St.

Dominic Savio College

SCHOOL OF LAW
Quirino Highway, Pangarap, Caloocan City (North)

Name: Angelica D. Solis Subject: Corporation and Basic Security Law

Piercing the veil of corporate fiction
A. Fraud Case Digest

1. Gregorio Araneta, Inc., Plaintiff-Appellant, V. Paz Tuason De Paterno And Jose

Vidal, Defendants-Appellants (G.R. No. L-2886. August 22, 1952)

Facts: Ms. Paz Tuason de Paterno, the registered owner of a plot of land measuring about
40,703 square meters, got various loans from Mr. Jose Vidal totaling P90,098 and created
a first mortgage on the aforementioned property to secure the obligation. She got
additional loans of P30,000 and P20,000 using the same security in January and April of
1943.

The previous mortgage arrangement was renewed and the funds obtained were
combined on each of the most recent times. The time of payment was set at two years in
the first novated contract and at four years in the second and final one. When Mr. Jose
Araneta was rumored to be the president of the same in 1943, Ms. Paz Tuason made the
decision to sell the entire property to Mr. Gregorio Araneta for a net price of P400,000.
According to rumors, Mr.Jose Araneta also served as Ms. Paz Tuason's agent for the land
deal.

As a result, on October 19, 1943, a contract called "Promesa de Compra y Venta" was
executed as a result of the negotiations. Additionally, this agreement indicated that Ms.
Paz Tuason would sell the entire estate, excluding the debt owed to Mr. Jose Vidal, to
M/s. Gregorio Araneta, Inc. for the specified sum of P400,000. Despite Ms. Paz Tuason's
promise to pay Vidal P143,150 in full settlement of her mortgage debt, the mortgagee
refused to accept the check or have the mortgage canceled.

A case was brought against Mr. Vidal, but it was never set down for trial. The paperwork
and checks were also lost in the course of the war efforts in January or February 1945, and
the case was never reassembled after that. Following liberation, M/s. Gregorio Araneta,
Inc. filed this lawsuit to compel Ms. Paz Tuason to give the plaintiff a clean title to the
lots indicated, free and clear of any debts and encumbrances, as well as a deed canceling
the mortgage to Mr. Vidal. By virtue of a summons issued by the court, Vidal entered the
case and filed a cross-claim against Ms. Paz Tuazon to foreclose on his mortgage.

Issue: Whether or not Mr. Jose Araneta acted as agent of Ms. Paz Tuason de Paterno.
 St. Dominic Savio College
SCHOOL OF LAW
Quirino Highway, Pangarap, Caloocan City (North)

Ruling: No. Mr. Jose Araneta did not act as an agent of Ms. Paz Tuason. Even if Ms. Paz
Tuason have known that Mr. Jose Araneta is the same as M/s. Gregorio Arantea Inc., she
would still go with sale of her property as Mr. Jose Araneta did not by way of being an
agent performed such act of being an agent for the sale was between the corporation and
not that of with Jose. Otherwise, greed would have set in in the heart of Jose, would Jose
have been the agent as well as the purchaser of the property of Ms. Paz, than to respect
their trusted and respected relationship as principal and agent. Moreover, Mr. Jose
Araneta was not given any authority to make a binding contract. He was not given the
confidence to administer, and act in behalf of Ms. Paz so there was no betrayal of thrust
as Mr. Jose acted only as a middle-man tasked only to look for a buyer and not to
administer any sale between any prospective buyers. Adding to this, Jose was not to make
the terms of payment. Therefore, Mr. Jose Araneta was left with no power or discretion
whatsoever, which he could abuse to his advantage and to the owner's prejudice. He is
not entrusted as an agent for the agent’s incapacity to buy principal’s property rests in
the fact that the agent and principal form one juridical person.
 St. Dominic Savio College
SCHOOL OF LAW
Quirino Highway, Pangarap, Caloocan City (North)

2. Palacio v. Fely Transportation Company- 5 SCRA 1011 (August 31, 1962)

Facts: Mr. Alfredo Carillo was hired by the defendant, M/s. Fely Transportation
company, to drive AC-787 (687) (a registration for 1952), which was owned and operated
by the defendant company, around December 1952. On December 24, 1952, at around
11:30 a.m., while driving AC-687 on Halcon Street in Quezon City, the driver Alfonso
(Alfredo) Carillo ran over Mr. Mario Palacio, a child of the plaintiff Gregorio Palacio; that
on account of the aforesaid injuries, Mario Palacio suffered a simple fracture of the right
tenor (sic), complete third, thereby hospitalizing him at the Philippine Orthopedic
Hospital from December 24, 1952

The Defendant filed its answer on June 20, 1956. It asserts two affirmative defenses: (1)
that the complaint lacks any basis for action against the defendant; and (2) that Isabelo
Calingasan sold and transferred the Jeep AC-687 to M/s. Fely Transportation on
December 24, 1955, long after Mr. Alfredo Carillo, the vehicle's driver, had been found
guilty and had completed his sentence in the Court of First Instance of Quezon City.

Issue: whether or not the court erred in not sustaining that the defendant-appellee is
subsidiarily liable for damages as a result of the criminal case of the court of first instance
of Quezon city.

Ruling: Yes, the court is right that the defendant-appellee is subsidiarily liable for
damages as the equivalent of the criminal case filed by the court of first instance of
Quezon city, because Isabelo Calingasan and defendant Fely Transportation may be
regarded as one and the same person. It is evident that Isabelo Calingasan's main purpose
in forming the corporation was to evade his subsidiary's civil liability resulting from the
conviction of his driver, Alfredo Carillo. This conclusion is borne out by the fact that the
incorporators of M/s. Fely Transportation are Isabelo Calingasan, his wife, his son, Dr.
Calingasan, and his two daughters.
 St. Dominic Savio College
SCHOOL OF LAW
Quirino Highway, Pangarap, Caloocan City (North)

3. Palay, Inc. vs. Clave- September 21, 1983 (G.R.No. L-56076)

Facts: A contract to sell a plot of land in Antipolo, Rizal that belonged to petitioner Palay,
Inc. was signed on March 28, 1965, in favor of private respondent Nazario Dumpit by
Petitioner Corporation’s president, Albert Onstott.

According to the contract for sale, if the buyer did not comply with the terms of the
agreement, there would be no need for further legal action because extrajudicial
rescinding would take effect 90 days from the date the one-month grace period expired.
Six years later, the latter submitted a letter in which it expressed a desire to resume its
payment schedule. The petitioner, however, claimed that the agreement had been broken
long ago and that a different party had already purchased the land.

Dumpit filed a petition with the NHA asking for reconveyance with a refund as a backup.

Issue: Whether or not, there is fraud present in the act of the President rescinding the
Contract and Sold the Subject Property to Third Persons.

Ruling: The SC held that there was no presence of badges of fraud of subdivision owner
when it rescinded a contract to sell extra judicially and sold the property to a third person.

Furthermore, the President of Real Estate Corporation cannot be held personally liable
where he appears to be controlling stockholder absent sufficient proof that he used the
corporation to defraud defaulting lot buyer;
 St. Dominic Savio College
SCHOOL OF LAW
Quirino Highway, Pangarap, Caloocan City (North)

4. Del Rosario vs NLRC- G.R. No. 85416 July 24, 1990

Facts: The POEA issued a ruling dismissing the case for financial claims as being without
merit in POEA Case No. 85-06-0394. Arieb Enterprises, the foreign employer, and Philsa
Construction and Trading Co., Inc., the recruiter, were compelled to jointly and severally
pay the private respondent's salary differentials and vacation leave benefits after the case
was appealed to the NLRC, which overturned the POEA ruling. The POEA issued a writ
of execution, but it was returned unsatisfied since Philsa had ceased operations and
couldn't afford to pay the verdict. A private respondent asked for an alias warrant to be
issued against Philsa officers. The petitioner, the corporation's president, and general
manager led the officers in opposing this motion. The petitioner filed an NLRC appeal.
On September 23, 1988, the NLRC rejected the appeal on the grounds that Philsa's
corporate personality should not be taken into account.

An alias writ of Execution be issued, and the handling sheriff is instructed to execute
against Mr. Francisco V. del Rosario's properties and, if necessary, against the cash
and/or surety bond of the Bonding Company in question for the full satisfaction of the
judgment awarded, according to a resolution that the POEA issued on February 12, 1988.

The NLRC rejected the petitioner's appeal after receiving it on September 23, 1988. The
petitioner's application for reconsideration was turned down on October 21, 1988.

On October 28, 1988, this petition was filed, alleging that the NLRC had abused its
discretion. On November 10, 1988, the Court issued a temporary restraining order
enjoining the enforcement of the NLRC's decision and resolution date dated September
23, 1988.

The petition is GRANTED, and the NLRC's judgment and resolution in POEA Case No.
85-06-0394, dated September 23, 1988, and October 21, 1988, respectively, are SET ASIDE.
The Court's interim restraining order ordered on November 10, 1988, has been Made
Permanent.

The NLRC considers Philsa Construction & Trading Co., Inc. and Philsa International
Placement & Services Corp to be the same entity because both corporations have the same
board of directors and executives. The move for reconsideration filed by the petitioner
was refused. As a result, this petition was brought, arguing that the NLRC misused its
discretion grossly.

ISSUE: Whether the action of the NLRC affirming the issuance of an alias writ of
execution against petitioner, on the theory that the corporate personality of Philsa should
be disregarded.
 St. Dominic Savio College
SCHOOL OF LAW
Quirino Highway, Pangarap, Caloocan City (North)

RULING: YES. Under the law a corporation is bestowed juridical personality, separate
and distinct from its stockholders. But when the juridical personality of the corporation
is used to defeat public convenience, justify wrong, protect fraud or defend crime, the
corporation shall be considered as a mere association of persons and its responsible
officers and/or stockholders shall be held individually liable. For the same reasons, a
corporation shall be liable for the obligations of a stockholder, or a corporation and its
successor-in-interest shall be considered as one and the liability of the former shall attach
to the latter.
But for the separate juridical personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established. It cannot be presumed. Thus,
at the time Philsa allowed its license to lapse in 1985 and even at the time it was delisted
in 1986, there was yet no judgment in favor of private respondent. An intent to evade
payment of his claims cannot therefore be implied from the expiration of Philsa's license
and its delisting. Likewise, substantial identity of the incorporators of the two
corporations does not necessarily imply fraud. In the case of FRANCISCO V. DEL
ROSARIO vs. NATIONAL LABOR RELATIONS COMMISSION, not only has there been
a failure to establish fraud, but it has also not been shown that petitioner is the corporate
officer responsible for private respondent's predicament. It must be emphasized that the
claim for differentials and benefits was actually directed against the foreign employer.
Philsa became liable only because of its undertaking to be jointly and severally bound
with the foreign employer, an undertaking required by the rules of the POEA, together
with the filing of cash and surety bonds, in order to ensure that overseas workers shall
find satisfaction for awards in their favor.
The circumstances of this case distinguish it from those in earlier decisions of the Court
in labor cases where the veil of corporate fiction was pierced.
 St. Dominic Savio College
SCHOOL OF LAW
Quirino Highway, Pangarap, Caloocan City (North)

5 . VILLA REY TRANSIT, INC. vs. FERRER, PANTRANCO – (G.R. No. L-23893;
October 29, 1968)

Facts: Jose Villarama operated a bus service under two certifications of public
convenience issued by the Public Service Commission (PSC). Later, he sold the certificates
to Pangasinan Transportation Company, Inc. (Pantranco) under the condition that the
seller (Villarama) "shall not apply for any TPU service identical or competing with the
buyer for a period of ten years."

Within three months, a corporation called Villa Rey Transit, Inc. (the Corporation) was
formed with a capital stock of P500,000.00 divided into 5,000 shares of P100.00 par value
each; P200,000.00 was the subscribed stock; Natividad Villarama (wife of Jose Villarama)
was one of the incorporators, and she subscribed for P1,000.00; the balance of P199,000.00
was subscribed by Jose Villarama's brother and sister-in-law;

The Corporation purchased five certificates of public convenience and 49 buses from one
Valentin Fernando less than a month after registering with the SEC. Later, the Sheriff of
Manila imposed a levy on two of the five certificates, in favor of Eusebio Ferrer, the
judgment creditor, against Fernando, the judgment debtor. A public auction was held.
Ferrer placed the top bid. Pantranco purchased the two certificates from Ferrer.

The Corporation filed a case against Ferrer, Pantranco, and the PSC to have the sheriff's
auction canceled. Pantranco, for its part, filed a third-party complaint against Villarama,
stating that the previous agreement barred Villarama and/or the Corporation from
running the two certificates in question. The trial court found the sheriff's sale of two
certificates of public convenience in favor of Ferrer, as well as the latter's subsequent
transfer of the same to Pantranco, null and void, and proclaimed Villa Rey Transit, Inc.
to be the rightful owner of the aforementioned certificates of public convenience.

Pantranco challenges the decision's correctness, claiming that Villa Rey Transit, Inc.
(Corporation) is a unique and separate corporation from Villarama. Ferrer, for his side,
contests the judgement in the sense that it declares the sheriff's sale null and void.

Issue: Whether the stipulation between Villarama and Pantranco binds Villa Rey Transit,
Inc.

Ruling: YES. The restrictive clause in the contract entered into by the Villarama and
Pantranco is also enforceable and binding against the said Corporation. The rule is that a
seller or promisor may not make use of a corporate entity as a means of evading the
obligation of his covenant. The evidence has disclosed that Villarama, albeit was not an
incorporator or stockholder of the Corporation, his wife, however, was an incorporator
 St. Dominic Savio College
SCHOOL OF LAW
Quirino Highway, Pangarap, Caloocan City (North)

and was elected treasurer of the Corporation. The evidence further shows that the initial
cash capitalization of the corporation was mostly financed by Villarama; he supplied the
organization expenses and the assets of the Corporation, such as trucks and equipment;
there was no actual payment by the original subscribers of the amounts of P95,000.00 and
P100,000.00 as appearing in the books; Villarama made use of the money of the
Corporation and deposited them to his private accounts; and the Corporation paid his
personal accounts. The foregoing circumstances are strong persuasive evidence showing
that Villarama has been too involved in the affairs of the Corporation to altogether negate
the claim that he was only a part-time general manager. They show beyond doubt that
the Corporation is his alter ego.

The doctrine that a corporation is a legal entity distinct and separate from the members
and stockholders who compose it is recognized and respected in all cases which are
within reason and the law. When the fiction is urged as a means of perpetrating a fraud
or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention
of statutes, the achievement or perfection of a monopoly or generally the perpetration of
knavery or crime, the veil with which the law covers and isolates the corporation from
the members or stockholders who compose it will be lifted to allow for its consideration
merely as an aggregation of individuals.