RECENT PRONOUNCEMENTS OF

THE SUPREME COURT IN

COMMERCIAL LAWS

ADMIRALTY (Harbor Pilots) –

“A Master's designation as the commander of a vessel is long-settled. This court's
citation in Yu Con v. Ipil (41 Phil. 770) of General Review of Legislation and
Jurisprudence explains that "Master" and "Captain" are synonymous terms:

The name of captain or master is given, according to the kind of vessel, to the
person in charge of it.

The first denomination is applied to those who govern vessels that navigate the
high seas or ships of large dimensions and importance, although they be engaged
in the coastwise trade.

Masters are those who command smaller ships engaged exclusively in the
coastwise trade.

For the purposes of maritime commerce, the words 'captain' and Q 'master' have
the same meaning; both being the chiefs or commanders of ships.

Likewise, in Inter-Orient Maritime Enterprises, Inc. v. National Labor Relations

Commission: (235 SCRA 268) “A master or captain, for purposes of maritime
commerce, is one who has command of a vessel. A captain commonly performs
three (3) distinct roles: (1) he is a general agent of the shipowner; (2) he is
also commander and technical director of the vessel; and (3) he is a
representative of the country under whose flag he navigates. Of these roles, by
far the most important is the role performed by the captain as commander of the
vessel; for such role (which, to our mind, is analogous to that of "Chief Executive
Officer" [CEO] of a present-day corporate enterprise) has to do with the operation
and preservation of the vessel during its voyage and the protection of the
passengers (if any) and crew and cargo. In his role as general agent of the
shipowner, the captain has authority to sign bills of lading, carry goods aboard and
deal with the freight earned, agree upon rates and decide whether to take cargo.
The ship captain, as agent of the shipowner, has legal authority to enter into
contracts with respect to the vessel and the trading of the vessel, subject to
applicable limitations established by statute, contract or instructions and
regulations of the shipowner. To the captain is committed the governance, care
and management of the vessel. Clearly, the captain is vested with both
management and fiduciary functions.
Accordingly, it is settled that Harbor Pilots are liable only to the extent that they
can perform their function through the officers and crew of the piloted vessel.
Where there is failure by the officers and crew to adhere to their orders, Harbor
Pilots cannot be held liable. In Far Eastern Shipping Co. V. Court of Appeals,
(297 SCRA 30) this court explained the intertwined responsibilities of pilots and
masters:

[W]here a compulsory pilot is in charge of a ship, the master being required to

permit him to navigate it, if the master observes that the pilot is incompetent or
physically incapable, then it is the duty of the master to refuse to permit the pilot
to act. But if no such reasons are present, then the master is justified in relying
upon the pilot, but not blindly. Under the circumstances of this case, if a
situation arose where the master, exercising that reasonable vigilance which the
master of a ship should exercise, observe, or should have observed, that the pilot
was so navigating the vessel that she was going, or was likely to go, into danger,
and there was in the exercise of reasonable care and vigilance an opportunity for
the master to intervene so as to save the ship from danger, the master should
have acted accordingly. The master of a vessel must exercise a degree of
vigilance commensurate with the circumstances. (Lorenzo Shipping Corp. vs.
National Power Corp., 772 SCRA 113)

ARRASTRE OPERATOR –

1. “As previously held by this Court, the arrastre operator's principal work is that
of handling cargo, so that its drivers/operators or employees should observe the
standards and measures necessary to prevent losses and damage to shipments under
its custody. In the performance of its obligations, an arrastre operator should
observe the same degree of diligence as that required of a common carrier and a
warehouseman. Being the custodian of the goods discharged from a vessel, an
arrastre operator's duty is to take good care of the goods and to turn them over to
the party entitled to their possession.

Since the relationship of an arrastre operator and a consignee is akin to that

between a warehouseman and a depositor, then, in instances when the consignee
claims any loss, the burden of proof is on the arrastre operator to show that it
complied with the obligation to deliver the goods and that the losses were not due
to its negligence or that of its employees.

Anent the grant of attorney's fees, the Court sustains the petitioner's stance that the
same is unjustified. The Court has held, with respect to the award of attorney's
fees, as follows:
 “We have consistently held that an award of attorney's fees under
Article 2208 demands factual, legal, and equitable justification to
avoid speculation and conjecture surrounding the grant thereof.
Due to the special nature of the award of attorney's fees, a rigid
standard is imposed on the courts before these fees could be granted.
Hence, it is imperative that they clearly and distinctly set forth in
their decisions the basis for the award thereof. It is not enough that
they merely state the amount of the grant in the dispositive portion of
their decisions. It bears reiteration that the award of attorney's fees is
an exception rather than the general rule; thus, there must be
compelling legal reason to bring the case within the exceptions
provided under Article 2208 of the Civil Code to justify the award.”
(PNCC vs. APAC Marketing Corp., 697 SCRA 441)

The court must always state the basis for the grant of attorney's fees before such is
justified, because the principle that is generally observed is that no premium should
be placed on the right to litigate.” (Asian Terminals, Inc. vs. Allied Guarantee
Insurance Co., Inc., G.R. No. 182208, 772 SCRA 362)

2. “The relationship between an arrastre operator and a consignee is similar

to that between a warehouseman and a depositor, or to that between a
common carrier and the consignee and/or the owner of the shipped goods.
Thus, an arrastre operator should adhere to the same degree of diligence as that
legally expected of a warehouseman or a common carrier as set forth in Section
3[b] of the Warehouse Receipts [Act] and Article 1733 of the Civil Code. As
custodian of the shipment discharged from the vessel, the arrastre operator must
take good care of the same and turn it over to the party entitled to its possession.

In case of claim for loss filed by a consignee or the insurer as subrogee, it is the
arrastre operator that carries the burden of proving compliance with the obligation
to deliver the goods to the appropriate party. It must show that the losses were not
due to its negligence or that of its employees. It must establish that it observed the
required diligence in handling the shipment. Otherwise, it shall be presumed that
the loss was due to its fault. In the same manner, an arrastre operator shall be liable
for damages if the seal and lock of the goods deposited and delivered to it as closed
and sealed, be broken through its fault. Such fault on the part of the arrastre
operator is likewise presumed unless there is proof to the contrary. (Marina Port
Services, Inc. vs. American Home Assurance Corp., G.R. No. 201822, August 12, 2015; 766
SCRA 418-419)

At any rate, MPSI cannot just the same be held liable for the missing bags of flour
since the consigned goods were shipped under "Shipper's Load and Count"
arrangement." This means that the shipper was solely responsible for the loading
of the container, while the carrier was oblivious to the contents of the shipment.
Protection against pilferage of the shipment was the consignee's lookout. The
arrastre operator was, like any ordinary depositary, duty-bound to take good care
of the goods received from the vessel and to turn the same over to the party entitled
to their possession, subject to such qualifications as may have validly been
imposed in the contract between the parties. The arrastre operator was not required
to verify the contents of the container received and to compare them with those
declared by the shipper because, as earlier stated, the cargo was at the shipper's
load and count. The arrastre operator was expected to deliver to the consignee
only the container received from the carrier.” (Marina Port Services, Inc. vs.
American Home Assurance Corp., G.R. No. 201822, August 12, 2015; 766 SCRA 426)

3. “The functions of an arrastre operator involve the handling of cargo deposited

on the wharf or between the establishment of the consignee or shipper and the
ship’s tackle. Being the custodian of the goods discharged from a vessel, an
arrastre operator’s duty is to take good care of the goods and to turn them over to
the part entitled to their possession.”

4. “The legal relationship between an arrastre operator and a consignee is

akin to that between a warehouseman and a depositor. As to both the nature of
the functions and the place of their performance, an arrastre operator’s services are
clearly not maritime in character.”

5. “In Insurance Company of North America v. Asian Terminals, Inc., the Court
explained that the liabilities of the arrastre operator for losses and damages are set
forth in the contract for cargo handling services it had executed with the PPA.
Corollarily then, the rights of an arrastre operator to be paid for damages it
sustains from handling cargoes do not likewise spring from contracts of
carriage.” (Unknown Owner of the Vessel M/V China Joy vs. Asian Terminals, Inc. (752
SCRA 657)

7. “In the performance of its obligations, an arrastre operator should observe the
same degree of diligence as that required of a common carrier and a
warehouseman.”

5. “In a claim for loss filed by the consignee (or the insurer), the burden of proof to
show compliance with the obligation to deliver the goods to the appropriate party
devolves upon the arrastre operator.” (Asian Terminals, Inc. vs. First Lepanto-Taisho
Insurance Corporation, 726 SCRA 415 (2014) – cited in (752 SCRA 662)
BANKS/AGENCY –

(1) “A contract of agency may be inferred from all the dealings between
Oliver and Castro. Agency can be express or implied from the acts of the
principal, from his silence or lack of action, or his failure to repudiate the
agency knowing that another person is acting on his behalf without authority.
The question of whether an agency has been created is ordinarily a question
which may be established in the same way as any other fact, either by direct
or circumstantial evidence. The question is ultimately one of intention.

In this case, Oliver and Castro had a business agreement wherein Oliver would
obtain loans from the bank, through the help of Castro as its branch manager; and
after acquiring the loan proceeds, Castro would lend the acquired amount to
prospective borrowers who were waiting for the actual release of their loan
proceeds. Oliver would gain 4% to 5% interest per month from the loan proceeds
of her borrowers, while Castro would earn a commission of 10% from the interests.
Clearly, an agency was formed because Castro bound herself to render some
service in representation or on behalf of Oliver, in the furtherance of their business
pursuit.

For months, the agency between Oliver and Castro benefited both parties. Oliver,
through Castro’s representations, was able to obtain loans, relend them to
borrowers, and earn interests; while Castro acquired commissions from the
transactions. Oliver even gave Castro her passbook to facilitate the transactions.

Accordingly, the laws on agency apply to their relationship. Article 1881 of the
New Civil Code provides that the agent must act within the scope of his authority.
He may do such acts as may be conducive to the accomplishment of the purpose of
the agency. Thus, as long as the agent acts within the scope of the authority given
by his principal, the actions of the former shall bind the latter.” (Oliver vs.
Philippine Savings Bank, et al., G.R. No. 214567, April 4, 2016; 788 SCRA 203-204)

“As a standard banking practice intended precisely to prevent unauthorized and

fraudulent withdrawals, a bank manager must verify with the client-depositor to
authenticate and confirm that he or she has validly authorized such withdrawal.”
(Oliver vs. Philippine Savings Bank, et al., G.R. No. 214567, April 4, 2016; 788 SCRA 206)

“In the case of banks, the degree of diligence required is more than that of a
good father of a family. Considering the fiduciary nature of their relationship
with their depositors, banks are duty bound to treat the accounts of their
clients with the highest degree of care. The point is that as a business affected
with public interest and because of the nature of its functions, the bank is
under obligation to treat the accounts of its depositors with meticulous care,
always having in mind the fiduciary nature of their relationship.” (Oliver vs.
Philippine Savings Bank, et al., G.R. No. 214567, April 4, 2016; 788 SCRA 208)
“Time and again, the Court has emphasized that the bank is expected to ensure that
the depositor’s funds shall only be given to him or his authorized representative.
In Producers Bank of the Phil. v. Court of Appeals (397 SCRA 651), the Court
held that the usual banking procedure was that withdrawals of savings
deposits could only be made by persons whose authorized signatures were in
the signature cards on file with the bank. In the said case, the bank therein
allowed an unauthorized person to withdraw from its depositor’s savings
account, thus, it failed to exercise the required diligence of banks and must be
held liable.

With respect to withdrawal slips, the Court declared in Philippine National Bank v.
Pike (470 SCRA 328), that "ordinarily, banks allow withdrawal by someone who is
not the account holder so long as the account holder authorizes his representative
to withdraw and receive from his account by signing on the space provided
particularly for such transactions, usually found at the back of withdrawal slips."
There, the bank violated its fiduciary duty because it allowed a withdrawal by a
representative even though the authorization portion of the withdrawal slip was not
signed by the depositor.

Finally, in Cagungun v. Planters Development Bank (473 SCRA 259), a case very
similar to the present one, the depositors therein entrusted their passbook to the
bank employees for some specific transactions. The bank employees went beyond
their authority and were able to withdraw from the depositors’ account without the
latter’s consent. The bank was held liable therein for the acts of its employees
because it failed to safeguard the accounts of its depositors.

In the case at bench, it must be determined whether the P7 million was

withdrawn from the bank with the authority of Oliver. As testified to by
Castro, every withdrawal from the bank was duly evidenced by a cash
withdrawal slip, a copy of which is given both to the bank and to its client.
Contrary to the position of the CA and that of the respondents, Oliver cannot
be required to produce the cash withdrawal slip for the said transaction
because, precisely, she consistently denied giving authority to withdraw such
amount from her account.

Necessarily, the party that must have access to such crucial document would
either be PSBank or Castro. They must present the said cash withdrawal slip,
duly signed by Oliver, to prove that the withdrawal of P7 million was indeed
sanctioned. Unfortunately, both PSBank and Castro failed to present the cash
withdrawal slip.” (Oliver vs. Philippine Savings Bank, et al., G.R. No. 214567, April 4,
2016; 788 SCRA 189)

(2) (a) Diligence required of banks – “The Bank avers that contrary to the CA's
conclusion in the questioned Decision, it exercised due diligence before it entered
into the Mortgage Agreement with Golden Dragon and accepted Unit 2308-B2,
among other properties, as collateral. The Bank stressed that prior to the approval
of Golden Dragon's loan, it deployed representatives to ascertain that the properties
being offered as collateral were in order. Moreover, it confirmed that the titles
corresponding to the properties offered as collateral were free from existing liens,
mortgages and other encumbrances. Proceeding from this, the Bank claims that
the CA overlooked these facts when it failed to recognize the Bank as a mortgagee
in good faith.

The Court finds the Bank's assertions indefensible.

First of all, under Presidential Decree No. 957 (PD 957), no mortgage on any
condominium unit may be constituted by a developer without prior written
approval of the National Housing Authority, now HLURB. PD 957 further
requires developers to notify buyers of the loan value of their corresponding
mortgaged properties before the proceeds of the secured loan are released.

In Far East Bank & Trust Co. v. Marquez, (420 SCRA 349) the Court clarified the
legal effect of a mortgage constituted in violation of the foregoing provision, thus:

“The lot was mortgaged in violation of Section 18 of PD 957.

Respondent, who was the buyer of the property, was not notified of
the mortgage before the release of the loan proceeds by petitioner.
Acts executed against the provisions of mandatory or prohibitory
laws shall be void. Hence, the mortgage over the lot is null and void
insofar as private respondent is concerned.”

The Court reiterated the foregoing pronouncement in the recent case of Philippine
National Bank vs. Lim (689 SCRA 523) and again in United Overseas Bank of the
Philippines, Inc. v. Board of Commissioners-HLURB. (760 SCRA 300) [Prudential
Bank vs. Rapanot, 814 SCRA353)

It bears stressing that banks are required to exercise the highest degree of diligence
in the conduct of their affairs. The Court explained this exacting requirement in
the recent case of Philippine National Bank v. Vila (799 SCRA 90) thus:

‘In Land Bank of the Philippines v. Belle Corporation, the Court

exhorted banks to exercise the highest degree of diligence in its
dealing with properties offered as securities for the loan obligation:

When the purchaser or the mortgagee is a bank, the rule on innocent

purchasers or mortgagees for value is applied more strictly. Being in
the business of extending loans secured by real estate mortgage,
banks are presumed to be familiar with the rules on land
registration. Since the banking business is impressed with public
interest, they are expected to be more cautious, to exercise a higher
degree of diligence, care and prudence, than private individuals in
their dealings, even those involving registered lands. Banks may not
simply rely on the face of the certificate of title. Hence, they cannot
 assume that, x x x the title offered as security is on its face free of
any encumbrances or lien, they are relieved of the responsibility of
taking further steps to verify the title and inspect the properties to be
mortgaged. As expected, the ascertainment of the status or condition
of a property offered to it as security for a loan must be a standard
and indispensable part of the bank's operations. x x x [Prudential
Bank vs. Rapanot, 814 SCRA354-355)

In loan transactions, banks have the particular obligation of ensuring that clients
comply with all the documentary requirements pertaining to the approval of their
loan applications and the subsequent release of their proceeds.

If only the Bank exercised the highest degree of diligence required by the nature of
its business as a financial institution, it would have discovered that: (i) Golden
Dragon did not comply with the approval requirement imposed by Section 18 of
PD 957, and (ii) that Rapanot already paid a reservation fee and had made several
installment payments in favor of Golden Dragon, with a view of acquiring Unit
2308-B2.

The Bank's failure to exercise the diligence required of it constitutes negligence,

and negates its assertion that it is a mortgagee in good faith.” (Prudential Bank, etc. vs.
Rapanot, et al., 814 SCRA 356)

(2) (b) Diligence required of banks - “Similar to common carriers, banking is a

business that is impressed with the public interest. It affects economies and plays a
significant role in businesses and commerce. The public reposes its faith and
confidence upon banks, such that “even the humble wage-earner has not hesitated
to entrust his life’s savings to the bank of his choice, knowing that they will be safe
in its custody and will even earn some interest for him. This is why we have
recognized the fiduciary nature of the banks functions, and attached a special
standard of diligence for the exercise of their functions.

In Simex International (Manila), Inc. vs. Court of Appeals, this court described the
nature of banks functions and the attitude expected of banks in handling their
depositors accounts, thus:

‘In every case, the depositor expects the bank to treat his account with
the utmost fidelity, whether such account consists only a few hundred
pesos or of millions . . .

The point is that as a business affected with public interest and because
of the nature of its functions, the bank is under obligation to treat the
accounts of its depositors with meticulous care, always having in mind
the fiduciary nature of their relationship.’
The fiduciary nature of banking is affirmed in Republic Act No. 8791 or The
General Banking Law, thus:

‘SEC. 2. Declaration of Policy. – The State recognizes the vital role of

banks in providing an environment conducive to the sustained
development of the national economy and the fiduciary nature of
banking that requires high standards of integrity and performance. In
furtherance thereof, the State shall promote and maintain a stable and
efficient banking and financial system that is globally competitive,
dynamic and responsive to the demands of a developing economy.’

In The Consolidated Bank and Trust Corporation v. Court of Appeals, this court
explained the meaning of fiduciary relationship and the standard of diligence
assumed by banks:

‘This fiduciary relationship means that the banks obligation to observe

“high standards of integrity and performance” is deemed written into
every deposit agreement between a bank and its depositor. The
fiduciary nature of banking requires banks to assume a degree of
diligence higher than that of a good father of a family. Article 1172 of
the Civil Code states that the degree of diligence required of an
obligor is that prescribed by law or contract, and absent such
stipulation then the diligence a good father of a family.’ (Philippine
National Bank vs. Santos, 744 SCRA 678-679)

(3) Banking/Taxation –

China Banking Corp. (CBC) accepted “special savings deposits” – which it called
“Savings Plus Deposit.” For said deposit, CBC issued a passbook, not a certificate
of deposit.

The BIR subjected said deposit to the same documentary stamps on time deposits,
but CBC contested it, stressing that in this kind of account, partial withdrawal was
allowed. So, it represented a continuing fund which is open to deposits and
withdrawals at any time, and, therefore, falls under the category of certificates of
deposit at sight or on demand - which is exempt from documentary stamp tax.
The Supreme Court sustained the BIR stating the following:

1. “In the case of “Far East Bank & Trust Co. vs. Querimit,” the
Court defined a certificate of deposit as a written acknowledgment by
a bank or banker of the receipt of a sum of money on deposit which the
bank or banker promises to pay to the depositor, to the order of the
depositor or to some other person or his order, whereby the relation of
debtor and creditor between the bank and the depositor is created.”
 2. “A certificate of deposit is also defined as a receipt issued by a bank
for an
interest-bearing time deposit coming due at a specified future time.”

3. “In International, this Court held that a passbook representing an

interest-earning deposit account issued by a bank qualifies as a
certificate of deposit drawing interest. A document to be deemed a
certificate of deposit requires no specific form as long as there is some
written memorandum that the bank accepted a deposit of a sum of
money from a depositor. What is important and controlling is the
nature or meaning conveyed by the passbook and not the particular
label or nomenclature attached to it, inasmuch as substance, not form,
is paramount.” (China Banking Corp. vs. Commissioner of Internal
Revenue, 602 SCRA 316)

(4) Supervision –

The Supervision and Examination Department (SED) of the Bangko Sentral ng

Pilipinas (BSP) conducted examinations of the books of a number of rural banks.
After the examinations, exit conferences were held with the officers/ representatives
of the banks wherein the SED examiners provided them with copies of Lists of
Findings/Exceptions containing the deficiencies discovered during the
examinations. Those banks were required to comment and to undertake the
remedial measures stated in the Lists within 30 days from receipt of the Lists, which
remedial measures included the infusion of additional capital. The banks filed a
complaint and prayed for nullification of the Report of Examination (ROE) and for
the issuance of a writ of preliminary injunction before the RTC. The RTC issued
the writ and the Court of Appeals sustained it. The Supreme Court reversed the
orders of the lower courts and made the following pronouncements:

1. “The respondent banks cannot claim a violation of their right to

due process if they are not provided with copies of the ROEs.”

2. “The respondent banks have failed to show that they are entitled to
copies of the ROEs. They can point to no provision of law, no section
in the procedures of the BSP that shows that the BSP is required to
give them copies of the ROEs.”

3. “The issuance by the RTC of writs of preliminary injunction is an

unwarranted interference with the powers of the Monetary Board
(MB). Sections 29 and 30 of R.A. 7653 refer to the appointment of a
conservator or a receiver for a bank.”

4. “Under the law, the sanction of closure could be imposed upon a

bank by the BSP even without notice and hearing. The apparent lack
of procedural due process would not result in the invalidity of action
 by the MB. This was the ruling in ‘Central Bank of the Philippines v.
Court of Appeals’ (220 SCRA 536). This ‘close now, hear later’ scheme
is grounded on practical and legal considerations to prevent
unwarranted dissipation of the bank’s assets and as a valid exercise of
police power to protect the depositors, creditors, stockholders and the
general public.”

5. “The ‘close now, hear later’ doctrine has already been justified as
a measure for the protection of the public interest. Swift action is
called for on the part of the BSP when it finds that a bank is in dire
straits. Unless adequate and determined efforts are taken by the
government against distressed and mismanaged banks, public faith in
the banking system is certain to deteriorate to the prejudice of the
national economy itself, not to mention the losses suffered by the bank
depositors, creditors and stockholders, who all deserve the protection
of the government.”

6. “Judicial review enters the picture only after the Monetary Board
(MB) has taken action – it cannot prevent such action by the MB. The
threat of imposition, even of closure, does not violate their right to due
process, and cannot be the basis for a writ of preliminary injunction.”
(Bangko Sentral ng Pilipinas Monetary Board vs. Antonio Valenzuela, 602
SCRA 698)

BANK SECRECY LAW –

(A) “Section 2 of R.A. No. 1405, the Law on Secrecy of Bank Deposits enacted in
1955, was first amended by Presidential Decree No. 1792 in 1981 and further
amended by R.A. No. 7653 in 1993. It now reads: cirtual

‘SEC. 2. All deposits of whatever nature with banks or banking

institutions in the Philippines including investments in bonds issued by
the Government of the Philippines, its political subdivisions and its
instrumentalities, are hereby considered as of an absolutely
confidential nature and may not be examined, inquired or looked into
by any person, government official, bureau or office, except when the
examination is made in the course of a special or general examination
of a bank and is specifically authorized by the Monetary Board after
being satisfied that there is reasonable ground to believe that a bank
fraud or serious irregularity has been or is being committed and that it
is necessary to look into the deposit to establish such fraud or
irregularity, or when the examination is made by an independent
auditor hired by the bank to conduct its regular audit provided that the
examination is for audit purposes only and the results thereof shall be
for the exclusive use of the bank, or upon written permission of the
 depositor, or in cases of impeachment, or upon order of a competent
court in cases of bribery or dereliction of duty of public officials, or in
cases where the money deposited or invested is the subject matter of
the litigation.’

R.A. No. 1405 provides for exceptions when records of deposits may be
disclosed. These are under any of the following instances: (a) upon written
permission of the depositor; (b) in cases of impeachment; (c) upon order of a
competent court in the case of bribery or dereliction of duty of public officials; or
(d) when the money deposited or invested is the subject matter of the litigation;
and (e) in cases of violation of the Anti-Money Laundering Act, the Anti-Money
Laundering Council may inquire into a bank account upon order of any competent
court.23
cralawlawlibrary

In this case, the Joint Motion to Approve Agreement was executed by BPI and
TIDCORP only. There was no written consent given by petitioner or its
representative, Epifanio Ramos, Jr., that petitioner is waiving the confidentiality of
its bank deposits. The provision on the waiver of the confidentiality of petitioner’s
bank deposits was merely inserted in the agreement. It is clear therefore that
petitioner is not bound by the said provision since it was without the express
consent of petitioner who was not a party and signatory to the said agreement.

Neither can petitioner be deemed to have given its permission by failure to

interpose its objection during the proceedings. It is an elementary rule that the
existence of a waiver must be positively demonstrated since a waiver by
implication is not normally countenanced. The norm is that a waiver must not
only be voluntary, but must have been made knowingly, intelligently, and with
sufficient awareness of the relevant circumstances and likely
consequences. There must be persuasive evidence to show an actual intention to
relinquish the right. Mere silence on the part of the holder of the right should not be
construed as a surrender thereof; the courts must indulge every reasonable
presumption against the existence and validity of such waiver.” (Dona Adela Export
… vs. TIDCORP, 750 SCRA 443-445)

(B ) “Sally Go-Bangayan was the cashier of BSB Group, Inc. and her husband
was its president. She was charged for qualified theft for having deposited in her
own account checks of BSB worth P1,534,135.50. During the trial, the
prosecution presented the testimony of the representative of Security Bank, but
before the completion of her testimony, Sally filed a Motion to Suppress. The
prosecution also moved for the issuance of a subpoena to Metrobank. Sally
opposed the issuance of that subpoena contending that Metrobank was not
mentioned as one of the banks where she deposited BSB checks. The trial court
ruled against Sally; so, she filed a petition for certiorari with the Court of Appeals.
The CA reversed the trial court; so, BSB went to the Supreme Court. The Supreme
Court sustained the Court of Appeals and made the following pronouncements:

1. “The measure of protection afforded by the law has been explained

in “China Banking Corp. vs. Ortega”(49 SCRA355). That case
principally addressed the issue of whether the prohibition against an
examination of bank deposits precludes garnishment in satisfaction of
a judgment. Ruling on that issue in the negative, the Court found
guidance in the relevant portions of the legislative deliberations on
Senate Bill No. 351 and House Bill No. 3977, which later became the
Bank Secrecy Act, and it held that the absolute confidentiality rule in
R.A. No. 1405 actually aims at protection from unwarranted inquiry
or investigation is merely to determine the existence and nature, as
well as the amount of the deposit in any given account.

2. “What indeed constitutes the subject matter in litigation in relation

to Sec. 2 of R.A. No. 1405has been pointedly and amply addressed in
“Union Bank of the Phil. vs. Court of Appeals” (321 SCRA 563) in
which the Court noted that the inquiry into bank deposits allowable
under R.A. No. 1405 must be premised on the fact that the money
deposited in the account is itself the subject of the action. Given this
perspective, we deduce that the subject matter of the action in the case
at bar is to be determined from the indictment that charges
respondent with the offense, and not from the evidence sought by the
prosecution to be admitted into the records.”
… In other words, it can be hardly inferred from the indictment itself
that the Security Bank account is the ostensible object of the
prosecution’s inquiry. Without needlessly expanding the scope of
what is plainly alleged in the Information, the subject matter of the
action in this case is the money amounting to P1,534,135.50 alleged
to have been stolen by respondent, not the money equivalent of the
checks which are sought to be admitted in evidence. Thus, it is that
which the prosecution is bound to prove with its evidence, and no
other.” (BSB Group of Companies, Inc. vs. Sally Go, etc., G.R No.168644,
Feb. 16, 2010)

BANKS’ UNAUTHORIZED CHECK PAYMENTS –

1. The Court agrees with the appellate court that in cases of unauthorized payment
of checks to a person other than the payee named therein, the drawee bank may be
held liable to the drawer. The drawee bank, in turn, may seek reimbursement from
the collecting bank for the amount of the check. This rule on the sequence of
recovery in case of unauthorized check transactions had already been deeply
embedded in jurisprudence. (Bank of America vs. Associated Citizens Bank, 588 SCRA
51 cited in BDO Unibank, Inc. vs. Lao, 827 SCRA 493-494)
The liability of the drawee bank is based on its contract with the drawer and its
duty to charge to the latter’s accounts only those payables authorized by him. A
drawee bank is under strict liability to pay the check only to the payee or to the
payee’s order. When the drawee bank pays a person other than the payee named in
the check, it does not comply with the terms of the check and violates its duty to
charge the drawer’s account only for properly payable items. (PNB vs. Rodriguez,
566 SCRA 513 cited in BDO vs. Lao, 827 SCRA 494)

2. On the other hand, the liability of the collecting bank is anchored on its
guarantees as the last endorser of the check. Under Section 66 of the Negotiable
Instruments Law, an endorser warrants “that the instrument is genuine and in all
respects what it purports to be; that he has good title to it; that all prior parties had
capacity to contract; and that the instrument is at the time of his endorsement valid
and subsisting.”

It has been repeatedly held that in check transactions, the collecting bank generally
suffers the loss because it has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the check for payment to the
drawee is an assertion that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements. If any of the warranties made by
the collecting bank turns out to be false, then the drawee bank may recover from it
up to the amount of the check. (Areza vs. Express Savings Bank, Inc., 734 SCRA 588
cited in BDO vs. Lao, 827 SCRA 494-495)

3. The Court agrees with the appellate court that in cases of unauthorized
payment of checks to a person other than the payee named therein, the drawee
bank may be held liable to the drawer. The drawee bank, in turn, may seek
reimbursement from the collecting bank for the amount of the check. This rule on
the sequence of recovery in case of unauthorized check transactions had already
been deeply embedded in jurisprudence. (Bank of America vs. Associated Citizens
Bank, 588 SCRA 51 cited in BDO Unibank, Inc. vs. Lao, 827 SCRA 493-494)

4. The liability of the drawee bank is based on its contract with the drawer and its
duty to charge to the latter’s accounts only those payables authorized by him. A
drawee bank is under strict liability to pay the check only to the payee or to the
payee’s order. When the drawee bank pays a person other than the payee named in
the check, it does not comply with the terms of the check and violates its duty to
charge the drawer’s account only for properly payable items. (PNB vs. Rodriguez,
566 SCRA 513 cited in BDO vs. Lao, 827 SCRA 494)

5. On the other hand, the liability of the collecting bank is anchored on its
guarantees as the last endorser of the check. Under Section 66 of the Negotiable
Instruments Law, an endorser warrants “that the instrument is genuine and in all
respects what it purports to be; that he has good title to it; that all prior parties had
capacity to contract; and that the instrument is at the time of his endorsement valid
and subsisting.”

It has been repeatedly held that in check transactions, the collecting bank generally
suffers the loss because it has the duty to ascertain the genuineness of all prior
endorsements considering that the act of presenting the check for payment to the
drawee is an assertion that the party making the presentment has done its duty to
ascertain the genuineness of the endorsements. If any of the warranties made by
the collecting bank turns out to be false, then the drawee bank may recover from it
up to the amount of the check. (Areza vs. Express Savings Bank, Inc., 734 SCRA 588
cited in BDO vs. Lao, 827 SCRA 494-495)

6. Banks assume a degree of prudence and diligence higher than that of a good
father of a family, because their business is imbued with public interest and is
inherently fiduciary. Thus, banks have the obligation to treat the amounts of its
clients “meticulously and with the highest degree of care.” With respect to its
fiduciary duties, this Court explained:

“The law imposes on banks high standards in view of the fiduciary

nature of banking. Section 2 of Republic Act No. 8791 (“RA 8791”),
which took effect on 13 June 2000, declares that the State recognizes
the “fiduciary nature of banking that requires high standards of
integrity and performance.” This new provision in the general
banking law, introduced in 2000, is a statutory affirmation of Supreme
Court decisions, starting with the 1990 case of Simex International v.
Court of Appeals, holding that “the bank is under obligation to treat
the accounts of its depositors with meticulous care, always having in
mind the fiduciary nature of their relationship.”

This fiduciary relationship means that the bank’s obligation to

observe “high standards of integrity and performance” is deemed
written into every deposit agreement between a bank and its
depositor. The fiduciary nature of banking requires banks to assume
a degree of diligence higher than that of a good father of a family.
Article 1172 of the Civil Code states that the degree of diligence
required of an obligor is that prescribed by law or contract, and
absent such stipulation then the diligence of a good father of a family.
Section 2 of RA 8791 prescribes the statutory diligence required from
banks – that banks must observe “high standards of integrity and
performance” in servicing their depositors.”

The high degree of diligence required of banks equally holds true in their dealing
with mortgaged real properties, and subsequently acquired through foreclosure,
such as the Unit purchased by petitioner.

In the same way that banks are “presumed to be familiar with the rules on land
registration,” given that they are in the business of extending loans secured by real
estate mortgage, banks are also expected to exercise the highest degree of
diligence. This is especially true when investigating real properties offered as
security, since they are aware that such property may be passed on to an innocent
purchaser in the event of foreclosure. Indeed, “the ascertainment of the status or
condition of a property offered to it as security for a loan must be a standard and
indispensable part of a bank’s operations.” (Poole-Blundenr vs. Union Bank of the
Phil. 847 SCRA 170-172)

BILLS OF LADING –

(1) “A bill of lading is defined as “a written acknowledgment of the receipt of

goods and an agreement to transport and to deliver them at a specified place
to a person named or on his order.

It may also be defined as “an instrument in writing, signed by a carrier or his

agent, describing the freight so as to identify it, stating the name of the
consignor, the terms of the contract of carriage, and agreeing or directing that
the freight be delivered to bearer, to order or to a specified person at a
specified place.
Under Article 350 of the Code of Commerce, “the shipper as well as the carrier of
the merchandise or goods may mutually demand that a bill of lading be made.” A
bill of lading, when issued by the carrier to the shipper, is the legal evidence of the
contract of carriage between the former and the latter. It defines the rights and
liabilities of the parties in reference to the contract of carriage. The stipulations in
the bill of lading are valid and binding unless they are contrary to law, morals,
customs, public order or public policy.” (Designer Baskets, Inc. vs. Air-Sea Transport,
Inc., et al., G.R. No. 184513, March 9, 2016; 787 SCRA 150-151)

“Further, a carrier is allowed by law to release the goods to the consignee even
without the latter’s surrender of the bill of lading. The third paragraph of
Article 353 of the Code of Commerce is enlightening:

‘Article 353. The legal evidence of the contract between the shipper
and the carrier shall be the bills of lading, by the contents of which
the disputes which may arise regarding their execution and
performance shall be decided, no exceptions being admissible other
than those of falsity and material error in the drafting.

After the contract has been complied with, the bill of lading which the
carrier has issued shall be returned to him, and by virtue of the
exchange of this title with the thing transported, the respective
obligations and actions shall be considered cancelled, unless in the
same act the claim which the parties may wish to reserve be reduced
 to writing, with the exception of that provided for in Article 366.

In case the consignee, upon receiving the goods, cannot return the
bill of lading subscribed by the carrier, because of its loss or any
other cause, he must give the latter a receipt for the goods delivered,
this receipt producing the same effects as the return of the bill of
lading.’

The general rule is that upon receipt of the goods, the consignee surrenders
the bill of lading to the carrier and their respective obligations are considered
canceled. The law, however, provides two (2) exceptions where the goods may
be released without the surrender of the bill of lading because the consignee
can no longer return it.

These exceptions are: (1) when the bill of lading gets lost or (2) for other
cause. In either case, the consignee must issue a receipt to the carrier upon the
release of the goods. Such receipt shall produce the same effect as the surrender of
the bill of lading.

We have already ruled that the non-surrender of the original bill of lading does not
violate the carrier’s duty of extraordinary diligence over the goods. In Republic v.
Lorenzo Shipping Corporation (450 SCRA 550) we found that the carrier exercised
extraordinary diligence when it released the shipment to the consignee, not upon
the surrender of the original bill of lading, but upon signing the delivery receipts
and surrender of the certified true copies of the bills of lading. Thus, we held that
the surrender of the original bill of lading is not a condition precedent for a
common carrier to be discharged of its contractual obligation.” (Designer Baskets,
Inc. vs. Air-Sea Transport, Inc., et al., G.R. No. 184513, March 9, 2016; 787 SCRA 152-153)

“Clearly, law and jurisprudence is settled that the surrender of the original
bill of lading is not absolute; that in case of loss or any other cause, a common
carrier may release the goods to the consignee even without it.”

Here, Ambiente could not produce the bill of lading covering the shipment not
because it was lost, but for another cause: the bill of lading was retained by DBI
pending Ambiente’s full payment of the shipment. Ambiente and ASTI then
entered into an Indemnity Agreement, wherein the former asked the latter to
release the shipment even without the surrender of the bill of lading. The
execution of this Agreement, and the undisputed fact that the shipment was
released to Ambiente pursuant to it, to our mind, operates as a receipt in substantial
compliance with the last paragraph of Article 353 of the Code of Commerce.”
(Designer Baskets, Inc. vs. Air-Sea Transport, Inc., et al., G.R. No. 184513, March 9, 2016;
787 SCRA 155)

(2) In maritime transportation, a bill of lading is issued by a common carrier as:

(a) a contract, (b) receipt; and (c) symbol of the goods covered by it. If it has
no notation of any defect or damage in the goods, it is considered as a “clean bill
of lading.” A clean bill of lading constitutes prima facie evidence of the receipt
by the carrier of the goods as therein described.” (Eastern Shipping Lines vs. BPI/MS
Insurance Corp., 745 SCRA 112-113)

(3) “Mere proof of delivery of goods in good order to a common carrier and of
their arrival in bad order at their destination constitutes a prima facie case of fault or
negligence against the carrier. If no adequate explanation is given as to how the
deterioration, loss, or destruction of the goods happened, the transporter shall be
held responsible.” (Eastern Shipping Lines vs. BPI/MS Insurance Corp., 745 SCRA 114)

(4) “According to the New Civil Code, the law of the country to which the goods
are to be transported shall govern the liability of the common carrier for their loss,
destruction or deterioration. The Code takes precedence as the primary law over
the rights and obligations of common carriers with the Code of Commerce and
COGSA applying suppletorily.”

(5) “The New Civil Code provides that a stipulation limiting a common carrier’s
liability to the value of the goods appearing in the bill of lading is binding, unless
the shipper or owner declares a greater value. In addition, a contract fixing the sum
that may be recovered by the owner or shipper for the loss, destruction, or
deterioration of the goods is valid, if it is reasonable and just under the
circumstances, and has been fairly and freely agreed upon.” (Eastern Shipping Lines vs.
BPI/MS Insurance Corp., 745 SCRA 115-116)

(6) “The bills of lading represent the formal expression of the parties rights, duties
and obligations. It is the best evidence of the intention of the parties which is to be
deciphered from the language used in the contract, not from the unilateral post facto
assertions of one of the parties, or of third parties who are strangers to the contract.
Thus, when the terms of an agreement have been reduced to writing, it is deemed to
contain all the terms agreed upon and there can be, between the parties and their
successor-in-interest, no evidence of such terms other than the contents of the
written agreement.

As to the non-declaration of the value of the goods on the second bill of lading, we
see no error on the part of the appellate court when it ruled that there was a
compliance of the requirement provided by COGSA. The declaration requirement
does not require that all the details must be written down on the very bill of lading
itself. It must be emphasized that all the needed details are in the invoice, which
“contains the itemized list of goods shipped to a buyer, stating quantities, prices,
shipping charges,” and other details which may contain numerous sheets.
Compliance can be attained by incorporating the invoice, by way of reference, to
the bill of lading provided that the former containing the description of the nature,
value and/or payment of freight charges is as in this case duly admitted as
evidence.” (Eastern Shipping Lines vs. BPI/MS Insurance Corp., 745 SCRA 117)

(7) “A bill of lading is written acknowledgment of the receipt of goods and an

agreement to transport and to deliver them at a specified place to a person named or
on his or her order. It operates both as a receipt and as a contract.” (Philam
Insurance Company, Inc. (now Chartis Philippines Insurance, Inc.) vs. Heung-A Shipping
Corporation, 730 SCRA 512 (2014)

CARRIAGE OF GOODS BY SEA ACT –

“The prescriptive period for filing an action for lost/damaged goods governed by
contracts of carriage by sea to and from Philippine ports in foreign trade is
governed by paragraph 6, Section 3 of the Carriage of Goods by Sea Act
(COGSA).” [Notes in 745 SCRA 117]

CHECKS –

1. A crossed check is one where two parallel lines are drawn across its face or
across the corner thereof. A check may be crossed generally or specially. A
check is crossed especially when the name of a particular banker or company is
written between the parallel lines drawn. It is crossed generally when only the
words “and company” are written at all between the parallel lines. (Go vs.
Metrobank, 628 SCRA 107 cited in BDO vs. Lao, 827 SCRA 495-496)

2. Jurisprudence dictates that the effects of crossing a check are: (1) that
the check may not be encashed but only deposited in the bank; (2) that the
check may be negotiated only once – to one who has an account with a bank;
and (3) that the act of crossing the check serves as a warning to the holder
that the check has been issued for a definite purpose so that he must inquire if
he has received the check pursuant to that purpose.

The effects of crossing a check, thus, relate to the mode of payment, meaning that
the drawer had intended the check for deposit only by the rightful person. i.e., the
payee named therein.

3. In Associated Bank vs. Court of Appeals (Associated Bank) (208 SCRA465), the
person who suffered the loss as a result of the unauthorized encashment of crossed
checks was allowed to recover the loss directly from the negligent bank despite the
latter’s contention of lack of privity of contract. The Court said:

There being no evidence that the crossed checks were actually

received by the private respondent, she would have a right of action
against the drawer companies, which in turn could go against their
respective drawee banks, which in turn could sue the herein
petitioner as collecting bank. In a similar situation, it was held that,
to simplify proceedings, the payee of the illegally encashed checks
should be allowed to recover directly from the bank responsible for
such encashment regardless of whether or not the checks were
actually delivered to the payee. We approve such direct action in the
case at bar. (cited in BDO vs. Lao, 827 SCRA 497)

4. The Court is of the considered view that the pronouncements made in

Associated Bank as regards the simplification of the recovery proceedings are
applicable in the present case. The factual milieu of this case are substantially
similar with that of Associated Bank, i.e., a crossed check was presented and
deposited, without authority, in the account of a person other than the payee named
therein; the collecting bank endorsed the crossed check and warrant the validity of
all prior endorsements and/or lack of it; the warranty turned out to be false; and, a
party to the check transaction, which would otherwise be held liable to the party
aggrieved, was not made a party in the proceedings in court.” (BDO vs. Lao, 827
SCRA 499)

5. “The legal effects of a manager’s check and a cashier’s check are the same.
A manager’s check, like a cashier’s check, is an order of the bank to pay, drawn
upon itself, committing in effect its total resources, integrity, and honor behind its
issuance. By its peculiar character and general use in commerce, a manager’s
check or a cashier’s check is regarded substantially to be as good as the money it
represents. Thus, the succeeding discussions and jurisprudence on manager’s
checks, unless stated otherwise, are applicable to cashier’s checks, and vice versa.”

While indeed, it cannot be said that manager’s and cashier’s checks are pre-
cleared, clearing should not be confused with acceptance. Manager’s and
cashier’s checks are still the subject of clearing to ensure that the same have not
been materially altered or otherwise completely counterfeited. However,
manager’s and cashier’s checks are pre-accepted by the mere issuance thereof
by the bank, which is both its drawer and drawee. Thus, while manager’s and
cashier’s checks are still subject to clearing, they cannot be countermanded for
being drawn against a closed account, for being drawn against insufficient
funds, or for similar reasons such as a condition not appearing on the face of the
check. Long standing and accepted banking practices do not countenance the
countermanding of manager’s and cashier’s checks on the basis of a mere
allegation of failure of the payee to comply with its obligations towards the
purchaser. On the contrary, the accepted banking practice is that such checks are
as good as cash. Thus, in New Pacific Timber & Supply Company, Inc. v. Hon.
Seneris, we held:

‘It is a well-known and accepted practice in the business sector that a

Cashier's Check is deemed as cash. Moreover, since the said check
had been certified by the drawee bank, by the certification, the funds
represented by the check are transferred from the credit of the maker
to that of the payee or holder, and for all intents and purposes, the
latter becomes the depositor of the drawee bank, with rights and
duties of one in such situation. Where a check is certified by the bank
on which it is drawn, the certification is equivalent to acceptance.
Said certification "implies that the check is drawn upon sufficient
funds in the hands of the drawee, that they have been set apart for its
satisfaction, and that they shall be so applied whenever the check is
presented for payment. It is an understanding that the check is good
then, and shall continue good, and this agreement is as binding on the
bank as its notes in circulation, a certificate of deposit payable to the
order of the depositor, or any other obligation it can assume. The
object of certifying a check, as regards both parties, is to enable the
holder to use it as money." When the holder procures the check to be
certified, "the check operates as an assignment of a part of the funds
to the creditors." Hence, the exception to the rule enunciated under
Section 63 of the Central Bank Act to the effect "that a check which
has been cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor in cash in an amount equal to
the amount credited to his account" shall apply in this case. x x x.

Even more telling is the Court’s pronouncement in Tan vs. Court of Appeals, which
unequivocally settled the unconditional nature of the credit created by the issuance of
manager’s or cashier’s checks:

“A cashier’s check is a primary obligation of the issuing bank and

accepted in advance by its mere issuance. By its very nature, a
cashier’s check is the bank’s order to pay drawn upon itself,
committing in effect its total resources, integrity and honor behind the
check. A cashier’s check by its peculiar character and general use in
the commercial world is regarded substantially to be as good as the
money which it represents. In this case, therefore, PCIB by issuing the
check created an unconditional credit in favor of any collecting bank.”
(Metropolitan Bank & Trust Co. vs. Chiok, 742 SCRA 465-466)

6. “We agree with the finding of the Court of Appeals that BPI is not a holder in
due course with respect to manager’s checks. Said checks were never indorsed
by Nuguid to FEBTC, the predecessor-in-interest of BPI, for the reason that they
were deposited by Chiok directly to Nuguid’s account with FEBTC. However, in
view of our ruling that Nuguid has withdrawn the value of the checks from his
account, BPI has the rights of an equitable assignee for value under Section 49 of
the Negotiable Instruments Law, which provides:

‘Section 49. Transfer without indorsement; effect of. – Where the

holder of an instrument payable to his order transfers it for value
without indorsing it, the transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires in addition, the
right to have the indorsement of the transferor. But for the purpose of
determining whether the transferee is a holder in due course, the
negotiation takes effect as of the time when the indorsement is actually
made.’

As an equitable assignee, BPI acquires the instrument subject to defenses and

equities available among prior parties and, in addition, the right to have the
indorsement of Nuguid. Since the checks in question are manager’s checks, the
drawer and the drawee thereof are both Global Bank. Respondent Chiok cannot be
considered a prior party as he is not the check’s drawer, drawee, indorser, payee or
indorsee. Global Bank is consequently primarily liable upon the instrument, and
cannot hide behind respondent Chiok’s defenses. As discussed above, manager’s
checks are pre-accepted. By issuing the manager’s check, therefore, Global
Bank committed in effect its total resources, integrity and honor towards its
payment.

Resultantly, Global Bank should pay BPI the amount of P18,455,350.00,

representing the aggregate face value of MC No. 025935 and MC No. 025939.”
(Metropolitan Bank & Trust Co. vs. Chiok, 742 SCRA 483-484)

CHECKS –

1. A crossed check is one where two parallel lines are drawn across its face or
across the corner thereof. A check may be crossed generally or specially. A
check is crossed especially when the name of a particular banker or company is
written between the parallel lines drawn. It is crossed generally when only the
words “and company” are written at all between the parallel lines. (Go vs.
Metrobank, 628 SCRA 107 cited in BDO vs. Lao, 827 SCRA 495-496)

2. Jurisprudence dictates that the effects of crossing a check are: (1) that
the check may not be encashed but only deposited in the bank; (2) that the
check may be negotiated only once – to one who has an account with a bank;
and (3) that the act of crossing the check serves as a warning to the holder
that the check has been issued for a definite purpose so that he must inquire if
he has received the check pursuant to that purpose.
The effects of crossing a check, thus, relate to the mode of payment, meaning that
the drawer had intended the check for deposit only by the rightful person. i.e., the
payee named therein.

3. In Associated Bank vs. Court of Appeals (Associated Bank) (208 SCRA465), the
person who suffered the loss as a result of the unauthorized encashment of crossed
checks was allowed to recover the loss directly from the negligent bank despite the
latter’s contention of lack of privity of contract. The Court said:

There being no evidence that the crossed checks were actually

received by the private respondent, she would have a right of action
against the drawer companies, which in turn could go against their
respective drawee banks, which in turn could sue the herein
petitioner as collecting bank. In a similar situation, it was held that,
to simplify proceedings, the payee of the illegally encashed checks
should be allowed to recover directly from the bank responsible for
such encashment regardless of whether or not the checks were
actually delivered to the payee. We approve such direct action in the
case at bar. (cited in BDO vs. Lao, 827 SCRA 497)

4. The Court is of the considered view that the pronouncements made in

Associated Bank as regards the simplification of the recovery proceedings are
applicable in the present case. The factual milieu of this case are substantially
similar with that of Associated Bank, i.e., a crossed check was presented and
deposited, without authority, in the account of a person other than the payee named
therein; the collecting bank endorsed the crossed check and warrant the validity of
all prior endorsements and/or lack of it; the warranty turned out to be false; and, a
party to the check transaction, which would otherwise be held liable to the party
aggrieved, was not made a party in the proceedings in court.” (BDO vs. Lao, 827
SCRA 499)

5. “The legal effects of a manager’s check and a cashier’s check are the same.
A manager’s check, like a cashier’s check, is an order of the bank to pay, drawn
upon itself, committing in effect its total resources, integrity, and honor behind its
issuance. By its peculiar character and general use in commerce, a manager’s
check or a cashier’s check is regarded substantially to be as good as the money it
represents. Thus, the succeeding discussions and jurisprudence on manager’s
checks, unless stated otherwise, are applicable to cashier’s checks, and vice versa.”

While indeed, it cannot be said that manager’s and cashier’s checks are pre-
cleared, clearing should not be confused with acceptance. Manager’s and
cashier’s checks are still the subject of clearing to ensure that the same have not
been materially altered or otherwise completely counterfeited. However,
manager’s and cashier’s checks are pre-accepted by the mere issuance thereof
by the bank, which is both its drawer and drawee. Thus, while manager’s and
cashier’s checks are still subject to clearing, they cannot be countermanded for
being drawn against a closed account, for being drawn against insufficient
funds, or for similar reasons such as a condition not appearing on the face of the
check. Long standing and accepted banking practices do not countenance the
countermanding of manager’s and cashier’s checks on the basis of a mere
allegation of failure of the payee to comply with its obligations towards the
purchaser. On the contrary, the accepted banking practice is that such checks are
as good as cash. Thus, in New Pacific Timber & Supply Company, Inc. v. Hon.
Seneris, we held:

‘It is a well-known and accepted practice in the business sector that a

Cashier's Check is deemed as cash. Moreover, since the said check
had been certified by the drawee bank, by the certification, the funds
represented by the check are transferred from the credit of the maker
to that of the payee or holder, and for all intents and purposes, the
latter becomes the depositor of the drawee bank, with rights and
duties of one in such situation. Where a check is certified by the bank
on which it is drawn, the certification is equivalent to acceptance.
Said certification "implies that the check is drawn upon sufficient
funds in the hands of the drawee, that they have been set apart for its
satisfaction, and that they shall be so applied whenever the check is
presented for payment. It is an understanding that the check is good
then, and shall continue good, and this agreement is as binding on the
bank as its notes in circulation, a certificate of deposit payable to the
order of the depositor, or any other obligation it can assume. The
object of certifying a check, as regards both parties, is to enable the
holder to use it as money." When the holder procures the check to be
certified, "the check operates as an assignment of a part of the funds
to the creditors." Hence, the exception to the rule enunciated under
Section 63 of the Central Bank Act to the effect "that a check which
has been cleared and credited to the account of the creditor shall be
equivalent to a delivery to the creditor in cash in an amount equal to
the amount credited to his account" shall apply in this case. x x x.

Even more telling is the Court’s pronouncement in Tan vs. Court of Appeals, which
unequivocally settled the unconditional nature of the credit created by the issuance of
manager’s or cashier’s checks:

“A cashier’s check is a primary obligation of the issuing bank and

accepted in advance by its mere issuance. By its very nature, a
cashier’s check is the bank’s order to pay drawn upon itself,
committing in effect its total resources, integrity and honor behind the
check. A cashier’s check by its peculiar character and general use in
the commercial world is regarded substantially to be as good as the
money which it represents. In this case, therefore, PCIB by issuing the
check created an unconditional credit in favor of any collecting bank.”
 (Metropolitan Bank & Trust Co. vs. Chiok, 742 SCRA 465-466)

6. “We agree with the finding of the Court of Appeals that BPI is not a holder in
due course with respect to manager’s checks. Said checks were never indorsed
by Nuguid to FEBTC, the predecessor-in-interest of BPI, for the reason that they
were deposited by Chiok directly to Nuguid’s account with FEBTC. However, in
view of our ruling that Nuguid has withdrawn the value of the checks from his
account, BPI has the rights of an equitable assignee for value under Section 49 of
the Negotiable Instruments Law, which provides:

‘Section 49. Transfer without indorsement; effect of. – Where the

holder of an instrument payable to his order transfers it for value
without indorsing it, the transfer vests in the transferee such title as the
transferor had therein, and the transferee acquires in addition, the
right to have the indorsement of the transferor. But for the purpose of
determining whether the transferee is a holder in due course, the
negotiation takes effect as of the time when the indorsement is actually
made.’

As an equitable assignee, BPI acquires the instrument subject to defenses and

equities available among prior parties and, in addition, the right to have the
indorsement of Nuguid. Since the checks in question are manager’s checks, the
drawer and the drawee thereof are both Global Bank. Respondent Chiok cannot be
considered a prior party as he is not the check’s drawer, drawee, indorser, payee or
indorsee. Global Bank is consequently primarily liable upon the instrument, and
cannot hide behind respondent Chiok’s defenses. As discussed above, manager’s
checks are pre-accepted. By issuing the manager’s check, therefore, Global
Bank committed in effect its total resources, integrity and honor towards its
payment.

Resultantly, Global Bank should pay BPI the amount of P18,455,350.00,

representing the aggregate face value of MC No. 025935 and MC No. 025939.”
(Metropolitan Bank & Trust Co. vs. Chiok, 742 SCRA 483-484)

COMMON CARRIERS –

(1) “In this relation, Article 1756 of the Civil Code provides that "[i]n case of
death of or injuries to passengers, common carriers are presumed to have been at
fault or to have acted negligently, unless they prove that they observed
extraordinary diligence as prescribed in Articles 1733 and 1755." This disputable
presumption may also be overcome by a showing that the accident was caused by a
fortuitous event.” (Tiu vs. Arriesgado, 437 SCRA 426)
The foregoing provisions notwithstanding, it should be pointed out that the law
does not make the common carrier an insurer of the absolute safety of its
passengers. In Mariano, Jr. v. Callejas, (594 SCRA 569) the Court explained that:
While the law requires the highest degree of diligence from common
carriers in the safe transport of their passengers and creates a
presumption of negligence against them, it does not, however, make
the carrier an insurer of the absolute safety of its passengers.

Article 1755 of the Civil Code qualifies the duty of extraordinary

care, vigilance[,] and precaution in the carriage of passengers by
common carriers to only such as human care and foresight can
provide. What constitutes compliance with said duty is adjudged
with due regard to all the circumstances.

Article 1756 of the Civil Code, in creating a presumption of fault or

negligence on the part of the common carrier when its passenger is
injured, merely relieves the latter, for the time being, from introducing
evidence to fasten the negligence on the former, because the
presumption stands in the place of evidence. Being a mere
presumption, however, the same is rebuttable by proof that the
common carrier had exercised extraordinary diligence as required
by law in the performance of its contractual obligation, or that the
injury suffered by the passenger was solely due to a fortuitous event.

In fine, we can only infer from the law the intention of the Code
Commission and Congress to curb the recklessness of drivers and
operators of common carriers in the conduct of their business.

Thus, it is clear that neither the law nor the nature of the business of a
transportation company makes it an insurer of the passenger's safety,
but that its liability for personal injuries sustained by its passenger
rests upon its negligence, its failure to exercise the degree of
diligence that the law requires.” (Pilapil vs. CA, 180 SCRA 546)

Therefore, it is imperative for a party claiming against a common carrier under the
above-said provisions to show that the injury or death to the passenger/s arose from
the negligence of the common carrier and/or its employees in providing safe
transport to its passengers.

In Pilapil v. CA, the Court clarified that where the injury sustained by the
passenger was in no way due (1) to any defect in the means of transport or in the
method of transporting, or (2) to the negligent or willful acts of the common
carrier's employees with respect to the foregoing - such as when the injury arises
wholly from causes created by strangers which the carrier had no control of or
prior knowledge to prevent — there would be no issue regarding the common
carrier's negligence in its duty to provide safe and suitable care, as well as
competent employees in relation to its transport business; as such, the presumption
of fault/negligence foisted under Article 1756 of the Civil Code should not apply:
First, as stated earlier, the presumption of fault or negligence against the carrier is
only a disputable presumption. [The presumption] gives in where contrary facts
are established proving either that the carrier had exercised the degree of diligence
required by law or the injury suffered by the passenger was due to a fortuitous
event. Where, as in the instant case, the injury sustained by the petitioner was
in no way due to any defect in the means of transport or in the method of
transporting or to the negligent or wilful acts of [the common carrier'sl
employees, and therefore involving no issue of negligence in its duty to provide
safe and suitable [care] as well as competent employees, with the injury
arising wholly from causes created by strangers over which the carrier had no
control or even knowledge or could not have prevented, the presumption is
rebutted and the carrier is not and ought not to be held liable. To rule
otherwise would make the common carrier the insurer of the absolute safety of its
passengers which is not the intention of the lawmakers.” (G.V. Florida Transport,
Inc. vs. Heirs of Romeo L. Battung, Jr., etc..; 772 SCRA 579)

(2) “The following provisions of the Code of Commerce state how damages on
goods delivered by the carrier should be appraised:

‘Article 361. The merchandise shall be transported at the risk and

venture of the shipper, if the contrary has not been expressly stipulated.
As a consequence, all the losses and deteriorations which the goods
may suffer during the transportation by reason of fortuitous event, force
majeure, or the inherent nature and defect of the goods, shall be for the
account and risk of the shipper. Proof of these accidents is incumbent
upon the carrier.

Article 362. Nevertheless, the carrier shall be liable for the losses and
damages resulting from the causes mentioned in the preceding article if
it is proved, as against him, that they arose through his negligence or
by reason of his having failed to take the precautions which usage has
established among careful persons, unless the shipper has committed
fraud in the bill of lading, representing the goods to be of a kind or
quality different from what they really were.

If, notwithstanding the precautions referred to in this article, the goods

transported run the risk of being lost, on account of their nature or by
reason of unavoidable accident, there being no time for their owners to
dispose of them, the carrier may proceed to sell them, placing them for
this purpose at the disposal of the judicial authority or of the officials
designated by special provisions.

Article 364. If the effect of the damage referred to in Article 361 is

merely a diminution in the value of the goods, the obligation of the
carrier shall be reduced to the payment of the amount which, in the
 judgment of experts, constitutes such difference in value.

Article 365. If, in consequence of the damage, the goods are rendered
useless for sale and consumption for the purposes for which they are
properly destined, the consignee shall not be bound to receive them,
and he may have them in the hands of the carrier, demanding of the
latter their value at the current price on that day.

If among the damaged goods there should be some pieces in good

condition and without any defect, the foregoing provision shall be
applicable with respect to those damaged and the consignee shall
receive those which are sound, this segregation to be made by distinct
and separate pieces and without dividing a single object, unless the
consignee proves the impossibility of conveniently making use of them
in this form.

The same rule shall be applied to merchandise in bales or packages,

separating those parcels which appear sound.’

From the above-cited provisions, if the goods are delivered but arrived at the
destination in damaged condition, the remedies to be pursued by the consignee
depend on the extent of damage on the goods.

If the goods are rendered useless for sale, consumption or for the intended purpose,
the consignee may reject the goods and demand the payment of such goods at their
market price on that day pursuant to Article 365. In case the damaged portion of
the goods can be segregated from those delivered in good condition, the consignee
may reject those in damaged condition and accept merely those which are in good
condition. But if the consignee is able to prove that it is impossible to use those
goods which were delivered in good condition without the others, then the entire
shipment may be rejected. To reiterate, under Article 365, the nature of damage
must be such that the goods are rendered useless for sale, consumption or intended
purpose for the consignee to be able to validly reject them.

If the effect of damage on the goods consisted merely of diminution in value, the
carrier is bound to pay only the difference between its price on that day and its
depreciated value as provided under Article 364.” (Loadstar Shipping Co., Inc. vs.
Malayan Insurance Co., Inc. 742 SCRA 639-640)

(3) “Indeed, this Court has consistently been of the view that it is for the better
protection of the public for both the owner of record and the actual operator to be
adjudged jointly and severally liable with the driver. As aptly stated by the
appellate court, “the principle of holding the registered owner liable for damages
notwithstanding that ownership of the offending vehicle has already been
transferred to another is designed to protect the public and not as a shield on the
part of unscrupulous transferees of the vehicle to take refuge in, in order to free
itself from liability arising from its own negligent act.”
cralawlawl

Hence, considering that the negligence of driver Gimena was sufficiently proven by
the records of the case, and that no evidence of whatever nature was presented by
petitioner to support its defense of due diligence in the selection and supervision of
its employees, petitioner, as the employer of Gimena, may be held liable for
damages arising from the death of respondent Yu’s wife.” (R Transport Corp. vs. Yu,
750 SCRA 709)

(4) “Common carriers, from the nature of their business and on public policy
considerations, are bound to observe extraordinary diligence in the vigilance over
the goods transported by them. Subject to certain exceptions enumerated under
Article 1734 of the Civil Code, common carriers are responsible for the loss,
destruction, or deterioration of the goods. The extraordinary responsibility of the
common carrier lasts from the time the goods are unconditionally placed in the
possession of, and received by the carrier for transportation until the same are
delivered, actually or constructively, by the carrier to the consignee, or to the person
who has a right to receive them.

CORPORATION LAW –
(1) Piercing the Veil of Corporate Entity –
(1-A) In the recent case of Jose Emmanuel P. Guillermo v. Crisanto P. Uson [785
SCRA 543], the Court resolved the twin doctrines of piercing the veil of corporate
fiction and personal liability of company officers in labor cases. According to the
Court:

“The common thread running among the aforementioned cases, however, is that
the veil of corporate fiction can be pierced, and responsible corporate directors
and officers or even a separate but related corporation, may be impleaded and
held answerable solidarity in a labor case, even after final judgment and on
execution, so long as it is established that such persons have deliberately used the
corporate vehicle to unjustly evade the judgment obligation, or have resorted to
fraud, bad faith or malice in doing so. When the shield of a separate corporate
identity is used to commit wrongdoing and opprobriously elude responsibility, the
courts and the legal authorities in a labor case have not hesitated to step in and
shatter the said shield and deny the usual protections to the offending party, even
after final judgment. The key element is the presence of fraud, malice or bad
faith. Bad faith, in this instance, does not connote bad judgment or negligence
but imports a dishonest purpose or some moral obliquity and conscious doing of
wrong; it means breach of a known duty through motive or interest or ill will; it
partakes of the nature of fraud.
As the foregoing implies, there is no hard and fast rule on when corporate fiction
may be disregarded; instead, each case must be evaluated according to its peculiar
circumstances. For the case at bar, applying the above criteria, a finding of
personal and solidary liability against a corporate Officer like Guillermo must be
rooted on a satisfactory showing of fraud, bad faith or malice, or the presence of
any of the justifications for disregarding the corporate fiction. x x x. (Citations
omitted)

“A corporation is a juridical entity with a legal personality separate and distinct

from those acting for and in its behalf and, in general, from the people comprising
it. Thus, as a general rule, an officer may not be held liable for the corporation’s
labor obligations unless he acted with evident malice and/or bad faith in dismissing
an employee.” Section 31 of the Corporation Code is the governing law on
personal liability of officers for the debts of the corporation. To hold a director or
officer personally liable for corporate obligations, two requisites must concur:
(1) it must be alleged in the complaint that the director or officer assented to
patently unlawful acts of the corporation or that the officer was guilty of gross
negligence or bad faith; and (2) there must be proof that the officer acted in bad
faith.

Based on the records, the petitioner and the private respondents in the NLRC case
failed to specifically allege either in their complaint or position paper that the
respondent, as an officer of SEASUMCO, willfully and knowingly assented to the
corporations’ patently unlawful act of closing the corporation, or that the
respondent had been guilty of gross negligence or bad faith in directing the affairs
of the corporation. In fact, there was no evidence at all to show the respondent’s
participation in the petitioner’s illegal dismissal. Clearly, the twin requisites of
allegation and proof of bad faith, necessary to hold the respondent personally liable
for the monetary awards to the petitioner, are lacking.

The respondent is merely one of the officers of SEASUMCO and to single him out
and require him to personally answer for the liabilities of SEASUMCO are without
basis. In the absence of a finding that he acted with malice or bad faith, it was
error for the labor tribunals to hold him responsible.

The Court had repeatedly emphasized that the piercing of the veil of corporate
fiction is frowned upon and can only be done if it has been clearly established
that the separate and distinct personality of the corporation is used to justify a
wrong, protect fraud, or perpetrate a deception. To disregard the separate
juridical personality of a corporation, the wrongdoing must be established
clearly and convincingly. It cannot be presumed.” (Reyno Dimson vs. Gerry T.
Chua, 811 SCRA 643)

(1-B) Anent, the propriety of holding Racho, PSI’s President, jointly and
solidarily liable with PSI for the payment of the money awards in favor of the
respondents, the Court finds for the petitioners.
A corporation has a personality separate and distinct from its directors, officers, or
owners. Nevertheless, in exceptional cases, courts find it proper to breach this
corporate personality in order to make directors, officers, or owners solidarily
liable for the companies’ acts. Thus, under Section 31 of the Corporation Code of
the Philippines, “[d]irectors or trustees who willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors, or
trustees, shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other persons.”

The doctrine of piercing the corporate veil applies only when the corporate
fiction is used to defeat public convenience, justify wrong, protect fraud, or
defend crime. In the absence of malice, bad faith, or a specific provision of law
making a corporate officer liable, such corporate officer cannot be made
personally liable for corporate liabilities.

The respondents failed to adduce any evidence to prove that Racho, as President
and General Manager of PSI, is hiding behind the veil of corporate fiction to defeat
public convenience, justify wrong, protect fraud, or defend crime. Thus, it is only
PSI who is responsible for the respondents’ illegal dismissal. (People’s Security,
Inc., et al. vs. Julius S. Flores, et al., 812 SCRA 272)

(1-C) It is basic that "a corporation is an artificial being invested with a

personality separate and distinct from those of the stockholders and from other
corporations to which it may be connected or related." Clear and convincing
evidence is needed to warrant the application of the doctrine of piercing the veil of
corporate fiction. In our view, the Labor Arbiter failed to provide a clear
justification for the application of the doctrine. The Articles of Incorporation and
By-Laws of both corporations show that they have distinct business locations and
distinct business purposes. It can also be gleaned therein that they have a different
set of incorporators or directors since only two out of the five directors of Mexicali
are also directors of Calexico. At any rate, the Court has ruled that the existence
of interlocking directors, corporate officers and shareholders is not enough
justification to disregard the separate corporate personalities. To pierce the veil
of corporate fiction, there should be clear and convincing proof that fraud,
illegality or inequity has been committed against third persons. For while
respondents' act of not issuing employment contract and ID may be an indication
of the proof required, however, this, by itself, is not sufficient evidence to pierce
the corporate veil between Mexicali and Calexico. (Malixi vs. Mexicali Phil., etc., G.R.
No. 205061, June 08, 2016; 792 SCRA 586)

(2) Corporate Contracts –

In corporations, consent is manifested through a board resolution since powers are
exercised through its board of directors. The mandate of Section 23 of the
Corporation Code is clear that unless otherwise provided in the Code, "the
corporate powers of all corporations shall be exercised, all business conducted
and all property of such corporations controlled and held by the board of
directors or trustees..."

Further, as a juridical entity, a corporation may act through its board of directors,
which exercises almost all corporate powers, lays down all corporate business
policies and is responsible for the efficiency of management. As a general rule, in
the absence of authority from the board of directors, no person, not even its
officers, can validly bind a corporation. This is so because a corporation is a
juridical person, separate and distinct from its stockholders and members, having
powers, attributes and properties expressly authorized by law or incident to its
existence. (Philippine Stock Exchange, Inc. vs. Litonjua, 812 SCRA 136)

(3) Principle of Lenity –

As Section 144 speaks, among others, of the imposition of criminal penalties, the
Court is guided by the elementary rules of statutory construction of penal
provisions. First, in all criminal prosecutions, the existence of criminal liability for
which the accused is made answerable must be clear and certain. We have
consistently held that "penal statutes are construed strictly against the State and
liberally in favor of the accused. When there is doubt on the interpretation of
criminal laws, all must be resolved in favor of the accused. Since penal laws
should not be applied mechanically, the Court must determine whether their
application is consistent with the purpose and reason of the law." (People vs. Valdez,
776 SCRA 672)

Intimately related to the in dubio pro reo principle is the rule of lenity. The rule
applies when the court is faced with two possible interpretations of a penal
statute, one that is prejudicial to the accused and another that is favorable to
him. The rule calls for the adoption of an interpretation which is more lenient to
the accused. (Intestate Estate of Manolita Gonzales vs. People, 612 SCRA 272)

The Corporation Code was intended as a regulatory measure, not primarily as a

penal statute. Sections 31 to 34 in particular were intended to impose exacting
standards of fidelity on corporate officers and directors but without unduly
impeding them in the discharge of their work with concerns of litigation.
Considering the object and policy of the Corporation Code to encourage the use of
the corporate entity as a vehicle for economic growth, we cannot espouse a strict
construction of Sections 31 and 34 as penal offenses in relation to Section 144 in
the absence of unambiguous statutory language and legislative intent to that effect.
(Ient vs. Tullett Prebon Phil., Inc. 814 SCRA 233)
We stress that had the Legislature intended to attach penal sanctions to Sections 31
and 34 of the Corporation Code it could have expressly stated such intent in the
same manner that it did for Section 74 of the same Code.

(4) Stockholders of Record –

“In this regard, the case of Batangas Laguna Tayabas Bus Co., Inc. v. Bitanga (362
SCRA 397) instructs that an owner of shares of stock cannot be accorded the rights
pertaining to a stockholder - such as the right to call for a meeting and the right to
vote, or be voted for - if his ownership of such shares is not recorded in the Stock
and Transfer Book, viz.:

‘Indeed, until registration is accomplished, the transfer, though valid

between the parties, cannot be effective as against the corporation.
Thus, the unrecorded transferee, the Bitanga group in this case,
cannot vote nor be voted for. The purpose of registration, therefore,
is two-fold: (a) to enable the transferee to exercise all the rights of
a stockholder, including the right to vote and to be voted for, and
(b) to inform the corporation of any change in share ownership so
that it can ascertain the persons entitled to the rights and subject to
the liabilities of a stockholder. Until challenged in a proper
proceeding, a stockholder of record has a right to participate in any
meeting; his vote can be properly counted to determine whether a
stockholders' resolution was approved, despite the claim of the
alleged transferee. On the other hand, a person who has purchased
stock, and who desires to be recognized as a stockholder for the
purpose of voting, must secure such a standing by having the
transfer recorded on the corporate books. Until the transfer is
registered, the transferee is not a stockholder but an outsider.’

The contents of the GIS, however, should not be deemed conclusive as to the
identities of the registered stockholders of the corporation, as well as their
respective ownership of shares of stock, as the controlling document should be
the corporate books, specifically the Stock and Transfer Book. Jurisprudence
in Lao v. Lao (567 SCRA 558) is instructive on this matter, to wit:

‘The mere inclusion as shareholder of petitioners in the General

Information Sheet of PFSC is insufficient proof that they are
shareholders of the company.

Petitioners bank heavily on the General Information Sheet submitted

by PFSC to the SEC in which they were named as shareholders of
PFSC. They claim that respondent is now estopped from contesting
the General Information Sheet.
 While it may be true that petitioners were named as shareholders in
the General Information Sheet submitted to the SEC, that document
alone does not conclusively prove that they are shareholders of
PFSC. The information in the document will still have to be
correlated with the corporate books of PFSC. As between the
General Information Sheet and the corporate books, it is the latter
that is controlling. As correctly ruled by the CA:

We agree with the trial court that mere inclusion in the General
Information Sheets as stockholders and officers does not make one
a stockholder of a corporation, for this may have come to pass by
mistake, expediency or negligence. As professed by respondent-
appellee, this was done merely to comply with the reportorial
requirements with the SEC. This maybe against the law but
"practice, no matter how long continued, cannot give rise to any
vested right."

If a transferee of shares of stock who failed to register such transfer in

the Stock and Transfer Book of the Corporation could not exercise the
rights granted unto him by law as stockholder, with more reason that
such rights be denied to a person who is not a stockholder of a
corporation. Petitioners-appellants never secured such a standing as
stockholders of PFSC and consequently, their petition should be
denied.’ (Lao vs. Lao, 567 SCRA 571-572) [F & S Velasco Co., Inc. vs.
Madrid, 774 SCRA 399-400)

(5) Tests in Determining Intra-corporate Disputes –

“To determine if a case involves an intra-corporate controversy, the courts have
applied two tests: (1) the relationship test and (2) the nature of the controversy
test.

Under the relationship test, the existence of any of the following

relationships makes the conflict intra-corporate:

(a) between the corporation, partnership or association and the public;

(b) between the corporation, partnership or association and the State

insofar as its franchise, permit or license to operate is concerned;

(c) between the corporation, partnership or association and its

stockholders, partners, members or officers; and

(d) among the stockholders, partners or associates themselves.

On the other hand, the nature of the controversy test dictates that "the controversy
must not only be rooted in the existence of an intra-corporate relationship, but must
as well pertain to the enforcement of the parties’ correlative rights and obligations
under the Corporation Code and the internal and intra-corporate regulatory rules of
the corporation."

A combined application of the relationship test and the nature of the controversy
test has become the norm in determining whether a case is an intra-corporate
controversy, to be "heard and decided by the branches of the RTC specifically
designated by the Court to try and decide such cases." (Philcomsat vs. Sandiganbayan,
759 SCRA 242)

(6) LIABILITY OF OFFICERS –

(6-A) “In fine, since respondents failed to prove, by substantial evidence, that
Montallana’s dismissal was based on a just or authorized cause under the Labor
Code or was clearly warranted under La Consolacion’s Administrative Affairs
Manual, the Court rules that the dismissal was illegal. Consequently, the NLRC’s
identical ruling, which was erroneously reversed by the CA on certiorari, must be
reinstated with the modification, however, in that the order for respondents Mora
and Manalili to pay Montallana backwages73 should be deleted. It is a rule that
personal liability of corporate directors, trustees or officers attaches only
when: (a) they assent to a patently unlawful act of the corporation, or when
they are guilty of bad faith or gross negligence in directing its affairs, or when
there is a conflict of interest resulting in damages to the corporation, its
stockholders or other persons; (b) they consent to the issuance of watered
down stocks or when, having knowledge of such issuance, do not forthwith file
with the corporate secretary their written objection; (c) they agree to hold
themselves personally and solidarily liable with the corporation; or (d) they
are made by specific provision of law personally answerable for their
corporate action.74 None of these circumstances, in so far as Mora and Manalili are
concerned, were shown to be present in this case; hence, there is no reason for them
to be held liable for Montallana’s backwages. (Montallana vs. La Consolacion College,
c”“

Manila, 744 SCRA 176)

(6-B) “As a general rule, the officer cannot be held personally liable with the
corporation, whether civilly or otherwise, for the consequences of his acts, if acted
for and in behalf of the corporation, within the scope of his authority and in good
faith.” (Laborte vs. Pagsanjan Tourism Consumers Cooperative, 713 SCRA 536 (2014)

(6-C) “A corporation is a juridical entity with legal personality separate and

distinct from those acting for and in its behalf and, in general, from the people
comprising it. The general rule is that, obligations incurred by the corporation,
acting through its directors, officers and employees, are its sole liabilities.
A director or officer shall only be personally liable for the obligations of the
corporation, if the following conditions concur: (l) the complainant alleged in the
complaint that the director or officer assented to patently unlawful acts of the
corporation, or that the officer was guilty of gross negligence or bad faith; and (2)
the complainant clearly and convincingly proved such unlawful acts, negligence or
bad faith.

In the present case, the respondents failed to show the existence of the first
requisite. They did not specifically allege in their complaint that Rana and Burgos
willfully and knowingly assented to the petitioner's patently unlawful act of forcing
the respondents to sign the dubious employment contracts in exchange for their
salaries. The respondents also failed to prove that Rana and Burgos had been guilty
of gross negligence or bad faith in directing the affairs of the corporation.

To hold an officer personally liable for the debts of the corporation, and thus pierce
the veil of corporate fiction, it is necessary to clearly and convincingly establish the
bad faith or wrongdoing of such officer, since bad faith is never presumed. Because
the respondents were not able to clearly show the definite participation of Burgos
and Rana in their illegal dismissal, we uphold the general rule that corporate
officers are not personally liable for the money claims of the discharged employees,
unless they acted with evident malice and bad faith in terminating their
employment.” (FVR Skills … vs. Seva, 739 SCRA289-290)

(7) Ratification –
As a consequence, the power to ratify the previous resolutions and actions of the
board of directors in this case lies in the stockholders, not in the board of directors.
It would be absurd to require the board of directors to ratify their own acts – acts
which the same directors already approved of beforehand. Hence, Juanito, as the
administrator of Teresita’s estate even though not a director, is entitled to vote on
behalf of Teresita’s estate as the administrator thereof. The Court reiterates its
ruling in Tan v. Sycip, viz:

‘In stock corporations, shareholders may generally transfer their

shares. Thus, on the death of a shareholder, the executor or
administrator duly appointed by the Court is vested with the legal title
to the stock and entitled to vote it. Until a settlement and division of
the estate is effected, the stocks of the decedent are held by the
administrator or executor.’ (Lopez Realty, Inc. vs. Tanjangco, 739 SCRA
670-671)

It is the signature of the corporate secretary, as the one who is tasked to prepare and
record the minutes, that gives the minutes of the meeting probative value and
credibility, as the Court explained in Dumlao, to wit:

The non-signing by the majority of the members of the GSIS Board of Trustees of
the said minutes does not necessarily mean that the supposed resolution was not
approved by the board. The signing of the minutes by all the members of the board
is not required. There is no provision in the Corporation Code of the Philippines
that requires that the minutes of the meeting should be signed by all the members of
the board.

(8) Corporate Secretary –The proper custodian of the books, minutes and
official records of a corporation is usually the corporate secretary. Being the
custodian of corporate records, the corporate secretary has the duty to record and
prepare the minutes of the meeting. The signature of the corporate secretary gives
the minutes of the meeting probative value and credibility. In this case, Antonio
Eduardo B. Nachura, Deputy Corporate Secretary, recorded, prepared and certified
the correctness of the minutes of the meeting of 23 April 1982; and the same was
confirmed by Leonilo M. Ocampo, Chairman of the GSIS Board of Trustees. Said
minutes contained the statement that the board approved the sale of the properties,
subject matter of this case, to respondent La’o.

Thus, without the certification of the corporate secretary, it is incumbent upon the
other directors or stockholders as the case may be, to submit proof that the minutes
of the meeting is accurate and reflective of what transpired during the meeting.
Conformably to the foregoing, in the absence of Asuncion’s certification, only
Juanito, Benjamin and Rosendo, whose signatures appeared on the minutes, could
be considered as to have ratified the sale to the spouses Tanjangco. (Lopez Realty,
Inc. vs. Tanjangco, 739 SCRA 672-6731)

9. BENEFICIAL OWNERSHIP OF SHARES –

The definition of “beneficial owner or beneficial ownership” in the SRC-IRR,

which is in consonance with the concept of “full beneficial ownership” in the
FIA-IRR, is, as stressed in the Decision, relevant in resolving only the question of
who is the beneficial owner or has beneficial ownership of each “specific stock” of
the public utility company whose stocks are under review.

If the Filipino has the voting power of the “specific stock,” i.e., he can vote the
stock or direct another to vote for him, or the Filipino has the investment power
over the “specific stock,” i.e., he can dispose of the stock or direct another to
dispose of it for him, or both, i.e., he can vote and dispose of that “specific
stock” or direct another to vote or dispose it for him, then such Filipino is the
“beneficial owner” of that “specific stock.”

Being considered Filipino, that “specific stock” is then to be counted as part of the
60% Filipino ownership requirement under the Constitution. The right to the
dividends, jus fruendi – a right emanating from ownership of that “specific stock”
necessarily accrues to its Filipino “beneficial owner.”

So long as Filipinos have controlling interest of a public utility corporation,

their decision to declare more dividends for a particular stock over other
kinds of stock is their sole prerogative – an act of ownership that would
presumably be for the benefit of the public utility corporation itself. (Roy III
vs. Herbosa, et al. 823 SCRA 147 – 148)

10. To be considered a close corporation, an entity must abide by the

requirements laid out in Section 96 of the Corporation Code, which reads:

Definition and applicability of Title. - A close corporation, within the

meaning of this Code, is one whose articles of incorporation provide
that: (1) all the corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a specified
number of persons, not exceeding twenty (20); (2) all the issued stock
of all classes shall be subject to one or more specified restrictions on
transfer permitted by this Title; and (3) the corporation shall not list
in any stock exchange or make any public offering of any of its stock of
any class. Notwithstanding the foregoing, a corporation shall not be
deemed a close corporation when at least two-thirds (2/3) of its voting
stock or voting rights is owned or controlled by another corporation
which is not a close corporation within the meaning of this Code.

In San Juan Structural and Steel Fabricators. Inc. v. Court ol Appeals (296 SCRA
631) this Court held that a narrow distribution of ownership does not, by itself,
make a close corporation. Courts must look into the articles of incorporation
to find provisions expressly stating that: (l) the number of stockholders shall
not exceed 20; or (2) a pre-emption of shares is restricted in favor of any
stockholder or of the corporation; or (3) the listing of the corporate stocks in
any stock exchange or making a public offering of those stocks is prohibited.

Section 97 of the Corporation Code only specifies that "the stockholders of the
corporation shall be subject to all liabilities of directors." Nowhere in that
provision do we find any inference that stockholders of a close corporation are
automatically liable for corporate debts and obligations.

Parenthetically, only Section 100, paragraph 5, of the Corporation Code explicitly

provides for personal liability of stockholders of close corporation, viz:

Agreements by stockholders. –

x xxx

5. To the extent that the stockholders are actively engaged in the

management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties
to each other and among themselves. Said stockholders shall
be personally liable for corporate torts unless the corporation has
obtained reasonably adequate liability insurance.
As can be read in that provision, several requisites must be present for its
applicability. None of these were alleged in the case of Spouses Cruz. Neither did
the RTC or the CA explain the factual circumstances for this Court to discuss the
personally liability of respondents to their creditors because of corporate torts."
(Naguiat vs NLRC, 269 SCRA 564)

We thus apply the general doctrine of separate juridical personality, which

provides that a corporation has a legal personality separate and distinct from that of
people comprising it. By virtue of that doctrine, stockholders of a corporation
enjoy the principle of limited liability: the corporate debt is not the debt of the
stockholder. (PNB vs. Hydro Resources Contractors Corp., 693 SCRA 294) Thus, being
an officer or a stockholder of a corporation does not make one's property the
property also of the corporation. (Traders Royal Bank vs. CA, 177 SCRA 788)

Situs Development Corp. v. Asiatrust Bank (677 SCRA 495) is analogous to the case
at bar. We held therein that the parcels of land mortgaged to creditor banks were
owned not by the corporation, but by the spouses who were its stockholders.
Applying the doctrine of separate juridical personality, we ruled that the parcels of
land of the spouses could not be considered part of the corporate assets that could
be subjected to rehabilitation proceedings.

In rehabilitation proceedings, claims of creditors are limited to demands of

whatever nature or character against a debtor or its property, whether for money
or otherwise. In several cases, we have already held that stay orders should only
cover those claims directed against corporations or their properties, against their
guarantors, or their sureties who are not solidarily liable with them, to the
exclusion of accommodation mortgagors.

To repeat, properties merely owned by stockholders cannot be included in the

inventory of assets of a corporation under rehabilitation. (Bustos vs. Millians
Shoe, Inc., et al., (824 SCRA 73-77)

11. The doctrine of piercing the veil of corporate fiction is a legal percept that
allows a corporation’s separate personality to be disregarded under certain
circumstances, so that a corporation and its stockholders or members, or a
corporation and another related corporation could be treated as a single
entity. The doctrine is an equitable principle, it being meant to apply only in a
situation where the separate corporate personality of a corporation is being abused
or being used for wrongful purposes. As Manila Hotel Corporation v. NLRC (343
SCRA 1) explains:

“Piercing the veil of corporate entity is an equitable remedy. It is resorted to

when the corporate fiction is used to defeat public convenience, justify wrong,
protect fraud or defend a crime. It is done only when a corporation is a mere
 alter ego or business conduit of a person or another corporation.”

In Concept Builders, Inc. v. NLRC (257 SCRA 149), we laid down the following
test to determine when it would be proper to apply the doctrine of piercing the veil
of corporate fiction:

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 forum, with how the corporation operated and the individual
defendant’s relationship to that operation.

Relative to the Concept Builders test are the following critical ruminations from
Rufina Luy Lim v. CA (323 SCRA 102):

“More ownership by a single stockholder or by another corporation of all

or nearly all of the capital stock of a corporation is not of itself a
sufficient reason for disregarding the fiction of separate corporate
personalities.”

Moreover, to disregard the separate juridical personality of a corporation, the

wrongdoing must be clearly and convincingly established. It cannot be presumed.
(Veterans Federation of the Philippines vs. Montenegro, et al., (847 SCRA 26-28)

4. While a corporation may exist for any lawful purpose, the law will regard it as
an association of person, or in case of two corporations, merge them into one,
when its corporate legal entity is used as a cloak for fraud or illegality. This is the
doctrine of piercing the veil of corporate fiction which applies only when such
corporate fiction is used to defeat public convenience, justify wrong, protect fraud
or defend crime, or when it is made as a shield to confuse the legitimate issues, or
where a corporation is the mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of another
corporation.

To disregard the separate juridical personality of a corporation, the

wrongdoing must be established clearly and convincingly. It cannot be
presumed.

Thus, to hold a director or officer personally liable for corporate obligations,

two requisites must concur: (1) complainant must allege in the complaint
that the director or officer assented to patently unlawful acts of the
corporation, or that the officer was guilty of gross negligence or bad faith; and
(2) complainant must clearly and convincingly prove such unlawful acts,
negligence or bad faith.

Also, the existence of interlocking directors, corporate officers and

shareholders, which the LA considered, without more, is not enough
justification to pierce the veil of corporate fiction in the absence of fraud or
other public policy considerations.

Any piercing of the corporate veil has to be done with caution. The wrongdoing
must be clearly and convincingly established. It cannot just be presumed.
(Zaragoza vs. Tan, et al., (847 SCRA 450-456)

5. Any piercing of the corporate veil must be done with caution (Vda de Roxas vs.
Our Lady’s Foundation, Inc., 692 SCRA 578). As the CA had correctly observed, it
must be certain that the corporate fiction was misused to such an extent that
injustice, fraud, or crime was committed against another, in disregard of rights.
Moreover, the wrongdoing must be clearly and convincingly established. Sarona
v. NLRC (663 SCRA394) instructs, thus:

“Whether the separate personality of the corporation should be

pierced hinges on obtaining facts appropriately pleaded or proved.
However, any piercing of the corporate veil has to be done with
caution, albeit, the Court will not hesitate to disregard the corporate
veil when it is misused or when necessary in the interest of justice.
After all, the concept of corporate entity was not meant to promote
unfair objectives.”

The doctrine of piercing the corporate veil applies only in three (3) basic
areas, namely: (1) defeat of public convenience as when the corporate fiction
is used as a vehicle for the evasion of an existing obligation; (2) fraud cases or
when the corporate entity is used to justify a wrong, protect fraud, or defend a
crime; or (3) alter ego cases, where a corporation is merely a farce since it is
a mere alter ego or business conduit of a person, or where the corporation is
so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation.
CMCI 's alter ego theory rests on the alleged interlocking boards of directors and
stock ownership of the two corporations. The CA, however, rejected this theory
based on the settled rule that mere ownership by a single stockholder of even
all or nearly all of the capital stocks of a corporation, by itself, is not sufficient
ground to disregard the corporate veil. We can only sustain the CA's ruling.

The instrumentality or control test of the alter ego doctrine requires not mere
majority or complete stock control, but complete domination of finances, policy
and business practice with respect to the transaction in question. The corporate
entity must be shown to have no separate mind, will, or existence of its own at the
time of the transaction. (California Manufacturing, Co., Inc. vs. Advanced Technology
System, Inc., 824 SCRA 303-305)

6. A corporation is an artificial being created by operation of law. It possesses

the right of succession and such powers, attributes, and properties expressly
authorized by law or incident to its existence. It has a personality separate and
distinct form the persons composing it, as well as from any other legal entity to
which it may be related.

Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of
another corporation. For reasons of public policy and in the interest of justice, the
corporate veil will justifiably be impaled only when it becomes a shield for fraud,
illegality or inequity committed against third persons.

Hence, any application of the doctrine of piercing the corporation veil should be
done with caution. A court should be mindful of the milieu where it is to be
applied. It must be certain that the corporate fiction was misused to such an extent
that injustice, fraud, or crime was committed against another, in disregard of rights.
The wrongdoing must be clearly and convincingly established; it cannot be
presumed. Otherwise, an injustice that was never unintended may result from an
erroneous application.

Further, the Court’s ruling in Philippine National Bank v. Hydro Resources

Contractors Corporation, (693 SCRA 294) in enlightening, viz.:

The doctrine of piercing the corporate veil applies only in three (3)
basic areas, namely: (1) defeat of public convenience as when the
corporate fiction is used as a vehicle for the evasion of an existing
obligation; (2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or (3) alter ego
cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make
it merely an instrumentality, agency, conduit or adjunct of another
corporation.

xxx

In this connection, case law lays down a three-pronged test to

determine the application of the alter ego theory, which is also known
as the instrumentality theory, namely:

(1) Control, not mere majority or complete stock control, but

complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;

(2) Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
plaintiff’s legal right; and

(3) The aforesaid control and breach of duty must have proximately
caused the injury or unjust loss complained of.

The first prong is the “instrumentality” or “control” test.” This test

requires that the subsidiary be completely under the control and
domination of the parent. It examines the parent corporation’s
relationship with the subsidiary. It inquires whether a subsidiary
corporation is so organized and controlled and its affairs are so
conducted as to make it a mere instrumentality or agent of the parent
corporation such that its separate existence as a distinct corporate
entity will be ignored. It seeks to establish whether the subsidiary
corporation has no autonomy and the parent corporation, though
acting through the subsidiary in form and appearance, “is operating
the business directly for itself.”

The second prong is the “fraud” test. This test requires that the
parent corporation’s conduct in using the subsidiary corporation be
unjust, fraudulent or wrongful. It examines the relationship of the
plaintiff to the corporation. It recognizes that piercing is appropriate
only if the parent corporation uses the subsidiary in a way that harms
and plaintiff creditor. As such, it requires a showing of “an element
of injustice or fundamental unfairness.”

The third prong is the “harm” test. This test requires the plaintiff to
show that the defendant’s control, exerted in a fraudulent, illegal or
 otherwise unfair manner toward it, caused the harm suffered. A
causal connection between the fraudulent conduct committed through
the instrumentality of the subsidiary and the injury suffered or the
damage incurred by the plaintiff should be established. The plaintiff
must prove that, unless the corporate veil is pierced, it will have been
treated unjustly by the defendant’s exercise of control and improper
use of the corporate form and, thereby, suffer damages.

To summarize, piercing the corporate veil based on the alter ego

theory requires the concurrence of three elements: control of the
corporation by the stockholder or parent corporation, fraud or
fundamental unfairness imposed on the plaintiff, and harm or
damage caused to the plaintiff by the fraudulent or unfair act of
the corporation. The absence of any of these elements prevents
piercing the corporate veil.

Although ownership by one corporation of all or a great majority of stocks of

another corporation and their interlocking directorates may serve as indicia of
control, by themselves and without more, these circumstances are insufficient to
establish an alter ego relationship or connection between Philippine Carpet on the
one hand and Pacific Carpet on the other hand, that will justify the puncturing of
the latter’s corporate cover.

This Court has declared that “mere ownership by a single stockholder or by

another corporation of all or nearly all of the capital stock of a corporation is not of
itself sufficient ground for disregarding the separate corporate personality. It has
likewise ruled that the “existence of interlocking directors, corporate officers and
shareholders is not enough justification to pierce the veil of corporate fiction in the
absence of fraud or other public policy considerations. (Pantranco Employees
Association vs. NLRC, 581 SCRA 598, cited in Zambrano vs. Philippine Carpet
Manufacturing Corporation, et al. 828 SCRA 162– 166)

7. “In the 1965 case of Nell v. Pacific Farms, Inc. (15 SCRA 415), the Court first
pronounced the rule regarding the transfer of all the assets of one corporation to
another (hereafter referred to as the Nell Doctrine) as follows:

Generally, where one corporation sells or otherwise transfers all of its assets to
another corporation, the latter is not liable for the debts and liabilities of the
transferor, except:

1. where the purchaser expressly or impliedly agrees to assume such debts;

2. where the transaction amounts to a consolidation or merger of the

corporations;
 3. where the purchasing corporation is merely a continuation of the selling
corporation; and
4. where the transaction is entered into fraudulently in order to escape liability
for such debts.

The Nell Doctrine states the general rule that the transfer of all the assets of a
corporation to another shall not render the latter liable to the liabilities of the
transferor. If any of the above-cited exceptions are present, then the
transferee corporation shall assume the liabilities of the transferor.” (Y-I
Leisure Philippines, Inc. vs Yu, 770 SCRA 71-72)

“The purpose of the business-enterprise transfer is to protect the creditors of the

business by allowing them a remedy against the new owner of the assets and
business enterprise. Otherwise, creditors would be left "holding the bag," because
they may not be able to recover from the transferor who has "disappeared with the
loot," or against the transferee who can claim that he is a purchaser in good faith
and for value. Based on the foregoing, as the exception of the Nell doctrine relates
to the protection of the creditors of the transferor corporation, and does not depend
on any deceit committed by the transferee -corporation, then fraud is certainly not
an element of the business enterprise doctrine.

While the Corporation Code allows the transfer of all or substantially all of the
assets of a corporation, the transfer should not prejudice the creditors of the
assignor corporation.

Under the business-enterprise transfer, the petitioners have consequently inherited

the liabilities of MADCI because they acquired all the assets of the latter
corporation. The continuity of MADCI's land developments is now in the hands of
the petitioners, with all its assets and liabilities. There is absolutely no certainty
that Yu can still claim its refund from MADCI with the latter losing all its assets.
To allow an assignor to transfer all its business, properties and assets without the
consent of its creditors will place the assignor's assets beyond the reach of its
creditors. Thus, the only way for Yu to recover his money would be to assert his
claim against the petitioners as transferees of the assets.” (Y-I Leisure Philippines,
Inc., et al. vs. Yu, G.R. No. 207161, Sept. 08, 2015; 770 SCRA 56)

“In the 1965 case of Nell v. Pacific Farms, Inc. (15 SCRA 415), the Court first
pronounced the rule regarding the transfer of all the assets of one corporation to
another (hereafter referred to as the Nell Doctrine) as follows:
Generally, where one corporation sells or otherwise transfers all of its assets to
another corporation, the latter is not liable for the debts and liabilities of the
transferor, except:
 1. where the purchaser expressly or impliedly agrees to assume such debts;

2. where the transaction amounts to a consolidation or merger of the

corporations;
3. where the purchasing corporation is merely a continuation of the selling
corporation; and
4. where the transaction is entered into fraudulently in order to escape liability
for such debts.

The Nell Doctrine states the general rule that the transfer of all the assets of a
corporation to another shall not render the latter liable to the liabilities of the
transferor. If any of the above-cited exceptions are present, then the
transferee corporation shall assume the liabilities of the transferor.” (Y-I
Leisure Philippines, Inc. vs Yu, 770 SCRA 71-72)

“The purpose of the business-enterprise transfer is to protect the creditors of the

business by allowing them a remedy against the new owner of the assets and
business enterprise. Otherwise, creditors would be left "holding the bag," because
they may not be able to recover from the transferor who has "disappeared with the
loot," or against the transferee who can claim that he is a purchaser in good faith
and for value. Based on the foregoing, as the exception of the Nell doctrine relates
to the protection of the creditors of the transferor corporation, and does not depend
on any deceit committed by the transferee -corporation, then fraud is certainly not
an element of the business enterprise doctrine.

While the Corporation Code allows the transfer of all or substantially all of the
assets of a corporation, the transfer should not prejudice the creditors of the
assignor corporation.

Under the business-enterprise transfer, the petitioners have consequently inherited

the liabilities of MADCI because they acquired all the assets of the latter
corporation. The continuity of MADCI's land developments is now in the hands of
the petitioners, with all its assets and liabilities. There is absolutely no certainty
that Yu can still claim its refund from MADCI with the latter losing all its assets.
To allow an assignor to transfer all its business, properties and assets without the
consent of its creditors will place the assignor's assets beyond the reach of its
creditors. Thus, the only way for Yu to recover his money would be to assert his
claim against the petitioners as transferees of the assets.” (Y-I Leisure Philippines,
Inc., et al. vs. Yu, G.R. No. 207161, Sept. 08, 2015; 770 SCRA 56)

12. Derivative Actions (1) --

“A stockholder suing on account of wrongful or fraudulent corporate actions
(undertaken through directors, associates, officers, or other persons) may sue
in any of three (3) capacities: (a) as an individual; (b) as part of a group or
specific class of stockholders; or (c) as a representative of the corporation.

Villamor, Jr. v. Umale (736 SCRA 325), distinguished individual suits from class or
representative suits:

Individual suits are filed when the cause of action belongs to the individual
stockholder personally, and not to the stockholders as a group or to the
corporation, e.g., denial of right to inspection and denial of dividends to a
stockholder.

If the cause of action belongs to a group of stockholders, such as when the

rights violated belong to preferred stockholders, a class or representative suit
may be filed to protect the stockholders in the group.

Villamor, Jr. further explained that a derivative suit "is an action filed by
stockholders to enforce a corporate action." A derivative suit, therefore,
concerns "a wrong to the corporation itself." The real party in interest is the
corporation, not the stockholders filing the suit. The stockholders are
technically nominal parties but are nonetheless the active persons who pursue
the action for and on behalf of the corporation.

Remedies through derivative suits are not expressly provided for in our statutes—
more specifically, in the Corporation Code and the Securities Regulation Code—
but they are "impliedly recognized when the said laws make corporate directors or
officers liable for damages suffered by the corporation and its stockholders for
violation of their fiduciary duties." They are intended to afford reliefs to
stockholders in instances where those responsible for running the affairs of a
corporation would not otherwise act:

However, in cases of mismanagement where the wrongful acts are

committed by the directors or trustees themselves, a stockholder or
member may find that he has no redress because the former are vested
by law with the right to decide whether or not the corporation should
sue, and they will never be willing to sue themselves. The corporation
would thus be helpless to seek remedy. Because of the frequent
occurrence of such a situation, the common law gradually recognized
the right of a stockholder to sue on behalf of a corporation in what
eventually became known as a "derivative suit." It has been proven to
be an effective remedy of the minority against the abuses of
management.

Thus, an individual stockholder is permitted to institute a derivative

suit on behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever officials of the
corporation refuse to sue or are the ones to be sued or hold the control
of the corporation. In such actions, the suing stockholder is regarded
as the nominal party, with the corporation as the party in interest.
The distinction between individual and class/representative suits on one hand and
derivative suits on the other is crucial. These are not discretionary alternatives.
The fact that stockholders suffer from a wrong done to or involving a corporation
does not vest in them a sweeping license to sue in their own capacity. The
recognition of derivative suits as a vehicle for redress distinct from individual and
representative suits is an acknowledgment that certain wrongs may be addressed
only through acts brought for the corporation.

Although in most every case of wrong to the corporation, each

stockholder is necessarily affected because the value of his interest
therein would be impaired, this fact of itself is not sufficient to give
him an individual cause of action since the corporation is a person
distinct and separate from him, and can and should itself sue the
wrongdoer.

Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate

Controversies (Interim Rules) provides the five (5) requisites for filing derivative
suits:

SECTION 1. Derivative action.—A stockholder or member may bring

an action in the name of a corporation or association, as the case may
be, provided, that:

(1) he was a stockholder or member at the time the acts or

transactions subject of the action occurred and at the time the action
was filed;

(2) he exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under
the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires;

(3) no appraisal rights are available for the act or acts complained
of; and

(4) the suit is not a nuisance or harassment suit.

In case of nuisance or harassment suit, the court shall forthwith

dismiss the case.

The fifth requisite for filing derivative suits, while not included in the enumeration,
is implied in the first paragraph of Rule 8, Section 1 of the Interim Rules: The
action brought by the stockholder or member must be "in the name of [the]
corporation or association. . . ." This requirement has already been settled in
jurisprudence.
Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al., this court said
that "among the basic requirements for a derivative suit to prosper is that the
minority shareholder who is suing for and on behalf of the corporation must
allege in his complaint before the proper forum that he is suing on a
derivative cause of action on behalf of the corporation and all other
shareholders similarly situated who wish to join [him." . . .

Moreover, it is important that the corporation be made a party to the case.

In derivative suits, the corporation concerned must be impleaded as a party.

As explained in Asset Privatization Trust (300 SCRA 579):

‘Not only is the corporation an indispensible party, but it is also the

present rule that it must be served with process. The reason given is
that the judgment must be made binding upon the corporation in
order that the corporation may get the benefit of the suit and may not
bring a subsequent suit against the same defendants for the same
cause of action. In other words the corporation must be joined as
party because it is its cause of action that is being litigated and
because judgment must be a res ajudicata [sic] against it.’ (Florete,
Sr. vs. Florete, Jr., et al., G.R. No. 177275, Jan. 20, 2016; 781 SCRA 255)

Derivative Actions (2) –

“A derivative action is a suit by a shareholder to enforce a corporate cause of

action.

Under the Corporation Code, where a corporation is an injured party, its power to
sue is lodged with its board of directors or trustees. But an individual stockholder
may be permitted to institute a derivative suit on behalf of the corporation in order
to protect or vindicate corporate rights whenever the officials of the corporation
refuse to sue, or are the ones to be sued, or hold control of the corporation. In such
actions, the corporation is the real party-in-interest while the suing stockholder, on
behalf of the corporation, is only a nominal party. A stockholder's right to institute
a derivative suit is not based on any express provision of the Corporation Code, or
even the Securities Regulation Code, but is impliedly recognized when the said
laws make corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties.

Prior to the promulgation of the Interim Rules of Procedure Governing Intra-

Corporate Controversies, the requirements for derivative suits were encapsulated in
San Miguel Corporation v. Kahn (176 SCRA 447), to wit: (1) the party bringing
suit should be a shareholder as of the time of the act or transaction complained of,
the number of his shares not being material; (2) he has tried to exhaust intra-
corporate remedies, i.e., has made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to heed his plea; and (3) the
cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular
stockholder bringing the suit.
These jurisprudential requirements were incorporated in Section 1, Rule 8 of A.M.
No. 01-2-04-SC, otherwise known as the Interim Rules of Procedure Governing
Intra-Corporate Controversies under Republic Act No. 8799. Section 1 reads:
(l) the person filing the suit must be a stockholder or member at the
time the acts or transactions subject of the action occurred and the
time the action was filed;

(2) he must have exerted all reasonable efforts, and alleges the same
with particularity in the complaint, to exhaust all remedies available
under the articles of incorporation, by-laws, laws or rules governing
the corporation or partnership to obtain the relief he desires;

(3) no appraisal rights are available for the act or acts complained of;
and

(4) the suit is not a nuisance or harassment suit.

Not every suit filed on behalf of the corporation is a derivative suit. For a
derivative suit to prosper, the minority stockholder suing for and on behalf of
the corporation must allege in his complaint that he is suing on a derivative
cause of action on behalf of the corporation and all other stockholders
similarly situated who may wish to join him in the suit.

It is a condition sine qua non that the corporation be impleaded as party in a

derivative suit. The Court explained in Asset Privatization Trust v. Court of
Appeals (300 SCRA 579), the rationale:
‘Not only is the corporation an indispensible party, but it is also the
present rule that it must be served with process. The reason given is
that the judgment must be made binding upon the corporation in order
that the corporation may get the benefit of the suit and may not bring a
subsequent suit against the same defendants for the same cause of
action. In other words the corporation must be joined as party
because it is its cause of action that is being litigated and because
judgment must be a res judicata against it.’

At the outset, the rule on derivative suits presupposes that the corporation is the
injured party and the individual stockholder may file a derivative suit on behalf of
the corporation to protect or vindicate corporate rights whenever the officials of the
corporation refuse to sue, or are the ones to be sued, or hold control of the
corporation.
The unavailability of appraisal right as a requirement for derivative suits does not
apply in this case. A stockholder who dissents from certain corporate actions has
the right to demand payment of the fair value of his or her shares. This right,
known as the right of appraisal, is expressly recognized in Section 81 of the
Corporation Code, to wit: Section 81. Instances of appraisal right.- Any
stockholder of a corporation shall have the right to dissent and demand payment of
the fair value of his shares in the following instances: 1. In case any amendment to
the articles of incorporation has the effect of changing or restricting the rights of
any stockholder or class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of extending or shortening
the term of corporate existence; 2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or substantially all of the corporate
property and assets as provided in the Code; and 3. In case of merger or
consolidation.
When Republic Act No. 8799 took effect, the Securities and Exchange
Commission's (SEC) exclusive and original jurisdiction over cases enumerated in
Section 5 of Presidential Decree No. 902-A was transferred to the RTC designated
as a special commercial court. As long as the nature of the controversy is intra-
corporate, the designated RTCs have the authority to exercise jurisdiction over
such cases. (Bangko Sentral ng Pilipinas vs. Vicente Jose Campa, Jr., et al., G.R. No.
185979, March 16, 2016; 787 SCRA 476)

Notes: An additional stockholder is permitted to institute a derivative suit on behalf of the

corporation wherein he holds stock in order to protect or vindicate corporate rights,
whenever officials of the corporation refuse to sue or are the ones to be sued or hold the
control of the corporation – in such actions, the suing stockholder is regarded as the
nominal party, with the corporation as the party-in-interest. (Majority Stockholders of
Ruby Industrial Corporation vs. Lim, 650 SCRA 461 (2011)

(13) (A) Liability of Corporate Directors/Officers –

“The general rule is that a corporation is invested by law with a personality
separate and distinct from that of the persons composing it, or from any other
legal entity that it may be related to. The obligations of a corporation, acting
through its directors, officers, and employees, are its own sole liabilities.
Therefore, the corporation’s directors, officers, or employees are generally
not personally liable for the obligations of the corporation.

Bancom alleges that his case falls under the exception to the general rule and that
Nite should be held personally liable for Bancap’s obligation. Bancom alleges that
Nite signed the Confirmation of Sale knowing that Bancap did not have the
treasury bills, and thus, sale was illegal.

To hold a director or officer personally liable for corporate obligations, two

requisites must concur: (1) complainant must allege in the complaint that the
director or officer assented to patently unlawful acts of the corporation, or
that the officer was guilty of gross negligence or bad faith; and (2) the
complaint must clearly and convincingly prove such unlawful acts, negligence
or bad faith. To hold a director personally liable for debts of the corporation,
and thus pierce the veil of corporate fiction, the bad faith or wrongdoing of
the director must be established clearly and convincingly.

In addition, we consider the testimony of Lagrimas Nuqui, the Legal Officer in

Charge of the Government Securities Department of the BangkoSentral ng
Pilipinas from 1994 to 1998, who explained that primary issues of treasury bills are
supposed to be issued only to accredited dealers but these accredited banks can sell
to anyone who need not be accredited, and such buyers, who may be corporations
or individuals, are classified as the secondary market.
The trial court and the Court of Appeals found that Bancap sold the treasury bills
as a secondary dealer. As such, Bancap’s act of selling securities to Bancom is at
most ultra vires and not patently unlawful.” (Bank of Commerce vs. Nite, G.R. No.
211535, July 22, 2015; 763 SCRA 620)

(B) Doctrine of Apparent Authority –

“Lastly, the CA held that contracts entered into by a corporate officer or obligations
assumed by such officer for and in behalf of the corporation are binding on said
corporation, if such officer has acted within the scope of his authority, or even if such
officer has exceeded the limits of his authority, the corporation still ratifies such contracts
or obligations.
The doctrine of apparent authority provides that a corporation will be estopped from
denying the agent's authority if it knowingly permits one of its officers or any other agent
to act within the scope of an apparent authority, and it holds him out to the public as
possessing the power to do those acts.
Apparent authority is derived not merely from practice. Its existence may be ascertained
through: (1) the general manner in which the corporation holds out an officer or agent as
having the power to act or, in other words, the apparent authority to act in general, with
which it clothes him; or (2) the acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, whether within or beyond the scope of his
ordinary powers. It requires presentation of evidence of similar acts executed either in its
favor or in favor of other parties. It is not the quantity of similar acts which establishes
apparent authority, but the vesting of a corporate officer with the power to bind the
corporation. The doctrine does not apply, however, if the principal did not commit any
act or conduct which a third party knew and relied upon in good faith as a result of the
exercise of reasonable prudence. In the present case, the aforementioned circumstances
are lacking and, indubitably, neither did PNCDC act in good faith. Also, it must be
stressed that the board of directors, not the president, exercises corporate power. While
in the absence of a charter or by-law provision to the contrary the president is presumed
to have authority, the questioned act should still be within the domain of the general
objectives of the company's business and within the scope of his or her usual duties.”
(Philippine Race Horse Trainers Association, Inc. vs. Piedras Negras Construction and
Development Corp., G.R. No. 192659, December 2, 2015.; 775 SCRA 643-644)

(C) Section 74 of the Corporation Code provides for the liability for damages of
any officer or agent of the corporation for refusing to allow any director, trustee,
stockholder or member of the corporation to examine and copy excerpts from its
records or minutes. Section 144 of the same Code further provides for other
applicable penalties in case of violation of any provision of the Corporation Code.
Hence, to prove any violation under the aforementioned provisions, it is necessary
that: (1) a director, trustee, stockholder or member has made a prior demand in
writing for a copy of excerpts from the corporation records or minutes; (2) any
officer or agent of the concerned corporation shall refuse to allow the said director,
trustee, stockholder or member of the corporation to examine and copy said
excerpts; (3) if such refusal is made pursuant to a resolution or order of the board
of directors of trustees, the liability under this section for such action shall be
imposed upon the directors or trustees who voted for such refusal; and (4) where
the officer or agent of the corporation sets up the defense that the person
demanding to examine and copy excerpts from the corporation’s records and
minutes has improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in making
his demand, the contrary must be shown or proved.

Clearly, Ongjoco, as a member of BMTODA, had a right to examine documents

and records pertaining to said association. To recall, Ongjoco made a prior
demand in writing for copy of pertinent records of BMTODA from Roque and
Singson. Onjoco sent his letters dated December 13, 2003 and August 29, 2004 to
Roque and Singson, respectively. However, both of them refused to furnish
Ongjoco copies of such pertinent records. (Roque vs. People, 826 SCRA 622- 623)

8. In any case, the revocation of a corporation’s Certificate of Registration does

not automatically warrant the extinction of the corporation itself such that its rights
and liabilities are likewise altogether extinguished. In the case of Clemente v.
Court of Appeals, (242 SCRA 717) the Court explained that the termination of the
life of a juridical entity does not, by itself, cause the extinction or diminution of the
rights and liabilities of such entity nor those of its owners and creditors. (Roque vs.
People, 826 SCRA 622- 624)

(14) Stock Transfers –

“A certificate of stock is a written instrument signed by the proper officer of a

corporation stating or acknowledging that the person named in the document
is the owner of a designated number of shares of its stock. It is prima facie
evidence that the holder is a shareholder of a corporation. A certificate, however,
is merely a tangible evidence of ownership of shares of stock. It is not a stock in
the corporation and merely expresses the contract between the corporation and the
stockholder. The shares of stock evidenced by said certificates, meanwhile, are
regarded as property and the owner of such shares may, as a general rule, dispose
of them as he sees fit, unless the corporation has been dissolved, or unless the right
to do so is properly restricted, or the owner's privilege of disposing of his shares
has been hampered by his own action.
Section 63 of the Corporation Code prescribes the manner by which a share of
stock may be transferred. Said provision is essentially the same as Section 35 of
the old Corporation Law, which, as held in Fleisher v. Botica Nolasco Co. (47 Phil.
583) defines the nature, character and transferability of shares of stock. Fleisher
also stated that the provision on the transfer of shares of stocks contemplates no
restriction as to whom they may be transferred or sold. As owner of personal
property, a shareholder is at liberty to dispose of them in favor of whomsoever he
pleases, without any other limitation in this respect, than the general provisions of
law.

Section 63 provides: Certificate of stock and transfer of shares. – The

capital stock of stock corporations shall be divided into shares for
which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and sealed with
the seal of the corporation shall be issued in accordance with the by-
laws. Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates indorsed by
the owner or his attorney-in-fact or other person legally authorized
to make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and
the number of shares transferred.

No shares of stock against which the corporation holds any unpaid

claim shall be transferable in the books of the corporation.

Under the provision, certain minimum requisites must be complied with for there
to be a valid transfer of stocks, to wit: (a) there must be delivery of the stock
certificate; (b) the certificate must be endorsed by the owner or his attorney-in-
fact or other persons legally authorized to make the transfer; and (c) to be valid
against third parties, the transfer must be recorded in the books of the corporation.

It is the delivery of the certificate, coupled with the endorsement by the owner or
his duly authorized representative that is the operative act of transfer of shares
from the original owner to the transferee.

The Court even emphatically declared in Fil-Estate Golf and Development, Inc., et
al. v. Vertex Sales and Trading, Inc. (698 SCRA 272) that in "a sale of shares of
stock, physical delivery of a stock certificate is one of the essential requisites for
the transfer of ownership of the stocks purchased." (Raquel-Santos vs. Court of
Appeals, 592 SCRA 169) The delivery contemplated in Section 63, however, pertains
to the delivery of the certificate of shares by the transferor to the transferee,
that is, from the original stockholder named in the certificate to the person or entity
the stockholder was transferring the shares to, whether by sale or some other valid
form of absolute conveyance of ownership. (Monserrat vs. Ceron, 58 Phil. 469)
"[S]hares of stock may be transferred by delivery to the transferee of the
certificate properly indorsed. Title may be vested in the transferee by the delivery
of the duly indorsed certificate of stock." (Razon vs. IAC, 207 SCRA 234)

In Rural Bank of Salinas vs. Court of Appeals (210 SCRA 510), the Court ruled that
the right of a transferee/assignee to have stocks transferred to his name is an
inherent right flowing from his ownership of the stocks. In said case, the private
respondent presented to the bank the deeds of assignment for registration, transfer
of the shares assigned in the bank's books, cancellation of the stock certificates,
and issuance of new stock certificates, which the bank refused. In ruling favorably
for the private respondent, the Court stressed that a corporation, either by its
board, its by-laws, or the act of its officers, cannot create restrictions in stock
transfers. In transferring stock, the secretary of a corporation acts in purely
ministerial capacity, and does not try to decide the question of ownership. If a
corporation refuses to make such transfer without good cause, it may, in fact, even
be compelled to do so by mandamus.

Nevertheless, to be valid against third parties and the corporation, the transfer must
be recorded or registered in the books of corporation. There are several reasons
why registration of the transfer is necessary: one, to enable the transferee to
exercise all the rights of a stockholder; two, to inform the corporation of any
change in share ownership so that it can ascertain the persons entitled to the rights
and subject to the liabilities of a stockholder; and three, to avoid fictitious or
fraudulent transfers, among others. Thus, in Chua Guan v. Samahang Magsasaka,
Inc. (62 Phil. 472), the Court stated that the only safe way to accomplish the
hypothecation of share of stock is for the transferee [a creditor, in this case] to
insist on the assignment and delivery of the certificate and to obtain the transfer of
the legal title to him on the books of the corporation by the cancellation of the
certificate and the issuance of a new one to him.

The surrender of the original certificate of stock is necessary before the issuance of
a new one so that the old certificate may be cancelled. A corporation is not bound
and cannot be required to issue a new certificate unless the original certificate is
produced and surrendered. Surrender and cancellation of the old certificates serve
to protect not only the corporation but the legitimate shareholder and the public as
well, as it ensures that there is only one document covering a particular share of
stock.” (Teng vs. SEC, et al., G.R. No. 184332, Feb. 17, 2016; 784 SCRA 232-233)

CORPORATE REHABILITATION –

(1) “Under the Rules of Procedure on Corporate Rehabilitation, “rehabilitation” is

defined as the restoration of the debtor to a position of successful operation and
solvency, if it is shown that its continuance of operation is economically feasible
and its creditors can recover by way of the present value of payments projected in
the plan, more if the corporation continues as a going concern than if it is
immediately liquidated.” (San Jose Timber Corporation vs. Securities and Exchange
Commission, 667 SCRA 13 (2012 - cited in 754 SCRA 514)

(2) “Rehabilitation proceedings are summary and non-adversarial in nature, and do

not contemplate adjudication of claims that must be threshed out in ordinary court
proceedings.” (Advent Capital and Finance Corporation vs. Alcantara, 664 SCRA 224
(2012) – cited in 754 SCRA 514)

(3) “Restoration is the central idea behind the remedy of corporate rehabilitation.
In common parlance, to “restore” means “to bring back to or put back into a former
or original state.” Case law explains that corporate rehabilitation contemplates a
continuance of corporate life and activities in an effort to restore and reinstate
the corporation to its former position of successful operation and solvency, the
purpose being to enable the company to gain a new lease on life and allow its
creditors to be paid their claims out of its earnings. Consistent therewith is the
term’s statutory definition under Republic Act No. 10142, otherwise known as the
“Financial Rehabilitation and Insolvency Act of 2010” (FRIA), which provides:

‘Section 4. Definition of Terms. – As used in this Act, the term:

(gg) Rehabilitation shall refer to the restoration of the debtor to a

condition of successful operation and solvency, if it is shown that its
continuance of operation is economically feasible and its creditors can
recover by way of the present value of payments projected in the plan,
more if the debtor continues as a going concern than if it is
immediately liquidated. x x x x’

In other words, rehabilitation assumes that the corporation has been

operational but for some reasons like economic crisis or mismanagement had
become distressed or insolvent, i.e., that it is generally unable to pay its debts as
they fall due in the ordinary course of business or has liability that are greater than
its assets. Thus, the basic issues in rehabilitation proceedings concern the viability
and desirability of continuing the business operations of the distressed
corporation, all with a view of effectively restoring it to a state of solvency or to its
former healthy financial condition through the adoption of a rehabilitation plan.”
(BPI Family Savings Bank, Inc. vs. St. Michael Medical Center, Inc. 754 SCRA 504)

(4) “A material financial commitment becomes significant in gauging the resolve,

determination, earnestness and good faith of the distressed corporation in financing
the proposed rehabilitation plan. This commitment may include the voluntary
undertakings of the stockholders or the would-be investors of the debtor-
corporation indicating their readiness, willingness and ability to contribute funds or
property to guarantee the continued successful operation of the debtor
corporation during the period of rehabilitation.” (BPI Family Savings Bank, Inc. vs.
St. Michael Medical Center, Inc. 754 SCRA 509)

(5) “The failure of the Rehabilitation Plan to state any material financial
commitment to support rehabilitation, as well as to include a liquidation analysis,
translates to the conclusion that the RTC’s stated considerations for approval, i.e.,
that: (a) the plan provides for recovery rates on operating mode as opposed to
liquidation values; (b) it contains details for a business plan which will restore
profitability and solvency on petitioner; (c) the projected cash flow can support the
continuous operation of the debtor as a going concern; and (d) the plan has
provisions to ensure that future income will inure to the benefit of the creditors, are
actually unsubstantiated, and hence, insufficient to decree SMMCI’s
rehabilitation. It is well to emphasize that the remedy of rehabilitation should be
denied to corporations that do not qualify under the Rules. Neither should it be
allowed to corporations whose sole purpose is to delay the enforcement of any of
the rights of the creditors, which is rendered obvious by: (a) the absence of a sound
and workable business plan; (b) baseless and unexplained assumptions, targets, and
goals; and (c) speculative capital infusion or complete lack thereof for the
execution of the business plan. Unfortunately, these negative indicators have all
surfaced to the fore, much to SMMCI’s chagrin.” (BPI Family Savings Bank, Inc. vs.
St. Michael Medical Center, Inc. 754 SCRA 512-513)

(6) “In Asiatrust Development Bank vs. First Aikka Development, Inc., we said that
rehabilitation proceedings have a two-prolonged purpose, namely: (a) to
efficiently and equitably distribute the assets of the insolvent debtor to its
creditors; and (b) to provide the debtor with a fresh start, viz.:

‘Rehabilitation proceedings in our jurisdiction have equitable and

rehabilitative purposes. On the one hand, they attempt to provide for
the efficient and equitable distribution of an insolvent debtor’s
remaining assets to its creditors; and on the other, to provide debtors
with a “fresh start” by relieving them of the weight of their outstanding
debts and permitting them to reorganize their affairs. The purpose of
rehabilitation proceedings is to enable the company to gain a new lease
on life and thereby allow creditors to be paid their claims from its
earnings.’
Consequently, the basic issues in rehabilitation proceedings concern the viability
and desirability of continuing the business operations of the petitioning corporation.
The determination of such issues was to be carried out by the court-appointed
rehabilitation receiver, who was Cacho in this case.

Moreover, Republic Act No. 10142 (Financial Rehabilitation and Insolvency Act
(FRIA) of 2010), a law that is applicable hereto, has defined a corporate debtor as a
corporation duly organized and existing under Philippine laws that has become
insolvent. The term insolvent is defined in Republic Act No. 10142 as “the
financial condition of a debtor that is generally unable to pay its or his liabilities
as they fall due in the ordinary course of business or has liabilities that are
greater than its or his assets. As such, the contention that rehabilitation becomes
inappropriate because of the perceived insolvency of Basic Polyprinters was
incorrect.” (PBCom vs. Basic Polyprinters .., 738 SCRA 571-572)

(7) “A corporate rehabilitation case is a special proceeding in rem wherein the

petitioner seeks to establish the status of a party or a particular fact, i.e., the
inability of the corporate debtor to pay its debts when they fall due. It is
summary and non-adversarial in nature. Its end goal is to secure the approval
of a rehabilitation plan to facilitate the successful recovery of the corporate
debtor. It does not seek relief from an injury caused by another party.

Jurisdiction over corporate rehabilitation cases originally fell within the

jurisdiction of the Securities and Exchange Commission (SEC) which had absolute
jurisdiction, control, and supervision over all Philippine corporations. With the
enactment of the Securities Regulation Code in 2000, this jurisdiction was
transferred to the Regional Trial Courts.

Consequently, this Court enacted A.M. No. 00-8-10-SC or the Interim Rules of
Procedure on Corporate Rehabilitation (Interim Rules) which took effect on
December 15, 2000. Under the Interim Rules, a motion for reconsideration
was a prohibited pleading. Orders issued by the rehabilitation court were also
immediately executory unless restrained by the appellate court.

The Interim Rules, however, did not specifically indicate the mode of appeal that
governed corporate rehabilitation cases. Thus, in 2004, the Court enacted A.M.
No. 04-9-07-SC to clarify the proper mode of appeal from decisions and final
orders of Rehabilitation Courts:

“Whereas, there is a need to clarify the proper mode of appeal in

these cases in order to prevent cluttering the dockets of the courts
with appeals and/or petitions for certiorari;

Wherefore, the Court Resolves:

1. All decisions and final orders in cases falling under the Interim
Rules of Corporate Rehabilitation and the Interim Rules of Procedure
Governing Intra-Corporate Controversies under Republic Act No.
8799 shall be appealable to the Court of Appeals through a petition
for review under Rule 43 of the Rules of Court.

In 2008, this Court enacted the Rules of Procedure on Corporate

Rehabilitation (2008 Rules). The 2008 Rules included motions for
reconsideration as a relief from any order of the court prior to the
approval of the rehabilitation plan.

RULE 8
PROCEDURAL REMEDIES

Section 1. Motion for Reconsideration. - A party may file a motion

for reconsideration of any order issued by the court prior to the
approval of the rehabilitation plan. No relief can be extended to the
party aggrieved by the court's order on the motion through a special
civil action for certiorari under Rule 65 of the rules of Court. Such
order can only be elevated to the Court of Appeals as an assigned
error in the petition for review of the decision or order approving or
disapproving the rehabilitation plan.

An order issued after the approval of the rehabilitation plan can be

reviewed only through a special civil action for certiorari under Rule
65 of the Rules of Court.

Section 2. Review of Decision or Order on Rehabilitation Plan. - An

order approving or disapproving a rehabilitation plan can only be
reviewed through a petition for review to the Court of Appeals under
Rule 43 of the Rules of Court within fifteen (15) days from notice of
the decision or order.

Notably, the 2008 Rules also allowed a petition for certiorari under
Rule 65 of the Rules of Court as a recourse, but only against an order
issued after the approval of the rehabilitation plan. Lastly, the 2008
Rules adopted the mode of appeal prescribed in A.M. No. 04-9-07-SC
against an order approving or disapproving the rehabilitation plan.

In 2010, Congress enacted the Financial Rehabilitation and

Insolvency Act (FRIA)27 which updated the existing laws on corporate
rehabilitation. The Court promulgated A.M. No. 12-12-11-SC, or the
Financial Rehabilitation Rules of Procedure (2013 Rules) on August
27, 2013.

The 2013 Rules adopted the same remedies as the 2008 Rules against
 interlocutory orders of the rehabilitation court. However, the 2013
Rules eliminated the remedy of appeal from the rehabilitation court's
approval or disapproval of the rehabilitation plan:

RULE 6
PROCEDURAL REMEDIES

Section 1. Motion for Reconsideration. - A party may file a motion

for reconsideration of any order issued by the court prior to the
approval of the Rehabilitation Plan. No relief can be extended to the
party aggrieved by the court's order on the motion through a special
civil action for certiorari under Rule 65 of the Rules of Court.

An order issued after the approval of the Rehabilitation Plan can be

reviewed only through a special civil action for certiorari under Rule
65 of the Rules of Court.

Section 2. Review of Decision or Order on Rehabilitation Plan. - An

order approving or disapproving a rehabilitation plan can only be
reviewed through a petition for certiorari to the Court of Appeals
under Rule 65 of the Rules of Court within fifteen (15) days from
notice of the decision or order.

Under the 2013 Rules, the Rehabilitation Court's final order

approving or disapproving a rehabilitation plan is no longer subject
to appeal; it can only be reviewed through a petition for certiorari.
The 2013 Rules narrowed the scope of appellate review from errors of
law and fact under Rule 43, to errors of jurisdiction or abuse of
discretion under Rule 65. It effectively lends more credence to the
factual findings and the judgment of rehabilitation courts.”

The dismissal of the petition for rehabilitation, even if due to technical

grounds or due to its insufficiency, amounts to a failure of rehabilitation. It is
a final order because it finally disposes of the case, leaving nothing else to be
done. Pursuant to A.M. No. 04-9-07-SC, the correct remedy against all
decisions and final orders of the rehabilitation courts in proceedings governed
by the Interim Rules is a petition for review to the CA under Rule 43 of the
Rules of Court. A petitionfor certiorari under Rule 65 of the Rules of Court is
evidently the wrong mode of appeal.” (Golden Cane Furniture Manufacturing
Corp. vs. Steelpro Philippines, Inc., G.R. No. 198222, April 04, 2016; 788 SCRA 91)

Notes. - “A corporate rehabilitation is one of many statutorily provided remedies for

businesses that experience a downturn. Rather than leave the various creditors
unprotected, legislation now provides for an orderly procedure of equitably and fairly
addressing their concerns.” (Pryce Corporation vs. China Banking Corporation, 716
SCRA 207)
“Under the Interim Rules, rehabilitation is the process of restoring “the debtor to a
position of successful operation and solvency, if it is shown that its continuance of operation
is economically feasible and its creditors can recover by way of the present value of
payments projected in the plan more if the corporation continues as s going concern that if
it is immediately liquidated.” (Philippine Bank of Communications vs. Basic Polyprinters
and Packaging Corporation, 738 SCRA 561).

(8) Creation of a Management Committee –

“However, case law is quick to point out that the creation and appointment of a
management committee x x x is an extraordinary and drastic remedy to be
exercised with care and caution; and only when the requirements under the Interim
Rules of Procedure Governing Intra-corporate Controversies are shown. x x x In
view of the extraordinary nature of such a remedy, Section 1, Rule 9 of the Interim
Rules provides the elements needed for the creation of a Management Committee:

‘Section 1. Creation of a management committee. – As an incident to

any of the cases filed under these Rules or the Interim Rules on
Corporate Rehabilitation, a party may apply for the appointment of a
management committee for the corporation, partnership or
association when there is imminent danger of: (a) dissipation, loss,
wastage or destruction of assets or other properties; and (b)
paralyzation of its business operations which may be prejudicial to
the interest of the minority stockholders, parties-litigants or the
general public.’

Thus, applicants for the appointment of a management committee need to establish

the confluence of these two (2) requisites. This is because appointed management
committees will immediately take over the management of the corporation and
exercise the management powers specified in the law. This may have a negative
effect on the operations and affairs of the corporation with third parties, as persons
who are more familiar with its operations are necessarily dislodged from their
positions in favor of appointees who are strangers to the corporation's operations
and affairs.

In the case at bar, the CA merely based its directive of creating a Management
Committee for FSVCI on its finding of "the persisting conflict between [the
Saturnino and Madrid Groups], the allegations of embezzlement of corporate funds
among the parties, and the uncertainty in the leadership and direction of the
corporation had created an imminent danger of dissipation, loss[,] and wastage of
FSVCI's assets and the paralyzation of its business operations which may be
prejudicial to the minority stockholders, parties-litigants or the general public."
However, absent any actual evidence from the records showing such imminent
danger, the CA's findings have no legal or factual basis to support the
appointment/constitution of a Management Committee for FSVCI.
Accordingly, the CA erred in ordering the creation of a Management
Committee in this case. Hence, in the event a Management Committee had
already been constituted pursuant to the CA ruling, as what herein
respondents point out, then it should be immediately dissolved for the reasons
aforestated.” (F & S Velasco Co., Inc. vs. Madrid, et al., 774 SCRA 403-404)

CREDIT CARDS –
1. After all, credit card arrangements are simple loan arrangements between the
card issuer and the card holder.

Simply put, every credit card transaction involves three contracts, namely: (a)
the sales contract between the credit card holder and the merchant or the
business establishment which accepted the credit card; (b) the loan
agreement between the credit card issuer and the credit card holder; and
lastly, (c) the promise to pay between the credit card issuer and the merchant
or business establishment. (Bankard, Inc. vs. Alarte, 824 SCRA 13)

2. Since credit card is “any card, plate, coupon book, or other credit device
existing for the purpose of obtaining money, goods, property, labor or services or
anything of value on credit, it is considered an access device.

A counterfeit access device is “any access device that is counterfeit, fictitious,

altered, or forged, or an identifiable component of an access device or counterfeit
access device.”

Under Section 9(a) and (e) of Republic Act No. 8484, the possession and use of an
access device is not illegal. Rather, what is prohibited is the possession and use
of a counterfeit access device. Therefore, the corpus delicti of the crime is not
merely the access device, but also any evidence that proves that it is counterfeit.
(Cruz vs. People, 826 SCRA 574 – 575)

INSURANCE –
(1) Policy –
“In Eternal Gardens Memorial Park Corporation vs. The Philippine American
Life Insurance Company (551 SCRA1), we ruled in favor of the insured and in
favorof the effectivity of the insurance contract in the midst of ambiguity in the
insurance contract provisions. We held that:
 “It must be remembered that an insurance contract is a contract of
adhesion which must be construed liberally in favor of the insured
and strictly against the insurer in order to safeguard the latter’s
interest. Thus, in Malayan Insurance Corporation v. Court of
Appeals, (270 SCRA 242) this Court held that: Indemnity and liability
insurance policies are construed in accordance with the general rule
of resolving any ambiguity therein in favor of the insured, where the
contract or policy is prepared by the insurer. A contract of
insurance, being a contract of adhesion, par excellence, any
ambiguity therein should be resolved against the insurer; in other
words, it should be construed liberally in favor of the insured and
strictly against the insurer. Limitations of liability should be
regarded with extreme jealousy and must be construed in such a way
as to preclude the insurer from noncompliance with its obligations.

xxx

As a final note, to characterize the insurer and the insured as

contracting parties on equal footing is inaccurate at best. Insurance
contracts are wholly prepared by the insurer with vast amounts of
experience in the industry purposefully used to its advantage. More
often than not, insurance contracts are contracts of adhesion
containing technical terms and conditions of the industry, confusing if
at all understandable to laypersons, that are imposed on those who
wish to avail of insurance. As such, insurance contracts are imbued
with public interest that must be considered whenever the rights
and obligations of the insurer and the insured are to be
delineated. Hence, in order to protect the interest of insurance
applicants, insurance companies must be obligated to act with
haste upon insurance applications, to either deny or approve the
same, or otherwise be bound to honor the application as a valid,
binding, and effective insurance contract.” (The Insular Life
Assurance Co., Ltd. vs. Khu, et al., G.R. No. 195176, April 18, 2016; 789
SCRA 557-558)

(2) Contestability in Life Insurance –

“In Manila Bankers Life Insurance Corporation v. Aban (702 SCRA 417), the
Court held that if the insured dies within the two-year contestability period, the
insurer is bound to make good its obligation under the policy, regardless of the
presence or lack of concealment or misrepresentation. The Court held:

Section 48 serves a noble purpose, as it regulates the actions of both

the insurer and the insured. Under the provision, an insurer is given
two years - from the effectivity of a life insurance contract and while
the insured is alive - to discover or prove that the policy is void ab
 initio or is rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent. After the two-year
period lapses, or when the insured dies within the period, the insurer
must make good on the policy, even though the policy was obtained
by fraud, concealment, or misrepresentation. This is not to say that
insurance fraud must be rewarded, but that insurers who recklessly
and indiscriminately solicit and obtain business must be penalized,
for such recklessness and lack of discrimination ultimately work to
the detriment of bona fide takers of insurance and the public in
general.

In the present case, Sun Life issued Atty. Jesus Jr.'s policy on February 5, 2001.
Thus, it has two years from its issuance, to investigate and verify whether the
policy was obtained by fraud, concealment, or misrepresentation. Upon the death
of Atty. Jesus Jr., however, on May 11, 2001, or a mere three months from the
issuance of the policy, Sun Life loses its right to rescind the policy. As discussed
in Manila Bankers, the death of the insured within the two-year period will
render the right of the insurer to rescind the policy nugatory. As such, the
incontestability period will now set in.” (Sun Life of Canada vs. Sibya, et al.; 793
SCRA 45)

(3) Subrogation – (a) “Malayan’s claim against the petitioners is based on

subrogation to the rights possessed by PASAR as consignee of the allegedly
damaged goods. The right of subrogation stems from Article 2207 of the New Civil
Code which states:

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

(b) "The right of subrogation is not dependent upon, nor does it grow out of, any
privity of contract or upon written assignment of claim. It accrues simply upon
payment of the insurance claim by the insurer."

(c) “The right of subrogation is however, not absolute. "There are a few
recognized exceptions to this rule. For instance: (1) if the assured by his own act
releases the wrongdoer or third party liable for the loss or damage, from liability,
the insurer’s right of subrogation is defeated. x x x Similarly, (2) where the
insurer pays the assured the value of the lost goods without notifying the carrier
who has in good faith settled the assured’s claim for loss, the settlement is binding
on both the assured and the insurer, and the latter cannot bring an action against the
carrier on his right of subrogation. x x x And (c) where the insurer pays the
assured for a loss which is not a risk covered by the policy, thereby effecting
‘voluntary payment,’ the former has no right of subrogation against the third party
liable for the loss x x x."

(d) “The rights of a subrogee cannot be superior to the rights possessed by a

subrogor. "Subrogation is the substitution of one person in the place of another
with reference to a lawful claim or right, so that he who is substituted succeeds to
the rights of the other in relation to a debt or claim, including its remedies or
securities. The rights to which the subrogee succeeds are the same as, but not
greater than, those of the person for whom he is substituted, that is, he cannot
acquire any claim, security or remedy the subrogor did not have. In other words, a
subrogee cannot succeed to a right not possessed by the subrogor. A subrogee in
effect steps into the shoes of the insured and can recover only if the insured likewise
could have recovered." Consequently, an insurer indemnifies the insured based on
the loss or injury the latter actually suffered from. If there is no loss or injury, then
there is no obligation on the part of the insurer to indemnify the insured. Should the
insurer pay the insured and it turns out that indemnification is not due, or if due, the
amount paid is excessive, the insurer takes the risk of not being able to seek
recompense from the alleged wrongdoer. This is because the supposed subrogor
did not possess the right to be indemnified and, therefore, no right to collect is
passed on to the subrogee.” (Loadstar Shipping Co., Inc. vs. Malayan Insurance Co., Inc.
742 SCRA 641-643)

TRADE-NAMES/TRADE-MARKS –
“The ownership of a trademark is acquired by its registration and its actual
use by the manufacturer or distributor of the goods made available to the
purchasing public.

Section 122 of R.A. No. 8293 provides that the rights in a mark shall be acquired
by means of its valid registration with the IPO. A certificate of registration of a
mark, once issued, constitutes prima facie evidence of the validity of the
registration, of the registrant's ownership of the mark, and of the registrant's
exclusive right to use the same in connection with the goods or services and those
that are related thereto specified in the certificate. R.A. No. 8293, however,
requires the applicant for registration or the registrant to file a declaration of actual
use (DAU) of the mark, with evidence to that effect, within three (3) years from the
filing of the application for registration; otherwise, the application shall be refused
or the mark shall be removed from the register. In other words, the prima facie
presumption brought about by the registration of a mark may be challenged and
overcome, in an appropriate action, by proof of the nullity of the registration or of
non-use of the mark, except when excused. Moreover, the presumption may
likewise be defeated by evidence of prior use by another person, i.e., it will
controvert a claim of legal appropriation or of ownership based on registration by a
subsequent user. This is because a trademark is a creation of use and belongs
to one who first used it in trade or commerce.

The determination of priority of use of a mark is a question of fact. Adoption of

the mark alone does not suffice. One may make advertisements, issue circulars,
distribute price lists on certain goods, but these alone will not inure to the claim of
ownership of the mark until the goods bearing the mark are sold to the public in the
market. Accordingly, receipts, sales invoices, and testimonies of witnesses as
customers, or orders of buyers, best prove the actual use of a mark in trade and
commerce during a certain period of time.” (UFC Phil., Inc. vs. Barrio Fiesta …, Jan.
20, 2016, 781 SCRA 455-456)

In Mighty Corporation v. E. & J. Gallo Winery, the Court held that, "Non-
competing goods may be those which, though they are not in actual competition,
are so related to each other that it can reasonably be assumed that they originate
from one manufacturer, in which case, confusion of business can arise out of
the use of similar marks."

In that case, the Court enumerated factors in determining whether goods are
related: (1) classification of the goods; (2) nature of the goods; (3)
descriptive properties, physical attributes or essential characteristics of the
goods, with reference to their form, composition, texture or quality; and (4)
style of distribution and marketing of the goods, including how the goods are
displayed and sold.

The registered trademark owner may use his mark on the same or similar
products, in different segments of the market, and at different price levels
depending on variations of the products for specific segments of the market.
The Court has recognized that the registered trademark owner enjoys
protection in product and market areas that are the normal potential
expansion of his business. (UFC Phil., Inc. vs. Barrio Fiesta …, Jan. 20, 2016, 781
SCRA 466-467)

TRADEMARKS –

1. The Intellectual Property Code defines a “mark” as “any visible sign capable of
distinguishing the goods (trademark) or services (service mark) of an enterprise.”
Case law explains that trademarks deal with the psychological function of symbols
and the effect of these symbols on the public at large.” It is a merchandising
shortcut, and, “whatever the means employed, the aim is the same to convey
through the mark, in the minds of potential customers, the desirability of the
commodity upon which it appears.” Thus, the protection of trademarks as
intellectual property is intended not only to preserve the goodwill and reputation
of the business established on the goods or services bearing the mark through
actual use over a period of time, but also to safeguard the public as consumers
against confusion on these goods or services.

2. As viewed by modern authorities on trademark law, trademarks perform

three (3) distinct functions: (1) they indicate origin or ownership of the
articles to which they are attached; (2) they guarantee that those articles
come up to a certain standard of quality; and (3) they advertise the articles
they symbolize.

In Berries Agricultural Co., Inc. v. Abyadang (647 SCRA 517), this Court explained
that “the ownership of a trademark is acquired by its registration and its actual
use by the manufacturer or distributor of the goods made available to the
purchasing public. xxx A certificate of registration of a mark, once issued,
constitutes prima facie evidence of the validity of the registration, of the
registrant’s ownership of the mark, and of the registrant’s exclusive right to use the
same in connection with the goods or services and those that are related thereto
specified in the certificate.” However, “the prima facie presumption brought
about by the registration of a mark may be challenged and overcome, in an
appropriate action, by proof of, among others, non-use of the mark, except when
excused.

The actual use of the mark representing the goods or services introduced and
transacted in commerce over a period of time creates that goodwill which the law
seeks to protect. For this reason, the IP Code, under Section 124.2, requires the
registrant or owner of a registered mark to declare “actual use of the mark” (DAU)
and present evidence of such use within the prescribed period. Failing in which,
the IPO DG may cause the motu propio removal from the register of the mark’s
registration.

The IP Code and the Trademark Regulations have not specifically defined “use.”
However, it is understood that the “use” which the law requires to maintain the
registration of a mark must be genuine, and not merely token. (W Land Holdings,
Inc. vs. Starwood Hotels …, 847 SCRA 414-418)

3. The following shall be accepted as proof of actual use of the mark: (a)
labels of the mark as these are used; (b) downloaded pages from the website of
the applicant or registrant clearly showing that the goods are being sold or the
services are being rendered in the Philippines; (c) photographs (including
digital photographs printed on ordinary paper) of goods bearing the marks as these
are actually used or of the stamped or marked container of goods and of the
establishment/s where the services are being rendered; (d) brochures or
advertising materials showing the actual use of the mark on the goods being sold or
services being rendered in the Philippines; (e) for online sale, receipts of sale of
the goods or services rendered or other similar evidence of use, showing that
the goods are placed on the market or the services are available in the
Philippines or that the transaction took place in the Philippines; (f) copies of
contracts for sevices showing the use of the mark. (ditto, p. 423)

4. Computer printouts of the drawing or reproduction of marks will not be

accepted as evidence of use. (ditto, p. 423)

5. Goodwill is no longer confined to the territory of actual market

penetration; it extends to zones where the marked article has been fixed in the
public mind through advertising. Whether in the print, broadcast or
electronic communications medium, particularly on the Internet, advertising
has paved the way for growth and expansion of the product by creating and
earning a reputation that crosses over borders, virtually turning the whole
world into one vast marketplace. (ditto, p. 426)

6. It must be emphasized, however, that the mere exhibition of goods or services

over the Internet, without more, is not enough to constitute actual use. To
reiterate, the “use” contemplated by law is genuine use – that is, a bona fide kind
of use tending towards a commercial transaction in the ordinary course of trade.
Since the Internet creates a borderless marketplace, it must be shown that the
owner has actually transacted, or at the very least, intentionally targeted
customers of a particular jurisdiction in order to be considered as having used
the trademark in the ordinary course of his trade in that country. A showing
of an actual commercial link to the country is therefore imperative.
Otherwise, an unscrupulous registrant would be able to maintain his mark by the
mere expedient of setting up a website, or by posting his goods or services on
another’s site, although no commercial activity is intended to be pursued in the
Philippines. This type of token use renders inutile the commercial purpose of the
mark, and hence, negates the reason to keep its registration active. As the IP Code
expressly requires, the use of the mark must be “within the Philippines.”
(ditto, p. 427)

As earlier intimated, mere use of a mark on a website which can be accessed

anywhere in the world will not automatically mean that the mark has been used in
the ordinary course of trade of a particular country. Thus, the use of mark on the
internet must be shown to result into a within-State sale, or at the very least,
discernibly intended to target customers that reside in that country. This being so,
the use of the mark on an interactive website, for instance, may be said to
target local customers when they contain specific details regarding or
pertaining to the target State, sufficiently showing an intent towards realizing
a within-State commercial activity or interaction. These details may constitute
a local contact phone number, specific reference being available to local
customers, a specific local webpage, whether domestic language and currency is
used on the website, and/or whether domestic payment methods are accepted.
(ditto, p. 430)
7. To establish trademark infringement, the following elements must be shown:
(a) the validity of plaintiff’s mark; (b) the plaintiff’s ownership of the mark; and
(c) the use of the mark or its colorable imitation by the alleged infringer results in
“likelihood of confusion.” (Ong vs. People, 661 SCRA 104 [2011]).

8. The first condition of the proscription requires resemblance or similarity

between a prospective mark and an earlier mark. Similarity does not mean
absolute identity of marks. To be regarded as similar to an earlier mark, it is
enough that a prospective mark be a colorable imitation of the former.
Colorable imitation denotes such likeness in form, content, words, sound,
meaning, special arrangement or general appearance of one mark with
respect to another as would likely mislead an average buyer in the ordinary
course of purchase.

In determining whether there is similarity or colorable imitation between two

marks, authorities employ either: (a) the dominancy test or (b) the holistic
test. In Mighty Corporation vs. E. & J. Gallo Winery (434 SCRA 473), we
distinguished between the two tests as follows:

The Dominancy Test focuses on the similarity of the prevalent features of

the competing trademarks which might cause confusion or deception, and
thus infringement. If the competing trademark contains the main,
essential or dominant features of another, and confusion or deception
is likely to result, infringement takes place. Duplication or imitation is
not necessary; nor is it necessary that the infringing label should suggest an
effort to imitate. The question is whether the use of the marks involved is
likely to cause confusion or mistakes in the mind of the public or deceive
purchasers.

On the other hand, the Holistic Test requires that the entirety of the marks
is question be considered in resolving confusing similarity. Comparison of
words is not the only determining factor. The trademarks in their entirety
as they appear in their respective labels or hang tags must also be
considered in relation to the goods to which they are attached. The
discerning eye of the observer must focus not only on the predominant
words but also on the other features appearing in both labels in order that
he may draw his conclusion whether one is confusingly similar to the other.

There are currently no fixed rules as to which of the two tests can be applied in any
given case. However, recent case law on trademark seems to indicate an
overwhelming judicial preference towards applying the dominancy test. (UFC Phil,
Inc. vs. Barrio Fiesta Mfg. Corp., 781 SCRA 424)

The second condition of the proscription requires that the prospective mark pertain
to goods or services that are either identical, similar or related to the goods or
services represented by the earlier mark. While there can be no quibble that the
curl snack product for which the registration of the OK Hotdog Inasal mark is
sought cannot be considered as identical or similar to the restaurant services
represented by the Mang Inasal mark, there is ample reason to conclude that the
said product and services may nonetheless be regarded as related to each other.

Related goods and services are those that, though non-identical or non-
similar, are so logically connected to each other that they may reasonably be
assumed to originate from one manufacturer or from economically-linked
manufacturers. (Mang Inasal Phil., Inc. vs. IFP Manufacturing Corp., 827 SCRA 472-
476)

9. The mere unauthorized use of a container bearing a registered trademark

is connection with the sale, distribution or advertising of goods or services
which is likely to cause confusion, mistake or deception among the buyers or
consumers can be considered as trademark infringement. (Republic Gas
Corporation vs. Petron Corporation, 698 SCRA 666).