G.R. No.
L-31061 August 17, 1976 said property and that the corresponding certificate of title be issued
SULO NG BAYAN INC., plaintiff-appellant,
vs.
GREGORIO ARANETA, INC., PARADISE FARMS, INC.,
NATIONAL WATERWORKS & SEWERAGE AUTHORITY,
HACIENDA CARETAS, INC, and REGISTER OF DEEDS OF
BULACAN, defendants-appellees.
Hill & Associates Law Offices for appellant.
Araneta, Mendoza & Papa for appellee Gregorio Araneta, Inc.
Carlos, Madarang, Carballo & Valdez for Paradise Farms, Inc.
Leopoldo M. Abellera, Arsenio J. Magpale & Raul G. Bernardo,
Office of the Government Corporate Counsel for appellee National
Waterworks & Sewerage Authority.
Candido G. del Rosario for appellee Hacienda Caretas, Inc.
ANTONIO, J.:
The issue posed in this appeal is whether or not plaintiff corporation
(non- stock may institute an action in behalf of its individual
members for the recovery of certain parcels of land allegedly owned
by said members; for the nullification of the transfer certificates of
title issued in favor of defendants appellees covering the aforesaid
parcels of land; for a declaration of "plaintiff's members as absolute
owners of the property" and the issuance of the corresponding
certificate of title; and for damages.
On April 26, 1966, plaintiff-appellant Sulo ng Bayan, Inc. filed
an accion de revindicacion with the Court of First Instance of
Bulacan, Fifth Judicial District, Valenzuela, Bulacan, against
defendants-appellees to recover the ownership and possession of a
large tract of land in San Jose del Monte, Bulacan, containing an area
of 27,982,250 square meters, more or less, registered under the
Torrens System in the name of defendants-appellees' predecessors-
in-interest. 1 The complaint, as amended on June 13, 1966,
specifically alleged that plaintiff is a corporation organized and
existing under the laws of the Philippines, with its principal office
and place of business at San Jose del Monte, Bulacan; that its
membership is composed of natural persons residing at San Jose del
Monte, Bulacan; that the members of the plaintiff corporation,
through themselves and their predecessors-in-interest, had pioneered
in the clearing of the fore-mentioned tract of land, cultivated the
same since the Spanish regime and continuously possessed the said
property openly and public under concept of ownership adverse
against the whole world; that defendant-appellee Gregorio Araneta,
Inc., sometime in the year 1958, through force and intimidation,
ejected the members of the plaintiff corporation fro their possession
of the aforementioned vast tract of land; that upon investigation
conducted by the members and officers of plaintiff corporation, they
found out for the first time in the year 1961 that the land in question
"had been either fraudelently or erroneously included, by direct or
constructive fraud, in Original Certificate of Title No. 466 of the
Land of Records of the province of Bulacan", issued on May 11,
1916, which title is fictitious, non-existent and devoid of legal
efficacy due to the fact that "no original survey nor plan whatsoever"
appears to have been submitted as a basis thereof and that the Court
of First Instance of Bulacan which issued the decree of registration
did not acquire jurisdiction over the land registration case because no
notice of such proceeding was given to the members of the plaintiff
corporation who were then in actual possession of said properties;
that as a consequence of the nullity of the original title, all
subsequent titles derived therefrom, such as Transfer Certificate of
Title No. 4903 issued in favor of Gregorio Araneta and Carmen
Zaragoza, which was subsequently cancelled by Transfer Certificate
of Title No. 7573 in the name of Gregorio Araneta, Inc., Transfer
Certificate of Title No. 4988 issued in the name of, the National
Waterworks & Sewerage Authority (NWSA), Transfer Certificate of
Title No. 4986 issued in the name of Hacienda Caretas, Inc., and
another transfer certificate of title in the name of Paradise Farms,
Inc., are therefore void. Plaintiff-appellant consequently prayed (1)
that Original Certificate of Title No. 466, as well as all transfer
certificates of title issued and derived therefrom, be nullified; (2) that
"plaintiff's members" be declared as absolute owners in common of
Page 1 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
to plaintiff; and (3) that defendant-appellee Gregorio Araneta, Inc. be
ordered to pay to plaintiff the damages therein specified.
On September 2, 1966, defendant-appellee Gregorio Araneta, Inc.
filed a motion to dismiss the amended complaint on the grounds that
(1) the complaint states no cause of action; and (2) the cause of
action, if any, is barred by prescription and laches. Paradise Farms,
Inc. and Hacienda Caretas, Inc. filed motions to dismiss based on the
same grounds. Appellee National Waterworks & Sewerage Authority
did not file any motion to dismiss. However, it pleaded in its answer
as special and affirmative defenses lack of cause of action by the
plaintiff-appellant and the barring of such action by prescription and
laches.
During the pendency of the motion to dismiss, plaintiff-appellant
filed a motion, dated October 7, 1966, praying that the case be
transferred to another branch of the Court of First Instance sitting at
Malolos, Bulacan, According to defendants-appellees, they were not
furnished a copy of said motion, hence, on October 14, 1966, the
lower court issued an Order requiring plaintiff-appellant to furnish
the appellees copy of said motion, hence, on October 14, 1966,
defendant-appellant's motion dated October 7, 1966 and,
consequently, prayed that the said motion be denied for lack of
notice and for failure of the plaintiff-appellant to comply with the
Order of October 14, 1966. Similarly, defendant-appellee paradise
Farms, Inc. filed, on December 2, 1966, a manifestation information
the court that it also did not receive a copy of the afore-mentioned of
appellant. On January 24, 1967, the trial court issued an Order
dismissing the amended complaint.
On February 14, 1967, appellant filed a motion to reconsider the
Order of dismissal on the grounds that the court had no jurisdiction
to issue the Order of dismissal, because its request for the transfer of
the case from the Valenzuela Branch of the Court of First Instance to
the Malolos Branch of the said court has been approved by the
Department of Justice; that the complaint states a sufficient cause of
action because the subject matter of the controversy in one of
common interest to the members of the corporation who are so
numerous that the present complaint should be treated as a class suit;
and that the action is not barred by the statute of limitations because
(a) an action for the reconveyance of property registered through
fraud does not prescribe, and (b) an action to impugn a void
judgment may be brought any time. This motion was denied by the
trial court in its Order dated February 22, 1967. From the afore-
mentioned Order of dismissal and the Order denying its motion for
reconsideration, plaintiff-appellant appealed to the Court of Appeals.
On September 3, 1969, the Court of Appeals, upon finding that no
question of fact was involved in the appeal but only questions of law
and jurisdiction, certified this case to this Court for resolution of the
legal issues involved in the controversy.
I
Appellant contends, as a first assignment of error, that the trial court
acted without authority and jurisdiction in dismissing the amended
complaint when the Secretary of Justice had already approved the
transfer of the case to any one of the two branches of the Court of
First Instance of Malolos, Bulacan.
Appellant confuses the jurisdiction of a court and the venue of cases
with the assignment of cases in the different branches of the same
Court of First Instance. Jurisdiction implies the power of the court to
decide a case, while venue the place of action. There is no question
that respondent court has jurisdiction over the case. The venue of
actions in the Court of First Instance is prescribed in Section 2, Rule
4 of the Revised Rules of Court. The laying of venue is not left to the
caprice of plaintiff, but must be in accordance with the aforesaid
provision of the rules. 2 The mere fact that a request for the transfer
of a case to another branch of the same court has been approved by
the Secretary of Justice does not divest the court originally taking
cognizance thereof of its jurisdiction, much less does it change the
venue of the action. As correctly observed by the trial court, the
indorsement of the Undersecretary of Justice did not order the
transfer of the case to the Malolos Branch of the Bulacan Court of
First Instance, but only "authorized" it for the reason given by
plaintiff's counsel that the transfer would be convenient for the
parties. The trial court is not without power to either grant or deny
the motion, especially in the light of a strong opposition thereto filed
by the defendant. We hold that the court a quo acted within its
authority in denying the motion for the transfer the case to Malolos
notwithstanding the authorization" of the same by the Secretary of
Justice.
II
Let us now consider the substantive aspect of the Order of dismissal.
In dismissing the amended complaint, the court a quo said:
The issue of lack of cause of action raised in the
motions to dismiss refer to the lack of
personality of plaintiff to file the instant action.
Essentially, the term 'cause of action' is
composed of two elements: (1) the right of the
plaintiff and (2) the violation of such right by the
defendant. (Moran, Vol. 1, p. 111). For these
reasons, the rules require that every action must
be prosecuted and defended in the name of the
real party in interest and that all persons having
an interest in the subject of the action and in
obtaining the relief demanded shall be joined as
plaintiffs (Sec. 2, Rule 3). In the amended
complaint, the people whose rights were alleged
to have been violated by being deprived and
dispossessed of their land are the members of the
corporation and not the corporation itself. The
corporation has a separate. and distinct
personality from its members, and this is not a
mere technicality but a matter of substantive law.
There is no allegation that the members have
assigned their rights to the corporation or any
showing that the corporation has in any way or
manner succeeded to such rights. The
corporation evidently did not have any rights
violated by the defendants for which it could
seek redress. Even if the Court should find
against the defendants, therefore, the plaintiff
corporation would not be entitled to the reliefs
prayed for, which are recoveries of ownership
and possession of the land, issuance of the
corresponding title in its name, and payment of
damages. Neither can such reliefs be awarded to
the members allegedly deprived of their land,
since they are not parties to the suit. It appearing
clearly that the action has not been filed in the
names of the real parties in interest, the
complaint must be dismissed on the ground of
lack of cause of action. 3
Viewed in the light of existing law and jurisprudence, We find that
the trial court correctly dismissed the amended complaint.
It is a doctrine well-established and obtains both at law and in equity
that a corporation is a distinct legal entity to be considered as
separate and apart from the individual stockholders or members who
compose it, and is not affected by the personal rights, obligations and
transactions of its stockholders or members. 4 The property of the
corporation is its property and not that of the stockholders, as
owners, although they have equities in it. Properties registered in the
name of the corporation are owned by it as an entity separate and
distinct from its members. 5 Conversely, a corporation ordinarily has
no interest in the individual property of its stockholders unless
transferred to the corporation, "even in the case of a one-man
corporation. 6 The mere fact that one is president of a corporation
does not render the property which he owns or possesses the
property of the corporation, since the president, as individual, and the
corporation are separate similarities. 7 Similarly, stockholders in a
corporation engaged in buying and dealing in real estate whose
certificates of stock entitled the holder thereof to an allotment in the
distribution of the land of the corporation upon surrender of their
stock certificates were considered not to have such legal or equitable
title or interest in the land, as would support a suit for title, especially
against parties other than the corporation. 8
It must be noted, however, that the juridical personality of the
corporation, as separate and distinct from the persons composing it,
is but a legal fiction introduced for the purpose of convenience and
to subserve the ends of justice. 9 This separate personality of the
corporation may be disregarded, or the veil of corporate fiction
pierced, in cases where it is used as a cloak or cover for fraud or
Page 2 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
illegality, or to work -an injustice, or where necessary to achieve
equity. 10
Thus, when "the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, ... the law
will regard the corporation as an association of persons, or in the
case of two corporations, merge them into one, the one being merely
regarded as part or instrumentality of the other. 11 The same is true
where a corporation is a dummy and serves no business purpose and
is intended only as a blind, or an alter ego or business conduit for the
sole benefit of the stockholders. 12 This doctrine of disregarding the
distinct personality of the corporation has been applied by the courts
in those cases when the corporate entity is used for the evasion of
taxes 13 or when the veil of corporate fiction is used to confuse
legitimate issue of employer-employee relationship, 14 or when
necessary for the protection of creditors, in which case the veil of
corporate fiction may be pierced and the funds of the corporation
may be garnished to satisfy the debts of a principal
stockholder. 15 The aforecited principle is resorted to by the courts as
a measure protection for third parties to prevent fraud, illegality or
injustice. 16
It has not been claimed that the members have assigned or
transferred whatever rights they may have on the land in question to
the plaintiff corporation. Absent any showing of interest, therefore, a
corporation, like plaintiff-appellant herein, has no personality to
bring an action for and in behalf of its stockholders or members for
the purpose of recovering property which belongs to said
stockholders or members in their personal capacities.
It is fundamental that there cannot be a cause of action 'without an
antecedent primary legal right conferred' by law upon a
person. 17 Evidently, there can be no wrong without a corresponding
right, and no breach of duty by one person without a corresponding
right belonging to some other person. 18 Thus, the essential elements
of a cause of action are legal right of the plaintiff, correlative
obligation of the defendant, an act or omission of the defendant in
violation of the aforesaid legal right. 19 Clearly, no right of action
exists in favor of plaintiff corporation, for as shown heretofore it
does not have any interest in the subject matter of the case which is
material and, direct so as to entitle it to file the suit as a real party in
interest.
III
Appellant maintains, however, that the amended complaint may be
treated as a class suit, pursuant to Section 12 of Rule 3 of the
Revised Rules of Court.
In order that a class suit may prosper, the following requisites must
be present: (1) that the subject matter of the controversy is one of
common or general interest to many persons; and (2) that the parties
are so numerous that it is impracticable to bring them all before the
court. 20
Under the first requisite, the person who sues must have an interest
in the controversy, common with those for whom he sues, and there
must be that unity of interest between him and all such other persons
which would entitle them to maintain the action if suit was brought
by them jointly. 21
As to what constitutes common interest in the subject matter of the
controversy, it has been explained in Scott v. Donald 22 thus:
The interest that will allow parties to join in a
bill of complaint, or that will enable the court to
dispense with the presence of all the parties,
when numerous, except a determinate number, is
not only an interest in the question, but one in
common in the subject Matter of the suit; ... a
community of interest growing out of the nature
and condition of the right in dispute; for,
although there may not be any privity between
the numerous parties, there is a common title out
of which the question arises, and which lies at
the foundation of the proceedings ... [here] the
only matter in common among the plaintiffs, or
between them and the defendants, is an interest
in the Question involved which alone cannot lay
a foundation for the joinder of parties. There is
 scarcely a suit at law, or in equity which settles a
Principle or applies a principle to a given state of
facts, or in which a general statute is interpreted,
that does not involved a Question in which other
parties are interested. ... (Emphasis supplied )
Here, there is only one party plaintiff, and the plaintiff corporation
does not even have an interest in the subject matter of the
controversy, and cannot, therefore, represent its members or
stockholders who claim to own in their individual capacities
ownership of the said property. Moreover, as correctly stated by the
appellees, a class suit does not lie in actions for the recovery of
property where several persons claim Partnership of their respective
portions of the property, as each one could alleged and prove his
respective right in a different way for each portion of the land, so
that they cannot all be held to have Identical title through acquisition
prescription. 23
Having shown that no cause of action in favor of the plaintiff exists
and that the action in the lower court cannot be considered as a class
suit, it would be unnecessary and an Idle exercise for this Court to
resolve the remaining issue of whether or not the plaintiffs action for
reconveyance of real property based upon constructive or implied
trust had already prescribed.
ACCORDINGLY, the instant appeal is hereby DISMISSED with
costs against the plaintiff-appellant.
Page 3 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
G.R. No. L-48627
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM,
petitioners
vs.
THE HONORABLE COURT OF APPEALS and ALBERTO V.
ARELLANO, respondents.
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 be 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 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 his 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 share holdings, 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 decision, which is hereby modified
accordingly. It is so ordered.
G.R. No. 70789 October 19, 1992
RUSTAN PULP & PAPER MILLS, INC., BIENVENIDO R.
TANTOCO, SR., and ROMEO S. VERGARA, petitioners,
vs.
Page 4 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
THE INTERMEDIATE APPELLATE COURT and ILIGAN
DIVERSIFIED PROJECTS, INC., ROMEO A. LLUCH and
ROBERTO G. BORROMEO, respondents.
MELO, J.:
When petitioners informed herein private respondents to stop the
delivery of pulp wood supplied by the latter pursuant to a contract of
sale between them, private respondents sued for breach of their
covenant. The court of origin dismissed the complaint but at the
same time enjoined petitioners to respect the contract of sale if
circumstances warrant the full operation in a commercial scale of
petitioners' Baloi plant and to continue accepting and paying for
deliveries of pulp wood products from Romeo Lluch (page 14,
Petition; page 20, Rollo). On appeal to the then Intermediate
Appellate Court, Presiding Justice Ramon G. Gaviola, Jr., who spoke
for the First Civil Cases Division, with Justices Caguioa, Quetulio-
Losa, and Luciano, concurring, modified the judgment by directing
herein petitioners to pay private respondents, jointly and severally,
the sum of P30,000.00 as moral damages and P15,000.00 as
attorney's fees (pages 48-58, Rollo).
In the petition at bar, it is argued that the Appellate Court erred;
A. . . . IN HOLDING PERSONALLY LIABLE
UNDER THE CONTRACT OF SALE
PETITIONER TANTOCO WHO SIGNED
MERELY AS REPRESENTATIVE OF
PETITIONER RUSTAN, AND PETITIONER
VERGARA WHO DID NOT SIGN AT ALL;
B. . . . IN HOLDING THAT PETITIONER
RUSTAN'S DECISION TO SUSPEND
TAKING DELIVERY OF PULP WOOD FROM
RESPONDENT LLUCH, WHICH WAS
PROMPTED BY SERIOUS AND
UNFORESEEN DEFECTS IN THE MILL,
WAS NOT IN THE LAWFUL EXERCISE OF
ITS RIGHTS UNDER THE CONTRACT OF
SALE; and
C. . . . IN AWARDING MORAL DAMAGES
AND ATTORNEY'S FEES IN THE ABSENCE
OF FRAUD OR BAD FAITH.
(page 18, Petition; page 24, Rollo)
The generative facts of the controversy, as gathered from the
pleadings, are fairly simple.
Sometime in 1966, petitioner Rustan established a pulp and paper
mill in Baloi, Lano del Norte. On March 20, 1967, respondent Lluch,
who is a holder of a forest products license, transmitted a letter to
petitioner Rustan for the supply of raw materials by the former to the
latter. In response thereto, petitioner Rustan proposed, among other
things, in the letter-reply:
2. That the contract to supply is not exclusive
because Rustan shall have the option to buy from
other suppliers who are qualified and holder of
appropriate government authority or license to
sell and dispose pulp wood.
These prefatory business proposals culminated in the execution,
during the month of April, 1968, of a contract of sale whereby
Romeo A. Lluch agreed to sell, and Rustan Pulp and Paper Mill, Inc.
undertook to pay the price of P30.00 per cubic meter of pulp wood
raw materials to be delivered at the buyer's plant in Baloi, Lanao del
Norte. Of pertinent significance to the issue at hand are the following
stipulations in the bilateral undertaking:
3. That BUYER shall have the option to buy
from other SELLERS who are equally qualified
and holders of appropriate government authority
or license to sell or dispose, that BUYER shall
not buy from any other seller whose pulp woods
being sold shall have been established to have
 emanated from the SELLER'S lumber and/or
firewood concession. . . .
And that SELLER has the priority to supply the
pulp wood materials requirement of the BUYER;
xxx xxx xxx
7. That the BUYER shall have the right to stop
delivery of the said raw materials by the seller
covered by this contract when supply of the same
shall become sufficient until such time when
need for said raw materials shall have become
necessarily provided, however, that the SELLER
is given sufficient notice.
(pages 8-9, Petition; pages 14-15, Rollo)
In the installation of the plant facilities, the technical staff of Rustan
Pulp and Paper Mills, Inc. recommended the acceptance of deliveries
from other suppliers of the pulp wood materials for which the
corresponding deliveries were made. But during the test run of the
pulp mill, the machinery line thereat had major defects while
deliveries of the raw materials piled up, which prompted the
Japanese supplier of the machinery to recommend the stoppage of
the deliveries. The suppliers were informed to stop deliveries and the
letter of similar advice sent by petitioners to private respondents
reads:
Iligan Diversified Projects, Inc.
Iligan City
Attention: Mr. Romeo A. Lluch
Dear Mr. Lluch:
This is to inform you that the supply of raw materials to us has
become sufficient and we will not be needing further delivery from
you. As per the terms of our contract, please stop delivery thirty (30)
days from today.
Private respondent Romeo Lluch sought to clarify the tenor of the
letter as to whether stoppage of delivery or termination of the
contract of sale was intended, but the query was not answered by
petitioners. This alleged ambiguity notwithstanding, Lluch and the
other suppliers resumed deliveries after the series of talks between
Romeo S. Vergara and Romeo Lluch.
On January 23, 1969, the complaint for contractual breach was filed
which, as earlier noted, was dismissed. In the process of discussing
the merits of the appeal interposed therefrom, respondent Court
clarified the eleven errors assigned below by herein petitioners and it
seems that petitioners were quite satisfied with the Appellate Court's
in seriatim response since petitioners trimmed down their discourse
before this Court to three basic matters, relative to the nature of
liability, the propriety of the stoppage, and the feasibility of
awarding moral damages including attorney's fees.
Respondent Court found it ironic that petitioners had to exercise the
prerogative regarding the stoppage of deliveries via the letter
addressed to Iligan Diversified Project, Inc. on September 30, 1968
because petitioners never really stopped accepting deliveries from
private respondents until December 23, 1968. Petitioner's paradoxial
stance portrayed in this manner:
. . . We cannot accept the reasons given by appellees as to why they
were stopping deliveries of pulp wood materials. First, We find it
preposterous for a business company like the appellee to accumulate
stockpiles of cut wood even after its letter to appellants dated
September 30, 1968 stopping the deliveries because the supply of
raw materials has become sufficient. The fact that appellees were
buying and accepting pulp wood materials from other sources other
than the appellants even after September 30, 1968 belies that they
have more than sufficient supply of pulp wood materials, or that they
are unable to go into full commercial operation or that their
machineries are defective or even that the pulp wood materials
coming from appellants are sub-standard. Second, We likewise find
the court a quo's finding that "even with one predicament in which
Page 5 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
defendant Rustan found itself wherein commercial operation was
delayed, it accommodated all its suppliers of raw materials, including
plaintiff, Romeo Lluch, by allowing them to deliver all its stockpiles
of cut wood" (Decision, page 202, Record on Appeal) to be both
illogical and inconsistent. Illogical, because as appellee Rustan itself
claimed "if the plant could not be operated on a commercial scale, it
would then be illogical for defendant Rustan to continue accepting
deliveries of raw materials." Inconsistent because this kind of
"concern" or "accommodation" is not usual or consistent with
ordinary business practice considering that this would mean adequate
losses to the company. More so, if We consider that appellee is a
new company and could not therefore afford to absorb more losses
than it already allegedly incurred by the consequent defects in the
machineries.
Clearly therefore, this is a breach of the contract entered into by and
between appellees and appellants which warrants the intervention of
this Court.
xxx xxx xxx
. . . The letter of September 30, 1968, Exh. "D" shows that
defendants were terminating the contract of sale (Exh. "A"), and
refusing any future or further delivery — whether on the ground that
they had sufficient supply of pulp wood materials or that appellants
cannot meet the standard of quality of pulp wood materials that
Rustan needs or that there were defects in appellees' machineries
resulting in an inability to continue full commercial operations.
Furthermore, there is evidence on record that appellees have been
accepting deliveries of pulp wood materials from other sources, i.e.
Salem Usman, Fermin Villanueva and Pacasum even after
September 30, 1968.
Lastly, it would be unjust for the court a quo to rule that the contract
of sale be temporarily suspended until Rustan, et al., are ready to
accept deliveries from appellants. This would make the resumption
of the contract purely dependent on the will of one party — the
appellees, and they could always claim, as they did in the instant
case, that they have more than sufficient supply of pulp wood when
in fact they have been accepting the same from other sources. Added
to this, the court a quo was imposing a new condition in the contract,
one that was not agreed upon by the parties.
(Pages B-10, Decision; Pages 55-57, Rollo)
The matter of Tantoco's and Vergara's joint and several liability as a
result of the alleged breach of the contract is dependent, first of all,
on whether Rustan Pulp and Paper Mills may legally exercise the
right of stoppage should there be a glut of raw materials at its plant.
And insofar as the express discretion on the part of petitioners is
concerned regarding the right of stoppage, We feel that there is
cogent basis for private respondent's apprehension on the illusory
resumption of deliveries inasmuch as the prerogative suggests a
condition solely dependent upon the will of petitioners. Petitioners
can stop delivery of pulp wood from private respondents if the
supply at the plant is sufficient as ascertained by petitioners, subject
to re-delivery when the need arises as determined likewise by
petitioners. This is Our simple understanding of the literal import of
paragraph 7 of the obligation in question. A purely potestative
imposition of this character must be obliterated from the face of the
contract without affecting the rest of the stipulations considering that
the condition relates to the fulfillment of an already existing
obligation and not to its inception (Civil Code Annotated, by Padilla,
1987 Edition, Volume 4, Page 160). It is, of course, a truism in legal
jurisprudence that a condition which is both potestative (or
facultative) and resolutory may be valid, even though the saving
clause is left to the will of the obligor like what this Court, through
Justice Street, said in Taylor vs. Uy Tieng Piao and Tan Liuan (43
Phil. 873; 879; cited in Commentaries and Jurisprudence on the Civil
Code, by Tolentino, Volume 4, 1991 edition, page 152). But the
conclusion drawn from the Taylor case, which allowed a condition
for unilateral cancellation of the contract when the machinery to be
installed on the factory did not arrive in Manila, is certainly
inappropriate for application to the case at hand because the factual
milieu in the legal tussle dissected by Justice Street conveys that the
proviso relates to the birth of the undertaking and not to the
fulfillment of an existing obligation.
In support of the second ground for allowance of the petition, FERNAN, J.:
petitioners are of the impression that the letter dated September 30,
1968 sent to private respondents is well within the right of stoppage
guaranteed to them by paragraph 7 of the contract of sale which was
construed by petitioners to be a temporary suspension of deliveries.
There is no doubt that the contract speaks loudly about petitioners' In a sworn complaint dated July 23, 1984, Adelio C. Cruz charged
prerogative but what diminishes the legal efficacy of such right is the Quiterio L. Dalisay, Senior Deputy Sheriff of Manila, with
condition attached to it which, as aforesaid, is dependent exclusively "malfeasance in office, corrupt practices and serious irregularities"
on their will for which reason, We have no alternative but to treat the allegedly committed as follows:
controversial stipulation as inoperative (Article 1306, New Civil
Code). It is for this same reason that We are not inclined to follow
the interpretation of petitioners that the suspension of delivery was
merely temporary since the nature of the suspension itself is again 1. Respondent sheriff attached and/or levied the money belonging to
conditioned upon petitioner's determination of the sufficiency of complainant Cruz when he was not himself the judgment debtor in
supplies at the plant. the final judgment of NLRC NCR Case No. 8-12389-91 sought to be
enforced but rather the company known as "Qualitrans Limousine
Neither are We prepared to accept petitioners' exculpation grounded Service, Inc.," a duly registered corporation; and,
on frustration of the commercial object under Article 1267 of the
New Civil Code, because petitioners continued accepting deliveries
from the suppliers. This conduct will estop petitioners from claiming
that the breakdown of the machinery line was an extraordinary
obstacle to their compliance to the prestation. It was indeed 2. Respondent likewise caused the service of the alias writ of
incongruous for petitioners to have sent the letters calling for execution upon complainant who is a resident of Pasay City, despite
suspension and yet, they in effect disregarded their own advice by knowledge that his territorial jurisdiction covers Manila only and
accepting the deliveries from the suppliers. The demeanor of does not extend to Pasay City.
petitioners along this line was sought to be justified as an act of
generous accommodation, which entailed greater loss to them and
"was not motivated by the usual businessman's obsession with
profit" (Page 34, Petition; Page 40, Rollo). Altruism may be a noble
In his Comments, respondent Dalisay explained that when he
gesture but petitioners' stance in this respect hardly inspires belief for
garnished complainant's cash deposit at the Philtrust bank, he was
such an excuse is inconsistent with a normal business enterprise
merely performing a ministerial duty. While it is true that said writ
which takes ordinary care of its concern in cutting down on expenses
was addressed to Qualitrans Limousine Service, Inc., yet it is also a
(Section 3, (d), Rule 131, Revised Rules of Court). Knowing fully
fact that complainant had executed an affidavit before the Pasay City
well that they will encounter difficulty in producing output because
assistant fiscal stating that he is the owner/president of said
of the defective machinery line, petitioners opted to open the plant to
corporation and, because of that declaration, the counsel for the
greater loss, thus compounding the costs by accepting additional
plaintiff in the labor case advised him to serve notice of garnishment
supply to the stockpile. Verily, the petitioner's action when they
on the Philtrust bank.
acknowledged that "if the plant could not be operated on a
commercial scale, it would then be illogical for defendant Rustan to
continue accepting deliveries of raw materials." (Page 202, Record
on Appeal; Page 8, Decision; Page 55, Rollo).
On November 12, 1984, this case was referred to the Executive
Petitioners argue next that Tantoco and Vergara should not have Judge of the Regional Trial Court of Manila for investigation, report
been adjudged to pay moral damages and attorney's fees because and recommendation.
Tantoco merely represented the interest of Rustan Pulp and Paper
Mills, Inc. while Romeo S. Vergara was not privy to the contract of
sale. On this score, We have to agree with petitioners' citation of
authority to the effect that the President and Manager of a
Prior to the termination of the proceedings, however, complainant
corporation who entered into and signed a contract in his official
executed an affidavit of desistance stating that he is no longer
capacity, cannot be made liable thereunder in his individual capacity
interested in prosecuting the case against respondent Dalisay and that
in the absence of stipulation to that effect due to the personality of
it was just a "misunderstanding" between them. Upon respondent's
the corporation being separate and distinct from the person
motion, the Executive Judge issued an order dated May 29, 1986
composing it (Bangued Generale Belge vs. Walter Bull and Co., Inc.,
recommending the dismissal of the case.
84 Phil. 164). And because of this precept, Vergara's supposed non-
participation in the contract of sale although he signed the letter
dated September 30, 1968 is completely immaterial. The two
exceptions contemplated by Article 1897 of the New Civil Code
where agents are directly responsible are absent and wanting. It has been held that the desistance of complainant does not preclude
the taking of disciplinary action against respondent. Neither does it
WHEREFORE, the decision appealed from is hereby MODIFIED in dissuade the Court from imposing the appropriate corrective
the sense that only petitioner Rustan Pulp and Paper Mills is ordered sanction. One who holds a public position, especially an office
to pay moral damages and attorney's fees as awarded by respondent directly connected with the administration of justice and the
Court. execution of judgments, must at all times be free from the
appearance of impropriety.1
SO ORDERED.

We hold that respondent's actuation in enforcing a judgment against

complainant who is not the judgment debtor in the case calls for
Adm. Matter No. R-181-P July 31, 1987
disciplinary action. Considering the ministerial nature of his duty in
enforcing writs of execution, what is incumbent upon him is to
ADELIO C. CRUZ, complainant, ensure that only that portion of a decision ordained or decreed in the
dispositive part should be the subject of execution.2 No more, no
vs. less. That the title of the case specifically names complainant as one
of the respondents is of no moment as execution must conform to
that directed in the dispositive portion and not in the title of the case.
QUITERIO L. DALISAY, Deputy Sheriff, RTC, Manila,
respondents.

RESOLUTION
The tenor of the NLRC judgment and the implementing writ is clear
enough. It directed Qualitrans Limousine Service, Inc. to reinstate
Page 6 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
the discharged employees and pay them full backwages. Respondent,
however, chose to "pierce the veil of corporate entity" usurping a
power belonging to the court and assumed improvidently that since
the complainant is the owner/president of Qualitrans Limousine
Service, Inc., they are one and the same. It is a well-settled doctrine
both in law and in equity that as a legal entity, a corporation has a
personality distinct and separate from its individual stockholders or
members. The mere fact that one is president of a corporation does
not render the property he owns or possesses the property of the
corporation, since the president, as individual, and the corporation
are separate entities.3
Anent the charge that respondent exceeded his territorial jurisdiction,
suffice it to say that the writ of execution sought to be implemented
was dated July 9, 1984, or prior to the issuance of Administrative
Circular No. 12 which restrains a sheriff from enforcing a court writ
outside his territorial jurisdiction without first notifying in writing
and seeking the assistance of the sheriff of the place where execution
shall take place.
ACCORDINGLY, we find Respondent Deputy Sheriff Quiterio L.
Dalisay NEGLIGENT in the enforcement of the writ of execution in
NLRC Case-No. 8-12389-91, and a fine equivalent to three [3]
months salary is hereby imposed with a stern warning that the
commission of the same or similar offense in the future will merit a
heavier penalty. Let a copy of this Resolution be filed in the personal
record of the respondent.
SO ORDERED.
G.R. No. L-56076 September 21, 1983
of 1,165 square meters, - covered by TCT No. 90454, and owned by
said corporation. The sale price was P23,300.00 with 9% interest per
annum, payable with a downpayment of P4,660.00 and monthly
installments of P246.42 until fully paid. Paragraph 6 of the contract
provided for automatic extrajudicial rescission upon default in
payment of any monthly installment after the lapse of 90 days from
the expiration of the grace period of one month, without need of
notice and with forfeiture of all installments paid.
Respondent Dumpit paid the downpayment and several installments
amounting to P13,722.50. The last payment was made on December
5, 1967 for installments up to September 1967.
On May 10, 1973, or almost six (6) years later, private respondent
wrote petitioner offering to update all his overdue accounts with
interest, and seeking its written consent to the assignment of his
rights to a certain Lourdes Dizon. He followed this up with another
letter dated June 20, 1973 reiterating the same request. Replying
petitioners informed respondent that his Contract to Sell had long
been rescinded pursuant to paragraph 6 of the contract, and that the
lot had already been resold.
Questioning the validity of the rescission of the contract, respondent
filed a letter complaint with the National Housing Authority (NHA)
for reconveyance with an altenative prayer for refund (Case No.
2167). In a Resolution, dated July 10, 1979, the NHA, finding the
rescission void in the absence of either judicial or notarial demand,
ordered Palay, Inc. and Alberto Onstott in his capacity as President
of the corporation, jointly and severally, to refund immediately to
Nazario Dumpit the amount of P13,722.50 with 12% interest from
the filing of the complaint on November 8, 1974. Petitioners' Motion
for Reconsideration of said Resolution was denied by the NHA in its
Order dated October 23, 1979. 1

On appeal to the Office of the President, upon the allegation that the
PALAY, INC. and ALBERT ONSTOTT, petitioner, NHA Resolution was contrary to law (O.P. Case No. 1459),
respondent Presidential Executive Assistant, on May 2, 1980,
vs. affirmed the Resolution of the NHA. Reconsideration sought by
petitioners was denied for lack of merit. Thus, the present petition
JACOBO C. CLAVE, Presidential Executive Assistant
wherein the following issues are raised:
NATIONAL HOUSING AUTHORITY and NAZARIO
DUMPIT respondents.

I
Santos, Calcetas-Santos & Geronimo Law Office for petitioner.

Whether notice or demand is not mandatory under the circumstances

and, therefore, may be dispensed with by stipulation in a contract to
Wilfredo E. Dizon for private respondent.
sell.

II
MELENCIO-HERRERA, J.:

Whether petitioners may be held liable for the refund of the

The Resolution, dated May 2, 1980, issued by Presidential Executive installment payments made by respondent Nazario M. Dumpit.
Assistant Jacobo Clave in O.P. Case No. 1459, directing petitioners
Palay, Inc. and Alberto Onstott jointly and severally, to refund to
private respondent, Nazario Dumpit, the amount of P13,722.50 with III
12% interest per annum, as resolved by the National Housing
Authority in its Resolution of July 10, 1979 in Case No. 2167, as
well as the Resolution of October 28, 1980 denying petitioners'
Whether the doctrine of piercing the veil of corporate fiction has
Motion for Reconsideration of said Resolution of May 2, 1980, are
application to the case at bar.
being assailed in this petition.

IV
On March 28, 1965, petitioner Palay, Inc., through its President,
Albert Onstott executed in favor of private respondent, Nazario
Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of
the Crestview Heights Subdivision in Antipolo, Rizal, with an area

Page 7 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
Whether respondent Presidential Executive Assistant committed previous court action, but it proceeds at its own risk. For it is only
grave abuse of discretion in upholding the decision of respondent the final judgment of the corresponding court that will conclusively
NHA holding petitioners solidarily liable for the refund of the and finally settle whether the action taken was or was not correct in
installment payments made by respondent Nazario M. Dumpit law. But the law definitely does not require that the contracting party
thereby denying substantial justice to the petitioners, particularly who believes itself injured must first file suit and wait for a judgment
petitioner Onstott before taking extrajudicial steps to protect its interest. Otherwise, the
party injured by the other's breach will have to passively sit and
watch its damages accumulate during the pendency of the suit until
the final judgment of rescission is rendered when the law itself
We issued a Temporary Restraining Order on Feb 11, 1981 enjoining
requires that he should exercise due diligence to minimize its own
the enforcement of the questioned Resolutions and of the Writ of
damages (Civil Code, Article 2203).
Execution that had been issued on December 2, 1980. On October
28, 1981, we dismissed the petition but upon petitioners' motion,
reconsidered the dismissal and gave due course to the petition on
March 15, 1982. We see no conflict between this ruling and the previous
jurisprudence of this Court invoked by respondent declaring that
judicial action is necessary for the resolution of a reciprocal
obligation (Ocejo Perez & Co., vs. International Banking Corp., 37
On the first issue, petitioners maintain that it was justified in
Phil. 631; Republic vs. Hospital de San Juan De Dios, et al., 84 Phil
cancelling the contract to sell without prior notice or demand upon
820) since in every case where the extrajudicial resolution is
respondent in view of paragraph 6 thereof which provides-
contested only the final award of the court of competent jurisdiction
can conclusively settle whether the resolution was proper or not. It is
in this sense that judicial action win be necessary, as without it, the
6. That in case the BUYER falls to satisfy any monthly installment extrajudicial resolution will remain contestable and subject to
or any other payments herein agreed upon, the BUYER shall be judicial invalidation unless attack thereon should become barred by
granted a month of grace within which to make the payment of the t acquiescense, estoppel or prescription.
in arrears together with the one corresponding to the said month of
grace. -It shall be understood, however, that should the month of
grace herein granted to the BUYER expire, without the payment &
Fears have been expressed that a stipulation providing for a
corresponding to both months having been satisfied, an interest of
unilateral rescission in case of breach of contract may render
ten (10%) per cent per annum shall be charged on the amounts the
nugatory the general rule requiring judicial action (v. Footnote,
BUYER should have paid; it is understood further, that should a
Padilla Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140)
period of NINETY (90) DAYS elapse to begin from the expiration
but, as already observed, in case of abuse or error by the rescinder
of the month of grace hereinbefore mentioned, and the BUYER shall
the other party is not barred from questioning in court such abuse or
not have paid all the amounts that the BUYER should have paid with
error, the practical effect of the stipulation being merely to transfer to
the corresponding interest up to the date, the SELLER shall have the
the defaulter the initiative of instituting suit, instead of the rescinder
right to declare this contract cancelled and of no effect without
(Emphasis supplied).
notice, and as a consequence thereof, the SELLER may dispose of
the lot/lots covered by this Contract in favor of other persons, as if
this contract had never been entered into. In case of such cancellation
of this Contract, all the amounts which may have been paid by the Of similar import is the ruling in Nera vs. Vacante 4 , reading:
BUYER in accordance with the agreement, together with all the
improvements made on the premises, shall be considered as rents
paid for the use and occupation of the above mentioned premises and
A stipulation entitling one party to take possession of the land and
for liquidated damages suffered by virtue of the failure of the
building if the other party violates the contract does not ex propio
BUYER to fulfill his part of this agreement : and the BUYER hereby
vigore confer upon the former the right to take possession thereof if
renounces his right to demand or reclaim the return of the same and
objected to without judicial intervention and determination.
further obligates peacefully to vacate the premises and deliver the
same to the SELLER.

This was reiterated in Zulueta vs. Mariano 5 where we held that

extrajudicial rescission has legal effect where the other party does
Well settled is the rule, as held in previous jurisprudence, 2 that
not oppose it.6 Where it is objected to, a judicial determination of the
judicial action for the rescission of a contract is not necessary where
issue is still necessary.
the contract provides that it may be revoked and cancelled for
violation of any of its terms and conditions. However, even in the
cited cases, there was at least a written notice sent to the defaulter
informing him of the rescission. As stressed in University of the In other words, resolution of reciprocal contracts may be made
Philippines vs. Walfrido de los Angeles 3 the act of a party in extrajudicially unless successfully impugned in Court. If the debtor
treating a contract as cancelled should be made known to the other. impugns the declaration, it shall be subject to judicial determination.
We quote the pertinent excerpt: 7

Of course, it must be understood that the act of a party in treating a
contract as cancelled or resolved in account of infractions by the
other contracting party must be made known to the other and is
always provisional being ever subject to scrutiny and review by the
proper court. If the other party denies that rescission is justified it is
free to resort to judicial action in its own behalf, and bring the matter
to court. Then, should the court, after due hearing, decide that the
resolution of the contract was not warranted, the responsible party
will be sentenced to damages; in the contrary case, the resolution
will be affirmed, and the consequent indemnity awarded to the party
prejudiced.
In this case, private respondent has denied that rescission is justified
and has resorted to judicial action. It is now for the Court to
determine whether resolution of the contract by petitioners was
warranted.
We hold that resolution by petitioners of the contract was ineffective
and inoperative against private respondent for lack of notice of
resolution, as held in the U.P. vs. Angeles case, supra

Petitioner relies on Torralba vs. De los Angeles 8 where it was held

that "there was no contract to rescind in court because from the
In other words, the party who deems the contract violated may moment the petitioner defaulted in the timely payment of the
consider it resolved or rescinded, and act accordingly, without installments, the contract between the parties was deemed ipso facto
Page 8 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
rescinded." However, it should be noted that even in that case notice
in writing was made to the vendee of the cancellation and annulment
of the contract although the contract entitled the seller to immediate
repossessing of the land upon default by the buyer.
The indispensability of notice of cancellation to the buyer was to be
later underscored in Republic Act No. 6551 entitled "An Act to
Provide Protection to Buyers of Real Estate on Installment
Payments." which took effect on September 14, 1972, when it
specifically provided:
Sec. 3(b) ... the actual cancellation of the contract shall take place
after thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a notarial
act and upon full payment of the cash surrender value to the buyer.
(Emphasis supplied).
The contention that private respondent had waived his right to be
notified under paragraph 6 of the contract is neither meritorious
because it was a contract of adhesion, a standard form of petitioner
corporation, and private respondent had no freedom to stipulate. A
waiver must be certain and unequivocal, and intelligently made; such
waiver follows only where liberty of choice has been fully accorded.
9 Moreover, it is a matter of public policy to protect buyers of real
estate on installment payments against onerous and oppressive
conditions. Waiver of notice is one such onerous and oppressive
condition to buyers of real estate on installment payments.
Regarding the second issue on refund of the installment payments
made by private respondent. Article 1385 of the Civil Code provides:
ART. 1385. Rescission creates the obligation to return the things
which were the object of the contract, together with their fruits, and
the price with its interest; consequently, it can be carried out only
when he who demands rescission can return whatever he may be
obliged to restore.
Neither sham rescission take place when the things which are the
object of the contract are legally in the possession of third persons
who did not act in bad faith.
In this case, indemnity for damages may be demanded from the
person causing the loss.
As a consequence of the resolution by petitioners, rights to the lot
should be restored to private respondent or the same should be
replaced by another acceptable lot. However, considering that the
property had already been sold to a third person and there is no
evidence on record that other lots are still available, private
respondent is entitled to the refund of installments paid plus interest
at the legal rate of 12% computed from the date of the institution of
the action. 10 It would be most inequitable if petitioners were to be
allowed to retain private respondent's payments and at the same time
appropriate the proceeds of the second sale to another.
We come now to the third and fourth issues regarding the personal
liability of petitioner Onstott who was made jointly and severally
liable with petitioner corporation for refund to private respondent of
the total amount the latter had paid to petitioner company. It is basic
that a corporation is invested by law with a personality separate and
distinct from those of the persons composing it as wen as from that
of any other legal entity to which it may be related. 11 As a general
rule, a corporation may not be made to answer for acts or liabilities
of its stockholders or those of the legal entities to which it may be
connected and vice versa. However, the veil of corporate fiction may
Page 9 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
be pierced when it is used as a shield to further an end subversive of
justice 12 ; or for purposes that could not have been intended by the
law that created it 13 ; or to defeat public convenience, justify
wrong, protect fraud, or defend crime. 14 ; or to perpetuate fraud or
confuse legitimate issues 15 ; or to circumvent the law or perpetuate
deception 16 ; or as an alter ego, adjunct or business conduit for the
sole benefit of the stockholders. 17
We find no badges of fraud on petitioners' part. They had literally
relied, albeit mistakenly, on paragraph 6 (supra) of its contract with
private respondent when it rescinded the contract to sell
extrajudicially and had sold it to a third person.
In this case, petitioner Onstott was made liable because he was then
the President of the corporation and he a to be the controlling
stockholder. No sufficient proof exists on record that said petitioner
used the corporation to defraud private respondent. He cannot,
therefore, be made personally liable just because he "appears to be
the controlling stockholder". Mere ownership by a single stockholder
or by another corporation is not of itself sufficient ground for
disregarding the separate corporate personality. 18 In this respect
then, a modification of the Resolution under review is called for.
WHEREFORE, the questioned Resolution of respondent public
official, dated May 2, 1980, is hereby modified. Petitioner Palay, Inc.
is directed to refund to respondent Nazario M. Dumpit the amount of
P13,722.50, with interest at twelve (12%) percent per annum from
November 8, 1974, the date of the filing of the Complaint. The
temporary Restraining Order heretofore issued is hereby lifted.
No costs.
SO ORDERED.
G.R. No. L-49834 June 22, 1989
PAULINO SORIANO, NENITA C. ESPERANZA and JANDRO
G. MACADANGDANG, petitioners,
vs.
HON. COURT OF APPEALS (Former Sixth Division) and
GERVACIO CU, respondents.
Herman D. Coloma for petitioners.
Jorge S. Castillo for private respondent.
SARMIENTO, J.:
The central issue in this case is whether or not the respondent
appellate court 1 erred in affirming in toto the decision dated July 12,
1971 of the trial court 2 in Civil Case No. 4463 which held the
petitioners, defendants therein, solidarily liable in their personal
capacity to the private respondent under an agreement between them
embodied in a receipt. It is the petitioners' contention that they
should not be made accountable for the controversial contract in their
personal capacity but, if ever, as officers of Bacarra (I.N.) FaCoMa,
Inc., they having entered into the "deal" with the private respondent
as such. The petitioners argue that even if their liability proves to be
personal in character, still the same should only be joint and not
solidary as erroneously ruled by the two lower courts. Further, they
claim that inasmuch as their co-defendant in the court a quo,
Bienvenido E. Acosta (who did not join them in their appeal and in
this petition), acted without their authority and consent, he, alone,
should be held responsible for whatever loss the private respondent
may have incurred. The petitioners, however, lament that the trial
court refused to give due course to their cross-claim against Acosta,
and the appellate court chose to ignore this point in their appeal.
The receipt dated August 10, 1964, the bone of the present
controversy, states as follows:
GREETINGS:
WE, the President, Manager, Treasurer and Director Representative
of Bacarra (I.N.) Facoma, Inc., do hereby execute this document:
That we received from Mr. Gervacio Cu, a truck load of Virginia
tobacco consisting of ONE HUNDRED SIXTY (160) bales of fifty
(50) kilos each bale (sic) the said Virginia tobacco consists of
different grades or class from E to A (sic) the said tobaccos are to be
shipped to the redrying plants through the Bacarra Facoma under
Guia number 236.
Conditions of the deal between Mr. Cu and the Association. Upon
payment of the said tobacco by the Philippine Virginia Tobacco
Administration then Mr. Cu, will collect the corresponding payments
as graded by the redrying plant as further stipulated that the check
representing the payment shall only be cashed in the presence of Mr.
Cu, or his authorized representative. (Sic)
This instrument is executed for the protection, guidance and
information of the parties concerned.
Done this 10th day of August 1964 at Bacarra, Ilocos Norte.
(Sgd.) Paulino Soriano PAULINO SORIANO President
(Sgd.) Nenita C. Esperanza
NENITA C. ESPERANZA
Sec. Treasurer
by:
(Sgd.) Erlinda V. Acosta BIENVENIDO E. ACOSTA Director,
Official Representative
(Sgd.) A. Macadangdang
A.G. MACADANGDANG
Manager 3
Conflict later arose when the private respondent was not paid his
tobacco, prompting him to file on January 31, 1969, a complaint with
the trial court for the collection of a sum of money against all the
signatories to the receipt.
During the course of the trial, it became apparent from the testimony
of the private respondent's only witness that the said tobacco was
diverted by defendant Bienvenido E. Acosta to another re-drying
plant. The petitioners, professing lack of knowledge of Acosta's act
of diverting the tobacco and not having authorized or consented to its
diversion, moved on January 8, 1971, for leave to file a cross- claim
against their co-defendants, the spouses Bienvenido E. Acosta and
Erlinda V. Acosta. 4 In an order dated January 11, 1971, 5 the trial
court, ruling that the cross-claim "partakes more of a defense
premised on plaintiffs (private respondent's) evidence and not a
claim of legal liability of the cross-defendants (the Acostas) so-called
and considering that it (the motion) is obviously intended for delay,"
denied the petitioners' motion.
After trial, the trial court adjudged for the plaintiff (private
respondent herein). The dispositive portion of the decision reads:
Consequently, judgment is hereby rendered ordering the defendants
to jointly and severally pay the plaintiff Cu, (1) the sum of P l9,350.
00 with interest thereon at the legal rate from the filing of the
complaint; (2) the sum of P 2,000.00 as attorney's fees; (3) the
amount of P 320.00, value of the empty sacks, P 80.00, cost of
baling, and transportation expenses of P 350.00; and (4) costs of suit.
SO ORDERED. 6
The petitioners elevated the case to the Court of Appeals raising the
following errors allegedly committed by the trial court:
I The subject receipt itself states that the conditions contained therein
THE LOWER COURT ERRED IN HOLDING THAT THE
TRANSACTION SUBJECT MATTER OF THE PRESENT
Page 10 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
ACTION BE BETWEEN THE PLAINTIFF AND DEFENDANTS
WAS A SALE ON CREDIT TO THE OFFICERS OF THE
BACARRA (I.N.) FACOMA, INC. IN THEIR PRIVATE
CAPACITIES.
II
THE LOWER COURT ERRED IN HOLDING THAT
CONSIGNMENT OF PLAINTIFF'S TOBACCOS THROUGH THE
BACARRA (I.N.) FACOMA, INC. WAS NOT ESTABLISHED BY
THE EVIDENCE.
III
THE LOWER COURT ERRED IN DENYING THE ADMISSION
OF THE CROSS-CLAIM AGAINST DEFENDANTS
BIENVENIDO E. ACOSTA AND ERLINDA V. ACOSTA.
IV
THE LOWER COURT ERRED IN ORDERING DEFENDANTS
TO JOINTLY AND SEVERALLY PAY THE PLAINTIFF (1) THE
SUM OF P 19,350.00 WITH INTEREST THEREON AT THE
LEGAL RATE FROM THE FILING OF THE COMPLAINT (2)
THE SUM OF P 2,000.00 AS ATTORNEY'S FEES (3) THE
AMOUNT OF P 320.00, VALUE OF THE EMPTY SACKS; P
80.00 COSTS OF BALING AND TRANSPORTATION
EXPENSES OF P 250.00 AND (4) COSTS OF THE SUIT. 7
On April 4, 1978, the respondent appellate court affirmed in toto the
decision of the trial court.
In support of its decision on the central issue earlier adverted to, the
appellate court ruled that the fact that the petitioners signed their
names over their respective positions in the Bacarra (I.N.) FaCoMa,
Inc. was of no legal moment as there was no showing that the
document was signed by them for and on behalf of the
corporation. 8 The appellate court likewise emphasized the failure of
the petitioners to present any evidence to show that they were
authorized by the corporation to enter into the transaction. 9 Further,
the respondent Court of Appeals, in affirming the trial court's
decision, made capital of what it observed was a departure from the
corporation's usual business practice in the execution of the receipt in
question. 10 No discussions were made however on the other errors
assigned by the petitioners particularly on the matter of the counter-
claim and the liability being joint or solidary.
The petitioners moved for a reconsideration of the respondent
appellate court's decision but their motion proved futile as shown by
the resolution 11 of that court dated December 4, 1978, which denied
the same.
Hence, this petition.
As already stated, the petitioners reiterate before us the submission
that their liability under the contract lies in their official capacity as
officers of the Bacarra (I.N.) FaCoMa, Inc., and not in their personal
capacity as ruled by the lower courts. In addition, the petitioners
bewail the alleged failure of the respondent appellate court to pass
upon the errors of the trial court in refusing to give due course to
their cross-claim against their co-defendants, the Acosta spouses, and
in holding them (the petitioners and their co- defendants below)
jointly and severally liable to the private respondent.
The petition is impressed with merit.
Contrary to the view espoused by the respondent Court of Appeals,
the act of the petitioners indicating in the controversial receipt their
official designations in the Bacarra (I.N.) FaCoMa, Inc.-is vital in the
proper resolution of this case. We cannot accept the conclusion that
the official designations of the petitioners were written on the
document merely as meaningless and hollow decorations or as
mere description personae without any relevance to the liability of
the corporation these officers obviously represented. Indeed, taken in
conjunction with the other obtaining circumstances, the receipt
discloses the capacity by which the petitioners entered into the "deal"
with the private respondent.
were between the private respondent and the "Association." The
lower courts ruled that the "Association" referred only to the
signatories. We disagree. It is quite plain and we are convinced that
the "Association is none other than the Bacarra (I.N.) FaCoMa, Inc.,
which is a farmers' cooperative marketing association. Not only that,
we cannot find any cogent reason why the petitioners (and their co-
defendants) used the word "Association" when they could have more
easily and conveniently placed "the undersigned" or words to the
same effect in its stead. The error of the appealed decision on this
regard is made evident when we consider that even the private
respondent's lone witness, Rafael Ayson, the driver of the truck used
in transporting the tobacco, testified at the trial that the receipt and
invoices used in transporting the private respondent's tobacco were
in the name of the Bacarra (I.N.) FACOMA, Inc. and not in the
names of the signatories to the controversial document. 12 This seals
the case for the petitioners because if it were as the two lower courts
ruled, the other documents relative to the transport of the tobacco
would have been prepared in the petitioners' names.
Anent the alleged failure of the petitioners to present any
authorization from the Bacarra (I.N.) FaCoMa, Inc. to enter into the
transaction with the private respondent, the same has been
sufficiently explained. As pointed out by the petitioners, the
signatories to the receipt in question comprise the majority of the
Board of Directors of Bacarra (I.N.) FaCoMa, Inc. There was thus no
further need for a separate authorization to bind the corporation to
the transaction. To pass such a separate resolution, the petitioners
would only be seeking authorization from themselves to enter into
the transaction which is clearly a redundancy.
The alleged departure from the established business practice of the
corporation with respect to the execution of the controversial receipt
on the other hand, could be traced to the uncontroverted fact that the
private respondent, aside from being a non-member of the Bacarra
(I.N.) FaCoMa, Inc., is also an alien, a Chinese national. While the
petitioners admit that the FaCoMa accepted consignments of produce
even from non-members, that privilege was not extended to aliens
like the private respondent. (The private respondent did not make an
effort to rebut the petitioners on this point). Hence, the private
respondent's citizenship presented a problem. It is precisely for this
reason that the receipt was executed in the manner it was done. To
further expedite the transaction, the guia and the other documents
covering the private respondent's tobacco were also listed not in his
name but in the names of several farmers which he himself furnished
to the Association. Unfortunately, the lower courts failed to grasp the
importance of these circumstances peculiar to the case, choosing
instead to fault the petitioners for their failure to present in court the
farmers in whose names the other documents coveting the private
respondent's tobacco were issued. Surely, the petitioners could not be
expected to present the said farmers in court because their names
were merely supplied by the private respondent. There is even a
possibility that the said names are fictitious.
In the light of the foregoing, it is clear that the liability of the
petitioners under the document subject of the instant case, is not
personal but corporate, and therefore attached to the Bacarra (I.N.)
FaCoMa, Inc. which, being a corporation, has a personality distinct
and separate from that of the petitioners who are only its officers. It
is the general rule that the protective mantle of a corporation's
separate and distinct personality could only be pierced and liability
attached directly to its officers and/or members-stockholders, when
the same is used for fraudulent, unfair or illegal purpose. 13 In the
case at bar, there is no showing that the Association entered into the
transaction with the private respondent for the purpose of defrauding
the latter of his goods or the payment thereof. More importantly,
there is no proof whatsoever that the majority of the directors used
the distinct and separate personality of Bacarra (I.N.) FaCoMa, Inc.
as a protective shield for any wrongdoing. Therefore, the general rule
on corporate liability, not the exception, should be applied in
resolving this case. Consequently, the private respondent's cause of
action lies against the Bacarra (I.N.) FaCoMa, Inc., and not against
the petitioners.
In view of this ruling, there is no need to discuss the other issues
raised by the petitioners. Suffice it to state that under the law and
well-established jurisprudence, an obligation is presumed joint and
not solidary. 14 There is nothing in the receipt, constituting the
agreement of the parties, which would sufficiently indicate that the
petitioners bound themselves solidarily, if they bound themselves
personally at all.
Page 11 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
WHEREFORE, the petition is GRANTED; the Decision dated April
4, 1978 of the Court of Appeals, and its Resolution dated December
4, 1978 are REVERSED and SET ASIDE, and an other one entered
dismissing the complaint against the herein petitioners. Costs against
the private respondent.
SO ORDERED.
G.R. No. 191525
INTERNATIONAL ACADEMY OF MANAGEMENT AND
ECONOMICS (I/AME), Petitioner
vs.
LITTON AND COMPANY, INC., Respondent
DECISION
SERENO, CJ.:
Before us is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court assailing the Court of Appeals (CA) Decision 1 and
Resolution2 in CA-G.R. SP No. 107727.
The CA affirmed the Judgment3 and Order4 of the Regional Trial
Court (RTC) of Manila in Special Civil Action No. 06-115547
reinstating the Order5 of the Metropolitan Trial Court (Me TC) of
Manila in favor of Litton and Company, Inc. (Litton).
THE FACTS
The facts, as culled from the records, are as follows:
Atty. Emmanuel T. Santos (Santos), a lessee to two (2) buildings
owned by Litton, owed the latter rental arrears as well as his share of
the payment of realty taxes.6
Consequently, Litton filed a complaint for unlawful detainer against
Santos before the MeTC of Manila. The MeTC ruled in Litton’s
favor and ordered Santos to vacate A.I.D. Building and Litton
Apartments and to pay various sums of money representing unpaid
arrears, realty taxes, penalty, andattorney’s fees. 7
It appears however that the judgment was not executed. Litton
subsequently filed an action for revival of judgment, which was
granted by the RTC.8 Santos then appealed the RTC decision to the
CA, which nevertheless affirmed the RTC. 9 The said CA decision
became final and executory on 22 March 1994.10
On l 1 November 1996, the sheriff of the MeTC of Manila levied on
a piece of real property covered by Transfer Certificate of Title
(TCT) No. 187565 and registered in the name of International
Academy of Management and Economics Incorporated (I/AME), in
order to execute the judgment against Santos. 11 The annotations on
TCT No. 187565 indicated that such was "only up to the extent of the
share of Emmanuel T. Santos."12
I/AME filed with Me TC a "Motion to Lift or Remove Annotations
Inscribed in TCT No. 187565 of the Register of Deeds of Makati
City."13 I/AME claimed that it has a separate and distinct personality
from Santos; hence, its properties should not be made to answer for
the latter's liabilities. The motion was denied in an Order dated 29
October 2004.
Upon motion for reconsideration of I/AME, the Me TC reversed its
earlier ruling and ordered the cancellation of the annotations of levy
as well as the writ of execution. Litton then elevated the case to the
RTC, which in turn reversed the Order granting I/AME’s motion for
reconsideration and reinstated the original Order dated 29 October
2004.
I/AME then filed a petition with the CA to contest the judgment of
the RTC, which was eventually denied by the appellate court.
THE CA RULING
The CA upheld the Judgment and Order of the RTC and held that no
grave abuse of discretion was committed when the trial court pierced
the corporate veil of I/AME.14
It took note of how Santos had utilized I/ AME to insulate the
Makati real property covered by TCT No. 187565 from the execution
of the judgment rendered against him, for the following reasons:
First, the Deed of Absolute Sale dated 31 August 1979 indicated that
Santos, being the .President, was representing I/AME as the
vendee.15 However, records show that it was only in 1985 that
I/AME was organized as a juridical entity. 16 Obviously, Santos could
not have been President of a non-existent corporation at that time. 17
Second, the CA noted that the subject real property was transferred
to I/AME during the pendency of the appeal for the revival of the
judgment in the ejectment case in the CA. 18
Finally, the CA observed that the Register of Deeds of Makati City
issued TCT No. 187565 only on 17 November 1993, fourteen (14)
years after the execution of the Deed of Absolute Sale and more than
eight (8) years after I/AME was incorporated.19
Thus, the CA concluded that Santos merely used I/ AME as a shield
to protect his property from the coverage of the writ of execution;
therefore, piercing the veil of corporate fiction is proper. 20
THE ISSUES
The issues boil down to the alleged denial of due process when the
court pierced the corporate veil of I/ AME and its property was made
to answer for the liability of Santos.
OUR RULING
We deny the petition.
There was no violation of due
process against I/AME
Petitioner avers that its right to due process was violated when it was
dragged into the case and its real property made an object of a writ of
execution in a judgment against Santos. It argues that since it was not
impleaded in the main case, the court a quo never acquired
jurisdiction over it. Indeed, compliance with the recognized modes of
acquisition ofjurisdiction cannot be dispensed with even in piercing
the veil of corporation.21
In a petition for review on certiorari under Rule 45, only questions
of law shall be entertained. This Court considers the determination of
the existence of any of the circumstances that would warrant the
piercing of the veil of corporate fiction as a question of fact which
ordinarily cannot be the subject of a petition for review
on certiorari under Rule 45. We will only take cognizance of factual
issues if the findings of the lower court are not supported by the
evidence on record or are based on a misapprehension of
facts.22 Once the CA affirms the factual findings of the trial court,
such findings are deemed final and conclusive and thus, may not be
reviewed on appeal, unless the judgment of the CA depends on a
misapprehension of facts, which if properly considered, would
justify a different conclusion. 23 Such exception however, is not
applicable in this case.
The 29 October 2004 MeTC judgment, the RTC judgment, and the
CA decision are one in accord on the matters presented before this
Court.
In general, corporations, whether stock or non-stock, are treated as
separate and distinct legal entities from the natural persons
composing them. The privilege of being considered a distinct and
separate entity is confined to legitimate uses, and is subject to
equitable limitations to prevent its being exercised for fraudulent,
unfair or illegal purposes.24 However, once equitable limitations are
breached using the coverture of the corporate veil, courts may step in
to pierce the same.
As we held in Lanuza, Jr. v. BF Corporation:25
Piercing the corporate veil is warranted when "[the separate
personality of a corporation] is used as a means to perpetrate fraud or
an illegal act, or as a vehicle for the evasion of an existing obligation,
the circumvention of statutes, or to confuse legitimate issues." It is
also warranted in alter ego cases "where a corporation is merely a
farce since it is a mere alter ego or business conduit of a person, or
where the corporation is so organized and controlled and its affairs
Page 12 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation."
When [the] corporate veil is pierced, the corporation and persons
who are normally treated as distinct from the corporation are treated
as one person, such that when the corporation is adjudged liable,
these persons, too, become liable as if they were the corporation.
The piercing of the corporate veil is premised on the fact that the
corporation concerned must have been properly served with
summons or properly subjected to the jurisdiction of the court a quo.
Corollary thereto, it cannot be subjected to a writ of execution meant
for another in violation of its right to due process.26
There exists, however, an exception to this rule: if it is shown "by
clear and convincing proof that the separate and distinct personality
of the corporation was purposefully employed to evade a legitimate
and binding commitment and perpetuate a fraud or like wrongdoings.
"27
The resistance of the Court to offend the right to due process of a
corporation that is a nonparty in a main case, may disintegrate not
only when its director, officer, shareholder, trustee or member is a
party to the main case, but when it finds facts which show that
piercing of the corporate veil is merited. 28
Thus, as the Court has already ruled, a party whose corporation is
vulnerable to piercing of its corporate veil cannot argue violation of
due process.29
In this case, the Court confirms the lower courts' findings that Santos
had an existing obligation based on a court judgment that he owed
monthly rentals and unpaid realty taxes under a lease contract he
entered into as lessee with the Littons as lessor. He was not able to
comply with this particular obligation, and in fact, refused to comply
therewith.
This Court agrees with the CA that Santos used I/AME as a means to
defeat judicial processes and to evade his obligation to
Litton.30 Thus, even while I/AME was not imp leaded in the main
case and yet was so named in a writ of execution to satisfy a court
judgment against Santos, it is vulnerable to the piercing of its
corporate veil. We will further expound on this matter.
Piercing the Corporate Veil may
Apply to Non-stock Corporations
Petitioner I/AME argues that the doctrine of piercing the corporate
veil applies only to stock corporations, and not to non-stock,
nonprofit corporations such as I/AME since there are no stockholders
to hold liable in such a situation but instead only members. Hence,
they do not have investments or shares of stock or assets to answer
for possible liabilities.
Thus, no one in a non-stock corporation can be held liable in case the
corporate veil is disregarded or pierced.31
The CA disagreed. It ruled that since the law does not make a
distinction between a stock and non-stock corporation, neither should
there be a distinction in case the doctrine of piercing the veil of
corporate fiction has to be applied. While I/AME is an educational
institution, the CA further ruled, it still is a registered corporation
conducting its affairs as such.32
This Court agrees with the CA.
In determining the propriety of applicability of piercing the veil of
corporate fiction, this Court, in a number of cases, did not put in
issue whether a corporation is a stock or non-stock corporation.
In Sula ng Bayan, Inc. v. Gregorio Araneta, Inc. ,33 we considered
but ultimately refused to pierce the corporate veil of a non-stock non-
profit corporation which sought to institute an action for
reconveyance of real property on behalf of its members. This Court
held that the non-stock corporation had no personality to institute a
class suit on behalf of its members, considering that the non-stock
corporation was not an assignee or transferee of the real property in
question, and did not have an identity that was one and the same as
its members.
In another case, this Court did not put in issue whether the
corporation is a non-stock, non-profit, non-governmental corporation
in considering the application of the doctrine of piercing of corporate
veil. In Republic of the Philippines v. Institute for Social
Concern,34 while we did not allow the piercing of the corporate veil,
this Court affirmed the finding of the CA that the Chairman of the
Institute for Social Concern cannot be held jointly and severally
liable with the aforesaid non-governmental organization (NGO) at
the time the Memorandum of Agreement was entered into with the
Philippine Government. We found no fraud in that case committed
by the Chairman that would have justified the piercing of the
corporate veil of the NG0.35
In the United States, from which we have adopted our law on
corporations, non-profit corporations are not immune from the
doctrine of piercing the corporate veil.1âwphi1 Their courts view
piercing of the corporation asan equitable remedy, which justifies
said courts to scrutm1ze any organization however organized and in
whatever manner it operates. Moreover, control of ownership does
not hinge on stock ownership.
As held in Barineau v. Barineau:36
[t]he mere fact that the corporation involved is a nonprofit
corporation does not by itself preclude a court from applying the
equitable remedy of piercing the corporate veil. The equitable
character of the remedy permits a court to look to the substance of
the organization, and its decision is not controlled by the statutory
framework under which the corporation was formed and operated.
While it may appear to be impossible for a person to exercise
ownership control over a non-stock, not-for-profit corporation, a
person can be held personally liable under the alter ego theory if the
evidence shows that the person controlling the corporation did in fact
exercise control, even though there was no stock ownership.
In another U.S. case, Public Interest Bounty Hunters v. Board of
Governors of Federal Reserve System,37 the U.S. Court allowed the
piercing of the corporate veil of the Foundation headed by the
plaintiff, in order to avoid inequitable results. Plaintiff was found to
be the sole trustee, the sole member of the board, and the sole
financial contributor to the Foundation. In the end, the Court found
that the plaintiff used the Foundation to avoid paying attorneys’ fees.
The concept of equitable ownership, for stock or non-stock
corporations, in piercing of the corporate veil scenarios, may also be
considered. An equitable owner is an individual who is a non-
shareholder defendant, who exercises sufficient control or
considerable authority over the corporation to the point of
completely disregarding the corporate form and acting as though its
assets are his or her alone to manage and distribute. 38
Given the foregoing, this Court sees no reason why a non-stock
corporation such as I/AME, may not be scrutinized for purposes of
piercing the corporate veil or fiction.
Piercing the Corporate Veil may
Apply to Natural Persons
The petitioner also insists that the piercing of the corporate veil
cannot be applied to a natural person - in this case, Santos - simply
because as a human being, he has no corporate veil shrouding or
covering his person.39
a) When the Corporation is the Alter Ego of a Natural Person
As cited in Sula ng Bayan, Inc. v. Araneta, Inc. ,40 "[t]he doctrine of
alter ego is based upon the misuse of a corporation by an
individual for wrongful or inequitable purposes, and in such case the
court merely disregards the corporate entity and holds the individual
responsible for acts knowingly and intentionally done in the name of
the corporation." This, Santos has done in this case. Santos formed
I/AME, using the non-stock corporation, to evade paying his
judgment creditor, Litton.
The piercing of the corporate veil may apply to corporations as well
as natural persons involved with corporations. This Court has held
that the "corporate mask may be lifted and the corporate veil may be
pierced when a corporation is just but the alter ego of a person or of
another corporation."41
We have considered a deceased natural person as one and the same
with his corporaticc to protect the succession rights of his legal heirs
to his estate. In Cease v. Court of Appeals, 42 the predecessor-in-
Page 13 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
interest organized a close corporation which acquired properties
during its existence. When he died intestate, trouble ensued amongst
his children on whether or not to consider his company one and the
same with his person. The Court agreed with the trial court when it
pierced the corporate veil of the decedent's corporation. It found that
said corporation was his business conduit and alter ego. Thus, the
acquired properties were actually properties of the decedent and as
such, should be divided among the decedent's legitimate children in
the partition of his estate.43
In another instance, this Court allowed the piercing of the corporate
veil against another natural person, in Arcilla v. Court of
Appeals. 44 The case stemmed from a complaint for sum of money
against Arcilla for his failure to pay his loan from the private
respondent. Arcilla, in his defense, alleged that the loan was in the
name of his family corporation, CSAR Marine Resources, Inc. He
further argued that the CA erred in holding CSAR Marine Resources
liable to the private respondent since the latter was not impleaded as
a party in the case. This Court allowed the piercing of the corporate
veil and held that Arcilla used "his capacity as President, x x x [as] a
sanctuary for a defense x x x to avoid complying with the liability
adjudged against him x x x. "45 We held that his liability remained
attached even if he was impleaded as a party, and not the
corporation, to thecollection case and even if he ceased to be
corporate president.46 Indeed, even if Arcilla had ceased to be
corporate president, he remained personally liable for the judgment
debt to pay his personal loan, for we treated him and the corporation
as one and the same. CSAR Marine was deemed his alter ego.
We find similarities with Arcilla and the instant case.
Like Arcilla, Santos: (1) was adjudged liable to pay on a judgment
against him; (2) he became President of a corporation; (3) he formed
a corporation to conceal assets which were supposed to pay for the
judgment against his favor; (4) the corporation which has Santos as
its President, is being asked by the court to pay on the judgment; and
(5) he may not use as a defense that he is no longer President
of I/AME (although a visit to the website of the school shows he is
the current President).47
This Court agrees with the CA that I/AME is the alter ego of Santos
and Santos - the natural person - is the alter ego of I/AME. Santos
falsely represented himself as President of I/AME in the Deed of
Absolute Sale when he bought the Makati real property, at a time
when I/ AME had not yet existed. Uncontroverted facts in this case
also reveal the findings of Me TC showing Santos and I/ AME as
being one and the same person:
(1) Santos is the conceptualizer and implementor of I/AME;
(2) Santos’ contribution is ₱1,200,000.00 (One Million Two
Hundred Thousand Pesos) out of the ₱1,500,000.00 (One Million
Five Hundred Thousand Pesos), making him the majority contributor
of I/AME; and,
(3) The building being occupied by I/AME is named after Santos
using his known nickname (to date it is called, the "Noli Santos
Inte1national Tower").48
This Court deems I/AME and Santos as alter egos of each other
based on the former’s own admission in its pleadings before the trial
court. In its Answer (to Amended Petition) with the RTC
entitled Litton and Company, Inc. v. Hon. Hernandez-Calledo, Civil
Case No. 06-115547, I/AME admitted the allegations found in
paragraphs 2, 4 and 5 of the amended petition of Litton, particularly
paragraph number 4 which states:
4. Respondent, International Academy of Management and
Economics Inc. (hereinafter referred to as Respondent I/ AME), is a
corporation organized and existing under Philippine laws with
address at 1061 Metropolitan Avenue, San Antonie Village, Makati
City, where it may be served with summons and other judicial
processes. It is the corporate entity used by Respondent Santos as
his alter ego for the purpose of shielding his assets from the
reach of his creditors, one of which is herein
Petitioner.49 (Emphases ours)
Hence, I/AME is the alter ego of the natural person, Santos, which
the latter used to evade the execution on the Makati property, thus
frustrating the satisfaction of the judgment won by Litton.
b) Reverse Piercing of the Corporate Veil
This Court in Arcilla pierced the corporate veil of CSAR Marine
Resources to satisfy a money judgment against its erstwhile
President, Arcilla.
We borrow from American parlance what is called reverse piercing
or reverse corporate piercing or piercing the corporate veil "in
reverse."
As held in the U.S. Case, C.F. Trust, Inc., v. First Flight Limited
Partnership, 50 "in a traditional veil-piercing action, a court
disregards the existence of the corporate entity so a claimant can
reach the assets of a corporate insider. In a reverse piercing action,
however, the plaintiff seeks to reach the assets of a corporation to
satisfy claims against a corporate insider."
"Reverse-piercing flows in the opposite direction (of traditional
corporate veil-piercing) and makes the corporation liable for the debt
of the shareholders."51
It has two (2) types: outsider reverse piercing and insider reverse
piercing. Outsider reverse piercing occurs when a party with a claim
against an individual or corporation attempts to be repaid with assets
of a corporation owned or substantially controlled by the
defendant.52 In contrast, in insider reverse piercing, the controlling
members will attempt to ignore the corporate fiction in order to take
advantage of a benefit available to the corporation, such as an
interest in a lawsuit or protection of personal assets. 53
Outsider reverse veil-piercing is applicable in the instant case. Litton,
as judgment creditor, seeks the Court's intervention to pierce the
corporate veil of I/AME in order to make its Makati real property
answer for a judgment against Santos, who formerly owned and still
substantially controls I/AME.
In the U.S. case Acree v. McMahan, 54 the American court held that
"[ o ]utsider reverse veil-piercing extends the traditional veil-piercing
doctrine to permit a third-party creditor to pierce the veil to satisfy
the debts of an individual out of the corporation's assets."
The Court has pierced the corporate veil in a reverse manner in the
instances when the scheme was to avoid corporate assets to be
included in the estate of a decedent as in the Cease case and when
the corporation was used to escape a judgment to pay a debt as in
the Arcilla case.
In a 1962 Philippine case, this Court also employed what we now
call reverse-piercing of the corporate veil. In Palacio v. Fely
Transportation Co., 55 we found that the president and general
manager of the private respondent company formed the corporation
to evade his subsidiary civil liability resulting from the conviction of
his driver who ran over the child of the petitioner, causing injuries
and medical expenses. The Court agreed with the plaintiffs that the
president and general manager, and Fely Transportation, may be
regarded as one and the same person. Thus, even if the president and
general manager was not a party to the case, we reversed the lower
court and declared both him and the private respondent company,
jointly and severally liable to the plaintiffs. Thus, this Court allowed
the outsider-plaintiffs to pierce the corporate veil of Fely
Transportation to run after its corporate assets and pay the subsidiary
civil liability of the company's president and general manager.
This notwithstanding, the equitable remedy of reverse corporate
piercing or reverse piercing was not meant to encourage a creditor’s
failure to undertake such remedies that could have otherwise been
available, to the detriment of other creditors. 56
Reverse corporate piercing is an equitable remedy which if utilized
cavalierly, may lead to disastrous consequences for both stock and
non-stock corporations. We are aware that ordinary judgment
collection procedures or other legal remedies are preferred over that
which would risk damage to third parties (for instance, innocent
stockholders or voluntary creditors) with unprotected interests in the
assets of the beleaguered corporation.57
Thus, this Court would recommend the application of the current
1997 Rules on Civil Procedure on Enforcement of Judgments. Under
the current Rules of Court on Civil Procedure, when it comes to
satisfaction by levy, a judgment obligor is given the option to
immediately choose which property or part thereof may be levied
Page 14 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
upon to satisfy the judgment. If the judgmentobligor does not
exercise the option, personal properties, if any, shall be first levied
and then on real properties if the personal properties are deemed
insufficient to answer for the judgment.58
In the instant case, it may be possible for this Court to recommend
that Litton run after the other properties of Santos that could satisfy
the money judgment - first personal, then other real properties other
than that of the school. However, if we allow this, we frustrate the
decades-old yet valid MeTC judgment which levied on the real
property now titled under the name of the school. Moreover, this
Court will unwittingly condone the action of Santos in hiding all
these years behind the corporate form to evade paying his obligation
under the judgment in the court a quo. This we cannot countenance
without being a party to the injustice.
Thus, the reverse piercing of the corporate veil of I/AME to enforce
the levy on execution of the Makati real property where the school
now stands is applied.
WHEREFORE, in view of the foregoing, the instant petition
is DENIED. The CA Decision in CA-G.R. SP No. 107727 dated 30
October 2009 and its Resolution on 12 March 2010 are
hereby AFFIRMED. The MeTC Order dated 29 October 2004 is
hereby REINSTATED.
Accordingly, the MeTC of Manila, Branch 2, is
hereby DIRECTED to execute with dispatch the MeTC Order dated
29 October 2004 against Santos.
SO ORDERED.
G.R. No. L-15121             August 31, 1962
GREGORIO PALACIO, in his own behalf and in behalf of his
minor child,
MARIO PALACIO, plaintiffs-appellants,
vs.
FELY TRANSPORTATION COMPANY, defendant-appellee.
Antonio A. Saba for plaintiffs-appellants.
Mercado, Ver and Reyes for defendant-appellee.
REGALA, J.:
This is an appeal by the plaintiffs from the decision of the Court of
First Instance of Manila which dismissed their complaint.
Originally taken to the Court of Appeals, this appeal was certified to
this Court on the ground that it raises purely questions of law.
The parties in this case adopt the following findings of fact of the
lower court:
In their complaint filed with this Court on May 15, 1954, plaintiffs
allege, among other things, "that about December, 1952, the
defendant company hired Alfredo Carillo as driver of AC-787 (687)
(a registration for 1952) owned and operated by the said defendant
company; that on December 24, 1952, at about 11:30 a.m., while the
driver Alfonso (Alfredo) Carillo was driving AC-687 at Halcon
Street, Quezon City, wilfully, unlawfully and feloniously and in a
negligent, reckless and imprudent manner, run over a child Mario
Palacio of the herein plaintiff Gregorio Palacio; that on account of
the aforesaid injuries, Mario Palacio suffered a simple fracture of the
right tenor (sic), complete third, thereby hospitalizing him at the
Philippine Orthopedic Hospital from December 24, 1952, up to
January 8, 1953, and continued to be treated for a period of five
months thereafter; that the plaintiff Gregorio Palacio herein is a
welder by occupation and owner of a small welding shop and
because of the injuries of his child he has abandoned his shop where
he derives income of P10.00 a day for the support of his big family;
that during the period that the plaintiff's (Gregorio Palacio's) child
was in the hospital and who said child was under treatment for five
months in order to meet the needs of his big family, he was forced to
sell one air compressor (heavy duty) and one heavy duty electric
drill, for a sacrifice sale of P150.00 which could easily sell at
P350.00; that as a consequence of the negligent and reckless act of
the driver Alfredo Carillo of the herein defendant company, the
herein plaintiffs were forced to litigate this case in Court for an
agreed amount of P300.00 for attorney's fee; that the herein plaintiffs
have now incurred the amount of P500.00 actual expenses for
transportation, representation and similar expenses for gathering
evidence and witnesses; and that because of the nature of the injuries
of plaintiff Mario Palacio and the fear that the child might become a
useless invalid, the herein plaintiff Gregorio Palacio has suffered
moral damages which could be conservatively estimated at
P1,200.00.
On May 23, 1956, defendant Fely Transportation Co., filed a Motion
to Dismiss on the grounds (1) that there is no cause of action against
the defendant company, and (2) that the cause of action is barred by
prior judgment..
In its Order, dated June 8, 1956, this Court deferred the
determination of the grounds alleged in the Motion to Dismiss until
the trial of this case.
On June 20, 1956, defendant filed its answer. By way of affirmative
defenses, it alleges (1) that complaint states no cause of action
against defendant, and (2) that the sale and transfer of the jeep AC-
687 by Isabelo Calingasan to the Fely Transportation was made on
December 24, 1955, long after the driver Alfredo Carillo of said jeep
had been convicted and had served his sentence in Criminal Case
No. Q-1084 of the Court of First Instance of Quezon City, in which
both the civil and criminal cases were simultaneously tried by
agreement of the parties in said case. In the Counterclaim of the
Answer, defendant alleges that in view of the filing of this complaint
which is a clearly unfounded civil action merely to harass the
defendant, it was compelled to engage the services of a lawyer for an
agreed amount of P500.00.
During the trial, plaintiffs presented the transcript of the stenographic
notes of the trial of the case of "People of the Philippines vs. Alfredo
Carillo, Criminal Case No. Q-1084," in the Court of First Instance of
Rizal, Quezon City (Branch IV), as Exhibit "A".1äwphï1.ñët
It appears from Exhibit "A" that Gregorio Palacio, one of the herein
plaintiffs, testified that Mario Palacio, the other plaintiff, is his son;
that as a result of the reckless driving of accused Alfredo Carillo, his
child Mario was injured and hospitalized from December 24, 1952,
to January 8, 1953; that during all the time that his child was in the
hospital, he watched him during the night and his wife during the
day; that during that period of time he could not work as he slept
during the day; that before his child was injured, he used to earn
P10.00 a day on ordinary days and on Sundays from P20 to P50 a
Sunday; that to meet his expenses he had to sell his compressor and
electric drill for P150 only; and that they could have been sold for
P300 at the lowest price.
During the trial of the criminal case against the driver of the jeep in
the Court of First Instance of Quezon City (Criminal Case No. Q-
1084) an attempt was unsuccessfully made by the prosecution to
prove moral damages allegedly suffered by herein plaintiff Gregorio
Palacio. Likewise an attempt was made in vain by the private
prosecutor in that case to prove the agreed attorney's fees between
him and plaintiff Gregorio Palacio and the expenses allegedly
incurred by the herein plaintiffs in connection with that case. During
the trial of this case, plaintiff Gregorio Palacio testified substantially
to the same facts.
The Court of First Instance of Quezon City in its decision in
Criminal Case No. 1084 (Exhibit "2") determined and thoroughly
discussed the civil liability of the accused in that case. The
dispositive part thereof reads as follows:
IN VIEW OF THE FOREGOING, the Court finds the accused
Alfredo Carillo y Damaso guilty beyond reasonable doubt of the
crime charged in the information and he is hereby sentenced to suffer
imprisonment for a period of Two Months & One Day of Arresto
Mayor; to indemnify the offended party, by way of consequential
damages, in the sum of P500.00 which the Court deems reasonable;
with subsidiary imprisonment in case of insolvency but not to exceed
¹/3 of the principal penalty imposed; and to pay the costs.
On the basis of these facts, the lower court held action is barred by
the judgment in the criminal case and, that under Article 103 of the
Revised Penal Code, the person subsidiarily liable to pay damages is
Isabel Calingasan, the employer, and not the defendant corporation.
Page 15 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
Against that decision the plaintiffs appealed, contending that:
THE LOWER COURT ERRED IN NOT SUSTAINING THAT
THE DEFENDANT-APPELLEE IS SUBSIDIARILY LIABLE FOR
DAMAGES AS A RESULT OF CRIMINAL CASE NO. Q-1084 OF
THE COURT OF FIRST INSTANCE OF QUEZON CITY FOR
THE REASON THAT THE INCORPORATORS OF THE FELY
TRANSPORTATION COMPANY, THE DEFENDANT-
APPELLEE HEREIN, ARE ISABELO CALINGASAN HIMSELF,
HIS SON AND DAUGHTERS;
THE LOWER COURT ERRED IN NOT CONSIDERING THAT
THE INTENTION OF ISABELO CALINGASAN IN
INCORPORATING THE FELY TRANSPORTATION
COMPANY, THE DEFENDANT-APPELLEE HEREIN, WAS TO
EVADE HIS CIVIL LIABILITY AS A RESULT OF THE
CONVICTION OF HIS DRIVER OF VEHICLE AC-687 THEN
OWNED BY HIM:
THE LOWER COURT ERRED IN HOLDING THAT THE CAUSE
OF ACTION OF THE PLAINTIFFS-APPELLANTS IS BARRED
BY PRIOR JUDGMENT.
With respect to the first and second assignments of errors, plaintiffs
contend that the defendant corporate should be made subsidiarily
liable for damages in the criminal case because the sale to it of the
jeep in question, after the conviction of Alfred Carillo in Criminal
Case No. Q-1084 of the Court of First Instance of Quezon City was
merely an attempt on the part of Isabelo Calingasan its president and
general manager, to evade his subsidiary civil liability.
The Court agrees with this contention of the plaintiffs. Isabelo
Calingasan and defendant Fely Transportation may be regarded as
one and the same person. It is evident that Isabelo Calingasan's main
purpose in forming the corporation was to evade his subsidiary civil
liability1 resulting from the conviction of his driver, Alfredo Carillo.
This conclusion is borne out by the fact that the incorporators of the
Fely Transportation are Isabelo Calingasan, his wife, his son, Dr.
Calingasan, and his two daughters. We believe that this is one case
where the defendant corporation should not be heard to say that it
has a personality separate and distinct from its members when to
allow it to do so would be to sanction the use of the fiction of
corporate entity as a shield to further an end subversive of justice.
(La Campana Coffee Factory, et al. v. Kaisahan ng mga
Manggagawa, etc., et al., G.R. No. L-5677, May 25, 1953)
Furthermore, the failure of the defendant corporation to prove that it
has other property than the jeep (AC-687) strengthens the conviction
that its formation was for the purpose above indicated.
And while it is true that Isabelo Calingasan is not a party in this case,
yet, is held in the case of Alonso v. Villamor, 16 Phil. 315, this Court
can substitute him in place of the defendant corporation as to the real
party in interest. This is so in order to avoid multiplicity of suits and
thereby save the parties unnecessary expenses and delay. (Sec. 2,
Rule 17, Rules of Court; Cuyugan v. Dizon. 79 Phil. 80; Quison v.
Salud, 12 Phil. 109.)
Accordingly, defendants Fely Transportation and Isabelo Calingasan
should be held subsidiarily liable for P500.00 which Alfredo Carillo
was ordered to pay in the criminal case and which amount he could
not pay on account of insolvency.
We also sustain plaintiffs' third assignment of error and hold that the
present action is not barred by the judgment of the Court of First
Instance of Quezon City in the criminal case. While there seems to
be some confusion on part of the plaintiffs as to the theory on which
the is based — whether ex-delito or quasi ex-delito (culpa aquiliana)
— We are convinced, from the discussion prayer in the brief on
appeal, that they are insisting the subsidiary civil liability of the
defendant. As a matter of fact, the record shows that plaintiffs merely
presented the transcript of the stenographic notes (Exhibit "A") taken
at the hearing of the criminal case, which Gregorio Palacio
corroborated, in support of their claim for damages. This rules out
the defense of res judicata, because such liability proceeds precisely
from the judgment in the criminal action, where the accused was
found guilty and ordered to pay an indemnity in the sum P500.00.
WHEREFORE, the decision of the lower court is hereby reversed
and defendants Fely Transportation and Isabelo Calingasan are
ordered to pay, jointly and severally, the plaintiffs the amount of
P500.00 and the costs.
G.R. No. L-5081             February 24, 1954
MARVEL BUILDING CORPORATION, ET AL., plaintiffs-
appellees,
vs.
SATURNINO DAVID, in his capacity as Collector, Bureau of
Internal Revenue, defendant-appellant.
Assistant Solicitor General Francisco Carreon for appellant.
Antonio Quirino and Rosendo J. Tansinsin for appellees.
LABRADOR, J.:
This action was brought by plaintiffs as stockholders of the Marvel
Building Corporation to enjoin the defendant Collector of Internal
Revenue from selling at public auction various properties described
in the complaint, including three parcels of land, with the buildings
situated thereon, known as the Aguinaldo Building, the Wise
Building, and the Dewey Boulevard-Padre Faura Mansion, all
registered in the name of the said corporation. Said properties were
seized and distrained by defendant to collect war profits taxes
assessed against plaintiff Maria B. Castro (Exhibit B). Plaintiffs
allege that the said three properties (lands and buildings) belong to
Marvel Building Corporation and not to Maria B. Castro, while the
defendant claims that Maria B. Castro is the true and sole owner of
all the subscribed stock of the Marvel Building Corporation,
including those appearing to have been subscribed and paid for by
the other members, and consequently said Maria B. Castro is also the
true and exclusive owner of the properties seized. The trial court held
that the evidence, which is mostly circumstantial, fails to show to its
satisfaction that Maria B. Castro is the true owner of all the stock
certificates of the corporation, because the evidence is susceptible of
two interpretations and an interpretation may not be made which
would deprive one of the property without due process of law.
It appears that on September 15, 1950, the Secretary of Finance,
upon consideration of the report of a special committee assigned to
study the war profits tax case of Mrs. Maria B. Castro, recommended
the collection of P3,593,950.78 as war profits taxes for the latter, and
on September 22, 1953 the President instructed the Collector that
steps be taken to collect the same (Exhibits 114, 114-A to 114-D).
Pursuant thereto various properties, including the three above
mentioned, were seized by the Collector of Internal Revenue on
October 31, 1950. On November 13, 1950, the original complaint in
this case was filed. After trial, the Court of First Instance of Manila
rendered judgment ordering the release of the properties mentioned,
and enjoined the Collector of Internal Revenue from selling the
same. The Collector of Internal Revenue has appealed to this Court
against the judgment.
The following facts are not disputed, or are satisfactorily proved by
the evidence:
The Articles of Incorporation of the Marvel Building Corporation is
dated February 12, 1947 and according to it the capital stock is
P2,000,000, of which P1,025,000 was (at the time of incorporation)
subscribed and paid for by the following incorporators:
Maria B. Castro 250 shares P 250,000.00
Amado A. Yatco 100       " 100,000.00
Santiago Tan 100       " 100,000.00
Jose T. Lopez   90       " 90,000.00
Benita Lamagna   90       " 90,000.00
C.S. Gonzales   80       " 80,000.00
Maria Cristobal   70       " 70,000.00
Segundo Esguerra, Sr.   75       " 75,000.00
Ramon Sangalang   70       " 70,000.00
Page 16 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
Maximo Cristobal   55       " 55,000.00
Antonio Cristobal   45       "       45,000.00
P1,025,000.00
Maria B Castro was elected President and Maximo Cristobal,
Secretary-Treasurer (Exhibit A).
The Wise Building was purchased on September 4, 1946, the
purchase being made in the name of Dolores Trinidad, wife of
Amado A. Yatco (Exhibit V), and the Aguinaldo Building, on
January 17, 1947, in the name of Segundo Esguerra, Sr. (Exhibit M).
Both building were purchased for P1,800,000, but as the corporation
had only P1,025,000, the balance of the purchase price was obtained
as loans from the Insular Life Assurance Co., Ltd. and the Philippine
Guaranty Co., Inc. (Exhibit C).
Of the incorporators of the Marvel Building Corporation, Maximo
Cristobal and Antonio Cristobal are half-brothers of Maria B. Castro,
Maria Cristobal is a half-sister, and Segundo Esguerra, Sr. a brother-
in-law, husband of Maria Cristobal, Maria B. Castro's half-sister.
Maximo B. Cristobal did not file any income tax returns before the
year 1946, except for three years 1939 and 1940, but in these years
he was exempted from the tax. He has not filed any war profits tax
return (Exhibit 54). Antonio Cristobal, Segundo Esguerra, Sr. and
Jose T. Lopez did not file any income tax returns for the years prior
to 1946, and neither did they file any war profits tax returns (Exhibit
52). Maria Cristobal filed income tax returns for the year 1929 to
1942, but they were exempt from the tax (Exhibit 53). Benita A.
Lamagna did not file any income tax returns prior to 1945, except for
1942 which was exempt. She did not file any was profits tax (Exhibit
55). Ramon M. Sangalang did not file income tax returns up to 1945
except for the years 1936, 1937, 1938, 1939 and 1940. He has not
filed any war profits tax return (Exhibit 57). Amada A. Yatco did not
file income tax returns prior to 1945, except for the years 1937,
1938, 1939, 1941 and 1942, but these were exempt. He did not file
any war profits tax return (Exhibit 58).
Antonio Cristobal's income in 1946 is P15,630, and in 1947, P4,550
(Exhibits 59-60); Maximo B. Cristobal's income in 1946 is
P19,759.10, in 1947, P9,773.47 (Exhibits 61-62); Segundo
Esquerra's income in 1946 is P5,500, in 1947, P7,754.32 (Exhibits
63-64); Jose T. Lopez's income in 1946 is P20,785, in 1947,
P14,302.77 (Exhibits 69-70); Benita A. Lamagna's income in 1945 is
P1,559, in 1946, P6,463.36, in 1947, P6,189.79 and her husband's
income in 1947 is P10,825.53 (Exhibits 65-68); Ramon M.
Sangalang's income in 1945 is P5,500, in 1946, P18,300.00 (Exhibits
71-72); Santiago Tan's income in 1945 is P456, in 1947 is P9,167.95,
and in 1947, P7,620.11 (Exhibits 73-75); and Amado Yatco's income
in 1945 is P12,600, in 1946, P23,960, and in 1947, P11,160 (Exhibits
76-78).
In October, 1945 Maria B. Castro, Nicasio Yatco, Maxima Cristobal
de Esquerra, Maria Cristobal Lopez and Maximo Cristobal organized
the Maria B. Castro, Inc. with capital stock of P100,000, of which
Maria B. Castro subscribed for P99,600 and all others for P100 each.
This was increased in 1950 to P500,000 and Maria B. Castro
subscribed P76,000 and the others P1,000 each (Exhibit 126).
It does not appear that the stockholders or the board of directors of
the Marvel Building Corporation have ever held a business meeting,
for no books thereof or minutes meeting were ever mentioned by the
officers thereof or presented by them at the trial. The by-laws of the
corporation, if any had ever been approved, has not been presented.
Neither does it appear that any report of the affairs of the corporation
has been made, either of its transactions or accounts.
From the book of accounts of the corporation, advances to the
Marvel Building Corporation of P125,000 were made by Maria B.
Castro in 1947, P102,916.05 in 1948 and P102,916.05 in 1948, and
P160,910.96 in 1949 (Exhibit 118).
The main issue involved in these proceedings is: Is Maria B. Castro
the owner of all the shares of stocks of Marvel Building Corporation
and the other stockholders mere dummies of hers?
The most important evidence presented by the Collector of Internal
Revenue to prove his claim that Maria B. Castro is the sole and
exclusive owner of the shares of stock of the Marvel Building
Corporation is supposed endorsement in blank of the shares of stock
issued in the name of the other incorporators, and the possession
thereof by Maria B. Castro. The existence of said endorsed
certificates was testified to by witnesses Felipe Aquino, internal
revenue examiner, Antonio Mariano, examiner, and Crispin
Llamado, Under Secretary of Finance, who declared as follows:
Towards the end of the year 1948 and about the beginning of the
year 1949, while Aquino and Mariano were examining the books and
papers were furnished by its secretary, Maximo Cristobal, they came
across an envelope containing eleven stock certificates, bound
together by an Acco fastener, which (certificates) corresponded in
number and in amount on their face to the subscriptions of the
stockholders that all the certificates, except that in the name of Maria
B. Castro, were endorsed in the bank by the subscribers; that as the
two revenue agents could not agree what to do with the certificates,
Aquino brought them to Under-Secretary of Finance Llamado, who
thereupon suggested that photostatic copies thereof be taken; that this
was done, and the photostatic copies taken are (Exhibits 4, 5, 6, 7, 8,
9, 10, 11, 12 and 13; and in that July, 1950, copy-cat copies of the
above photostats were taken, and said copy-cat copies are Exhibits
40-49.
Julio Llamado, bookkeeper of the Marvel Building Corporation from
1947 to May, 1948, also testified that he was the one who had
prepared the original certificates, putting therein the number of
shares in words in handprint; that the originals were given to him by
Maria B. Castro for comparison with the articles of incorporation;
that they were not yet signed by the President and by the Secretary-
Treasurer when he had the certificates; and that after the checking he
returned all of them to Mrs. Castro. He recognized the photostats,
Exhibit 4 to 13 as photostats of the said originals. He also declared
that he also prepared a set of stock certificates, similar to the
certificates which were copied in the photostats, the number of
shares, and the date issue, and that the certificates he had prepared
are Exhibits H, H-1 to H-7 and J (Exhibits 30-38). This set of
certificates was made by him first and the set of which photostats
were taken, a few days later.
The plaintiffs offered a half-hearted denial of the existence of the
endorsed blank certificates, Maximo Cristobal, secretary of the
corporation, saying that no investigation was ever made by Aquino
and Mariano in which said certificates were discovered by the latter.
They, however, vigorously attack the credibility of the witnesses for
the defendant, imputing to the Llamados, enmity against Maria B.
Castro, and to Aquino and Mariano, a very doubtful conduct in not
divulging the existence of the certificates either Lobrin, Chief
Income Tax Examiner, or to the Collector of Internal Revenue, both
their immediate chiefs. Reliance is also placed on a certificate,
Exhibit W, wherein Aquino and others declare that the certificates
(Exhibits 30 to 38, or H, H-1 to H-7 and J) were regular and were not
endorsed when the same were examined. In connection with this
certificate, Exhibit W, we note that it states that the certificates
examined were Exhibits 30 to 38, the existence or character of which
are not disputed. But the statement contains nothing to the effect that
the above certificates were the only one existence, according to their
knowledge. Again the certificate was issued for an examination on
September 1949, not by Aquino and Mariano at the end of 1948 or
the beginning of 1949. The certificate, therefore, neither denies the
existence of the endorsed certificates, nor that Aquino and Mariano
had made an examination of the papers of the corporation at the end
of the year 1948. It ca not, therefore, discredit the testimonies of the
defendant's witnesses.
As to the supposed enmity of the Llamados towards the plaintiff
Maria B. Castro, we note that, supposing that there really was such
enmity, it does not appear that it was of such magnitude or force as
could have induced the Llamados and Maria B. Castro were close
friends way back in 1947 and up to 1949; but that at the time of the
trial the friendship had been marred by misunderstandings. We
believe that in 1948 and 1949 the Llamados were trusted friends of
Maria B. Castro, and this explains why they had knowledge of her
secret transactions. The younger Llamado even made advances for
the hand of Maria B. Castro's daughter, and this at the time when as a
bookkeeper he was entrusted with checking up the certificates of
stock. When the older Llamado kept secret the existence of the
Page 17 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
endorsed certificates, the friendship between the two families was
yet intact; hence, the existence of the endorsed certificates must have
been kept to himself by the older Llamado. All the above
circumstances reinforce our belief that the Llamados had personal
knowledge of the facts they testify to, and the existence of this
knowledge in turn renders improbable plaintiffs' claim that their
testimonies were biased.
Attempt was also made by the plaintiffs to show by expert evidence
that the endorsement could have been superimposed, i.e., that the
signatures made on other papers and these were pasted and thereafter
the documents photographed. Judicial experience is to the effect that
the expert witnesses can always be obtained for both sides of an
issue, most likely because expert witnesses are no longer
impermeable to the influence of fees (II Wigmore, Sec. 563(2), p.
646). And if parties are capable of paying fees, expert opinion should
be received with caution. In the case at bar, the opinion on the
supposed superimposition was merely a possibility, and we note
various circumstances which proved that the signatures were not
superimposed and corroborate defendant's claim that they were
genuine. In the first place,, the printed endorsement contains a very
heavy line at the bottom for the signature of the endorsee. This line
in almost all the endorsements is as clear as the printed letters above
it, and at the points where the letters of the signature extend down
and transversed it (the line), there is no indication that the line is
covered by a superimposed paper. Again in these places both the
signatures and the lines are clear and distinct where they cross one
another. Had there been superimpositions the above features could
not have been possible. In the second place, Maria B. Castro
admitted having signed 25 stock certificates, but only eleven were
issued (t. s. n., p. 662). No explanation is given by her why she had
to sign as many as 25 forms when there were only eleven subscribers
and eleven forms to be filed. This circumstances corroborate the
young Llamado's declaration that two sets of certificates had been
prepared. The nineteen issue must be Exhibits H, H-1 to H-7 and J,
or Nos. 30 to 38, and the stock certificates endorsed whose
photostatic copies are Exhibits 4 to 13. It is to be remembered also,
that it is a common practice among unscrupulous merchants to carry
two sets of books, one set for themselves and another to be shown to
tax collectors. This practice could not have been unknown to Maria
B. Castro, who apparently had been able to evade the payment of her
war profits taxes. These circumstances, coupled with the testimony
of Julio Llamado that two sets of certificates were given to him for
checking, show to an impartial mind the existence of the set of
certificates endorsed in blank, thus confirming the testimonies of the
defendant's witnesses, Aquino, Mariano and Crispin Llamado, and
thus discrediting the obviously partial testimony of the expert
presented by plaintiffs. The genuineness of the signatures on the
endorsements is not disputed. How could the defendant have secured
these genuine signatures? Plaintiffs offer no explanation for this,
although they do not question them. It follows that the genuine
signatures must have been made on the stock certificates themselves.
Next in importance among the evidence submitted by the defendant
collector to prove his contention that Maria B. Castro is the sole
owner of the shares of stock of the Marvel Building Corporation, is
the fact that the other stockholders did not have incomes in such
amounts, during the time of the organization of the corporation in
1947, or immediately thereto, as to enable them to pay in full for
their supposed subscriptions. This fact is proved by their income tax
returns, or the absence thereof. Let us take Amado A. Yatco as an
example. Before 1945 his returns were exempt from the tax, in 1945
he had P12,600 and in 1946, P23,000. He has four children. How
could he have paid P100,000 in 1945 and 1946? Santiago Tan who
also contributed P100,000 had no appreciable income before 1946,
and this year an income of only P9,167.95. Jose T. Lopez also did
not file any income tax returns before 1940 and 1946 he had an
income of only P20,785, whereas he is supposed to have subscribed
P90,000 worth of stock early in 1947. Benita Lamagna had no
returns either up to 1945, except in 1942, which was exempt and in
1945 she had an income of P1,550 and in 1946, P6,463.36. In the
same situation are all the others, and besides, brothers and sisters and
brother-in-law of Maria B. Castro. On the other hand, Maria B.
Castro had been found to have made enormous gains or profits in her
business such that the taxes thereon were assessed at around
P3,000,000. There was, therefore, a prima facie case out by the
defendant collector that Maria B. Castro had furnished (& all the
money that the Marvel Building Corporation had.
In order the meet the above evidence only three of the plaintiffs
testified, namely, Maximo Cristobal, the corporation's secretary, who
made the general assertion on the witness stand that the other
stockholders paid for their shares in full, Maria B. Castro, who stated
that payments for the subscription were made to her, and C.S.
Gonzales, who admitted that Maria B. Castro, paid for his
subscription. After a careful study of the above testimonies,
however, we find them subject to various objections. Maximo
Cristobal declared that he issued provincial receipts for the
subscriptions supposedly paid to him in 1946; but none of the
supposed receipts were presented. If the subscriptions were really
received by him, big as the amounts were, he would have been able
to tell specifically, by dates and in fix amounts, when and how the
payments were made. The general assertion of alleged payments,
without the concrete days and amounts of payments, are, according
to our experience, positive identifications of untruthfulness, for when
a witness testified to a fact that actually occurs, the act is concretely
stated and no generalization is made.
With respect to Maria B. Castro's testimony, we find it to be as
untruthful as that of Cristobal. She declared that payments of the
subscriptions took place between July and December, 1946, and that
first payments were first deposited by her in the National City Bank
of New York. A study of her account in said bank (Exhibit 82),
however, fails to show the alleged deposit of the subscriptions during
the year 1946 (See Exhibits 83-112). This fact completely belies her
assertion. As to the testimony of C.S. Gonzales that Maria B. Castro
advanced his subscription, there is nothing in the evidence to
corroborate it, and the circumstances show otherwise. If he had
really been a stockholder and Maria B. Castro advanced his
subscription, the agreement between him and Castro should have
been put in writing, the amount advanced being quite considerable
(P80,000), and it appearing further that Gonzales is no close relative
or confidant of Castro.
would not have asked them to endorse their stock certificates, or be
keeping these in her possession, if they were really the owners. They
never would have consented that Maria B. Castro keep the funds
without receipts or accounting, nor that she manages the business
without their knowledge or concurrence, were they owners of the
stocks in their own rights. Each and every one of the facts all set
forth above, in the same manner, is inconsistent with the claim that
the stockholders, other than Maria B. Castro, own their shares in
their own right. On the other hand, each and every one of them, and
all of them, can point to no other conclusion than that Maria B.
Castro was the sole and exclusive owner of the shares and that they
were only her dummies.
In our opinion, the facts and circumstances duly set forth above, all
of which have been proved to our satisfaction, prove conclusively
and beyond reasonable doubt (section 89, Rule 123 of the Rules of
Court and section 42 of the Provisional law for the application of the
Penal Code) that Maria B. Castro is the sole and exclusive owner of
all the shares of stock of the Marvel Building Corporation and that
the other partners are her dummies.
Wherefore, the judgment appealed from should be, as it hereby is,
reversed and the action filed by plaintiffs-appellees, dismissed, with
costs against plaintiffs-appellees. So ordered.

Lastly, it is significant that the plaintiffs, the supposed subscribers,

who should have come to court to assert that they actually paid for
their subscriptions, and are not mere dummies, did not do so. They
could not have afforded such a costly indifference, valued at from
P70,000 to P100,000 each, if they were not actual dummies. This
failure on their part to take the witness stand to deny or refute the
charge that they were mere dummies is to us of utmost significance.
What could have been easier to disprove the charge that they were
dummies, than for them to come to court and show their receipts and
testify on the payments they have paid on their subscriptions? This
they, however refused to do so. They had it in their power to rebut
the charges, but they chose to keep silent. The non-production of
evidence that would naturally have been produced by an honest and
therefore fearless claimant permits the inference that its tenor is
unfavorable to the party's cause (II Wigmore, Sec. 285, p.162). A
party's silence to adverse testimony is equivalent to an admission of
its truth (Ibid, Sec. 289, p. 175).

Our consideration of the evidence submitted on both sides leads us to

a conclusion exactly opposite that arrived at by the trial court. In
general the evidence offered by the plaintiffs is testimonial and direct
evidence, easy of fabrication; that offered by defendant,
documentary and circumstantial, not only difficult of fabrication but
in most cases found in the possession of plaintiffs. There is very little
room for choice as between the two. The circumstantial evidence is
not only convincing; it is conclusive. The existence of endorsed
certificates, discovered by the internal revenue agents between 1948
and 1949 in the possession of the Secretary-Treasurer, the fact that
twenty-five certificates were signed by the president of the
corporation, for no justifiable reason, the fact that two sets of
certificates were issued, the undisputed fact that Maria B. Castro had
made enormous profits and, therefore, had a motive to hide them to
evade the payment of taxes, the fact that the other subscribers had no
incomes of sufficient magnitude to justify their big subscriptions, the
fact that the subscriptions were not receipted for and deposited by the
treasurer in the name of the corporation but were kept by Maria B.
Castro herself, the fact that the stockholders or the directors never
appeared to have ever met to discuss the business of the corporation,
the fact that Maria B. Castro advanced big sums of money to the
corporation without any previous arrangement or accounting, and the
fact that the books of accounts were kept as if they belonged to
Maria B. Castro alone — these facts are of patent and potent
significance. What are their necessary implications? Maria B. Castro

Page 18 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
G.R. No. L-13203             January 28, 1961
YUTIVO SONS HARDWARE COMPANY, petitioner,
vs.
COURT OF TAX APPEALS and COLLECTOR OF
INTERNAL REVENUE, respondents.
Sycip, Quisumbing, Salazar & Associates for petitioner.
Office of the Solicitor General for respondents.
GUTIERREZ DAVID, J.:
This is a petition for review of a decision of the Court of Tax
Appeals ordering petitioner to pay to respondent Collector of Internal
Revenue the sum of P1,266,176.73 as sales tax deficiency for the
third quarter of 1947 to the fourth quarter of 1950; inclusive, plus
75% surcharge thereon, equivalent to P349,632.54, or a sum total of
P2,215,809.27, plus costs of the suit.
From the stipulation of facts and the evidence adduced by both
parties, it appears that petitioner Yutivo Sons Hardware Co.
(hereafter referred to as Yutivo) is a domestic corporation, organized
under the laws of the Philippines, with principal office at 404
Dasmariñas St., Manila. Incorporated in 1916, it was engaged, prior
to the last world war, in the importation and sale of hardware
supplies and equipment. After the liberation, it resumed its business
and until June of 1946 bought a number of cars and trucks from
General Motors Overseas Corporation (hereafter referred to as GM
for short), an American corporation licensed to do business in the
Philippines. As importer, GM paid sales tax prescribed by sections
184, 185 and 186 of the Tax Code on the basis of its selling price to
Yutivo. Said tax being collected only once on original sales, Yutivo
paid no further sales tax on its sales to the public.
On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as
SM) was organized to engage in the business of selling cars, trucks
and spare parts. Its original authorized capital stock was P1,000,000
divided into 10,000 shares with a par value of P100 each.
At the time of its incorporation 2,500 shares worth P250,000 appear
to have been subscribed into equal proportions by Yu Khe Thai, Yu
Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington Sycip. The
first three named subscribers are brothers, being sons of Yu Tiong
Yee, one of Yutivo's founders. The latter two are respectively sons of
Yu Tiong Sin and Albino Sycip, who are among the founders of
Yutivo.
After the incorporation of SM and until the withdrawal of GM from
the Philippines in the middle of 1947, the cars and tracks purchased
by Yutivo from GM were sold by Yutivo to SM which, in turn, sold
them to the public in the Visayas and Mindanao.
When GM decided to withdraw from the Philippines in the middle of
1947, the U.S. manufacturer of GM cars and trucks appointed Yutivo
as importer for the Visayas and Mindanao, and Yutivo continued its
previous arrangement of selling exclusively to SM. In the same way
that GM used to pay sales taxes based on its sales to Yutivo, the
latter, as importer, paid sales tax prescribed on the basis of its selling
price to SM, and since such sales tax, as already stated, is collected
only once on original sales, SM paid no sales tax on its sales to the
public.
On November 7, 1950, after several months of investigation by
revenue officers started in July, 1948, the Collector of Internal
Revenue made an assessment upon Yutivo and demanded from the
latter P1,804,769.85 as deficiency sales tax plus surcharge covering
the period from the third quarter of 1947 to the fourth quarter of
1949; or from July 1, 1947 to December 31, 1949, claiming that the
taxable sales were the retail sales by SM to the public and not the
sales at wholesale made by, Yutivo to the latter inasmuch as SM and
Yutivo were one and the same corporation, the former being the
subsidiary of the latter.
The assessment was disputed by the petitioner, and a reinvestigation
of the case having been made by the agents of the Bureau of Internal
Revenue, the respondent Collector in his letter dated November 15,
1952 countermanded his demand for sales tax deficiency on the
ground that "after several investigations conducted into the matter no
sufficient evidence could be gathered to sustain the assessment of
this Office based on the theory that Southern Motors is a mere
instrumentality or subsidiary of Yutivo." The withdrawal was
Page 19 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
subject, however, to the general power of review by the now defunct
Board of Tax Appeals. The Secretary of Finance to whom the papers
relative to the case were endorsed, apparently not agreeing with the
withdrawal of the assessment, returned them to the respondent
Collector for reinvestigation.
After another investigation, the respondent Collector, in a letter to
petitioner dated December 16, 1954, redetermined that the
aforementioned tax assessment was lawfully due the government and
in addition assessed deficiency sales tax due from petitioner for the
four quarters of 1950; the respondents' last demand was in the total
sum of P2,215,809.27 detailed as follows:
Deficiency Sales 75% Total Amount
Tax Surcharge Due
Assessment
(First) of
November 7,
1950 for
deficiency sales
Tax for the
period from 3rd
Qrtr 1947 to
4th Qrtr 1949
inclusive P1,031,296.60 P773,473.45 P1,804,769.05
Additional
Assessment for
period from 1st
to 4th Qrtr
1950, inclusive 234,880.13 176,160.09 411,040.22
Total amount
demanded per
letter of
December 16,
1954 P1,266,176.73 P949,632.54 P2,215,809.27
This second assessment was contested by the petitioner Yutivo
before the Court of Tax Appeals, alleging that there is no valid
ground to disregard the corporate personality of SM and to hold that
it is an adjunct of petitioner Yutivo; (2) that assuming the separate
personality of SM may be disregarded, the sales tax already paid by
Yutivo should first be deducted from the selling price of SM in
computing the sales tax due on each vehicle; and (3) that the
surcharge has been erroneously imposed by respondent. Finding
against Yutivo and sustaining the respondent Collector's theory that
there was no legitimate or bona fide purpose in the organization of
SM — the apparent objective of its organization being to evade the
payment of taxes — and that it was owned (or the majority of the
stocks thereof are owned) and controlled by Yutivo and is a mere
subsidiary, branch, adjunct, conduit, instrumentality or alter ego of
the latter, the Court of Tax Appeals — with Judge Roman Umali not
taking part — disregarded its separate corporate existence and on
April 27, 1957, rendered the decision now complained of. Of the two
Judges who signed the decision, one voted for the modification of
the computation of the sales tax as determined by the respondent
Collector in his decision so as to give allowance for the reduction of
the tax already paid (resulting in the reduction of the assessment to
P820,509.91 exclusive of surcharges), while the other voted for
affirmance. The dispositive part of the decision, however, affirmed
the assessment made by the Collector. Reconsideration of this
decision having been denied, Yutivo brought the case to this Court
thru the present petition for review.
It is an elementary and fundamental principle of corporation law that
a corporation is an entity separate and distinct from its stockholders
and from other corporation petitions to which it may be connected.
However, "when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime," the law
will regard the corporation as an association of persons, or in the
case of two corporations merge them into one. (Koppel [Phil.], Inc.
vs. Yatco, 77 Phil. 496, citing I Fletcher Cyclopedia of Corporation,
Perm Ed., pp. 135 136; United States vs. Milwaukee Refrigeration
Transit Co., 142 Fed., 247, 255 per Sanborn, J.) Another rule is that,
when the corporation is the "mere alter ego or business conduit of a
person, it may be disregarded." (Koppel [Phil.], Inc. vs.
Yatco, supra.)
After going over the voluminous record of the present case, we are
inclined to rule that the Court of Tax Appeals was not justified in
finding that SM was organized for no other purpose than to defraud
the Government of its lawful revenues. In the first place, this
corporation was organized in June, 1946 when it could not have
caused Yutivo any tax savings. From that date up to June 30, 1947,
or a period of more than one year, GM was the importer of the cars
and trucks sold to Yutivo, which, in turn resold them to SM. During
that period, it is not disputed that GM as importer, was the one solely
liable for sales taxes. Neither Yutivo or SM was subject to the sales
taxes on their sales of cars and trucks. The sales tax liability of
Yutivo did not arise until July 1, 1947 when it became the importer
and simply continued its practice of selling to SM. The decision,
therefore, of the Tax Court that SM was organized purposely as a tax
evasion device runs counter to the fact that there was no tax to evade.
Making the observation from a newspaper clipping (Exh. "T") that
"as early as 1945 it was known that GM was preparing to leave the
Philippines and terminate its business of importing vehicles," the
court below speculated that Yutivo anticipated the withdrawal of GM
from business in the Philippines in June, 1947. This observation,
which was made only in the resolution on the motion for
reconsideration, however, finds no basis in the record. On the other
hand, GM had been an importer of cars in the Philippines even
before the war and had but recently resumed its operation in the
Philippines in 1946 under an ambitious plan to expand its operation
by establishing an assembly plant here, so that it could not have been
expected to make so drastic a turnabout of not merely abandoning
the assembly plant project but also totally ceasing to do business as
an importer. Moreover, the newspaper clipping, Exh. "T", was
published on March 24, 1947, and clipping, merely reported a
rumored plan that GM would abandon the assembly plant project in
the Philippines. There was no mention of the cessation of business
by GM which must not be confused with the abandonment of the
assembly plant project. Even as respect the assembly plant, the
newspaper clipping was quite explicit in saying that the Acting
Manager refused to confirm that rumor as late as March 24, 1947,
almost a year after SM was organized.
At this juncture, it should be stated that the intention to minimize
taxes, when used in the context of fraud, must be proved to exist by
clear and convincing evidence amounting to more than mere
preponderance, and cannot be justified by a mere speculation. This is
because fraud is never lightly to be presumed. (Vitelli & Sons vs.
U.S 250 U.S. 355; Duffin vs. Lucas, 55 F (2d) 786; Budd vs.
Commr., 43 F (2d) 509; Maryland Casualty Co. vs. Palmette Coal
Co., 40 F (2d) 374; Schoonfield Bros., Inc. vs. Commr., 38 BTA
943; Charles Heiss vs. Commr 36 BTA 833; Kerbaugh vs. Commr
74 F (2d) 749; Maddas vs. Commr., 114 F. (2d) 548; Moore vs.
Commr., 37 BTA 378; National City Bank of New York vs.
Commr., 98 (2d) 93; Richard vs. Commr., 15 BTA 316; Rea Gane
vs. Commr., 19 BTA 518). (See also Balter, Fraud Under Federal
Law, pp. 301-302, citing numerous authorities: Arroyo vs. Granada,
et al., 18 Phil. 484.) Fraud is never imputed and the courts never
sustain findings of fraud upon circumstances which, at the most,
create only suspicion. (Haygood Lumber & Mining Co. vs. Commr.,
178 F (2d) 769; Dalone vs. Commr., 100 F (2d) 507).
In the second place, SM was organized and it operated, under
circumstance that belied any intention to evade sales taxes. "Tax
evasion" is a term that connotes fraud thru the use of pretenses and
forbidden devices to lessen or defeat taxes. The transactions between
Yutivo and SM, however, have always been in the open, embodied
in private and public documents, constantly subject to inspection by
the tax authorities. As a matter of fact, after Yutivo became the
importer of GM cars and trucks for Visayas and Mindanao, it merely
continued the method of distribution that it had initiated long before
GM withdrew from the Philippines.
On the other hand, if tax saving was the only justification for the
organization of SM, such justification certainly ceased with the
passage of Republic Act No. 594 on February 16, 1951, governing
payment of advance sales tax by the importer based on the landed
cost of the imported article, increased by mark-ups of 25%, 50%, and
100%, depending on whether the imported article is taxed under
sections 186, 185 and 184, respectively, of the Tax Code. Under
Page 20 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
Republic Act No. 594, the amount at which the article is sold is
immaterial to the amount of the sales tax. And yet after the passage
of that Act, SM continued to exist up to the present and operates as it
did many years past in the promotion and pursuit of the business
purposes for which it was organized.
In the third place, sections 184 to 186 of the said Code provides that
the sales tax shall be collected "once only on every original sale,
barter, exchange . . , to be paid by the manufacturer, producer or
importer." The use of the word "original" and the express provision
that the tax was collectible "once only" evidently has made the
provisions susceptible of different interpretations. In this connection,
it should be stated that a taxpayer has the legal right to decrease the
amount of what otherwise would be his taxes or altogether avoid
them by means which the law permits. (U.S. vs. Isham 17 Wall. 496,
506; Gregory vs. Helvering 293 U.S. 465, 469; Commr. vs. Tower,
327 U.S. 280; Lawton vs. Commr 194 F (2d) 380). Any legal means
by the taxpayer to reduce taxes are all right Benry vs. Commr. 25 T.
Cl. 78). A man may, therefore, perform an act that he honestly
believes to be sufficient to exempt him from taxes. He does not incur
fraud thereby even if the act is thereafter found to be insufficient.
Thus in the case of Court Holding Co. vs. Commr. 2 T. Cl. 531, it
was held that though an incorrect position in law had been taken by
the corporation there was no suppression of the facts, and a fraud
penalty was not justified.
The evidence for the Collector, in our opinion, falls short of the
standard of clear and convincing proof of fraud. As a matter of fact,
the respondent Collector himself showed a great deal of doubt or
hesitancy as to the existence of fraud. He even doubted the validity
of his first assessment dated November 7, 1959. It must be
remembered that the fraud which respondent Collector imputed to
Yutivo must be related to its filing of sales tax returns of less taxes
than were legally due. The allegation of fraud, however, cannot be
sustained without the showing that Yutivo, in filing said returns, did
so fully knowing that the taxes called for therein called for therein
were less than what were legally due. Considering that respondent
Collector himself with the aid of his legal staff, and after some two
years of investigation and duty of investigation and study concluded
in 1952 that Yutivo's sales tax returns were correct — only to reverse
himself after another two years — it would seem harsh and unfair for
him to say in 1954 that Yutivo fully knew in October 1947 that its
sales tax returns were inaccurate.
On this point, one other consideration would show that the intent to
save taxes could not have existed in the minds of the organizers of
SM. The sales tax imposed, in theory and in practice, is passed on to
the vendee, and is usually billed separately as such in the sales
invoice. As pointed out by petitioner Yutivo, had not SM handled the
retail, the additional tax that would have been payable by it, could
have been easily passed off to the consumer, especially since the
period covered by the assessment was a "seller's market" due to the
post-war scarcity up to late 1948, and the imposition of controls in
the late 1949.
It is true that the arrastre charges constitute expenses of Yutivo and
its non-inclusion in the selling price by Yutivo cost the Government
P4.00 per vehicle, but said non-inclusion was explained to have been
due to an inadvertent accounting omission, and could hardly be
considered as proof of willful channelling and fraudulent evasion of
sales tax. Mere understatement of tax in itself does not prove fraud.
(James Nicholson, 32 BTA 377, affirmed 90 F. (2) 978, cited in
Merten's Sec. 55.11 p. 21) The amount involved, moreover, is
extremely small inducement for Yutivo to go thru all the trouble of
organizing SM. Besides, the non-inclusion of these small arrastre
charges in the sales tax returns of Yutivo is clearly shown in the
records of Yutivo, which is uncharacteristic of fraud (See Insular
Lumber Co. vs. Collector, G.R. No. L-719, April 28, 1956.)
We are, however, inclined to agree with the court below that SM was
actually owned and controlled by petitioner as to make it a mere
subsidiary or branch of the latter created for the purpose of selling
the vehicles at retail and maintaining stores for spare parts as well as
service repair shops. It is not disputed that the petitioner, which is
engaged principally in hardware supplies and equipment, is
completely controlled by the Yutivo, Young or Yu family. The
founders of the corporation are closely related to each other either by
blood or affinity, and most of its stockholders are members of the Yu
(Yutivo or Young) family. It is, likewise, admitted that SM was
organized by the leading stockholders of Yutivo headed by Yu Khe
Thai. At the time of its incorporation 2,500 shares worth
P250,000.00 appear to have been subscribed in five equal
proportions by Yu Khe Thai, Yu Khe Siong, Yu Khe Jin, Yu Eng
Poh and Washington Sycip. The first three named subscribers are
brothers, being the sons of Yu Tien Yee, one of Yutivo's founders.
Yu Eng Poh and Washington Sycip are respectively sons of Yu
Tiong Sing and Alberto Sycip who are co-founders of Yutivo.
According to the Articles of Incorporation of the said subscriptions,
the amount of P62,500 was paid by the aforenamed subscribers, but
actually the said sum was advanced by Yutivo. The additional
subscriptions to the capital stock of SM and subsequent transfers
thereof were paid by Yutivo itself. The payments were made,
however, without any transfer of funds from Yutivo to SM. Yutivo
simply charged the accounts of the subscribers for the amount
allegedly advanced by Yutivo in payment of the shares. Whether a
charge was to be made against the accounts of the subscribers or said
subscribers were to subscribe shares appears to constitute a unilateral
act on the part of Yutivo, there being no showing that the former
initiated the subscription.
The transactions were made solely by and between SM and Yutivo.
In effect, it was Yutivo who undertook the subscription of shares,
employing the persons named or "charged" with corresponding
account as nominal stockholders. Of course, Yu Khe Thai, Yu Khe
Jin, Yu Khe Siong and Yu Eng Poh were manifestly aware of these
subscriptions, but considering that they were the principal officers
and constituted the majority of the Board of Directors of both Yutivo
and SM, their subscriptions could readily or easily be that of Yutivo's
Moreover, these persons were related to death other as brothers or
first cousins. There was every reason for them to agree in order to
protect their common interest in Yutivo and SM.
The issued capital stock of SM was increased by additional
subscriptions made by various person's but except Ng Sam Bak and
David Sycip, "payments" thereof were effected by merely debiting
'or charging the accounts of said stockholders and crediting the
corresponding amounts in favor of SM, without actually transferring
cash from Yutivo. Again, in this instance, the "payments" were
Yutivo, by effected by the mere unilateral act of Yutivo a accounts of
the virtue of its control over the individual persons charged, would
necessarily exercise preferential rights and control directly or
indirectly, over the shares, it being the party which really undertook
to pay or underwrite payment thereof.
The shareholders in SM are mere nominal stockholders holding the
shares for and in behalf of Yutivo, so even conceding that the
original subscribers were stockholders bona fide Yutivo was at all
times in control of the majority of the stock of SM and that the latter
was a mere subsidiary of the former.
True, petitioner and other recorded stockholders transferred their
shareholdings, but the transfers were made to their immediate
relatives, either to their respective spouses and children or sometimes
brothers or sisters. Yutivo's shares in SM were transferred to
immediate relatives of persons who constituted its controlling
stockholders, directors and officers. Despite these purported changes
in stock ownership in both corporations, the Board of Directors and
officers of both corporations remained unchanged and Messrs. Yu
Khe Thai, Yu Khe Siong Hu Khe Jin and Yu Eng Poll (all of the Yu
or Young family) continued to constitute the majority in both boards.
All these, as observed by the Court of Tax Appeals, merely serve to
corroborate the fact that there was a common ownership and interest
in the two corporations.
SM is under the management and control of Yutivo by virtue of a
management contract entered into between the two parties. In fact,
the controlling majority of the Board of Directors of Yutivo is also
the controlling majority of the Board of Directors of SM. At the
same time the principal officers of both corporations are identical. In
addition both corporations have a common comptroller in the person
of Simeon Sy, who is a brother-in-law of Yutivo's president, Yu Khe
Thai. There is therefore no doubt that by virtue of such control, the
business, financial and management policies of both corporations
could be directed towards common ends.
Another aspect relative to Yutivo's control over SM operations
relates to its cash transactions. All cash assets of SM were handled
by Yutivo and all cash transactions of SM were actually maintained
Page 21 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
thru Yutivo. Any and all receipts of cash by SM including its
branches were transmitted or transferred immediately and directly to
Yutivo in Manila upon receipt thereof. Likewise, all expenses,
purchases or other obligations incurred by SM are referred to Yutivo
which in turn prepares the corresponding disbursement vouchers and
payments in relation there, the payment being made out of the cash
deposits of SM with Yutivo, if any, or in the absence thereof which
occurs generally, a corresponding charge is made against the account
of SM in Yutivo's books. The payments for and charges against SM
are made by Yutivo as a matter of course and without need of any
further request, the latter would advance all such cash requirements
for the benefit of SM. Any and all payments and cash vouchers are
made on Yutivo stationery and made under authority of Yutivo's
corporate officers, without any copy thereof being furnished to SM.
All detailed records such as cash disbursements, such as expenses,
purchases, etc. for the account of SM, are kept by Yutivo and SM
merely keeps a summary record thereof on the basis of information
received from Yutivo.
All the above plainly show that cash or funds of SM, including those
of its branches which are directly remitted to Yutivo, are placed in
the custody and control of Yutivo, resources and subject to
withdrawal only by Yutivo. SM's being under Yutivo's control, the
former's operations and existence became dependent upon the latter.
Consideration of various other circumstances, especially when taken
together, indicates that Yutivo treated SM merely as its department
or adjunct. For one thing, the accounting system maintained by
Yutivo shows that it maintained a high degree of control over SM
accounts. All transactions between Yutivo and SM are recorded and
effected by mere debit or credit entries against the reciprocal account
maintained in their respective books of accounts and indicate the
dependency of SM as branch upon Yutivo.
Apart from the accounting system, other facts corroborate or
independently show that SM is a branch or department of Yutivo.
Even the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat
Yutivo — Manila as their "Head Office" or "Home Office" as shown
by their letters of remittances or other correspondences. These
correspondences were actually received by Yutivo and the reference
to Yutivo as the head or home office is obvious from the fact that all
cash collections of the SM's branches are remitted directly to Yutivo.
Added to this fact, is that SM may freely use forms or stationery of
Yutivo
The fact that SM is a mere department or adjunct of Yutivo is made
more patent by the fact that arrastre conveying, and charges paid for
the "operation of receiving, loading or unloading" of imported cars
and trucks on piers and wharves, were charged against SM. Overtime
charges for the unloading of cars and trucks as requested by Yutivo
and incurred as part of its acquisition cost thereof, were likewise
charged against and treated as expenses of SM. If Yutivo were the
importer, these arrastre and overtime charges were Yutivo's expenses
in importing goods and not SM's. But since those charges were made
against SM, it plainly appears that Yutivo had sole authority to
allocate its expenses even as against SM in the sense that the latter is
a mere adjunct, branch or department of the former.
Proceeding to another aspect of the relation of the parties, the
management fees due from SM to Yutivo were taken up as expenses
of SM and credited to the account of Yutivo. If it were to be assumed
that the two organizations are separate juridical entities, the
corresponding receipts or receivables should have been treated as
income on the part of Yutivo. But such management fees were
recorded as "Reserve for Bonus" and were therefore a liability
reserve and not an income account. This reserve for bonus were
subsequently distributed directly to and credited in favor of the
employees and directors of Yutivo, thereby clearly showing that the
management fees were paid directly to Yutivo officers and
employees.
Briefly stated, Yutivo financed principally, if not wholly, the
business of SM and actually extended all the credit to the latter not
only in the form of starting capital but also in the form of credits
extended for the cars and vehicles allegedly sold by Yutivo to SM as
well as advances or loans for the expenses of the latter when the
capital had been exhausted. Thus, the increases in the capital stock
were made in advances or "Guarantee" payments by Yutivo and
credited in favor of SM. The funds of SM were all merged in the
cash fund of Yutivo. At all times Yutivo thru officers and directors
common to it and SM, exercised full control over the cash funds,
policies, expenditures and obligations of the latter.
Southern Motors being but a mere instrumentality, or adjunct of
Yutivo, the Court of Tax Appeals correctly disregarded the technical
defense of separate corporate entity in order to arrive at the true tax
liability of Yutivo.
Petitioner contends that the respondent Collector had lost his right or
authority to issue the disputed assessment by reason of prescription.
The contention, in our opinion, cannot be sustained. It will be noted
that the first assessment was made on November 7, 1950 for
deficiency sales tax from 1947 to 1949. The corresponding returns
filed by petitioner covering the said period was made at the earliest
on October 1, as regards the third quarter of 1947, so that it cannot
be claimed that the assessment was not made within the five-year
period prescribed in section 331 of the Tax Code invoked by
petitioner. The assessment, it is admitted, was withdrawn by the
Collector on insufficiency of evidence, but November 15, 1952 due
to insufficiency of evidence, but the withdrawal was made subject to
the approval of the Secretary of Finance and the Board of Tax
Appeals, pursuant to the provisions of section 9 of Executive Order
No. 401-A, series of 1951. The decision of the previous assessment
of November 7, Collector countermanding the as 1950 was
forwarded to the Board of Tax Appeals through the Secretary of
Finance but that official, apparently disagreeing with the decision,
sent it back for re-investigation. Consequently, the assessment of
November 7, 1950 cannot be considered to have been finally
withdrawn. That the assessment was subsequently reiterated in the
decision of respondent Collector on December 16, 1954 did not alter
the fact that it was made seasonably. In this connection, it would
appear that a warrant of distraint and levy had been issued on March
28, 1951 in relation with this case and by virtue thereof the
properties of Yutivo were placed under constructive distraint. Said
warrant and constructive distraint have not been lifted up to the
present, which shows that the assessment of November 7, 1950 has
always been valid and subsisting.
Anent the deficiency sale tax for 1950, considering that the
assessment thereof was made on December 16, 1954, the same was
assessed well within the prescribed five-year period.
Petitioner argues that the original assessment of November 7, 1950
did not extend the prescriptive period on assessment. The argument
is untenable, for, as already seen, the assessment was never finally
withdrawn, since it was not approved by the Secretary of Finance or
of the Board of Tax Appeals. The authority of the Secretary to act
upon the assessment cannot be questioned, for he is expressly
granted such authority under section 9 of Executive Order No. 401-
And under section 79 (c) of the Revised Administrative Code, he has
"direct control, direction and supervision over all bureaus and offices
under his jurisdiction and may, any provision of existing law to the
contrary not withstanding, repeal or modify the decision of the chief
of said Bureaus or offices when advisable in public interest."
It should here also be stated that the assessment in question was
consistently protested by petitioner, making several requests for
reinvestigation thereof. Under the circumstances, petitioner may be
considered to have waived the defense of prescription.
"Estoppel has been employed to prevent the application of the statute
of limitations against the government in certain instances in which
the taxpayer has taken some affirmative action to prevent the
collection of the tax within the statutory period. It is generally held
that a taxpayer is estopped to repudiate waivers of the statute of
limitations upon which the government relied. The cases frequently
involve dissolved corporations. If no waiver has been given, the
cases usually show come conduct directed to a postponement of
collection, such, for example, as some variety of request to apply an
overassessment. The taxpayer has 'benefited' and 'is not in a position
to contest' his tax liability. A definite representation of implied
authority may be involved, and in many cases the taxpayer has
received the 'benefit' of being saved from the inconvenience, if not
hardship of immediate collection. "
Conceivably even in these cases a fully informed Commissioner may
err to the sorrow of the revenues, but generally speaking, the cases
present a strong combination of equities against the taxpayer, and
Page 22 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
few will seriously quarrel with their application of the doctrine of
estoppel." (Mertens Law of Federal Income Taxation, Vol. 10-A, pp.
159-160.)
It is also claimed that section 9 of Executive Order No. 401-A, series
of 1951 — es involving an original assessment of more than P5,000
— refers only to compromises and refunds of taxes, but not to total
withdrawal of the assessment. The contention is without merit. A
careful examination of the provisions of both sections 8 and 9 of
Executive Order No. 401-A, series of 1951, reveals the procedure
prescribed therein is intended as a check or control upon the powers
of the Collector of Internal Revenue in respect to assessment and
refunds of taxes. If it be conceded that a decision of the Collector of
Internal Revenue on partial remission of taxes is subject to review by
the Secretary of Finance and the Board of Tax Appeals, then with
more reason should the power of the Collector to withdraw totally an
assessment be subject to such review.
We find merit, however, in petitioner's contention that the Court of
Tax Appeals erred in the imposition of the 5% fraud surcharge. As
already shown in the early part of this decision, no element of fraud
is present.
Pursuant to Section 183 of the National Internal Revenue Code the
50% surcharge should be added to the deficiency sales tax "in case a
false or fraudulent return is willfully made." Although the sales made
by SM are in substance by Yutivo this does not necessarily establish
fraud nor the willful filing of a false or fraudulent return.
The case of Court Holding Co. v. Commissioner of Internal
Revenue (August 9, 1943, 2 TC 531, 541-549) is in point. The
petitioner Court Holding Co. was a corporation consisting of only
two stockholders, to wit: Minnie Miller and her husband Louis
Miller. The only assets of third husband and wife corporation
consisted of an apartment building which had been acquired for a
very low price at a judicial sale. Louis Miller, the husband, who
directed the company's business, verbally agreed to sell this property
to Abe C. Fine and Margaret Fine, husband and wife, for the sum of
$54,000.00, payable in various installments. He received $1,000.00
as down payment. The sale of this property for the price mentioned
would have netted the corporation a handsome profit on which a
large corporate income tax would have to be paid. On the afternoon
of February 23, 1940, when the Millers and the Fines got together for
the execution of the document of sale, the Millers announced that
their attorney had called their attention to the large corporate tax
which would have to be paid if the sale was made by the corporation
itself. So instead of proceeding with the sale as planned, the Millers
approved a resolution to declare a dividend to themselves "payable in
the assets of the corporation, in complete liquidation and surrender of
all the outstanding corporate stock." The building, which as above
stated was the only property of the corporation, was then transferred
to Mr. and Mrs. Miller who in turn sold it to Mr. and Mrs. Fine for
exactly the same price and under the same terms as had been
previously agreed upon between the corporation and the Fines.
The return filed by the Court Holding Co. with the respondent
Commissioner of Internal Revenue reported no taxable gain as
having been received from the sale of its assets. The Millers, of
course, reported a long term capital gain on the exchange of their
corporate stock with the corporate property. The Commissioner of
Internal Revenue contended that the liquidating dividend to
stockholders had no purpose other than that of tax avoidance and
that, therefore, the sale by the Millers to the Fines of the
corporation's property was in substance a sale by the corporation
itself, for which the corporation is subject to the taxable profit
thereon. In requiring the corporation to pay the taxable profit on
account of the sale, the Commissioner of Internal Revenue, imposed
a surcharge of 25% for delinquency, plus an additional surcharge as
fraud penalties.
The U. S. Court of Tax Appeals held that the sale by the Millers was
for no other purpose than to avoid the tax and was, in substance, a
sale by the Court Holding Co., and that, therefore, the said
corporation should be liable for the assessed taxable profit thereon.
The Court of Tax Appeals also sustained the Commissioner of
Internal Revenue on the delinquency penalty of 25%. However, the
Court of Tax Appeals disapproved the fraud penalties, holding that
an attempt to avoid a tax does not necessarily establish fraud; that it
is a settled principle that a taxpayer may diminish his tax liability by
means which the law permits; that if the petitioner, the Court Yutivo complied with the above circulars on its sales to SM, and as
Holding Co., was of the opinion that the method by which it separately billed, the sales taxes did not form part of the "gross
attempted to effect the sale in question was legally sufficient to avoid selling price" as the measure of the tax. Since Yutivo had previously
the imposition of a tax upon it, its adoption of that methods not billed the sales tax separately in its sales invoices to SM General
subject to censure; and that in taking a position with respect to a Circulars Nos. 431 and 440 should be deemed to have been
question of law, the substance of which was disclosed by the complied. Respondent Collector's method of computation, as opined
statement indorsed on it return, it may not be said that that position by Judge Nable in the decision complained of —
was taken fraudulently. We quote in full the pertinent portion of the
decision of the Court of Tax Appeals: . . . . is unfair, because . . .(it is) practically imposing tax on a tax
already paid. Besides, the adoption of the procedure would in certain
". . . The respondent's answer alleges that the petitioner's failure to cases elevate the bracket under which the tax is based. The late
report as income the taxable profit on the real estate sale was payment is already penalized, thru the imposition of surcharges, by
fraudulent and with intent to evade the tax. The petitioner filed a adopting the theory of the Collector, we will be creating an
reply denying fraud and averring that the loss reported on its return additional penalty not contemplated by law."
was correct to the best of its knowledge and belief. We think the
respondent has not sustained the burden of proving a fraudulent If the taxes based on the sales of SM are computed in accordance
intent. We have concluded that the sale of the petitioner's property with Gen. Circulars Nos. 431 and 440 the total deficiency sales
was in substance a sale by the petitioner, and that the liquidating taxes, exclusive of the 25% and 50% surcharges for late payment and
dividend to stockholders had no purpose other than that of tax for fraud, would amount only to P820,549.91 as shown in the
avoidance. But the attempt to avoid tax does not necessarily establish following computation:
fraud. It is a settled principle that a taxpayer may diminish his
liability by any means which the law permits. United States v. Isham, Gross Sales of Sales Taxes Due Total Gross
17 Wall. 496; Gregory v. Helvering, supra; Chrisholm v. Rates of Vehicles and Computed Selling Price
Commissioner, 79 Fed. (2d) 14. If the petitioner here was of the Sales Tax Exclusive of under Gen. Cir Charged to the
opinion that the method by which it attempted to effect the sale in Sales Tax Nos. 431 & 400 Public
question was legally sufficient to avoid the imposition of tax upon it,
its adoption of that method is not subject to censure. Petitioner took a 5% P11,912,219.57 P595,610.98 P12,507,83055
position with respect to a question of law, the substance of which
was disclosed by the statement endorsed on its return. We can not 7% 909,559.50 63,669.16 973,228.66
say, under the record before us, that that position was taken
fraudulently. The determination of the fraud penalties is reversed." 10% 2,618,695.28 261,869.53 2,880,564.81

When GM was the importer and Yutivo, the wholesaler, of the cars 15% 3,602,397.65 540,359.65 4,142,757.30
and trucks, the sales tax was paid only once and on the original sales
by the former and neither the latter nor SM paid taxes on their 20% 267,150.50 53,430.10 320,580.60
subsequent sales. Yutivo might have, therefore, honestly believed
that the payment by it, as importer, of the sales tax was enough as in
30% 837,146.97 251,114.09 1,088,291.06
the case of GM Consequently, in filing its return on the basis of its
sales to SM and not on those by the latter to the public, it cannot be
50% 74,244.30 37,122.16 111,366.46
said that Yutivo deliberately made a false return for the purpose of
defrauding the government of its revenues which will justify the
imposition of the surcharge penalty. 75%           8,000.00           6,000.00         14,000.00

We likewise find meritorious the contention that the Tax Court erred
in computing the alleged deficiency sales tax on the selling price of
SM without previously deducting therefrom the sales tax due
thereon. The sales tax provisions (sees. 184.186, Tax Code) impose a
tax on original sales measured by "gross selling price" or "gross
value in money". These terms, as interpreted by the respondent
Collector, do not include the amount of the sales tax, if invoiced
separately. Thus, General Circular No. 431 of the Bureau of Internal
Revenue dated July 29, 1939, which implements sections 184.186 of
the Tax Code provides: "
. . .'Gross selling price' or gross value in money' of the articles sold,
bartered, exchanged, transferred as the term is used in the aforecited
sections (sections 184, 185 and 186) of the National Internal
Revenue Code, is the total amount of money or its equivalent which
the purchaser pays to the vendor to receive or get the goods.
However, if a manufacturer, producer, or importer, in fixing the
gross selling price of an article sold by him has included an amount
intended to cover the sales tax in the gross selling price of the
articles, the sales tax shall be based on the gross selling price less the
amount intended to cover the tax, if the same is billed to the
purchaser as a separate item.
General Circular No. 440 of the same Bureau reads:
Amount intended to cover the tax must be billed as a separate em so
as not to pay a tax on the tax. — On sales made after he third quarter
of 1939, the amount intended to cover the sales tax must be billed to
the purchaser as separate items in the, invoices in order that the
reduction thereof from the gross ailing price may be allowed in the
computation of the merchants' percentage tax on the sales. Unless
billed to the purchaser as a separate item in the invoice, the amounts
intended to cover the sales tax shall be considered as part of the gross
selling price of the articles sold, and deductions thereof will not be
allowed, (Cited in Dalupan, Nat. Int. Rev. Code, Annotated, Vol. II,
pp. 52-53.)
Page 23 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
TOTAL P20,220,413.77 P1,809,205.67 P22,038,619.44
Less Taxes Paid by Yutivo 988,655.76
Deficiency Tax still due P820,549.91
This is the exact amount which, according to Presiding Judge Nable
of the Court of Tax Appeals, Yutivo would pay, exclusive of the
surcharges.
Petitioner finally contends that the Court of Tax Appeals erred or
acted in excess of its jurisdiction in promulgating judgment for the
affirmance of the decision of respondent Collector by less than the
statutory requirement of at least two votes of its judges. Anent this
contention, section 2 of Republic Act No. 1125, creating the Court of
Tax Appeals, provides that "Any two judges of the Court of Tax
Appeals shall constitute a quorum, and the concurrence of two
judges shall be necessary to promulgate decision thereof. . . . " It is
on record that the present case was heard by two judges of the lower
court. And while Judge Nable expressed his opinion on the issue of
whether or not the amount of the sales tax should be excluded from
the gross selling price in computing the deficiency sales tax due from
the petitioner, the opinion, apparently, is merely an expression of his
general or "private sentiment" on the particular issue, for he
concurred the dispositive part of the decision. At any rate, assuming
that there is no valid decision for lack of concurrence of two judges,
the case was submitted for decision of the court below on March 28,
1957 and under section 13 of Republic Act 1125, cases brought
before said court hall be decided within 30 days after submission
thereof. "If no decision is rendered by the Court within thirty days
from the date a case is submitted for decision, the party adversely
affected by said ruling, order or decision, may file with said Court a
notice of his intention to appeal to the Supreme Court, and if no
decision has as yet been rendered by the Court, the aggrieved party
may file directly with the Supreme Court an appeal from said ruling,
order or decision, notwithstanding the foregoing provisions of this
section." The case having been brought before us on appeal, the
question raised by petitioner as become purely academic.
IN VIEW OF THE FOREGOING, the decision of the Court of Tax
Appeals under review is hereby modified in that petitioner shall be
ordered to pay to respondent the sum of P820,549.91, plus 25%
surcharge thereon for late payment.
So ordered without costs.
G.R. No. L-17618             August 31, 1964
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
NORTON and HARRISON COMPANY, respondent.
Office of the Solicitor General for petitioner.
Pio Joven for respondent.
PAREDES, J.:
This is an appeal interposed by the Commissioner of Internal
Revenue against the following judgment of the Court of Tax
Appeals:
IN VIEW OF THE FOREGOING, we find no legal basis to support
the assessment in question against petitioner. If at all, the assessment
should have been directed against JACKBILT, the manufacturer.
Accordingly, the decision appealed from is reversed, and the surety
bond filed to guarantee payment of said assessment is ordered
cancelled. No pronouncement as to costs.
Norton and Harrison is a corporation organized in 1911, (1) to buy
and sell at wholesale and retail, all kinds of goods, wares, and
merchandise; (2) to act as agents of manufacturers in the United
States and foreign countries; and (3) to carry on and conduct a
general wholesale and retail mercantile establishment in the
Philippines. Jackbilt is, likewise, a corporation organized on
February 16, 1948 primarily for the purpose of making, producing
and manufacturing concrete blocks. Under date of July 27, 1948.
Norton and Jackbilt entered into an agreement whereby Norton was
made the sole and exclusive distributor of concrete blocks
manufactured by Jackbilt. Pursuant to this agreement, whenever an
order for concrete blocks was received by the Norton & Harrison Co.
from a customer, the order was transmitted to Jackbilt which
delivered the merchandise direct to the customer. Payment for the
goods is, however, made to Norton, which in turn pays Jackbilt the
amount charged the customer less a certain amount, as its
compensation or profit. To exemplify the sales procedures adopted
by the Norton and Jackbilt, the following may be cited. In the case of
the sale of 420 pieces of concrete blocks to the American Builders on
April 1, 1952, the purchaser paid to Norton the sum of P189.00 the
purchase price. Out of this amount Norton paid Jackbilt P168.00, the
difference obviously being its compensation. As per records of
Jackbilt, the transaction was considered a sale to Norton. It was
under this procedure that the sale of concrete blocks manufactured
by Jackbilt was conducted until May 1, 1953, when the agency
agreement was terminated and a management agreement between the
parties was entered into. The management agreement provided that
Norton would sell concrete blocks for Jackbilt, for a fixed monthly
fee of P2,000.00, which was later increased to P5,000.00.
During the existence of the distribution or agency agreement, or on
June 10, 1949, Norton & Harrison acquired by purchase all the
outstanding shares of stock of Jackbilt. Apparently, due to this
transaction, the Commissioner of Internal Revenue, after conducting
an investigation, assessed the respondent Norton & Harrison for
deficiency sales tax and surcharges in the amount of P32,662.90,
making as basis thereof the sales of Norton to the Public. In other
words, the Commissioner considered the sale of Norton to the public
as the original sale and not the transaction from Jackbilt. The period
covered by the assessment was from July 1, 1949 to May 31, 1953.
As Norton and Harrison did not conform with the assessment, the
matter was brought to the Court of Tax Appeals.
The Commissioner of Internal Revenue contends that since Jackbilt
was owned and controlled by Norton & Harrison, the corporate
Page 24 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
personality of the former (Jackbilt) should be disregarded for sales
tax purposes, and the sale of Jackbilt blocks by petitioner to the
public must be considered as the original sales from which the sales
tax should be computed. The Norton & Harrison Company
contended otherwise — that is, the transaction subject to tax is the
sale from Jackbilt to Norton.
Wherefore, the parties respectfully pray that the foregoing stipulation
of facts be admitted and approved by this Honorable Court, without
prejudice to the parties adducing other evidence to prove their case
not covered by this stipulation of facts. 1äwphï1.ñët
The majority of the Tax Court, in relieving Norton & Harrison of
liability under the assessment, made the following observations:
The law applicable to the case is Section 186 of the National Internal
Revenue Code which imposes a percentage tax of 7% on every
original sale of goods, wares or merchandise, such tax to be based on
the gross selling price of such goods, wares or merchandise. The
term "original sale" has been defined as the first sale by every
manufacturer, producer or importer. (Sec. 5, Com. Act No. 503.)
Subsequent sales by persons other than the manufacturer, producer
or importer are not subject to the sales tax.
If JACKBILT actually sold concrete blocks manufactured by it to
petitioner under the distributorship or agency agreement of July 27,
1948, such sales constituted the original sales which are taxable
under Section 186 of the Revenue Code, while the sales made to the
public by petitioner are subsequent sales which are not taxable. But it
appears to us that there was no such sale by JACKBILT to petitioner.
Petitioner merely acted as agent for JACKBILT in the marketing of
its products. This is shown by the fact that petitioner merely accepted
orders from the public for the purchase of JACKBILT blocks. The
purchase orders were transmitted to JACKBILT which delivered the
blocks to the purchaser directly. There was no instance in which the
blocks ordered by the purchasers were delivered to the petitioner.
Petitioner never purchased concrete blocks from JACKBILT so that
it never acquired ownership of such concrete blocks. This being so,
petitioner could not have sold JACKBILT blocks for its own
account. It did so merely as agent of JACKBILT. The distributorship
agreement of July 27, 1948, is denominated by the parties
themselves as an "agency for marketing" JACKBILT products. ... .
xxx     xxx     xxx
Therefore, the taxable selling price of JACKBILT blocks under the
aforesaid agreement is the price charged to the public and not the
amount billed by JACKBILT to petitioner. The deficiency sales tax
should have been assessed against JACKBILT and not against
petitioner which merely acted as the former's agent.
xxx     xxx     xxx
Presiding Judge Nable of the same Court expressed a partial dissent,
stating:
Upon the aforestated circumstances, which disclose Norton's control
over and direction of Jackbilt's affairs, the corporate personality of
Jackbilt should be disregarded, and the transactions between these
two corporations relative to the concrete blocks should be ignored in
determining the percentage tax for which Norton is liable.
Consequently, the percentage tax should be computed on the basis of
the sales of Jackbilt blocks to the public.
The majority opinion is now before Us on appeal by the
Commissioner of Internal Revenue, on four (4) assigned errors, all of
which pose the following propositions: (1) whether the acquisition of
all the stocks of the Jackbilt by the Norton & Harrison Co., merged
the two corporations into a single corporation; (2) whether the basis
of the computation of the deficiency sales tax should be the sale of
the blocks to the public and not to Norton.
It has been settled that the ownership of all the stocks of a
corporation by another corporation does not necessarily breed an
identity of corporate interest between the two companies and be
considered as a sufficient ground for disregarding the distinct
personalities (Liddell & Co., Inc. v. Coll. of Int. Rev. L-9687, June
30, 1961). However, in the case at bar, we find sufficient grounds to
support the theory that the separate identities of the two companies
should be disregarded. Among these circumstances, which we find
not successfully refuted by appellee Norton are: (a) Norton and
Harrison owned all the outstanding stocks of Jackbilt; of the 15,000
authorized shares of Jackbilt on March 31, 1958, 14,993 shares
belonged to Norton and Harrison and one each to seven others; (b)
Norton constituted Jackbilt's board of directors in such a way as to
enable it to actually direct and manage the other's affairs by making
the same officers of the board for both companies. For instance,
James E. Norton is the President, Treasurer, Director and
Stockholder of Norton. He also occupies the same positions in
Jackbilt corporation, the only change being, in the Jackbilt, he is
merely a nominal stockholder. The same is true with Mr. Jordan, F.
M. Domingo, Mr. Mantaring, Gilbert Golden and Gerardo Garcia,
while they are merely employees of the North they are Directors and
nominal stockholders of the Jackbilt (c) Norton financed the
operations of the Jackbilt, and this is shown by the fact that the loans
obtained from the RFC and Bank of America were used in the
expansion program of Jackbilt, to pay advances for the purchase of
equipment, materials rations and salaries of employees of Jackbilt
and other sundry expenses. There was no limit to the advances given
to Jackbilt so much so that as of May 31, 1956, the unpaid advances
amounted to P757,652.45, which were not paid in cash by Jackbilt,
but was offset by shares of stock issued to Norton, the absolute and
sole owner of Jackbilt; (d) Norton treats Jackbilt employees as its
own. Evidence shows that Norton paid the salaries of Jackbilt
employees and gave the same privileges as Norton employees, an
indication that Jackbilt employees were also Norton's employees.
Furthermore service rendered in any one of the two companies were
taken into account for purposes of promotion; (e) Compensation
given to board members of Jackbilt, indicate that Jackbilt is merely a
department of Norton. The income tax return of Norton for 1954
shows that as President and Treasurer of Norton and Jackbilt, he
received from Norton P56,929.95, but received from Jackbilt the
measly amount of P150.00, a circumstance which points out that
remuneration of purported officials of Jackbilt are deemed included
in the salaries they received from Norton. The same is true in the
case of Eduardo Garcia, an employee of Norton but a member of the
Board of Jackbilt. His Income tax return for 1956 reveals that he
received from Norton in salaries and bonuses P4,220.00, but
received from Jackbilt, by way of entertainment, representation,
travelling and transportation allowances P3,000.00. However, in the
withholding statement (Exh. 28-A), it was shown that the total of
P4,200.00 and P3,000.00 (P7,220.00) was received by Garcia from
Norton, thus portraying the oneness of the two companies. The
Income Tax Returns of Albert Golden and Dioscoro Ramos both
employees of Norton but board members of Jackbilt, also disclose
the game method of payment of compensation and allowances. The
offices of Norton and Jackbilt are located in the same compound.
Payments were effected by Norton of accounts for Jackbilt and vice
versa. Payments were also made to Norton of accounts due or
payable to Jackbilt and vice versa.
Norton and Harrison, while not denying the presence of the set up
stated above, tried to explain that the control over the affairs of
Jackbilt was not made in order to evade payment of taxes; that the
loans obtained by it which were given to Jackbilt, were necessary for
the expansion of its business in the manufacture of concrete blocks,
which would ultimately benefit both corporations; that the
transactions and practices just mentioned, are not unusual and
extraordinary, but pursued in the regular course of business and
trade; that there could be no confusion in the present set up of the
two corporations, because they have separate Boards, their cash
assets are entirely and strictly separate; cashiers and official receipts
and bank accounts are distinct and different; they have separate
income tax returns, separate balance sheets and profit and loss
statements. These explanations notwithstanding an over-all appraisal
of the circumstances presented by the facts of the case, yields to the
conclusion that the Jackbilt is merely an adjunct, business conduit or
alter ego, of Norton and Harrison and that the fiction of corporate
entities, separate and distinct from each, should be disregarded. This
is a case where the doctrine of piercing the veil of corporate fiction,
should be made to apply. In the case of Liddell & Co. Inc. v. Coll. of
Int. Rev., supra, it was held:
There are quite a series of conspicuous circumstances that militates
against the separate and distinct personality of Liddell Motors Inc.,
from Liddell & Co. We notice that the bulk of the business of Liddell
& Co. was channel Red through Liddell Motors, Inc. On the other
hand, Liddell Motors Inc. pursued no activities except to secure cars,
trucks, and spare parts from Liddell & Co., Inc. and then sell them to
Page 25 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
the general public. These sales of vehicles by Liddell & Co, to
Liddell Motors. Inc. for the most part were shown to have taken
place on the same day that Liddell Motors, Inc. sold such vehicles to
the public. We may even say that the cars and trucks merely touched
the hands of Liddell Motors, Inc. as a matter of formality.
xxx     xxx     xxx
Accordingly, the mere fact that Liddell & Co. and Liddell Motors,
Inc. are corporations owned and controlled by Frank Liddell directly
or indirectly is not by itself sufficient to justify the disregard of the
separate corporate identity of one from the other. There is however,
in this instant case, a peculiar sequence of the organization and
activities of Liddell Motors, Inc.
As opined in the case of Gregory v. Helvering "the legal right of a
tax payer to decrease the amount of what otherwise would be his
taxes, or altogether avoid them, by means which the law permits,
cannot be doubted". But as held in another case, "where a
corporation is a dummy, is unreal or a sham and serves no business
purpose and is intended only as a blind, the corporate form may be
ignored for the law cannot countenance a form that is bald and a
mischievous fictions".
... a taxpayer may gain advantage of doing business thru a
corporation if he pleases, but the revenue officers in proper cases,
may disregard the separate corporate entity where it serves but as a
shield for tax evasion and treat the person who actually may take
benefits of the transactions as the person accordingly taxable.
... to allow a taxpayer to deny tax liability on the ground that the
sales were made through another and distinct corporation when it is
proved that the latter is virtually owned by the former or that they are
practically one and the same is to sanction a circumvention of our tax
laws. (and cases cited therein.)
In the case of Yutivo Sons Hardware Co. v. Court of Tax Appeals, L-
13203, Jan. 28, 1961, this Court made a similar ruling where the
circumstances of unity of corporate identities have been shown and
which are identical to those obtaining in the case under
consideration. Therein, this Court said:
We are, however, inclined to agree with the court below that SM was
actually owned and controlled by petitioner as to make it a mere
subsidiary or branch of the latter created for the purpose of selling
the vehicles at retail (here concrete blocks) ... .
It may not be amiss to state in this connection, the advantages to
Norton in maintaining a semblance of separate entities. If the income
of Norton should be considered separate from the income of Jackbilt,
then each would declare such earning separately for income tax
purposes and thus pay lesser income tax. The combined taxable
Norton-Jackbilt income would subject Norton to a higher tax. Based
upon the 1954-1955 income tax return of Norton and Jackbilt (Exhs.
7 & 8), and assuming that both of them are operating on the same
fiscal basis and their returns are accurate, we would have the
following result: Jackbilt declared a taxable net income of
P161,202.31 in which the income tax due was computed at
P37,137.00 (Exh. 8); whereas Norton declared as taxable, a net
income of P120,101.59, on which the income tax due was computed
at P25,628.00. The total of these liabilities is P50,764.84. On the
other hand, if the net taxable earnings of both corporations are
combined, during the same taxable year, the tax due on their total
which is P281,303.90 would be P70,764.00. So that, even on the
question of income tax alone, it would be to the advantages of
Norton that the corporations should be regarded as separate entities.
WHEREFORE, the decision appealed from should be as it is hereby
reversed and another entered making the appellee Norton & Harrison
liable for the deficiency sales taxes assessed against it by the
appellant Commissioner of Internal Revenue, plus 25% surcharge
thereon. Costs against appellee Norton & Harrison.
G.R. No. L-5677             May 25, 1953
LA CAMPANA FACTORY, INC., and TAN TONG doing
business under the trial name "LA CAMPANA GAUGAU
PACKING", petitioners,
vs.
KAISAHAN NG MGA MANGGAGAWA SA LA CAMPANA
(KKM) and THE COURT OF INDUSTRIAL
RELATIONS, respondents.
Ceferino de los Santos, R., Ceferino de los Santos, Jr. and Manuel V.
Roxas for petitioners.
Carlos E. Santiago for respondent union.
REYES, J.:
Tan Tong, one of the herein petitioners, has since 1932 been engaged
in the business of buying and selling gaugau under the trade name La
Campana Gaugau Packing with an establishment in Binondo,
Manila, which was later transferred to España Extension, Quezon
City. But on July 6, 1950, Tan Tong, with himself and members of
his family corporation known as La Campana Factory Co., Inc., with
its principal office located in the same place as that of La Campana
Gaugau Packing.
About a year before the formation of the corporation, or on July 11,
1949, Tan Tong had entered into a collective bargaining agreement
with the Philippine Legion of Organized Workers, known as PLOW
for short, to which the union of Tan Tong's employees headed by
Manuel E. Sadde was then affiliated. Seceding, however, from the
PLOW, Tan Tong's employees later formed their own organization
known as Kaisahan Ng Mga Manggagawa Sa La Campana, one of
the herein respondents, and applied for registration in the
Department of Labor as an independent entity. Pending consideration
of this application, the Department gave the new organization legal
standing by issuing it a permit as an affiliate to the Kalipunan Ng
Mga Manggagawa.
On July 19, 1951, the Kaisahan Ng Mga Manggagawa Sa La
Campana, hereinafter to be referred to as the respondent Kaisahan,
which, as of that date, counted with 66 members — workers all of
them of both La Campana Gaugau Packing and La Campana Coffee
Factory Co., Inc. — presented a demand for higher wages and more
privileges, the demand being addressed to La Campana Starch and
Coffee Factory, by which name they sought to designate, so it
appears, the La Campana Gaugau Packing and the La Campana
Coffee Factory Co., Inc. As the demand was not granted and an
attempt at settlement through the mediation of the Conciliation
Service of the Department of Labor had given no result, the said
Department certified the dispute to the Court of Industrial Relations
on July 17, 1951, the case being there docketed as Case No. 584-V.
With the case already pending in the industrial court, the Secretary of
Labor, on September 5, 1951, revoked the Kalipunan Ng Mga
Kaisahang Manggagawa's permit as a labor union on the strength of
information received that it was dominated by subversive elements,
and, in consequence, on the 20th of the same month, also suspended
the permit of its affiliate, the respondent Kaisahan.
We have it from the court's order of January 15, 1952, which forms
one of the annexes to the present petition, that following the
revocation of the Kaisahan's permit, "La Campana Gaugau and
Coffee Factory" (obviously the combined name of La Campana
Gaugau Packing and La Campana Coffee Factory Co., Inc,) and the
PLOW, which had been allowed to intervene as a party having an
interest in the dispute, filed separate motions for the dismissal of the
case on the following grounds:
1. That the action is directed against two different entities with
distinct personalities, with "La Campana Starch Factory" and the "La
Campana Coffee Factory, Inc.";
2. That the workers of the "La Campana Coffee Factory, Inc." are
less than thirty-one;
3. That the petitioning union has no legal capacity to sue, because its
registration as an organized union has been revoked by the
Department of Labor on September 5, 1951; and
4. That there is an existing valid contract between the respondent "La
Campana Gaugau Packing" and the intervenor PLOW, where-in the
petitioner's members are contracting parties bound by said contract.
Several hearings were held on the above motions, in the course of
which ocular inspections were also made, and on the basis of the
evidence received and the facts observed in the ocular inspections,
Page 26 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
the Court of Industrial Relations denied the said motions in its order
of January 14, 1952, because if found as a fact that:
A. While the coffee corporation is a family corporation with Mr. Tan
Tong, his wife, and children as the incorporations and stockhelders
(Exhibit 1), the La Campana Gaugau Packing is merely a business
name (Exhibit 4).
B. According to the contract of lease (Exhibit 23), Mr. Tan Tong.,
propriety and manager of the Ka Campana Gaugau Factory, leased a
space of 200 square meters in the bodega housing the gaugau factory
to his son Tan Keng Lim, manager of the La Campana Coffee
Factory. But the lease was executed only on September 1, 1951,
while the dispute between the parties was pending before the Court.
C. There is only one entity La Campana Starch and Coffee Factory,
as shown by the signboard (Exhibit 1), the advertisement in the
delivery trucks (Exhibit I-1), the packages of gaugau(Exhibit K), and
delivery forms (Exhibits J, J-1, and J-2).
D. All the laborers working in the gaugau or in the coffee factory
receive their pay from the same person, the cashier, Miss Natividad
Garcia, secretary of Mr. Tan Tong; and they are transferred from the
gaugau to the coffee and vice-versa as the management so requires.
E. There has been only one payroll for the entire La Campana
personnel and only one person preparing the same — Miss Natividad
Garcia, secretary of Mr. Tan Tong. But after the case at bar was
certified to this Court on July 17, 1951, the company began making
separate payrolls for the coffee factory (Exhibits M-2 and M-3, and
for the gaugau factory (Exhibits O-2, O-3 and O-4). It is to be noted
that before July 21, 1951, the coffee payrolls all began with number
"41-Maria Villanueva" with 24 or more laborers (Exhibits M and M-
1), whereas beginning July 21, 1951, the payrolls for the coffee
factory began with No. 1-Loreta Bernabe with only 14 laborers
(Exhibits M-2 and M-3).
F. During the ocular inspection made in the factory on August 26,
1951 the Court has found the following:
In the ground floor and second floor of the gaugau factory there were
hundreds of bags of raw coffee behind the pile of gaugau sacks.
There were also women employees working paper wrappers for
gaugau, and, in the same place there were about 3,000 cans to be
used as containers for coffee.
The Court found out also that there were 16 trucks used both for the
delivery of coffee and gaugau. To show that those trucks carried both
coffee and gaugau, the union president invited the Court to examine
the contents of delivery truck No. T-582 parked in a garage between
the gaugau building and the coffee factory, and upon examination,
there were found inside the said truck boxes of gaugau and cans of
coffee,
and held that:
. . . there is only one management for the business of gaugau and
coffee with whom the laborers are dealing regarding their work.
Hence, the filing of action against the Ka Campana Starch and
Coffee Factory is proper and justified.
With regards to the alleged lack of personality, it is to be noted that
before the certification of the case to this Court on July 17, 1951, the
petitioner Kaisahan Ng Mga Manggagawa Sa La Campana, had a
separate permit from the Department of Labor. This permit was
suspended on September 30, 1951. (Exhibit M-Intervenor, page 55,
of the record). It is not true that, on July 17, 1951, when this case
forwarded to this Court, the petitioner's permit, as an independent
union, had not yet been issued, for the very Exhibit MM-Intervenor
regarding the permit, conclusively shows the preexistence of said
permit. (Annex G.)
Their motion for reconsideration of the above order having been
denied, Tan Tong and La Campana Coffee Factory, Inc. (same as La
Campana Coffee Factory Co., Inc.), later joined by the PLOW, filed
the present petition for certiorari on the grounds that the Court of
Industrial Relations had no jurisdiction to take cognizance of the
case, for the reason, according to them, "(1) that the petitioner La
Campana Coffee Factory, Inc. has only 14 employees, only 5 of
whom are members of the respondent union and therefore the
absence of the jurisdictional number (30) as provided by sections 1
and 4 of Commonwealth Act No. 103; and, (2) that the suspension of
respondent union's permit by the Secretary of Labor has the effect of
taking away the union's right to collective bargaining under section 2
of Commonwealth Act No. 213 and consequently, its personality to
sue for ad in behalf of its members."
As to the first ground, petitioners obviously do not question the fact
that the number of employees of the La Campana Gaugau Packing
involved in the case is more than the jurisdictional number (31)
required bylaw, but they do contend that the industrial court has no
jurisdiction to try the case as against La Campana Coffee Factory,
Inc. because the latter has allegedly only 14 laborers and only of
these are members of the respondent Kaisahan. This contention loses
force when it is noted that, as found by the industrial court — and
this finding is conclusive upon us — La Campana Gaugau Packing
and La Campana Coffee Factory Co. Inc., are operating under one
single management, that is, as one business though with two trade
names. True, the coffee factory is a corporation and, by legal fiction,
an entity existing separate and apart fro the persons composing it,
that is, Tan Tong and his family. But it is settled that this fiction of
law, which has been introduced as a matter of convenience and to
subserve the ends of justice cannot be invoked to further an end
subversive of that purpose.
Disregarding Corporate Entity. — The doctrine that a corporation is
a legal entity existing separate and apart from the person composing
it is a legal theory introduced for purposes of convenience and to
subserve the ends of justice. The concept cannot, therefore, be
extended to a point beyond its reason and policy, and when invoked
in support of an end subversive of this policy, will be disregarded by
the courts. Thus, in an appropriate case and in furtherance of the
ends of justice, a corporation and the individual or individuals
owning all its stocks and assets will be treated as identical, the
corporate entity being disregarded where used as a cloak or cover for
fraud or illegality. (13 Am. Jur., 160-161.)
. . . A subsidiary or auxiliary corporation which is created by a parent
corporation merely as an agency for the latter may sometimes be
regarded as identical with the parent corporation, especially if the
stockholders or officers of the two corporations are substantially the
same or their system of operation unified. (Ibid. 162; see Annotation
1 A. L. R. 612, s. 34 A. L. R. 599.)
In the present case Tan Tong appears to be the owner of
the gaugau factory. And the coffee factory, though an incorporated
business, is in reality owned exclusively by Tan Tong and his family.
As found by the Court of industrial Relations, the two factories have
but one office, one management and one payroll, except after July
17, the day the case was certified to the Court of Industrial Relations,
when the person who was discharging the office of cashier for both
branches of the business began preparing separate payrolls for the
two. And above all, it should not be overlooked that, as also found
by the industrial court, the laborers of the gaugau factory and the
coffee factory were interchangeable, that is, the laborers from the
gaugau factory were sometimes transferred to the coffee factory and
vice-versa. In view of all these, the attempt to make the two factories
appears as two separate businesses, when in reality they are but one,
is but a device to defeat the ends of the law (the Act governing
capital and labor relations) and should not be permitted to prevail.
The second point raised by petitioners is likewise with-out merit. In
the first place, there being more than 30 laborers involved and the
Secretary of Labor having certified the dispute to the Court of
Industrial Relations, that court duly acquired jurisdiction over the
case (International Oil Factory vs. NLU, Inc. 73 Phil., 401; section 4,
C. A. 103). This jurisdiction was not when the Department of Labor
suspended the permit of the respondent Kaisahan as a labor
organization. For once jurisdiction is acquired by the Court of
Industrial Relations it is retained until the case is completely decided.
(Manila Hotel Employees Association vs. Manila Hotel Co. et al., 73
Phil., 374.)
In view of the foregoing, the petition is denied, with costs against the
petitioner.
G.R. No. L-20502             February 26, 1965
Page 27 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
EMILIO CANO ENTERPRISES, INC., petitioner,
vs.
COURT OF INDUSTRIAL RELATIONS, ET AL., respondents.
D. T. Reyes and Associates for petitioner.
Mariano B. Tuason for respondent Court of Industrial Relations.
C. E. Santiago for respondent Honorata Cruz.
BAUTISTA ANGELO, J.:
In a complaint for unfair labor practice filed before the Court of
Industrial Relations on June 6, 1956 by a prosecutor of the latter
court, Emilio, Ariston and Rodolfo, all surnamed Cano, were made
respondents in their capacity as president and proprietor, field
supervisor and manager, respectively, of Emilio Cano Enterprises,
Inc.
After trial, Presiding Judge Jose S. Bautista rendered decision
finding Emilio Cano and Rodolfo Cano guilty of the unfair labor
practice charge, but absolved Ariston for insufficiency of evidence.
As a consequence, the two were ordered, jointly and severally, to
reinstate Honorata Cruz, to her former position with payment of
backwages from the time of her dismissal up to her reinstatement,
together with all other rights and privileges thereunto appertaining.
Meanwhile, Emilio Cano died on November 14, 1958, and the
attempt to have the case dismissed against him having failed, the
case was appealed to the court en banc, which in due course affirmed
the decision of Judge Bautista. An order of execution was issued on
August 23, 1961 the dispositive part of which reads: (1) to reinstate
Honorata Cruz to her former position as ordered in the decision; and
(2) to deposit with the court the amount of P7,222.58 within ten days
from receipt of the order, failing which the court will order either a
levy on respondents' properties or the filing of an action for contempt
of court.
The order of execution having been directed against the properties of
Emilio Cano Enterprises, Inc. instead of those of the respondents
named in the decision, said corporation filed an ex parte motion to
quash the writ on the ground that the judgment sought to be enforced
was not rendered against it which is a juridical entity separate and
distinct from its officials. This motion was denied. And having failed
to have it reconsidered, the corporation interposed the present
petition for certiorari.1äwphï1.ñët
The issue posed before us is: Can the judgment rendered against
Emilio and Rodolfo Cano in their capacity as officials of the
corporation Emilio Cano Enterprises, Inc. be made effective against
the property of the latter which was not a party to the case?
The answer must be in the affirmative. While it is an undisputed rule
that a corporation has a personality separate and distinct from its
members or stockholders because of a fiction of the law, here we
should not lose sight of the fact that the Emilio Cano Enterprises,
Inc. is a closed family corporation where the incorporators and
directors belong to one single family. Thus, the following are its
incorporators: Emilio Cano, his wife Juliana, his sons Rodolfo and
Carlos, and his daughter-in-law Ana D. Cano. Here is an instance
where the corporation and its members can be considered as one.
And to hold such entity liable for the acts of its members is not to
ignore the legal fiction but merely to give meaning to the principle
that such fiction cannot be invoked if its purpose is to use it as a
shield to further an end subversive of justice. 1 And so it has been
held that while a corporation is a legal entity existing separate and
apart from the persons composing it, that concept cannot be extended
to a point beyond its reason and policy, and when invoked in support
of an end subversive of this policy it should be disregarded by the
courts (12 Am. Jur. 160-161).
A factor that should not be overlooked is that Emilio and Rodolfo
Cano are here indicted, not in their private capacity, but as president
and manager, respectively, of Emilio Cano Enterprises, Inc. Having
been sued officially their connection with the case must be deemed
to be impressed with the representation of the corporation. In fact,
the court's order is for them to reinstate Honorata Cruz to her former
position in the corporation and incidentally pay her the wages she
had been deprived of during her separation. Verily, the order against
them is in effect against the corporation. No benefit can be attained if
this case were to be remanded to the court a quo merely in response
to a technical substitution of parties for such would only cause an
unwarranted delay that would work to Honorata's prejudice. This is FIRST DIVISION
contrary to the spirit of the law which enjoins a speedy adjudication
of labor cases disregarding as much as possible the technicalities of [G.R. No. L-28694. May 13, 1981.]
procedure. We, therefore, find unmeritorious the relief herein prayed
for. TELEPHONE ENGINEERING & SERVICE COMPANY,
INC., Petitioner, v. WORKMEN’S COMPENSATION
WHEREFORE, petition is dismissed, with costs. COMMISSION, PROVINCIAL SHERIFF OF RIZAL and
LEONILA SANTOS GATUS, for herself and in behalf of her
minor children, Teresita, Antonina and Reynaldo, all surnamed
GATUS, Respondents.

Andres T. Velarde and V.E. del Rosario and Associate

for Petitioner.

Bernardo V. Castro for Private Respondents.

Juan T. Gerardo for respondent Commission.

SYNOPSIS

Pacifico L. Gatus, a purchasing agent of Utilities Management

Corporation (UMACOR), detailed in the Telephone and Equipment
Services Co., Inc. (TESCO), a sister company of the former and
petitioner herein, contracted "liver cirrhosis with malignant
degeneration" which caused his death. The Acting Referee awarded
death benefits and burial expenses to be paid by TESCO, on the basis
of uncontroverted claim for compensation, filed by the widow of the
deceased and an admission by the TESCO that the illness was
contracted "in regular occupation." A ‘motion for reconsideration
and/or petition to set aside the award filed by the petitioner was
denied. Before an order could be issued by the Workmen’s
Compensation Commission on petitioner’s motion to elevate the
records of the case, petitioner filed with this Court a petition
for" Certiorari with Preliminary Injunction," contending that the
Commission has no jurisdiction to render a valid award, there being
no employer-employee relationship between the petitioner and
private respondents.

The Supreme Court ruled that the lack of employer-employee

relationship is a matter of defense that should properly be raised in
the Workmen’s Compensation Commission and cannot be raised for
the first time on appeal, as the determination of such relationship
involving a finding of fact, is conclusive and binding and not subject
to review by this Court.

Petition dismissed.

SYLLABUS

1. LABOR AND SOCIAL LEGISLATION; WORKMEN’S

COMPENSATION ACT; EMPLOYER-EMPLOYEE
RELATIONSHIP; BASIC PRINCIPLES. — A few basic principles
should be re-stated: the existence of employer-employee relationship
is the jurisdictional foundation for recovery of compensation under
the Workmen’s Compensation Law (Madrigal Shipping Co. v.
Melad, 7 SCRA 330 [1963]), The lack of employer-employee
relationship, however, is a matter of defense that the employer
should properly raise in the proceedings below. The determination of
this relationship involves a finding of fact, which is conclusive and
binding and not subject to review by this Court (Abong v. WCC, 54
SCRA 379 [1973]).

2. ID.; ID.; ID.; UNTIMELY DENIAL OF RELATIONSHIP IN

CASE AT BAR. — While, indeed, jurisdiction cannot be conferred
by acts or omission of the parties, TESCO’s denial at this stage that
it is the employer of the deceased is obviously an afterthought, a
devise to defeat the law and evade its obligations. In fact, in its letter
dated October 27, 1967 to the Acting Referee, in its request for
extension of time to file Motion for Reconsideration, in its "Motion
for Reconsideration and/or Petition to Set Aside Award," and in its
"Urgent Motion to Compel the Referee to Elevate Records to the
Commission for Review," petitioner represented and defended itself
as the employer of the deceased. Nowhere in said documents did it
allege that it was not the employer and petitioner even admitted that
TESCO and UMACOR are sister companies operating under one
Page 28 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
single management and housed in the same building. This denial also
constitutes a change of theory on appeal which is not allowed in this
jurisdiction (Carantes v. Court of Appeals 76 SCRA 514 [1977]).
Moreover, issues not raised before the Workmen’s Compensation
Commission cannot be raised for the first time on appeal
(Buenaventura vs, WCC, 76 SCRA 485 [1977]). For that matter, a
factual question may not be raised for the first time on appeal to the
Supreme Court (Gonzales-Precilla v. Rosario, 33 SCRA 228 [1970]).
3. COMMERCIAL LAW; CORPORATION LAW; WHEN VEIL
OF CORPORATE FICTION MAY BE PIERCED. — Although
respect for the corporate personality as such, is the general rule, there
are exceptions. In appropriate cases, the veil of corporate fiction may
be pierced as when the same is made as a shield to confuse the
legitimate issues.
4. REMEDIAL LAW; SPECIAL CIVIL ACTION; CERTIORARI;
WHEN PREMATURE. — Certiorari cannot be resorted to when the
remedy of appeal is present (Fernando v. Vasques. 31 SCRA 288
[1970] and certiorari will not lie, it being prematurely filed where
petitioner had not utilized the remedies available to it under Rules
23, 24 and 25 of the Rules of the Workmen’s Compensation
Commission, namely. an appeal from the award of the Referee,
within fifteen days from notice, to the Commission; a petition for
reconsideration of the latter’s resolution, if adverse, to the
Commission en banc; and within ten days from receipt of an
unfavorable decision by the latter, an appeal to this Court.
5. ID.; ID.; ID.; ID.; EXCEPTIONS; CASE AT BAR NOT
FALLING THEREUNDER. — This rule admits of exceptions, as
where public welfare and the advancement of public policy so
dictate, the broader interests of justice so require, or where the
Orders complained of were found to be completely null and void, or
that the appeal was not considered the appropriate remedy (Fernando
v. Vasquez. supra). The case at bar does not fall within any of these
exceptions.
DECISION
MELENCIO-HERRERA, J.:
These Certiorari proceedings stem from the award rendered against
petitioner Telephone Engineering and Services, Co., Inc. (TESCO)
on October 6, 1967 by the Acting Referee of Regional Office No. 4,
Quezon City Sub-Regional Office, Workmen’s Compensation
Section, in favor of respondent Leonila S. Gatus and her children,
dependents of the deceased employee Pacifico L. Gatus. The
principal contention is that the award was rendered without
jurisdiction as there was no employer-employee relationship between
petitioner and the deceased.
Petitioner is a domestic corporation engaged in the business of
manufacturing telephone equipment with offices at Sheridan Street,
Mandaluyong, Rizal. Its Executive Vice-President and General
Manager is Jose Luis Santiago. It has a sister company, the Utilities
Management Corporation (UMACOR), with offices in the same
location. UMACOR is also under the management of Jose Luis
Santiago.
On September 8, 1964, UMACOR employed the late Pacifico L.
Gatus as Purchasing Agent. On May 16, 1965, Pacifico L. Gatus was
detailed with petitioner company. He reported back to UMACOR on
August 1, 1965. On January 13, 1967, he contracted illness and
although he returned to work on May 10, 1967, he died nevertheless
on July 14, 1967 of "liver cirrhosis with malignant
degeneration."cralaw virtua1aw library
On August 7, 1967, his widow, respondent Leonila S. Gatus, filed a
"Notice and Claim for Compensation" with Regional Office No. 4,
Page 29 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
Quezon City Sub-Regional Office, Workmen’s Compensation
Section, alleging therein that her deceased husband was an employee
of TESCO and that he died of liver cirrhosis. 1 On August 9, 1967,
said Office wrote petitioner transmitting the Notice and Claim for
Compensation, and requiring it to submit an Employer’s Report of
Accident or Sickness pursuant to Section 37 of the Workmen’s
Compensation Act (Act No. 3428). 2 An "Employer’s Report of
Accident or Sickness" was thus submitted with UMACOR indicated
as the employer of the deceased. The Report was signed by Jose Luis
Santiago. In answer to questions Nos. 8 and 17, the employer stated
that it would not controvert the claim for compensation, and admitted
that the deceased employee contracted illness "in regular
occupation." 3 On the basis of this Report, the Acting Referee
awarded death benefits in the amount of P5,759.52 plus burial
expenses of P200.00 in favor of the heirs of Gatus in a letter-award
dated October 6, 1967 4 against TESCO.chanrobles.com:cralaw:red
Replying on October 27, 1967, TESCO, through Jose Luis Santiago,
informed the Acting Referee that it would avail of the 15-days-notice
given to it to state its non-conformity to the award and contended
that the cause of the illness contracted by Gatus was in no way
aggravated by the nature of his work. 5
On November 6, 1967, TESCO requested for an extension of ten
days within which to file a Motion for Reconsideration, 6 and on
November 15, 1967, asked for an additional extension of five days. 7
TESCO filed its "Motion for Reconsideration and/or Petition to Set
Aside Award" on November 18, 1967, alleging as grounds therefor,
that the Admission made in the "Employer’s Report of Accident or
Sickness" was due to honest mistake and/or excusable negligence on
its part, and that the illness for which compensation is sought is not
an occupational disease, hence, not compensable under the law. 8
The extension requested was denied. The Motion for
Reconsideration was likewise denied in an Order issued by the Chief
of Section of the Regional Office dated December 28, 1967 9
predicated on two grounds: that the alleged mistake or negligence
was not excusable, and that the basis of the award was not on the
theory of direct causation alone but also on that of aggravation. On
January 28, 1968, an Order of execution was issued by the same
office.
On February 3, 1968, petitioner filed an "Urgent Motion to Compel
Referee to Elevate the Records to the Workmen’s Compensation
Commission for Review." 10 Meanwhile, the Provincial Sheriff of
Rizal levied on and attached the properties of TESCO on February
17, 1968, and scheduled the sale of the same at public auction on
February 26, 1968. On February 28, 1968, the Commission issued an
Order requiring petitioner to submit verified or true copies of the
Motion for Reconsideration and/or Petition to Set Aside Award and
Order of December 28, 1967, and to show proof that the said Motion
for Reconsideration was filed within the reglementary period, with
the warning that failure to comply would result in the dismissal of
the Motion. However, before this Order could be released, TESCO
filed with this Court, on February 22, 1968, the present petition
for" Certiorari with Preliminary Injunction" seeking to annul the
award and to enjoin the Sheriff from levying and selling its
properties at public auction.
On February 29, 1968, this Court required respondents to answer the
Petition but denied Injunction. 11 TESCO’s Urgent Motion dated
April 2, 1968, for the issuance of a temporary restraining order to
enjoin the Sheriff from proceeding with the auction sale of its
properties was denied in our Resolution dated May 8,
1968.chanrobles virtual lawlibrary
TESCO asserts:chanrob1es virtual 1aw library
I. That the respondent Workmen’s Compensation Commission has
no jurisdiction nor authority to render the award (Annex `D’,
Petition) against your petitioner there being no employer-employee
relationship between it and the deceased Gatus;
II. That petitioner can never be estopped from questioning the
jurisdiction of respondent commission especially considering that
jurisdiction is never conferred by the acts or omission of the parties;
III. That this Honorable Court has jurisdiction to nullify the award of
respondent commission.

TESCO takes the position that the Commission has no jurisdiction to
render a valid award in this suit as there was no employer-employee
relationship between them, the deceased having been an employee of
UMACOR and not of TESCO. In support of this contention,
petitioner submitted photostat copies of the payroll of UMACOR for
the periods May 16-31, 1967 and June 1-15, 1967 12 showing the
name of the deceased as one of the three employees listed under the
Purchasing Department of UMACOR. It also presented a photostat
copy of a check of UMACOR payable to the deceased representing
his salary for the period June 14 to July 13, 1967. 13
Both public and private respondents contend, on the other hand, that
TESCO is estopped from claiming lack of employer-employee
relationship.
To start with, a few basic principles should be re-stated: the
existence of employer-employee relationship is the jurisdictional
foundation for recovery of compensation under the Workmen’s
Compensation Law. 14 The lack of employer-employee relationship,
however, is a matter of defense that the employer should properly
raise in the proceedings below. The determination of this relationship
involves a finding of fact, which is conclusive and binding and not
subject to review by this Court. 15
Viewed in the light of these criteria, we note that it is only in this
Petition before us that petitioner denied, for the first time, the
employer-employee relationship. In fact, in its letter dated October
27, 1967 to the Acting Referee, in its request for extension of time to
file Motion for Reconsideration, in its "Motion for Reconsideration
and/or Petition to Set Aside Award," and its "Urgent Motion to
Compel the Referee to Elevate Records to the Commission for
Review," petitioner represented and defended itself as the employer
of the deceased. Nowhere in said documents did it allege that it was
not the employer. Petitioner even admitted that TESCO and
UMACOR are sister companies operating under one single
management and housed in the same building. Although respect for
the corporate personality as such, is the general rule, there are
exceptions. In appropriate cases, the veil of corporate fiction may be
pierced as when the same is made as a shield to confuse the
legitimate issues. 16
While, indeed, jurisdiction cannot be conferred by acts or omission
of the parties, TESCO’s denial at this stage that it is the employer of
the deceased is obviously an afterthought, a devise to defeat the law
and evade its obligations. 17 This denial also constitutes a change of
theory on appeal which is not allowed in this jurisdiction. 18
Moreover, issues not raised before the Workmen’s Compensation
Commission cannot be raised for the first time on appeal. 19 For that
matter, a factual question may not be raised for the first time on
appeal to the Supreme Court. 20
This Certiorari proceeding must also be held to have been
prematurely brought. Before a petition for Certiorari can be
instituted, all remedies available in the trial Court must be exhausted
first. 21 Certiorari cannot be resorted to when the remedy of appeal
is present. 22 What is sought to be annulled is the award made by the
Referee. However, TESCO did not pursue the remedies available to
it under Rules 23, 24 and 25 of the Rules of the Workmen’s
Compensation Commission, namely, an appeal from the award of the
Referee, within fifteen days from notice, to the Commission; a
petition for reconsideration for the latter’s resolution, if adverse, to
the Commission en banc; and within ten days, from receipt of an
unfavorable decision by the latter, an appeal to this Court. As
petitioner had not utilized these remedies available to
it, Certiorari will not lie, it being prematurely filed. As this Court
ruled in the case of Manila Jockey Club, Inc. v. Del Rosario, 2
SCRA 462 (1961):chanrobles virtualawlibrary
chanrobles.com:chanrobles.com.ph
"An aggrieved party by the decision of a Commissioner should seek
a reconsideration of the decision by the Commission en banc. If the
decision is adverse to him, he may appeal to the Supreme Court. An
appeal brought to the Supreme Court without first resorting to the
remedy referred to is premature and may be dismissed."cralaw
virtua1aw library
Although this rule admits of exceptions, as where public welfare and
Page 30 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
the advancement of public policy so dictate, the broader interests of
justice so require, or where the Orders complained of were found to
be completely null and void, or that the appeal was not considered
the appropriate remedy, 23 the case at bar does not fall within any of
these exceptions.
WHEREFORE, this Petition is hereby dismissed.
SO ORDERED.
G.R. No. L-30822 July 31, 1975
EDUARDO CLAPAROLS, ROMULO AGSAM and/or
CLAPAROLS STEEL AND NAIL PLANT, petitioners,
vs.
COURT OF INDUSTRIAL RELATIONS, ALLIED
WORKERS' ASSOCIATION and/or DEMETRIO GARLITOS,
ALFREDO ONGSUCO, JORGE SEMILLANO, SALVADOR
DOROTEO, ROSENDO ESPINOSA, LUDOVICO
BALOPENOS, ASER AMANCIO, MAXIMO QUIOYO,
GAUDENCIO QUIOYO, and IGNACIO QUIOYO, respondents.
Ruben G. Bala for petitioners.
Rolando N. Medalla for private respondents.
MAKASIAR, J.:
A petition for certiorari to set aside the order of respondent Court of
Industrial Relations dated May 30, 1969 directing petitioners to pay
back wages and bonuses to private respondents as well as its
resolution of July 5, 1969 denying the motion for reconsideration of
said order in Case No. 32-ULP-Iloilo entitled "Allied Workers'
Association, et. al., versus Eduardo Claparols, et. al.."
It appears that on August 6, 1957, a complaint for unfair labor
practice was filed by herein private respondent Allied Workers'
Association, respondent Demetrio Garlitos and ten (10) respondent
workers against herein petitioners on account of the dismissal of
respondent workers from petitioner Claparols Steel and Nail Plant.
On September 16, 1963, respondent Court rendered its decision
finding "Mr. Claparols guilty of union busting and" of having
"dismissed said complainants because of their union activities," and
ordering respondents "(1) To cease and desist from committing
unfair labor practices against their employees and laborers; (2) To
reinstate said complainants to their former or equivalent jobs, as soon
as possible, with back wages from the date of their dismissal up to
their actual reinstatement" (p. 12, Decision; p. 27, rec.).
A motion to reconsider the above decision was filed by herein
petitioners, which respondent Court, sitting en banc, denied in a
resolution dated January 27, 1964.
On March 30, 1964, counsel for herein respondent workers
(complainants in the ULP case) filed a motion for execution of
respondent Court's September 16, 1963 decision.
On May 14, 1964, respondent Court, in its order of September 16,
1963, granted execution and directed herein petitioners
to reinstate the above complainants to their former or equivalent jobs
within five (5) days after receipt of a copy of this order. In order to
implement the award of back wages, the Chief of the Examining
Division or any of his assistants is hereby directed to proceed to the
office of the respondents at Matab-ang, Talisay, Negros Occidental,
and examine its payrolls and other pertinent records and compute the
back wages of the complainants in accordance with the decision
dated September 16, 1963, and, upon termination, to submit his
report as soon as possible for further disposition (p. 7, Brief for
Respondents, p. 113, rec.).
which was reiterated by respondent Court in a subsequent order
dated November 10, 1964 (pp. 7-8, Brief for Respondents, p. 113,
rec.).
On December 14, 1964, respondent workers were accompanied by
the Chief of Police of Talisay, Negros Occidental to the compound
of herein petitioner company to report for reinstatement per order of
the court. Respondent workers were, however, refused reinstatement
by company accountant Francisco Cusi for he had no order from
plant owner Eduardo Claparols nor from his lawyer Atty. Plaridel
Katalbas, to reinstate respondent workers.
Again, on December 15, 1964, respondent workers were
accompanied by a police officer to the company compound, but then,
they were again refused reinstatement by Cusi on the same ground.
On January 15, 1965, the CIR Chief Examiner Submitted his report
containing three computations, to wit:
The first computation covers the period February 1, 1957 to October
31, 1964. The second is up to and including December 7, 1962, when
the corporation stopped operations, while the third is only up to June
30, 1957 when the Claparols Steel and Nail Plant ceased to operate
(Annex B, Petition for Review on Certiorari, p. 14, Brief for
appellees, p. 113, rec.).
with the explanation that:
6. Since the records of the Claparols Steel Corporation show that it
was established on July 1, 1957 succeeding the Claparols Steel and
Nail Plant which ceased operations on June 30, 1957, and that the
Claparols Steel Corporation stopped operations on December 7,
1962, three (3) computations are presented herein for the
consideration of this Honorable Court (p. 2, Report of Examiner, p.
29, rec.).
resolution. Petitioners assigned therein as errors of law the very
same assignment of errors it raises in the present case, to wit:
I
THE RESPONDENT COURT ERRED AND/OR ACTED WITH
GRAVE ABUSE OF DISCRETION, AMOUNTING TO LACK OF
JURISDICTION, IN HOLDING IN THE ORDER UNDER
REVIEW THAT BONUSES SHOULD BE PAID TO THE
RESPONDENT WORKERS DESPITE THE FACT THAT THE
SAME WAS NOT ADJUDICATED IN ITS ORIGINAL
DECISION.
II
THE RESPONDENT COURT ERRED AND/OR ACTED WITH
GRAVE ABUSE OF DISCRETION, AMOUNTING TO LACK OF
JURISDICTION, IN NOT APPLYING THE DOCTRINE LAID
DOWN BY THIS HONORABLE TRIBUNAL IN THE CASE OF
"STA. CECILIA SAWMILLS, INC. VS. C.I.R., ET. AL.," G.R. No.
L-19273-74, PROMULGATED ON FEBRUARY 29, 1964 (pp. 10-
11, rec.).
On April 27, 1967, the Supreme Court denied petitioners' petition
for certiorari (p. 77, rec. of L-27272), which was reiterated on May
19, 1967 (p. 27, Respondent's Brief, p. 113, rec.; p. 81, rec. of L-
27272).

On January 23, 1965, petitioners filed an opposition alleging that On May 3, 1967, private respondents moved to have the workers'
under the circumstances presently engulfing the company, petitioner back wages properly recomputed. A motion to the same end was
Claparols could not personally reinstate respondent workers; that reiterated by private respondents on June 14, 1967.
assuming the workers are entitled to back wages, the same should
only be limited to three months pursuant to the court ruling in the On July 13, 1967, respondent Court directed a recomputation of the
case of Sta. Cecilia Sawmills vs. CIR (L-19273-74, February 20, back wages of respondent workers in accordance with its order dated
1964); and that since Claparols Steel Corporation ceased to operate November 28, 1966. The said order in part reads:
on December 7, 1962, re-employment of respondent workers cannot
WHEREFORE, the Chief Auditing Examiner of the Court or any of
go beyond December 7, 1962.
his assistants, is hereby directed to recompute the back wages of the
A reply to petitioner's opposition was filed by respondent workers, workers involved in this case in accordance with the Order of
alleging among others, that Claparols Steel and Nail Plant and November 28, 1966 within 20 days from receipt of a copy of this
Claparols Steel and Nail Corporation are one and the same Order (p. 28, Brief for Respondents, p. 113, rec.).
corporation controlled by petitioner Claparols, with the latter
Then on March 21, 1968, the Chief Examiner came out with his
corporation succeeding the former.
report, the disputed portion of which (regarding bonuses) reads:
On November 28, 1966, after conducting a series of hearings on the
xxx xxx xxx
report of the examiner, respondent Court issued an order, the
dispositive portion of which reads: 4. The yearly bonuses of the employees and laborers of respondent
corporation are given on the following basis:
WHEREFORE, the Report of the. Examiner filed on January 15,
1965, is hereby approved subject to the foregoing findings and Basic Additional:
dispositions. Consequently, the Corporation Auditing Examiner is
directed to recompute the back wages of complainants Demetrio a. For every dependent 1% of monthly salary
Garlitos and Alfredo Ongsuco on the basis of P200.00 and P270.00 a
b. For every dependent in elementary grade 2% of monthly salary
month, respectively; to compute those of complainant Ignacio
Quioyo as aforesaid; to compute the deductible earnings of c. For every dependent in high school 3% of monthly salary
complainants Ongsuco, Jorge Semillano and Garlitos, as found in the
body of this order; and to compute the bonuses of each and every d. For every dependent in college 5% of monthly salary
complainant, except Honorato Quioyo. Thereafter, as soon as
possible, the Examiner should submit a report in compliance xxx xxx xxx
herewith of the Court's further disposition (p. 24, Brief for
7. The computed ... bonuses after deducting the earnings elsewhere
Respondents, p. 113, rec.).
of Messrs. Ongsuco, Garlitos and Semillano are as follows:
On December 7, 1966, a motion for reconsideration was filed by
Name x x x Bonuses x x x
petitioner, assailing respondent Court's ruling that (1) the ruling in
the case of Sta. Cecilia Sawmills Inc. CIR, et. al, does not apply in 1. Alfredo Ongsuco P1,620.00
the case at bar; and (2) that bonus should be included in the 2. Demetrio Garlitos 1,200.00
recoverable wages. 3. Ignacio Quioyo 455.23
4. Aser Abancio 461.00
On December 14, 1966, a counter-opposition was filed by private
5. Ludovico Belopeños 752.05
respondents alleging that petitioners' motion for reconsideration
6. Salvador Doroteo 714.70
was pro forma, it not making express reference to the testimony or
7. Rosendo Espinosa 1,075.40
documentary evidence or to the provision of law alleged to be
8. Gaudencio Quioyo 1,167.92
contrary to such findings or conclusions of respondent Court.
9. Jorge Semillano 1,212.08
On February 8, 1967, respondent Court of Industrial Relations 10. Maximo Quioyo 449.41
dismissed petitioners' motion for reconsideration for being pro Total P9,107.79
forma.
(Pp. 30-31, Respondent's Brief, p. 113, rec.)
Whereupon, petitioners filed a petition for certiorari with this
On April 16, 1968, petitioners filed their opposition to the report of
COURT in G.R. No. L-27272 to set aside the November 28, 1966
the Examiner dated March 21, 1968 on grounds already rejected by
order of respondent Court, as well as its February 8, 1967
Page 31 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
respondent Court in its order dated November 28, 1966, and by the
Supreme Court also in its ruling in G.R. No. L-27272.
On May 4, 1968, a rejoinder to petitioners' opposition was filed by
private respondents, alleging among others "that the grounds of
petitioners' opposition were the same grounds raised by them before
and passed upon by respondent Court and this Honorable Tribunal;
that this order of November 28, 1966 which passed upon these issues
became final and executory on June 3, 1967 from the Honorable
Supreme Court. (Order of respondent Court dated July 13, 1967). [p.
32, Brief for Respondents, p. 113, rec.].
On July 26, 1968, private respondents filed their motion for approval
of the Report of the Examiner submitted on March 21, 1968,
alleging, among others, that petitioners, in their opposition, did not
actually dispute the data elicited by the Chief Examiner but rather
harped on grounds which, as already stated, had already been turned
down by the Supreme Court.
On October 19, 1968, herein private respondents filed their
"Constancia", submitting the case for resolution of respondent Court
of Industrial Relations.
On May 30, 1969, respondent Court issued an order, subject of the
present appeal, the dispositive portion of which reads:
WHEREFORE, there being no proof offered to substantiate
respondent Eduardo Claparols' opposition, the Examiner's Report
should be, and it is hereby, APPROVED. Consequently, pursuant to
the decision dated September 16, 1963, respondent ... (petitioners
herein) are hereby directed to pay the respective back wages and
bonuses of the complainants (respondents herein) ... (p. 35, Brief for
Respondents; p. 113, rec.; emphasis supplied).1äwphï1.ñët
On June 7, 1969, petitioners filed a motion for reconsideration on
practically the same grounds previously raised by them.
On June 30, 1969, respondents filed an opposition to petitioners'
motion for reconsideration, with the following allegations:
1. The issues raised, namely, whether bonuses should be included in
the award for back wages had already been resolved by respondent
court in its orders dated November 28, 1966, and December 7, 1966,
and in the Resolution of the Honorable Supreme Court in G.R. No.
L-27272 dated April 26, 1967 and May 19, 1967, and the same is
already a settled and final issue.
2. Petitioners' motion for reconsideration is merely a rehash of
previous arguments, effete and unrejuvenated, pro forma, and
intended merely to delay the proceedings.
As correctly contended by private respondents, the present petition is
barred by Our resolutions of April 26, 1967 and May 19, 1967 in
G.R. No. L-27272 (Eduardo Claparols, et. al. vs. CIR, et. al.) [pp.
77-83, rec. of L- 27272], dismissing said case, wherein said
petitioners invoked the applicability of the doctrine in Sta. Cecilia
Sawmills, Inc. vs. CIR, et. al. (L-19273-74, Feb. 29, 1964, 10 SCRA
433) and impugned the illegality of the order of respondent Court
dated November 28, 1966 directing the computation and payment of
the bonuses, aside from back wages on the ground that these bonuses
were not included in the decision of September 16, 1963, which had
long become final.
The aforesaid resolutions in G.R. No. L-27272 constitute the law of
the instant case, wherein herein petitioners raised again practically
the same issues invoked in the abovementioned case. The denial of
the petition in G.R. No. L-27272 suffices to warrant the denial of the
present petition; and We need not go any further.
However, without lending a sympathetic ear to the obvious desire of
herein petitioners of this Court to re-examine — which would be an
exercise in futility — the final ruling in G.R. No. L-27272, which as
above-stated is the law of the instant case, but solely to remind
herein petitioners, We reiterate the governing principles.
WE uniformly held that "a bonus is not a demandable and
enforceable obligation, except when it is a part of the wage or salary
compensation" (Philippine Education Co. vs. CIR and the Union of
Philippine Co. Employees [NLU], 92 Phil. 381; Ansay, et. al. vs.
National Development Co., et. al., 107 Phil. 998, 999; Emphasis
supplied).
Page 32 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
In Atok Big Wedge Mining Co. vs. Atok Big Wedge Mutual Benefit
Association (92 Phil. 754), this Court, thru Justice Labrador, held:
Whether or not bonus forms part of wages depends upon the
condition or circumstance for its payment. If it is an additional
compensation WHICH THE EMPLOYER PROMISED AND
AGREED to give without any condition imposed for its
payment ... then it is part of the wage. (Emphasis
supplied).1äwphï1.ñët
In Altomonte vs. Philippine American Drug Co. (106 Phil. 137), the
Supreme Court held that an employee is not entitled to bonus where
there is no showing that it had been granted by the employer to its
employees periodically or regularly as to become part of their wages
or salaries. The clear implication is that bonus is recoverable as part
of the wage or salary where the employer regularly or periodically
gives it to employees.
American jurisprudence equally regards bonuses as part of
compensation or recoverable wages.
Thus, it was held that "... it follows that in determining the regular
rate of pay, a bonus which in fact constitutes PART OF AN
EMPLOYEE'S compensation, rather than a true gift or gratuity, has
to be taken into consideration." (48 Am. Jur. 2d, Labor and Labor
Relations, No. 1555, citing the cases of Triple "AAA" Co. vs. Wirtz
and Haber vs. Americana Corporation; Emphasis supplied). It was
further held that "... the regular rate includes incentive bonuses paid
to the employees in addition to the guaranteed base rates regardless
of any contract provision to the contrary and even though such
bonuses could not be determined or paid until such time after the pay
day" (48 Am. Jur. 2d, Labor and Labor Relations, No. 1555, citing
the case of Walling vs. Harnischfeger Corp., 325 US 427, 89 L Ed
1711, 65 S Ct. 1246; Emphasis supplied).1äwphï1.ñët
Petitioners in the present case do not dispute that as a matter of
tradition, the company has been doling out bonuses to employees. In
fact, the company balance sheets for the years 1956 to 1962
contained bonus and pension computations which were never
repudiated or questioned by petitioners. As such, bonus for a given
year earmarked as a matter of tradition for distribution to employees
has formed part of their recoverable wages from the company.
Moreover, with greater reason, should recovery of bonuses as part of
back wages be observed in the present case since the company, in the
light of the very admission of company accountant Francisco Cusi,
distributes bonuses to its employees even if the company has
suffered losses. Specifically, petitioner company has done this in
1962 (t.s.n., p. 149, Sept. 20, 1965).
Since bonuses are part of back wages of private respondents, the
order of May 30, 1969, directing the payment of their bonuses, did
not amend the decision of September 16, 1963 of respondent Court
directing payment of their wages, which has long become final and
executory, in the same way that the previous order of May 14, 1964
granting execution of said decision of September 16, 1963 also
directed the computation of the wages to be paid to private
respondents as decreed by the decision of September 16, 1963. All
the orders of May 30, 1969, November 28, 1966 and May 14, 1964
merely implement the already final and executory decision of
September 16, 1963.
Petitioners insist that We adopt the ruling in the Sta. Cecilia
Sawmills case wherein the recoverable back wages were limited to
only three (3) months; because as in the Sta. Cecilia Sawmills case,
the Claparols Steel and Nail Plant ceased operations due to enormous
business reverses.
Respondent Court's findings that indeed the Claparols Steel and Nail
Plant, which ceased operation of June 30, 1957, was SUCCEEDED
by the Claparols Steel Corporation effective the next day, July 1,
1957 up to December 7, 1962, when the latter finally ceased to
operate, were not disputed by petitioners. It is very clear that the
latter corporation was a continuation and successor of the first entity,
and its emergence was skillfully timed to avoid the financial liability
that already attached to its predecessor, the Claparols Steel and Nail
Plant. Both predecessors and successor were owned and controlled
by the petitioner Eduardo Claparols and there was no break in the
succession and continuity of the same business. This "avoiding-the-
liability" scheme is very patent, considering that 90% of the
subscribed shares of stocks of the Claparols Steel Corporation (the
second corporation) was owned by respondent (herein petitioner)
Claparols himself, and all the assets of the dissolved Claparols Steel
and Nail Plant were turned over to the emerging Claparols Steel
Corporation.
It is very obvious that the second corporation seeks the protective
shield of a corporate fiction whose veil in the present case could, and
should, be pierced as it was deliberately and maliciously designed to
evade its financial obligation to its employees.
It is well remembering that in Yutivo & Sons Hardware Company vs.
Court of Tax Appeals (L-13203, Jan. 28, 1961, 1 SCRA 160), We
held that when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the law
will regard the corporation as an association or persons, or, in the
case of two corporations, will merge them into one.
In Liddel & Company, Inc. vs. Collector of Internal Revenue (L-
9687, June 30, 1961, 2 SCRA 632), this Court likewise held that
where a corporation is a dummy and serves no business purpose and
is intended only as a blind, the corporate fiction may be ignored.
In Commissioner of Internal Revenue vs. Norton and Harrison
Company (L-17618, Aug. 31, 1964, 11 SCRA 714), We ruled that
where a corporation is merely an adjunct, business conduit or alter
ego of another corporation, the fiction of separate and distinct
corporate entities should be disregarded.
To the same uniform effect are the decisions in the cases of Republic
vs. Razon (L-17462, May 29, 1967, 20 SCRA 234) and A.D. Santos,
Inc. vs. Vasquez (L-23586, March 20, 1968, 22 SCRA 1156).
WE agree with respondent Court of Industrial Relations, therefore,
that the amount of back wages recoverable by respondent workers
from petitioners should be the amount accruing up to December 7,
1962 when the Claparols Steel Corporation ceased operations.
WHEREFORE, PETITION IS HEREBY DENIED WITH TREBLE
COSTS AGAINST PETITIONERS TO BE PAID BY THEIR
COUNSEL.
Page 33 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
G.R. No. L-68661 July 22, 1986
NATIONAL FEDERATION OF LABOR UNION (NAFLU)
AND TERESITA LORENZO, ET AL., petitioners,
vs.
HON. MINISTER BLAS OPLE, as Minister of Labor and
Employment; LAWMAN INDUSTRIAL/LIBRA
GARMENTS/DOLPHIN ENTERPRISES, respondents.
Olalia, Dimapilis, Olalia & Associates for petitioners.
GUTIERREZ, JR., J.:
The only issue raised in this petition is whether or not, on the basis
of the findings of the public respondent that the respondent company
was guilty of unfair labor practice, the petitioners should be
reinstated to their former positions without loss of seniority rights
and with full backwages.
The background facts which led to the filing of the instant petition
are summarized in the assailed decision as follows:
On September 8, 1982, the National Federation of Labor Union
(NAFLU) filed a request for conciliation before the Bureau of Labor
Relations requesting for the intervention in its dispute with
management involving certain money claims, refusal to conclude a
collective agreement after such has been negotiated and run-away
shop undertaken by management in order to bust the union.
Several conferences were conducted by the Bureau to settle the
dispute amicably. In the course of the proceedings, however,
management unilaterally declared a temporary shutdown on
September 15, 1982. "On September 23, 1982, the management of
Lawman Industrial promised the union 'that it will start the
normalization of operations at Lawman effective January, 1983.
On October 11, 1982, after all efforts to mediate the charges of
unfair labor practice and non-payment of certain money claims have
failed, the union filed its notice of strike.
On November 9, 1982, the firm offered payment of P200,000. as
complete settlement of all claims inclusive of the separation pay
from the company. The union rejected the offer which it felt was
tantamount to a proposal to eliminate the union and final separation
of its members from the company.
Efforts of conciliation proved futile. Until the last conference on
January 6, 1983, the company had failed to resume operations
alleging poor business conditions.
Meanwhile, the union filed a complaint for unfair labor practice
against the management of Lawman sometime December 1982
docketed as Case No. 11-695-82 (NAFLU v. Lawman) pending
before the Metro Manila Branch of the NLRC.
Notwithstanding the commitment of management to resume
operations in January, 1983 and even with the expiration on March
15, 1983 of the provisional shutdown, the period of shutdown was
extended without notifying this Office of such extension. On March
17, 1983, this Office issued the Order now in question.
On May 20, 1983, respondent filed a motion for reconsideration
alleging that it had suffered losses as shown by its financial
statements. In view thereof, it informed this Ministry of its decision
to effect a shutdown on September 8, 1982 and to circularize a
memorandum on November 2, 1982 announcing the cessation of
operations.
The company alleged further that it had no more plant and building
because they were allegedly repossessed by the Pioneer Texturizing
Corporation for the failure of respondent to pay rentals as evidenced
by the letter of Mr. Eugenio Tan dated August 10, 1982 stating that
respondent is given fifteen (15) days to settle its accounts, otherwise
an action for repossession and ejectment would be instituted against
it.
Nonetheless, the company offered to pay every employee affected by
the shutdown a separation pay of P328.95 each.
On June 6, 1983, the National Federation of Labor Unions (NAFLU)
submitted a position paper alleging that it was certified by the
Bureau of Labor Relations as the sole and exclusive bargaining agent
of all the rank and file employees of the said factory. Negotiations
followed in October 1981 until January 1982. The management
refused to grant substantial economic demands to the workers, hence,
the union declared a strike in July 1982. Thru the efforts of the
Bureau of Labor Relations, the strike was settled in July 1982. The
management agreed as follows: Wage increase, Pl.00 for the first
year; Pl.00 for the second year and P1.00 for the third year of the
contract. Vacation and sick leaves were also granted and other fringe
benefits. The collective bargaining agreement was suppose to be
effective September 1982.
But the actual partial shutdown began in August 1982. It appears
moreover that at night, machines were dismantled, hauled out and
then installed at No. 43 Engineering Road, Araneta University
compound, Malabon, Metro Manila and the name of Lawman was
changed to LIBRA GARMENTS. Under that name, new applicants
for employment were called even as the company continued to
manufacture the same products but under the name of LIBRA
GARMENTS. When this was discovered by the workers, LIBRA
GARMENTS was changed to DOLPHIN GARMENTS.
On March 17,1983, the Minister of Labor and Employment issued an
order, stating:
In view of the foregoing, this office hereby assumes jurisdiction over
the dispute at Lawman Industrial Corporation pursuant to Art. 264
(g) of the Labor Code. All employees affected by the extended
shutdown which is highly irregular, are ordered to return to work and
management is directed to accept all returning workers under the
same terms and conditions prevailing previous to the illegal
shutdown. Management is further directed to pay severance
compensation including all unpaid wages previous to the shutdown
and after March 15, 1983 in the event that the company cannot
resume operations, All pending cases including Case No. 11-695-82
(NAFLU v. Lawman) are hereby ordered consolidated to this Office
for resolution. Pending the determination of the charges on illegal
lockout run-away-shop and the pending money claims against the
company, Lawman Industrial is hereby enjoined from transferring
ownership or otherwise effecting any encumbrance or any of its
existing assets in favor of any third party without a prior clearance
from this Office and timely notice to the union. The company is
likewise prohibited from terminating the employment of any of its
employees pending the outcome of this dispute.
This order automatically enjoins a strike or lockout.
On July 31, 1984, the public respondent modified its earlier order
and directed the private respondent to pay all accrued wages and
benefits including a one month's pay for its failure to comply with
the requirement of notice under Batas Pambansa Blg. 130, as
amended and separation pay for all dismissed employees equivalent
to one month's pay or one-half month's pay for every year of service
whichever is higher computed up to January, 1983 when the
company had declared its intention to actually close its operations.
However, despite a finding that the private respondent company was
guilty of unfair labor practice, the public respondent did not order the
reinstatement of the employees concerned "because the company has
declared that it had already ceased its operations completely." It is
this order for non-reinstatement which is now before us.
The petition is impressed with merit.
We see no reason to disturb the findings of fact of the public
respondent, supported as they are by substantial evidence in the light
of the well established principle that findings of administrative
agencies which have acquired expertise because their jurisdiction is
confined to specific matters are geiterary accorded not only respect
but at times even finality, and that judicial review by this Court on
labor cases does not go so far as to evaluate the sufficiency of the
evidence upon which the Deputy Minister and the Regional Director
based their determinations but are limited to issues of jurisdiction or
grave abuse of discretion (Special Events and Central Shipping
Office Workers Union v. San Miguel Corporation, 122 SCRA 557).
The findings of the Minister of Labor and Employment embodied in
its July 31, 1984 decision are categorical:
Page 34 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
It is clear from the records of this case that the company bargained in
bad faith with the union when pending the negotiation of their
collective agreement, the company declared a temporary cessation of
its operations which in reality was an illegal lockout. Evidently, the
company also maintained run-away shop when it started transferring
its machine first to Libra and then to Dolphin Garments. Failure on
the part of the company to comply with the requirements of notice
and due process to the employees and the Labor Ministry one month
before the intended 'closure' of the firm is clearly against the law.
There is also evidence on the record that even after the alleged
'shutdown' the company was still operating in the name of Lawman
Industrial although production was being carried out by another firm
called Libra Garments (later Dolphin Garments). When the company
declared in its position paper dated May 20, 1983 that all the
machines of Lawman had been repossessed by the owner, Pioneer
Texturizing Corporation, it admitted the fact that it has violated the
17 March Order of this Office enjoining any encumbrance or transfer
of the properties of Lawman without prior clearance from this
Office. The evident bad faith, fraud and deceit committed by the
company to the prejudice of both the union and the employees who
have existing wage claims, some of which are due for execution,
leads us to affirm the union's position that the veil of corporate
fiction should be pierced in order to safeguard the right to self-
organization and certain vested rights which had accrued in favor of
the union.
It is very obvious from the above findings that the second
corporation seeks the protective shield of a corporate fiction to
achieve an illegal purpose. As enunciated in the case of Claparols v.
Court of Industrial Relations (65 SCRA 613) its veil in the present
case should, therefore, be pierced as it was deliberately and
maliciously designed to evade its financial obligations to its
employees. It is an established principle that when the veil of
corporate fiction is made as a shield to perpetrate a fraud or to
confuse legitimate issues (here, the relation of employer-employee),
the same should be pierced (A.D. Santos, Inc. v. Vasquez, 22 SCRA
1156).
Thus, as Lawman Industrial Corporation was guilty of unfair labor
practice, the public respondent's order for reinstatement should
follow as a matter of right. In National Mines and Allied Workers
Union v. National Labor Relations Commission (118 SCRA 637),
this Court held that it is an established rule that an employer who
commits an unfair labor practice may be required to reinstate with
fun backwages the workers affected by such act (See also Compana
Maritima v. United Seamen's Union, 104 Phil. 7; Talisay Silay
Mining Co. v. Court of Industrial Relations, 106 Phil. 1081; Velez v.
PAV Watchmen's Union, 107 Phil. 689; Phil. Sugar Institute v. Court
of Industrial Relations, et al., 109 Phil. 452; Big Five Products
Workers Union v. Court of Industrial Relations, 8 SCRA 559; and
MD Transit and Taxi Co. v. De Guzman, 7 SCRA 726).
After finding that Lawman Industrial Corporation had transferred its
business operations to Libra Garments Enterprises, which later
changed its name to Dolphin Garments Enterprises, the public
respondent cannot deny reinstatement to the petitioners simply
because Lawman Industrial Corporation has ceased its operations.
As Libra/Dolphin Garments is but an alter-ego of the old employer,
Lawman Industrial, the former must bear the consequences of the
latter's unfair acts by reinstating the petitioners to their former
positions without loss of seniority rights (See Phil. Land-Air-Sea
Labor Union (PLASLU) v. Sy Indong Co. Rice and Corn Mill, 11
SCRA 277).
To justify its closure, the respondent company argues that it can no
longer continue its operations due to serious losses, and in support
thereof, presented its financial statements for 1980-1981 and from
January to June, 1986.
The alleged losses of the respondent company are more apparent
than real. The argument of the private respondent are refuted by the
petitioners:
As of December 1981, LAWMAN's Cost of Goods Manufactured
and Sold was P2,065,822.26 while on June 30, 1982, it was P
3,768,609.22. The alleged reason was the entry of Direct Labor
under the 'Statement of Cost of Goods Manufactured and Sold'
amounting to P 1,703,768.27 for 1982. This could only mean that
there was a sudden increase in production of LAWMAN
necessitating an additional and huge labor cost, Comparing this with
the past year (1981), the entry for Direct Labor was only P
398,863.40. This tremendous increase in Direct Labor for the six
months ending June 1982 was not sufficiently explained by
LAWMAN in the proceedings below.
Even on the entry Administrative Salaries has been increased to
justify losses. For June 30, 1982, LAWMAN spent a sizable
P213,752.85 whereas for December 30, 1981, it only spent
P47,889.20 without any justifiable reason at all.
In addition, the Solicitor General submits the following observations:
xxx xxx xxx
... [T]he net sales of LAWMAN for the year 1981 was,
P2,117,203.95 whereas for the shorter period of January to June
1982, its next sales was already P2,359,479.25, surpassing its entire
1981 sales. This clearly shows that the firm was experiencing a sales
upswing at the time of its shutdown,
Following the precedent set in Lepanto Consolidated Mining Co. v.
Encarnacion et al (136 SCRA 256) and cases cited therein, the
petitioner-workers should be reinstated but with backwages not
exceeding three years.
WHEREFORE, the petition for review is GRANTED. The appealed
decision dated July 31, 1984 is hereby SET ASIDE. The private
respondent is ordered to reinstate the petitioners to positions in
LIBRA/DOLPHIN GARMENTS with backwages of not more than
three (3) years each and without loss of seniority rights and benefits
being enjoyed by them prior to the alleged closure of Lawman's
Industrial Corporation.
SO ORDERED.
Page 35 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
G.R. No. L-69494 May 29, 1987
A.C. RANSOM LABOR UNION-CCLU, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION, First
Division A.C. RANSOM (PHIIS.) CORPORATION RUBEN
HERNANDEZ, MAXIMO C. HERNANDEZ, SR., PORFIRIO
R. VALENCIA, LAURA H. CORNEJO, FRANCISCO
HERNANDEZ, CELESTINO C. HERNANDEZ and MA.
ROSARIO HERNANDEZ, respondents.
RESOLUTION
MELENCIO-HERRERA, J.:
In a joint Decision in two earlier cases rendered by the then Court of
Industrial Relations (CIR) on August 19, 1972, it declared in the
dispositive portion thereof:
IN VIEW OF ALL THE FOREGOING, ... the A.C. Ransom
Philippine Corporation is guilty of unfair labor practice of
interference and discrimination herein above held and specified;
ordering said corporation, its officers and agents to cease and desist
from committing the same: finding the strike legal and justified; and
to reinstate immediately ... , to their respective positions with
backwages from July 25, 1969 until actually reinstated, without loss
of seniority rights and other privileges appurtenant to their
employment. (Emphasis supplied). 1
This Court affirmed that Decision when it denied the Petition for
Review filed by RANSOM on February 26, 1973 in G.R. Nos. L-
36226-68.
The backwages due the 22 employees having been computed at P
199,276.00 by the (CIR) Examiner, successive Motions for
Execution were filed by the UNION on January 27, 1973 and March
1, 1973, all of which RANSOM opposed stressing its "precarious
financial position if immediate execution of the backwages would be
ordered." Upon the UNION's Motion of April 22, 1973 asking the
CIR that RANSOM be ordered to deposit with the Court the
backwages due them. RANSOM manifested that it did not have the
necessary funds to deposit and asked that the employees' earnings
elsewhere during this suspension be deducted. After several
hearings, a recomputation was made and the award of P199,276.00
was reduced to P 164,984.00. 2
The records show that, upon application filed by RANSOM on April
2, 1973, it was granted clearance by the Secretary of Labor on June
7, 1973 to cease operation and terminate employment effective May
1, 1973, without prejudice to the right of subject employees to seek
redress of grievances under existing laws and decrees. 3 The reasons
given by RANSOM for the clearance application were financial
difficulties on account of obligations incurred prior to 1966.
On January 21, 1974, the UNION filed another Motion for Execution
alleging that although RANSOM had assumed a posture of suffering
from business reverse, its officers and principal stockholders had
organized a new corporation, the Rosario Industrial Corporation
(thereinafter called ROSARIO), using the same equipment,
personnel, business stocks and the same place of business. For its
part, RANSOM declared that ROSARIO is a distinct and separate
corporation, which was organized long before these instant cases
were decided adversely against RANSOM.
It appears that sometime in 1969, ROSARIO, a closed corporation,
was, in fact, established. It was engaged in the same line of business
as RANSOM with the same Hernandez family as the owners, the
same officers, the same President, the same counsel and the same
address at 555 Quirino Avenue, Paranaque, Rizal. The compound,
building, plant, equipment, machinery, laboratory and bodega were
the same as those occupied and used by RANSOM. The UNION
claims that ROSARIO thrives to this day.
Writs of execution were issued successively against RANSOM on
June 23, 1976, and February 17, 1977, to no avail.
On December 18, 1978, the UNION again filed an ex-parte Motion
for Writ of Execution and Garnishment praying that the Writ issue
against the Officers/Agents of RANSOM personally and or their
estates, as the case may be, considering their success in hiding or
shielding the assets of said company. RANSOM countered that the
CIR Decision, dated August 19, 1972, could no longer be enforced
by mere Motion because more than five (5) years had already lapsed.
Acting on the Motion, Labor Arbiter Tito F. Genilo issued, on March
11, 1980, an Order, the pertinent part of which reads:
Under the circumstances and pursuant to the decision
aforementioned, especially that portion holding the respondent
corporation's officers and agents liable, the following officers of the
respondent corporation — as appears in the record-are hereby
deemed included parties respondents in their official capacity:
a) Ruben Hernandez (President, per his testimony on August 21,
1974);
b) Maximo C. Hernandez, Jr. (Director);
c) Porfirio N. Valencia (Director);
d) Laura H. Cornejo (Director);
e) Francisco Hernandez (Chairman of the Board);
f) Celestino C. Hernandez (Director); and
g) Ma. Rosario Hernandez (Director).
Consequently, let a writ of execution be issued for P 164,984.00
against respondent corporation and its officers/agents enumerated
above.
SO ORDERED. (Emphasis supplied) 4
It appears that among the persons named in the aforequoted Order,
Ma. Rosario Hernandez died in 1971; Francisco Hernandez died in
1977: and Celestino C. Hernandez passed away in 1979. And
Maximo Hernandez who was named in the CIR Decision, died in
1966. 5
The NLRC, on appeal, modified the Decision by relieving the
officers and agents of liability as follows:
As to the liability of the respondent's officers and agents, we agree
with the contention of the respondent-appellant that there is nothing
in the order dated March 11, 1980 that would justify the holding of
the individual officers and agents of respondent in their personal
capacity. As a general rule, officers of the corporation are not liable
personally for the official acts unless they have exceeded the scope
of their authority. In the absence of evidence showing that the
officers mentioned in the Order of the Labor Arbiter dated March 11,
1980 have exceeded their authority, the writ of execution can not be
enforced against them, especially' so since they were not given a
chance to be heard.
WHEREFORE, the Order appealed from is hereby affirmed, except
as modified above.
SO ORDERED. 6
Reconsideration sought by the UNION from the NLRC was denied,
hence this special civil action of Certiorari.
On June 10, 1986, this Court promulgated its Decision, the
dispositive portion of which decrees:
WHEREFORE, the questioned Decision of the National Labor
Relations Commission is SET ASIDE, and the Order of the Labor
Arbiter Tito F. Genilo of March 11, 1980 is reinstated with the
modification that personal liability for the backwages due the 22
strikers shall be limited to Ruben Hernandez, who was President of
RANSOM in 1974, jointly and severally with other Presidents of the
same corporation who had been elected as such after 1972 or up to
the time the corporate life was terminated.
Both parties have moved for reconsideration. Private respondents
point out that they were never impleaded as parties in the Trial
Court, and that their personal liabilities were never at issue; that
judgment holding Ruben Hernandez personally liable is tantamount
to deprivation of property without due process of law; and that he
was not an officer of the corporation at the time the unfair labor
practices were committed.
Page 36 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
The UNION on the other hand, in its own Motion for
Reconsideration, prays that the veil of corporate fiction be pierced
and that the Decision be modified, in that all the individual private
respondents and not only the President, should be held jointly and
severally liable with RANSOM. On November 4, 1986, it further
filed an Urgent Motion for Preliminary Mandatory Injunction
"directing private respondents to deposit the amount of P 199,276.00
or to put up a supersedeas bond of the same sum."
Incontrovertible is the fact that RANSOM was found guilty by the
CIR, in its Decision of August 19, 1972, of unfair labor practice; that
its officers and agents were ordered to cease and desist from further
committing acts constitutive of the same, and to reinstate
immediately the 22 union members to their respective positions with
backwages from July 25, 1969 until actually reinstated.
The CIR Decision became final, conclusive, and executory after this
Court denied the RANSOM petition for review in 1973. In other
words, this Court upheld that portion of the judgment ordering
the officers and agents of RANSOM to reinstate the laborers
concerned, with backwages. The inclusion of the officers and agents
was but proper since a corporation, as an artificial being, can act only
through them. It was also pursuant to the CIR Act (CA No.
103 ), 7 the Industrial Peace Act (R.A. 875) 8 the Minimum Wage
Law (R.A. 602). 9 Consequently, when, in resolving the UNION's
Motion for Writ of Execution and Garnishment in the Order of
March 11, 1980, Labor Arbiter Genilo named the seven (17) private
respondents herein as the RANSOM officers and agents, who should
be held liable (supra), he merely implemented the already final and
executory CIR decision of August 19, 1972. The NLRC, on appeal to
it by RANSOM, could not have modified the CIR Decision, as
affirmed by this Court, by relieving RANSOM's officers and
agents of liability. It is also for that reason that in our Decision of
June 10, 1986 we set aside said NLRC Decision and reinstated the
Order of Labor Arbiter Genilo, with modification, in that we limited
liability for backwages due the 22 UNION members to the President
of RANSOM in 1974 jointly and severally with other Presidents of
the same corporation who had been elected as such after 1972 or up
to the time the corporation life was terminated, since the President
should also be deemed included in the term "employer. "
The foregoing, however, limits the scope of liability and deviates
from the CIR Decision, affirmed by this Court in 1973, holding
the officers and agents of RANSOM liable. In other words, the
officers and agents listed in the Genilo Order except for those who
have since passed away, should, as affirmed by this Court, be held
jointly and severally liable for the payment of backwages to the 22
strikers.
This finding does not ignore the legal fiction that a corporation has a
personality separate and distinct from its stockholders and members,
for, as this Court had held "where the incorporators and directors
belong to a single family, the corporation and its members can be
considered as one in order to avoid its being used as an instrument to
commit injustice," 10 or to further an end subversive of justice. 11 In
the case of Claparols vs. CIR 12 involving almost similar facts as in
this case, it was also held that the shield of corporate fiction should
be pierced when it is deliberately and maliciously designed to evade
financial obligations to employees. To the same effect was this
Court's rulings in still other cases:
When the notion of legal entity is used as a means to perpetrate fraud
or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, and or confuse legitimate
issues the veil which protects the corporation will be lifted (Villa
Rey Transit, Inc. vs. Ferrer, 25 SCRA 846 [1968]; Republic vs.
Razon, 20 SCRA 234 [1967]; A.D. Santos, Inc. vs. Vasquez, 22
SCRA 1156 [1968]; Telephone Eng'g. & Service Company, Inc. vs.
WCC, 104 SCRA 354 [1981]).
The alleged bankruptcy of RANSOM furnishes no justification for
non-payment of backwages to the employees concerned taking into
consideration Article 110 of the Labor Code, which provides:
ART. 110. Worker preference in case of bankruptcy. - In the event of
bankruptcy or liquidation of an employer's business, his workers
shall enjoy first preference as regards wages due them for services
rendered during the period prior to the bankruptcy or liquidation, any
provision of law to the contrary notwithstanding. Unpaid wages shag
be paid in full before other creditors may establish any claim to a
share in the assets of the employer.
The term "wages" refers to all remunerations, earnings and other
benefits in terms of money accruing to the employees or workers for
services rendered. They are to be paid in full before other creditors
may establish any claim to a share in the assets of the employer.
Section 10. Payment of wages in case of bankruptcy.-Unpaid wages
earned by the employees before the declaration of bankruptcy or
judicial liquidation of the employer's business shall be given first
preference and shall be paid in full before other creditors may
establish any claim to a share in the assets of the employer. 13
The foregoing provisions are but in consonance with the principles
of social justice and protection to labor guaranteed by past and
present Constitutions and are not really being given any retroactive
effect when applied herein.
The Decision of the CIR was rendered on August 19, 1972.
Clearance to RANSOM to cease operations and terminate
employment granted by the Secretary of Labor was made effective
on May 1, 1973. The right of the employees concerned to backwages
awarded them, therefore, had already vested at the time and even
before clearance was granted. Note should also be taken of the fact
that the clearance was without prejudice to the right of subject
employees to seek redress of grievances under existing laws and
decrees.
The worker preference applies even if the employer's properties are
encumbered by means of a mortgage contract, as in this case. So that,
when machinery and equipment of RANSOM were sold to
Revelations Manufacturing Corporation for P 2M in 1975, the right
of the 22 laborers to be paid from the proceeds should have been
recognized, even though it is claimed that those proceeds were
turned over to the Commercial Bank and Trust Company (Comtrust)
in payment of RANSOM obligations, since the workers' preference
is over and above the claim of other creditors.
The contention, therefore, of the heirs of the late Maximo C.
Hernandez, Sr. that since they paid from their own personal funds the
balance of the amount owing by RANSOM to Comtrust they are the
"preferential creditors" of RANSOM, is clearly without merit.
Workers are to be paid in full before other creditors may establish
any claim to a share in the assets of the employer.
... even if the employer's properties are encumbered by means of a
mortgage contract, still the workers' wages which enjoy first
preference in case of bankruptcy or liquidation are duly protected by
an automatic first lien over and above all other earlier encumbrances
on the said properties. Otherwise, workers' wages may be imperilled
by foreclosure of mortgages, and as a consequence, the aforecited
provision of the New Labor Code would be rendered
meaningless. 14
Aggravating RANSOM's clear evasion of payment of its financial
obligations is the organization of a "run-away corporation,"
ROSARIO, in 1969 at the time the unfair labor practice case was
pending before the CIR by the same persons who were the officers
and stockholders of RANSOM, engaged in the same line of business
as RANSOM, producing the same line of products, occupying the
same compound, using the same machineries, buildings, laboratory,
bodega and sales and accounts departments used by RANSOM, and
which is still in existence. Both corporations were closed
corporations owned and managed by members of the same family.
Its organization proved to be a convenient instrument to avoid
payment of backwages and the reinstatement of the 22 workers. This
is another instance where the fiction of separate and distinct
corporate entities should be disregarded.
It is very obvious that the second corporation seeks the protective
shield of a corporate fiction whose veil in the present case could, and
should, be pierced as it was deliberately and maliciously designed to
evade its financial obligation to its employees.
... When a notion of legal entity is used to. defeat public
convenience, justify wrong, protect fraud, or defend crime, the law
will regard the corporation as an association or persons, or, in the
case of two corporations, will merge them into one. 15
Page 37 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
The corporation will be treated merely as an aggregation of
individuals or, where there are two corporations, they will be merged
as one, the one being merely regarded as part of the instrumentality
of the other. 16
The UNION's plea, therefore, for the reinstatement of the 22 strikers
in ROSARIO should be favorably heard. However, ROSARIO shall
have the option to award them separation pay equivalent to one-half
month for every year of service actually rendered by the 22 strikers.
The plea of the UNION for the restoration of the original
computation of P199,276.00 or to grant the 22 Union members three
(3) years backwages is rejected. It is the amount of P164,984.00 as
backwages, which was the subject of the Writ of Execution issued by
the Labor Arbiter pursuant to the CIR Decision of 1972.
With the conclusions arrived at, the UNION's Urgent Motion for a
Writ of Preliminary Mandatory Injunction directing private
respondents to deposit the amount due as backwages in the
meantime, need no longer be acted on.
A final and executory Decision in favor of the UNION obtained in
1972 and affirmed by this Court in 1973 has remained unsatisfied to
this date despite no less than ten (10) Motions for Execution over a
period of fourteen (14) years, not to mention the fact that this is the
second time that this case is before this Court. The detriment and
prejudice caused the employees concerned is subversive of the ends
of justice. This protracted litigation must end and labor should now
enjoy the just deserts of its legal victory.
ACCORDINGLY, private respondents' Motion for Reconsideration
is hereby denied with FINALITY; the Motion for Reconsideration
filed by petitioner is granted in part; and the dispositive portion of
the Decision, dated June 10, 1986, is hereby amended to read as
follows:
WHEREFORE, the questioned Decision of the National Labor
Relations Commission is SET ASIDE, and the Order of Labor
Arbiter Tito F. Genilo of March 11, 1980 is reinstated with the
modification that Rosario Industrial Corporation and its officers and
agents are hereby held jointly and severally liable with the surviving
private respondents for the payment of the backwages due the 22
union members.
Rosario Industrial Corporation is hereby ordered to reinstate the 22
union members or, if this is not possible, to award them separation
pay equivalent at least to one (1) month pay or to one (1) month
salary for every year of service actually rendered by them with A.C.
Ransom (Phils). Corporation, whichever is higher.
This decision is immediately executory.
SO ORDERED.
G.R. No. 108734 May 29, 1996
CONCEPT BUILDERS, INC., petitioner,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION, (First
Division); and Norberto Marabe; Rodolfo Raquel, Cristobal
Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar,
Norberto Comendador, Rogelio Salut, Emilio Garcia, Jr.,
Mariano Rio, Paulina Basea, Alfredo Albera, Paquito Salut,
Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe
Radiana, Gavino Sualibio, Moreno Escares, Ferdinand Torres,
Felipe Basilan, and Ruben Robalos, respondents.
HERMOSISIMA, JR., J.:p
The corporate mask may be lifted and the corporate veil may be
pierced when a corporation is just but the alter ego of a person or of
another corporation. Where badges of fraud exist; where public
convenience is defeated; where a wrong is sought to be justified
thereby, the corporate fiction or the notion of legal entity should
come to naught. The law in these instances will regard the
corporation as a mere association of persons and, in case of two
corporations, merge them into one.
Thus, where a sister corporation is used as a shield to evade a
corporation's subsidiary liability for damages, the corporation may
not be heard to say that it has a personality separate and distinct from
the other corporation. The piercing of the corporate veil comes into
play.
This special civil action ostensibly raises the question of whether the
National Labor Relations Commission committed grave abuse of
discretion when it issued a "break-open order" to the sheriff to be
enforced against personal property found in the premises of
petitioner's sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with
principal office at 355 Maysan Road, Valenzuela, Metro Manila, is
engaged in the construction business. Private respondents were
employed by said company as laborers, carpenters and riggers.
proceed with the public auction sale of the aforesaid personal
properties on November 7, 1989.
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-
party claim with the Labor Arbiter alleging that the properties sought
to be levied upon by the sheriff were owned by Hydro (Phils.), Inc.
(HPPI) of which he is the Vice-President.
On November 23, 1989, private respondents filed a "Motion for
Issuance of a Break-Open Order," alleging that HPPI and petitioner
corporation were owned by the same incorporator/stockholders.
They also alleged that petitioner temporarily suspended its business
operations in order to evade its legal obligations to them and that
private respondents were willing to post an indemnity bond to
answer for any damages which petitioner and HPPI may suffer
because of the issuance of the break-open order.

On November, 1981, private respondents were served individual
written notices of termination of employment by petitioner, effective
on November 30, 1981. It was stated in the individual notices that
their contracts of employment had expired and the project in which
they were hired had been completed.
Public respondent found it to be, the fact, however, that at the time of
the termination of private respondent's employment, the project in
which they were hired had not yet been finished and completed.
Petitioner had to engage the services of sub-contractors whose
workers performed the functions of private respondents.
In support of their claim against HPPI, private respondents presented
duly certified copies of the General Informations Sheet, dated May
15, 1987, submitted by petitioner to the Securities Exchange
Commission (SEC) and the General Information Sheet, dated May
25, 1987, submitted by HPPI to the Securities and Exchange
Commission.
The General Information Sheet submitted by the petitioner revealed
the following:
1. Breakdown of Subscribed Capital

Aggrieved, private respondents filed a complaint for illegal Name of Stockholder Amount Subscribed
dismissal, unfair labor practice and non-payment of their legal
HPPI P 6,999,500.00
holiday pay, overtime pay and thirteenth-month pay against
petitioner. Antonio W. Lim 2,900,000.00
On December 19, 1984, the Labor Arbiter rendered Dennis S. Cuyegkeng 300.00
judgment1 ordering petitioner to reinstate private respondents and to
pay them back wages equivalent to one year or three hundred Elisa C. Lim 100,000.00
working days.
Teodulo R. Dino 100.00
On November 27, 1985, the National Labor Relations Commission
Virgilio O. Casino 100.00
(NLRC) dismissed the motion for reconsideration filed by petitioner
on the ground that the said decision had already become final and 2. Board of Directors
executory.2
Antonio W. Lim Chairman
On October 16, 1986, the NLRC Research and Information
Department made the finding that private respondents' back wages Dennis S. Cuyegkeng Member
amounted to P199,800.00.3
Elisa C. Lim Member
On October 29, 1986, the Labor Arbiter issued a writ of execution
directing the sheriff to execute the Decision, dated December 19, Teodulo R. Dino Member
1984. The writ was partially satisfied through garnishment of sums
Virgilio O. Casino Member
from petitioner's debtor, the Metropolitan Waterworks and Sewerage
Authority, in the amount of P81,385.34. Said amount was turned 3. Corporate Officers
over to the cashier of the NLRC.
Antonio W. Lim President
On February 1, 1989, an Alias Writ of Execution was issued by the
Labor Arbiter directing the sheriff to collect from herein petitioner Dennis S. Cuyegkeng Assistant to the President
the sum of P117,414.76, representing the balance of the judgment
award, and to reinstate private respondents to their former positions. Elisa O. Lim Treasurer

On July 13, 1989, the sheriff issued a report stating that he tried to Virgilio O. Casino Corporate Secretary
serve the alias writ of execution on petitioner through the security 4. Principal Office
guard on duty but the service was refused on the ground that
petitioner no longer occupied the premises. 355 Maysan Road

On September 26, 1986, upon motion of private respondents, the Valenzuela, Metro Manila.5
Labor Arbiter issued a second alias writ of execution.
On the other hand, the General Information Sheet of HPPI revealed
The said writ had not been enforced by the special sheriff because, as the following:
stated in his progress report, dated November 2, 1989:
1. Breakdown of Subscribed Capital
1. All the employees inside petitioner's premises at 355 Maysan
Road, Valenzuela, Metro Manila, claimed that they were employees Name of Stockholder Amount Subscribed
of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;
Antonio W. Lim P 400,000.00
2. Levy was made upon personal properties he found in the premises;
Elisa C. Lim 57,700.00
3. Security guards with high-powered guns prevented him from
AWL Trading 455,000.00
removing the properties he had levied upon.4
Dennis S. Cuyegkeng 40,100.00
The said special sheriff recommended that a "break-open order" be
issued to enable him to enter petitioner's premises so that he could Teodulo R. Dino 100.00
Page 38 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman
Elisa C. Lim Member
Dennis S. Cuyegkeng Member
Virgilio O. Casino Member
Teodulo R. Dino Member
3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa C. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila.6
On February 1, 1990, HPPI filed an Opposition to private
respondents' motion for issuance of a break-open order, contending
that HPPI is a corporation which is separate and distinct from
petitioner. HPPI also alleged that the two corporations are engaged in
two different kinds of businesses, i.e., HPPI is a manufacturing firm
while petitioner was then engaged in construction.
On March 2, 1990, the Labor Arbiter issued an Order which denied
private respondents' motion for break-open order.
Private respondents then appealed to the NLRC. On April 23, 1992,
the NLRC set aside the order of the Labor Arbiter, issued a break-
open order and directed private respondents to file a bond.
Thereafter, it directed the sheriff to proceed with the auction sale of
the properties already levied upon. It dismissed the third-party claim
for lack of merit.
Petitioner moved for reconsideration but the motion was denied by
the NLRC in a Resolution, dated December 3, 1992.
Hence, the resort to the present petition.
Petitioner alleges that the NLRC committed grave abuse of
discretion when it ordered the execution of its decision despite a
third-party claim on the levied property. Petitioner further contends,
that the doctrine of piercing the corporate veil should not have been
applied, in this case, in the absence of any showing that it created
HPPI in order to evade its liability to private respondents. It also
contends that HPPI is engaged in the manufacture and sale of steel,
concrete and iron pipes, a business which is distinct and separate
from petitioner's construction business. Hence, it is of no
consequence that petitioner and HPPI shared the same premises, the
same President and the same set of officers and subscribers. 7
We find petitioner's contention to be unmeritorious.
It is a fundamental principle of corporation law that a corporation is
an entity separate and distinct from its stockholders and from other
corporations to which it may be connected. 8 But, this separate and
distinct personality of a corporation is merely a fiction created by
law for convenience and to promote justice. 9 So, when the notion of
separate juridical personality is used to defeat public convenience,
justify wrong, protect fraud or defend crime, or is used as a device to
defeat the labor laws,10 this separate personality of the corporation
may be disregarded or the veil of corporate fiction pierced. 11 This is
true likewise when the corporation is merely an adjunct, a business
conduit or an alter ego of another corporation.12
The conditions under which the juridical entity may be disregarded
vary according to the peculiar facts and circumstances of each case.
No hard and fast rule can be accurately laid down, but certainly,
there are some probative factors of identity that will justify the
application of the doctrine of piercing the corporate veil, to wit:
1. Stock ownership by one or common ownership of both
corporations.
Page 39 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business.13
The SEC en banc explained the "instrumentality rule" which the
courts have applied in disregarding the separate juridical personality
of corporations as follows:
Where one corporation is so organized and controlled and its affairs
are conducted so that it is, in fact, a mere instrumentality or adjunct
of the other, the fiction of the corporate entity of the
"instrumentality" may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but
such domination of instances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal. It must be
kept in mind that the control must be shown to have been exercised
at the time the acts complained of took place. Moreover, the control
and breach of duty must proximately cause the injury or unjust loss
for which the complaint is made.
The test in determining the applicability of the doctrine of piercing
the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and business
practice in respect to the transaction attacked so that the corporate
entity as to this transaction had at the time no separate mind, will or
existence of its own;
2. Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty or dishonest and unjust act in contravention of
plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause
the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the
corporate veil." In applying the "instrumentality" or "alter ego"
doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's
relationship to that operation.14
Thus the question of whether a corporation is a mere alter ego, a
mere sheet or paper corporation, a sham or a subterfuge is purely one
of fact.15
In this case, the NLRC noted that, while petitioner claimed that it
ceased its business operations on April 29, 1986, it filed an
Information Sheet with the Securities and Exchange Commission on
May 15, 1987, stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila. On the other hand, HPPI, the third-party
claimant, submitted on the same day, a similar information sheet
stating that its office address is at 355 Maysan Road, Valenzuela,
Metro Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O. Casiño as
the corporate secretary of both corporations. It would also not be
amiss to note that both corporations had the same president,
the same board of directors, the same corporate officers, and
substantially the same subscribers.
From the foregoing, it appears that, among other things, the
respondent (herein petitioner) and the third-party claimant shared
the same address and/or premises. Under this circumstances, (sic) it
cannot be said that the property levied upon by the sheriff were not
of respondents.16
Clearly, petitioner ceased its business operations in order to evade
the payment to private respondents of back wages and to bar their
reinstatement to their former positions. HPPI is obviously a business
conduit of petitioner corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to
petitioner corporation.
The facts in this case are analogous to Claparols v. Court of
Industrial Relations, 17 where we had the occasion to rule:
Respondent court's findings that indeed the Claparols Steel and Nail
Plant, which ceased operation of June 30, 1957, was SUCCEEDED
by the Claparols Steel Corporation effective the next day, July 1,
1957, up to December 7, 1962, when the latter finally ceased to
operate, were not disputed by petitioner. It is very clear that the latter
corporation was a continuation and successor of the first entity . . . .
Both predecessors and successor were owned and controlled by
petitioner Eduardo Claparols and there was no break in the
succession and continuity of the same business. This "avoiding-the-
liability" scheme is very patent, considering that 90% of the
subscribed shares of stock of the Claparols Steel Corporation (the
second corporation) was owned by respondent . . . Claparols himself,
and all the assets of the dissolved Claparols Steel and Nail plant were
turned over to the emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective
shield of a corporate fiction whose veil in the present case could, and
should, be pierced as it was deliberately and maliciously designed to
evade its financial obligation to its employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy
upon the property subject of the execution, private respondents had
no other recourse but to apply for a break-open order after the third-
party claim of HPPI was dismissed for lack of merit by the NLRC.
This is in consonance with Section 3, Rule VII of the NLRC Manual
of Execution of Judgment which provides that:
Should the losing party, his agent or representative, refuse or prohibit
the Sheriff or his representative entry to the place where the property
subject of execution is located or kept, the judgment creditor may
apply to the Commission or Labor Arbiter concerned for a break-
open order.
Furthermore, our perusal of the records shows that the twin
requirements of due notice and hearing were complied with.
Petitioner and the third-party claimant were given the opportunity to
submit evidence in support of their claim.
Hence, the NLRC did not commit any grave abuse of discretion
when it affirmed the break-open order issued by the Labor Arbiter.
Finally, we do not find any reason to disturb the rule that factual
findings of quasi-judicial agencies supported by substantial evidence
are binding on this Court and are entitled to great respect, in the
absence of showing of grave abuse of a discretion.18
WHEREFORE, the petition is DISMISSED and the assailed
resolutions of the NLRC, dated April 23, 1992 and December 3,
1992, are AFFIRMED.
SO ORDERED.
Page 40 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
G.R. No. L-10510             March 17, 1961
M. MC CONNEL, W. P. COCHRANE, RICARDO
RODRIGUEZ, ET AL., petitioners,
vs.
THE COURT OF APPEALS and DOMINGA DE LOS REYES,
assisted by her husband, SABINO PADILLA, respondents.
Jesus B. Santos and Cornelio Antiquera for petitioners.
Teodoro Padilla for respondents.
REYES, J.B.L., J.:
The issue before us in the correctness of the decision of the Court of
Appeals that, under the circumstances of record, there was
justification for disregarding the corporate entity of the Park Rite
Co., Inc., and holding its controlling stockholders personally
responsible for a judgment against the corporation.
The Court of Appeals found that the Park Rite Co., Inc., a Philippine
corporation, was originally organized on or about April 15, 1947,
with a capital stock of 1,500 shares at P1.00 a share. The corporation
leased from Rafael Perez Rosales y Samanillo a vacant lot on Juan
Luna street (Manila) which it used for parking motor vehicles for a
consideration.
It turned out that in operating its parking business, the corporation
occupied and used not only the Samanillo lot it had leased but also
an adjacent lot belonging to the respondents-appellees Padilla,
without the owners' knowledge and consent. When the latter
discovered the truth around October of 1947, they demanded
payment for the use and occupation of the lot.
The corporation (then controlled by petitioners Cirilo Parades and
Ursula Tolentino, who had purchased and held 1,496 of its 1,500
shares) disclaimed liability, blaming the original incorporators,
McConnel, Rodriguez and Cochrane. Whereupon, the lot owners
filed against it a complaint for forcible entry in the Municipal Court
of Manila on 7 October 1947 (Civil Case No. 4031).
Judgment was rendered in due course on 13 November 1947,
ordering the Park Rite Co., Inc. to pay P7,410.00 plus legal interest
as damages from April 15, 1947 until return of the lot. Restitution
not having been made until 31 January 1948, the entire judgment
amounted to P11,732.50. Upon execution, the corporation was found
without any assets other than P550.00 deposited in Court. After their
application to the judgment credit, there remained a balance of
P11,182.50 outstanding and unsatisfied.
The judgment creditors then filed suit in the Court of First Instance
of Manila against the corporation and its past and present
stockholders, to recover from them, jointly and severally, the
unsatisfied balance of the judgment, plus legal interest and costs. The
Court of First Instance denied recovery; but on appeal, the Court of
Appeals (CA-G.R. No. 8434-R) reversed, finding that the
corporation was a mere alter ego or business conduit of the principal
stockholders that controlled it for their own benefit, and adjudged
them responsible for the amounts demanded by the lot owners, as
follows:
WHEREFORE, premises considered, the decision appealed from is
reversed. Defendants-appellees Cirilo Paredes and Ursula Tolentino
are hereby declared liable to the plaintiffs-appellants for the rentals
due on the lot in question from August 22, 1947 to January 31, 1948
at the rate of P1,235.00 a month, with legal interest thereon from the
time of the filing of the complaint. Deducting the P550.00 which was
paid at the time when the corporation was already acquired by the
said defendants-appellees Cirilo Paredes and Ursula Tolentino, they
are hereby ordered to pay to plaintiffs-appellants Dominga de los
Reyes and Sabino Padilla the sum of P6,036.66 with legal interest
therein from the time of the filing of the complaint until fully paid.
Defendant-appellee RICARDO RODRIGUEZ is hereby ordered to
pay to the plaintiffs-appellants Dominga de los Reyes and Sabino
Padilla the sum of P1,742.64 with legal interest thereon from the
time of the filing of the complaint and until it is fully paid. In
addition thereto the defendants-appellees Cirilo Paredes, Ursula
Tolentino and Ricardo Rodriguez shall pay the costs proportionately
in both instances.
IT IS SO ORDERED.
Cirilo Paredes and Ursula Tolentino then resorted to this court. We
granted certiorari.
On the main issue whether the individual stockholders maybe held
liable for obligations contracted by the corporation, this Court has
already answered the question in the affirmative wherever
circumstances have shown that the corporate entity is being used as
an alter ego or business conduit for the sole benefit of the
stockholders, or else to defeat public convenience, justify wrong,
protect fraud, or defend crime (Koppel [Phil.] Inc. vs. Yatco, 77 Phil.
496; Arnold vs. Willits and Patterson, 44 Phil. 364).
The Court of Appeals has made express findings to the following
effect:
There is no question that a wrong has been committed by the so-
called Park Rite Co., Inc., upon the plaintiffs when it occupied the lot
of the latter without its prior knowledge and consent and without
paying the reasonable rentals for the occupation of said lot. There is
also no doubt in our mind that the corporation was a mere alter ego
or business conduit of the defendants Cirilo Paredes and Ursula
Tolentino, and before them — the defendants M. McConnel, W. P.
Cochrane, and Ricardo Rodriguez. The evidence clearly shows that
these persons completely dominated and controlled the corporation
and that the functions of the corporation were solely for their
benefits.
When it was originally organized on or about April 15, 1947, the
original incorporators were M. McConnel, W. P. Cochrane, Ricardo
Rodriguez, Benedicto M. Dario and Aurea Ordrecio with a capital
stock of P1,500.00 divided into 1,500 shares at P1.00 a share.
McConnel and Cochrane each owned 500 shares, Ricardo Rodriguez
408 shares, and Dario and Ordrecio 1 share each. It is obvious that
the shares of the last two named persons were merely qualifying
shares. Then or about August 22, 1947 the defendants Cirilo Paredes
and Ursula Tolentino purchased 1,496 shares of the said corporation
and the remaining four shares were acquired by Bienvenido J.
Claudio, Quintin C. Paredes, Segundo Tarictican, and Paulino
Marquez at one share each. It is obvious that the last four shares
bought by these four persons were merely qualifying shares and that
to all intents and purposes the spouses Cirilo Paredes and Ursula
Tolentino composed the so-called Park Rite Co., Inc. That the
corporation was a mere extension of their personality is shown by
the fact that the office of Cirilo Paredes and that of Park Rite Co.,
Inc. were located in the same building, in the same floor and in the
same room — at 507 Wilson Building. This is further shown by the
fact that the funds of the corporation were kept by Cirilo Paredes in
his own name (p. 14, November 8, 1950, T.S.N.) The corporation
itself had no visible assets, as correctly found by the trial court,
except perhaps the toll house, the wire fence around the lot and the
signs thereon. It was for this reason that the judgment against it
could not be fully satisfied. (Emphasis supplied).
The facts thus found can not be varied by us, and conclusively show
that the corporation is a mere instrumentality of the individual
stockholder's, hence the latter must individually answer for the
corporate obligations. While the mere ownership of all or nearly all
of the capital stock of a corporation is a mere business conduit of the
stockholder, that conclusion is amply justified where it is shown, as
in the case before us, that the operations of the corporation were so
merged with those of the stockholders as to be practically
indistinguishable from them. To hold the latter liable for the
corporation's obligations is not to ignore the corporation's separate
entity, but merely to apply the established principle that such entity
can not be invoked or used for purposes that could not have been
intended by the law that created that separate personality.
The petitioners-appellants insist that the Court could have no
jurisdiction over an action to enforce a judgment within five (5)
years from its rendition, since the Rules of Court provide for
enforcement by mere motion during those five years. The error of
this stand is apparent, because the second action, originally begun in
the Court of First Instance, was not an action to enforce the judgment
of the Municipal Court, but an action to have non-parties to the
judgment held responsible for its payment.
Finding no error in the judgment appealed from, the same is hereby
affirmed, with costs against petitioners-appellants Cirilo Paredes and
Ursula Tolentino.
Page 41 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
G.R. No. L-41337 June 30, 1988
TAN BOON BEE & CO., INC., petitioner,
vs.
THE HONORABLE HILARION U. JARENCIO, PRESIDING
JUDGE OF BRANCH XVIII of the Court of First Instance of
Manila, GRAPHIC PUBLISHING, INC., and PHILIPPINE
AMERICAN CAN DRUG COMPANY, respondents.
De Santos, Balgos & Perez Law Office for petitioner.
Araneta Mendoza & Papa Law Office for respondent Phil. American
Drug Company.
PARAS, J.:
This is a petition for certiorari, with prayer for preliminary
injunction, to annul and set aside the March 26, 1975 Order of the
then Court of First Instance of Manila, Branch XXIII, setting aside
the sale of "Heidelberg" cylinder press executed by the sheriff in
favor of the herein petitioner, as well as the levy on the said property,
and ordering the sheriff to return the said machinery to its owner,
herein private respondent Philippine American Drug Company.
Petitioner herein, doing business under the name and style of Anchor
Supply Co., sold on credit to herein private respondent Graphic
Publishing, Inc. (GRAPHIC for short) paper products amounting to
P55,214.73. On December 20, 1972, GRAPHIC made partial
payment by check to petitioner in the total amount of P24,848.74;
and on December 21, 1972, a promissory note was executed to cover
the balance of P30,365.99. In the said promissory note, it was
stipulated that the amount will be paid on monthly installments and
that failure to pay any installment would make the amount
immediately demandable with an interest of 12% per annum. On
September 6, 1973, for failure of GRAPHIC to pay any installment,
petitioner filed with the then Court of First Instance of Manila,
Branch XXIII, presided over by herein respondent judge, Civil Case
No. 91857 for a Sum of Money (Rollo, pp. 36-38). Respondent judge
declared GRAPHIC in default for failure to file its answer within the
reglementary period and plaintiff (petitioner herein) was allowed to
present its evidence ex parte. In a Decision dated January 18, 1974
(Ibid., pp. 39-40), the trial court ordered GRAPHIC to pay the
petitioner the sum of P30,365.99 with 12% interest from March 30,
1973 until fully paid, plus the costs of suit. On motion of petitioner, a
writ of execution was issued by respondent judge; but the aforestated
writ having expired without the sheriff finding any property of
GRAPHIC, an alias writ of execution was issued on July 2, 1974.
Pursuant to the said issued alias writ of execution, the executing
sheriff levied upon one (1) unit printing machine Identified as
"Original Heidelberg Cylinder Press" Type H 222, NR 78048, found
in the premises of GRAPHIC. In a Notice of Sale of Execution of
Personal Property dated July 29, 1974, said printing machine was
scheduled for auction sale on July 26, 1974 at 10:00 o'clock at 14th
St., Cor. Atlanta St., Port Area, Manila (lbid., p. 45); but in a letter
dated July 19, 1974, herein private respondent, Philippine American
Drug Company (PADCO for short) had informed the sheriff that the
printing machine is its property and not that of GRAPHIC, and
accordingly, advised the sheriff to cease and desist from carrying out
the scheduled auction sale on July 26, 1974. Notwithstanding the
said letter, the sheriff proceeded with the scheduled auction sale, sold
the property to the petitioner, it being the highest bidder, and issued a
Certificate of Sale in favor of petitioner (Rollo, p. 48). More than
five (5) hours after the auction sale and the issuance of the certificate
of sale, PADCO filed an "Affidavit of Third Party Claim" with the
Office of the City Sheriff (Ibid., p. 47). Thereafter, on July 30,1974,
PADCO filed with the Court of First Instance of Manila, Branch
XXIII, a Motion to Nullify Sale on Execution (With Injunction)
(Ibid., pp, 49-55), which was opposed by the petitioner (Ibid., pp.
5668). Respondent judge, in an Order dated March 26, 1975 (Ibid.,
pp. 64-69), ruled in favor of PADCO. The decretal portion of the
said order, reads:
WHEREFORE, the sale of the 'Heidelberg cylinder press executed
by the Sheriff in favor of the plaintiff as well as the levy on the said
property is hereby set aside and declared to be without any force and
effect. The Sheriff is ordered to return the said machinery to its
owner, the Philippine American Drug Co.
Petitioner filed a Motion For Reconsideration (Ibid., pp. 7093) and
an Addendum to Motion for Reconsideration (Ibid., pp. 94-08), but
in an Order dated August 13, 1975, the same was denied for lack of
merit (Ibid., p. 109). Hence, the instant petition.
In a Resolution dated September 12, 1975, the Second Division of
this Court resolved to require the respondents to comment, and to
issue a temporary restraining order (Rollo, p. 111 ). After submission
of the parties' Memoranda, the case was submitted for decision in the
Resolution of November 28, 1975 (Ibid., p. 275).
Petitioner, to support its stand, raised two (2) issues, to wit:
I Appeals, 1 SCRA 160 [1961]; and Emilio Cano Enterprises, Inc. vs.
THE RESPONDENT JUDGE GRAVELY EXCEEDED, IF NOT
ACTED WITHOUT JURISDICTION WHEN HE ACTED UPON
THE MOTION OF PADCO, NOT ONLY BECAUSE SECTION 17,
RULE 39 OF THE RULES OF COURT WAS NOT COMPLIED
WITH, BUT ALSO BECAUSE THE CLAIMS OF PADCO
WHICH WAS NOT A PARTY TO THE CASE COULD NOT BE
VENTILATED IN THE CASE BEFORE HIM BUT IN
INDEPENDENT PROCEEDING.
II
THE RESPONDENT JUDGE GRAVELY ABUSED HIS
DISCRETION WHEN HE REFUSED TO PIERCE THE PADCO'S
(IDENTITY) AND DESPITE THE ABUNDANCE OF EVIDENCE
CLEARLY SHOWING THAT PADCO WAS CONVENIENTLY
SHIELDING UNDER THE THEORY OF CORPORATE
PETITION.
Petitioner contends that respondent judge gravely exceeded, if not,
acted without jurisdiction, in nullifying the sheriffs sale not only
because Section 17, Rule 39 of the Rules of Court was not complied
with, but more importantly because PADCO could not have litigated
its claim in the same case, but in an independent civil proceeding.
This contention is well-taken.
In the case of Bayer Philippines, Inc. vs. Agana (63 SCRA 355, 366-
367 [1975]), this Court categorically ruled as follows:
In other words, constitution, Section 17 of Rule 39 of the Revised
Rules of Court, the rights of third-party claimants over certain
properties levied upon by the sheriff to satisfy the judgment should
not be decided inthe action where the third-party claims have been
presented, but in the separate action instituted by the claimants.
... Otherwise stated, the court issuing a writ of execution is supposed
to enforce the authority only over properties of the judgment debtor,
and should a third party appeal- to claim the property levied upon by
the sheriff, the procedure laid down by the Rules is that such claim
should be the subject of a separate and independent action.
xxx xxx xxx
... This rule is dictated by reasons of convenience, as "intervention is
more likely to inject confusion into the issues between the parties in
the case . . . with which the third-party claimant has nothing to do
and thereby retard instead of facilitate the prompt dispatch of the
controversy which is the underlying objective of the rules of
pleading and practice." Besides, intervention may not be permitted
after trial has been concluded and a final judgment rendered in the
case.
However, the fact that petitioner questioned the jurisdiction of the
court during the initial hearing of the case but nevertheless actively
participated in the trial, bars it from questioning now the court's
jurisdiction. A party who voluntarily participated in the trial, like the
herein petitioner, cannot later on raise the issue of the court's lack of
jurisdiction (Philippine National Bank vs. Intermediate Appellate
Court, 143 SCRA [1986]).
As to the second issue (the non-piercing of PADCO's corporate
Identity) the decision of respondent judge is as follows:
Page 42 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
The plaintiff, however, contends that the controlling stockholders of
the Philippine American Drug Co. are also the same controlling
stockholders of the Graphic Publishing, Inc. and, therefore, the levy
upon the said machinery which was found in the premises occupied
by the Graphic Publishing, Inc. should be upheld. This contention
cannot be sustained because the two corporations were duly
incorporated under the Corporation Law and each of them has a
juridical personality distinct and separate from the other and the
properties of one cannot be levied upon to satisfy the obligation of
the other. This legal preposition is elementary and fundamental.
It is true that a corporation, upon coming into being, is invested by
law with a personality separate and distinct from that of the persons
composing it as well as from any other legal entity to which it may
be related (Yutivo & Sons Hardware Company vs. Court of Tax
CIR, 13 SCRA 290 [1965]). As a matter of fact, the doctrine that a
corporation is a legal entity distinct and separate from the members
and stockholders who compose it is recognized and respected in all
cases which are within reason and the law (Villa Rey Transit, Inc. vs.
Ferrer, 25 SCRA 845 [1968]). However, this separate and distinct
personality is merely a fiction created by law for convenience and to
promote justice (Laguna Transportation Company vs. SSS, 107 Phil.
833 [1960]). Accordingly, this separate personality of the
corporation may be disregarded, or the veil of corporate fiction
pierced, in cases where it is used as a cloak or cover for fraud or
illegality, or to work an injustice, or where necessary to achieve
equity or when necessary for the protection of creditors (Sulo ng
Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347 [1976]). Corporations
are composed of natural persons and the legal fiction of a separate
corporate personality is not a shield for the commission of injustice
and inequity (Chenplex Philippines, Inc., et al. vs. Hon. Pamatian et
al., 57 SCRA 408 (19741). Likewise, this is true when the
corporation is merely an adjunct, business conduit or alter ego of
another corporation. In such case, the fiction of separate and distinct
corporation entities should be disregarded (Commissioner of Internal
Revenue vs. Norton & Harrison, 11 SCRA 714 [1964]).
In the instant case, petitioner's evidence established that PADCO was
never engaged in the printing business; that the board of directors
and the officers of GRAPHIC and PADCO were the same; and that
PADCO holds 50% share of stock of GRAPHIC. Petitioner likewise
stressed that PADCO's own evidence shows that the printing
machine in question had been in the premises of GRAPHIC since
May, 1965, long before PADCO even acquired its alleged title on
July 11, 1966 from Capitol Publishing. That the said machine was
allegedly leased by PADCO to GRAPHIC on January 24, 1966, even
before PADCO purchased it from Capital Publishing on July 11,
1966, only serves to show that PADCO's claim of ownership over
the printing machine is not only farce and sham but also
unbelievable.
Considering the aforestated principles and the circumstances
established in this case, respondent judge should have pierced
PADCO's veil of corporate Identity.
Respondent PADCO argues that if respondent judge erred in not
piercing the veil of its corporate fiction, the error is merely an error
of judgment and not an error of jurisdiction correctable by appeal
and not by certiorari.
To this argument of respondent, suffice it to say that the same is a
mere technicality. In the case of Rubio vs. Mariano (52 SCRA 338,
343 [1973]), this Court ruled:
While We recognize the fact that these movants — the MBTC, the
Phillips spouses, the Phillips corporation and the Hacienda Benito,
Inc.— did raise in their respective answers the issue as to the
propriety of the instant petition for certiorari on the ground that the
remedy should have been appeal within the reglementary period, We
considered such issue as a mere technicality which would have
accomplished nothing substantial except to deny to the petitioner the
right to litigate the matters he raised ...
Litigations should, as much as possible, be decided on their merits
and not on technicality (De las Alas vs. Court of Appeals, 83 SCRA
200, 216 [1978]). Every party-litigant must be afforded the amplest
opportunity for the proper and just determination of his cause, free
from the unacceptable plea of technicalities (Heirs of Ceferino
Morales vs. Court of Appeals, 67 SCRA 304, 310 [1975]).
PREMISES CONSIDERED, the March 26,1975 Order of the then
Court of First Instance of Manila, is ANNULLED and SET ASIDE,
and the Temporary Restraining Order issued is hereby made
permanent.
SO ORDERED.
Page 43 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
ERNESTO CEASE, CECILIA CEASE, MARION CEASE,
TERESA CEASE-LACEBAL, and the F.L. CEASE
PLANTATION CO., INC. as Trustee of properties of the defunct
TIAONG MILLING & PLANTATION CO., Petitioners, v.
HONORABLE COURT OF APPEALS, (Special Seventh
Division), HON. MANOLO L. MADDELA, Presiding Judge,
Court of First Instance of Quezon, BENJAMIN CEASE and
FLORENCE CEASE, Respondents.
DECISION
GUERRERO, J.:
Appeal by certiorari from the decision of the Court of Appeals in
CA-G.R. No. 45474, entitled "Ernesto Cease, Et. Al. v. Hon. Manolo
L. Maddela, Judge of the Court of First Instance of Quezon, Et. Al."
1 which dismissed the petition for certiorari, mandamus, and
prohibition instituted by the petitioners against the respondent judge
and the private respondents.chanroblesvirtualawlibrary
The antecedents of the case, as found by the appellate court, are as
follows:jgc:chanrobles.com.ph
"IT RESULTING: That the antecedents are not difficult to
understand; sometime in June 1908, one Forrest L. Cease common
predecessor in interest of the parties together with five (5) other
American citizens organized the Tiaong Milling and Plantation
Company and in the course of its corporate existence the company
acquired various properties but at the same time all the other original
incorporates were bought out by Forrest L. Cease together with his
children namely Ernest, Cecilia, Teresita, Benjamin, Florence and
one Bonifacia Tirante also considered a member of the family; the
charter of the company lapsed in June 1958; but whether there were
steps to liquidate it, the record is silent; on 13 August 1959, Forrest
L. Cease died and by extrajudicial partition of his shares, among the
children, this was disposed of on 19 October 1959; it was here where
the trouble among them came to arise because it would appear that
Benjamin and Florence wanted an actual division while the other
children wanted reincorporation; and proceeding on that, these other
children Ernesto, Teresita and Cecilia and aforementioned other
stockholder Bonifacia Tirante proceeded to incorporate themselves
into the FL Cease Plantation Company and registered it with the
Securities and Exchange Commission on 9 December, 1959;
apparently in view of that, Benjamin and Florence for their part
initiated a Special Proceeding No. 3893 of the Court of First Instance
of Tayabas for the settlement of the estate of Forest L. Cease on 21
April, 1960 and one month afterwards on 19 May, 1960 they filed
Civil Case No. 6326 against Ernesto, Teresita and Cecilia Cease
together with Bonifacia Tirante asking that the Tiaong Milling and
Plantation Corporation be declared identical to FL Cease and that its
properties be divided among his children as his intestate heirs; this
Civil Case was resisted by aforestated defendants and
notwithstanding efforts of the plaintiffs to have the properties placed
under receivership, they were not able to succeed because defendants
filed a bond to remain as they have remained in possession; after that
and already during the pendency of Civil Case No. 6326 specifically
on 21 May, 1961 apparently on the eve of the expiry of the three (3)
year period provided by the law for the liquidation of corporations,
the board of liquidators of Tiaong Milling executed an assignment
and conveyance of properties and trust agreement in favor of FL
Cease Plantation Co. Inc. as trustee of the Tiaong Milling and
Plantation Co. so that upon motion of the plaintiffs trial Judge
ordered that this alleged trustee be also included as party defendant;
now this being the situation, it will be remembered that there were
thus two (2) proceedings pending in the Court of First Instance of
Quezon namely Civil Case No. 6326 and Special Proceeding No.
3893 but both of these were assigned to the Honorable Respondent
Judge Manolo L. Maddela, p. 43 and the case was finally heard and
submitted upon stipulation of facts pp. 34-110, rollo; and trial Judge
by decision dated 27 December 1969 held for the plaintiffs Benjamin the present petition to this Court on the following assignment of
and Florence, the decision containing the following dispositive errors:chanrob1es virtual 1aw library
part:jgc:chanrobles.com.ph
THE COURT OF APPEALS ERRED —
"VIEWED IN THE LIGHT OF ALL THE FOREGOING, judgment
is hereby rendered in favor of plaintiffs and against the defendants I. IN SANCTIONING THE WRONGFUL EXERCISE OF
declaring that:chanrob1es virtual 1aw library JURISDICTION BEYOND THE LIMITS OF AUTHORITY
CONFERRED BY LAW UPON THE LOWER COURT, WHEN IT
1) The assets or properties of the defunct Tiaong Milling and PROCEEDED TO HEAR, ADJUDGE AND ADJUDICATE —
Plantation Company now appearing under the name of F.L. Cease
Plantation Company as Trustee, is the estate also of the deceased (a) Special Proceedings No. 3893 for the settlement of the Estate of
Forrest L. Cease and ordered divided share and share alike, among Forrest L. Cease, simultaneously and concurrently with —
his six children the plaintiffs and the defendants in accordance with
Rule 69, Rules of Court; (b) Civil Case No. 6326, wherein the lower Court ordered Partition
under Rule 69, Rules of Court —
2) The Resolution to Sell dated October 12, 1959 and the Transfer
and Conveyance with Trust Agreement is hereby set aside as THE ISSUE OF LEGAL OWNERSHIP OF THE PROPERTIES
improper and illegal for the purposes and effect that it was intended COMMONLY INVOLVED IN BOTH ACTIONS HAVING BEEN
and, therefore, null and void; RAISED AT THE OUTSET BY THE TIAONG MILLING AND
PLANTATION COMPANY, AS THE REGISTERED OWNER OF
3) That F.L. Cease Plantation Company is removed as Trustee for SUCH PROPERTIES UNDER ACT 496.
interest against the estate and essential to the protection of plaintiffs’
rights and is hereby ordered to deliver and convey all the properties II. IN AFFIRMING — UNSUPPORTED BY ANY EVIDENCE
and assets of the defunct Tiaong Milling now under its name, WHATSOEVER NOR CITATION OF ANY LAW TO JUSTIFY —
custody and control to whomsoever be appointed as Receiver — THE UNWARRANTED CONCLUSION THAT SUBJECT
disqualifying any of the parties herein — the latter to act accordingly PROPERTIES, FOUND BY THE LOWER COURT AND THE
upon proper assumption of office; and COURT OF APPEALS AS ACTUALLY REGISTERED IN THE
NAME OF PETITIONER CORPORATION AND/OR ITS
4) Special Proceedings No. 3893 for administration is terminated and PREDECESSOR IN INTEREST, THE TIAONG MILLING AND
dismissed; the instant case to proceed but on issues of damages only PLANTATION COMPANY, DURING ALL THE 50 YEARS OF
and for such action inherently essential for partition. ITS CORPORATE EXISTENCE, "ARE ALSO PROPERTIES OF
THE ESTATE OF FOREST L. CEASE."cralaw virtua1aw library
SO ORDERED.
III. IN AFFIRMING THE ARBITRARY CONCLUSION OF THE
Lucena City, December 27, 1969, pp. 122-a-123, rollo;" LOWER COURT THAT ITS DECISION OF DECEMBER 27, 1969
IS AN "INTERLOCUTORY DECISION." IN DISMISSING THE
upon receipt of that, defendants there filed a notice of appeal p. 129, PETITION FOR WRIT OF MANDAMUS, AND IN AFFIRMING
rollo together with an appeal bond and a record on appeal but the THE MANIFESTLY UNJUST JUDGMENT RENDERED WHICH
plaintiffs moved to dismiss the appeal on the ground that the CONTRADICTS THE FINDINGS OF ULTIMATE FACTS
judgment was in fact interlocutory and not appealable p. 168 rollo THEREIN CONTAINED.
and this position of defendants was sustained by trial Judge, His
Honor ruling that. During the period that ensued after the filing in this Court of the
respective briefs and the subsequent submission of the case for
"IN VIEW OF THE FOREGOING, the appeal interposed by decision, some incidents had transpired, the summary of which may
plaintiffs is hereby dismissed as premature and the Record on Appeal be stated as follows:chanrob1es virtual 1aw library
is necessarily disapproved as improper at this stage of the
proceedings. 1. Separate from this present appeal, petitioners filed a petition
for certiorari and prohibition in this Court, docketed as G.R. No. L-
SO ORDERED. 35629 (Ernesto Cease, Et. Al. v. Hon. Manolo L. Maddela, Et. Al.)
which challenged the order of respondent judge dated September 27,
Lucena City, April 27, 1970."cralaw virtua1aw library 1972 appointing his Branch Clerk of Court, Mr. Eleno M. Joyas, as
receiver of the properties subject of the appealed civil case, which
and so it was said defendants brought the matter first to the Supreme order, petitioners saw as a virtual execution of the lower court’s
Court, on mandamus on 20 May, 1970 to compel the appeal judgment (p. 92, rollo). In Our resolution of November 13, 1972,
and certiorari and prohibition to annul the order of 27 April, 1970 on issued in G.R. No. L-35629, the petition was denied since respondent
the ground that the decision was "patently erroneous" p. 16, rollo; judge merely appointed an auxilliary receiver for the preservation of
but the Supreme Court remanded the case to this Court of Appeals the properties as well as for the protection of the interests of all
by resolution of 27 May 1970, p. 173, and this Court of Appeals on 1 parties in Civil Case No. 6326; but at the same time, We expressed
July, 1970 p. 175 dismissed the petition so far as the mandamus was Our displeasure in the appointment of the branch clerk of court or
concerned taking the view that the decision sought to be appealed any other court personnel for that matter as receiver. (p. 102,
dated 27 December, 1969 was interlocutory and not appealable but rollo)chanrobles virtualawlibrary chanrobles.com:chanrobles.com.ph
on motion for reconsideration of petitioners and since there was
possible merit so far as its prayer for certiorari and prohibition was 2. Meanwhile, sensing that the appointed receiver was making some
concerned, by resolution of the Court on 19 August, 1970, p. 232, attempts to take possession of the properties, petitioners filed in this
the petition was permitted to go ahead in that capacity; and it is the present appeal an urgent petition to restrain proceedings in the lower
position of petitioners that the decision of 27 December, 1969 as court. We resolved the petition on January 29, 1975 by issuing a
well as the order of 27 April, 1970 suffered of certain fatal defects, corresponding temporary restraining order enjoining the court a quo
which respondents deny and on their part raise the preliminary point from implementing its decision of December 27, 1969, more
that this Court of Appeals has no authority to give relief to particularly, the taking over by a receiver of the properties subject of
petitioners because not. the litigation, and private respondents Benjamin and Florence Cease
from proceeding or taking any action on the matter until further
"in aid of its appellate jurisdiction," orders from this Court (pp. 99-100, rollo). Private respondents filed a
motion for reconsideration of Our resolution of January 29, 1975.
and that the questions presented cannot be raised for the first time After weighing the arguments of the parties and taking note of Our
before this Court of Appeals;" resolution in G.R. No. L-35629 which upheld the appointment of a
receiver, We issued another resolution dated April 11, 1975 lifting
Respondent Court of Appeals in its decision promulgated December effective immediately Our previous temporary restraining order
9, 1970 dismissed the petition with costs against petitioners, hence which enforced the earlier resolution of January 29, 1975 (pp. 140-
Page 44 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
141, rollo)
3. On February 6, 1976, private respondents filed an urgent petition
to restrain proceedings below in view of the precipitate replacement
of the court appointed receiver Mayor Francisco Escueta (vice Mr.
Eleno M. Joyas) and the appointment of Mr. Guillermo Lagrosa on
the eve of respondent Judge Maddela’s retirement (p. 166, rollo).
The urgent petition was denied in Our resolution of February 18,
1976 (p. 176, rollo)
4. Several attempts at a compromise agreement failed to materialize.
A Tentative Compromise Agreement dated July 30, 1975 was
presented to the Court on August 6, 1976 for the signature of the
parties, but respondents "unceremoniously" repudiated the same by
leaving the courtroom without the permission of the court (Court of
First Instance of Quezon, Branch II) as a result of which respondents
and their counsel were cited for contempt (p. 195, 197, rollo); that
respondents’ reason for the repudiation appears to be petitioners’
failure to render an audited account of their administration covering
the period from May 31, 1961 up to January 29, 1974, plus the
inclusion of a provision on waiver and relinquishment by
respondents of whatever rights that may have accrued to their favor
by virtue of the lower court’s decision and the affirmative decision of
the appellate court.
We go now to the alleged errors committed by the respondent Court
of Appeals.
As can be gleaned from petitioners’ brief and the petition itself, two
contentions underlie the first assigned error. First, petitioners argue
that there was an irregular and arbitrary termination and dismissal of
the special proceedings for judicial administration simultaneously
ordered in the lower court’s decision in Civil Case No. 6326
adjudicating the partition of the estate, without categorically
resolving the opposition to the petition for administration. Second,
that the issue of ownership had been raised in the lower court when
Tiaong Milling asserted title over the properties registered in its
corporate name adverse to Forrest L. Cease or his estate, and that the
said issue was erroneously disposed of by the trial court in the
partition proceedings when it concluded that the assets or properties
of the defunct company is also the estate of the deceased proprietor.
The propriety of the dismissal and termination of the special
proceedings for judicial administration must be affirmed in spite of
its rendition in another related case in view of the established
jurisprudence which favors partition when judicial administration
becomes unnecessary. As observed by the Court of Appeals, the
dismissal at first glance is wrong, for the reason that what was
actually heard was Civil Case No. 6326. The technical consistency,
however, if far less an importance than the reason behind the
doctrinal rule against placing an estate under administration. Judicial
rulings consistently hold the view that where partition is possible,
either judicial or extrajudicial, the estate should not be burdened with
an administration proceeding without good and compelling reason.
When the estate has no creditors or pending obligations to be paid,
the beneficiaries in interest are not bound to submit the property to
judicial administration which is always long and costly, or to apply
for the appointment of an administrator by the court, especially when
judicial administration is unnecessary and superfluous. Thus —
"When a person dies without leaving pending obligations to be paid,
his heirs, whether of age or not, are bound to submit the property to a
judicial administration, which is always long and costly, or to apply
for the appointment of an administrator by the court. It has been
uniformly held that in such case the judicial administration and the
appointment of an administrator are superfluous and unnecessary
proceedings (Ilustre v. Alaras Frondosa, 17 Phil., 321; Malahacan v.
Ignacio, 19 Phil, 434; Bondad v. Bondad, 34 Phil., 232; Baldemor v.
Malangyaon, 34 Phil., 367; Fule v. Fule, 46 Phil., 317)." Syllabus,
Intestate estate of the deceased Luz Garcia. Pablo G. Utulo v. Leona
Pasion Viuda de Garcia, 66 Phil. 302.
"Where the estate has no debts, recourse may be had to an
administration proceeding only if the heirs have good reasons for not
resorting to an action for partition. Where partition is possible, either
in or out of court, the estate should not be burdened with an
administration proceeding without good and compelling reasons."
(Intestate Estate of Mercado v. Magtibay, 96 Phil. 383)
Page 45 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
In the records of this case, We find no indication of any indebtedness
of the estate. No creditor has come up to charge the estate within the
two-year period after the death of Forrest L. Cease, hence, the
presumption under Section 1, Rule 74 that the estate is free from
creditors must apply. Neither has the status of the parties as legal
heirs, much less that of respondents, been raised as an issue. Besides,
extant in the records is the stipulation of the parties to submit the
pleadings and contents of the administration proceedings for the
cognizance of the trial judge in adjudicating the civil case for
partition (Respondents’ Brief, p. 20, rollo). As respondents observe,
the parties in both cases are the same, so are the properties involved;
that actual division is the primary objective in both actions; the
theory and defense of the respective parties are likewise common;
and that both cases have been assigned to the same respondent judge.
We feel that the unifying effect of the foregoing circumstances
invites the wholesome exception to the structures of procedural rule,
thus allowing, instead, room for judicial flexibility. Respondent
judge’s dismissal of the administration proceedings then, is a
judicious move, appreciable in today’s need for effective and speedy
administration of justice. There being ample reason to support the
dismissal of the special proceedings in this appealed case, We cannot
see in the records any compelling reason why it may not be
dismissed just the same even if considered in a separate action. This
is inevitably certain specially when the subject property has already
been found appropriate for partition, thus reducing the petition for
administration to a mere unnecessary solicitation.
The second point raised by petitioners in their first assigned error is
equally untenable. In effect, petitioners argue that the action for
partition should not have prospered in view of the repudiation of the
co-ownership by Tiaong Milling and Plantation Company when, as
early in the trial court, it already asserted ownership and corporate
title over the properties adverse to the right of ownership of Forrest
L. Cease or his estate. We are not unmindful of the doctrine relied
upon by petitioners in Rodriguez v. Ravilan, 17 Phil. 63 wherein this
Court held that in an action for partition, it is assumed that the parties
by whom it is prosecuted are all co-owners or co-proprietors of the
property to be divided, and that the question of common ownership
is not to be argued, not the fact as to whether the intended parties are
or are not the owners of the property in question, but only as to how
and in what manner and proportion the said property of common
ownership shall be distributed among the interested parties by order
of the Court. Consistent with this dictum, it has been held that if any
party to a suit for partition denies the pro-indiviso character of the
estate whose partition is sought, and claims instead, exclusive title
thereto, the action becomes one for recovery of property cognizable
in the courts of ordinary jurisdiction. 2
Petitioners’ argument has only theoretical persuasion, to say the
least, rather apparent than real. It must be remembered that when
Tiaong Milling adduced its defense and raised the issue of
ownership, its corporate existence already terminated through the
expiration of its charter. It is clear in Section 77 of Act No. 1459
(Corporation Law) that upon the expiration of the charter period, the
corporation ceases to exist and is dissolved ipso facto except for
purposes connected with the winding up and liquidation. The
provision allows a three-year period from expiration of the charter
within which the entity gradually settles and closes its affairs,
disposes and convey its property and to divide its capital stock, but
not for the purpose of continuing the business for which it was
established. At this terminal stage of its existence, Tiaong Milling
may no longer persist to maintain adverse title and ownership of the
corporate assets as against the prospective distributees when at this
time it merely holds the property in trust, its assertion of ownership
is not only a legal contradiction, but more so, to allow it to maintain
adverse interest would certainly thwart the very purpose of
liquidation and the final distribution of the assets to the proper
parties.chanrobles lawlibrary : rednad
We agree with the Court of Appeals in its reasoning that substance is
more important than form when it sustained the dismissal of Special
Proceedings No. 3893, thus —
"a) As to the dismissal of Special Proceedings No. 3893, of course,
at first glance, this was wrong, for the reason that the case that had
been heard was Civil Case No. 6326; but what should not be
overlooked either is that respondent Judge was the same judge that
had before him in his own sala, said Special Proceedings No. 3893,
p. 43 rollo, and the parties to the present Civil Case No. 6326 had
themselves asked respondent Judge to take judicial notice of the
same and its contents page 34, rollo; it is not difficult to see that
when respondent Judge in par. 4 of the dispositive part of his
decision complained of, ordered that,
‘4) Special Proceedings No. 3893 for administration is terminated
and dismissed; the instant case to proceed but on issues of damages
only and for such action inherently essential or partition. p. 123,
rollo,
in truth and in fact, His Honor was issuing that order also within
Civil Case No. 6326 but in connection with Special Proceedings No.
3893; for substance is more important than form, the contending
parties in both proceedings being exactly the same, but not only this,
let it not be forgotten that when His Honor dismissed Special
Proceedings No. 3893, that dismissal precisely was a dismissal that
petitioners herein had themselves sought and solicited from
respondent Judge as petitioners themselves aver in their present
petition pp. 5-6, rollo: this Court must find difficulty in reconciling
petitioners’ attack with the fact that it was they themselves that had
insisted on that dismissal; on the principle that not he who is favored
but he who is hurt by a judicial order is he only who should be heard
to complain and especially since extraordinary legal remedies are
remedies in extremis granted to parties who have been the victims
not merely of errors but of grave wrongs, and it cannot be seen how
one who got what he had asked could be heard to claim that he had
been the victim of a wrong, petitioners should not now complain of
an order they had themselves asked in order to attack such an order
afterwards; if at all, perhaps, third parties, creditors, the Bureau of
Internal Revenue, might have been prejudiced, and could have had
the personality to attack that dismissal of Special Proceedings No.
3893, but not petitioners herein, and it is not now for this Court of
Appeals to protect said third persons who have not come to the Court
below or sought to intervene herein;"
On the second assigned error, petitioners argue that no evidence has
been found to support the conclusion that the registered properties of
Tiaong Milling are also properties of the estate of Forrest L. Cease;
that on the contrary, said properties are registered under Act No. 496
in the name of Tiaong Milling as lawful owner and possessor for the
last 50 years of its corporate existence.
We do not agree. In reposing ownership to the estate of Forrest L.
Cease, the trial court indeed found strong support, one that is based
on a well-entrenched principle of law. In sustaining respondents’
theory of "merger of Forrest L. Cease and the Tiaong Milling as one
personality", or that "the company is only the business conduit and
alter ego of the deceased Forrest L. Cease and the registered
properties of Tiaong Milling are actually properties of Forrest L.
Cease and should be divided equally, share and share alike among
his six children, . . .", the trial court did aptly apply the familiar
exception to the general rule by disregarding the legal fiction of
distinct and separate corporate personality and regarding the
corporation and the individual member one and the same. In
shredding the fictitious corporate veil, the trial judge narrated the
undisputed factual premise, thus:jgc:chanrobles.com.ph
"While the records showed that originally its incorporates were
aliens, friends or third-parties in relation of one to another, in the
course of its existence, it developed into a close family corporation.
The Board of Directors and stockholders belong to one family the
head of which Forrest L. Cease always retained the majority stocks
and hence the control and management of its affairs. In fact, during
the reconstruction of its records in 1947 before the Security and
Exchange Commission only 9 nominal shares out of 300 appears in
the name of his 3 eldest children then and another person close to
them. It is likewise noteworthy to observe that as his children
increase or perhaps become of age, he continued distributing his
shares among them adding Florence, Teresa and Marion until at the
time of his death only 190 were left to his name. Definitely, only the
members of his family benefited from the Corporation.
"The accounts of the corporation and therefore its operation, as well
as that of the family appears to be instinguisable and apparently
joined together. As admitted by the defendants (Manifestation of
Compliance with order of March 7, 1963 [Exhibit "21" ] the
Page 46 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
corporation ‘never’ had any account with any banking institution or
if any account was carried in a bank on its behalf, it was in the name
of Mr. Forrest L. Cease. In brief, the operation of the Corporation is
merged with those of the majority stockholders, the latter using the
former as his instrumentality and for the exclusive benefits of all his
family. From the foregoing indication, therefore, there is truth in
plaintiff’s allegation that the corporation is only a business conduit
of his father and an extension of his personality, they are one and the
same thing. Thus, the assets of the corporation are also the estate of
Forrest L. Cease, the father of the parties herein who are all
legitimate children of full blood."cralaw virtua1aw library
A rich store of jurisprudence has established the rule known as the
doctrine of disregarding or piercing the veil of corporate fiction.
Generally, a corporation is invested by law with a personality
separate and distinct from that of the persons composing it as well as
from that of any other legal entity to which it may be related. By
virtue of this attribute, a corporation may not, generally, be made to
answer for acts or liabilities of its stockholders or those of the legal
entities to which it may be connected, and vice versa. This separate
and distinct personality is, however, merely a fiction created by law
for convenience and to promote the ends of justice (Laguna
Transportation Company v. Social Security System, L-14606, April
28, 1960; La Campana Coffee Factory, Inc. v. Kaisahan ng mga
Manggagawa sa La Campana, L-5677, May 25, 1953). For this
reason, it may not be used or invoked for ends subversive of the
policy and purpose behind its creation (Emiliano Cano Enterprises,
Inc. v. CIR, L-20502, Feb. 26, 1965) or which could not have been
intended by law to which it owes its being McConnel v. Court of
Appeals, L-10510, March 17, 1961, 1 SCRA 722). This is
particularly true where the fiction is used to defeat public
convenience, justify wrong, protect fraud, defend crime (Yutivo
Sons Hardware Company v. Court of Tax Appeals, L-13203, Jan. 28,
1961, 1 SCRA 160), confuse legitimate legal or judicial issues (R.F.
Sugay & Co. v. Reyes, L-20451, Dec. 28, 1964), perpetrate
deception or otherwise circumvent the law (Gregorio Araneta, Inc. v.
Tuason de Paterno, L-2886, Aug. 22, 1952, 49 O.G. 721). This is
likewise true where the corporate entity is being used as an alter ego,
adjunct, or business conduit for the sole benefit of the stockholders
or of another corporate entity (McConnel v. Court of Appeals, supra;
Commissioner of Internal Revenue v. Norton Harrison Co., L-7618,
Aug. 31, 1964).chanrobles virtual lawlibrary
In any of these cases, the notion of corporate entity will be pierced or
disregarded, and the corporation will be treated merely as an
association of persons or, where there are two corporations, they will
be merged as one, the one being merely regarded as part or the
instrumentality of the other (Koppel [Phil.], Inc. v. Yatco, 77 Phil.
496; Yutivo Sons Hardware Company v. Court of Tax Appeals,
supra).
So must the case at bar add to this jurisprudence. An indubitable
deduction from the findings of the trial court cannot but lead to the
conclusion that the business of the corporation is largely, if not
wholly, the personal venture of Forrest L. Cease. There is not even a
shadow of a showing that his children were subscribers or purchasers
of the stocks they own. Their participation as nominal shareholders
emanated solely from Forrest L. Cease’s gratuitous dole out of his
own shares to the benefit of his children and ultimately his family.
Were we sustain the theory of petitioners that the trial court acted in
excess of jurisdiction or abuse of discretion amounting to lack of
jurisdiction in deciding Civil Case No. 6326 as a case for partition
when the defendant therein, Tiaong Milling and Plantation
Company, Inc. as registered owner asserted ownership of the assets
and properties involved in the litigation, which theory must
necessarily be based on the assumption that said assets and
properties of Tiaong Milling and Plantation Company, Inc. now
appearing under the name of F. L. Cease Plantation Company as
Trustee are distinct and separate from the estate of Forrest L. Cease
to which petitioners and respondents as legal heirs of said Forrest L.
Cease are equally entitled share and share alike, then that legal
fiction of separate corporate personality shall have been used to
delay and ultimately deprive and defraud the respondents of their
successional rights to the estate of their deceased father. For Tiaong
Milling and Plantation Company shall have been able to extend its
corporate existence beyond the period of its charter which lapsed in
June, 1958 under the guise and cover of F. L. Cease Plantation
Company, Inc. as Trustee which would be against the law, and said
Trustee shall have been able to use the assets and properties for the
benefit of the petitioners, to the great prejudice and defraudation of
private respondents. Hence, it becomes necessary and imperative to
pierce that corporate veil.
Under the third assigned error, petitioners claim that the decision of
the lower court in the partition case is not interlocutory but rather
final for it consists of final and determinative dispositions of the
contentions of the parties. We find no merit in petitioners’ stand.
Under the 1961 pronouncement and ruling of the Supreme Court in
Vda. de Zaldarriaga v. Enriquez, 1 SCRA 1188 (and the sequel case
of Vda. de Zaldarriaga v. Zaldarriaga 2 SCRA 356), the lower
court’s dismissal of petitioners’ proposed appeal from its December
27, 1969 judgment as affirmed by the Court of Appeals on the
ground of prematurity in that the judgment was not final but
interlocutory was in order. As was said in said case:chanrobles.com :
virtual law library
"It is true that in Africa v. Africa, 42 Phil. 934 and other cases it was
held — contrary to the rule laid down in Ron v. Mojica, 8 Phil. 328;
Rodriguez v. Ravilan, 17 Phil. 63 — that in a partition case where
defendant relies on the defense of exclusive ownership, the action
becomes one for title and the decision or order directing partition is
final, but the ruling to this effect has been expressly reversed in the
Fuentebella case which, in our opinion, expresses the correct view,
considering that a decision or order directing partition is not final
because it leaves something more to be done in the trial court for the
complete disposition of the case, namely, the appointment of
commissioners, the proceedings to be had before them, the
submission of their report which, according to law, must be set for
hearing. In fact, it is only after said hearing that the court may render
a final judgment finally disposing of the action (Rule 71, section 7,
Rules of Court)." (1 SCRA at page 1193)
It should be noted, however, that the said ruling in Zaldarriaga as
based on Fuentebella v. Carrascoso, XIV Lawyers Journal 305 (May
27, 1942), has been expressly abandoned by the Court in Miranda v.
Court of Appeals, 71 SCRA 295; 331-333 (June 18, 1976) wherein
Mr. Justice Teehankee, speaking for the Court, laid down the
following doctrine:jgc:chanrobles.com.ph
"The Court, however, deems it proper for the guidance of the bench
and bar to now declare as is clearly indicated from the compelling
reasons and considerations herein above stated:chanrob1es virtual
1aw library
— that the Court considers the better rule to be that stated in H. E.
Heacock Co. v. American Trading Co., to wit, that where the
primary purpose of a case is to ascertain and determine who between
plaintiff and defendant is the true owner and entitled to the exclusive
use of the disputed property, ‘the judgment . . . rendered by the lower
court [is] a judgment on the merits as to those questions, and [that]
the order of the court for an accounting was based upon, and is
incidental to the judgment on the merits. That is to say, that the
judgment . . . [is] a final judgment . . .; that in this kind of a case an
accounting is a mere incident to the judgment; that an appeal lies
from the rendition of the judgment as rendered . . .’ (as is widely
held by a great number of judges and members of the bar, as shown
by the cases so decided and filed and still pending with the Court) for
the fundamental reasons therein stated that ‘this is more in harmony
with the administration of justice and the spirit and intent of the
[Rules]. If on appeal the judgment of the lower court is affirmed, it
would not in the least work an injustice to any of the legal rights of
[appellee]. On the other hand, if for any reason this court should
reverse the judgment of the lower court, the accounting would be a
waste of time and money, and might work a material injury to the
[appellant]; and
— that accordingly, the contrary ruling in Fuentebella v. Carrascoso
which expressly reversed the Heacock case and a line of similar
decisions and ruled that such a decision for recovery of property with
accounting ‘is not final but merely interlocutory and therefore not
appealable’ and subsequent cases adhering to the same must be now
in turn abandoned and set aside.
"Fuentebella adopted instead the opposite line of conflicting
Page 47 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified
decisions mostly in partition proceedings and exemplified by Ron v.
Mojica, 8 Phil. 928 (under the old Code of Civil Procedure) that an
order for partition of real property is not final and appealable until
after the actual partition of the property as reported by the court-
appointed commissioners and approved by the court in its judgment
accepting the report. It must be especially noted that such rule
governing partitions is now so expressly provided and spelled out in
Rule 69 of the Rules of Court, with special reference to Sections 1, 2,
3, 6, 7 and 11, to wit, that there must first be a preliminary order for
partition of the real estate (section 2) and where the par ties-co-
owners cannot agree, the court-appointed commissioners make a
plan of actual partition which must first he passed upon and accepted
by the trial court and embodied in a judgment to be rendered by it
(sections 6 and 11). In partition cases, it must be further borne in
mind that Rule 69, section 1 refers to ‘a person having the right to
compel the partition of real estate,’ so that the general rule of
partition that an appeal will not lie until the partition or distribution
proceedings are terminated will not apply where appellant claims
exclusive ownership of the whole property and denies the adverse
party’s right to any partition, as was the ruling in Villanueva v.
Capistrano and Africa v. Africa supra, Fuentebella’s express reversal
of these cases must likewise be deemed now also abandoned in view
of the Court’s expressed preference for the rationale of the Heacock
case.
"The Court’s considered opinion is that imperative considerations of
public policy and of sound practice in the courts and adherence to the
constitutional mandate of simplified, just, speedy and inexpensive
determination of every action call for considering such judgments for
recovery of property with accounting as final judgments which are
duly appealable (and would therefore become final and executory if
not appealed within the reglementary period) with the accounting as
a mere incident of the judgment to be rendered during the course of
the appeal as provided in Rule 39, section 4 or to be implemented at
the execution stage upon final affirmance on appeal of the judgment
(as in Court of Industrial Relations unfair labor practice cases
ordering the reinstatement of the worker with accounting,
computation and payment of his backwages less earnings elsewhere
during his layoff) and that the only reason given in Fuentebella for
the contrary ruling, viz, `the general harm that would follow from
throwing the door open to multiplicity of appeals in a single case’ is
of lesser import and consequence." (Emphasis copied)
The Miranda ruling has since then been applied as the new rule by a
unanimous Court in Valdez v. Bagasao, 82 SCRA 22 (March 8,
1978).
If there were a valid genuine claim of exclusive ownership of the
inherited properties on the part of petitioners to respondents’ action
for partition, then under the Miranda ruling, petitioners would be
sustained, for as expressly held therein "the general rule of partition
that an appeal will not lie until the partition or distribution
proceedings are terminated will not apply where appellant claims
exclusive ownership of the whole property and denies the adverse
party’s right to any partition."cralaw virtua1aw library
But this question has now been rendered moot and academic for the
very issue of exclusive ownership claimed by petitioners to deny and
defeat respondents’ right to partition — which is the very core of
their rejected appeal — has been squarely resolved herein against
them, as if the appeal had been given due course. The Court has
herein expressly sustained the trial court’s findings, as affirmed by
the Court of Appeals, that the assets or properties of the defunct
company constitute the estate of the deceased proprietor (supra at
page 7) and the defunct company’s assertion of ownership of the
properties is a legal contradiction and would but thwart the
liquidation and final distribution and partition of the properties
among the parties hereof as children of their deceased father Forrest
L. Cease. There is therefore no further hindrance to effect the
partition of the properties among the parties in implementation of the
appealed judgment.cralawnad
One last consideration. Parties are brothers and sisters, legal heirs of
their deceased father, Forrest L. Cease. By all rights in law and
jurisprudence, each is entitled to share and share alike in the estate,
which the trial court correctly ordained and sustained by the
appellate court. Almost 20 years have lapsed since the filing of
Special Proceedings No. 3893 for the administration of the Estate of
Forrest L. Cease and Civil Case No. 6326 for liquidation and
partition of the assets of the defunct Tiaong Milling and Plantation
Co., Inc. A succession of receivers were appointed by the court to
take, keep in possession, preserve and manage properties of the
corporation which at one time showed an income of P386,152.90 and
expenses of P308,405:01 for the period covering January 1, 1960 to
August 31, 1967 as per Summary of Operations of Commissioner for
Finance appointed by the Court (Brief for Respondents, p. 38). In the
meantime, ejectment cases were filed by and against the heirs in
connection with the properties involved, aggravating the already
strained relations of the parties. A prudent and practical realization of
these circumstances ought and must constrain the parties to give each
one his due in law and with fairness and dispatch that their basic
rights be enjoyed. And by remanding this case to the court a quo for
the actual partition of the properties, the substantial rights of
everyone of the heirs have not been impaired, for in fact, they have
been preserved and maintained.

WHEREFORE, IN VIEW OF THE FOREGOING, the judgment

appealed from is hereby AFFIRMED with costs against the
petitioners.

SO ORDERED.

Page 48 of 48 Corporate Entity Theory - Piercing the Veil of Corporate Fiction Justified