1. U.S. V. MILWAUKEE REFRIGERATOR TRANSIT CO.

A refrigerator company was incorporated to own and operate a private ear

line,'and to have charge of all the interstate transportation of the product of a
brewing company. A majority of the brewing company’s stock, however, was
owned by persons who had no interest m the refrigerator company, and the
stock of the latter was bought and paid for by the holders with their own
money and in their own interest; none of it being held in trust for the brewing
company, though tile majority of it was owned by persons who also owned
brewing. company stock. The brewing company paid its freights in full and
received no rehates, nor was it a party to contracts between the refrigerator
company and the railroad companies by which the refrigerator company
received a rebate of from one-eiglith to oiie-tenth of all freight moneys on all
interstate traffic it controlled. Held, that such facts were insufficient to
establish •that the brewing company had received rebates in violation of Elkins
Act, Feb. 19, 1903, c. 70S, 32 Stat. 847 [U. S. Comp. St Supp. 1905, p. 599.]

2. GOCHAN V. YOUNG

The Facts

The undisputed facts are summarized by the Court of Appeals as follows:

"Felix Gochan and Sons Realty Corporation (Gochan Realty, for brevity) was
registered with the SEC on June, 1951, with Felix Gochan, Sr., Maria Pan Nuy
Go Tiong, Pedro Gochan, Tomasa Gochan, Esteban Gochan and Crispo Gochan
as its incorporators.

"Felix Gochan Sr.'s daughter, Alice, mother of [herein respondents], inherited

50 shares of stock in Gochan Realty from the former.

"Alice died in 1955, leaving the 50 shares to her husband, John Young, Sr.

"In 1962, the Regional Trial Court of Cebu adjudicated 6/14 of these shares to
her children, herein [respondents] Richard Young, David Young, Jane Young
Llaban, John Young Jr., Mary Young Hsu and Alexander Thomas Young.

"Having earned dividends, these stocks numbered 179 by 20 September 1979.

"Five days later (25 September), at which time all the children had reached the
age of majority, their father John Sr., requested Gochan Realty to partition the
shares of his late wife by cancelling the stock certificates in his name and
issuing in lieu thereof, new stock certificates in the names of [herein
respondents].

"On 17 October 1979, respondent Gochan Realty refused, citing as reason, the
right of first refusal granted to the remaining stockholders by the Articles of
Incorporation.

"On 21, 1990, [sic] John, Sr. died, leaving the shares to the [respondents].

"On 8 February 1994, [respondents] Cecilia Gochan Uy and Miguel Uy filed a

complaint with the SEC for issuance of shares of stock to the rightful owners,
nullification of shares of stock, reconveyance of property impressed with trust,
accounting, removal of officers and directors and damages against
respondents. A Notice of Lis Pendens was annotated as [sic] real properties of
the corporation.

"On 16 March 1994, [herein petitioners] moved to dismiss the complaint

alleging that: (1) the SEC ha[d] no jurisdiction over the nature of the action; (2)
the [respondents] [were] not the real parties-in-interest and ha[d] no capacity to
sue; and (3) [respondents'] causes of action [were] barred by the Statute of
Limitations.

"The motion was opposed by herein [respondents].

"On 29 March 1994, [petitioners'] filed a Motion for cancellation of Notice of Lis
Pendens. [Respondents] opposed the said motion.

"On 9 December 1994, the SEC, through its Hearing Officer, granted the
motion to dismiss and ordered the cancellation of the notice of lis pendens
annotated upon the titles of the corporate lands. In its order, the SEC opined:

'In the instant case, the complaint admits that complainants Richard G. Young,
David G. Young, Jane G. Young Llaban, John D. Young, Jr., Mary G. Young
Hsu and Alexander Thomas G. Young, who are the children of the late Alice T.
Gochan and the late John D. Young, Sr. are suing in their own right and as
heirs of and/or as the beneficial owners of the shares in the capital stock of
FGSRC held in trust for them during his lifetime by the late John D. Young.
Moreover, it has been shown that said complainants ha[d] never been x x x
stockholder[s] of record of FGSRC to confer them with the legal capacity to
bring and maintain their action. Conformably, the case cannot be considered
as an intra-corporate controversy within the jurisdiction of this Commission.

'The complainant heirs base what they perceived to be their stockholders'

rights upon the fact of their succession to all the rights, property and interest
of their father, John D. Young, Sr. While their heirship is not disputed, their
right to compel the corporation to register John D. Young's Sr. shares of stock
in their names cannot go unchallenged because the devolution of property to
the heirs by operation of law in succession is subject to just obligations of the
deceased before such property passes to the heirs. Conformably, until therefore
the estate is settled and the payment of the debts of the deceased is
accomplished, the heirs cannot as a matter of right compel the delivery of the
shares of stock to them and register such transfer in the books of the
corporation to recognize them as stockholders. The complainant heirs succeed
to the estate of [the] deceased John D. Young, Sr. but they do not thereby
become stockholders of the corporation.

'Moreover, John D. [Young Sr.'s] shares of stocks form part of his estate which
is the subject of Special Proceedings No. 3694-CEB in the Regional Trial Court
of Cebu, Branch VIII, [par. 4 of the complaint]. As complainants clearly claim[,]
the Intestate Estate of John D. Young, Sr. has an interest in the subject matter
of the instant case. However, actions for the recovery or protection of the
property [such as the shares of stock in question] may be brought or defended
not by the heirs but by the executor or administrator thereof.

'Complainants further contend that the alleged wrongful acts of the corporation
and its directors constitute fraudulent devices or schemes which may be
detrimental to the stockholders. Again, the injury [is] perceived[,] as is alleged[,]
to have been suffered by complainants as stockholders, which they are not.
Admittedly, the SEC has no jurisdiction over a controversy wherein one of the
parties involved is not or not yet a stockholder of the corporation. [SEC vs. CA,
201 SCRA 134].

'Further, by the express allegation of the complaint, herein complainants bring

this action as [a] derivative suit on their own behalf and on behalf of
respondent FGSRC.

'Section 5, Rule III of the Revised Rules of Procedure in the Securities and
Exchange Commission provides:

'Section 5. Derivative Suit. No action shall be brought by stockholder in the

right of a corporation unless the complainant was a stockholder at the time the
questioned transaction occurred as well as at the time the action was filed and
remains a stockholder during the pendency of the action. x x x.'
'The rule is in accord with well settled jurisprudence holding that a stockholder
bringing a derivative action must have been [so] at the time the transaction or
act complained of [took] place. (Pascual vs. Orozco, 19 Phil. 82; Republic vs.
Cuaderno, 19 SCRA 671; San Miguel Corporation vs. Khan, 176 SCRA 462-
463) The language of the rule is mandatory, strict compliance with the terms
thereof thus being a condition precedent, a jurisdictional requirement to the
filing of the instant action.

'Otherwise stated, proof of compliance with the requirement must be

sufficiently established for the action to be given due course by this
Commission. The failure to comply with this jurisdictional requirement on
derivative action must necessarily result in the dismissal of the instant
complaint.' (pp. 77-79, Rollo)

"[Respondents] moved for a reconsideration but the same was denied for being
pro-forma.

"[Respondents] appealed to the SEC en banc, contending, among others, that

the SEC ha[d] jurisdiction over the case.

"[Petitioners], on the other hand, contend that the appeal was 97 days late,
beyond the 30-day period for appeals.

"On 3 March 1995, the SEC en banc ruled for the [petitioners,] holding that the
[respondents'] motion for reconsideration did not interrupt the 30-day period
for appeal because said motion was pro-forma."4

Aggrieved, herein respondents then filed a Petition for Review with the Court of
Appeals.

Ruling of the Court of Appeals

The Court of Appeals ruled that the SEC had no jurisdiction over the case as
far as the heirs of Alice Gochan were concerned, because they were not yet
stockholders of the corporation. On the other hand, it upheld the capacity of
Respondents Cecilia Gochan Uy and her spouse, Miguel Uy. It also held that
the Intestate Estate of John Young Sr. was an indispensable party.

The appellate court further ruled that the cancellation of the notice of lis
pendens on the titles of the corporate real estate was not justified. Moreover, it
declared that respondents' Motion for Reconsideration before the SEC was not
pro forma; thus, its filing tolled the appeal period.
Hence, this Petition.5

The Issues

These are the issues presented before us:

"A. Whether or not the Spouses Uy have the personality to file an action before
the SEC against Gochan Realty Corporation.

"B. Whether or not the Spouses Uy could properly bring a derivative suit in the
name of Gochan Realty to redress wrongs allegedly committed against it for
which the directors refused to sue.

"C. Whether or not the intestate estate of John D. Young Sr. is an

indispensable party in the SEC case considering that the individual heirs'
shares are still in the decedent stockholder's name.

"D. Whether or not the cancellation of [the] notice of lis pendens was justified
considering that the suit did not involve real properties owned by Gochan
Realty."6

In addition, the Court will determine the effect of Republic Act No.87997 on
this case.

The Court's Ruling

The Petition has no merit. In view of the effectivity of RA 8799, however, the
case should be remanded to the proper regional trial court, not to the
Securities and Exchange Commission.

First Issue:

Personality of the Spouses Uy to File a Suit Before the SEC

Petitioners argue that Spouses Cecilia and Miguel Uy had no capacity or legal
standing to bring the suit before the SEC on February 8, 1994, because the
latter were no longer stockholders at the time. Allegedly, the stocks had already
been purchased by the corporation. Petitioners further assert that, being
allegedly a simple contract of sale cognizable by the regular courts, the
purchase by Gochan Realty of Cecilia Gochan Uy's 210 shares does not come
within the purview of an intra-corporate controversy.

As a general rule, the jurisdiction of a court or tribunal over the subject matter
is determined by the allegations in the complaint.8 For purposes of resolving a
motion to dismiss, Cecilia Uy's averment in the Complaint -that the purchase
of her stocks by the corporation was null and void ab initio - is deemed
admitted. It is elementary that a void contract produces no effect either against
or in favor of anyone; it cannot create, modify or extinguish the juridical
relation to which it refers.9 Thus, Cecilia remains a stockholder of the
corporation in view of the nullity of the Contract of Sale. Although she was no
longer registered as a stockholder in the corporate records as of the filing of the
case before the SEC, the admitted allegations in the Complaint made her still a
bona fide stockholder of Felix Gochan & Sons Realty Corporation (FGSRC), as
between said parties.

In any event, the present controversy, whether intra-corporate or not, is no

longer cognizable by the SEC, in view of RA 8799, which transferred to regional
trial courts the former's jurisdiction over cases involving intra-corporate
disputes.

Action Has Not Prescribed

Petitioners contend that the statute of limitations already bars the Uy spouses'
action, be it one for annulment of a voidable contract or one based upon a
written contract. The Complaint, however, contains respondents' allegation
that the sale of the shares of stock was not merely voidable, but was void ab
initio. Below we quote its relevant portion:

"38. That on November 21, 1979, respondent Felix Gochan & Sons Realty
Corporation did not have unrestricted retained earnings in its books to cover
the purchase price of the 208 shares of stock it was then buying from
complainant Cecilia Gochan Uy, thereby rendering said purchase null and void
ab initio for being violative of the trust fund doctrine and contrary to law,
morals good customs, public order and public policy;"

Necessarily, petitioners' contention that the action has prescribed cannot be

sustained. Prescription cannot be invoked as a ground if the contract is alleged
to be void ab initio.10 It is axiomatic that the action or defense for the
declaration of nullity of a contract does not prescribe.11

Second Issue:
Derivative Suit and the Spouses Uy

Petitioners also contend that the action filed by the Spouses Uy was not a
derivative suit, because the spouses and not the corporation were the injured
parties. The Court is not convinced. The following quoted portions of the
Complaint readily shows allegations of injury to the corporation itself:

"16. That on information and belief, in further pursuance of the said

conspiracy and for the fraudulent purpose of depressing the value of the stock
of the Corporation and to induce the minority stockholders to sell their shares
of stock for an inadequate consideration as aforesaid, respondent Esteban T.
Gochan . . ., in violation of their duties as directors and officers of the
Corporation . . ., unlawfully and fraudulently appropriated [for] themselves the
funds of the Corporation by drawing excessive amounts in the form of salaries
and cash advances. . . and by otherwise charging their purely personal
expenses to the Corporation."

xxx xxx xxx

"41. That the payment of P1,200,000.00 by the Corporation to complainant

Cecilia Gochan Uy for her shares of stock constituted an unlawful, premature
and partial liquidation and distribution of assets to a stockholder, resulting in
the impairment of the capital of the Corporation and prevented it from
otherwise utilizing said amount for its regular and lawful business, to the
damage and prejudice of the Corporation, its creditors, and of complainants as
minority stockholders;"12

As early as 1911, this Court has recognized the right of a single stockholder to
file derivative suits. In its words:

"[W]here corporate directors have committed a breach of trust either by their

frauds, ultra vires acts, or negligence, and the corporation is unable or
unwilling to institute suit to remedy the wrong, a single stockholder may
institute that suit, suing on behalf of himself and other stockholders and for
the benefit of the corporation, to bring about a redress of the wrong done
directly to the corporation and indirectly to the stockholders."13

In the present case, the Complaint alleges all the components of a derivative
suit. The allegations of injury to the Spouses Uy can coexist with those
pertaining to the corporation. The personal injury suffered by the spouses
cannot disqualify them from filing a derivative suit on behalf of the corporation.
It merely gives rise to an additional cause of action for damages against the
erring directors. This cause of action is also included in the Complaint filed
before the SEC.
The Spouses Uy have the capacity to file a derivative suit in behalf of and for
the benefit of the corporation. The reason is that, as earlier discussed, the
allegations of the Complaint make them out as stockholders at the time the
questioned transaction occurred, as well as at the time the action was filed and
during the pendency of the action.

Third Issue:

Capacity of the Intestate Estate of John D. Young Sr.

Petitioners contend that the Intestate Estate of John D. Young Sr. is not an
indispensable party, as there is no showing that it stands to be benefited or
injured by any court judgement.

It would be useful to point out at this juncture that one of the causes of action
stated in the Complaint filed with the SEC refers to the registration, in the
name of the other heirs of Alice Gochan Young, of 6/14th of the shares still
registered under the name of John D. Young Sr. Since all the shares that
belonged to Alice are still in his name, no final determination can be had
without his estate being impleaded in the suit. His estate is thus an
indispensable party with respect to the cause of action dealing with the
registration of the shares in the names of the heirs of Alice.

Petitioners further claim that the Estate of John Young Sr. was not properly
represented. They claim that "when the estate is under administration, suits
for the recovery or protection of the property or rights of the deceased may be
brought only by the administrator or executor as approved by the court."14
The rules relative to this matter do not, however, make any such categorical
and confining statement.

Section 3 of Rule 3 of the Rules of Court, which is cited by petitioners in

support of their position, reads:

"Sec. 3. Representatives as parties. - Where the action is allowed to be

prosecuted or defended by a representative or someone acting in a fiduciary
capacity, the beneficiary shall be included in the title of the case and shall be
deemed to be the real party in interest. A representative may be a trustee of an
express trust, a guardian, an executor or administrator, or a party authorized
by law or these Rules. An agent acting in his own name and for the benefit of
an undisclosed principal may sue or be sued without joining the principal
except when the contract involves things belonging to the principal."
Section 2 of Rule 87 of the same Rules, which also deals with administrators,
states:

"Sec. 2. Executor or administrator may bring or defend actions which survive. -

For the recovery or protection of the property or rights of the deceased, an
executor or administrator may bring or defend, in the right of the deceased,
actions for causes which survive."

The above-quoted rules, while permitting an executor or administrator to

represent or to bring suits on behalf of the deceased, do not prohibit the heirs
from representing the deceased. These rules are easily applicable to cases in
which an administrator has already been appointed. But no rule categorically
addresses the situation in which special proceedings for the settlement of an
estate have already been instituted, yet no administrator has been appointed.
In such instances, the heirs cannot be expected to wait for the appointment of
an administrator; then wait further to see if the administrator appointed would
care enough to file a suit to protect the rights and the interests of the deceased;
and in the meantime do nothing while the rights and the properties of the
decedent are violated or dissipated.1âwphi1.nêt

The Rules are to be interpreted liberally in order to promote their objective of

securing a just, speedy and inexpensive disposition of every action and
proceeding.15 They cannot be interpreted in such a way as to unnecessarily
put undue hardships on litigants. For the protection of the interests of the
decedent, this Court has in previous instances16 recognized the heirs as
proper representatives of the decedent, even when there is already an
administrator appointed by the court. When no administrator has been
appointed, as in this case, there is all the more reason to recognize the heirs as
the proper representatives of the deceased. Since the Rules do not specifically
prohibit them from representing the deceased, and since no administrator had
as yet been appointed at the time of the institution of the Complaint with the
SEC, we see nothing wrong with the fact that it was the heirs of John D. Young
Sr. who represented his estate in the case filed before the SEC.

Fourth Issue

Notice of Lis Pendens

On the issue of the annotation of the Notice of Lis Pendens on the titles of the
properties of the corporation and the other respondents, we still find no reason
to disturb the ruling of the Court of Appeals.

Under the third, fourth and fifth causes of action of the Complaint, there are
allegations of breach of trust and confidence and usurpation of business
opportunities in conflict with petitioners' fiduciary duties to the corporation,
resulting in damage to the Corporation. Under these causes of action,
respondents are asking for the delivery to the Corporation of possession of the
parcels of land and their corresponding certificates of title. Hence, the suit
necessarily affects the title to or right of possession of the real property sought
to be reconveyed. The Rules of Court17 allows the annotation of a notice of lis
pendens in actions affecting the title or right of possession of real property.18
Thus, the Court of Appeals was correct in reversing the SEC Order for the
cancellation of the notice of lis pendens.

The fact that respondents are not stockholders of the Mactan Realty
Development Corporation and the Lapu-Lapu Real Estate Corporation does not
make them non-parties to this case. To repeat, the jurisdiction of a court or
tribunal over the subject matter is determined by the allegations in the
Complaint. In this case, it is alleged that the aforementioned corporations are
mere alter egos of the directors-petitioners, and that the former acquired the
properties sought to be re conveyed to FGSRC in violation of the directors-
petitioners' fiduciary duty to FGSRC. The notion of corporate entity will be
pierced or disregarded and the individuals composing it will be treated as
identical19 if, as alleged in the present case, the corporate entity is being used
as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an
alter ego, an adjunct, or a business conduit for the sole benefit of the
stockholders.

Effect of RA 8799

While we sustain the appellate court, the case can no longer be remanded to
the SEC. As earlier stated, RA 8799, which became effective on August 8, 2000,
transferred SEC's jurisdiction over cases involving intra-corporate disputes to
courts of general jurisdiction or to the regional trial courtS.20 Section 5.2
thereof reads as follows:

"5.2. The Commission's jurisdiction over all cases enumerated under Section 5
of Presidential Decree No. 902-A is hereby transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court: Provided, That the
Supreme Court in the exercise of its authority may designate the Regional Trial
Court branches that shall exercise jurisdiction over these cases. The
Commission shall retain jurisdiction over pending cases involving intra-
corporate disputes submitted for final resolution which should be resolved
within one (1) year from the enactment of this Code. The Commission shall
retain jurisdiction over pending suspension of payments/rehabilitation cases
filed as of 30 June 2000 until finally disposed."

In the light of the Resolution issued by this Court in AM No. 00-8-10-SC,21 the
Court Administrator and the Securities and Exchange Commission should be
directed to cause the transfer of the records of SEC Case No. 02-94-4674 to the
appropriate court of general jurisdiction.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision

AFFIRMED, subject to the modification that the case be remanded to the
proper regional trial court. The December 9, 1994 Order of Securities and
Exchange Commission hearing officer dismissing the Complaint and directing
the cancellation of the notice of lis pendens, as well as the March 3, 1995
Order denying complainants' motion for reconsideration are REVERSED and
SET ASIDE. Pursuant to AM No. 00-8-10-SC, the Office of the Court
Administrator and the SEC are DIRECTED to cause the actual transfer of the
records of SEC Case No.02-94-467 4 to the appropriate regional trial court.

SO ORDERED.

3. PNB V. ANDRADA ELECTRIC AND ENGINEERING CO.

The Facts

The factual antecedents of the case are summarized by the Court of Appeals as
follows:

"In its complaint, the plaintiff [herein respondent] alleged that it is a

partnership duly organized, existing, and operating under the laws of the
Philippines, with office and principal place of business at Nos. 794-812 Del
Monte [A]venue, Quezon City, while the defendant [herein petitioner] Philippine
National Bank (herein referred to as PNB), is a semi-government corporation
duly organized, existing and operating under the laws of the Philippines, with
office and principal place of business at Escolta Street, Sta. Cruz, Manila;
whereas, the other defendant, the National Sugar Development Corporation
(NASUDECO in brief), is also a semi-government corporation and the sugar
arm of the PNB, with office and principal place of business at the 2nd Floor,
Sampaguita Building, Cubao, Quezon City; and the defendant Pampanga
Sugar Mills (PASUMIL in short), is a corporation organized, existing and
operating under the 1975 laws of the Philippines, and had its business office
before 1975 at Del Carmen, Floridablanca, Pampanga; that the plaintiff is
engaged in the business of general construction for the repairs and/or
construction of different kinds of machineries and buildings; that on August
26, 1975, the defendant PNB acquired the assets of the defendant PASUMIL
that were earlier foreclosed by the Development Bank of the Philippines (DBP)
under LOI No. 311; that the defendant PNB organized the defendant
NASUDECO in September, 1975, to take ownership and possession of the
assets and ultimately to nationalize and consolidate its interest in other PNB
controlled sugar mills; that prior to October 29, 1971, the defendant PASUMIL
engaged the services of plaintiff for electrical rewinding and repair, most of
which were partially paid by the defendant PASUMIL, leaving several unpaid
accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff and
the defendant PASUMIL entered into a contract for the plaintiff to perform the
following, to wit -

'(a) Construction of one (1) power house building;

'(b) Construction of three (3) reinforced concrete foundation for three (3) units
350 KW diesel engine generating set[s];

'(c) Construction of three (3) reinforced concrete foundation for the 5,000 KW
and 1,250 KW turbo generator sets;

'(d) Complete overhauling and reconditioning tests sum for three (3) 350 KW
diesel engine generating set[s];

'(e) Installation of turbine and diesel generating sets including transformer,

switchboard, electrical wirings and pipe provided those stated units are
completely supplied with their accessories;

'(f) Relocating of 2,400 V transmission line, demolition of all existing concrete

foundation and drainage canals, excavation, and earth fillings - all for the total
amount of P543,500.00 as evidenced by a contract, [a] xerox copy of which is
hereto attached as Annex 'A' and made an integral part of this complaint;'

that aside from the work contract mentioned-above, the defendant PASUMIL
required the plaintiff to perform extra work, and provide electrical equipment
and spare parts, such as:

'(a) Supply of electrical devices;

'(b) Extra mechanical works;

'(c) Extra fabrication works;

'(d) Supply of materials and consumable items;

'(e) Electrical shop repair;

'(f) Supply of parts and related works for turbine generator;

'(g) Supply of electrical equipment for machinery;

'(h) Supply of diesel engine parts and other related works including fabrication
of parts.'

that out of the total obligation of P777,263.80, the defendant PASUMIL had
paid only P250,000.00, leaving an unpaid balance, as of June 27, 1973,
amounting to P527,263.80, as shown in the Certification of the chief
accountant of the PNB, a machine copy of which is appended as Annex 'C' of
the complaint; that out of said unpaid balance of P527,263.80, the defendant
PASUMIL made a partial payment to the plaintiff of P14,000.00, in broken
amounts, covering the period from January 5, 1974 up to May 23, 1974,
leaving an unpaid balance of P513,263.80; that the defendant PASUMIL and
the defendant PNB, and now the defendant NASUDECO, failed and refused to
pay the plaintiff their just, valid and demandable obligation; that the President
of the NASUDECO is also the Vice-President of the PNB, and this official holds
office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought this
official to pay the outstanding obligation of the defendant PASUMIL, inasmuch
as the defendant PNB and NASUDECO now owned and possessed the assets of
the defendant PASUMIL, and these defendants all benefited from the works,
and the electrical, as well as the engineering and repairs, performed by the
plaintiff; that because of the failure and refusal of the defendants to pay their
just, valid, and demandable obligations, plaintiff suffered actual damages in
the total amount of P513,263.80; and that in order to recover these sums, the
plaintiff was compelled to engage the professional services of counsel, to whom
the plaintiff agreed to pay a sum equivalent to 25% of the amount of the
obligation due by way of attorney's fees. Accordingly, the plaintiff prayed that
judgment be rendered against the defendants PNB, NASUDECO, and PASUMIL,
jointly and severally to wit:

'(1) Sentencing the defendants to pay the plaintiffs the sum of P513,263.80,
with annual interest of 14% from the time the obligation falls due and
demandable;

'(2) Condemning the defendants to pay attorney's fees amounting to 25% of the
amount claim;

'(3) Ordering the defendants to pay the costs of the suit.'

"The defendants PNB and NASUDECO filed a joint motion to dismiss the
complaint chiefly on the ground that the complaint failed to state sufficient
allegations to establish a cause of action against both defendants, inasmuch as
there is lack or want of privity of contract between the plaintiff and the two
defendants, the PNB and NASUDECO, said defendants citing Article 1311 of
the New Civil Code, and the case law ruling in Salonga v. Warner Barnes & Co.,
88 Phil. 125; and Manila Port Service, et al. v. Court of Appeals, et al., 20 SCRA
1214.

"The motion to dismiss was by the court a quo denied in its Order of November
27, 1980; in the same order, that court directed the defendants to file their
answer to the complaint within 15 days.

"In their answer, the defendant NASUDECO reiterated the grounds of its
motion to dismiss, to wit:

'That the complaint does not state a sufficient cause of action against the
defendant NASUDECO because: (a) NASUDECO is not x x x privy to the various
electrical construction jobs being sued upon by the plaintiff under the present
complaint; (b) the taking over by NASUDECO of the assets of defendant
PASUMIL was solely for the purpose of reconditioning the sugar central of
defendant PASUMIL pursuant to martial law powers of the President under the
Constitution; (c) nothing in the LOI No. 189-A (as well as in LOI No. 311)
authorized or commanded the PNB or its subsidiary corporation, the
NASUDECO, to assume the corporate obligations of PASUMIL as that being
involved in the present case; and, (d) all that was mentioned by the said letter
of instruction insofar as the PASUMIL liabilities [were] concerned [was] for the
PNB, or its subsidiary corporation the NASUDECO, to make a study of, and
submit [a] recommendation on the problems concerning the same.'

"By way of counterclaim, the NASUDECO averred that by reason of the filing by
the plaintiff of the present suit, which it [labeled] as unfounded or baseless, the
defendant NASUDECO was constrained to litigate and incur litigation expenses
in the amount of P50,000.00, which plaintiff should be sentenced to pay.
Accordingly, NASUDECO prayed that the complaint be dismissed and on its
counterclaim, that the plaintiff be condemned to pay P50,000.00 in concept of
attorney's fees as well as exemplary damages.

"In its answer, the defendant PNB likewise reiterated the grounds of its motion
to dismiss, namely: (1) the complaint states no cause of action against the
defendant PNB; (2) that PNB is not a party to the contract alleged in par. 6 of
the complaint and that the alleged services rendered by the plaintiff to the
defendant PASUMIL upon which plaintiff's suit is erected, was rendered long
before PNB took possession of the assets of the defendant PASUMIL under LOI
No. 189-A; (3) that the PNB take-over of the assets of the defendant PASUMIL
under LOI 189-A was solely for the purpose of reconditioning the sugar central
so that PASUMIL may resume its operations in time for the 1974-75 milling
season, and that nothing in the said LOI No. 189-A, as well as in LOI No. 311,
authorized or directed PNB to assume the corporate obligation/s of PASUMIL,
let alone that for which the present action is brought; (4) that PNB's
management and operation under LOI No. 311 did not refer to any asset of
PASUMIL which the PNB had to acquire and thereafter [manage], but only to
those which were foreclosed by the DBP and were in turn redeemed by the PNB
from the DBP; (5) that conformably to LOI No. 311, on August 15, 1975, the
PNB and the Development Bank of the Philippines (DBP) entered into a
'Redemption Agreement' whereby DBP sold, transferred and conveyed in favor
of the PNB, by way of redemption, all its (DBP) rights and interest in and over
the foreclosed real and/or personal properties of PASUMIL, as shown in Annex
'C' which is made an integral part of the answer; (6) that again, conformably
with LOI No. 311, PNB pursuant to a Deed of Assignment dated October 21,
1975, conveyed, transferred, and assigned for valuable consideration, in favor
of NASUDECO, a distinct and independent corporation, all its (PNB) rights and
interest in and under the above 'Redemption Agreement.' This is shown in
Annex 'D' which is also made an integral part of the answer; [7] that as a
consequence of the said Deed of Assignment, PNB on October 21, 1975 ceased
to managed and operate the above-mentioned assets of PASUMIL, which
function was now actually transferred to NASUDECO. In other words, so
asserted PNB, the complaint as to PNB, had become moot and academic
because of the execution of the said Deed of Assignment; [8] that moreover, LOI
No. 311 did not authorize or direct PNB to assume the corporate obligations of
PASUMIL, including the alleged obligation upon which this present suit was
brought; and [9] that, at most, what was granted to PNB in this respect was the
authority to 'make a study of and submit recommendation on the problems
concerning the claims of PASUMIL creditors,' under sub-par. 5 LOI No. 311.

"In its counterclaim, the PNB averred that it was unnecessarily constrained to
litigate and to incur expenses in this case, hence it is entitled to claim
attorney's fees in the amount of at least P50,000.00. Accordingly, PNB prayed
that the complaint be dismissed; and that on its counterclaim, that the plaintiff
be sentenced to pay defendant PNB the sum of P50,000.00 as attorney's fees,
aside from exemplary damages in such amount that the court may seem just
and equitable in the premises.

"Summons by publication was made via the Philippines Daily Express, a

newspaper with editorial office at 371 Bonifacio Drive, Port Area, Manila,
against the defendant PASUMIL, which was thereafter declared in default as
shown in the August 7, 1981 Order issued by the Trial Court.

"After due proceedings, the Trial Court rendered judgment, the decretal portion
of which reads:

'WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the

defendant Corporation, Philippine National Bank (PNB) NATIONAL SUGAR
DEVELOPMENT CORPORATION (NASUDECO) and PAMPANGA SUGAR MILLS
(PASUMIL), ordering the latter to pay jointly and severally the former the
following:
'1. The sum of P513,623.80 plus interest thereon at the rate of 14% per annum
as claimed from September 25, 1980 until fully paid;

'2. The sum of P102,724.76 as attorney's fees; and,

'3. Costs.

'SO ORDERED.

'Manila, Philippines, September 4, 1986.

'(SGD) ERNESTO S. TENGCO

'Judge'"3

Ruling of the Court of Appeals

Affirming the trial court, the CA held that it was offensive to the basic tenets of
justice and equity for a corporation to take over and operate the business of
another corporation, while disavowing or repudiating any responsibility,
obligation or liability arising therefrom.4

Hence, this Petition.5

Issues

In their Memorandum, petitioners raise the following errors for the Court's
consideration:

"I

The Court of Appeals gravely erred in law in holding the herein petitioners
liable for the unpaid corporate debts of PASUMIL, a corporation whose
corporate existence has not been legally extinguished or terminated, simply
because of petitioners['] take-over of the management and operation of
PASUMIL pursuant to the mandates of LOI No. 189-A, as amended by LOI No.
311.
"II

The Court of Appeals gravely erred in law in not applying [to] the case at bench
the ruling enunciated in Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415."6

Succinctly put, the aforesaid errors boil down to the principal issue of whether
PNB is liable for the unpaid debts of PASUMIL to respondent.

This Court's Ruling

The Petition is meritorious.

Main Issue:

Liability for Corporate Debts

As a general rule, questions of fact may not be raised in a petition for review
under Rule 45 of the Rules of Court.7 To this rule, however, there are some
exceptions enumerated in Fuentes v. Court of Appeals.8 After a careful
scrutiny of the records and the pleadings submitted by the parties, we find that
the lower courts misappreciated the evidence presented.9 Overlooked by the
CA were certain relevant facts that would justify a conclusion different from
that reached in the assailed Decision.10

Petitioners posit that they should not be held liable for the corporate debts of
PASUMIL, because their takeover of the latter's foreclosed assets did not make
them assignees. On the other hand, respondent asserts that petitioners and
PASUMIL should be treated as one entity and, as such, jointly and severally
held liable for PASUMIL's unpaid obligation.

As a rule, a corporation that purchases the assets of another will not be liable
for the debts of the selling corporation, provided the former acted in good faith
and paid adequate consideration for such assets, except when any of the
following circumstances is present: (1) where the purchaser expressly or
impliedly agrees to assume the 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 fraudulently entered into in order to escape liability for those
debts.11
Piercing the Corporate

Veil Not Warranted

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.12 It has a personality separate
and distinct from the persons composing it, as well as from any other legal
entity to which it may be related.13 This is basic.

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.14 For reasons of public policy and in the interest of
justice, the corporate veil will justifiably be impaled15 only when it becomes a
shield for fraud, illegality or inequity committed against third persons.16

Hence, any application of the doctrine of piercing the corporate veil should be
done with caution.17 A court should be mindful of the milieu where it is to be
applied.18 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 its rights.19 The wrongdoing must be clearly and convincingly
established; it cannot be presumed.20 Otherwise, an injustice that was never
unintended may result from an erroneous application.21

This Court has pierced the corporate veil to ward off a judgment credit,22 to
avoid inclusion of corporate assets as part of the estate of the decedent,23 to
escape liability arising from a debt,24 or to perpetuate fraud and/or confuse
legitimate issues25 either to promote or to shield unfair objectives26 or to
cover up an otherwise blatant violation of the prohibition against forum-
shopping.27 Only in these and similar instances may the veil be pierced and
disregarded.28

The question of whether a corporation is a mere alter ego is one of fact.29

Piercing the veil of corporate fiction may be allowed only if the following
elements concur: (1) control -- not mere stock control, but complete domination
-- not only of finances, but of policy and business practice in respect to the
transaction attacked, must have been such 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 a fraud or a
wrong to perpetuate the violation of a statutory or other positive legal duty, or a
dishonest and an unjust act in contravention of plaintiff's legal right; and (3)
the said control and breach of duty must have proximately caused the injury or
unjust loss complained of.30
We believe that the absence of the foregoing elements in the present case
precludes the piercing of the corporate veil. First, other than the fact that
petitioners acquired the assets of PASUMIL, there is no showing that their
control over it warrants the disregard of corporate personalities.31 Second,
there is no evidence that their juridical personality was used to commit a fraud
or to do a wrong; or that the separate corporate entity was farcically used as a
mere alter ego, business conduit or instrumentality of another entity or
person.32 Third, respondent was not defrauded or injured when petitioners
acquired the assets of PASUMIL.33

Being the party that asked for the piercing of the corporate veil, respondent
had the burden of presenting clear and convincing evidence to justify the
setting aside of the separate corporate personality rule.34 However, it utterly
failed to discharge this burden;35 it failed to establish by competent evidence
that petitioner's separate corporate veil had been used to conceal fraud,
illegality or inequity.36

While we agree with respondent's claim that the assets of the National Sugar
Development Corporation (NASUDECO) can be easily traced to PASUMIL,37 we
are not convinced that the transfer of the latter's assets to petitioners was
fraudulently entered into in order to escape liability for its debt to
respondent.38

A careful review of the records reveals that DBP foreclosed the mortgage
executed by PASUMIL and acquired the assets as the highest bidder at the
public auction conducted.39 The bank was justified in foreclosing the
mortgage, because the PASUMIL account had incurred arrearages of more than
20 percent of the total outstanding obligation.40 Thus, DBP had not only a
right, but also a duty under the law to foreclose the subject properties.41

Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB acquired
PASUMIL's assets that DBP had foreclosed and purchased in the normal
course. Petitioner bank was likewise tasked to manage temporarily the
operation of such assets either by itself or through a subsidiary corporation.44

PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL
assets pursuant to Section 6 of Act No. 3135.45 These assets were later
conveyed to PNB for a consideration, the terms of which were embodied in the
Redemption Agreement.46 PNB, as successor-in-interest, stepped into the
shoes of DBP as PASUMIL's creditor.47 By way of a Deed of Assignment,48
PNB then transferred to NASUDECO all its rights under the Redemption
Agreement.

In Development Bank of the Philippines v. Court of Appeals,49 we had the

occasion to resolve a similar issue. We ruled that PNB, DBP and their
transferees were not liable for Marinduque Mining's unpaid obligations to
Remington Industrial Sales Corporation (Remington) after the two banks had
foreclosed the assets of Marinduque Mining. We likewise held that Remington
failed to discharge its burden of proving bad faith on the part of Marinduque
Mining to justify the piercing of the corporate veil.

In the instant case, the CA erred in affirming the trial court's lifting of the
corporate mask.50 The CA did not point to any fact evidencing bad faith on the
part of PNB and its transferee.51 The corporate fiction was not used to defeat
public convenience, justify a wrong, protect fraud or defend crime.52 None of
the foregoing exceptions was shown to exist in the present case.53 On the
contrary, the lifting of the corporate veil would result in manifest injustice. This
we cannot allow.

No Merger or Consolidation

Respondent further claims that petitioners should be held liable for the unpaid
obligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly
authorized PASUMIL and PNB to merge or consolidate. On the other hand,
petitioners contend that their takeover of the operations of PASUMIL did not
involve any corporate merger or consolidation, because the latter had never lost
its separate identity as a corporation.

A consolidation is the union of two or more existing entities to form a new

entity called the consolidated corporation. A merger, on the other hand, is a
union whereby one or more existing corporations are absorbed by another
corporation that survives and continues the combined business.54

The merger, however, does not become effective upon the mere agreement of
the constituent corporations.55 Since a merger or consolidation involves
fundamental changes in the corporation, as well as in the rights of
stockholders and creditors, there must be an express provision of law
authorizing them.56 For a valid merger or consolidation, the approval by the
Securities and Exchange Commission (SEC) of the articles of merger or
consolidation is required.57 These articles must likewise be duly approved by a
majority of the respective stockholders of the constituent corporations.58

In the case at bar, we hold that there is no merger or consolidation with respect
to PASUMIL and PNB. The procedure prescribed under Title IX of the
Corporation Code59 was not followed.

In fact, PASUMIL's corporate existence, as correctly found by the CA, had not
been legally extinguished or terminated.60 Further, prior to PNB's acquisition
of the foreclosed assets, PASUMIL had previously made partial payments to
respondent for the former's obligation in the amount of P777,263.80. As of
June 27, 1973, PASUMIL had paid P250,000 to respondent and, from January
5, 1974 to May 23, 1974, another P14,000.

Neither did petitioner expressly or impliedly agree to assume the debt of

PASUMIL to respondent.61 LOI No. 11 explicitly provides that PNB shall study
and submit recommendations on the claims of PASUMIL's creditors.62 Clearly,
the corporate separateness between PASUMIL and PNB remains, despite
respondent's insistence to the contrary.63

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET
ASIDE. No pronouncement as to costs.

SO ORDERED.

4. ROVELS ENTERPRISES, INC. V. OCAMPO

Assailed in this petition for review on certiorari1 is the Decision of the Court of
Appeals dated June 5, 19982 in CA-G.R. SP No. 43260, affirming the Decision
of the Securities and Exchange Commission (SEC) in SEC Case No. 09-95-
5135 dismissing the petition to be declared the majority stockholder of
Tagaytay Taal Tourist Development Corporation (TTTDC). The petition was filed
by Rovels Enterprises, Inc. (Rovels), herein petitioner. Rovels is a domestic
corporation engaged in construction work. Its President is Eduardo Santos.
TTTDC was among Rovels' clients.

In payment for the services rendered by Rovels, the Board of Directors of

TTTDC passed a Resolution on December 29, 1975 providing as follows:

"RESOLVED, as it is hereby resolved that payment for professional fees and

services rendered by x x x Rovels' Enterprises x x x be made in cash if funds
are available, or its equivalent number of shares of stock of the corporation at
par value, and should said creditors elect the latter mode of payment, it is
further resolved that the President and/or his Secretary be authorized as they
are hereby authorized, to issue the corresponding unissued shares of stock of
the corporation."3 (emphasis added)

The Resolution was signed by three of TTTDC's directors, namely, Victoriano

Leviste, Bienvenido Cruz, Jr., and Roberto Roxas. Roberto Roxas is the
President of TTTDC and stockholder of Rovels at the same time. Noticeably, the
signatures of the other two (2) TTTDC directors - Jose Silva, Jr. and Emmanuel
Ocampo - do not appear in the subject Resolution despite their presence in the
December 29, 1975 Board meeting.4
On February 23, 1976, Eduardo Santos, President of Rovels, on behalf of
TTTDC, filed with the SEC an application for exemption from registration of
TTTDC's unissued shares of stock transferred to it (Rovels) as payment for its
services worth One Hundred Eight Thousand Pesos (P108,000.00). This was
done because under Section 4 (a) of the Revised Securities Act, no shares of
stocks shall be transferred unless first registered with the SEC or permitted to
be sold.5

On May 7, 1976, the SEC, in its Resolution No. 260,6 granted Eduardo Santos'
application.

On March 1, 1976, the TTTDC Board of Directors passed another Resolution7

repealing its Resolution of December 29, 1975, thus:

"RESOLVED, as it is hereby resolved, that the Resolution of December 29,

1975 authorizing the payment of creditors with unissued shares of the
corporation be as it is hereby repealed: Resolved further that the matter as well
as the amount of the creditors' claims be given adequate study and
consideration by the Board." (emphasis added)

In view of the December 29, 1975 TTTDC Board Resolution transferring to

Rovels the said shares of stock as construction fee, TTTDC Directors Jose
Silva, Jr. and Emmanuel Ocampo filed a complaint with the SEC against
Roberto Roxas, TTTDC President, and Eduardo Santos, Rovels' President,
docketed as SEC Case No. 1322. In their complaint, Silva and Ocampo alleged
that there was no meeting of the TTTDC's Board of Directors on December 29,
1975; that they did not authorize the transfer of TTTDC's shares of stock to
Rovels; that they never signed the alleged minutes of the meeting; and that the
signatures of the other two (2) Directors, Victoriano Leviste and Bienvenido
Cruz, Jr., as well as that of TTTDC's Secretary Francisco Carreon, Jr., were
obtained through fraud and misrepresentation. They also alleged that the
TTTDC Board Resolution dated December 29, 1975 was repealed by the March
1, 1976 Resolution. They thus prayed that the transfer of TTTDC's shares of
stock to Rovels pursuant to Resolution dated December 29, 1975 be annulled.

On March 17, 1979, SEC Hearing Officer Eugenio E. Reyes issued a Decision8
in favor of Silva and Ocampo, the dispositive portion of which reads:

"Considering that the (December 29, 1975) board resolution which authorizes
the corporation to pay its creditors with its unissued shares of stock x x x had
been expressly revoked or repealed on March 1, 1976 as earlier pointed out,
Commission Resolution No. 260 (granting Santos' application for exemption
from registration of the unissued shares), when issued on May 7, 1976 x x x
had lost its legal basis. Consequently, the corresponding issuance of shares
was without authority of the board of directors."
xxx-xxx-xxx

"WHEREFORE, premises considered, this Commission finds and so holds that

the purported board resolution of December 29, 1975, not having been
properly passed upon at a duly constituted board meeting, cannot be
recognized as valid and hence, without legal force and effect. Consequently, the
issuance of shares of stock to corporate creditors of the Tagaytay Taal Tourist
Development Corporation is null and void. In view thereof, the shares in
question are still considered unissued and remain part of the authorized
capital stocks of the Tagaytay Taal Tourist Development Corporation. This is
without prejudice to the rights of said corporate creditors as against Tagaytay
Taal Tourist Development Corporation for the latter's contractual obligations."
(emphasis added)

On appeal by Roberto Roxas and Eduardo Santos, the SEC en banc, in its
Decision dated September 2, 1982 in SEC-AC No. 049,9 affirmed the Decision
of the SEC Hearing Officer. This Court, in its Decision of June 20, 1983 in G.R.
No. 61863,10 likewise affirmed the Decision of the SEC en banc. The Decision
of this Court became final and executory on September 2, 1983.11

Subsequently, TTTDC, Jose Silva, Emmanuel Ocampo, Victoriano Leviste,

Francisco Carreon, Jr., and Expedito Leviste, Sr., another stockholder of
TTTDC, (the SILVA GROUP, now respondents), filed with the SEC a petition
against Eduardo Santos, Sylvia S. Veloso, Josefina Carballo, Augusto del
Rosario, Reynaldo Alcantara and Lauro Sandoval (the SANTOS GROUP),
docketed as SEC Case No. 3806. (The SANTOS GROUP were nominees of
Rovels who, by virtue of the shares of stock issued pursuant to the December
29, 1975 Resolution, proceeded to act as directors and officers of TTTDC). In
their petition, the SILVA GROUP prayed that they be declared the true and
lawful stockholders and incumbent directors and officers of TTTDC.

On July 6, 1993, SEC Hearing Officer Alberto P. Atas rendered a Decision12 in

favor of the SILVA GROUP, thus:

"WHEREFORE, judgment is hereby rendered in favor of the petitioners (SILVA

GROUP) and against the respondents (SANTOS GROUP), as follows:

a. Declaring petitioners as the lawful stockholders, directors and officers of

Tagaytay Taal Tourist Development Corporation;

b. Declaring respondents, to be not stockholders of Tagaytay Taal Tourist

Development Corporation;
c. Declaring respondents to be not directors or officers of Tagaytay Taal Tourist
Development Corporation;

d. The writ of preliminary injunction issued on November 6, 1990 is hereby

made permanent; and

e. Ordering the Records Division of this Commission to purge the records of

Tagaytay Taal Tourist Development Corporation of all papers and documents
filed by respondents purportedly in behalf of Tagaytay Taal Tourist
Development Corporation." (emphasis and words in parentheses added)

The above Decision became final and executory on September 1, 199413 as no

appeal was interposed by either the SILVA GROUP or the SANTOS GROUP.

However, Rovels, to whom the TTTDC shares of stock (worth P108,000.00) were
transferred, claimed that it became aware of the July 6, 1993 SEC Decision
only in June of 1995. So on September 6, 1995, it filed a petition with the
SEC,14 docketed as SEC Case No. 09-95-5135, praying that it be declared the
majority stockholder of TTTDC as against respondents Ocampo, Silva, Leviste,
Sr., Calalang and Carreon (belonging to the SILVA GROUP). The material
allegations of the petition state that: (1) TTTDC passed a Resolution dated
December 29, 1975 authorizing the transfer of its unissued shares to Rovels as
the latter's construction fee;15 (2) Pursuant to that Resolution, TTTDC shares
of stock worth P692,000.00 were transferred to Rovels;16 (3) While TTTDC, in
its March 1, 1976 Resolution, repealed the December 29, 1975 Resolution,
such repeal does not bind Rovels for lack of notice;17 (4) Several "interrelated
cases" (SEC Case Nos. 1322 and 3806) were filed with the SEC involving the
SILVA and SANTOS GROUPS;18 (5) Rovels is not bound by the SEC Decisions
since it was not impleaded as a party in said cases.19

Forthwith, the SILVA GROUP filed a motion to dismiss20 the petition on the
following grounds: (1) Rovels has no cause of action since TTTDC's December
29, 1975 Board Resolution was repealed by its March 1, 1976 Resolution;21 (2)
the petition is barred by the prior SEC Decisions in SEC Case No. 1322
declaring that the issuance of TTTDC's shares of stock to Rovels is valid, and
the SEC Decision in 3806 declaring the SILVA GROUP as the lawful
stockholders of TTTDC;22 and (3) the petition is barred by estoppel,
prescription and laches since it was filed long after Rovels was notified of the
repeal of the December 29, 1975 TTTDC Resolution.23

In an Order dated April 22, 199624 in SEC Case No. 09-95-5135, SEC Hearing
Officer Manuel P. Perea dismissed Rovel's petition on the grounds of lack of
cause of action, res judicata, estoppel, laches and prescription. This Order was
affirmed by the SEC en banc in its Decision dated January 20, 199725 in SEC
AC No. 560.

Upon a petition for review, docketed as CA-G.R. SP. No. 43260, the Court of
Appeals, in its Decision dated June 5, 1998,26 affirmed the January 20, 1997
SEC en banc Decision. Rovels' motion for reconsideration was likewise
denied.27

Hence, the instant petition for review on certiorari,28 alleging that the Court of
Appeals erred:

IN HOLDING THAT PETITIONER ROVELS HAS NO CAUSE OF ACTION

AGAINST PRIVATE RESPONDENTS; and

II

IN HOLDING THAT THE PETITION IN SEC CASE NO. 09-95-5135 IS BARRED

BY PRIOR JUDGMENT (RES JUDICATA), LACHES, PRESCRIPTION AND
ESTOPPEL.29

The petition is unmeritorious.

On the first assigned error, we find that the Court of Appeals is correct in
affirming the dismissal of Rovels' petition in SEC Case No. 09-955135 for lack
of cause of action.

A cause of action is defined as the delict or wrongful act or omission committed

by a person in violation of the right of another.30 A cause of action exists if the
following elements are present: (1) a right in favor of the plaintiff, (2) the
correlative obligation of the defendant to respect such right, and (3) the act or
omission of the defendant in violation of plaintiff's right.31 The test is whether
the material allegations of the complaint, assuming them to be true, state
ultimate facts which constitute plaintiff's cause of action, such that plaintiff is
entitled to a favorable judgment as a matter of law.32

The pertinent portions of Rovels petition filed with the SEC read:

xxx-xxx-xxx
"5. x x x. On December 29, 1975, TTTDC in a Resolution signed by majority
members of the Board of Directors resolved that TTTDC pay its creditors
through a 'debt-to-equity swap;'

xxx-xxx-xxx

"9. x x x the relation between the Silva faction and the Santos faction became
adversarial. The Silva faction attempted to form an alleged new board of
directors and repealed the Board Resolution dated December 29, 1975
Resolution regarding the 'debt' to equity swap. Thus, it resolved:

'RESOLVED, as it is hereby resolved, that the Resolution of December 29, 1975

authorizing the payment of creditors with unissued shares of the corporation
be as it is hereby repealed: Resolved further that the matter as well as the
amount of the creditor's claims be given adequate study and consideration by
the Board. x x x'

"10. That what is clear from the above Resolution of March 1, 1976 is the
admission that indeed TTTDC owes certain amount of money from its creditors.
The creditors became stockholders of record as a result of shares of stock
issued in implementation of the 'debt to equity' conversion. Corresponding
shares of stock were issued and signed by then president of the corporation
Roberto Roxas and then corporate secretary Francisco N. Carreon, Jr.

"Copy of said Certificate of Stocks are hereto attached and marked as Annexes
'D' to 'P' and made an integral part hereof.

xxx-xxx-xxx

"12. That several interrelated cases were filed by Eduardo L. Santos (SEC Case
No. 1322), on one hand, and Expedito M. Leviste, Francisco Carreon,
Felicisimo Ocampo and Jose M. Silva (SEC Case No. 3806) and vice versa on
the other. Petitioner, Rovels Enterprises, Inc. was never made a party in any of
these cases and its nominees in the Board of Directors of TTTDC continued to
exercise its function from 1976.

xxx-xxx-xxx

"19. That to implement the decision in SEC CASE 3806, which declared the
Silva Group as the duly authorized directors and officers, without looking
deeply into the records of the case, i.e. the sub-poened authentic 'Stock and
Transfer Book' of TTTDC and the earlier decision in PED Case No. 89-0644, will
constitute irreparable damage to the petitioner. Specially so, Silva executed an
affidavit showing 5 Directors of TTTDC but the stock certificates were not
signed by the corporate secretary who died in 1982.

xxx-xxx-xxx

"21. That petitioner which became duly registered majority stockholder thru
'debt to equity swap' had been an innocent party to such controversy between
the aforesaid 2 ruling thereof, hence, petitioner remains as is on a status quo
basis as majority stockholder of TTTDC.

xxx-xxx-xxx

"PRAYER

"WHEREFORE, premises considered, petitioner prays that this Honorable

Commission render judgment in favor of petitioner and against respondents
(SILVA GROUP):

xxx-xxx-xxx

"2. After due notice and hearing, re-declaring petitioner lawful registered
majority stockholder of TTTDC x x x;

"3. Ordering respondents to desist from sitting in the Board of Directors of

TTTDC as they are not lawful registered stockholders in the books of the said
corporation.

x x x - x x x - x x x33

A reading of the above petition (paragraph 5) shows that Rovels' prayer to be

declared the majority stockholder of TTTDC is anchored on the December 29,
1975 TTTDC Board Resolution transferring its shares of stock to Rovels as
construction fee. This Resolution could have vested in Rovels a right to be
declared a stockholder of TTTDC. However, the same petition (paragraphs 9
and 10) concedes that the December 29, 1975 Resolution was repealed by the
March 1, 1976 Resolution. The petition likewise alleges (paragraphs 12 and 19)
that there were prior "interrelated cases" filed with the SEC between the SILVA
and SANTOS GROUPS, namely: (1) SEC Case No. 1322 (wherein the SEC en
banc in its Decision dated September 2, 1982 nullified the TTTDC Board
Resolution dated December 29, 1975, which Decision was affirmed with finality
by this Court in G.R. No. 61863) and (2) SEC Case No. 3806 (wherein the SEC
declared the SILVA GROUP as the legitimate stockholders of TTTDC, not
Rovels' nominees [the SANTOS GROUP]). Clearly, on the face of its petition,
Rovels cannot claim to be the majority stockholder of TTTDC.

Relative to the second assigned error, Rovels contends that it is not bound by
the SEC Decision in SEC Case Nos. 1322 and 3806 and in G.R. No. 61863 as it
was "never a party in any of these cases." This contention brings us to the
issue of res judicata.

The requisites of res judicata,34 also known as the rule on bar by prior
judgment, are:

1) the former judgment must be final;

2) the court which rendered it had jurisdiction over the subject matter and the
parties;

3) the judgment must be on the merits; and

4) there must be between the first and the second actions, identity of parties,
subject matter and causes of action.

The first three (3) requisites of res judicata are present in this case. This is not
disputed by the parties and is, in fact, established by the record. The
controversy arises as to whether there is identity of the parties in the present
SEC Case No. 09-95-5135, on the one hand, and in prior SEC Case Nos. 1322
and 3806, on the other.

Contrary to its claim, Rovels is bound by the previous SEC Decisions. It must
be noted that Eduardo Santos, President of Rovels, was one of the respondents
in both SEC Case Nos. 1322 and 3806. Clearly, Rovels and Eduardo Santos,
being its President, share an identity of interests sufficient to make them
privies-in-law, as correctly found by the Court of Appeals in its assailed
Decision, thus:

"In the case at bench, there can be no question that the rights claimed by
petitioner and its stockholders/directors/officers who were parties in SEC Case
Nos. 1322 and 3806 are identical in that they are both based on the December
29, 1975 Resolution. Stated differently, they shared an identity of interest from
which flowed an identity of relief sought, namely, to be declared owners of the
stocks of TTTDC, premised on the same December 29, 1975 Resolution. x x x.
This 'identity of interest is sufficient to make them privies-in-law, one to the
other, and meets the requisite of substantial identity of parties.'"35

It bears stressing that absolute identity of parties is not required for the
principle of res judicata, or the rule on bar by prior judgment, to apply. Mere
substantial identity of parties, or a community of interests between a party in
the first case and a party in the subsequent case even if the latter was not
impleaded in the first case, is sufficient.36

Rovels cannot take refuge in the argument that, as a corporation, it is imbued

with personality separate and distinct from that of the respondents in SEC
Case Nos. 1322 and 3806. The legal fiction of separate corporate existence is
not at all times invincible and the same may be pierced when employed as a
means to perpetrate a fraud, confuse legitimate issues, or used as a vehicle to
promote unfair objectives or to shield an otherwise blatant violation of the
prohibition against forum-shopping. While it is settled that the piercing of the
corporate veil has to be done with caution, this corporate fiction may be
disregarded when necessary in the interest of justice.37

The doctrine of res judicata states that a final judgment on the merits rendered
by a court of competent jurisdiction is conclusive as to the rights of the parties
and their privies, and constitutes an absolute bar to subsequent actions
involving the same claim, demand or cause of action.38 This is founded on
public policy and necessity, which makes it to the interest of the State that
there should be an end to litigations, and on the principle that an individual
should not be vexed twice for the same cause.39

Just recently, we emphatically declared in In Re: Petition Seeking for

Clarification as to the Validity and Forceful Effect of Two (2) Final and
Executory but Conflicting Decisions of the Honorable Supreme Court:40 "Every
litigation must come to an end once a judgment becomes final, executory and
unappealable. This is a fundamental and immutable legal principle. For '(j)ust
as a losing party has the right to file an appeal within the prescribed period,
the winning party also has the correlative right to enjoy the finality of the
resolution of his case' by the execution and satisfaction of the judgment, which
is the 'life of the law.' Any attempt to thwart this rigid rule and deny the
prevailing litigant his right to savour the fruit of his victory, must immediately
be struck down."

Finally, this Court sustains the Appellate Court's finding that the filing of
Rovels petition in the instant SEC Case No. 09-95-5135 is barred by estoppel,
prescription and laches. There is no merit to Rovels' claim that it was only in
June of 199541 when it became aware of the repeal of the December 29, 1975
TTTDC Resolution and of the consequent nullification of the transfer of its
shares of stock.
It is undisputed that Eduardo Santos was present in the March 1, 1976 TTTDC
Board meeting wherein the December 29, 1975 Resolution was repealed. We
hold that Eduardo Santos, being the President of Rovels, is considered as its
(Rovels') agent. As such, his knowledge of the repeal of the December 29, 1975
Resolution, under the theory of imputed knowledge, is ascribed to his principal
(Rovels).

It was only on September 6, 1995, or almost twenty (20) years from the time
Eduardo Santos learned of the March 1, 1976 Resolution, that Rovels filed its
petition in SEC Case No. 09-95-5135. Within that long period of time, Rovels
did nothing to contest the March 1, 1976 TTTDC Resolution to protect its
rights, if any. Obviously, such inaction constitutes estoppel, prescription and
laches. As stated by Rovels itself, Article 1149 of the New Civil Code limits the
filing of actions, whose periods are not fixed therein or in any other laws, to
only five (5) years. In addition, the principle of laches or "stale demands"
provides that the failure or neglect, for an unreasonable and unexplained
length of time, to do that which by exercising due diligence could or should
have been done earlier, or the negligence or omission to assert a right within a
reasonable time, warrants a presumption that the party entitled to assert it
either has abandoned it or declined to assert it.42

In sum, this Court finds that the Court of Appeals did not commit any
reversible error in its challenged Decision.

WHEREFORE, the petition is DENIED. The assailed Decision of the Court of

Appeals dated June 5, 1998 and its Resolution dated December 21, 1998 in
CA-G.R. SP. No. 43260, are AFFIRMED.

SO ORDERED.

5. SULDAO V. CIMECH SYSTEM CONSTRUCTION, INC.

The facts are as follows:

Respondent Cimech Systems Construction, Inc. employed the services of

petitioner Ruperto Suldao on August 31, 2001 as a machinist with a daily wage
of P300.00 on a contractual status for a period of five months. After January
31, 2002, respondent continued to engage the services of petitioner as a
machinist until he became a permanent employee.

Petitioner alleged that owing to a dearth in projects being handled by the

respondent, he was ordered by Ms. Elsa Labocay to take a leave of absence
from November 1 to 6, 2002. He reported for work on November 7, 2002 but
was again ordered to take a leave of absence from November 7 to 14, 2002. On
November 15, 2002, he was purportedly ordered to make a letter-request for
field work transfer which he complied. The following day, he failed to report
back for work because he was sick. On November 17, 2002, he reported for
work but was allegedly barred from entering by the security guard on duty. On
November 21, 2002, he was again barred from entering the premises, hence he
filed the instant complaint4 for constructive dismissal.5

Respondent alleged that due to lack of available work in the machine shop,
petitioner was temporarily transferred to its fabrication department sometime
in November 2002. Petitioner refused to accept the transfer and insisted to
work as a machinist. Because of petitioner's arrogant and unruly behavior, he
was led away by a guard. When petitioner returned for work, he purportedly
demanded a salary increase and wages for the days that he did not work.
Respondent considered the actuations of petitioner tantamount to
insubordination, hence, it suspended6 the petitioner for six days.

After his suspension on November 28, 2002, petitioner accepted his transfer to
the fabrication department but worked for only one day. During the company's
Christmas party on December 21, 2002, petitioner came and asked for his 13th
month pay. On January 13, 2003, petitioner demanded to get his one day
salary deposit but was told to secure a clearance which he failed to comply.
Thereafter, petitioner filed the instant complaint for illegal dismissal.

On August 5, 2003, Labor Arbiter Melquiades Sol D. Del Rosario rendered a

decision, the dispositive portion of which reads:

CONFORMABLY WITH THE FOREGOING, judgment is hereby rendered finding

complainant to have been illegally dismissed constructively. Consequently, he
should be reinstated to his former position and paid his backwages which has
accumulated as of July 17, 2003 in the sum of P62,400.00 plus his one month
separation pay of P7,800.00.

SO ORDERED.7

The NLRC concurred with the findings of the Labor Arbiter that petitioner was
constructively dismissed.

Hence, respondent filed a petition for certiorari 8 which was granted by the
Court of Appeals. In its assailed June 23, 2005 decision, the Court of Appeals
reversed the NLRC by declaring:
WHEREFORE, premises considered, the Petition is hereby given DUE COURSE,
and the February 27, 2004 Decision of the NLRC is hereby REVERSED and
SET ASIDE. The December 20, 2002 Complaint is hereby DISMISSED.

SO ORDERED.9

Hence, this petition raising the sole issue of:

WHETHER THE COURT OF APPEALS COMMITED GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN
REVERSING THE DECISION OF THE LABOR ARBITER AND THE NLRC THAT
THE PETITIONER WAS CONSTRUCTIVELY DISMISSED.

As a general rule, a Petition for Review on Certiorari under Rule 45 of the Rules
of Court is limited to questions of law. However, this rule admits of
exceptions,10 such as in this case where the findings of the Labor Arbiter and
the NLRC vary from the findings of the Court of Appeals.

The petition is impressed with merit.

After a painstaking review of the records, we uphold the findings of the Labor
Arbiter and of the NLRC that petitioner was constructively dismissed.
Constructive dismissal or a constructive discharge has been defined as quitting
because continued employment is rendered impossible, unreasonable or
unlikely, as an offer involving a demotion in rank and a diminution in pay.11
In the instant case, there is constructive dismissal because the continued
employment of petitioner is rendered impossible so as to foreclose any choice
on his part except to resign from such employment.12

In cases of constructive dismissal, the burden of proof is on the employer to

show that the employee was dismissed for a valid and a just cause.13 In the
instant case, respondent failed to discharge this burden. As aptly observed by
the NLRC:

In essence, respondents would have it that they have not dismissed

complainant, rather it was he who did not return to his job after 13 January
2003.

To begin with, the issues raised undoubtedly was factual, the determination of
which lies within the competence of the Labor Arbiter's jurisdiction, over which
this Commission will interfere only when grave abuse or serious errors were
committed by him in the interpretation of the evidence on records.
In this case however, respondents failed to show by substantial proof the
veracity of their assertion. For one, while claiming that complainant was placed
on a six (6) days suspension for an alleged infraction, they failed nonetheless to
adduce evidence showing that indeed complainant committed the offense and
was placed as such as disciplinary measure.

Relevant on this score is the observation and findings of the Labor Arbiter, to
wit:

Respondents' averment that complainant was arrogant, and did not want to be
transferred to another position or department is belied by complainant's letter
dated November 28, 2002.

Excerpts from complainant's letter reads:

"Na tinatanggap ko na utos ng kumpanyang ito na umako ng ibang gawain

para sa kabutihan ng lahat. Na ang pagtanggap ko ng ibang trabaho ay
pansamantala lang habang walang gawain sa dati ko puwesto or gawain
trabaho sa kompanya.

Nang ang sulat salaysay kong ito ay aking isinagawa bilang pagtalima sa
kautusan ng atin kumpanya.

xxx

Complainant's claim that he was required to go on a leave of absence due to a

dearth of work is consistent with respondent's claim that there was scarcity of
work because of the economic crisis.

By all appearances, complainant does not have a high educational attainment

and his skill is limited to being a machinist. As such, all he can do is to obey
the biddings of his superior. So when required to go on leave, he meekly obeys.

Even his claim that he failed to report for work due to indisposition is
supported by a medical certificate. As between the conflicting claims of the
parties, this Arbitration Branch has to accord more weight to complainant's
claim that he was no longer allowed to work because he was barred by the
security guard of the company to enter the premises for reasons only known to
respondents.
Had there been truth to respondents' claim that complainant abandoned his
work because he did not want the job in the fabrication department,
complainant would not have made a letter of conformity to do the bidding of
the company. Moreover, complainant would not have taken steps to protect his
rights like the institution of the present labor suit if he had abandoned his
work because rather than spend time, effort and a little money in attending to
the hearings of this case, he would have concentrated in his new job or in
finding one in order to feed his family.14

While the decision to transfer employees to other areas of its operations forms
part of the well recognized prerogatives of management, it must be stressed,
however, that the managerial prerogative to transfer personnel must not be
exercised with grave abuse of discretion, bearing in mind the basic elements of
justice and fair play. Having the right should not be confused with the manner
in which that right is exercised. Thus it cannot be used as a subterfuge by the
employer to rid himself of an undesirable worker.15

In the instant case, while petitioner's transfer was valid, the manner by which
respondent unjustifiably prevented him from returning to work on several
occasions runs counter to the claim of good faith on the part of respondent
corporation. By reporting for work, petitioner manifested his willingness to
comply with the regulations of the corporation and his desire to continue
working for the latter. However, he was barred from entering the premises
without any explanation. This is a clear manifestation of disdain and
insensibility on the part of an employer towards a particular employee and a
veritable hallmark of constructive dismissal.

We cannot sustain the theory of respondent that since petitioner was allowed
to join its 2002 Christmas Party, there can be no constructive dismissal.
Petitioner's joining the Christmas party does not negate his illegal dismissal.
Neither does it detract us from the fact that petitioner was prevented from
entering the premises of the respondent corporation on previous occasions.

While the liability of the respondent corporation for the constructive dismissal
of the petitioner has been clearly established, the same does not hold true with
the other respondent, Engr. Rodolfo S. Labucay, President and General
Manager of the respondent corporation.16 In finding Labucay also liable, the
Labor Arbiter declared that:

The foregoing circumstances support the view that complainant was

constructively dismissed in an illegal manner. Consequently, respondents, in
solidum, are ordered to reinstate the complainant to his former position and
pay complainant his backwages x x x.
A corporation is invested by law with a personality separate from that of its
stockholders or members. It has a personality separate and distinct from those
of the persons composing it as well as from that of any other entity to which it
may be related. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not in
itself sufficient ground for disregarding the separate corporate personality. A
corporation's authority to act and its liability for its actions are separate and
apart from the individuals who own it.

The veil of corporate fiction treats as separate and distinct the affairs of a
corporation and its officers and stockholders. As a general rule, a corporation
will be looked upon as a legal entity, unless and until sufficient reason to the
contrary appears. When the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the law will regard
the corporation as an association of persons. Also, the corporate entity may be
disregarded in the interest of justice in such cases as fraud that may work
inequities among members of the corporation internally, involving no rights of
the public or third persons. In both instances, there must have been fraud and
proof of it. For the separate juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and convincingly established. It
cannot be presumed.17

In the instant case, no reason exists that will justify the piercing of the veil of
corporate fiction such as to hold Labucay, as the president and general
manager of the respondent corporation, solidarily liable with it. Thus, the
liability for the constructive dismissal of the petitioner solely devolves upon the
respondent corporation. Consequently, the decision of the Labor Arbiter and of
the NLRC should be modified in that only the respondent corporation should
be held liable.

WHEREFORE, the petition is GRANTED. The June 23, 2005 Decision of the
Court of Appeals in CA-G.R. SP No. 83963 and its January 10, 2006
Resolution are REVERSED and SET ASIDE. The February 27, 2004 Resolution
of the National Labor Relations Commission in NLRC CA No. 036963-03
affirming the decision of the Labor Arbiter finding that petitioner was
constructively dismissed, is REINSTATED with MODIFICATION that only the
respondent corporation, Cimech System Construction, Inc. is held liable.

No pronouncement as to costs.

SO ORDERED.

6. GENERAL CREDIT CORP. V. ALSONS DEV. AND INVESTMENT CORP.

The facts:

Shortly after its incorporation in 1957 as a finance and investment company,

petitioner General Credit Corporation (GCC, for short), then known as
Commercial Credit Corporation (CCC), established CCC franchise companies in
different urban centers of the country.3 In furtherance of its business, GCC
had, as early as 1974, applied for and was able to secure license from the then
Central Bank (CB) of the Philippines and the Securities and Exchange
Commission (SEC) to engage also in quasi-banking activities.4 On the other
hand, respondent CCC Equity Corporation (EQUITY, for brevity) was organized
in November 1994 by GCC for the purpose of, among other things, taking over
the operations and management of the various franchise companies. At a time
material hereto, respondent Alsons Development and Investment Corporation
(ALSONS, hereinafter) and Conrado, Nicasio, Editha and Ladislawa, all
surnamed Alcantara, and Alfredo de Borja (hereinafter the Alcantara family, for
convenience), each owned, just like GCC, shares in the aforesaid GCC
franchise companies, e.g., CCC Davao and CCC Cebu.

In December 1980, ALSONS and the Alcantara family, for a consideration of

Two Million (P2,000,000.00) Pesos, sold their shareholdings - a total of 101,953
shares, more or less - in the CCC franchise companies to EQUITY.[5] On
January 2, 1981, EQUITY issued ALSONS et al., a "bearer" promissory note for
P2,000,000.00 with a one-year maturity date, at 18% interest per annum, with
provisions for damages and litigation costs in case of default.6

Some four years later, the Alcantara family assigned its rights and interests
over the bearer note to ALSONS which thenceforth became the holder thereof.7
But even before the execution of the assignment deal aforestated, letters of
demand for interest payment were already sent to EQUITY, through its
President, Wilfredo Labayen, who pleaded inability to pay the stipulated
interest, EQUITY no longer then having assets or property to settle its
obligation nor being extended financial support by GCC.

What happened next, as narrated in the assailed Decision of the CA, may be
summarized, as follows:

1. On January 14, 1986, before the RTC of Makati, ALSONS, having failed to
collect on the bearer note aforementioned, filed a complaint for a sum of
money8 against EQUITY and GCC. The case, docketed as Civil Case No. 12707,
was eventually raffled to Branch 58 of the court. As stated in par. 4 of the
complaint, GCC is being impleaded as party-defendant for any judgment
ALSONS might secure against EQUITY and, under the doctrine of piercing the
veil of corporate fiction, against GCC, EQUITY having been organized as a tool
and mere conduit of GCC.
2. Answering with a cross-claim against GCC, EQUITY stated by way of special
and affirmative defenses that it (EQUITY):

a) was purposely organized by GCC for the latter to avoid CB Rules and
Regulations on DOSRI (Directors, Officers, Stockholders and Related Interest)
limitations, and that it acted merely as intermediary or bridge for loan
transactions and other dealings of GCC to its franchises and the investing
public; andcralawlibrary

b) is solely dependent upon GCC for its funding requirements, to settle, among
others, equity purchases made by investors on the franchises; hence, GCC is
solely and directly liable to ALSONS, the former having failed to provide
'EQUITY the necessary funds to meet its obligations to ALSONS.

3. GCC filed its ANSWER to Cross-claim, stressing that it is a distinct and

separate entity from EQUITY and alleging, in essence that the business
relationships with each other were always at arm's length. And following the
denial of its motion to dismiss ALSONS' complaint, on the ground of lack of
jurisdiction and want of cause of action, GCC filed its Answer thereto and set
up affirmative defenses with counterclaim for exemplary damages and
attorney's fees.

Issues having been joined, trial ensued. Presented by ALSONS, but testifying as
adverse witnesses, were CB and GCC officers. Among other things, ALSONS'
evidence, which included the EQUITY-issued "bearer" promissory note marked
as Exhibit "K" and over sixty (60) other marked and subsequently admitted
documents,9 were to the effect that five (5) incorporators, each contributing
P100,000.00 as the initial paid up capital of the company, organized EQUITY to
manage, as it did manage, various GCC franchises through management
contracts. Before EQUITY's incorporation, however, GCC was already into the
financing business as it was in fact managing and operating various CCC
franchises. Presented in evidence, too, was the September 29, 1982 letter-reply
of one G. Villanueva, then GCC President, to EQUITY President Wilfredo
Labayen, bearing on the sale of EQUITY shares to third parties, part of the
proceeds of which the Alcantaras wanted applied to liquidate the promissory
note in question. In said letter, Mr. Villanueva explained that the GCC Board
denied the Alcantaras' request to be paid out of such proceeds, but nonetheless
authorized EQUITY to pay them interest out of EQUITY's operation income, in
preference over what was due GCC.10

Albeit EQUITY presented its president, it opted to adopt the testimony of some
of ALSONS' witnesses, inclusive of the documentary exhibits testified to by
each of them, as its evidence.
For its part, GCC called only Wilfredo Labayen to testify. It stuck to its
underlying defense of separateness and presented documentary evidence
detailing the organizational structures of both GCC and EQUITY. And in a bid
to negate the notion that it was conducting its business illegally, GCC
presented CB and SEC-issued licenses authoring it to engage in financing and
quasi-banking activities. It also adduced evidence to prove that it was never a
party to any of the actionable documents ALSONS and its predecessors-in-
interest had in their possession and that the November 27, 1985 deed of
assignment of rights over the promissory note was unenforceable.

Eventually, the trial court, on its finding that EQUITY was but an
instrumentality or adjunct of GCC and considering the legal consequences and
implications of such relationship, came out with its decision on November 8,
1990, rendering judgment for ALSONS, to wit:

WHEREFORE, the foregoing premises considered, judgment is hereby rendered

in favor of plaintiff [ALSONS] and against the defendants [EQUITY and GCC]
who are hereby ordered, jointly and severally, to pay plaintiff:

1. the principal sum of Two Million Pesos (P2,000,000.00) together with the
interest due thereon at the rate of eighteen percent (18%) annually computed
from Jan. 2, 1981 until the obligation is fully paid;

2. liquidated damages due thereon equivalent to three percent (3%) monthly

computed from January 2, 1982 until the obligation is fully paid;

3. attorney's fees in an amount equivalent to twenty four percent (24%) of the

total obligation due; andcralawlibrary

4. the costs of suit.

IT IS SO ORDERED. (Words in brackets added.)

Therefrom, GCC went on appeal to the CA where its appellate recourse was
docketed as CA-G.R. CV No. 31801, ascribing to the trial court the commission
of the following errors:

1. In holding that there is a "Parent-Subsidiary" corporate relationship between

EQUITY and GCC;
2. In not holding that EQUITY and GCC are distinct and separate corporate
entities;

3. In applying the doctrine of "Piercing the Veil of Corporate Fiction" in the case
at bar; andcralawlibrary

4. In not holding ALSONS in estoppel to question the corporate personality of

EQUITY.

On April 11, 2002, the appellate court rendered the herein assailed Decision,11
affirming that of the trial court, thus:

WHEREFORE, premises considered, the Decision of the Regional Trial Court,

Branch 58, Makati in Civil Case No. 12707 is hereby AFFIRMED.

SO ORDERED.

In time, GCC moved for reconsideration followed by a motion for oral

argument, but both motions were denied by the CA in its equally assailed
Resolution of August 20, 2002.12

Hence, GCC's present recourse anchored on the following arguments, issues

and/or submissions:

1. The motion for oral argument with motion for reconsideration and its
supplement were perfunctorily denied by the CA without justifiable basis;

2. There is absolutely no basis for piercing the veil of corporate fiction;

3. Respondent Alsons is not a real party-in-interest as the promissory note

payable to bearer subject of the collection suit is but a simulated document
and/or refers to another party. Moreover, the subject promissory note is not
admissible in evidence because it has not been duly authenticated and it is an
altered document;

4. The fact of full payment stated in the ten (10) deeds of sale of the shares of
stock is conclusive on the sellers, and by the patrol evidence rule, the alleged
fact of its non-payment cannot be introduced in evidenced; andcralawlibrary
5. The counter-claim filed by GCC against Alsons should be granted in the
interest of justice.

The petition and the arguments and/or issues holding it together are without
merit. The desired reversal of the assailed decision and resolution of the
appellate court is accordingly DENIED.

Instead of raising distinctly formulated questions of law, as is expected of one

seeking a review under Rule 45 of the Rules of Court of a final CA judgment,13
petitioner GCC starts off by voicing disappointment over the "perfunctory"
denial by the CA of its twin motions for reconsideration and oral argument.
Petitioner, to be sure, cannot plausibly expect a reversal action premised on
the cursory way its motions were denied, if such indeed were the case. Such
manner of denial, while perhaps far from ideal, is not even a recognized ground
for appeal by certiorari, unless a denial of due process ensues, which is not the
case here. And lest it be overlooked, the CA prefaced its assailed denial
resolution with the clause: "[F]inding no reversible error committed to warrant
the modification and/or reversal of the April 11, 2002 Decision," suggesting
that the appellate court gave the petitioner's motion for reconsideration the
attention it deserved. At the very least, the petitioner was duly apprised of the
reasons why reconsideration could not be favorably considered. An extended
resolution was not really necessary to dispose of the motion for reconsideration
in question.

Petitioner's lament about being deprived of procedural due process owing to the
denial of its motion for oral argument is simply specious. Under the CA
Internal Rules, the appellate court may tap any of the three (3) alternatives
therein provided to aid the court in resolving appealed cases before it. It may
rely on available records alone, require the submission of memoranda or set
the case for oral argument. The option the Internal Rules thus gives the CA
necessarily suggests that the appellate court may, at its sound discretion,
dispense with a tedious oral argument exercise. Rule VI, Section 6 of the 2002
Internal Rules of the CA, provides:

SEC. 6 Judicial Action on Certain Petitions. - (a) In petitions for review, after
the receipt of the respondent's comment on the petition, - the Court [of
Appeals] may dismiss the petition if it finds the same to be patently without
merit ', otherwise, it shall give due course to it.

xxx

If the petition is given due course, the Court may consider the case submitted
for decision or require the parties to submit their memorandum or set the case
for oral argument. xxx. After the oral argument or upon submission of the
memoranda - the case shall be deemed submitted for decision.
In the case at bench, records reveal that the appellate court, in line with the
prescription of its own rules, required the parties to just submit, as they did,
their respective memoranda to properly ventilate their separate causes. Under
this scenario, the petitioner cannot be validly heard, having been deprived of
due process.

Just like the first, the last three (3) arguments set forth in the petition will not
carry the day for the petitioner. In relation therewith, the Court notes that
these arguments and the issues behind them were not raised before the trial
court. This appellate maneuver cannot be allowed. For, well-settled is the rule
that issues or grounds not raised below cannot be resolved on review in higher
courts.14 Springing surprises on the opposing party is antithetical to the
sporting idea of fair play, justice and due process; hence, the proscription
against a party shifting from one theory at the trial court to a new and different
theory in the appellate level. On the same rationale, points of law, theories,
issues not brought to the attention of the lower court or, in fine, not interposed
during the trial cannot be raised for the first time on appeal.15

There are, to be sure, exceptions to the rule respecting what may be raised for
the first time on appeal. Lack of jurisdiction over when the issues raised
present a matter of public policy16 comes immediately to mind. None of the
well-recognized exceptions obtain in this case, however.

Lest it be overlooked vis - à-vis the same last three arguments thus pressed,
both the trial court and the CA, based on the evidence adduced, adjudged the
petitioner and respondent EQUITY jointly and severally liable to pay what
respondent ALSONS is entitled to under the "bearer" promissory note. The
judgment argues against the notion of the note being simulated or altered or
that respondent ALSONS has no standing to sue on the note, not being the
payee of the "bearer" note. For, the declaration of liability not only presupposes
the duly established authenticity and due execution of the promissory note
over which ALSONS, as the holder in due course thereof, has interest, but also
the untenability of the petitioner's counterclaim for attorney's fees and
exemplary damages against ALSONS. At bottom, the petitioner predicated such
counter-claim on the postulate that respondent ALSONS had no cause of
action, the supposed promissory note being, according to the petitioner, either
a simulated or an altered document.

In net effect, the definitive conclusion of the appellate court - affirmatory of

that of the trial court - was that the bearer promissory note (Exh. "K") was a
genuine and authentic instrument payable to the holder thereof. This factual
determination, as a matter of long and sound appellate practice, deserves great
weight and shall not be disturbed on appeal, save for the most compelling
reasons,17 such as when that determination is clearly without evidentiary
support or when grave abuse of discretion has been committed.18 This is as it
should be since the Court, in petitions for review of CA decisions under Rule 45
of the Rules of Court, usually limits its inquiry only to questions of law. Stated
otherwise, it is not the function of the Court to analyze and weigh all over again
the evidence or premises supportive of the factual holdings of lower courts.19

As nothing in the record indicates any of the exceptions adverted to above, the
factual conclusion of the CA that the P2 Million promissory note in question
was authentic and was issued at the first instance to respondent ALSONS and
the Alcantara family for the amount stated on its face, must be affirmed. It
should be stressed in this regard that even the issuing entity, i.e., respondent
EQUITY, never challenged the genuineness and due execution of the note.

This brings us to the remaining but core issue tendered in this case and aptly
raised by the petitioner, to wit: whether there is absolutely no basis for piercing
GCC's veil of corporate identity.

A corporation is an artificial being vested by law with a personality distinct and

separate from those of the persons composing it20 as well as from that of any
other entity to which it may be related.21 The first consequence of the doctrine
of legal entity of the separate personality of the corporation is that a
corporation may not be made to answer for acts and liabilities of its
stockholders or those of legal entities to which it may be connected or vice
versa.22

The notion of separate personality, however, may be disregarded under the

doctrine - "piercing the veil of corporate fiction" - as in fact the court will often
look at the corporation as a mere collection of individuals or an aggregation of
persons undertaking business as a group, disregarding the separate juridical
personality of the corporation unifying the group. Another formulation of this
doctrine is that when two (2) business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary to
protect the rights of third parties, disregard the legal fiction that two
corporations are distinct entities and treat them as identical or one and the
same.23

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.24 After all, the concept of corporate entity was not meant to
promote unfair objectives.

Authorities are agreed on at least three (3) basic areas where piercing the veil,
with which the law covers and isolates the corporation from any other legal
entity to which it may be related, is allowed.25 These are: 1) defeat of public
convenience,26 as when the corporate fiction is used as vehicle for the evasion
of an existing obligation;27 2) fraud cases or when the corporate entity is used
to justify a wrong, protect fraud, or defend a crime;28 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.29

The CA found valid grounds to pierce the corporate veil of petitioner GCC, there
being justifiable basis for such action. When the appellate court spoke of a
justifying factor, the reference was to what the trial court said in its decision,
namely: the existence of "certain circumstances [which], taken together, gave
rise to the ineluctable conclusion that - [respondent] EQUITY is but an
instrumentality or adjunct of [petitioner] GCC."

The Court agrees with the disposition of the appellate court on the application
of the piercing doctrine to the transaction subject of this case. Per the Court's
count, the trial court enumerated no less than 20 documented circumstances
and transactions, which, taken as a package, indeed strongly supported the
conclusion that respondent EQUITY was but an adjunct, an instrumentality or
business conduit of petitioner GCC. This relation, in turn, provides a justifying
ground to pierce petitioner's corporate existence as to ALSONS' claim in
question. Foremost of what the trial court referred to as "certain
circumstances" are the commonality of directors, officers and stockholders and
even sharing of office between petitioner GCC and respondent EQUITY; certain
financing and management arrangements between the two, allowing the
petitioner to handle the funds of the latter; the virtual domination if not control
wielded by the petitioner over the finances, business policies and practices of
respondent EQUITY; and the establishment of respondent EQUITY by the
petitioner to circumvent CB rules. For a perspective, the following are some
relevant excerpts from the trial court's decision setting forth in some detail the
tipping circumstances adverted to therein:

It must be noted that as characterized by their business relationship,

[respondent] EQUITY and [petitioner] GCC had common directors and/or
officers as well as stockholders. This is revealed by the proceedings recorded in
SEC Case No. 25-81 entitled "Avelina Ramoso, et al., v. GCC, et al., where it
was established, thru the testimony of EQUITY's own President - that more
than 90% of the stockholders of - EQUITY were also stockholders of - GCC '..
Disclosed likewise is the fact that when [EQUITY's President] Labayen sold the
shareholdings of EQUITY in said franchise companies, practically the entire
proceeds thereof were surrendered to GCC, and not received by EQUITY
(EXHIBIT "RR") xxx. crvll

It was likewise shown by a preponderance of evidence that not only had 'GCC
financed - EQUITY and that the latter was heavily indebted to the former but
EQUITY was, in fact, a wholly owned subsidiary of 'GCC. Thus, as affirmed by
EQUITY's President, - the funds invested by EQUITY in the CCC franchise
companies actually came from CCC Phils. or GCC (Exhibit "Y-5")'. that, as
disclosed by the Auditor's report for 1982, past due receivables alone of GCC
exceeded P101,000,000.00 mostly to GCC affiliates especially CCC EQUITY. ';
that [CB's] Report of Examination dated July 14, 1977 shows that - EQUITY
which has a paid-up capital of only P500,000.00 was the biggest borrower of
GCC with a total loan of P6.70 Million '.

xxx

It has likewise been amply substantiated by [respondent ALSONS'] evidence

that not only did - GCC cause the incorporation of - EQUITY, but, the latter
had grossly inadequate capital for the pursuit of its line of business to the
extent that its business affairs were considered as GCC's own business
endeavors. xxx.

xxx

ALSONS has likewise shown 'that the bonuses of the officers and directors of -
EQUITY was based on its total financial performance together with all its
affiliates' both firms were sharing one and the same office when both were still
operational - and that the directors and executives of - EQUITY never acted
independently - but took their orders from - GCC'.

The evidence has also indubitably established that - EQUITY was organized by
- GCC for the purpose of circumventing [CB] rules and regulations and the
Anti-Usury Law. Thus, as disclosed by the Advance Report - on the result of
Central Bank's Operations Examination conducted on - GCC as of March 31,
1977 (EXHIBITS "FFF" etc.), the latter violated [CB] rules and regulations by :
(a) using as a conduit its non-quasi bank affiliates '. (b) issuing without
recourse facilities to enable GCC to extend credit to affiliates like - EQUITY
which go beyond the single borrower's limit without the need of showing
outstanding balance in the book of accounts. (Emphasis over words in brackets
added.)

It bears to stress at this point that the facts and the inferences drawn
therefrom, upon which the two (2) courts below applied the piercing doctrine,
stand, for the most part, undisputed. Among these is, to reiterate, the matter of
EQUITY having been incorporated to serve, as it did serve, as an
instrumentality or adjunct of GCC. With the view we take of this case, GCC did
not adduce any evidence, let alone rebut the testimonies and documents
presented by ALSONS, to establish the prevailing circumstances adverted to
that provided the justifying occasion to pierce the veil of corporate fiction
between GCC and EQUITY. We quote the trial court:
Verily, indeed, as the relationships binding herein [respondent EQUITY and
petitioner GCC] have been that of "parent-subsidiary corporations" the
foregoing principles and doctrines find suitable applicability in the case at bar;
and, it having been satisfactorily and indubitably shown that the said
relationships had been used to perform certain functions not characterized
with legitimacy, this Court - feels amply justified to "pierce the veil of corporate
entity" and disregard the separate existence of the percent (sic) and subsidiary
the latter having been so controlled by the parent that its separate identity is
hardly discernible thus becoming a mere instrumentality or alter ego of the
former. Consequently, as the parent corporation, [petitioner] GCC maybe (sic)
held responsible for the acts and contracts of its subsidiary - [respondent]
EQUITY - most especially if the latter (who had anyhow acknowledged its
liability to ALSONS) maybe (sic) without sufficient property with which to settle
its obligations. For, after all, GCC was the entity which initiated and benefited
immensely from the fraudulent scheme perpetrated in violation of the law.
(Words in parenthesis in the original; emphasis and bracketed words added).

Given the foregoing considerations, it behooves the petitioner, as a matter of

law and equity, to assume the legitimate financial obligation of a cash-strapped
subsidiary corporation which it virtually controlled to such a degree that the
latter became its instrument or agent. The facts, as found by the courts a quo,
and the applicable law call for this kind of disposition. Or else, the Court would
be allowing the wrong use of the fiction of corporate veil.

WHEREFORE, the instant petition is DENIED and the appealed Decision and
Resolution of the Court of Appeals are accordingly AFFIRMED.

Costs against the petitioner.

SO ORDERED.

7. INDOPHIL TEXTILE MILL WORKERS UNION-PTGWO V. CALICA

The antecedent facts are as follows:

Petitioner Indophil Textile Mill Workers Union-PTGWO is a legitimate labor

organization duly registered with the Department of Labor and Employment
and the exclusive bargaining agent of all the rank-and-file employees of
Indophil Textile Mills, Incorporated. Respondent Teodorico P. Calica is
impleaded in his official capacity as the Voluntary Arbitrator of the National
Conciliation and Mediation Board of the Department of Labor and
Employment, while private respondent Indophil Textile Mills, Inc. is a
corporation engaged in the manufacture, sale and export of yarns of various
counts and kinds and of materials of kindred character and has its plants at
Barrio Lambakin. Marilao, Bulacan.
In April, 1987, petitioner Indophil Textile Mill Workers Union-PTGWO and
private respondent Indophil Textile Mills, Inc. executed a collective bargaining
agreement effective from April 1, 1987 to March 31, 1990.

On November 3, 1967 Indophil Acrylic Manufacturing Corporation was formed

and registered with the Securities and Exchange Commission. Subsequently,
Acrylic applied for registration with the Board of Investments for incentives
under the 1987 Omnibus Investments Code. The application was approved on
a preferred non-pioneer status.

In 1988, Acrylic became operational and hired workers according to its own
criteria and standards. Sometime in July, 1989, the workers of Acrylic
unionized and a duly certified collective bargaining agreement was executed.

In 1990 or a year after the workers of Acrylic have been unionized and a CBA
executed, the petitioner union claimed that the plant facilities built and set up
by Acrylic should be considered as an extension or expansion of the facilities of
private respondent Company pursuant to Section 1(c), Article I of the CBA, to
wit,.

c) This Agreement shall apply to the Company's plant facilities and

installations and to any extension and expansion thereat. (Rollo, p.4)

In other words, it is the petitioner's contention that Acrylic is part of the

Indophil bargaining unit.

The petitioner's contention was opposed by private respondent which submits

that it is a juridical entity separate and distinct from Acrylic.

The existing impasse led the petitioner and private respondent to enter into a
submission agreement on September 6, 1990. The parties jointly requested the
public respondent to act as voluntary arbitrator in the resolution of the
pending labor dispute pertaining to the proper interpretation of the CBA
provision.

After the parties submitted their respective position papers and replies, the
public respondent Voluntary Arbitrator rendered its award on December 8,
1990, the dispositive portion of which provides as follows:

PREMISES CONSIDERED, it would be a strained interpretation and application

of the questioned CBA provision if we would extend to the employees of Acrylic
the coverage clause of Indophil Textile Mills CBA. Wherefore, an award is made
to the effect that the proper interpretation and application of Sec. l, (c), Art. I, of
the 1987 CBA do (sic) not extend to the employees of Acrylic as an extension or
expansion of Indophil Textile Mills, Inc. (Rollo, p.21)

Hence, this petition raising four (4) issues, to wit:

1. WHETHER OR NOT THE RESPONDENT ARBITRATOR ERRED IN

INTERPRETING SECTION 1(c), ART I OF THE CBA BETWEEN PETITIONER
UNION AND RESPONDENT COMPANY.

2. WHETHER OR NOT INDOPHIL ACRYLIC IS A SEPARATE AND DISTINCT

ENTITY FROM RESPONDENT COMPANY FOR PURPOSES OF UNION
REPRESENTATION.

3. WHETHER OR NOT THE RESPONDENT ARBITRATOR GRAVELY ABUSED

HIS DISCRETION AMOUNTING TO LACK OR IN EXCESS OF HIS
JURISDICTION.

4. WHETHER OR NOT THE RESPONDENT ARBITRATOR VIOLATED

PETITIONER UNION'S CARDINAL PRIMARY RIGHT TO DUE PROCESS. (Rollo,
pp. 6-7)

The central issue submitted for arbitration is whether or not the operations in
Indophil Acrylic Corporation are an extension or expansion of private
respondent Company. Corollary to the aforementioned issue is the question of
whether or not the rank-and-file employees working at Indophil Acrylic should
be recognized as part of, and/or within the scope of the bargaining unit.

Petitioner maintains that public respondent Arbitrator gravely erred in

interpreting Section l(c), Article I of the CBA in its literal meaning without
taking cognizance of the facts adduced that the creation of the aforesaid
Indophil Acrylic is but a devise of respondent Company to evade the application
of the CBA between petitioner Union and respondent Company.

Petitioner stresses that the articles of incorporation of the two corporations

establish that the two entities are engaged in the same kind of business, which
is the manufacture and sale of yarns of various counts and kinds and of other
materials of kindred character or nature.

Contrary to petitioner's assertion, the public respondent through the Solicitor

General argues that the Indophil Acrylic Manufacturing Corporation is not an
alter ego or an adjunct or business conduit of private respondent because it
has a separate legitimate business purpose. In addition, the Solicitor General
alleges that the primary purpose of private respondent is to engage in the
business of manufacturing yarns of various counts and kinds and textiles. On
the other hand, the primary purpose of Indophil Acrylic is to manufacture, buy,
sell at wholesale basis, barter, import, export and otherwise deal in yarns of
various counts and kinds. Hence, unlike private respondent, Indophil Acrylic
cannot manufacture textiles while private respondent cannot buy or import
yarns.

Furthermore, petitioner emphasizes that the two corporations have practically

the same incorporators, directors and officers. In fact, of the total stock
subscription of Indophil Acrylic, P1,749,970.00 which represents seventy
percent (70%) of the total subscription of P2,500,000.00 was subscribed to by
respondent Company.

On this point, private respondent cited the case of Diatagon Labor Federation
v. Ople, G.R. No. L-44493-94, December 3, 1980, 10l SCRA 534, which ruled
that two corporations cannot be treated as a single bargaining unit even if their
businesses are related. It submits that the fact that there are as many
bargaining units as there are companies in a conglomeration of companies is a
positive proof that a corporation is endowed with a legal personality distinctly
its own, independent and separate from other corporations (see Rollo, pp. 160-
161).

Petitioner notes that the foregoing evidence sufficiently establish that Acrylic is
but an extension or expansion of private respondent, to wit:

(a) the two corporations have their physical plants, offices and facilities
situated in the same compound, at Barrio Lambakin, Marilao, Bulacan;

(b) many of private respondent's own machineries, such as dyeing machines,

reeling, boiler, Kamitsus among others, were transferred to and are now
installed and being used in the Acrylic plant;

(c) the services of a number of units, departments or sections of private

respondent are provided to Acrylic; and

(d) the employees of private respondent are the same persons manning and
servicing the units of Acrylic. (see Rollo, pp. 12-13)

Private respondent insists that the existence of a bonafide business

relationship between Acrylic and private respondent is not a proof of being a
single corporate entity because the services which are supposedly provided by
it to Acrylic are auxiliary services or activities which are not really essential in
the actual production of Acrylic. It also pointed out that the essential services
are discharged exclusively by Acrylic personnel under the control and
supervision of Acrylic managers and supervisors.

In sum, petitioner insists that the public respondent committed grave abuse of
discretion amounting to lack or in excess of jurisdiction in erroneously
interpreting the CBA provision and in failing to disregard the corporate entity of
Acrylic.

We find the petition devoid of merit.

Time and again, We stress that the decisions of voluntary arbitrators are to be
given the highest respect and a certain measure of finality, but this is not a
hard and fast rule, it does not preclude judicial review thereof where want of
jurisdiction, grave abuse of discretion, violation of due process, denial of
substantial justice, or erroneous interpretation of the law were brought to our
attention. (see Ocampo, et al. v. National Labor Relations Commission, G.R. No.
81677, 25 July 1990, First Division Minute Resolution citing Oceanic Bic
Division (FFW) v. Romero, G.R. No. L-43890, July 16, 1984, 130 SCRA 392)

It should be emphasized that in rendering the subject arbitral award, the

voluntary arbitrator Teodorico Calica, a professor of the U.P. Asian Labor
Education Center, now the Institute for Industrial Relations, found that the
existing law and jurisprudence on the matter, supported the private
respondent's contentions. Contrary to petitioner's assertion, public respondent
cited facts and the law upon which he based the award. Hence, public
respondent did not abuse his discretion.

Under the doctrine of piercing the veil of corporate entity, when valid grounds
therefore exist, the legal fiction that a corporation is an entity with a juridical
personality separate and distinct from its members or stockholders may be
disregarded. In such cases, the corporation will be considered as a mere
association of persons. The members or stockholders of the corporation will be
considered as the corporation, that is liability will attach directly to the officers
and stockholders. The doctrine applies when the 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. (Umali et al. v. Court of Appeals, G.R. No. 89561, September 13,
1990, 189 SCRA 529, 542)
In the case at bar, petitioner seeks to pierce the veil of corporate entity of
Acrylic, alleging that the creation of the corporation is a devise to evade the
application of the CBA between petitioner Union and private respondent
Company. While we do not discount the possibility of the similarities of the
businesses of private respondent and Acrylic, neither are we inclined to apply
the doctrine invoked by petitioner in granting the relief sought. The fact that
the businesses of private respondent and Acrylic are related, that some of the
employees of the private respondent are the same persons manning and
providing for auxilliary services to the units of Acrylic, and that the physical
plants, offices and facilities are situated in the same compound, it is our
considered opinion that these facts are not sufficient to justify the piercing of
the corporate veil of Acrylic.

In the same case of Umali, et al. v. Court of Appeals (supra), We already

emphasized that "the legal corporate entity is disregarded only if it is sought to
hold the officers and stockholders directly liable for a corporate debt or
obligation." In the instant case, petitioner does not seek to impose a claim
against the members of the Acrylic.

Furthermore, We already ruled in the case of Diatagon Labor Federation Local

110 of the ULGWP v. Ople (supra) that it is grave abuse of discretion to treat
two companies as a single bargaining unit when these companies are
indubitably distinct entities with separate juridical personalities.

Hence, the Acrylic not being an extension or expansion of private respondent,

the rank-and-file employees working at Acrylic should not be recognized as
part of, and/or within the scope of the petitioner, as the bargaining
representative of private respondent.

All premises considered, the Court is convinced that the public respondent
Voluntary Arbitrator did not commit grave abuse of discretion in its
interpretation of Section l(c), Article I of the CBA that the Acrylic is not an
extension or expansion of private respondent.

ACCORDINGLY, the petition is DENIED and the award of the respondent

Voluntary Arbitrator are hereby AFFIRMED.

SO ORDERED.

8. FRANCISCO MOTORS CORP. V. CA

On January 23, 1985, petitioner filed a complaint 2 against private

respondents to recover three thousand four hundred twelve and six centavos
(P3,412.06), representing the balance of the jeep body purchased by the
Manuels from petitioner; an additional sum of twenty thousand four hundred
fifty-four and eighty centavos (P20,454.80) representing the unpaid balance on
the cost of repair of the vehicle; and six thousand pesos (P6,000.00) for cost of
suit and attorney's fees. 3 To the original balance on the price of jeep body were
added the costs of repair. 4 In their answer, private respondents interposed a
counterclaim for unpaid legal services by Gregorio Manuel in the amount of
fifty thousand pesos (P50,000) which was not paid by the incorporators,
directors and officers of the petitioner. The trial court decided the case on June
26, 1985, in favor of petitioner in regard to the petitioner's claim for money, but
also allowed the counter-claim of private respondents. Both parties appealed.
On April 15, 1991, the Court of Appeals sustained the trial court's decision. 5
Hence, the present petition.

For our review in particular is the propriety of the permissive counterclaim

which private respondents filed together with their answer to petitioner's
complaint for a sum of money. Private respondent Gregorio Manuel alleged as
an affirmative defense that, while he was petitioner's Assistant Legal Officer, he
represented members of the Francisco family in the intestate estate
proceedings of the late Benita Trinidad. However, even after the termination of
the proceedings, his services were not paid. Said family members, he said, were
also incorporators, directors and officers of petitioner. Hence to petitioner's
collection suit, he filed a counter permissive counterclaim for the unpaid
attorney's fees. 6

For failure of petitioner to answer the counterclaim, the trial court declared
petitioner in default on this score, and evidence ex-parte was presented on the
counterclaim. The trial court ruled in favor of private respondents and found
that Gregorio Manuel indeed rendered legal services to the Francisco family in
Special Proceedings Number 7803 — "In the Matter of Intestate Estate of
Benita Trinidad". Said court also found that his legal services were not
compensated despite repeated demands, and thus ordered petitioner to pay
him the amount of fifty thousand (P50,000.00) pesos. 7

Dissatisfied with the trial court's order, petitioner elevated the matter to the
Court of Appeals, posing the following issues:

I.

WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS

NULL AND VOID AS IT NEVER ACQUIRED JURISDICTION OVER THE
PERSON OF THE DEFENDANT.

II.
WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN
THE ALLEGED PERMISSIVE COUNTERCLAIM SHOULD BE HELD LIABLE TO
THE CLAIM OF DEFENDANT-APPELLEES.

III.

WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-

APPELLANT TO ANSWER THE ALLEGED PERMISSIVE COUNTERCLAIM. 8

Petitioner contended that the trial court did not acquire jurisdiction over it
because no summons was validly served on it together with the copy of the
answer containing the permissive counterclaim. Further, petitioner questions
the propriety of its being made party to the case because it was not the real
party in interest but the individual members of the Francisco family concerned
with the intestate case.

In its assailed decision now before us for review, respondent Court of Appeals
held that a counterclaim must be answered in ten (10) days, pursuant to
Section 4, Rule 11, of the Rules of Court; and nowhere does it state in the
Rules that a party still needed to be summoned anew if a counterclaim was set
up against him. Failure to serve summons, said respondent court, did not
effectively negate trial court's jurisdiction over petitioner in the matter of the
counterclaim. It likewise pointed out that there was no reason for petitioner to
be excused from answering the counterclaim. Court records showed that its
former counsel, Nicanor G. Alvarez, received the copy of the answer with
counterclaim two (2) days prior to his withdrawal as counsel for petitioner.
Moreover when petitioner's new counsel, Jose N. Aquino, entered his
appearance, three (3) days still remained within the period to file an answer to
the counterclaim. Having failed to answer, petitioner was correctly considered
in default by the trial
court. 9 Even assuming that the trial court acquired no jurisdiction over
petitioner, respondent court also said, but having filed a motion for
reconsideration seeking relief from the said order of default, petitioner was
estopped from further questioning the trial court's jurisdiction. 10

On the question of its liability for attorney's fees owing to private respondent
Gregorio Manuel, petitioner argued that being a corporation, it should not be
held liable therefor because these fees were owed by the incorporators,
directors and officers of the corporation in their personal capacity as heirs of
Benita Trinidad. Petitioner stressed that the personality of the corporation, vis-
a-vis the individual persons who hired the services of private respondent, is
separate and distinct, 11 hence, the liability of said individuals did not become
an obligation chargeable against petitioner.

Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:

However, this distinct and separate personality is merely a fiction created by
law for convenience and to promote justice. Accordingly, this separate
personality of the corporation may be disregarded, or the veil of corporate
fiction pierced, in cases where it is used as a cloak or cover for found (sic)
illegality, or to work an injustice, or where necessary to achieve equity or when
necessary for the protection of creditors. (Sulo ng Bayan, Inc. vs. Araneta, Inc.,
72 SCRA 347) Corporations are composed of natural persons and the legal
fiction of a separate corporate personality is not a shield for the commission of
injustice and inequity. (Chemplex Philippines, Inc. vs. Pamatian, 57 SCRA
408).

In the instant case, evidence shows that the plaintiff-appellant Francisco

Motors Corporation is composed of the heirs of the late Benita Trinidad as
directors and incorporators for whom defendant Gregorio Manuel rendered
legal services in the intestate estate case of their deceased mother. Considering
the aforestated principles and circumstances established in this case, equity
and justice demands plaintiff-appellant's veil of corporate identity should be
pierced and the defendant be compensated for legal services rendered to the
heirs, who are directors of the plaintiff-appellant corporation. 12

Now before us, petitioner assigns the following errors:

I.

THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF PIERCING

THE VEIL OF CORPORATE ENTITY.

II.

THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS

JURISDICTION OVER PETITIONER WITH RESPECT TO THE COUNTERCLAIM.
13

Petitioner submits that respondent court should not have resorted to piercing
the veil of corporate fiction because the transaction concerned only respondent
Gregorio Manuel and the heirs of the late Benita Trinidad. According to
petitioner, there was no cause of action by said respondent against petitioner;
personal concerns of the heirs should be distinguished from those involving
corporate affairs. Petitioner further contends that the present case does not fall
among the instances wherein the courts may look beyond the distinct
personality of a corporation. According to petitioner, the services for which
respondent Gregorio Manuel seeks to collect fees from petitioner are personal
in nature. Hence, it avers the heirs should have been sued in their personal
capacity, and not involve the corporation. 14

With regard to the permissive counterclaim, petitioner also insists that there
was no proper service of the answer containing the permissive counterclaim. It
claims that the counterclaim is a separate case which can only be properly
served upon the opposing party through summons. Further petitioner states
that by nature, a permissive counterclaim is one which does not arise out of
nor is necessarily connected with the subject of the opposing party's claim.
Petitioner avers that since there was no service of summons upon it with
regard to the counterclaim, then the court did not acquire jurisdiction over
petitioner. Since a counterclaim is considered an action independent from the
answer, according to petitioner, then in effect there should be two
simultaneous actions between the same parties: each party is at the same time
both plaintiff and defendant with respect to the other, 15 requiring in each
case separate summonses.

In their Comment, private respondents focus on the two questions raised by

petitioner. They defend the propriety of piercing the veil of corporate fiction, but
deny the necessity of serving separate summonses on petitioner in regard to
their permissive counterclaim contained in the answer.

Private respondents maintain both trial and appellate courts found that
respondent Gregorio Manuel was employed as assistant legal officer of
petitioner corporation, and that his services were solicited by the incorporators,
directors and members to handle and represent them in Special Proceedings
No. 7803, concerning the Intestate Estate of the late Benita Trinidad. They
assert that the members of petitioner corporation took advantage of their
positions by not compensating respondent Gregorio Manuel after the
termination of the estate proceedings despite his repeated demands for
payment of his services. They cite findings of the appellate court that support
piercing the veil of corporate identity in this particular case. They assert that
the corporate veil may be disregarded when it is used to defeat public
convenience, justify wrong, protect fraud, and defend crime. It may also be
pierced, according to them, where the corporate entity is being used as an alter
ego, adjunct, or business conduit for the sole benefit of the stockholders or of
another corporate entity. In these instances, they aver, the corporation should
be treated merely as an association of individual persons. 16

Private respondents dispute petitioner's claim that its right to due process was
violated when respondents' counterclaim was granted due course, although no
summons was served upon it. They claim that no provision in the Rules of
Court requires service of summons upon a defendant in a counterclaim. Private
respondents argue that when the petitioner filed its complaint before the trial
court it voluntarily submitted itself to the jurisdiction of the court. As a
consequence, the issuance of summons on it was no longer necessary. Private
respondents say they served a copy of their answer with affirmative defenses
and counterclaim on petitioner's former counsel, Nicanor G. Alvarez. While
petitioner would have the Court believe that respondents served said copy
upon Alvarez after he had withdrawn his appearance as counsel for the
petitioner, private respondents assert that this contention is utterly baseless.
Records disclose that the answer was received two (2) days before the former
counsel for petitioner withdrew his appearance, according to private
respondents. They maintain that the present petition is but a form of dilatory
appeal, to set off petitioner's obligations to the respondents by running up
more interest it could recover from them. Private respondents therefore claim
damages against petitioner. 17

To resolve the issues in this case, we must first determine the propriety of
piercing the veil of corporate fiction.

Basic in corporation law is the principle that a corporation has a separate

personality distinct from its stockholders and from other corporations to which
it may be connected. 18 However, under the doctrine of piercing the veil of
corporate entity, the corporation's separate juridical personality may be
disregarded, for example, when the corporate identity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime. Also, where the
corporation 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, then its distinct personality may be ignored. 19 In these
circumstances, the courts will treat the corporation as a mere aggrupation of
persons and the liability will directly attach to them. The legal fiction of a
separate corporate personality in those cited instances, for reasons of public
policy and in the interest of justice, will be justifiably set aside.

In our view, however, given the facts and circumstances of this case, the
doctrine of piercing the corporate veil has no relevant application here.
Respondent court erred in permitting the trial court's resort to this doctrine.
The rationale behind piercing a corporation's identity in a given case is to
remove the barrier between the corporation from the persons comprising it to
thwart the fraudulent and illegal schemes of those who use the corporate
personality as a shield for undertaking certain proscribed activities. However,
in the case at bar, instead of holding certain individuals or persons responsible
for an alleged corporate act, the situation has been reversed. It is the petitioner
as a corporation which is being ordered to answer for the personal liability of
certain individual directors, officers and incorporators concerned. Hence, it
appears to us that the doctrine has been turned upside down because of its
erroneous invocation. Note that according to private respondent Gregorio
Manuel his services were solicited as counsel for members of the Francisco
family to represent them in the intestate proceedings over Benita Trinidad's
estate. These estate proceedings did not involve any business of petitioner.
Note also that he sought to collect legal fees not just from certain Francisco
family members but also from petitioner corporation on the claims that its
management had requested his services and he acceded thereto as an
employee of petitioner from whom it could be deduced he was also receiving a
salary. His move to recover unpaid legal fees through a counterclaim against
Francisco Motors Corporation, to offset the unpaid balance of the purchase
and repair of a jeep body could only result from an obvious misapprehension
that petitioner's corporate assets could be used to answer for the liabilities of
its individual directors, officers, and incorporators. Such result if permitted
could easily prejudice the corporation, its own creditors, and even other
stockholders; hence, clearly inequitous to petitioner.

Furthermore, considering the nature of the legal services involved, whatever

obligation said incorporators, directors and officers of the corporation had
incurred, it was incurred in their personal capacity. When directors and
officers of a corporation are unable to compensate a party for a personal
obligation, it is far-fetched to allege that the corporation is perpetuating fraud
or promoting injustice, and be thereby held liable therefor by piercing its
corporate veil. While there are no hard and fast rules on disregarding separate
corporate identity, we must always be mindful of its function and purpose. A
court should be careful in assessing the milieu where the doctrine of piercing
the corporate veil may be applied. Otherwise an injustice, although
unintended, may result from its erroneous application.

The personality of the corporation and those of its incorporators, directors and
officers in their personal capacities ought to be kept separate in this case. The
claim for legal fees against the concerned individual incorporators, officers and
directors could not be properly directed against the corporation without
violating basic principles governing corporations. Moreover, every action —
including a counterclaim — must be prosecuted or defended in the name of the
real party in interest. 20 It is plainly an error to lay the claim for legal fees of
private respondent Gregorio Manuel at the door of petitioner (FMC) rather than
individual members of the Francisco family.

However, with regard to the procedural issue raised by petitioner's allegation,

that it needed to be summoned anew in order for the court to acquire
jurisdiction over it, we agree with respondent court's view to the contrary.
Section 4, Rule 11 of the Rules of Court provides that a counterclaim or cross-
claim must be answered within ten (10) days from service. Nothing in the Rules
of Court says that summons should first be served on the defendant before an
answer to counterclaim must be made. The purpose of a summons is to enable
the court to acquire jurisdiction over the person of the defendant. Although a
counterclaim is treated as an entirely distinct and independent action, the
defendant in the counterclaim, being the plaintiff in the original complaint, has
already submitted to the jurisdiction of the court. Following Rule 9, Section 3
of the 1997 Rules of Civil Procedure, 21 if a defendant (herein petitioner) fails
to answer the counterclaim, then upon motion of plaintiff, the defendant may
be declared in default. This is what happened to petitioner in this case, and
this Court finds no procedural error in the disposition of the appellate court on
this particular issue. Moreover, as noted by the respondent court, when
petitioner filed its motion seeking to set aside the order of default, in effect it
submitted itself to the jurisdiction of the court. As well said by respondent
court:

Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he

records show that upon its request, plaintiff-appellant was granted time to file
a motion for reconsideration of the disputed decision. Plaintiff-appellant did file
its motion for reconsideration to set aside the order of default and the
judgment rendered on the counterclaim.

Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the

counterclaim, as it vigorously insists, plaintiff-appellant is considered to have
submitted to the court's jurisdiction when it filed the motion for
reconsideration seeking relief from the court. (Soriano vs. Palacio, 12 SCRA
447). A party is estopped from assailing the jurisdiction of a court after
voluntarily submitting himself to its jurisdiction. (Tejones vs. Gironella, 159
SCRA 100). Estoppel is a bar against any claims of lack of jurisdiction. (Balais
vs. Balais, 159 SCRA 37). 22

WHEREFORE, the petition is hereby GRANTED and the assailed decision is

hereby REVERSED insofar only as it held Francisco Motors Corporation liable
for the legal obligation owing to private respondent Gregorio Manuel; but this
decision is without prejudice to his filing the proper suit against the concerned
members of the Francisco family in their personal capacity. No pronouncement
as to costs.1âwphi1.nêt

SO ORDERED.

9. KOPPEL (PHIL.) INC. V. YATCO

AGREED STATEMENT OF FACTS

Now come the plaintiff by attorney Eulogio P. Revilla and the defendant by the
Solicitor General and undersigned Assistant Attorney of the Bureau of Justice
and, with leave of this Honorable Court, hereby respectfully stipulated and
agree to the following facts, to wit:

I. That plaintiff is a corporation duly organized and existing under and by

virtue of the laws of the Philippines, with principal office therein at the City of
Manila, the capital stock of which is divided into thousand (1,000) shares of
P100 each. The Koppel Industrial Car and Equipment company, a corporation
organized and existing under the laws of the State of Pennsylvania, United
States of America, and not licensed to do business in the Philippines, owned
nine hundred and ninety-five (995) shares out of the total capital stock of the
plaintiff from the year 1928 up to and including the year 1936, and the
remaining five (5) shares only were and are owned one each by officers of the
plaintiff corporation.

II. That plaintiff, at all times material to this case, was and now is duly licensed
to engage in business as a merchant and commercial broker in the Philippines;
and was and is the holder of the corresponding merchant's and commercial
broker's privilege tax receipts.

III. That the defendant Collector of Internal revenue is now Mr. Bibiano L. Meer
in lieu of Mr. Alfredo L. Yatco.

IV. That during the period from January 1, 1929, up to and including
December 31, 1932, plaintiff transacted business in the Philippines in the
following manner, with the exception of the transactions which are described in
paragraphs V and VI of this stipulation:

When a local buyer was interested in the purchase of railway materials,

machinery, and supplies, it asked for price quotations from plaintiff. Atypical
form of such request is attached hereto and made a part hereof as Exhibit A.
(Exhibit A represents typical transactions arising from written requests for
quotations, while Exhibits B to G, inclusive, are typical transactions arising
from verbal requests for quotation.) Plaintiff then cabled for the quotation
desired for Koppel Industrial Car and Equipment Company. A sample of the
pertinent cable is hereto attached and made a part hereof as Exhibit B. Koppel
Industrial Car and Equipment Company answered by cable quoting its cost
price, usually A. C. I. F. Manila cost price, which was later followed by a letter
of confirmation. A sample of the said cable quotation and of the letter of
confirmation are hereto attached and made a part hereof as Exhibits C and C-
1. Plaintiff, however, quoted by Koppel Industrial Car and Equipment
Company. Copy of the plaintiff's letter to purchaser is hereto attached and
made a part hereof as Exhibit D. On the basis of these quotations, orders were
placed by the local purchasers, copies of which orders are hereto attached as
Exhibits E and E-1.

A cable was then sent to Koppel Industrial Car and Equipment company giving
instructions to ship the merchandise to Manila forwarding the customer's
order. Sample of said cable is hereto attached as Exhibit F. The bills of lading
were usually made to "order" and indorsed in blank with notation to the effect
that the buyer be notified of the shipment of the goods covered in the bills of
lading; commercial invoices were issued by Koppel Industrial Car and
Equipment Company in the names of the purchasers and certificates of
insurance were likewise issued in their names, or in the name of Koppel
Industrial Car and Equipment Company but indorsed in blank and attached to
drafts drawn by Koppel Industrial Car and Equipment Company on the
purchasers, which were forwarded through foreign banks to local banks.
Samples of the bills of lading are hereto attached as Exhibits F-1, I-1, I-2 and I-
3. Bills of ladings, Exhibits I-1, I-2 and I-3, may equally have been employed,
but said Exhibits I-1, I-2 and I-3 have no connection with the transaction
covered by Exhibits B to G, inclusive. The purchasers secured the shipping
papers by arrangement with the banks, and thereupon received and cleared
the shipments. If the merchandise were of European origin, and if there was
not sufficient time to forward the documents necessary for clearance, through
foreign banks to local banks, to the purchasers, the Koppel Industrial Car and
Equipment company did, in many cases, send the documents directly from
Europe to plaintiff with instructions to turn these documents over to the
purchasers. In many cases, where sales was effected on the basis of C. I. F.
Manila, duty paid, plaintiff advanced the sums required for the payment of the
duty, and these sums, so advanced, were in every case reimbursed to plaintiff
by Koppel Industrial Car and Equipment Company. The price were payable by
drafts agreed upon in each case and drawn by Koppel Industrial Car and
Equipment Company on respective purchasers through local banks, and
payments were made to the banks by the purchasers on presentation and
delivery to them of the above-mentioned shipping documents or copies thereof.
A sample of said drafts is hereto attached as Exhibit G. Plaintiff received by
way of compensation a percentage of the profits realized on the above
transactions as fixed in paragraph 6 of the plaintiff's contract with Koppel
Industrial Car and Equipment Company, which contract is hereto attached as
Exhibit H, and suffered its corresponding share in the losses resulting from
some of the transactions.

That the total gross sales from January 1, 1929, up to and including December
31, 1932, effected in the foregoing manner and under the above specified
conditions, amount to P3, 596,438.84.

V. That when a local sugar central was interested in the purchase of railway
materials, machinery and supplies, it secured quotations from, and placed the
corresponding orders with, the plaintiff in substantially the same manner as
outlined in paragraph IV of this stipulation, with the only difference that the
purchase orders which were agreed to by the central and the plaintiff are
similar to the sample hereto attached and made a part hereof as Exhibit I.
Typical samples of the bills of lading covering the herein transaction are hereto
attached and made a part hereto as Exhibits I-1, I-2 and I-3. The value of the
sales carried out in the manner mentioned in this paragraph is P133,964.98.

VI. That sometime in February, 1929, Miguel J. Ossorio, of Manila, Philippines,

placed an option with Koppel Industrial Car and Equipment Company, through
plaintiff, to purchase within three months a pair of Atlas-Diesel Marine
Engines. Koppel Industrial Car and Equipment Company purchased said
Diesel Engines in Stockholm, Sweden, for $16,508.32. The suppliers drew a
draft for the amount of $16,508.32 on the Koppel Industrial Car and
Equipment Company, which paid the amount covered by the draft. Later,
Miguel J. Ossorio definitely called the deal off, and as Koppel Industrial Car
and Equipment Company could not ship to or draw on said Mr. Miguel J.
Ossorio, it in turn drew another draft on plaintiff for the same amount at six
months sight, with the understanding that Koppel Industrial Car and
Equipment Company would reimburse plaintiff when said engines were
disposed of. Plaintiff honored the draft and debited the said sum of $16,508.32
to merchandise account. The engines were left stored at Stockholm, Sweden.
On April 1, 1930, a new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines,
was found and the same engines were sold to him for $21,000 (P42,000) C. I.
F. Hongkong. The engines were shipped to Hongkong and a draft for $21,000
was drawn by Koppel Industrial Car and Equipment Company on Mr. Cesar
Barrios. After the draft was fully paid by Mr. Barrios, Koppel Industrial Car and
Equipment Company reimbursed plaintiff with cost price of $16,508.32 and
credited it with $1,152.95 as its share of the profit on the transaction. Exhibits
J and J-1 are herewith attached and made integral parts of this stipulation
with particular reference to paragraph VI hereof.

VII. That plaintiff's share in the profits realized out of these transactions
described in paragraphs IV, V and VI hereof totaling P3,772,403.82, amounts
to P132,201.30; and that plaintiff within the time provided by law returned the
aforesaid amount P132,201.30 for the purpose of the commercial broker's 4
per cent tax and paid thereon the sum P5,288.05 as such tax.

VIII. That defendant demanded of the plaintiff the sum of P64,122.51 as the
merchants' sales tax of 1% per cent on the amount of P3,772,403.82,
representing the total gross value of the sales mentioned in paragraphs IV, V
and VI hereof, including the 25 per cent surcharge for the late payment of the
said tax, which tax and surcharge were determined after the amount of
P5,288.05 mentioned in paragraph VI hereof was deducted.

IX. That plaintiff, on October 30, 1936, paid under protest said sum of
P64,122.51 in order to avoid further penalties, levy and distraint proceedings.

X. That defendant, on November 10, 1936, overruled plaintiff's protest, and

defendant has failed and refused and still fails and refuses, notwithstanding
demands by plaintiff, to return to the plaintiff said sum of P64,122.51 or any
part thereof.

xxx xxx xxx

That the parties hereby reserve the right to present additional evidence in
support of their respective contentions.

Manila, Philippines, December 26, 1939

(Sgd.) ROMAN OZAETA

Solicitor General
 (Sgd.) ANTONIO CAÑIZARES
Assistant Attorney

(Sgd.) E. P. REVILLA
Attorney for the Plaintiff
3rd Floor, Perez Samanillo Bldg., Manila

Both parties adduced some oral evidence in clarification of or addition to their

agreed statement of facts. A preponderance of evidence has established,
besides the facts thus stipulated, the following:

(a) The shares of stock of plaintiff corporation were and are all owned by Koppel
Industries Car and Equipment Company of Pennsylvania, U. S. A., exceptive
which were necessary to qualify the Board of Directors of said plaintiff
corporation;

(b) In the transactions involved herein the plaintiff corporation acted as the
representative of Koppel Industrial Car and Equipment Company only, and not
as the agent of both the latter company and the respective local purchasers —
plaintiff's principal witness, A.H. Bishop, its resident Vice-President, in his
testimony invariably referred to Koppel Industrial Car and Equipment Co. as
"our principal" 9 t. s. n., pp. 10, 11, 12, 19, 75), except that at the bottom of
page 10 to the top of page 11, the witness stated that they had "several
principal" abroad but that "our principal abroad was, for the years in question,
Koppel Industrial Car and Equipment Company," and on page 68, he testified
that what he actually said was ". . . but our principal abroad" and not "our
principal abroad" — as to which it is very significant that neither this witness
nor any other gave the name of even a single other principal abroad of the
plaintiff corporation;

(c) The plaintiff corporation bore alone incidental expenses — as, for instance,
cable expenses-not only those of its own cables but also those of its "principal"
(t.s.n., pp. 52, 53);

(d) the plaintiff's "share in the profits" realized from the transactions in which it
intervened was left virtually in the hands of Koppel Industrial Car and
Equipment Company (t.s.n., p. 51);

(e) Where drafts were not paid by the purchasers, the local banks were
instructed not to protest them but to refer them to plaintiff which was fully
empowered by Koppel Industrial Car and Equipment company to instruct the
banks with regards to disposition of the drafts and documents (t.s.n., p. 50;
Exhibit G);lawphil.net

(f) Where the goods were European origin, consular invoices, bill of lading, and,
in general, the documents necessary for clearance were sent directly to plaintiff
(t.s.n., p. 14);

(g) If the plaintiff had in stock the merchandise desired by local buyers, it
immediately filled the orders of such local buyers and made delivery in the
Philippines without the necessity of cabling its principal in America either for
price quotations or confirmation or rejection of that agreed upon between it
and the buyer (t.s.n., pp. 39-43);

(h) Whenever the deliveries made by Koppel Industrial Car and Equipment
Company were incomplete or insufficient to fill the local buyer's orders, plaintiff
used to make good the deficiencies by deliveries from its own local stock, but in
such cases it charged its principal only the actual cost of the merchandise thus
delivered by it from its stock and in such transactions plaintiff did not realize
any profit (t.s.n., pp. 53-54);

(i) The contract of sale involved herein were all perfected in the Philippines.

Those described in paragraph IV of the agreed statement of facts went through

the following process: (1) "When a local buyer was interested in the purchase of
railway materials, machinery, and supplies, it asked for price quotations from
plaintiff"; (2) "Plaintiff then cabled for the quotation desired from Koppel
Industrial Car and Equipment Company"; (3) "Plaintiff, however, quoted to the
purchaser a selling price above the figures quoted by Koppel Industrial Car and
Equipment Company"; (4) "On the basis of these quotations, orders were placed
by the local purchasers . . ."

Those described in paragraph V of said agreed statement of facts were

transacted "in substantially the same manner as outlined in paragraph IV."

As to the single transaction described in paragraph VI of the same agreed

statement of facts, discarding the Ossorio option which anyway was called off,
"On April 1, 1930, a new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines,
was found and the same engines were sold to him for $21,000(P42,000) C.I.F.
Hongkong." (Emphasis supplied.).

(j) Exhibit H contains the following paragraph:

It is clearly understood that the intent of this contract is that the broker shall
perform only the functions of a broker as set forth above, and shall not take
possession of any of the materials or equipment applying to said orders or
perform any acts or duties outside the scope of a broker; and in no sense shall
this contract be construed as granting to the broker the power to represent the
principal as its agent or to make commitments on its behalf.

The Court of First Instance held for the defendant and dismissed plaintiff's
complaint with costs to it.

Upon this appeal, seven errors are assigned to said judgment as follows:.

1. That the court a quo erred in not holding that appellant is a domestic
corporation distinct and separate from, and not a mere branch of Koppel
Industrial Car and Equipment Co.;

2. the court a quo erred in ignoring the ruling of the Secretary of Finance,
dated January 31, 1931, Exhibit M;

3. the court a quo erred in not holding that a character of a broker is

determined by the nature of the transaction and not by the basis or measure of
his compensation;

4. The court a quo erred in not holding that appellant acted as a commercial
broker in the transactions covered under paragraph VI of the agreed statement
of facts;

5. The court a quo erred in not holding that appellant acted as a commercial
broker in the transactions covered under paragraph v of the agreed statement
of facts;

6. The court a quo erred in not holding that appellant acted as a commercial
broker in the sole transaction covered under paragraph VI of the agreed
statement of facts;

7. the court a quo erred in dismissing appellant's complaint.

The lower court found and held that Koppel (Philippines), Inc. is a mere
dummy or brach ("hechura") of Koppel industrial Car and Equipment
Company. The lower court did not deny legal personality to Koppel
(Philippines), Inc. for any and all purposes, but in effect its conclusion was
that, in the transactions involved herein, the public interest and convenience
would be defeated and what would amount to a tax evasion perpetrated, unless
resort is had to the doctrine of "disregard of the corporate fiction."

I. In its first assignment of error appellant submits that the trial court erred in
not holding that it is a domestic corporation distinct and separate from and not
a mere branch of Koppel Industrial Car and Equipment Company. It contends
that its corporate existence as Philippine corporation can not be collaterally
attacked and that the Government is estopped from so doing. As stated above,
the lower court did not deny legal personality to appellant for any and all
purposes, but held in effect that in the transaction involved in this case the
public interest and convenience would be defeated and what would amount to
a tax evasion perpetrated, unless resort is had to the doctrine of "disregard of
the corporate fiction." In other words, in looking through the corporate form to
the ultimate person or corporation behind that form, in the particular
transactions which were involved in the case submitted to its determination
and judgment, the court did so in order to prevent the contravention of the
local internal revenue laws, and the perpetration of what would amount to a
tax evasion, inasmuch as it considered — and in our opinion, correctly — that
appellant Koppel (Philippines), Inc. was a mere branch or agency or dummy
("hechura") of Koppel Industrial Car and Equipment Co. The court did not hold
that the corporate personality of Koppel (Philippines), Inc., would also be
disregarded in other cases or for other purposes. It would have had no power to
so hold. The courts' action in this regard must be confined to the transactions
involved in the case at bar "for the purpose of adjudging the rights and
liabilities of the parties in the case. They have no jurisdiction to do more." (1
Flethcer, Cyclopedia of Corporation, Permanent ed., p. 124, section 41.)

A leading and much cited case puts it as follows:

If any general rule can be laid down, in the present state of authority, it is that
a corporation will be looked upon as a legal entity as a general rule, and until
sufficient reason to the contrary appears; but, when the notion of legal entity is
used to defeat public convinience, justify wrong, protect fraud, or defend crime,
the law will regard the corporation as an association of persons. (1 Fletcher
Cyclopedia of Corporation [Permanent Edition], pp. 135, 136; United States vs.
Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255, per Sanborn, J.)

In his second special defense appellee alleges "that the plaintiff was and is in
fact a branch or subsidiary of Koppel Industrial Car and Equipment Co., a
Pennsylvania corporation not licensed to do business in the Philippines but
actually doing business here through the plaintiff; that the said foreign
corporation holds 995 of the 1,000 shares of the plaintiff's capital stock, the
remaining five shares being held by the officers of the plaintiff herein in order
to permit the incorporation thereof and to enable its aforesaid officers to act as
directors of the plaintiff corporation; and that plaintiff was organized as a
Philippine corporation for the purpose of evading the payment by its parent
foreign corporation of merchants' sales tax on the transactions involved in this
case and others of similar nature."

By most courts the entity is normally regarded but is disregarded to prevent

injustice, or the distortion or hiding of the truth, or to let in a just defense. (1
Fletcher, Cyclopedia of Corporation, Permanent Edition, pp. 139,140; emphasis
supplied.)

Another rule is that, when the corporation is the mere alter ego, or business
conduit of a person, it may de disregarded." (1 Fletcher, Cyclopedia of
Corporation, Permanent Edition, p. 136.)

Manifestly, the principle is the same whether the "person" be natural or

artificial.

A very numerous and growing class of cases wherein the corporate entity is
disregarded is that (it 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)." (1 Fletcher, Cyclopedia of Corporation, Permanent ed.,
pp. 154, 155.)

While we recognize the legal principle that a corporation does not lose its entity
by the ownership of the bulk or even the whole of its stock, by another
corporation (Monongahela Co. vs. Pittsburg Co., 196 Pa., 25; 46 Atl., 99; 79
Am. St. Rep., 685) yet it is equally well settled and ignore corporate forms."
(Colonial Trust Co. vs. Montello Brick Works, 172 Fed., 310.)

Where it appears that two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary to
protect the rights of third persons, disregard the legal fiction that two
corporations are distinct entities, and treat them as identical. (Abney vs.
Belmont Country Club Properties, Inc., 279 Pac., 829.)

. . . the legal fiction of distinct corporate existence will be disregarded in a case

where a corporation is so organized and controlled and its affairs are so
conducted, as to make it merely an instrumentality or adjunct of another
corporation. (Hanter vs. Baker Motor Vehicle Co., 190 Fed., 665.)

In United States vs. Lehigh Valley R. Co. 9220 U.S., 257; 55 Law. ed., 458,
464), the Supreme Court of the United States disregarded the artificial
personality of the subsidiary coal company in order to avoid that the parent
corporation, the Lehigh Valley R. Co., should be able, through the fiction of
that personality, to evade the prohibition of the Hepburn Act against the
transportation by railroad companies of the articles and commodities described
therein.

Chief Justice White, speaking for the court, said:

. . . Coming to discharge this duty it follows, in view of the express prohibitions

of the commodities clause, it must be held that while the right of a railroad
company as a stockholder to use its stock ownership for the purpose of a bona
fide separate administration of the affairs of a corporation in which it has a
stock interest may not be denied, the use of such stock ownership in
substance for the purpose of destroying the entity of a producing, etc.,
corporation, and commingling its affairs in administration with the affairs of
the railroad company, so as to make the two corporations virtually one, brings
the railroad company so voluntarily acting as to such producing, etc.,
corporation within the prohibitions of the commodities clause. In other words,
that by operation and effect of the commodities clause there is duty cast upon
a railroad company proposing to carry in interstate commerce the product of a
producing, etc., corporation in which it has a stock interest, not to abuse such
power so as virtually to do by indirection that which the commodities clause
prohibits, — a duty which plainly would be violated by the unnecessary
commingling of the affairs of the producing company with its own, so as to
cause them to be one and inseparable.

Corrobarative authorities can be cited in support of the same proposition,

which we deem unnecessary to mention here.

From the facts hereinabove stated, as established by a preponderance of the

evidence , particularly those narrated in paragraph (a), (b), (c), (d), (e),(f), (h), (i),
and (j) after the agreed statement of facts, we find that, in so far as the sales
involved herein are concerned, Koppel (Philippines), Inc., and Koppel Industrial
Car and Equipment company are to all intents and purposes one and the
same; or, to use another mode of expression, that, as regards those
transactions, the former corporation is a mere branch, subsidiary or agency of
the latter. To our mind, this is conclusively borne out by the fact, among
others, that the amount of he so-called "share in the profits" of Koppel
(Philippines), Inc., was ultimately left to the sole, unbridled control of Koppel
Industrial Car and Equipment Company. If, in their relations with each other,
Koppel (Philippines), Inc., was considered and intended to function as a bona
fide separate corporation, we can not conceive how this arrangement could
have been adopted, for if there was any factor in its business as to which it
would in that case naturally have been opposed to being thus controlled, it
must have been precisely the amount of profit which it could endeavor and
hope to earn. No group of businessmen could be expected to organize a
mercantile corporation — the ultimate end of which could only be profit — if
the amount of that profit were to be subjected to such a unilateral control of
another corporation, unless indeed the former has previously been designed by
the incorporators to serve as a mere subsidiary, branch or agency of the latter.
Evidently, Koppel Industrial Car and Equipment Company made us of its
ownership of the overwhelming majority — 99.5% — of the capital stock of the
local corporation to control the operations of the latter to such an extent that it
had the final say even as to how much should be allotted to said local entity in
the so-called sharing in the profits. We can not overlook the fact that in the
practical working of corporate organizations of the class to which these two
entities belong, the holder or holders of the controlling part of the capital stock
of the corporation, particularly where the control is determined by the virtual
ownership of the totality of the shares, dominate not only the selection of the
Board of Directors but, more often than not, also the action of that Board.
Applying this to the instant case, we can not conceive how the Philippine
corporation could effectively go against the policies, decisions, and desires of
the American corporation with regards to the scheme which was devised
through the instrumentality of the contract Exhibit H, as well as all the other
details of the system which was adopted in order to avoid paying the 1½ per
cent merchants sales tax. Neither can we conceive how the Philippine
corporation could avoid following the directions of the American corporation
held 99.5 per cent of the capital stock of the Philippine corporation. In the
present instance, we note that Koppel (Philippines), Inc., was represented in
the Philippines by its "resident Vice-President." This fact necessarily leads to
the inference that the corporation had at least a Vice-President, and
presumably also a President, who were not resident in the Philippines but in
America, where the parent corporation is domiciled. If Koppel (Philippines),
Inc., had been intended to operate as a regular domestic corporation in the
Philippines, where it was formed, the record and the evidence do not disclose
any reason why all its officers should not reside and perform their functions in
the Philippines.

Other facts appearing from the evidence, and presently to be stated, strengthen
our conclusion, because they can only be explained if the local entity is
considered as a mere subsidiary, branch or agency of the parent organization.
Plaintiff charged the parent corporation no more than actual cost — without
profit whatsoever — for merchandise allegedly of its own to complete
deficiencies of shipments made by said parent corporation (t.s.n., pp. 53, 54) —
a fact which could not conceivably have been the case if plaintiff had acted in
such transactions as an entirely independent entity doing business — for
profit, of course — with the American concern. There has been no attempt even
to explain, if the latter situation really obtained, why these two corporations
should have thus departed from the ordinary course of business. Plaintiff was
charged by the American corporation with the cost even of the latter's cable
quotations — from ought that appears from the evidence, this can only be
comprehended by considering plaintiff as such a subsidiary, branch or agency
of the parent entity, in which case it would be perfectly understandable that for
convenient accounting purposes and the easy determination of the profits or
losses of the parent corporation's Philippines should be charged against the
Philippine office and set off against its receipts, thus separating the accounts of
said branch from those which the central organization might have in other
countries. The reference to plaintiff by local banks, under a standing
instruction of the parent corporation, of unpaid drafts drawn on Philippine
customers by said parent corporation, whenever said customers dishonored
the drafts, and the fact that the American corporation had previously advised
said banks that plaintiff in those cases was "fully empowered to instruct (the
banks) with regard to the disposition of the drafts and documents" (t.s.n., p.
50), in the absence of any other satisfactory explanation naturally give rise to
the inference that plaintiff was a subsidiary, branch or agency of the American
concern, rather than an independent corporation acting as a broker. For,
without such positive explanation, this delegation of power is indicative of the
relations between central and branch offices of the same business enterprise,
with the latter acting under instructions already given by the former. Far from
disclosing a real separation between the two entities, particularly in regard to
the transactions in question, the evidence reveals such commongling and
interlacing of their activities as to render even incomprehensible certain
accounting operations between them, except upon the basis that the Philippine
corporation was to all intents and purposes a mere subsidiary, branch, or
agency of the American parent entity. Only upon this basis can it be
comprehended why it seems not to matter at all how much profit would be
allocated to plaintiff, or even that no profit at all be so allocated to it, at any
given time or after any given period.

As already stated above, under the evidence the sales in the Philippines of the
railway materials, machinery and supplies imported here by Koppel Industrial
Car and Equipment Company could have been as conviniently and efficiently
transacted and handled — if not more so — had said corporation merely
established a branch or agency in the Philippines and obtained license to do
business locally; and if it had done so and said sales had been effected by such
branch or agency, there seems to be no dispute that the 1½ per cent
merchants' sales tax then in force would have been collectible. So far as we can
discover, there would be only one, but very important, difference between the
two schemes — a difference in tax liability on the ground that the sales were
made through another and distinct corporation, as alleged broker, when we
have seen that this latter corporation is virtually owned by the former, or that
they practically one and the same, is to sanction a circumvention of our tax
laws, and permit a tax evasion of no mean proportions and the consequent
commission of a grave injustice to the Government. Not only this; it would
allow the taxpayer to do by indirection what the tax laws prohibited to be done
directly (non-payment of legitimate taxes), paraphrasing the United States
Supreme Court in United States vs. Lehigh Valley R. Co., supra.

The act of one corporation crediting or debiting the other for certain items,
expenses or even merchandise sold or disposed of, is perfectly compatible with
the idea of the domestic entity being or acting as a mere branch, agency or
subsidiary of the parent organization. Such operations were called for any way
by the exigencies or convenience of the entire business. Indeed, accounting
operation such as these are invitable, and have to be effected in the ordinary
course of business enterprise extends its trade to another land through a
branch office, or through another scheme amounting to the same thing.

If plaintiff were to act as broker in the Philippines for any other corporation,
entity or person, distinct from Koppel Industrial Car and Equipment company,
an entirely different question will arise, which, however, we are not called
upon, nor in a position, to decide.

As stated above, Exhibit H contains to the following paragraph:

It is clearly understood that the intent of this contract is that the broker shall
perform only the functions of a broker as set forth above, and shall not take
possession of any of the materials or equipment applying to said orders or
perform any acts or duties outside the scope of a broker; and in no sense shall
this contract be construed as granting to the broker the power to represent the
principal as its agent or to make commitments on its behalf.

The foregoing paragraph, construed in the light of other facts noted elsewhere
in this decision, betrays, we think a deliberate intent, through the medium of a
scheme devised with great care, to avoid the payment of precisely the 1½ per
cent merchants' sales tax in force in the Philippines before, at the time of, and
after, the making of the said contract Exhibit H. If this were to be allowed, the
payment of a tax, which directly could not have been avoided, could be evaded
by indirection, consideration being had of the aforementioned peculiar relations
between the said American and local corporations. Such evasion, involving as it
would, a violation of the former Internal Revenue Law, would even fall within
the penal sanction of section 2741 of the Revised Administrative Code. Which
only goes to show the illegality of the whole scheme. We are not here concerned
with the impossibility of collecting the merchants' sales tax, as a mere
incidental consequence of transactions legal in themselves and innocent in
their purpose. We are dealing with a scheme the primary, not to say the sole,
object of which the evasion of the payment of such tax. It is this aim of the
scheme that makes it illegal.

We have said above that the contracts of sale involved herein were all perfected
in the Philippines. From the facts stipulated in paragraph IV of the agreed
statement of facts, it clearly appears that the Philippine purchasers had to wait
for Koppel Industrial Car and Equipment Company to communicate its cost
prices to Koppel (Philippines), Inc., were perfected in the Philippines. In those
cases where no such price quotations from the American corporation were
needed, of course, the sales effected in those cases described in paragraph V of
the agreed statement of facts were, as expressed therein, transacted "in
substantially the same manner as outlined in paragraph VI." Even the single
transaction described in paragraph VI of the agreed statement of facts was also
perfected in the Philippines, because the contracting parties were here and the
consent of each was given here. While it is true that when the contract was
thus perfected in the Philippines the pair of Atlas-Diesel Marine Engines were
in Sweden and the agreement was to deliver them C.I.F. Hongkong, the
contract of sale being consensual — perfected by mere consent — (Civil Code,
article 1445; 10 Manresa, 4th ed., p. 11), the location of the property and the
place of delivery did not matter in the question of where the agreement was
perfected.
In said paragraph VI, we read the following, as indicating where the contract
was perfected, considering beforehand that one party, Koppel (Philippines),Inc.,
which in contemplation of law, as to that transaction, was the same Koppel
Industrial Car Equipment Co., was in the Philippines:

. . . on April 1, 1930, a new local buyer Mr. Cesar Barrios, of Iloilo, Philippines,
was found and the same engines were sold to him for $21,000 (P42,000) C.I.F.
Hongkong . . . (Emphasis supplied.)

Under the revenue law in force when the sales in question took place, the
merchants' sales tax attached upon the happening of the respective sales of the
"commodities, goods, wares, and merchandise" involved, and we are clearly of
opinion that such "sales" took place upon the perfection of the corresponding
contracts. If such perfection took place in the Philippines, the merchants' sales
tax then in force here attached to the transactions.

Even if we should consider that the Philippine buyers in the cases covered by
paragraph IV and V of the agreed statement of facts, contracted with Koppel
Industrial Car and Equipment company, we will arrive at the same final result.
It can not be denied in that case that said American corporation contracted
through Koppel (Philippines), Inc., which was in the Philippines. The real
transaction in each case of sale, in final effect, began with an offer of sale from
the seller, said American corporation, through its agent, the local corporation,
of the railway materials, machinery, and supplies at the prices quoted, and
perfected or completed by the acceptance of that offer by the local buyers when
the latter, accepting those prices, placed their orders. The offer could not
correctly be said to have been made by the local buyers when they asked for
price quotations, for they could not rationally be taken to have bound
themselves to buy before knowing the prices. And even if we should take into
consideration the fact that the american corporation contracted, at least partly,
through correspondence, according to article 54 of the Code of Commerce, the
respective contracts were completed from the time of the acceptance by the
local buyers, which happened in the Philippines.

Contracts executed through correspondence shall be completed from the time

an answer is made accepting the proposition or the conditions by which the
latter may be modified." (Code of Commerce, article 54; emphasis supplied.)

A contract is as a rule considered as entered into at the place where the place it
is performed. So where delivery is regarded as made at the place of delivery."
(13 C. J., 580-81, section 581.)

(In the consensual contract of sale delivery is not needed for its perfection.)
II. Appellant's second assignment of error can be summarily disposed of. It is
clear that the ruling of the Secretary of Finance, Exhibit M, was not binding
upon the trial court, much less upon this tribunal, since the duty and power of
interpreting the laws is primarily a function of the judiciary. (Ortua vs. Singson
Encarnacion, 59 Phil., 440, 444.) Plaintiff cannot be excused from abiding by
this legal principle, nor can it properly be heard to say that it relied on the
Secretary's ruling and that, therefore, the courts should not now apply an
interpretation at variance therewith. The rule of stare decisis is undoubtedly
entitled to more respect in the construction of statutes than the interpretations
given by officers of the administrative branches of the government, even those
entrusted with the administration of particular laws. But this court, in
Philippine Trust Company and Smith, Bell and Co. vs. Mitchell(59 Phil., 30,
36), said:

. . . The rule of stare decisis is entitled to respect. Stability in the law,

particularly in the business field, is desirable. But idolatrous reverence for
precedent, simply as precedent, no longer rules. More important than anything
else is that court should be right. . . .

III. In the view we take of the case, and after the disposition made above of the
first assignment of error, it becomes unnecessary to make any specific ruling
on the third, fourth, fifth, sixth, and seventh assignments of error, all of which
are necessarily disposed of adversely to appellant's contention.

Wherefore, he judgment appealed from is affirmed, with costs of both instances

against appellant. So ordered.

Moran, C.J., Paras, Feria, Pablo, Bengzon, Briones, and Tuason, JJ., concur.

Separate Opinions

PERFECTO, J., concurring:

We fully agree with the well-written decision penned by Mr. Justice Hilado in
this case. We only wish to add that the ingenious device of evading the
payment of taxes, is not a new one. It is only one of the manifold
manifestations of the shrewdness of the masterminds behind some powerful
corporations who, without ay compunction, do not stop at adopting any
scheme by which the controlling capitalists may get even richer and richer,
sometimes at government expense, sometimes by squeezing credulous or
ignorant small shareholders, sometimes with the exploitation of the helpless
public at large, and sometimes at great sacrifice of all the three entities.

The system of corporation combines, of holding and subsidiary corporations, of

spreading and interlocking companies, has no well developed and has grown so
powerful that even the wisest government had been unable to defend itself and
protect the people from the crushing tentacles of the moneyed octopuses. It is
true that in the United States of America anti trusts laws were enacted but,
notwithstanding their ability and wisdom, the Americans were unable to stave
off the effects of the bankruptcy of the pyramid of holding and interlocking
companies built around the tragic figure of Samuel Insull.

That Philippine Government, that Filipino consumers, that Filipino public at

large, had already been victims of the evil effects of such a system has been
conclusively proved in the scandalous illegalities and irregularities disclosed in
the investigation made by the first National Assembly, through its Committee
on Rate Reducing of Public Utilities. In said investigation, it was revealed that,
by a system of holding and interlocking companies, by their manipulation of
books of accounts, our government was defrauded of enormous amounts in
taxes and millions of pesos were unjustly squeezed from the public.

It is high time that alarm be sounded so that our government and our public
may avoid being further victimized and this country turned into a puppet at
the mercy of moneyed tycoons who are not stopped by any scruple to attain
their unquenchable thristiness for more money and for power and domination.
All liberal-minded people must fight not only against political imperialism, but
also against economic or financial imperialism, in fact, against any kind of
imperialism. The call for eternal vigilance must be heeded by all, including
tribunals, if the survival of our people must not be jeopardized by artful
corporations and unscrupulous financiers.

10. PNB V. RITRATTO GROUP, INC.

The antecedents of this case are as follows:

Petitioner Philippine National Bank is a domestic corporation organized and

existing under Philippine law. Meanwhile, respondents Ritratto Group, Inc.,
Riatto International, Inc. and Dadasan General Merchandise are domestic
corporations, likewise, organized and existing under Philippine law.

On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary

company of PNB, organized and doing business in Hong Kong, extended a letter
of credit in favor of the respondents in the amount of US$300,000.00 secured
by real estate mortgages constituted over four (4) parcels of land in Makati
City. This credit facility was later increased successively to US$1,140,000.00 in
September 1996; to US$1,290,000.00 in November 1996; to US$1,425,000.00
in February 1997; and decreased to US$1,421,316.18 in April 1998.
Respondents made repayments of the loan incurred by remitting those
amounts to their loan account with PNB-IFL in Hong Kong.

However, as of April 30, 1998, their outstanding obligations stood at

US$1,497,274.70. Pursuant to the terms of the real estate mortgages, PNB-IFL,
through its attorney-in-fact PNB, notified the respondents of the foreclosure of
all the real estate mortgages and that the properties subject thereof were to be
sold at a public auction on May 27, 1999 at the Makati City Hall.

On May 25, 1999, respondents filed a complaint for injunction with prayer for
the issuance of a writ of preliminary injunction and/or temporary restraining
order before the Regional Trial Court of Makati. The Executive Judge of the
Regional Trial Court of Makati issued a 72-hour temporary restraining order.
On May 28, 1999, the case was raffled to Branch 147 of the Regional Trial
Court of Makati. The trial judge then set a hearing on June 8, 1999. At the
hearing of the application for preliminary injunction, petitioner was given a
period of seven days to file its written opposition to the application. On June
15, 1999, petitioner filed an opposition to the application for a writ of
preliminary injunction to which the respondents filed a reply. On June 25,
1999, petitioner filed a motion to dismiss on the grounds of failure to state a
cause of action and the absence of any privity between the petitioner and
respondents. On June 30, 1999, the trial court judge issued an Order for the
issuance of a writ of preliminary injunction, which writ was correspondingly
issued on July 14, 1999. On October 4, 1999, the motion to dismiss was
denied by the trial court judge for lack of merit.

Petitioner, thereafter, in a petition for certiorari and prohibition assailed the

issuance of the writ of preliminary injunction before the Court of Appeals. In
the impugned decision,1 the appellate court dismissed the petition. Petitioner
thus seeks recourse to this Court and raises the following errors:

1.

THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE

COMPLAINT A QUO, CONSIDERING THAT BY THE ALLEGATIONS OF THE
COMPLAINT, NO CAUSE OF ACTION EXISTS AGAINST PETITIONER, WHICH
IS NOT A REAL PARTY IN INTEREST BEING A MERE ATTORNEY-IN-FACT
AUTHORIZED TO ENFORCE AN ANCILLARY CONTRACT.

2.

THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL

COURT TO ISSUE IN EXCESS OR LACK OF JURISDICTION A WRIT OF
PRELIMINARY INJUNCTION OVER AND BEYOND WHAT WAS PRAYED FOR IN
THE COMPLAINT A QUO CONTRARY TO CHIEF OF STAFF, AFP VS. GUADIZ
JR., 101 SCRA 827.2

Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27,
2000 and the trial court's Orders dated June 30, 1999 and October 4, 1999 be
set aside and the dismissal of the complaint in the instant case.3

In their Comment, respondents argue that even assuming arguendo that

petitioner and PNB-IFL are two separate entities, petitioner is still the party-in-
interest in the application for preliminary injunction because it is tasked to
commit acts of foreclosing respondents' properties.4 Respondents maintain
that the entire credit facility is void as it contains stipulations in violation of
the principle of mutuality of contracts.5 In addition, respondents justified the
act of the court a quo in applying the doctrine of "Piercing the Veil of Corporate
Identity" by stating that petitioner is merely an alter ego or a business conduit
of PNB-IFL.6

The petition is impressed with merit.

Respondents, in their complaint, anchor their prayer for injunction on alleged

invalid provisions of the contract:

GROUNDS

THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE

DISCRETION OF THE DEFENDANT PNB CONTRAVENES THE PRINCIPAL OF
MUTUALITY OF CONTRACTS.

II

THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE

OF INTEREST AGREED UPON MAY BE UNILATERALLY MODIFIED BY
DEFENDANT, THERE WAS NO STIPULATION THAT THE RATE OF INTEREST
SHALL BE REDUCED IN THE EVENT THAT THE APPLICABLE MAXIMUM
RATE OF INTEREST IS REDUCED BY LAW OR BY THE MONETARY BOARD.7

Based on the aforementioned grounds, respondents sought to enjoin and

restrain PNB from the foreclosure and eventual sale of the property in order to
protect their rights to said property by reason of void credit facilities as bases
for the real estate mortgage over the said property.8

The contract questioned is one entered into between respondent and PNB-IFL,
not PNB. In their complaint, respondents admit that petitioner is a mere
attorney-in-fact for the PNB-IFL with full power and authority to, inter alia,
foreclose on the properties mortgaged to secure their loan obligations with
PNB-IFL. In other words, herein petitioner is an agent with limited authority
and specific duties under a special power of attorney incorporated in the real
estate mortgage. It is not privy to the loan contracts entered into by
respondents and PNB-IFL.

The issue of the validity of the loan contracts is a matter between PNB-IFL, the
petitioner's principal and the party to the loan contracts, and the respondents.
Yet, despite the recognition that petitioner is a mere agent, the respondents in
their complaint prayed that the petitioner PNB be ordered to re-compute the
rescheduling of the interest to be paid by them in accordance with the terms
and conditions in the documents evidencing the credit facilities, and crediting
the amount previously paid to PNB by herein respondents.9

Clearly, petitioner not being a part to the contract has no power to re-compute
the interest rates set forth in the contract. Respondents, therefore, do not have
any cause of action against petitioner.

The trial court, however, in its Order dated October 4, 1994, ruled that since
PNB-IFL, is a wholly owned subsidiary of defendant Philippine National Bank,
the suit against the defendant PNB is a suit against PNB-IFL.10 In justifying its
ruling, the trial court, citing the case of Koppel Phil. Inc. vs. Yatco,11 reasoned
that the corporate entity may be disregarded 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.12

We disagree.

The general rule is that as a legal entity, a corporation has a personality

distinct and separate from its individual stockholders or members, and is not
affected by the personal rights, obligations and transactions of the latter.13
The mere fact that a corporation owns all of the stocks of another corporation,
taken alone is not sufficient to justify their being treated as one entity. If used
to perform legitimate functions, a subsidiary's separate existence may be
respected, and the liability of the parent corporation as well as the subsidiary
will be confined to those arising in their respective business. The courts may in
the exercise of judicial discretion step in to prevent the abuses of separate
entity privilege and pierce the veil of corporate entity.
We find, however, that the ruling in Koppel finds no application in the case at
bar. In said case, this Court disregarded the separate existence of the parent
and the subsidiary on the ground that the latter was formed merely for the
purpose of evading the payment of higher taxes. In the case at bar,
respondents fail to show any cogent reason why the separate entities of the
PNB and PNB-IFL should be disregarded.

While there exists no definite test of general application in determining when a

subsidiary may be treated as a mere instrumentality of the parent corporation,
some factors have been identified that will justify the application of the
treatment of the doctrine of the piercing of the corporate veil. The case of
Garrett vs. Southern Railway Co.14 is enlightening. The case involved a suit
against the Southern Railway Company. Plaintiff was employed by Lenoir Car
Works and alleged that he sustained injuries while working for Lenoir. He,
however, filed a suit against Southern Railway Company on the ground that
Southern had acquired the entire capital stock of Lenoir Car Works, hence, the
latter corporation was but a mere instrumentality of the former. The Tennessee
Supreme Court stated that as a general rule the stock ownership alone by one
corporation of the stock of another does not thereby render the dominant
corporation liable for the torts of the subsidiary unless the separate corporate
existence of the subsidiary is a mere sham, or unless the control of the
subsidiary is such that it is but an instrumentality or adjunct of the dominant
corporation. Said Court then outlined the circumstances which may be useful
in the determination of whether the subsidiary is but a mere instrumentality of
the parent-corporation:

The Circumstance rendering the subsidiary an instrumentality. It is manifestly

impossible to catalogue the infinite variations of fact that can arise but there
are certain common circumstances which are important and which, if present
in the proper combination, are controlling.

These are as follows:

(a) The parent corporation owns all or most of the capital stock of the
subsidiary.

(b) The parent and subsidiary corporations have common directors or officers.

(c) The parent corporation finances the subsidiary.

(d) The parent corporation subscribes to all the capital stock of the subsidiary
or otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.

(f) The parent corporation pays the salaries and other expenses or losses of the
subsidiary.

(g) The subsidiary has substantially no business except with the parent
corporation or no assets except those conveyed to or by the parent corporation.

(h) In the papers of the parent corporation or in the statements of its officers,
the subsidiary is described as a department or division of the parent
corporation, or its business or financial responsibility is referred to as the
parent corporation's own.

(i) The parent corporation uses the property of the subsidiary as its own.

(j) The directors or executives of the subsidiary do not act independently in the
interest of the subsidiary but take their orders from the parent corporation.

(k) The formal legal requirements of the subsidiary are not observed.

The Tennessee Supreme Court thus ruled:

In the case at bar only two of the eleven listed indicia occur, namely, the
ownership of most of the capital stock of Lenoir by Southern, and possibly
subscription to the capital stock of Lenoir. . . The complaint must be
dismissed.

Similarly, in this jurisdiction, we have held that the doctrine of piercing the
corporate veil is an equitable doctrine developed to address situations where
the separate corporate personality of a corporation is abused or used for
wrongful purposes. The doctrine applies when the 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.15

In Concept Builders, Inc. v. NLRC,16 we have laid the test in determining the
applicability of the doctrine of piercing the veil of corporate fiction, to wit:
1. Control, not mere majority or complete 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 plaintiffs legal rights; and,

3. The aforesaid control and breach of duty must proximately cause the injury
or unjust loss complained of.

The absence of any one of these elements prevents "piercing the corporate veil."
In applying the "instrumentality" or "alter ego" doctrine, the courts are
concerned with reality and not form, with how the corporation operated and
the individual defendant's relationship to the operation.17

Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner
PNB, there is no showing of the indicative factors that the former corporation is
a mere instrumentality of the latter are present. Neither is there a
demonstration that any of the evils sought to be prevented by the doctrine of
piercing the corporate veil exists. Inescapably, therefore, the doctrine of
piercing the corporate veil based on the alter ego or instrumentality doctrine
finds no application in the case at bar.

In any case, the parent-subsidiary relationship between PNB and PNB-IFL is

not the significant legal relationship involved in this case since the petitioner
was not sued because it is the parent company of PNB-IFL. Rather, the
petitioner was sued because it acted as an attorney-in-fact of PNB-IFL in
initiating the foreclosure proceedings. A suit against an agent cannot without
compelling reasons be considered a suit against the principal. Under the Rules
of Court, every action must be prosecuted or defended in the name of the real
party-in-interest, unless otherwise authorized by law or these Rules.18 In
mandatory terms, the Rules require that "parties-in-interest without whom no
final determination can be had, an action shall be joined either as plaintiffs or
defendants."19 In the case at bar, the injunction suit is directed only against
the agent, not the principal.

Anent the issuance of the preliminary injunction, the same must be lifted as it
is a mere provisional remedy but adjunct to the main suit.20 A writ of
preliminary injunction is an ancillary or preventive remedy that may only be
resorted to by a litigant to protect or preserve his rights or interests and for no
other purpose during the pendency of the principal action. The dismissal of the
principal action thus results in the denial of the prayer for the issuance of the
writ. Further, there is no showing that respondents are entitled to the issuance
of the writ. Section 3, Rule 58, of the 1997 Rules of Civil Procedure provides:

SECTION 3. Grounds for issuance of preliminary injunction. — A preliminary

injunction may be granted when it is established:

(a) That the applicant is entitled to the relief demanded, and the whole or part
of such relief consists in restraining the commission or continuance of the act
or acts complained of, or in requiring the performance of an act or acts, either
for a limited period or perpetually,

(b) That the commission, continuance or non-performance of the acts or acts

complained of during the litigation would probably work injustice to the
applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is

attempting to do, or is procuring or suffering to be done, some act or acts
probably in violation of the rights of the applicant respecting the subject of the
action or proceeding, and tending to render the judgment ineffectual.

Thus, an injunctive remedy may only be resorted to when there is a pressing

necessity to avoid injurious consequences which cannot be remedied under
any standard compensation.21 Respondents do not deny their indebtedness.
Their properties are by their own choice encumbered by real estate mortgages.
Upon the non-payment of the loans, which were secured by the mortgages
sought to be foreclosed, the mortgaged properties are properly subject to a
foreclosure sale. Moreover, respondents questioned the alleged void
stipulations in the contract only when petitioner initiated the foreclosure
proceedings. Clearly, respondents have failed to prove that they have a right
protected and that the acts against which the writ is to be directed are violative
of said right.22 The Court is not unmindful of the findings of both the trial
court and the appellate court that there may be serious grounds to nullify the
provisions of the loan agreement. However, as earlier discussed, respondents
committed the mistake of filing the case against the wrong party, thus, they
must suffer the consequences of their error.

All told, respondents do not have a cause of action against the petitioner as the
latter is not privy to the contract the provisions of which respondents seek to
declare void. Accordingly, the case before the Regional Trial Court must be
dismissed and the preliminary injunction issued in connection therewith, must
be lifted.

IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed

decision of the Court of Appeals is hereby REVERSED. The Orders dated June
30, 1999 and October 4, 1999 of the Regional Trial Court of Makati, Branch
147 in Civil Case No. 99-1037 are hereby ANNULLED and SET ASIDE and the
complaint in said case DISMISSED.

SO ORDERED.

11. UMALI V. CA

The original complaint for annulment of title filed in the court a quo by herein
petitioners included as party defendants the Philippine Machinery Parts
Manufacturing Co., Inc. (PM Parts), Insurance Corporation of the Philippines
(ICP), Bormaheco, Inc., (Bormaheco) and Santiago M. Rivera (Rivera). A Second
Amended Complaint was filed, this time impleading Santiago M. Rivera as
party plaintiff.

During the pre-trial conference, the parties entered into the following
stipulation of facts:

As between all parties: Plaintiff Buenaflor M. Castillo is the judicial

administratrix of the estate of Felipe Castillo in Special Proceeding No. 4053,
pending before Branch IX, CFI of Quezon (per Exhibit A) which intestate
proceedings was instituted by Mauricia Meer Vda. de Castillo, the previous
administratrix of the said proceedings prior to 1970 (per exhibits A-1 and A-2)
which case was filed in Court way back in 1964;

b) The four (4) parcels of land described in paragraph 3 of the Complaint were
originally covered by TCT No. T-42104 and Tax Dec. No. 14134 with assessed
value of P3,100.00; TCT No. T 32227 and Tax Dec. No. 14132, with assessed
value of P5,130,00; TCT No. T-31762 and Tax Dec. No. 14135, with assessed
value of P6,150.00; and TCT No. T-42103 with Tax Dec. No. 14133, with
assessed value of P3,580.00 (per Exhibits A-2 and B, B-1 to B-3 C, C-1 -to C3

c) That the above-enumerated four (4) parcels of land were the subject of the
Deed of Extra-Judicial Partition executed by the heirs of Felipe Castillo (per
Exhibit D) and by virtue thereof the titles thereto has (sic) been cancelled and
in lieu thereof, new titles in the name of Mauricia Meer Vda. de Castillo and of
her children, namely: Buenaflor, Bertilla, Victoria, Marietta and Leovina, all
surnamed Castillo has (sic) been issued, namely: TCT No. T-12113 (Exhibit E );
TCT No. T-13113 (Exhibit F); TCT No. T-13116 (Exhibit G ) and TCT No.
T13117 (Exhibit H )

d) That mentioned parcels of land were submitted as guaranty in the

Agreement of Counter-Guaranty with Chattel-Real Estate Mortgage executed
on 24 October 1970 between Insurance Corporation of the Philippines and
Slobec Realty Corporation represented by Santiago Rivera (Exhibit 1);

e) That based on the Certificate of Sale issued by the Sheriff of the Province of
Quezon in favor of Insurance Corporation of the Philippines it was able to
transfer to itself the titles over the lots in question, namely: TCT No. T-23705
(Exhibit M), TCT No. T 23706 (Exhibit N ), TCT No. T-23707 (Exhibit 0) and
TCT No. T 23708 (Exhibit P);

f) That on 10 April 1975, the Insurance Corporation of the Philippines sold to

PM Parts the immovables in question (per Exhibit 6 for PM Parts) and by
reason thereof, succeeded in transferring unto itself the titles over the lots in
dispute, namely: per TCT No. T-24846 (Exhibit Q ), per TCT No. T-24847
(Exhibit R ), TCT No. T-24848 (Exhibit), TCT No. T-24849 (Exhibit T );

g) On 26 August l976, Mauricia Meer Vda. de Castillo' genther letter to Modesto

N. Cervantes stating that she and her children refused to comply with his
demands (Exhibit V-2);

h) That from at least the months of October, November and December 1970
and January 1971, Modesto N. Cervantes was the Vice-President of
Bormaheco, Inc. later President thereof, and also he is one of the Board of
Directors of PM Parts; on the other hand, Atty. Martin M. De Guzman was the
legal counsel of Bormaheco, Inc., later Executive Vice-President thereof, and
who also is the legal counsel of Insurance Corporation of the Philippines and
PM Parts; that Modesto N. Cervantes served later on as President of PM Parts,
and that Atty. de Guzman was retained by Insurance Corporation of the
Philippines specifically for foreclosure purposes only;

i) Defendant Bormaheco, Inc. on November 25, 1970 sold to Slobec Realty and
Development, Inc., represented by Santiago Rivera, President, one (1) unit
Caterpillar Tractor D-7 with Serial No. 281114 evidenced by a contract marked
Exhibit J and Exhibit I for Bormaheco, Inc.;

j) That the Surety Bond No. 14010 issued by co-defendant ICP was likewise
secured by an Agreement with Counter-Guaranty with Real Estate Mortgage
executed by Slobec Realty & Development, Inc., Mauricia Castillo Meer,
Buenaflor Castillo, Bertilla Castillo, Victoria Castillo, Marietta Castillo and
Leovina Castillo, as mortgagors in favor of ICP which document was executed
and ratified before notary public Alberto R. Navoa of the City of Manila on
October 24,1970;

k) That the property mortgaged consisted of four (4) parcels of land situated in
Lucena City and covered by TCT Nos. T-13114, T13115,
T-13116 and T-13117 of the Register of Deeds of Lucena City;

l) That the tractor sold by defendant Bormaheco, Inc. to Slobec Realty &
Development, Inc. was delivered to Bormaheco, Inc. on or about October
2,1973, by Mr. Menandro Umali for purposes of repair;

m) That in August 1976, PM Parts notified Mrs. Mauricia Meer about its
ownership and the assignment of Mr. Petronilo Roque as caretaker of the
subject property;

n) That plaintiff and other heirs are harvest fruits of the property (daranghita)
which is worth no less than Pl,000.00 per harvest.

As between plaintiffs and

defendant Bormaheco, Inc

o) That on 25 November 1970, at Makati, Rizal, Same Rivera, in representation

of the Slobec Realty & Development Corporation executed in favor of
Bormaheco, Inc., represented by its Vice-President Modesto N. Cervantes a
Chattel Mortgage concerning one unit model CAT D7 Caterpillar Crawler
Tractor as described therein as security for the payment in favor of the
mortgagee of the amount of P180,000.00 (per Exhibit K) that Id document was
superseded by another chattel mortgage dated January 23, 1971 (Exhibit 15);

p) On 18 December 1970, at Makati, Rizal, the Bormaheco, Inc., represented by

its Vice-President Modesto Cervantes and Slobec Realty Corporation
represented by Santiago Rivera executed the sales agreement concerning the
sale of one (1) unit Model CAT D7 Caterpillar Crawler Tractor as described
therein for the amount of P230,000.00 (per Exhibit J) which document was
superseded by the Sales Agreement dated January 23,1971 (Exhibit 16);

q) Although it appears on the document entitled Chattel Mortgage (per Exhibit

K) that it was executed on 25 November 1970, and in the document entitled
Sales Agreement (per Exhibit J) that it was executed on 18 December 1970, it
appears in the notarial register of the notary public who notarized them that
those two documents were executed on 11 December 1970. The certified xerox
copy of the notarial register of Notary Public Guillermo Aragones issued by the
Bureau of Records Management is hereto submitted as Exhibit BB That said
chattel mortgage was superseded by another document dated January 23,
1971;

r) That on 23 January 1971, Slobec Realty Development Corporation,

represented by Santiago Rivera, received from Bormaheco, Inc. one (1) tractor
Caterpillar Model D-7 pursuant to Invoice No. 33234 (Exhibits 9 and 9-A,
Bormaheco, Inc.) and delivery receipt No. 10368 (per Exhibits 10 and 10-A for
Bormaheco, Inc

s) That on 28 September 1973, Atty. Martin M. de Guzman, as counsel of

Insurance Corporation of the Philippines purchased at public auction for said
corporation the four (4) parcels of land subject of tills case (per Exhibit L), and
which document was presented to the Register of Deeds on 1 October 1973;

t) Although it appears that the realties in issue has (sic) been sold by Insurance
Corporation of the Philippines in favor of PM Parts on 1 0 April 1975, Modesto
N. Cervantes, formerly Vice- President and now President of Bormaheco, Inc.,
sent his letter dated 9 August 1976 to Mauricia Meer Vda. de Castillo (Exhibit
V), demanding that she and her children should vacate the premises;

u) That the Caterpillar Crawler Tractor Model CAT D-7 which was received by
Slobec Realty Development Corporation was actually reconditioned and
repainted. " 2

We cull the following antecedents from the decision of respondent Court of

Appeals:

Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de

Castillo. The Castillo family are the owners of a parcel of land located in
Lucena City which was given as security for a loan from the Development Bank
of the Philippines. For their failure to pay the amortization, foreclosure of the
said property was about to be initiated. This problem was made known to
Santiago Rivera, who proposed to them the conversion into subdivision of the
four (4) parcels of land adjacent to the mortgaged property to raise the
necessary fund. The Idea was accepted by the Castillo family and to carry out
the project, a Memorandum of Agreement (Exh. U p. 127, Record) was executed
by and between Slobec Realty and Development, Inc., represented by its
President Santiago Rivera and the Castillo family. In this agreement, Santiago
Rivera obliged himself to pay the Castillo family the sum of P70,000.00
immediately after the execution of the agreement and to pay the additional
amount of P400,000.00 after the property has been converted into a
subdivision. Rivera, armed with the agreement, Exhibit U , approached Mr.
Modesto Cervantes, President of defendant Bormaheco, and proposed to
purchase from Bormaheco two (2) tractors Model D-7 and D-8 Subsequently, a
Sales Agreement was executed on December 28,1970 (Exh. J, p. 22, Record).

On January 23, 1971, Bormaheco, Inc. and Slobec Realty and Development,
Inc., represented by its President, Santiago Rivera, executed a Sales Agreement
over one unit of Caterpillar Tractor D-7 with Serial No. 281114, as evidenced
by the contract marked Exhibit '16'. As shown by the contract, the price was
P230,000.00 of which P50,000.00 was to constitute a down payment, and the
balance of P180,000.00 payable in eighteen monthly installments. On the same
date, Slobec, through Rivera, executed in favor of Bormaheco a Chattel
Mortgage (Exh. K, p. 29, Record) over the said equipment as security for the
payment of the aforesaid balance of P180,000.00. As further security of the
aforementioned unpaid balance, Slobec obtained from Insurance Corporation
of the Phil. a Surety Bond, with ICP (Insurance Corporation of the Phil.) as
surety and Slobec as principal, in favor of Bormaheco, as borne out by Exhibit
'8' (p. 111, Record). The aforesaid surety bond was in turn secured by an
Agreement of Counter-Guaranty with Real Estate Mortgage (Exhibit I, p. 24,
Record) executed by Rivera as president of Slobec and Mauricia Meer Vda. de
Castillo, Buenaflor Castillo Umali, Bertilla Castillo-Rada, Victoria Castillo,
Marietta Castillo and Leovina Castillo Jalbuena, as mortgagors and Insurance
Corporation of the Philippines (ICP) as mortgagee. In this agreement, ICP
guaranteed the obligation of Slobec with Bormaheco in the amount of
P180,000.00. In giving the bond, ICP required that the Castillos mortgage to
them the properties in question, namely, four parcels of land covered by TCTs
in the name of the aforementioned mortgagors, namely TCT Nos. 13114,
13115, 13116 and 13117 all of the Register of Deeds for Lucena City.

On the occasion of the execution on January 23, 1971, of the Sales Agreement
Exhibit '16', Slobec, represented by Rivera received from Bormaheco the
subject matter of the said Sales Agreement, namely, the aforementioned tractor
Caterpillar Model D-7 as evidenced by Invoice No. 33234 (Exhs. 9 and 9-A, p.
112, Record) and Delivery Receipt No. 10368 (Exhs. 10 and 10-A, p. 113). This
tractor was known by Rivera to be a reconditioned and repainted one
[Stipulation of Facts, Pre-trial Order, par. (u)].

Meanwhile, for violation of the terms and conditions of the Counter-Guaranty

Agreement (Exh. 1), the properties of the Castillos were foreclosed by ICP As
the highest bidder with a bid of P285,212.00, a Certificate of Sale was issued
by the Provincial Sheriff of Lucena City and Transfer Certificates of Title over
the subject parcels of land were issued by the Register of Deeds of Lucena City
in favor of ICP namely, TCT Nos. T-23705, T 23706, T-23707 and T-23708
(Exhs. M to P, pp. 38-45). The mortgagors had one (1) year from the date of the
registration of the certificate of sale, that is, until October 1, 1974, to redeem
the property, but they failed to do so. Consequently, ICP consolidated its
ownership over the subject parcels of land through the requisite affidavit of
consolidation of ownership dated October 29, 1974, as shown in Exh. '22'(p.
138, Rec.). Pursuant thereto, a Deed of Sale of Real Estate covering the subject
properties was issued in favor of ICP (Exh. 23, p. 139, Rec.).

On April 10, 1975, Insurance Corporation of the Phil. ICP sold to Phil.
Machinery Parts Manufacturing Co. (PM Parts) the four (4) parcels of land and
by virtue of said conveyance, PM Parts transferred unto itself the titles over the
lots in dispute so that said parcels of land are now covered by TCT Nos. T-
24846, T-24847, T-24848 and T-24849 (Exhs. Q-T, pp. 46-49, Rec.).
Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a
letter dated August 9,1976 addressed to plaintiff Mrs. Mauricia Meer Castillo
requesting her and her children to vacate the subject property, who (Mrs.
Castillo) in turn sent her reply expressing her refusal to comply with his
demands.

On September 29, 1976, the heirs of the late Felipe Castillo, particularly
plaintiff Buenaflor M. Castillo Umali as the appointed administratrix of the
properties in question filed an action for annulment of title before the then
Court of First Instance of Quezon and docketed thereat as Civil Case No. 8085.
Thereafter, they filed an Amended Complaint on January 10, 1980 (p. 444,
Record). On July 20, 1983, plaintiffs filed their Second Amended Complaint,
impleading Santiago M. Rivera as a party plaintiff (p. 706, Record). They
contended that all the aforementioned transactions starting with the
Agreement of Counter-Guaranty with Real Estate Mortgage (Exh. I), Certificate
of Sale (Exh. L) and the Deeds of Authority to Sell, Sale and the Affidavit of
Consolidation of Ownership (Annexes F, G, H, I) as well as the Deed of Sale
(Annexes J, K, L and M) are void for being entered into in fraud and without
the consent and approval of the Court of First Instance of Quezon, (Branch IX)
before whom the administration proceedings has been pending. Plaintiffs pray
that the four (4) parcels of land subject hereof be declared as owned by the
estate of the late Felipe Castillo and that all Transfer Certificates of Title Nos.
13114,13115,13116,13117, 23705, 23706, 23707, 23708, 24846, 24847,
24848 and 24849 as well as those appearing as encumbrances at the back of
the certificates of title mentioned be declared as a nullity and defendants to pay
damages and attorney's fees (pp. 71071 1, Record).

In their amended answer, the defendants controverted the complaint and

alleged, by way of affirmative and special defenses that the complaint did not
state facts sufficient to state a cause of action against defendants; that
plaintiffs are not entitled to the reliefs demanded; that plaintiffs are estopped or
precluded from asserting the matters set forth in the Complaint; that plaintiffs
are guilty of laches in not asserting their alleged right in due time; that
defendant PM Parts is an innocent purchaser for value and relied on the face of
the title before it bought the subject property (p. 744, Record). 3

After trial, the court a quo rendered judgment, with the following decretal
portion:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and

against the defendants, declaring the following documents:

Agreement of Counter-Guaranty with Chattel-Real Estate Mortgage dated

October 24,1970 (Exhibit 1);
Sales Agreement dated December 28, 1970 (Exhibit J)

Chattel Mortgage dated November 25, 1970 (Exhibit K)

Sales Agreement dated January 23, 1971 (Exhibit 16);

Chattel Mortgage dated January 23, 1971 (Exhibit 17);

Certificate of Sale dated September 28, 1973 executed by the Provincial Sheriff
of Quezon in favor of Insurance Corporation of the Philippines (Exhibit L);

null and void for being fictitious, spurious and without consideration.
Consequently, Transfer Certificates of Title Nos. T 23705, T-23706, T23707
and T-23708 (Exhibits M, N, O and P) issued in the name of Insurance
Corporation of the Philippines, are likewise null and void.

The sale by Insurance Corporation of the- Philippines in favor of defendant

Philippine Machinery Parts Manufacturing Co., Inc., over Id four (4) parcels of
land and Transfer Certificates of Title Nos. T 24846, T-24847, T-24848 and T-
24849 subsequently issued by virtue of said sale in the name of Philippine
Machinery Parts Manufacturing Co., Inc., are similarly declared null and void,
and the Register of Deeds of Lucena City is hereby directed to issue, in lieu
thereof, transfer certificates of title in the names of the plaintiffs, except
Santiago Rivera.

Orders the defendants jointly and severally to pay the plaintiffs moral damages
in the sum of P10,000.00, exemplary damages in the amount of P5,000.00, and
actual litigation expenses in the sum of P6,500.00.

Defendants are likewise ordered to pay the plaintiffs, jointly and severally, the
sum of P10,000.00 for and as attomey's fees. With costs against the
defendants.

SO ORDERED. 4

As earlier stated, respondent court reversed the aforequoted decision of the

trial court and rendered the judgment subject of this petition-

Petitioners contend that respondent Court of Appeals erred:

1. In holding and finding that the actions entered into between petitioner
Rivera with Cervantes are all fair and regular and therefore binding between
the parties thereto;

2. In reversing the decision of the lower court, not only based on erroneous
conclusions of facts, erroneous presumptions not supported by the evidence on
record but also, holding valid and binding the supposed payment by ICP of its
obligation to Bormaheco, despite the fact that the surety bond issued it had
already expired when it opted to foreclose extrajudically the mortgage executed
by the petitioners;

3. In aside the finding of the lower court that there was necessity to pierce the
veil of corporate existence; and

4. In reversing the decision of the lower court of affirming the same 5

I. Petitioners aver that the transactions entered into between Santiago M.

Rivera, as President of Slobec Realty and Development Company (Slobec) and
Mode Cervantes, as Vice-President of Bormaheco, such as the Sales
Agreement, 6 Chattel Mortgage 7 and the Agreement of Counter-Guaranty with
Chattel/Real Estate Mortgage, 8 are all fraudulent and simulated and should,
therefore, be declared nun and void. Such allegation is premised primarily on
the fact that contrary to the stipulations agreed upon in the Sales Agreement
(Exhibit J), Rivera never made any advance payment, in the alleged amount of
P50,000.00, to Bormaheco; that the tractor was received by Rivera only on
January 23, 1971 and not in 1970 as stated in the Chattel Mortgage (Exhibit
K); and that when the Agreement of Counter-Guaranty with Chattel/Real
Estate Mortgage was executed on October 24, 1970, to secure the obligation of
ICP under its surety bond, the Sales Agreement and Chattel Mortgage had not
as yet been executed, aside from the fact that it was Bormaheco, and not
Rivera, which paid the premium for the surety bond issued by ICP

At the outset, it will be noted that petitioners submission under the first
assigned error hinges purely on questions of fact. Respondent Court of Appeals
made several findings to the effect that the questioned documents are valid and
binding upon the parties, that there was no fraud employed by private
respondents in the execution thereof, and that, contrary to petitioners'
allegation, the evidence on record reveals that petitioners had every intention to
be bound by their undertakings in the various transactions had with private
respondents. It is a general rule in this jurisdiction that findings of fact of said
appellate court are final and conclusive and, thus, binding on this Court in the
absence of sufficient and convincing proof, inter alia, that the former acted
with grave abuse of discretion. Under the circumstances, we find no compelling
reason to deviate from this long-standing jurisprudential pronouncement.
In addition, the alleged failure of Rivera to pay the consideration agreed upon
in the Sales Agreement, which clearly constitutes a breach of the contract,
cannot be availed of by the guilty party to justify and support an action for the
declaration of nullity of the contract. Equity and fair play dictates that one who
commits a breach of his contract may not seek refuge under the protective
mantle of the law.

The evidence of record, on an overall calibration, does not convince us of the

validity of petitioners' contention that the contracts entered into by the parties
are either absolutely simulated or downright fraudulent.

There is absolute simulation, which renders the contract null and void, when
the parties do not intend to be bound at all by the same. 9 The basic
characteristic of this type of simulation of contract is the fact that the apparent
contract is not really desired or intended to either produce legal effects or in
any way alter the juridical situation of the parties. The subsequent act of
Rivera in receiving and making use of the tractor subject matter of the Sales
Agreement and Chattel Mortgage, and the simultaneous issuance of a surety
bond in favor of Bormaheco, concomitant with the execution of the Agreement
of Counter-Guaranty with Chattel/Real Estate Mortgage, conduce to the
conclusion that petitioners had every intention to be bound by these contracts.
The occurrence of these series of transactions between petitioners and private
respondents is a strong indication that the parties actually intended, or at least
expected, to exact fulfillment of their respective obligations from one another.

Neither will an allegation of fraud prosper in this case where petitioners failed
to show that they were induced to enter into a contract through the insidious
words and machinations of private respondents without which the former
would not have executed such contract. To set aside a document solemnly
executed and voluntarily delivered, the proof of fraud must be clear and
convincing. 10 We are not persuaded that such quantum of proof exists in the
case at bar.

The fact that it was Bormaheco which paid the premium for the surety bond
issued by ICP does not per se affect the validity of the bond. Petitioners
themselves admit in their present petition that Rivera executed a Deed of Sale
with Right of Repurchase of his car in favor of Bormaheco and agreed that a
part of the proceeds thereof shall be used to pay the premium for the bond. 11
In effect, Bormaheco accepted the payment of the premium as an agent of ICP
The execution of the deed of sale with a right of repurchase in favor of
Bormaheco under such circumstances sufficiently establishes the fact that
Rivera recognized Bormaheco as an agent of ICP Such payment to the agent of
ICP is, therefore, binding on Rivera. He is now estopped from questioning the
validity of the suretyship contract.
II. Under the doctrine of piercing the veil of corporate entity, when valid
grounds therefore exist, the legal fiction that a corporation is an entity with a
juridical personality separate and distinct from its members or stockholders
may be disregarded. In such cases, the corporation will be considered as a
mere association of persons. The members or stockholders of the corporation
will be considered as the corporation, that is, liability will attach directly to the
officers and stockholders. 12 The doctrine applies when the corporate fiction is
used to defeat public convenience, justify wrong, protect fraud, or defend
crime, 13 or when it is made as a shield to confuse the legitimate issues 14 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. 15

In the case at bar, petitioners seek to pierce the V621 Of corporate entity of
Bormaheco, ICP and PM Parts, alleging that these corporations employed fraud
in causing the foreclosure and subsequent sale of the real properties belonging
to petitioners While we do not discount the possibility of the existence of fraud
in the foreclosure proceeding, neither are we inclined to apply the doctrine
invoked by petitioners in granting the relief sought. It is our considered opinion
that piercing the veil of corporate entity is not the proper remedy in order that
the foreclosure proceeding may be declared a nullity under the circumstances
obtaining in the legal case at bar.

In the first place, the legal corporate entity is disregarded only if it is sought to
hold the officers and stockholders directly liable for a corporate debt or
obligation. In the instant case, petitioners do not seek to impose a claim
against the individual members of the three corporations involved; on the
contrary, it is these corporations which desire to enforce an alleged right
against petitioners. Assuming that petitioners were indeed defrauded by private
respondents in the foreclosure of the mortgaged properties, this fact alone is
not, under the circumstances, sufficient to justify the piercing of the corporate
fiction, since petitioners do not intend to hold the officers and/or members of
respondent corporations personally liable therefor. Petitioners are merely
seeking the declaration of the nullity of the foreclosure sale, which relief may
be obtained without having to disregard the aforesaid corporate fiction
attaching to respondent corporations. Secondly, petitioners failed to establish
by clear and convincing evidence that private respondents were purposely
formed and operated, and thereafter transacted with petitioners, with the sole
intention of defrauding the latter.

The mere fact, therefore, that the businesses of two or more corporations are
interrelated is not a justification for disregarding their separate personalities,
16 absent sufficient showing that the corporate entity was purposely used as a
shield to defraud creditors and third persons of their rights.
III. The main issue for resolution is whether there was a valid foreclosure of the
mortgaged properties by ICP Petitioners argue that the foreclosure proceedings
should be declared null and void for two reasons, viz.: (1) no written notice was
furnished by Bormaheco to ICP anent the failure of Slobec in paying its
obligation with the former, plus the fact that no receipt was presented to show
the amount allegedly paid by ICP to Bormaheco; and (b) at the time of the
foreclosure of the mortgage, the liability of ICP under the surety bond had
already expired.

Respondent court, in finding for the validity of the foreclosure sale, declared:

Now to the question of whether or not the foreclosure by the ICP of the real
estate mortgage was in the exercise of a legal right, We agree with the
appellants that the foreclosure proceedings instituted by the ICP was in the
exercise of a legal right. First, ICP has in its favor the legal presumption that it
had indemnified Bormaheco by reason of Slobec's default in the payment of its
obligation under the Sales Agreement, especially because Bormaheco
consented to ICPs foreclosure of the mortgage. This presumption is in
consonance with pars. R and Q Section 5, Rule 5, * New Rules of Court which
provides that it is disputably presumed that private transactions have been fair
and regular. likewise, it is disputably presumed that the ordinary course of
business has been followed: Second, ICP had the right to proceed at once to the
foreclosure of the mortgage as mandated by the provisions of Art. 2071 Civil
Code for these further reasons: Slobec, the principal debtor, was admittedly
insolvent; Slobec's obligation becomes demandable by reason of the expiration
of the period of payment; and its authorization to foreclose the mortgage upon
Slobec's default, which resulted in the accrual of ICPS liability to Bormaheco.
Third, the Agreement of Counter-Guaranty with Real Estate Mortgage (Exh. 1)
expressly grants to ICP the right to foreclose the real estate mortgage in the
event of 'non-payment or non-liquidation of the entire indebtedness or fraction
thereof upon maturity as stipulated in the contract'. This is a valid and binding
stipulation in the absence of showing that it is contrary to law, morals, good
customs, public order or public policy. (Art. 1306, New Civil Code). 17

1. Petitioners asseverate that there was no notice of default issued by

Bormaheco to ICP which would have entitled Bormaheco to demand payment
from ICP under the suretyship contract.

Surety Bond No. B-1401 0 which was issued by ICP in favor of Bormaheco,
wherein ICP and Slobec undertook to guarantee the payment of the balance of
P180,000.00 payable in eighteen (18) monthly installments on one unit of
Model CAT D-7 Caterpillar Crawler Tractor, pertinently provides in part as
follows:

1. The liability of INSURANCE CORPORATION OF THE PHILIPPINES, under

this BOND will expire Twelve (I 2) months from date hereof. Furthermore, it is
hereby agreed and understood that the INSURANCE CORPORATION OF THE
PHILIPPINES will not be liable for any claim not presented in writing to the
Corporation within THIRTY (30) DAYS from the expiration of this BOND, and
that the obligee hereby waives his right to bring claim or file any action against
Surety and after the termination of one (1) year from the time his cause of
action accrues. 18

The surety bond was dated October 24, 1970. However, an annotation on the
upper part thereof states: "NOTE: EFFECTIVITY DATE OF THIS BOND SHALL
BE ON JANUARY 22, 1971." 19

On the other hand, the Sales Agreement dated January 23, 1971 provides that
the balance of P180,000.00 shall be payable in eighteen (18) monthly
installments. 20 The Promissory Note executed by Slobec on even date in favor
of Bormaheco further provides that the obligation shall be payable on or before
February 23, 1971 up to July 23, 1972, and that non-payment of any of the
installments when due shall make the entire obligation immediately due and
demandable. 21

It is basic that liability on a bond is contractual in nature and is ordinarily

restricted to the obligation expressly assumed therein. We have repeatedly held
that the extent of a surety's liability is determined only by the clause of the
contract of suretyship as well as the conditions stated in the bond. It cannot be
extended by implication beyond the terms the contract. 22

Fundamental likewise is the rule that, except where required by the provisions
of the contract, a demand or notice of default is not required to fix the surety's
liability. 23 Hence, where the contract of suretyship stipulates that notice of
the principal's default be given to the surety, generally the failure to comply
with the condition will prevent recovery from the surety. There are certain
instances, however, when failure to comply with the condition will not
extinguish the surety's liability, such as a failure to give notice of slight
defaults, which are waived by the obligee; or on mere suspicion of possible
default; or where, if a default exists, there is excuse or provision in the
suretyship contract exempting the surety for liability therefor, or where the
surety already has knowledge or is chargeable with knowledge of the default.
24

In the case at bar, the suretyship contract expressly provides that ICP shag not
be liable for any claim not filed in writing within thirty (30) days from the
expiration of the bond. In its decision dated May 25 1987, the court a quo
categorically stated that '(n)o evidence was presented to show that Bormaheco
demanded payment from ICP nor was there any action taken by Bormaheco on
the bond posted by ICP to guarantee the payment of plaintiffs obligation. There
is nothing in the records of the proceedings to show that ICP indemnified
Bormaheco for the failure of the plaintiffs to pay their obligation. " 25 The
failure, therefore, of Bormaheco to notify ICP in writing about Slobec's
supposed default released ICP from liability under its surety bond.
Consequently, ICP could not validly foreclose that real estate mortgage
executed by petitioners in its favor since it never incurred any liability under
the surety bond. It cannot claim exemption from the required written notice
since its case does not fall under any of the exceptions hereinbefore
enumerated.

Furthermore, the allegation of ICP that it has paid Bormaheco is not supported
by any documentary evidence. Section 1, Rule 131 of the Rules of Court
provides that the burden of evidence lies with the party who asserts an
affirmative allegation. Since ICP failed to duly prove the fact of payment, the
disputable presumption that private transactions have been fair and regular,
as erroneously relied upon by respondent Court of Appeals, finds no
application to the case at bar.

2. The liability of a surety is measured by the terms of his contract, and, while
he is liable to the full extent thereof, such liability is strictly limited to that
assumed by its terms. 26 While ordinarily the termination of a surety's liability
is governed by the provisions of the contract of suretyship, where the obligation
of a surety is, under the terms of the bond, to terminate at a specified time, his
obligation cannot be enlarged by an unauthorized extension thereof. 27 This is
an exception to the general rule that the obligation of the surety continues for
the same period as that of the principal debtor. 28

It is possible that the period of suretyship may be shorter than that of the
principal obligation, as where the principal debtor is required to make payment
by installments. 29 In the case at bar, the surety bond issued by ICP was to
expire on January 22, 1972, twelve (1 2) months from its effectivity date,
whereas Slobec's installment payment was to end on July 23, 1972. Therefore,
while ICP guaranteed the payment by Slobec of the balance of P180,000.00,
such guaranty was valid only for and within twelve (1 2) months from the date
of effectivity of the surety bond, or until January 22, 1972. Thereafter, from
January 23, 1972 up to July 23, 1972, the liability of Slobec became an
unsecured obligation. The default of Slobec during this period cannot be a valid
basis for the exercise of the right to foreclose by ICP since its surety contract
had already been terminated. Besides, the liability of ICP was extinguished
when Bormaheco failed to file a written claim against it within thirty (30) days
from the expiration of the surety bond. Consequently, the foreclosure of the
mortgage, after the expiration of the surety bond under which ICP as surety
has not incurred any liability, should be declared null and void.

3. Lastly, it has been held that where The guarantor holds property of the
principal as collateral surety for his personal indemnity, to which he may
resort only after payment by himself, until he has paid something as such
guarantor neither he nor the creditor can resort to such collaterals. 30
The Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage states
that it is being issued for and in consideration of the obligations assumed by
the Mortgagee-Surety Company under the terms and conditions of ICP Bond
No. 14010 in behalf of Slobec Realty Development Corporation and in favor of
Bormaheco, Inc. 31 There is no doubt that said Agreement of Counter-
Guaranty is issued for the personal indemnity of ICP Considering that the fact
of payment by ICP has never been established, it follows, pursuant to the
doctrine above adverted to, that ICP cannot foreclose on the subject properties,

IV. Private respondent PM Parts posits that it is a buyer in good faith and,
therefore, it acquired a valid title over the subject properties. The submission is
without merit and the conclusion is specious

We have stated earlier that the doctrine of piercing the veil of corporate fiction
is not applicable in this case. However, its inapplicability has no bearing on the
good faith or bad faith of private respondent PM Parts. It must be noted that
Modesto N. Cervantes served as Vice-President of Bormaheco and, later, as
President of PM Parts. On this fact alone, it cannot be said that PM Parts had
no knowledge of the aforesaid several transactions executed between
Bormaheco and petitioners. In addition, Atty. Martin de Guzman, who is the
Executive Vice-President of Bormaheco, was also the legal counsel of ICP and
PM Parts. These facts were admitted without qualification in the stipulation of
facts submitted by the parties before the trial court. Hence, the defense of good
faith may not be resorted to by private respondent PM Parts which is charged
with knowledge of the true relations existing between Bormaheco, ICP and
herein petitioners. Accordingly, the transfer certificates of title issued in its
name, as well as the certificate of sale, must be declared null and void since
they cannot be considered altogether free of the taint of bad faith.

WHEREFORE, the decision of respondent Court of Appeals is hereby

REVERSED and SET ASIDE, and judgment is hereby rendered declaring the
following as null and void: (1) Certificate of Sale, dated September 28,1973,
executed by the Provincial Sheriff of Quezon in favor of the Insurance
Corporation of the Philippines; (2) Transfer Certificates of Title Nos. T-23705, T-
23706, T-23707 and T-23708 issued in the name of the Insurance Corporation
of the Philippines; (3) the sale by Insurance Corporation of the Philippines in
favor of Philippine Machinery Parts Manufacturing Co., Inc. of the four (4)
parcels of land covered by the aforesaid certificates of title; and (4) Transfer
Certificates of Title Nos. T-24846, T-24847, T-24848 and T24849 subsequently
issued by virtue of said sale in the name of the latter corporation.

The Register of Deeds of Lucena City is hereby directed to cancel Transfer

Certificates of Title Nos. T-24846, T-24847, T24848 and T-24849 in the name
of Philippine Machinery Parts Manufacturing Co., Inc. and to issue in lieu
thereof the corresponding transfer certificates of title in the name of herein
petitioners, except Santiago Rivera.
The foregoing dispositions are without prejudice to such other and proper legal
remedies as may be available to respondent Bormaheco, Inc. against herein
petitioners.

SO ORDERED.

12. GREGORIO ARANETA INC, V. TUASON DE PATERNO

This is a three-cornered contest between the purchasers, the seller, and the
mortgagee of certain portions (approximately 40,703 square meters) of a big
block of residential land in the district of Santa Mesa, Manila. The plaintiff,
which is the purchaser, and the mortgagee elevated this appeal. Though not an
appellant, the seller and mortgagor has made assignments of error in her brief,
some to strengthen the judgment and others for the purpose of new trial.

The case is extremely complicated and multiple issues were raised.

The salient facts in so far as they are not controverted are these. Paz Tuason de
Paterno is the registered owner of the aforesaid land, which was subdivided
into city lots. Most of these lots were occupied by lessees who had contracts of
lease which were to expire on December 31,1952, and carried a stipulation to
the effect that in the event the owner and lessor should decide to sell the
property the lessees were to be given priority over other buyers if they should
desire to buy their leaseholds, all things being equal. Smaller lots were
occupied by tenants without formal contract.

In 1940 and 1941 Paz Tuason obtained from Jose Vidal several loans totalling
P90,098 and constituted a first mortgage on the aforesaid property to secure
the debt. In January and April, 1943, she obtained additional loans of P30,000
and P20,000 upon the same security. On each of the last-mentioned occasions
the previous contract of mortgage was renewed and the amounts received were
consolidated. In the first novated contract the time of payment was fixed at two
years and in the second and last at four years. New conditions not relevant
here were also incorporated into the new contracts.

There was, besides, a separate written agreement entitled "Penalidad del

Documento de Novacion de Esta Fecha" which, unlike the principal contracts,
was not registered. The tenor of this separate agreement, all copies, of which
were alleged to have been destroyed or lost, was in dispute and became the
subject of conflicting evidence. The lower court did not make categorical
findings on this point, however, and it will be our task to do so at the
appropriate place in this decision.

In 1943 Paz Tuason decided to sell the entire property for the net amount of
P400,000 and entered into negotiations with Gregorio Araneta, Inc. for this
purpose. The result of the negotiations was the execution on October 19, 1943,
of a contract called "Promesa de Compra y Venta" and identified as Exhibit "1."
This contract provided that subject to the preferred right of the lessees and
that of Jose Vidal as mortgagee, Paz Tuason would sell to Gregorio Araneta,
Inc. and the latter would buy for the said amount of P400,000 the entire estate
under these terms.

El precio sera pagado como sigue: un 40 por ciento juntamente con la carta de
aceptacion del arrendatario, un 20 por ciento delprecio al otorgarse la escritura
de compromiso de venta, y el remanente 40 por ciento al otorgarse la escritura
de venta definitiva, la cual sera otorgada despues de que se habiese
canceladola hipoteca a favor de Jose Vidal que pesa sobre dichos lotes.
Lacomision del 5 por ciento que corresponde a Jose Araneta serapagada al
otorgarse la escritura de compromiso de venta.

Paz Tuason se obliga a entregar mediante un propio las cartasque dirigira a

este efecto a los arrendatarios, de conformidad con el formulario adjunto, que
se marca como Apendice A.

Expirado el plazo arriba mencionado, Paz Tuason otorgara las escrituras

correspondientes de venta a los arrendatarios que hayan decidido comprar sus
respectivos lotes.

9. Los alquieres correspondientes a este año se prorratearan entre la vendedora

y el comprador, correspondiendo al comprador los alquileres correspondientes
a Noviembre y Diciembre de este año y asimismo sera por cuenta del
comprador el amillaramiento correspondiente a dichos meses.

10. Paz Tuason, reconoce haver recibido en este acto de Gregorio Araneta, Inc.,
la suma de Ciento Noventa Mil Pesos (P190,000)como adelanto del precio de
venta que Gregorio Araneta, Inc., tuviere que pagar a Paz Tuason.

La cantidad que Paz Tuason recibe en este acto sera aplicadapor ella a saldar
su deuda con Jose Vidal, los amillaramientos, sobre el utilizado por Paz
Tuason para otros fines.

11. Una vez determinados los lotes que Paz Tuason podra vendera Gregorio
Araneta, Inc., Paz Tuason otorgara una escritura deventa definitiva sobre
dichos lotes a favor de Gregorio Araneta, Inc.

Gregorio Araneta, Inc., pagara el precio de venta como sigue: 90 por ciento del
mismo al otorgarse la escritura de venta definitiva descontandose de la
cantidad que entonces se tenga que pagar de adelanto de P190,000 que se
entrega en virtud de esta escritura. El 10 por ciento remanente se pagara a Paz
Tuazon, una vez se haya cancelado la hipoteca que pesa actualmente sobre el
terreno.

No obstante la dispuesto en el parrafo 8, cualquier arrendatario que decida

comprar el lote que occupa con contrato de arrendamiento podra optar por
pedir el otorgamiento inmediato a su favor el acto de la escritura de venta
definitiva pagando en el acto el 50 por ciento del precio (ademas del 40 por
ciento que debio incluir en su carta de aceptacion) y el remanente de 10 por
ciento inmediatemente despues de cancelarse la hipoteca que pesa sobre el
terreno.

12. Si la mencionada cantidad de P190,000 excediere del 90 por ciento de la

cantidad que Gregorio Araneta, Inc., tuviere que vender a dicho comprador, el
saldo sera pagado inmediatamente por Paz Tuazon, tomandolo de las
cantidades que reciba de los arrendatarios como precio de venta.

In furtherance of this promise to buy and sell, letters were sent the lessees
giving them until August 31, 1943, an option to buy the lots they occupied at
the price and terms stated in said letters. Most of the tenants who held
contracts of lease took advantage of the opportunity thus extended and after
making the stipulated payments were giving their deeds of conveyance. These
sales, as far as the record would show, have been respected by the seller.

With the elimination of the lots sold or be sold to the tenants there remained
unencumbered, except for the mortgage to Jose Vidal, Lots 1, 8-16 and 18
which have an aggregate area of 14,810.20 square meters; and on December 2,
1943, Paz Tuason and Gregorio Araneta, Inc. executed with regard to these lots
an absolute deed of sale, the terms of which, except in two respects, were
similar to those of the sale to the lessees. This deed, copy of which is attached
to the plaintiff's complaint as Exhibit A, provided, among other things, as
follows:

The aforesaid lots are being sold by he Vendor to the Vendee separately at the
prices mentioned in paragraph (6) of the aforesaid contract entitled "Promesa
de Compra y Venta," making a total sum of One Hundred Thirty-Nine
Thousand Eighty-three pesos and Thirty-two centavos (P139,083.32), ninety
(90%) per cent of which amount, i.e., the sum of One Hundred Twenty-five
Thousand One Hundred Seventy-four Pesos and Ninety-nine centavos
(P125,174.99), the Vendor acknowledges to have received by virtue of the
advance of One Hundred Ninety Thousand (P190,000) Pesos made by the
Vendee to the Vendor upon the execution of the aforesaid contract entitled
"Promesa de Compra y Venta". The balance of Sixty-Four Thousand Eight
Hundred Twenty-five Pesos and One centavo (P64,825.01) between the sum of
P125,174.99, has been returned by the Vendor to the Vendee, which amount
the Vendee acknowledges to have received by these presents;
The aforesaid sum of P190,000 was delivered by the Vendee to the Vendor by
virtue of four checks issued by the Vendee against the Bank of the Philippine
Islands, as follows:

No. C-286445 in favor of Paz Tuason de Paterno

P13,476.62

No. C-286444 in favor of the City Treasurer, Manila

3,373.38

No. C-286443 in favor of Jose Vidal

30,000.00

No. C-286442 in favor of Jose Vidal

143,150.00

Total

P190,000.00

The return of the sum of P64,825.01 was made by the Vendor to the Vendee in
a liquidation which reads as follows:

Hemos recibido de Da. Paz Tuason de Paterno la cantidad de Sesenta y Cuatro

mil Ochocientos Veinticinco Pesos y un centimo (P64,825.01) enconcepto de
devolucion que nos hace del excesode lo pagadoa ella de

P190,000.00

Menos el 90% de P139,083.32, importe de los lotes que vamos a comprar

125,174.99

Exceso

64,825.01

Cheque BIF No. D-442988 de Simplicio del Rosario

21,984.20

Cheque PNB No. 177863-K de L.E. Dumas

21,688.60

Cheque PNB No. 267682-K de Alfonso Sycip

20,000.00

Cheque PNB No. 83940 de Josefina de Pabalan

4,847.96

Billetes recibidos de Alfonso Sycip

42.96

P68,563.21

Menos las comisiones de 5 % recibidas de Josefina de Pabalan

P538.60

L.E. Dumas
1,084.43

Angela S. Tuason

1,621.94

3,244.97

P65,318.24

Menos cheque BIF No. C-288642 a favor de Da. Paz Tuason de Paterno que le
entregamos como exceso

493.23

P64,825.01

Manila, Noviembre 2, 1943

GREGORIO ARANETA, INCORPORATED

Por;
(Fdo.) "JOSE ARANETA
Presidente

Recibido cheque No. C-288642 BIF-P493.23

Por:
(Fdo.) "M.J. GONZALEZ

In view of the foregoing liquidation, the vendor acknowledges fully and

unconditionally, having received the sum of P125,174.99 of the present legal
currency and hereby expressly declares that she will not hold the Vendee
responsible for any loss that she might suffer due to the fact that two of the
checks paid to her by the Vendee were issued in favor of Jose Vidal and the
latter has, up to the present time, not yet collected the same.
The ten (10%) per cent balance of the purchase price not yet paid in the total
sum of P13,908.33 will be paid by the Vendee to the Vendor when the existing
mortgage over the property sold by the Vendor to the Vendee is duly cancelled
in the office of the Register of Deeds, or sooner at the option of the Vendee.

This Deed of Sale is executed by the Vendor free from all liens and
encumbrances, with the only exception of the existing lease contracts on
parcels Nos. 1, 10, 11, and 16, which lease contracts will expire on December
31, 1953, with the understanding, however, that this sale is being executed
free from any option or right on the part of the lessees to purchase the lots
respectively leased by them.

It is therefore clearly understood that the Vendor will pay the existing mortgage
on her property in favor of Jose Vidal.

The liquidation of the amounts respectively due between the Vendor and the
Vendee in connection with the rents and real estate taxes as stipulated in
paragraph (9) of the contract entitled "Promesa de Compara y Venta" will be
adjusted between the parties in a separate document.

Should any of the aforesaid lessees of lots Nos. 2, 3, 4, 5, 6, 7, 9 and 17 fail to

carry out their respective obligations under the option to purchase exercised by
them so that the rights of the lessee to purchase the respective property leased
by him is cancelled, the Vendor shall be bound to sell the same to the herein
Vendee, Gregorio Araneta, Incorporated, in conformity with the terms and
conditions provided in the aforesaid contract of "Promesa de Compra y Venta";

The documentary stamps to be affixed to this deed will be for the account of
the Vendor while the expenses for the registration of this document will be for
the account of the Vendee.

The remaining area of the property of the Vendor subject to Transfer

Certificates of Title Nos. 60471 and 60472, are lots Nos. 2, 3, 4, 5, 6, 7, 9, and
17, all of the Consolidation of lots Nos. 20 and 117 of plan II-4755, G.L.R.O.
Record No. 7680.

Before the execution of the above deed, that is, on October 20, 1943, the day
immediately following the signing of the agreement to buy and sell, Paz Tuason
had offered to Vidal the check for P143,150 mentioned in Exhibit A, in full
settlement of her mortgage obligation, but the mortgagee had refused to receive
that check or to cancel the mortgage, contending that by the separate
agreement before mentioned payment of the mortgage was not to be effected
totally or partially before the end of four years from April, 1943.
Because of this refusal of Vidal's Paz Tuason, through Atty. Alfonso Ponce
Enrile, commenced an action against the mortgagee in October or the early
paret of November 1943. the record of that case was destroyed and no copy of
the complaint was presented in evidence. Attached to the complaint or
deposited with the clerk of court by Attorney Ponce Enrile simultaneously with
the docketing of the suit were the check for P143,150 previously turned down
by Vidal, another certified check for P12,932.61, also drawn by Gregorio
Araneta, Inc., in favor of Vidal, and one ordinary check for P30,000 issued by
Paz Tuazon. These three checks were supposed to cover the whole
indebtedness to Vidal including the principal and interest up to that time and
the penalty provided in the separate agreement.

But the action against Vidal never came on for trial and the record and the
checks were destroyed during the war operations in January or February,
1945; and neither was the case reconstituted afterward. This failure of the suit
for the cancellation of Vidal's mortgage, coupled with the destruction of the
checks tendered to the mortgagee, the nullification of the bank deposit on
which those checks had been drawn, and the tremendous rise of real estate
value following the termination of the war, gave occasion to the breaking off the
schemes outlined in Exhibits 1 and A; Paz Tuason after liberation repudiated
them for the reasons to be hereafter set forth. The instant action was the
offshoot, begun by Gregorio Araneta, Inc. to compel Paz Tuason to deliver to
the plaintiff a clear title to the lots described in Exhibit A free from all liens and
encumbrances, and a deed of cancellation of the mortgage to Vidal. Vidal came
into the case in virtue of a summon issued by order of the court, and filed a
cross-claim against Paz Tuazon to foreclose his mortgage.

It should be stated that the outset that all the parties are in agreement that
Vidal's loans are still outstanding. Paz Tuason's counsel concede that the
tender of payment to Vidal was legally defective and did not operate to
discharge the mortgage, while the plaintiff is apparently uninterested in this
feature of the case considering the matter one largely between the mortgagor
and the mortgagee, although to a certain degree this notion is incorrect. At any
rate, the points of discord between Paz Tuason and Vidal concern only the
accrual of interest on the loans, Vidal's claim to attorney's fees, and the
application of the debt moratorium law which the debtor now invokes. These
matters will be taken up in the discussion of the controversy between Paz
Tuason and Jose Vidal.

The principal bone of contention between Gregorio Araneta, Inc., and Paz
Tuason was the validity of the deed of sale of Exhibit A on which the suit was
predicated. The lower court's judgment was that this contract was invalid and
was so declared, "sin per juicio de que la demandada Paz Tuason de Paterno
pague a la entidad demandante todas las cantidades que habia estado
recibiendo de lareferida entidad demandante, en concepto de pago de
losterrenos, en moneda corriente, segun el cambio que debiaregir al tiempo de
otorgarse la escritura segun la escalade "Ballentine", descontando, sin
embargo, de dichas cantidades cualesquiera que la demandante haya
estadorecibiendo como alquileres de los terrenos supuestamentevendidos a
ella." The court based its opinion that Exhibit 1. His Honor, Judge Sotero
Rodas, agreedwith the defendant that under paragraph 8 of Exhibit 1 there was
to be no absolute sale to Gregorio Araneta, Inc., unless Vidal's mortgage was
cancelled.

In our opinion the trial court was in error in its interpretation of Exhibit 1. The
contemplated execution of an absolute deed of sale was not contingent on the
cancellation of Vidal's mortgage. What Exhibit 1 did provide (eleventh
paragraph) was that such deed of absolute sale should be executed "una vez
determinado los lotes que Paz Tuason podra vender a Gregorio Araneta, Inc."
The lots which could be sold to Gregorio Araneta, Inc. were definitely known by
October 31, 1943, which was the expiry of the tenants' option to buy, and the
lots included in the absolute of which the occupants' option to buy lapsed
unconditionally. Such deed as Exhibit A was then in a condition to be made.

Vidal's mortgage was not an obstacle to the sale. An amount had been set aside
to take care of it, and the parties, it would appear, were confident that the suit
against the mortgagee would succeed. The only doubt in their minds was in the
amount to which Vidal was entitled. The failure of the court to try and decide
that the case was not foreseen either.

This refutes, were think, the charge that there was undue rush on the part of
the plaintiff to push across the sale. The fact that simultaneously with Exhibit
A similar deeds were given the lessees who had elected to buy their leaseholds,
which comprise an area about twice as big as the lots described in Exhibit A,
and the further fact that the sale to the lessees have never been questioned
and the proceeds thereof have been received by the defendant, should add to
dispel any suspicion of bad faith on the part of the plaintiff. If anyone was in a
hurry it could have been the defendant. The clear preponderance of the
evidence that Paz Tuason was pressed for cash and that the payment of the
mortgage was only an incident, or a necessary means to effectuate the sale.
Otherwise she could have settled her mortgage obligation merely by selling a
portion of her estate, say, some of the lots leased to tenants who, except two
who were in concentration camps, were only too anxious to buy and own the
lots on which their houses were built.

Whatever the terms of Exhibit 1, the plaintiff and the defendant were at perfect
liberty to make a new agreement different from or even contrary to the
provisions of that document. The validity of the subsequent sale must of
necessity depend on what it said and not on the provisions of the promise to
buy and sell.

It is as possible proof or fraud that the discrepancies between the two

documents bear some attention. It was alleged that Attorneys Salvador Araneta
and J. Antonio Araneta who the defendant said had been her attorneys and
had drawn Exhibit A, and not informed or had misinformed her about its
contents; that being English, she had not read the deed of sale; that if she had
not trusted the said attorneys she would not have been so foolish as to affix her
signature to a contract so one-sided.

The evidence does not support the defendant. Except in two particulars,
Exhibit A was a substantial compliance with Exhibit 1 in furtherance of which
Exhibit A was made. One departure was the proviso that 10 per cent of the
purchase price should be paid only after Vidal's mortgage should have been
cancelled. This provisional deduction was not onerous or unusual. It was not
onerous or unusual that the vendee should withhold a relatively small portion
of the purchase price before all the impediments to the final consummation of
the sale had been removed. The tenants who had bought their lots had been
granted the privilege to deduct as much as 40 per cent of the stipulated price
pending discharge of the mortgage, although his percentage was later reduced
to 10 as in the case of Gregorio Araneta, Inc. It has also been that the validity
of the sales to the tenants has not been contested; that these sales embraced
in the aggregate 24,245.40 square meters for P260,916.68 as compared to
14,811.20 square meters sold to Gregorio Araneta, Inc. for P139,083.32; that
the seller has already received from the tenant purchasers 90 per cent of the
purchase money.

There is good reason to believe that had Gregorio Araneta, Inc. not insisted on
charging to the defendant the loss of the checks deposited with the court, the
sale in question would have gone the smooth way of the sales to the tenants.
Thus Dindo Gonzales, defendant's son, declared:

P. Despues de haberse presentado esta demanda, recuerda usted haber tenido

conversacion con Salvador Araneta acerca de este asunto?

R. Si Señor.

P. Usted fue quien se acerco al señor Salvador Araneta?

R. Si, señor.

P. Quiero usted decir al Honorable Juzgado que era lo que usted dijo al señor
Salvador Araneta?

R. No creo que es propio que yo diga, por tratarse de mi madre.

P. En otras palabras, usted quiere decir que no quiere usted que se vuelva
decir o repetir ante este Honorable Juzgado lo que usted dijo al señor Salvador
Araneta, pues, se trata de su madre?

R. No, señor.

P. Puede usted decirnos que quiso usted decir cuando que no quisiera decir?

R. Voy a decir lo que Salvador Araneta, yo me acerque a Don Salvador Araneta,

y yo le dije que es una verguenza de que nosotros, en la familia tengamos que
ir a la Corte por este, y tambien dije que mi madre de por si quiere vender el
terreno a ellos, porque mi madre quiere pagar al señor Vidal, y que es una
verguenza, siendo entre parientes, tener que venir por este; era lo que yo dije al
señor Salvador Araneta.

xxx xxx xxx

P. No recuerda usted tambien dijo al señor Salvador Araneta que usted no

comulgaba con ella (su madre) en este asunto?

R. Si, Señor; porque yo creia que mi madre solamente queria anular esta venta,
pero cuando me dijo el señor La O y sus abogados que, encima de quitar la
propiedad, todavia tendria ella que pagar al señor Vidal, este no veso claro.

xxx xxx xxx

P. Ahora bien; de tal suerte que, tal como nosotros desperendemos de su

testimonio, tanto, usted como, su madre, esteban muy conformes en la venta,
es asi?

R. Si, señor.

The other stipulation embodied in Exhibit A which had no counterpart in

Exhibit 1 was that by which Gregorio Araneta Inc. would hold Paz Tuason
liable for the lost checks and which, as stated, appeared to be at the root of the
whole trouble between the plaintiff and the defendant.

The stipulation reads:

In view of the foregoing liquidation, the Vendor acknowledges fully and
unconditionally, having received the sum of P125,174.99 of the present legal
currency and hereby expressly declares that she will not hold the Vendee
responsible for any loss that she might suffer due to the fact that two of the
checks paid to her by the Vendee were used in favor of Jose Vidal and the
latter has, up to the present time, not yet collected the same.

It was argued that no person in his or her right senses would knowingly have
agreed to a covenant so iniquitous and unreasonable.

In the light of all the circumstances, it is difficult to believe that the defendant
was deceived into signing Exhibit A, in spite of the provision of which she and
her son complaint. Intelligent and well educated who had been managing her
affairs, she had an able attorney who was assisting her in the suit against
Vidal, a case which was instituted precisely to carry into effect Exhibit A or
Exhibit 1, and a son who is leading citizen and a business-man and knew the
English language very well if she did not. Dindo Gonzalez took active part in, if
he was not the initiator of the negotiations that led to the execution of Exhibit
1, of which he was an attesting witness besides. If the defendant signed Exhibit
A without being apprised of its import, it can hardly be conceived that she did
not have her attorney or her son read it to her afterward. The transaction
involved the alienation of property then already worth a fortune and now
assessed by the defendant at several times higher. Doubts in defendant's
veracity are enhanced by the fact that she denied or at least pretended in her
answer to be ignorant of the existence of Exhibit A, and that only after she was
confronted with the signed copy of the document on the witness did she spring
up the defense of fraud. It would look as if she gambled on the chance that no
signed copy of the deed had been saved from the war. She could not have
forgotten having signed so important a document even if she had not
understood some of its provisions.

From the unreasonableness and inequity of the aforequoted Exhibit A it is not

to be presumed that the defendant did not understand it. It was highly possible
that she did not attach much importance to it, convinced that Vidal could be
forced to accept the checks and not foreseeing the fate that lay in store for the
case against the mortgagee.

Technical objections are made against the deed of sale.

First of these is that Jose Araneta, since deceased, was defendant's agent and
at the same time the president of Gregorio Araneta, Inc.

The trial court found that Jose Araneta was not Paz Tuason's agent or broker.
This finding is contrary to the clear weight of the evidence, although the point
would be irrelevant, if the court were right in its holding that Exhibit A was
void on another ground, i.e., it was inconsistent with Exhibit 1.

Without taking into account defendant's Exhibit 7 and 8, which the court
rejected and which, in our opinion, should have been admitted, Exhibit 1 is
decisive of the defendant's assertion. In paragraph 8 of Exhibit 1 Jose Araneta
was referred to as defendant's agent or broker "who acts in this transaction"
and who as such was to receive a commission of 5 per cent, although the
commission was to be charged to the purchasers, while in paragraph 13 the
defendant promised, in consideration of Jose Araneta's services rendered to
her, to assign to him all her right, title and interest to and in certain lots not
embraced in the sales to Gregorio Araneta, Inc. or the tenants.

However, the trial court hypothetically admitting the existence of the relation of
principal and agent between Paz Tuason and Jose Araneta, pointed out that
not Jose Araneta but Gregorio Araneta, Inc. was the purchaser, and cited the
well-known distinction between the corporation and its stockholders. In other
words, the court opined that the sale to Gregorio Araneta, Inc. was not a sale to
Jose Araneta the agent or broker.

The defendant would have the court ignore this distinction and apply to this
case the other well-known principle which is thus stated in 18 C.J.S. 380: "The
courts, at law and in equity, will disregard the fiction of corporate entity apart
from the members of the corporation when it is attempted to be used as a
means of accomplishing a fraud or an illegal act.".

It will at once be noted that this principle does not fit in with the facts of the
case at bar. Gregorio Araneta, Inc. had long been organized and engaged in real
estate business. The corporate entity was not used to circumvent the law or
perpetrate deception. There is no denying that Gregorio Araneta, Inc. entered
into the contract for itself and for its benefit as a corporation. The contract and
the roles of the parties who participated therein were exactly as they purported
to be and were fully revealed to the seller. There is no pretense, nor is there
reason to suppose, that if Paz Tuason had known Jose Araneta to Gregorio
Araneta, Inc's president, which she knew, she would not have gone ahead with
the deal. From her point of view and from the point of view of public interest, it
would have made no difference, except for the brokerage fee, whether Gregorio
Araneta, Inc. or Jose Araneta was the purchaser. Under these circumstances
the result of the suggested disregard of a technicality would be, not to stop the
commission of deceit by the purchaser but to pave the way for the evasion of a
legitimate and binding commitment buy the seller. The principle invoked by the
defendant is resorted to by the courts as a measure or protection against deceit
and not to open the door to deceit. "The courts," it has been said, "will not
ignore the corporate entity in order to further the perpetration of a fraud." (18
C.J.S. 381.)
The corporate theory aside, and granting for the nonce that Jose Araneta and
Gregorio Araneta, Inc. were identical and that the acts of one where the acts of
the other, the relation between the defendant and Jose Araneta did not fall
within the purview of article 1459 of the Spanish Civil Code.1

Agency is defined in article 1709 in broad term, and we have not come across
any commentary or decision dealing directly with the precise meaning of
agency as employed in article 1459. But in the opinion of Manresa(10 Manresa
4th ed. 100), agent in the sense there used is one who accepts another's
representation to perform in his name certain acts of more or less
transcendency, while Scaevola (Vol. 23, p. 403) says that the agent's in
capacity to buy his principal's property rests in the fact that the agent and the
principal form one juridicial person. In this connection Scaevola observes that
the fear that greed might get the better of the sentiments of loyalty and
disinterestedness which should animate an administrator or agent, is the
reason underlying various classes of incapacity enumerated in article 1459.
And as American courts commenting on similar prohibition at common law put
it, the law does not trust human nature to resist the temptations likely to arise
of antogonism between the interest of the seller and the buyer.

So the ban of paragraph 2 of article 1459 connotes the idea of trust and
confidence; and so where the relationship does not involve considerations of
good faith and integrity the prohibition should not and does not apply. To come
under the prohibition, the agent must be in a fiduciary with his principal.

Tested by this standard, Jose Araneta was not an agent within the meaning of
article 1459. By Exhibits 7 and 8 he was to be nothing more than a go-between
or middleman between the defendant and the purchaser, bringing them
together to make the contract themselves. There was no confidence to be
betrayed. Jose Araneta was not authorize to make a binding contract for the
defendant. He was not to sell and he did not sell the defendant's property. He
was to look for a buyer and the owner herself was to make, and did make, the
sale. He was not to fix the price of the sale because the price had been already
fixed in his commission. He was not to make the terms of payment because
these, too, were clearly specified in his commission. In fine, Jose Araneta was
left no power or discretion whatsoever, which he could abuse to his advantage
and to the owner's prejudice.

Defendant's other ground for repudiating Exhibit A is that the law firm of
Araneta & Araneta who handled the preparation of that deed and represented
by Gregorio Araneta, Inc. were her attorneys also. On this point the trial court's
opinion is likewise against the defendant.

Since attorney Ponce Enrile was the defendant's lawyer in the suit against
Vidal, it was not likely that she employed Atty. Salvador Araneta and J.
Antonio Araneta as her attorneys in her dealings with Gregorio Araneta, Inc.,
knowing, as she did, their identity with the buyer. If she had needed legal
counsels, in this transaction it seems certain that she would have availed
herself of the services of Mr. Ponce Enrile who was allegedly representing her in
another case to pave the way for the sale.

The fact that Attys. Salvador and Araneta and J. Antonio Araneta drew
Exhibits 1 and A, undertook to write the letters to the tenants and the deeds of
sale to the latter, and charged the defendant the corresponding fees for all this
work, did not themselves prove that they were the seller's attorneys. These
letters and documents were wrapped up with the contemplated sale in which
Gregorio Araneta, Inc. was interested, and could very well have been written by
Attorneys Araneta and Araneta in furtherance of Gregorio Araneta's own
interest. In collecting the fees from the defendant they did what any other
buyer could have appropriately done since all such expenses normally were to
be defrayed by the seller.

Granting that Attorney Araneta and Araneta were attorneys for the defendant,
yet they were not forbidden to buy the property in question. Attorneys are only
prohibited from buying their client's property which is the subject of litigation.
(Art. 1459, No. 5, Spanish Civil Code.) The questioned sale was effected before
the subject thereof became involved in the present action. There was already at
the time of the sale a litigation over this property between the defendant and
Vidal, but Attys. Salvador Araneta and J. Antonio Araneta were not her
attorneys in that case.

From the pronouncement that Exhibit A is valid, however, it does not follow
that the defendant should be held liable for the loss of the certified checks
attached to the complaint against Vidal or deposited with the court, or of the
funds against which they had been issued. The matter of who should bear this
loss does not depend upon the validity of the sale but on the extent and scope
of the clause hereinbefore quoted as applied to the facts of the present case.

The law and the evidence on this branch of the case revealed these facts, of
some of which passing mention has already been made.

The aforesaid checks, one for P143,150 and one for P12,932.61, were issued by
Gregorio Araneta, Inc. and payable to Vidal, and were drawn against the Bank
of the Philippines with which Gregorio Araneta, Inc. had a deposit in the
certification stated that they were to be "void if not presented for payment date
of acceptance" office (Bank) within 90 days from date of acceptance."

Under banking laws and practice, by the clarification" the funds represented by
the check were transferred from the credit of the maker to that of the payee or
holder, and, for all intents and purposes, the latter became the depositor of the
drawee bank, with rights and duties of one such relation." But the transfer of
the corresponding funds from the credit of the depositor to that of that of the
payee had to be co-extensive with the life of the checks, which in the case was
90 days. If the checks were not presented for payment within that period they
became invalid and the funds were automatically restored to the credit of the
drawer though not as a current deposit but as special deposit. This is the
consensus of the evidence for both parties which does not materially differ on
this proposition.

The checks were never collected and the account against which they were
drawn was not used or claimed by Gregorio Araneta, Inc.; and since that
account "was opened during the Japanese occupation and in Japanese
currency," the checks "became obsolete as the account subject thereto is
considered null and void in accordance with Executive Order No. 49 of the
President of the Philippines", according to the Bank.

Whether the Bank of the Philippines could lawfully limit the negotiability of
certified checks to a period less than the period provided by the Statute of
Limitations does not seem material. The limitation imposed by the Bank as to
time would adversely affect the payee, Jose Vidal, who is not trying to recover
on the instruments but on the contrary rejected them from the outset, insisting
that the payment was premature. As far as Vidal was concerned, it was of no
importance whether the certification was or was not restricted. On the other
hand, neither the plaintiff nor the defendant now insists that Vidal should
present, or should have presented, the checks for collection. They in fact agree
that the offer of those checks to Vidal did not, for technical reason, work to
wipe out the mortgage.

But as to Gregorio Araneta and Paz Tuason, the conditions specified in the
certification and the prevailing regulations of the Bank were the law of the
case. Not only this, but they were aware of and abided by those regulations and
practice, as instanced by the fact that the parties presented testimony to prove
those regulations and practice. And that Gregorio Araneta, Inc. knew that Vidal
had not cashed the checks within 90 days is not, and could not successfully be
denied.

In these circumstances, the stipulation in Exhibit A that the defendant or seller

"shall not hold the vendee responsible for any loss of these checks" was
unconscionable, void and unenforceable in so far as the said stipulation would
stretch the defendant's liability for this checks beyond 90 days. It was not in
accord with law, equity or good conscience to hold a party responsible for
something he or she had no access to and could not make use of but which
was under the absolute control and disposition of the other party. To make Paz
Tuason responsible for those checks after they expired and when they were
absolutely useless would be like holding an obligor to answer for the loss or
destruction of something which the obligee kept in its safe with no power given
the obligor to protect it or interfere with the obligee's possession.
To the extent that the contract Exhibit A would hold the vendor responsible for
those checks after they had lapsed, the said contract was without
consideration. The checks having become obsolete, the benefit in exchange for
which the defendant had consented to be responsible for them had vanished.
The sole motivation on her part for the stipulation was the fact that by the
checks the mortgage might or was to be released. After 90 days the defendant
stood to gain absolutely nothing by them, which had become veritable scraps of
paper, while the ownership of the deposit had reverted to the plaintiff which
alone could withdraw and make use of it.

What the plaintiff could and should have done if the disputed stipulation was
to be kept alive was to keep the funds accessible for the purpose of paying the
mortgage, by writing new checks either to Vidal or to the defendant, as was
done with the check for P30,000, or placing the deposit at the defendant's
disposal. The check for P30,000 intended for the penalty previously had been
issued in the name of Vidal and certified, too, but by mutual agreement it was
changed to an ordinary check payable to Paz Tuason. Although that check was
also deposited with the court and lost, its loss undoubtedly was imputable to
the defendant's account, and she did not seem to disown her liability for it.

Let it be remembered that the idea of certifying the lost checks was all the
plaintiff's. The plaintiff would not trust the defendant and studiously so
arranged matters that she could not by any possibility put a finger on the
money. For all the practical intents and purposes the plaintiff dealt directly
with the mortgagee and excluded the defendant from meddling in the manner
of payment to Vidal. And let it also be kept in mind that Gregorio Araneta, Inc.
was not a mere accommodator in writing these checks. It was as much
interested in the cancellation of the mortgage as Paz Tuason.

Coming down to Vidal's cross-claim Judge Rodas rendered no judgment other

than declaring that the mortgage remained intact and subsisting. The amount
to be paid Vidal was not named and the question whether interest and
attorney's fees were due was not passed upon. The motion for reconsideration
of the decision by Vidal's attorney's praying that Paz Tuason be sentenced to
pay the creditor P244,917.90 plus interest at the rate of 1 percent monthly
from September 10, 1948 and that the mortgaged property be ordered sold in
case of default within 90 days, and another motion by the defendant seeking
specification of the amount she had to pay the mortgagee were summarily
denied by Judge Potenciano Pecson, to whom the motions were submitted,
Judge Rodas by that time having been appointed to the Court of Appeals.

All the facts and evidence on this subject are on the record, however, and we
may just as well determine from these facts and evidence the amount to which
the mortgagee is entitled, instead of remanding the case for new trial, if only to
avoid further delay if the disposition of this case.
It is obvious that Vidal had a right to judgment for his credit and to foreclose
the mortgage if the credit was not paid.

There is no dispute as to the amount of the principal and there is agreement

that the loans made in 1943, in Japanese war notes, should be computed
under the Ballantyne conversion table. As has been said, where the parties do
not see eye-to-eye was in regard to the mortgagee's claim to attorney's fees and
interest from October, 1943, which was reached a considerable amount. It was
contended that, having offered to pay Vidal her debt in that month, the
defendant was relieved thereafter from paying such interest.

It is to be recalled that Paz Tuason deposited with the court three checks which
were intended to cover the principal and interest up to October, 1943, plus the
penalty provided in the instrument "Penalidad del Documento de Novacion de
Esta Fecha." The mortgagor maintains that although these checks may not
have constituted a valid payment for the purpose of discharging the debt, yet
they did for the purpose of stopping the running of interest. The defendant
draws attention to the following citations:

An offer in writing to pay a particular sum of money or to deliver a written

instrument or specific personal property is, if rejected, equivalent to the actual
production and tender of the money, instrument or property. (Sec. 24, Rule
123.)

It is not accord with either the letter or the spirit of the law to impose upon the
person affecting a redemption of property, in addition to 12 per cent interest
per annum up to the time of the offer to redeem, a further payment of 6 per
cent per annum from the date of the officer to redeem. (Fabros vs. Villa
Agustin, 18 Phil., 336.)

A tender by the debtor of the amount of this debt, if made in the proper
manner, will suspend the running of interest on the debt for the time of such
tender. (30 Am. Jur., 42.)

In the case of Fabrosa vs. Villa Agustin, supra, a parcel of land had been sold
on execution to one Tabliga. Within the period of redemption Fabros, to whom
the land had been mortgaged by the execution debtor, had offered to redeem
the land from the execution creditor and purchaser at public auction. The trial
court ruled that the redemptioner was not obliged to pay the stipulated interest
of 12 per cent after he offered to redeem the property; nevertheless he was
sentenced to pay 6 per cent interest from the date of the offer.

This court on appeal held that "there is no reason for this other (6 per cent)
interest, which appears to be a penalty for delinquency while there was no
delinquency." The court cited an earlier decision, Martinez vs. Campbell, 10
Phil., 626, where this doctrine was laid down: "When the right of redemption is
exercised within the term fixed by section 465 of the Code of Civil Procedure,
and an offer is made of the amount due for the repurchase of the property to
which said right refers, it is neither reasonable nor just that the repurchaser
should pay interest on the redemption money after the time when he offered to
repurchase and tendered the money therefor."

In the light of these decisions and law, the next query is; Did the mortgagor
have the right under the contract to pay the mortgage on October 20, 1943?
The answer to this question requires an inquiry into the provision of the
"Penalidad del Documento de Novacion de Esta Fecha."

Vidal introduced oral evidence to the effect that he reserved unto himself in
that agreement the right "to accept or refuse the total payment of the loan
outstanding . . ., if at the time of such offer of payment he considered it
advantageous to his interest." This was gist of Vidal's testimony and that of
Lucio M. Tiangco, one of Vidal's former attorneys who, as notary public, had
authenticated the document. Vidal's above testimony was ordered stricken out
as hearsay, for Vidal was blind and, according to him, only had his other
lawyer read the document to him.

We are of the opinion that the court erred in excluding Vidal's statement. There
is no reason to suspect that Vidal's attorney did not correctly read the paper to
him. The reading was a contemporaneous incident of the writing and the
circumstances under which the document was read precluded every possibility
of design, premeditation, or fabrication.

Nevertheless, Vidal's testimony, like the testimony of Lucio M. Tiangco's, was

based on recollection which, with the lapse of time, was for from infallible. By
contrast, the testimony of Attorneys Ponce Enrile, Salvador Araneta, and J.
Antonio Araneta does not suffer from such weakness and is entitled to full faith
and credit. The document was the subject of a close and concerted study on
their part with the object of finding the rights and obligations of the mortgagee
and the mortgagor in the premises and mapping out the course to be pursued.
And the results of their study and deliberation were translated into concrete
action and embodied in a letter which has been preserved. In line with the
results of their study, action was instituted in court to compel acceptance by
Vidal of the checks consigned with the complaint, and before the suit was
commenced, and with the document before him, Atty. Ponce Enrile, in behalf of
his client, wrote Vidal demanding that he accept the payment and execute a
deed of cancellation of the mortgage. In his letter Atty. Ponce Enrile reminded
Vidal that the recital in the "Penalidad del Documento de Novacion de Esta
Fecha" was "to the effect that should the debtor wish to pay the debt before the
expiration of the period the reinstated (two years) such debtor would have to
pay, in addition to interest due, the penalty of P30,000 — this is in addition to
the penalty clause of 10 per cent of the total amount due inserted in the
document of mortgage of January 20, 1943."

Atty. Ponce Enrile's concept of the agreement, formed after mature and careful
reading of it, jibes with the only possible reason for the insertion of the penalty
provision. There was no reason for the penalty unless it was for defendant's
paying her debt before the end of the agreed period. It was to Vidal's interest
that the mortgage be not settled in the near future, first, because his money
was earning good interest and was guaranteed by a solid security, and second,
which was more important, he, in all probability, shared the common belief
that Japanese war notes were headed for a crash and that four years thence,
judging by the trends of the war, the hostilities would be over.

To say, as Vidal says, that the debtor could not pay the mortgage within four
years and, at the same time, that there would be penalty if she paid after that
period, would be a contradiction. Moreover, adequate remedy was provided for
failure to pay or after the expiration of the mortgage: increased rate or interest,
foreclosure of the mortgage, and attorney's fees.

It is therefore to be concluded that the defendant's offer to pay Vidal in

October, 1943, was in accordance with the parties' contract and terminated the
debtor's obligation to pay interest. The technical defects of the consignation
had to do with the discharge of the mortgage, which is conceded on all sides to
be still in force because of the defects. But the matter of the suspension of the
running of interest on the loan stands of a different footing and is governed by
different principles. These principles regard reality rather than technicality,
substance rather than form. Good faith of the offer or and ability to make good
the offer should in simple justice excuse the debtor from paying interest after
the offer was rejected. A debtor can not be considered delinquent who offered
checks backed by sufficient deposit or ready to pay cash if the creditor chose
that means of payment. Technical defects of the offer cannot be adduced to
destroy its effects when the objection to accept the payment was based on
entirely different grounds. If the creditor had told the debtor that he wanted
cash or an ordinary check, which Vidal now seems to think Paz Tuason should
have tendered, certainly Vidal's wishes would have been fulfilled, gladly.

The plain truth was that the mortgagee bent all his efforts to put off the
payment, and thanks to the defects which he now, with obvious inconsistency,
points out, the mortgage has not perished with the checks.

Falling within the reasons for the stoppage of interest are attorney's fees. In
fact there is less merit in the claim for attorney's fees than in the claim for
interest; for the creditor it was who by his refusal brought upon himself this
litigation, refusal which, as just shown, resulted greatly to his benefit.
Vidal, however, is entitled to the penalty, a point which the debtor seems to a
grant. The suspension of the running of the interest is premised on the thesis
that the debt was considered paid as of the date the offer to pay the principal
was made. It is precisely the mortgagor's contention that he was to pay said
penalty if and when she paid the mortgage before the expiration of the four-
year period provided in the mortgage contract. This penalty was designed to
take the place of the interest which the creditor would be entitled to collect if
the duration of the mortgage had not been cut short and from which interest
the debtor has been relieved. "In obligations with a penalty clause the penalty
shall substitute indemnity for damages and the payment of interest. . ." (Art.
1152, Civil Code of Spain.).

To summarize, the following are our findings and decision:

The contract of sale Exhibit A was valid and enforceable, but the loss of the
checks for P143,150 and P12,932.61 and invalidation of the corresponding
deposit is to be borne by the buyer. Gregorio Araneta, Inc. the value of these
checks as well as the several payments made by Paz Tuason to Gregorio
Araneta, Inc. shall be deducted from the sum of P190,000 which the buyer
advanced to the seller on the execution of Exhibit 1.

The buyer shall be entitled to the rents on the land which was the subject of
the sale, rents which may have been collected by Paz Tuason after the date of
the sale.

Paz Tuason shall pay Jose Vidal the amount of the mortgage and the stipulated
interest up to October 20,1943, plus the penalty of P30,000, provided that the
loans obtained during the Japanese occupation shall be reduced according to
the Ballantyne scale of payment, and provided that the date basis of the
computation as to the penalty is the date of the filing of the suit against Vidal.

Paz Tuason shall pay the amount that shall have been found due under the
contracts of mortgage within 90 days from the time the court's judgment upon
the liquidation shall have become final, otherwise the property mortgaged shall
be ordered sold provided by law.

Vidal's mortgage is superior to the purchaser's right under Exhibit A, which is

hereby declared subject to said mortgage. Should Gregorio Araneta, Inc. be
forced to pay the mortgage, it will be subrogated to the right of the mortgagee.

This case will be remanded to the court of origin with instruction to hold a
rehearing for the purpose of liquidation as herein provided. The court also shall
hear and decide all other controversies relative to the liquidation which may
have been overlooked at this decision, in a manner not inconsistent with the
above findings and judgment.

The mortgagor is not entitled to suspension of payment under the debt

moratorium law or orders. Among other reasons: the bulk of the debt was a
pre-war obligation and the moratorium as to such obligations has been
abrogated unless the debtor has suffered war damages and has filed claim for
them; there is no allegation or proof that she has. In the second place, the
debtor herself caused her creditor to be brought into the case which resulted in
the filing of the cross-claim to foreclose the mortgage. In the third place,
prompt settlement of the mortgage is necessary to the settlement of the dispute
and liquidation between Gregorio Araneta, Inc. and Paz Tuason. If for no other
reason, Paz Tuason would do well to forego the benefits of the moratorium law.

There shall be no special judgments as to costs of either instance.

Paras, C.J., Pablo, Bengzon, Padilla, Bautista Angelo and Labrador, JJ.,
concur.

RESOLUTION

December 22, 1952

TUASON, J.:

The motion for reconsideration of the plaintiff, Gregorio Araneta, Inc., and the
defendant, Paz Tuason de Paterno, are in large part devoted to the question,
extensively discussed in the decision, of the validity of the contract of sale
Exhibit A. The arguments are not new and at least were given due
consideration in the deliberation and study of the case. We find no reason for
disturbing our decision on this phase of the case.

The plaintiff-appellant's alternative proposition — to wit: "Should this

Honorable Court declare that the purchase price was not paid and that plaintiff
has to bear the loss due to the invalidation of the occupation currency, its loss
should be limited to: (a) the purchase price of P139,083.32 less P47,825.70
which plaintiff paid and the defendant actually collected during the occupation,
or the sum of P92,233.32, or at most, (b) the purchase price of the lot in the
sum of P139,083.32," — as well as the alleged over-payment by the defendant-
appellee, may be taken up in the liquidation under the reservation in the
judgment that "the court (below) shall hold a rehearing for the purpose of
liquidation as herein provided" and "shall also hear and decide all other
controversies relative to the liquidation which may have been overlooked in this
decision, in the manner not inconsistent with the above findings and
judgment."

These payments and disbursement are matters of accounting which, not

having been put directly in issue or given due attention at the trial and in the
appealed decision, can better be treshed out in the proposed rehearing where
each party will have an opportunity to put forward his views and reasons, with
supporting evidence if necessary, on how the various items in question should
be regarded and credited, in the light of our decision.

As to Jose Vidal's motion: There is nothing to add to or detract from what has
been said in the decision relative to the interest on the loans and attorney's
fees. There are no substantial features of the case that have not been weighed
carefully in arriving at our conclusions. It is our considered opinion that the
decision is in accord with law, reason and equity.

The vehement protest that this court should not modify the conclusion of the
lower court on interest and attorney's fees is actually and entirely contrary to
the cross-claimant's own suggestion in his brief. From page 20 of his brief, we
copy these passages:

We submit that this Honorable Court is in a position now to render judgment

in the foreclosure of mortgage suit as no further issue of fact need be acted
upon by the trial court. Defendant Paz Tuason has admitted the amount of
capital due. That is a fact. She only requests that interest be granted up to
October 20,1943, and that the moratorium law be applied. Whether this is
possible or not is a legal question, which can be decided by this court.
Unnecessary loss of time and expenses to the parties herein will be avoided by
this Honorable Court by rendering judgment in the foreclosure of mortgage suit
as follows:

xxx xxx xxx

In reality, the judgment did not adjudicate the foreclosure of the mortgage nor
did it fix the amount due on the mortgage. The pronouncement that the
mortgage was in full force and effect was a conclusion which the mortgagor did
not and does not now question. There was therefore virtually no decision that
could be executed.

Vidal himself moved in the Court of First Instance for amendment of the
decision alleging, correctly, that "the court failed to act on the cross-claim of
Jose Vidal dated April 22, 1947, where he demanded foreclosure of the
mortgage . . . ." That motion like Paz Tuason's motion to complete the
judgment, was summarily denied.

In strict accordance with the procedure, the case should have been remanded
to the court of origin for further proceedings in the form stated by Paz Tuason's
counsel. Both the mortgagor and the mortgagee agree on this. We did not
follow the above course believing it best, in the interest of the parties
themselves and following Vidal's attorney's own suggestion, to decide the
controversies between Vidal and Paz Tuason upon the records and the briefs
already submitted.

The three motions for reconsideration are denied.

13. TRADERS ROYAL BANK V. COURT OF APPEALS

Assailed in this Petition for Review on Certiorari is the Decision of the

respondent Court of Appeals dated January 29, 1990,1 affirming the nullity of
the transfer of Central Bank Certificate of Indebtedness (CBCI) No. D891,2 with
a face value of P500,000.00, from the Philippine Underwriters Finance
Corporation (Philfinance) to the petitioner Trader's Royal Bank (TRB), under a
Repurchase Agreement3 dated February 4, 1981, and a Detached Assignment4
dated April 27, 1981.

Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila,
Branch 32, the action was originally filed as a Petition for Mandamus5 under
Rule 65 of the Rules of Court, to compel the Central Bank of the Philippines to
register the transfer of the subject CBCI to petitioner Traders Royal Bank
(TRB).

In the said petition, TRB stated that:

3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters)

executed a "Detached Assignment" . . ., whereby Filriters, as registered owner,
sold, transferred, assigned and delivered unto Philippine Underwriters Finance
Corporation (Philfinance) all its rights and title to Central Bank Certificates of
Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000) and having
an aggregate value of PESOS: THREE MILLION FIVE HUNDRED THOUSAND
(P3,500,000.00);

4. The aforesaid Detached Assignment (Annex "A") contains an express

authorization executed by the transferor intended to complete the assignment
through the registration of the transfer in the name of PhilFinance, which
authorization is specifically phrased as follows: '(Filriters) hereby irrevocably
authorized the said issuer (Central Bank) to transfer the said bond/certificates
on the books of its fiscal agent;
5. On February 4, 1981, petitioner entered into a Repurchase Agreement with
PhilFinance . . ., whereby, for and in consideration of the sum of PESOS: FIVE
HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred and
delivered to petitioner CBCI 4-year, 8th series, Serial No. D891 with a face
value of P500,000.00 . . ., which CBCI was among those previously acquired by
PhilFinance from Filriters as averred in paragraph 3 of the Petition;

6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance

agreed to repurchase CBCI Serial No. D891 (Annex "C"), at the stipulated price
of PESOS: FIVE HUNDRED NINETEEN THOUSAND THREE HUNDRED SIXTY-
ONE & 11/100 (P519,361.11) on April 27, 1981;

7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity,

April 27, 1981, when the checks it issued in favor of petitioner were dishonored
for insufficient funds;

8. Owing to the default of PhilFinance, it executed a Detached Assignment in

favor of the Petitioner to enable the latter to have its title completed and
registered in the books of the respondent. And by means of said Detachment,
Philfinance transferred and assigned all, its rights and title in the said CBCI
(Annex "C") to petitioner and, furthermore, it did thereby "irrevocably authorize
the said issuer (respondent herein) to transfer the said bond/certificate on the
books of its fiscal agent." . . .

9. Petitioner presented the CBCI (Annex "C"), together with the two (2)
aforementioned Detached Assignments (Annexes "B" and "D"), to the Securities
Servicing Department of the respondent, and requested the latter to effect the
transfer of the CBCI on its books and to issue a new certificate in the name of
petitioner as absolute owner thereof;

10. Respondent failed and refused to register the transfer as requested, and
continues to do so notwithstanding petitioner's valid and just title over the
same and despite repeated demands in writing, the latest of which is hereto
attached as Annex "E" and made an integral part hereof;

11. The express provisions governing the transfer of the CBCI were
substantially complied with the petitioner's request for registration, to wit:

"No transfer thereof shall be valid unless made at said office (where the
Certificate has been registered) by the registered owner hereof, in person or by
his attorney duly authorized in writing, and similarly noted hereon, and upon
payment of a nominal transfer fee which may be required, a new Certificate
shall be issued to the transferee of the registered holder thereof."
and, without a doubt, the Detached Assignments presented to respondent were
sufficient authorizations in writing executed by the registered owner, Filriters,
and its transferee, PhilFinance, as required by the above-quoted provision;

12. Upon such compliance with the aforesaid requirements, the ministerial
duties of registering a transfer of ownership over the CBCI and issuing a new
certificate to the transferee devolves upon the respondent;

Upon these assertions, TRB prayed for the registration by the Central Bank of
the subject CBCI in its name.

On December 4, 1984, the Regional Trial Court the case took cognizance of the
defendant Central Bank of the Philippines' Motion for Admission of Amended
Answer with Counter Claim for Interpleader6 thereby calling to fore the
respondent Filriters Guaranty Assurance Corporation (Filriters), the registered
owner of the subject CBCI as respondent.

For its part, Filriters interjected as Special Defenses the following:

11. Respondent is the registered owner of CBCI No. 891;

12. The CBCI constitutes part of the reserve investment against liabilities
required of respondent as an insurance company under the Insurance Code;

13. Without any consideration or benefit whatsoever to Filriters, in violation of

law and the trust fund doctrine and to the prejudice of policyholders and to all
who have present or future claim against policies issued by Filriters, Alfredo
Banaria, then Senior Vice-President-Treasury of Filriters, without any board
resolution, knowledge or consent of the board of directors of Filriters, and
without any clearance or authorization from the Insurance Commissioner,
executed a detached assignment purportedly assigning CBCI No. 891 to
Philfinance;

xxx xxx xxx

14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar

Jacobe, Vice-President-Treasury of Filriters (both of whom were holding the
same positions in Philfinance), without any consideration or benefit redounding
to Filriters and to the grave prejudice of Filriters, its policy holders and all who
have present or future claims against its policies, executed similar detached
assignment forms transferring the CBCI to plaintiff;
xxx xxx xxx

15. The detached assignment is patently void and inoperative because the
assignment is without the knowledge and consent of directors of Filriters, and
not duly authorized in writing by the Board, as requiring by Article V, Section 3
of CB Circular No. 769;

16. The assignment of the CBCI to Philfinance is a personal act of Alfredo

Banaria and not the corporate act of Filriters and such null and void;

a) The assignment was executed without consideration and for that reason, the
assignment is void from the beginning (Article 1409, Civil Code);

b) The assignment was executed without any knowledge and consent of the
board of directors of Filriters;

c) The CBCI constitutes reserve investment of Filriters against liabilities, which

is a requirement under the Insurance Code for its existence as an insurance
company and the pursuit of its business operations. The assignment of the
CBCI is illegal act in the sense of malum in se or malum prohibitum, for
anyone to make, either as corporate or personal act;

d) The transfer of dimunition of reserve investments of Filriters is expressly

prohibited by law, is immoral and against public policy;

e) The assignment of the CBCI has resulted in the capital impairment and in
the solvency deficiency of Filriters (and has in fact helped in placing Filriters
under conservatorship), an inevitable result known to the officer who executed
assignment.

17. Plaintiff had acted in bad faith and with knowledge of the illegality and
invalidity of the assignment.

a) The CBCI No. 891 is not a negotiable instrument and as a certificate of

indebtedness is not payable to bearer but is a registered in the name of
Filriters;

b) The provision on transfer of the CBCIs provides that the Central Bank shall
treat the registered owner as the absolute owner and that the value of the
registered certificates shall be payable only to the registered owner; a sufficient
notice to plaintiff that the assignments do not give them the registered owner's
right as absolute owner of the CBCI's;

c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs)

provides that the registered certificates are payable only to the registered owner
(Article II, Section 1).

18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891
by Filriters is not a regular transaction made in the usual of ordinary course of
business;

a) The CBCI constitutes part of the reserve investments of Filriters against

liabilities requires by the Insurance Code and its assignment or transfer is
expressly prohibited by law. There was no attempt to get any clearance or
authorization from the Insurance Commissioner;

b) The assignment by Filriters of the CBCI is clearly not a transaction in the

usual or regular course of its business;

c) The CBCI involved substantial amount and its assignment clearly

constitutes disposition of "all or substantially all" of the assets of Filriters,
which requires the affirmative action of the stockholders (Section 40,
Corporation [sic] Code.7

In its Decision8 dated April 29, 1988, the Regional Trial Court of Manila,
Branch XXXIII found the assignment of CBCI No. D891 in favor of Philfinance,
and the subsequent assignment of the same CBCI by Philfinance in favor of
Traders Royal Bank null and void and of no force and effect. The dispositive
portion of the decision reads:

ACCORDINGLY, judgment is hereby rendered in favor of the respondent

Filriters Guaranty Assurance Corporation and against the plaintiff Traders
Royal Bank:

(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the
subsequent assignment of CBCI by PhilFinance in favor of the plaintiff Traders
Royal Bank as null and void and of no force and effect;

(b) Ordering the respondent Central Bank of the Philippines to disregard the
said assignment and to pay the value of the proceeds of the CBCI No. D891 to
the Filriters Guaranty Assurance Corporation;
(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters
Guaranty Assurance Corp. The sum of P10,000 as attorney's fees; and

(d) to pay the costs.

SO ORDERED.9

The petitioner assailed the decision of the trial court in the Court of Appeals
10, but their appeals likewise failed. The findings of the fact of the said court
are hereby reproduced:

The records reveal that defendant Filriters is the registered owner of CBCI No.
D891. Under a deed of assignment dated November 27, 1971, Filriters
transferred CBCI No. D891 to Philippine Underwriters Finance Corporation
(Philfinance). Subsequently, Philfinance transferred CBCI No. D891, which was
still registered in the name of Filriters, to appellant Traders Royal Bank (TRB).
The transfer was made under a repurchase agreement dated February 4, 1981,
granting Philfinance the right to repurchase the instrument on or before April
27, 1981. When Philfinance failed to buy back the note on maturity date, it
executed a deed of assignment, dated April 27, 1981, conveying to appellant
TRB all its right and the title to CBCI No. D891.

Armed with the deed of assignment, TRB then sought the transfer and
registration of CBCI No. D891 in its name before the Security and Servicing
Department of the Central Bank (CB). Central Bank, however, refused to effect
the transfer and registration in view of an adverse claim filed by defendant
Filriters.

Left with no other recourse, TRB filed a special civil action for mandamus
against the Central Bank in the Regional Trial Court of Manila. The suit,
however, was subsequently treated by the lower court as a case of interpleader
when CB prayed in its amended answer that Filriters be impleaded as a
respondent and the court adjudge which of them is entitled to the ownership of
CBCI No. D891. Failing to get a favorable judgment. TRB now comes to this
Court on appeal. 11

In the appellate court, petitioner argued that the subject CBCI was a negotiable
instrument, and having acquired the said certificate from Philfinance as a
holder in due course, its possession of the same is thus free fro any defect of
title of prior parties and from any defense available to prior parties among
themselves, and it may thus, enforce payment of the instrument for the full
amount thereof against all parties liable thereon. 12
In ignoring said argument, the appellate court that the CBCI is not a negotiable
instrument, since the instrument clearly stated that it was payable to Filriters,
the registered owner, whose name was inscribed thereon, and that the
certificate lacked the words of negotiability which serve as an expression of
consent that the instrument may be transferred by negotiation.

Obviously, the assignment of the certificate from Filriters to Philfinance was

fictitious, having made without consideration, and did not conform to Central
Bank Circular No. 769, series of 1980, better known as the "Rules and
Regulations Governing Central Bank Certificates of Indebtedness", which
provided that any "assignment of registered certificates shall not be valid
unless made . . . by the registered owner thereof in person or by his
representative duly authorized in writing."

Petitioner's claimed interest has no basis, since it was derived from Philfinance
whose interest was inexistent, having acquired the certificate through
simulation. What happened was Philfinance merely borrowed CBCI No. D891
from Filriters, a sister corporation, to guarantee its financing operations.

Said the Court:

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment
purportedly for and on behalf of Filriters, did not have the necessary written
authorization from the Board of Directors of Filriters to act for the latter. For
lack of such authority, the assignment did not therefore bind Filriters and
violated as the same time Central Bank Circular No. 769 which has the force
and effect of a law, resulting in the nullity of the transfer (People v. Que Po Lay,
94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165
SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it
could assign or transfer to Traders Royal Bank and which the latter can
register with the Central Bank.

WHEREFORE, the judgment appealed from is AFFIRMED, with costs against

plaintiff-appellant.

SO ORDERED. 13

Petitioner's present position rests solely on the argument that Philfinance owns
90% of Filriters equity and the two corporations have identical corporate
officers, thus demanding the application of the doctrine or piercing the veil of
corporate fiction, as to give validity to the transfer of the CBCI from registered
owner to petitioner TRB. 14 This renders the payment by TRB to Philfinance of
CBCI, as actual payment to Filriters. Thus, there is no merit to the lower
court's ruling that the transfer of the CBCI from Filriters to Philfinance was
null and void for lack of consideration.

Admittedly, the subject CBCI is not a negotiable instrument in the absence of

words of negotiability within the meaning of the negotiable instruments law
(Act 2031).

The pertinent portions of the subject CBCI read:

xxx xxx xxx

The Central Bank of the Philippines (the Bank) for value received, hereby
promises to pay bearer, of if this Certificate of indebtedness be registered, to
FILRITERS GUARANTY ASSURANCE CORPORATION, the registered owner
hereof, the principal sum of FIVE HUNDRED THOUSAND PESOS.

xxx xxx xxx

Properly understood, a certificate of indebtedness pertains to certificates for the

creation and maintenance of a permanent improvement revolving fund, is
similar to a "bond," (82 Minn. 202). Being equivalent to a bond, it is properly
understood as acknowledgment of an obligation to pay a fixed sum of money. It
is usually used for the purpose of long term loans.

The appellate court ruled that the subject CBCI is not a negotiable instrument,
stating that:

As worded, the instrument provides a promise "to pay Filriters Guaranty

Assurance Corporation, the registered owner hereof." Very clearly, the
instrument is payable only to Filriters, the registered owner, whose name is
inscribed thereon. It lacks the words of negotiability which should have served
as an expression of consent that the instrument may be transferred by
negotiation.15

A reading of the subject CBCI indicates that the same is payable to FILRITERS
GUARANTY ASSURANCE CORPORATION, and to no one else, thus,
discounting the petitioner's submission that the same is a negotiable
instrument, and that it is a holder in due course of the certificate.
The language of negotiability which characterize a negotiable paper as a credit
instrument is its freedom to circulate as a substitute for money. Hence,
freedom of negotiability is the touchtone relating to the protection of holders in
due course, and the freedom of negotiability is the foundation for the protection
which the law throws around a holder in due course (11 Am. Jur. 2d, 32). This
freedom in negotiability is totally absent in a certificate indebtedness as it
merely to pay a sum of money to a specified person or entity for a period of
time.

As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:

The accepted rule is that the negotiability or non-negotiability of an instrument

is determined from the writing, that is, from the face of the instrument itself. In
the construction of a bill or note, the intention of the parties is to control, if it
can be legally ascertained. While the writing may be read in the light of
surrounding circumstance in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only
outward and visible expression of their meaning, no other words are to be
added to it or substituted in its stead. The duty of the court in such case is to
ascertain, not what the parties may have secretly intended as
contradistinguished from what their words express, but what is the meaning of
the words they have used. What the parties meant must be determined by
what they said.

Thus, the transfer of the instrument from Philfinance to TRB was merely an
assignment, and is not governed by the negotiable instruments law. The
pertinent question then is, was the transfer of the CBCI from Filriters to
Philfinance and subsequently from Philfinance to TRB, in accord with existing
law, so as to entitle TRB to have the CBCI registered in its name with the
Central Bank?

The following are the appellate court's pronouncements on the matter:

Clearly shown in the record is the fact that Philfinance's title over CBCI No.
D891 is defective since it acquired the instrument from Filriters fictitiously.
Although the deed of assignment stated that the transfer was for "value
received", there was really no consideration involved. What happened was
Philfinance merely borrowed CBCI No. D891 from Filriters, a sister corporation.
Thus, for lack of any consideration, the assignment made is a complete nullity.

What is more, We find that the transfer made by Filriters to Philfinance did not
conform to Central Bank Circular No. 769, series of 1980, otherwise known as
the "Rules and Regulations Governing Central Bank Certificates of
Indebtedness", under which the note was issued. Published in the Official
Gazette on November 19, 1980, Section 3 thereof provides that any assignment
of registered certificates shall not be valid unless made . . . by the registered
owner thereof in person or by his representative duly authorized in writing.

In the case at bar, Alfredo O. Banaria, who signed the deed of assignment
purportedly for and on behalf of Filriters, did not have the necessary written
authorization from the Board of Directors of Filriters to act for the latter. For
lack of such authority, the assignment did not therefore bind Filriters and
violated at the same time Central Bank Circular No. 769 which has the force
and effect of a law, resulting in the nullity of the transfer (People vs. Que Po
Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue,
165 SCRA 778).

In sum, Philfinance acquired no title or rights under CBCI No. D891 which it
could assign or transfer to Traders Royal Bank and which the latter can
register with the Central Bank

Petitioner now argues that the transfer of the subject CBCI to TRB must
upheld, as the respondent Filriters and Philfinance, though separate corporate
entities on paper, have used their corporate fiction to defraud TRB into
purchasing the subject CBCI, which purchase now is refused registration by
the Central Bank.

Says the petitioner;

Since Philfinance own about 90% of Filriters and the two companies have the
same corporate officers, if the principle of piercing the veil of corporate entity
were to be applied in this case, then TRB's payment to Philfinance for the CBCI
purchased by it could just as well be considered a payment to Filriters, the
registered owner of the CBCI as to bar the latter from claiming, as it has, that it
never received any payment for that CBCI sold and that said CBCI was sold
without its authority.

xxx xxx xxx

We respectfully submit that, considering that the Court of Appeals has held
that the CBCI was merely borrowed by Philfinance from Filriters, a sister
corporation, to guarantee its (Philfinance's) financing operations, if it were to be
consistent therewith, on the issued raised by TRB that there was a piercing a
veil of corporate entity, the Court of Appeals should have ruled that such veil of
corporate entity was, in fact, pierced, and the payment by TRB to Philfinance
should be construed as payment to Filriters. 17

We disagree with Petitioner.

Petitioner cannot put up the excuse of piercing the veil of corporate entity, as
this merely an equitable remedy, and may be awarded only in cases when the
corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime or where a corporation is a mere alter ego or business
conduit of a person. 18

Peiercing the veil of corporate entity requires the court to see through the
protective shroud which exempts its stockholders from liabilities that
ordinarily, they could be subject to, or distinguished one corporation from a
seemingly separate one, were it not for the existing corporate fiction. But to do
this, the court must be sure that the corporate fiction was misused, to such an
extent that injustice, fraud, or crime was committed upon another,
disregarding, thus, his, her, or its rights. It is the protection of the interests of
innocent third persons dealing with the corporate entity which the law aims to
protect by this doctrine.

The corporate separateness between Filriters and Philfinance remains, despite

the petitioners insistence on the contrary. For one, other than the allegation
that Filriters is 90% owned by Philfinance, and the identity of one shall be
maintained as to the other, there is nothing else which could lead the court
under circumstance to disregard their corporate personalities.

Though it is true that when valid reasons exist, the legal fiction that a
corporation is an entity with a juridical personality separate from its
stockholders and from other corporations may be disregarded, 19 in the
absence of such grounds, the general rule must upheld. The fact that
Filfinance owns majority shares in Filriters is not by itself a ground to
disregard the independent corporate status of Filriters. In Liddel & Co., Inc. vs.
Collector of Internal Revenue, 20 the 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 a sufficient reason for disregarding the fiction of separate corporate
personalities.

In the case at bar, there is sufficient showing that the petitioner was not
defrauded at all when it acquired the subject certificate of indebtedness from
Philfinance.

On its face the subject certificates states that it is registered in the name of
Filriters. This should have put the petitioner on notice, and prompted it to
inquire from Filriters as to Philfinance's title over the same or its authority to
assign the certificate. As it is, there is no showing to the effect that petitioner
had any dealings whatsoever with Filriters, nor did it make inquiries as to the
ownership of the certificate.
The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:

TRANSFER. This Certificate shall pass by delivery unless it is registered in the

owner's name at any office of the Bank or any agency duly authorized by the
Bank, and such registration is noted hereon. After such registration no transfer
thereof shall be valid unless made at said office (where the Certificates has
been registered) by the registered owner hereof, in person, or by his attorney,
duly authorized in writing and similarly noted hereon and upon payment of a
nominal transfer fee which may be required, a new Certificate shall be issued
to the transferee of the registered owner thereof. The bank or any agency duly
authorized by the Bank may deem and treat the bearer of this Certificate, or if
this Certificate is registered as herein authorized, the person in whose name
the same is registered as the absolute owner of this Certificate, for the purpose
of receiving payment hereof, or on account hereof, and for all other purpose
whether or not this Certificate shall be overdue.

This is notice to petitioner to secure from Filriters a written authorization for

the transfer or to require Philfinance to submit such an authorization from
Filriters.

Petitioner knew that Philfinance is not registered owner of the CBCI No. D891.
The fact that a non-owner was disposing of the registered CBCI owned by
another entity was a good reason for petitioner to verify of inquire as to the title
Philfinance to dispose to the CBCI.

Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990
21, known as the Rules and Regulations Governing Central Bank Certificates
of Indebtedness, Section 3, Article V of which provides that:

Sec. 3. Assignment of Registered Certificates. — Assignment of registered

certificates shall not be valid unless made at the office where the same have
been issued and registered or at the Securities Servicing Department, Central
Bank of the Philippines, and by the registered owner thereof, in person or by
his representative, duly authorized in writing. For this purpose, the transferee
may be designated as the representative of the registered owner.

Petitioner, being a commercial bank, cannot feign ignorance of Central Bank

Circular 769, and its requirements. An entity which deals with corporate
agents within circumstances showing that the agents are acting in excess of
corporate authority, may not hold the corporation liable. 22 This is only fair, as
everyone must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good
faith. 23
The transfer made by Filriters to Philfinance did not conform to the said.
Central Bank Circular, which for all intents, is considered part of the law. As
found by the courts a quo, Alfredo O. Banaria, who had signed the deed of
assignment from Filriters to Philfinance, purportedly for and in favor of
Filriters, did not have the necessary written authorization from the Board of
Directors of Filriters to act for the latter. As it is, the sale from Filriters to
Philfinance was fictitious, and therefore void and inexistent, as there was no
consideration for the same. This is fatal to the petitioner's cause, for then,
Philfinance had no title over the subject certificate to convey the Traders Royal
Bank. Nemo potest nisi quod de jure potest — no man can do anything except
what he can do lawfully.

Concededly, the subject CBCI was acquired by Filriters to form part of its legal
and capital reserves, which are required by law 24 to be maintained at a
mandated level. This was pointed out by Elias Garcia, Manager-in-Charge of
respondent Filriters, in his testimony given before the court on May 30, 1986.

Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI

No. D891 in the face value of P5000,000.00 subject of this case?

A Yes, sir.

Q Why do you know this?

A Well, this was CBCI of the company sought to be examined by the Insurance
Commission sometime in early 1981 and this CBCI No. 891 was among the
CBCI's that were found to be missing.

Q Let me take you back further before 1981. Did you have the knowledge of
this CBCI No. 891 before 1981?

A Yes, sir. This CBCI is an investment of Filriters required by the Insurance

Commission as legal reserve of the company.

Q Legal reserve for the purpose of what?

A Well, you see, the Insurance companies are required to put up legal reserves
under Section 213 of the Insurance Code equivalent to 40 percent of the
premiums receipt and further, the Insurance Commission requires this reserve
to be invested preferably in government securities or government binds. This is
how this CBCI came to be purchased by the company.
It cannot, therefore, be taken out of the said funds, without violating the
requirements of the law. Thus, the anauthorized use or distribution of the
same by a corporate officer of Filriters cannot bind the said corporation, not
without the approval of its Board of Directors, and the maintenance of the
required reserve fund.

Consequently, the title of Filriters over the subject certificate of indebtedness

must be upheld over the claimed interest of Traders Royal Bank.

ACCORDINGLY, the petition is DISMISSED and the decision appealed from

dated January 29, 1990 is hereby AFFIRMED.

SO ORDERED.

14. BOYER-ROXAS V. COURT OF APPEALS

This is a petition to review the decision and resolution of the Court of Appeals
in CA-G.R. No. 14530 affirming the earlier decision of the Regional Trial Court
of Laguna, Branch 37, at Calamba, in the consolidated RTC Civil Case Nos.
802-84-C and 803-84-C entitled "Heirs of Eugenia V. Roxas, Inc. v. Rebecca
Boyer-Roxas" and Heirs of Eugenia V. Roxas, Inc. v. Guillermo Roxas," the
dispositive portion of which reads:

IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the

plaintiff and against the defendants, by ordering as it is hereby ordered that:

1) In RTC Civil Case No. 802-84-C: Rebecca Boyer-Roxas and all persons
claiming under her to:

a) Immediately vacate the residential house near the Balugbugan pool located
inside the premises of the Hidden Valley Springs Resort at Limao, Calauan,
Laguna;

b) Pay the plaintiff the amount of P300.00 per month from September 10,
1983, for her occupancy of the residential house until the same is vacated;

c) Remove the unfinished building erected on the land of the plaintiff within
ninety (90) days from receipt of this decision;
d) Pay the plaintiff the amount of P100.00 per month from September 10,
1983, until the said unfinished building is removed from the land of the
plaintiff; and

e) Pay the costs.

2) In RTC Civil Case No. 803-84-C: Guillermo Roxas and all persons claiming
under him to:

a) Immediately vacate the residential house near the tennis court located
within the premises of the Hidden Valley Springs Resort at Limao, Calauan,
Laguna;

b) Pay the plaintiff the amount of P300.00 per month from September 10,
1983, for his occupancy of the said residential house until the same is vacated;
and

c) Pay the costs. (Rollo, p. 36)

In two (2) separate complaints for recovery of possession filed with the Regional
Trial Court of Laguna against petitioners Rebecca Boyer-Roxas and Guillermo
Roxas respectively, respondent corporation, Heirs of Eugenia V. Roxas, Inc.,
prayed for the ejectment of the petitioners from buildings inside the Hidden
Valley Springs Resort located at Limao, Calauan, Laguna allegedly owned by
the respondent corporation.

In the case of petitioner Rebecca Boyer-Roxas (Civil Case No-802-84-C), the

respondent corporation alleged that Rebecca is in possession of two (2) houses,
one of which is still under construction, built at the expense of the respondent
corporation; and that her occupancy on the two (2) houses was only upon the
tolerance of the respondent corporation.

In the case of petitioner Guillermo Roxas (Civil Case No. 803-84-C), the
respondent corporation alleged that Guillermo occupies a house which was
built at the expense of the former during the time when Guillermo's father,
Eriberto Roxas, was still living and was the general manager of the respondent
corporation; that the house was originally intended as a recreation hall but was
converted for the residential use of Guillermo; and that Guillermo's possession
over the house and lot was only upon the tolerance of the respondent
corporation.
In both cases, the respondent corporation alleged that the petitioners never
paid rentals for the use of the buildings and the lots and that they ignored the
demand letters for them to vacate the buildings.

In their separate answers, the petitioners traversed the allegations in the

complaint by stating that they are heirs of Eugenia V. Roxas and therefore, co-
owners of the Hidden Valley Springs Resort; and as co-owners of the property,
they have the right to stay within its premises.

The cases were consolidated and tried jointly.

At the pre-trial, the parties limited the issues as follows:

1) whether plaintiff is entitled to recover the questioned premises;

2) whether plaintiff is entitled to reasonable rental for occupancy of the

premises in question;

3) whether the defendant is legally authorized to pierce the veil of corporate

fiction and interpose the same as a defense in an accion publiciana;

4) whether the defendants are truly builders in good faith, entitled to occupy
the questioned premises;

5) whether plaintiff is entitled to damages and reasonable compensation for the

use of the questioned premises;

6) whether the defendants are entitled to their counterclaim to recover moral

and exemplary damages as well as attorney's fees in the two cases;

7) whether the presence and occupancy by the defendants on the premises in

questioned (sic) hampers, deters or impairs plaintiff's operation of Hidden
Valley Springs Resort; and

8) whether or not a unilateral and sudden withdrawal of plaintiffs tolerance

allowing defendants' occupancy of the premises in questioned (sic) is unjust
enrichment. (Original Records, 486)
Upon motion of the plaintiff respondent corporation, Presiding Judge Francisco
Ma. Guerrero of Branch 34 issued an Order dated April 25, 1986 inhibiting
himself from further trying the case. The cases were re-raffled to Branch 37
presided by Judge Odilon Bautista. Judge Bautista continued the hearing of
the cases.

For failure of the petitioners (defendants below) and their counsel to attend the
October 22, 1986 hearing despite notice, and upon motion of the respondent
corporation, the court issued on the same day, October 22, 1986, an Order
considering the cases submitted for decision. At this stage of the proceedings,
the petitioners had not yet presented their evidence while the respondent
corporation had completed the presentation of its evidence.

The evidence of the respondent corporation upon which the lower court based
its decision is as follows:

To support the complaints, the plaintiff offered the testimonies of Maria

Milagros Roxas and that of Victoria Roxas Villarta as well as Exhibits "A" to "M-
3".

The evidence of the plaintiff established the following: that the plaintiff, Heirs of
Eugenia V Roxas, Incorporated, was incorporated on December 4, 1962 (Exh.
"C") with the primary purpose of engaging in agriculture to develop the
properties inherited from Eugenia V. Roxas and that of y Eufrocino Roxas; that
the Articles of Incorporation of the plaintiff, in 1971, was amended to allow it to
engage in the resort business (Exh.
"C-1"); that the incorporators as original members of the board of directors of
the plaintiff were all members of the same family, with Eufrocino Roxas having
the biggest share; that accordingly, the plaintiff put up a resort known as
Hidden Valley Springs Resort on a portion of its land located at Bo. Limao,
Calauan, Laguna, and covered by TCT No. 32639 (Exhs. "A" and "A-l"); that
improvements were introduced in the resort by the plaintiff and among them
were cottages, houses or buildings, swimming pools, tennis court, restaurant
and open pavilions; that the house near the Balugbugan Pool (Exh. "B-l") being
occupied by Rebecca B. Roxas was originally intended as staff house but later
used as the residence of Eriberto Roxas, deceased husband of the defendant
Rebecca Boyer-Roxas and father of Guillermo Roxas; that this house presently
being occupied by Rebecca B. Roxas was built from corporate funds; that the
construction of the unfinished house (Exh. "B-2") was started by the defendant
Rebecca Boyer-Roxas and her husband Eriberto Roxas; that the third building
(Exh. "B-3") presently being occupied by Guillermo Roxas was originally
intended as a recreation hall but later converted as a residential house; that
this house was built also from corporate funds; that the said house occupied
by Guillermo Roxas when it was being built had nipa roofing but was later
changed to galvanized iron sheets; that at the beginning, it had no partition
downstairs and the second floor was an open space; that the conversion from a
recreation hall to a residential house was with the knowledge of Eufrocino
Roxas and was not objected to by any of the Board of Directors of the plaintiff;
that most of the materials used in converting the building into a residential
house came from the materials left by Coppola, a film producer, who filmed the
movie "Apocalypse Now"; that Coppola left the materials as part of his payment
for rents of the rooms that he occupied in the resort; that after the said
recreation hall was converted into a residential house, defendant Guillermo
Roxas moved in and occupied the same together with his family sometime in
1977 or 1978; that during the time Eufrocino Roxas was still alive, Eriberto
Roxas was the general manager of the corporation and there was seldom any
board meeting; that Eufrocino Roxas together with Eriberto Roxas were (sic)
the ones who were running the corporation; that during this time, Eriberto
Roxas was the restaurant and wine concessionaire of the resort; that after the
death of Eufrocino Roxas, Eriberto Roxas continued as the general manager
until his death in 1980; that after the death of Eriberto Roxas in 1980, the
defendants Rebecca B. Roxas and Guillermo Roxas, committed acts that
impeded the plaintiff's expansion and normal operation of the resort; that the
plaintiff could not even use its own pavilions, kitchen and other facilities
because of the acts of the defendants which led to the filing of criminal cases in
court; that cases were even filed before the Ministry of Tourism, Bureau of
Domestic Trade and the Office of the President by the parties herein; that the
defendants violated the resolution and orders of the Ministry of Tourism dated
July 28, 1983, August 3, 1983 and November 26, 1984 (Exhs. "G", "H" and "H-
l") which ordered them or the corporation they represent to desist from and to
turn over immediately to the plaintiff the management and operation of the
restaurant and wine outlets of the said resort (Exh. "G-l"); that the defendants
also violated the decision of the Bureau of Domestic Trade dated October 23,
1983 (Exh. "C"); that on August 27, 1983, because of the acts of the
defendants, the Board of Directors of the plaintiff adopted Resolution No. 83-12
series of 1983 (Exh. "F") authorizing the ejectment of the defendants from the
premises occupied by them; that on September 1, 1983, demand letters were
sent to Rebecca Boyer-Roxas and Guillermo Roxas (Exhs. "D" and "D-1")
demanding that they vacate the respective premises they occupy; and that the
dispute between the plaintiff and the defendants was brought before the
barangay level and the same was not settled (Exhs. "E" and "E-l"). (Original
Records, pp. 454-456)

The petitioners appealed the decision to the Court of Appeals. However, as

stated earlier, the appellate court affirmed the lower court's decision. The
Petitioners' motion for reconsideration was likewise denied.

Hence, this petition.

In a resolution dated February 5, 1992, we gave due course to the petition.

The petitioners now contend:

I Respondent Court erred when it refused to pierce the veil of corporate fiction
over private respondent and maintain the petitioners in their possession
and/or occupancy of the subject premises considering that petitioners are
owners of aliquot part of the properties of private respondent. Besides, private
respondent itself discarded the mantle of corporate fiction by acts and/or
omissions of its board of directors and/or stockholders.

II The respondent Court erred in not holding that petitioners were in fact
denied due process or their day in court brought about by the gross negligence
of their former counsel.

III The respondent Court misapplied the law when it ordered petitioner Rebecca
Boyer-Roxas to remove the unfinished building in RTC Case No. 802-84-C,
when the trial court opined that she spent her own funds for the construction
thereof. (CA Rollo, pp. 17-18)

Were the petitioners denied due process of law in the lower court?

After the cases were re-raffled to the sala of Presiding Judge Odilon Bautista of
Branch 37 the following events transpired:

On July 3, 1986, the lower court issued an Order setting the hearing of the
cases on July 21, 1986. Petitioner Rebecca V. Roxas received a copy of the
Order on July 15, 1986, while petitioner Guillermo Roxas received his copy on
July 18, 1986. Atty. Conrado Manicad, the petitioners' counsel received
another copy of the Order on July 11, 1986. (Original Records, p. 260)

On motion of the respondent corporation's counsel, the lower court issued an

Order dated July 15, 1986 cancelling the July 21, 1986 hearing and resetting
the hearing to August 11, 1986. (Original records, 262-263) Three separate
copies of the order were sent and received by the petitioners and their counsel.
(Original Records, pp. 268, 269, 271)

A motion to cancel and re-schedule the August 11, 1986 hearing filed by the
respondent corporation's counsel was denied in an Order dated August 8,
1986. Again separate copies of the Order were sent and received by the
petitioners and their counsel. (Original Records, pp. 276-279)

At the hearing held on August 11, 1986, only Atty. Benito P. Fabie, counsel for
the respondent corporation appeared. Neither the petitioners nor their counsel
appeared despite notice of hearing. The lower court then issued an Order on
the same date, to wit:
ORDER

When these cases were called for continuation of trial, Atty. Benito P. Fabie
appeared before this Court, however, the defendants and their lawyer despite
receipt of the Order setting the case for hearing today failed to appear. On
Motion of Atty. Fabie, further cross examination of witness Victoria Vallarta is
hereby considered as having been waived.

The plaintiff is hereby given twenty (20) days from today within which to
submit formal offer of evidence and defendants are also given ten (10) days
from receipt of such formal offer of evidence to file their objection thereto.

In the meantime, hearing in these cases is set to September 29, 1986 at 10:00
o'clock in the morning. (Original Records, p. 286)

Copies of the Order were sent and received by the petitioners and their counsel
on the following dates — Rebecca Boyer-Roxas on August 20, 1986, Guillermo
Roxas on August 26, 1986, and Atty. Conrado Manicad on September 19,
1986. (Original Records, pp. 288-290)

On September 1, 1986, the respondent corporation filed its "Formal Offer of

Evidence." In an Order dated September 29, 1986, the lower court issued an
Order admitting exhibits "A" to "M-3" submitted by the respondent corporation
in its "Formal Offer of Evidence . . . there being no objection . . ." (Original
Records, p. 418) Copies of this Order were sent and received by the petitioners
and their counsel on the following dates: Rebecca Boyer-Roxas on October 9,
1986; Guillermo Roxas on October 9, 1986 and Atty. Conrado Manicad on
October 4, 1986 (Original Records, pp. 420, 421, 428).

The scheduled hearing on September 29, 1986 did not push through as the
petitioners and their counsel were not present prompting Atty. Benito Fabie,
the respondent corporation's counsel to move that the cases be submitted for
decision. The lower court denied the motion and set the cases for hearing on
October 22, 1986. However, in its Order dated September 29, 1986, the court
warned that in the event the petitioners and their counsel failed to appear on
the next scheduled hearing, the court shall consider the cases submitted for
decision based on the evidence on record. (Original Records, p. 429, 430 and
431)

Separate copies of this Order were sent and received by the petitioners and
their counsel on the following dates: Rebecca Boyer-Roxas on October 9, 1986,
Guillermo Roxas on October 9, 1986; and Atty. Conrado Manicad on October 1,
1986. (Original Records, pp. 429-430)
Despite notice, the petitioners and their counsel again failed to attend the
scheduled October 22, 1986 hearing. Atty. Fabie representing the respondent
corporation was present. Hence, in its Order dated October 22, 1986, on
motion of Atty. Fabie and pursuant to the order dated September 29, 1986, the
Court considered the cases submitted for decision. (Original Records, p. 436)

On November 14, 1986, the respondent corporation, filed a "Manifestation",

stating that ". . . it is submitting without further argument its "Opposition to
the Motion for Reconsideration" for the consideration of the Honorable Court in
resolving subject incident." (Original Records, p. 442)

On December 16, 1986, the lower court issued an Order, to wit:

ORDER

Considering that the Court up to this date has not received any Motion for
Reconsideration filed by the defendants in the above-entitled cases, the Court
cannot act on the Opposition to Motion for Reconsideration filed by the plaintiff
and received by the Court on November 14, 1986. (Original Records, p. 446)

On January 15, 1987, the lower court rendered the questioned decision in the
two (2) cases. (Original Records, pp. 453-459)

On January 20, 1987, Atty. Conrado Manicad, the petitioners' counsel filed an
Ex-Parte Manifestation and attached thereto, a motion for reconsideration of
the October 22, 1986 Order submitting the cases for decision. He prayed that
the Order be set aside and the cases be re-opened for reception of evidence for
the petitioners. He averred that: 1) within the reglementary period he prepared
the motion for reconsideration and among other documents, the draft was sent
to his law office thru his messenger; after signing the final copies, he caused
the service of a copy to the respondent corporation's counsel with the
instruction that the copy of the Court be filed; however, there was a
miscommunication between his secretary and messenger in that the secretary
mailed the copy for the respondent corporation's counsel and placed the rest in
an envelope for the messenger to file the same in court but the messenger
thought that it was the secretary who would file it; it was only later on when it
was discovered that the copy for the Court has not yet been filed and that such
failure to file the motion for reconsideration was due to excusable neglect
and/or accident. The motion for reconsideration contained the following
allegations: that on the date set for hearing (October 22, 1986), he was on his
way to Calamba to attend the hearing but his car suffered transmission
breakdown; and that despite efforts to repair said transmission, the car
remained inoperative resulting in his absence at the said hearing. (Original
Records, pp. 460-469)
On February 3, 1987, Atty. Manicad filed a motion for reconsideration of the
January 15, 1987 decision. He explained that he had to file the motion because
the receiving clerk refused to admit the motion for reconsideration attached to
the ex-parte manifestation because there was no proof of service to the other
party. Included in the motion for reconsideration was a notice of hearing of the
motion on February 3, 1987. (Original Records, p. 476-A)

On February 4, 1987, the respondent corporation through its counsel filed a

Manifestation and Motion manifesting that they received the copy of the motion
for reconsideration only today (February 4, 1987), hence they prayed for the
postponement of the hearing. (Original Records, pp. 478-479)

On the same day, February 4, 1987, the lower court issued an Order setting
the hearing on February 13, 1987 on the ground that it received the motion for
reconsideration late. Copies of this Order were sent separately to the
petitioners and their counsel. The records show that Atty. Manicad received his
copy on February 11, 1987. As regards the petitioners, the records reveal that
Rebecca Boyer-Roxas did not receive her copy while as regards Guillermo
Roxas, somebody signed for him but did not indicate when the copy was
received. (Original Records, pp. 481-483)

At the scheduled February 13, 1987 hearing, the counsels for the parties were
present. However, the hearing was reset for March 6, 1987 in order to allow the
respondent corporation to file its opposition to the motion for reconsideration.
(Order dated February 13, 1987, Original Records, p. 486) Copies of the Order
were sent and received by the petitioners and their counsel on the following
dates: Rebecca Boyer-Roxas on February 23, 1987; Guillermo Roxas on
February 23, 1987 and Atty. Manicad on February 19, 1987. (Original Records,
pp. 487, 489-490)

The records are not clear as to whether or not the scheduled hearing on March
6, 1987 was held. Nevertheless, the records reveal that on March 13, 1987, the
lower court issued an Order denying the motion for reconsideration.

The well-settled doctrine is that the client is bound by the mistakes of his
lawyer. (Aguila v. Court of First Instance of Batangas, Branch I, 160 SCRA 352
[1988]; See also Vivero v. Santos, et al., 98 Phil. 500 [1956]; Isaac v. Mendoza,
89 Phil. 279 [1951]; Montes v. Court of First Instance of Tayabas, 48 Phil. 640
[1926]; People v. Manzanilla, 43 Phil. 167 [1922]; United States v. Dungca, 27
Phil. 274 [1914]; and United States v. Umali, 15 Phil. 33 [1910]) This rule,
however, has its exceptions. Thus, in several cases, we ruled that the party is
not bound by the actions of his counsel in case the gross negligence of the
counsel resulted in the client's deprivation of his property without due process
of law. In the case of Legarda v. Court of Appeals (195 SCRA 418 [1991]), we
said:
In People's Homesite & Housing Corp. v. Tiongco and Escasa (12 SCRA 471
[1964]), this Court ruled as follows:

Procedural technicality should not be made a bar to the vindication of a

legitimate grievance. When such technicality deserts from being an aid to
Justice, the courts are justified in excepting from its operation a particular
case. Where there was something fishy and suspicious about the actuations of
the former counsel of petitioners in the case at bar, in that he did not give any
significance at all to the processes of the court, which has proven prejudicial to
the rights of said clients, under a lame and flimsy explanation that the court's
processes just escaped his attention, it is held that said lawyer deprived his
clients of their day in court, thus entitling said clients to petition for relief from
judgment despite the lapse of the reglementary period for filing said period for
filing said petition.

In Escudero v. Judge Dulay (158 SCRA 69 [1988]), this Court, in holding that
the counsel's blunder in procedure is an exception to the rule that the client is
bound by the mistakes of counsel, made the following disquisition:

Petitioners contend, through their new counsel, that the judgment rendered
against them by the respondent court was null and void, because they were
therein deprived of their day in court and divested of their property without due
process of law, through the gross ignorance, mistake and negligence of their
previous counsel. They acknowledge that, while as a rule, clients are bound by
the mistake of their counsel, the rule should not be applied automatically to
their case, as their trial counsel's blunder in procedure and gross ignorance of
existing jurisprudence changed their cause of action and violated their
substantial rights.

We are impressed with petitioner's contentions.

xxx xxx xxx

While this Court is cognizant of the rule that, generally, a client will suffer
consequences of the negligence, mistake or lack of competence of his counsel,
in the interest of Justice and equity, exceptions may be made to such rule, in
accordance with the facts and circumstances of each case. Adherence to the
general rule would, in the instant case, result in the outright deprivation of
their property through a technicality.

In its questioned decision dated November 19, 1989 the Court of Appeals
found, in no uncertain terms, the negligence of the then counsel for petitioners
when he failed to file the proper motion to dismiss or to draw a compromise
agreement if it was true that they agreed on a settlement of the case; or in
simply filing an answer; and that after having been furnished a copy of the
decision by the court he failed to appeal therefrom or to file a petition for relief
from the order declaring petitioners in default. In all these instances the
appellate court found said counsel negligent but his acts were held to bind his
client, petitioners herein, nevertheless.

The Court disagrees and finds that the negligence of counsel in this case
appears to be so gross and inexcusable. This was compounded by the fact, that
after petitioner gave said counsel another chance to make up for his omissions
by asking him to file a petition for annulment of the judgment in the appellate
court, again counsel abandoned the case of petitioner in that after he received
a copy of the adverse judgment of the appellate court, he did not do anything to
save the situation or inform his client of the judgment. He allowed the
judgment to lapse and become final. Such reckless and gross negligence
should not be allowed to bind the petitioner. Petitioner was thereby effectively
deprived of her day in court. (at pp. 426-427)

The herein petitioners, however, are not similarly situated as the parties
mentioned in the abovecited cases. We cannot rule that they, too, were victims
of the gross negligence of their counsel.

The petitioners are to be blamed for the October 22, 1986 order issued by the
lower court submitting the cases for decision. They received notices of the
scheduled hearings and yet they did not do anything. More specifically, the
parties received notice of the Order dated September 29, 1986 with the warning
that if they fail to attend the October 22, 1986 hearing, the cases would be
submitted for decision based on the evidence on record. Earlier, at the
scheduled hearing on September 29, 1986, the counsel for the respondent
corporation moved that the cases be submitted for decision for failure of the
petitioners and their counsel to attend despite notice. The lower court denied
the motion and gave the petitioners and their counsel another chance by
rescheduling the October 22, 1986 hearing.

Indeed, the petitioners knew all along that their counsel was not attending the
scheduled hearings. They did not take steps to change their counsel or make
him attend to their cases until it was too late. On the contrary, they continued
to retain the services of Atty. Manicad knowing fully well his lapses vis-a-vis
their cases. They, therefore, cannot raise the alleged gross negligence of their
counsel resulting in their denial of due process to warrant the reversal of the
lower court's decision. In a similar case, Aguila v. Court of First Instance of
Batangas, Branch 1 (supra), we ruled:

In the instant case, the petitioner should have noticed the succession of errors
committed by his counsel and taken appropriate steps for his replacement
before it was altogether too late. He did not. On the contrary, he continued to
retain his counsel through the series of proceedings that all resulted in the
rejection of his cause, obviously through such counsel's "ineptitude" and, let it
be added, the clients' forbearance. The petitioner's reverses should have
cautioned him that his lawyer was mishandling his case and moved him to
seek the help of other counsel, which he did in the end but rather tardily.

Now petitioner wants us to nullify all of the antecedent proceedings and

recognize his earlier claims to the disputed property on the justification that
his counsel was grossly inept. Such a reason is hardly plausible as the
petitioner's new counsel should know. Otherwise, all a defeated party would
have to do to salvage his case is claim neglect or mistake on the part of his
counsel as a ground for reversing the adverse judgment. There would be no end
to litigation if these were allowed as every shortcoming of counsel could be the
subject of challenge by his client through another counsel who, if he is also
found wanting, would likewise be disowned by the same client through another
counsel, and so on ad infinitum. This would render court proceedings
indefinite, tentative and subject to reopening at any time by the mere
subterfuge of replacing counsel. (at pp. 357-358)

We now discuss the merits of the cases.

In the first assignment of error, the petitioners maintain that their possession
of the questioned properties must be respected in view of their ownership of an
aliquot portion of all the properties of the respondent corporation being
stockholders thereof. They propose that the veil of corporate fiction be pierced,
considering the circumstances under which the respondent corporation was
formed.

Originally, the questioned properties belonged to Eugenia V. Roxas. After her

death, the heirs of Eugenia V. Roxas, among them the petitioners herein,
decided to form a corporation — Heirs of Eugenia V. Roxas, Incorporated
(private respondent herein) with the inherited properties as capital of the
corporation. The corporation was incorporated on December 4, 1962 with the
primary purpose of engaging in agriculture to develop the inherited properties.
The Articles of Incorporation of the respondent corporation were amended in
1971 to allow it to engage in the resort business. Accordingly, the corporation
put up a resort known as Hidden Valley Springs Resort where the questioned
properties are located.

These facts, however, do not justify the position taken by the petitioners.

The respondent is a bona fide corporation. As such, it has a juridical

personality of its own separate from the members composing it. (Western Agro
Industrial Corporation v. Court of Appeals, 188 SCRA 709 [1990]; Tan Boon
Bee & Co., Inc. v. Jarencio, 163 SCRA 205 [1988]; Yutivo Sons Hardware
Company v. Court of Tax Appeals, 1 SCRA 160 [1961]; Emilio Cano
Enterprises, Inc. v. Court of Industrial Relations, 13 SCRA 290 [1965]) There is
no dispute that title over the questioned land where the Hidden Valley Springs
Resort is located is registered in the name of the corporation. The records also
show that the staff house being occupied by petitioner Rebecca Boyer-Roxas
and the recreation hall which was later on converted into a residential house
occupied by petitioner Guillermo Roxas are owned by the respondent
corporation. Regarding properties owned by a corporation, we stated in the
case of Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of
Manila, (6 SCRA 373 [1962]):

xxx xxx xxx

. . . Properties registered in the name of the corporation are owned by it as an

entity separate and distinct from its members. While shares of stock constitute
personal property, they do not represent property of the corporation. The
corporation has property of its own which consists chiefly of real estate (Nelson
v. Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W.
743). A share of stock only typifies an aliquot part of the corporation's property,
or the right to share in its proceeds to that extent when distributed according
to law and equity (Hall & Faley v. Alabama Terminal, 173 Ala., 398, 56 So.
235), but its holder is not the owner of any part of the capital of the corporation
(Bradley v. Bauder, 36 Ohio St., 28). Nor is he entitled to the possession of any
definite portion of its property or assets (Gottfried V. Miller, 104 U.S., 521;
Jones v. Davis, 35 Ohio St., 474). The stockholder is not a co-owner or tenant
in common of the corporate property (Harton v. Johnston, 166 Ala., 317, 51 So.
992). (at pp. 375-376)

The petitioners point out that their occupancy of the staff house which was
later used as the residence of Eriberto Roxas, husband of petitioner Rebecca
Boyer-Roxas and the recreation hall which was converted into a residential
house were with the blessings of Eufrocino Roxas, the deceased husband of
Eugenia V. Roxas, who was the majority and controlling stockholder of the
corporation. In his lifetime, Eufrocino Roxas together with Eriberto Roxas, the
husband of petitioner Rebecca Boyer-Roxas, and the father of petitioner
Guillermo Roxas managed the corporation. The Board of Directors did not
object to such an arrangement. The petitioners argue that . . . the authority
thus given by Eufrocino Roxas for the conversion of the recreation hall into a
residential house can no longer be questioned by the stockholders of the
private respondent and/or its board of directors for they impliedly but no leas
explicitly delegated such authority to said Eufrocino Roxas. (Rollo, p. 12)

Again, we must emphasize that the respondent corporation has a distinct

personality separate from its members. The corporation transacts its business
only through its officers or agents. (Western Agro Industrial Corporation v.
Court of Appeals, supra). Whatever authority these officers or agents may have
is derived from the board of directors or other governing body unless conferred
by the charter of the corporation. An officer's power as an agent of the
corporation must be sought from the statute, charter, the by-laws or in a
delegation of authority to such officer, from the acts of the board of directors,
formally expressed or implied from a habit or custom of doing business.
(Vicente v. Geraldez, 52 SCRA 210 [1973])

In the present case, the record shows that Eufrocino V. Roxas who then
controlled the management of the corporation, being the majority stockholder,
consented to the petitioners' stay within the questioned properties. Specifically,
Eufrocino Roxas gave his consent to the conversion of the recreation hall to a
residential house, now occupied by petitioner Guillermo Roxas. The Board of
Directors did not object to the actions of Eufrocino Roxas. The petitioners were
allowed to stay within the questioned properties until August 27, 1983, when
the Board of Directors approved a Resolution ejecting the petitioners, to wit:

R E S O L U T I O N No. 83-12

RESOLVED, That Rebecca B. Roxas and Guillermo Roxas, and all persons
claiming under them, be ejected from their occupancy of the Hidden Valley
Springs compound on which their houses have been constructed and/or are
being constructed only on tolerance of the Corporation and without any
contract therefor, in order to give way to the Corporation's expansion and
improvement program and obviate prejudice to the operation of the Hidden
Valley Springs Resort by their continued interference.

RESOLVED, Further that the services of Atty. Benito P. Fabie be engaged and
that he be authorized as he is hereby authorized to effect the ejectment,
including the filing of the corresponding suits, if necessary to do so. (Original
Records, p. 327)

We find nothing irregular in the adoption of the Resolution by the Board of

Directors. The petitioners' stay within the questioned properties was merely by
tolerance of the respondent corporation in deference to the wishes of Eufrocino
Roxas, who during his lifetime, controlled and managed the corporation.
Eufrocino Roxas' actions could not have bound the corporation forever. The
petitioners have not cited any provision of the corporation by-laws or any
resolution or act of the Board of Directors which authorized Eufrocino Roxas to
allow them to stay within the company premises forever. We rule that in the
absence of any existing contract between the petitioners and the respondent
corporation, the corporation may elect to eject the petitioners at any time it
wishes for the benefit and interest of the respondent corporation.

The petitioners' suggestion that the veil of the corporate fiction should be
pierced is untenable. The separate personality of the corporation may be
disregarded only when the corporation is used "as a cloak or cover for fraud or
illegality, or to work injustice, or where necessary to achieve equity or when
necessary for the protection of the creditors." (Sulong Bayan, Inc. v. Araneta,
Inc., 72 SCRA 347 [1976] cited in Tan Boon Bee & Co., Inc., v. Jarencio, supra
and Western Agro Industrial Corporation v. Court of Appeals, supra) The
circumstances in the present cases do not fall under any of the enumerated
categories.

In the third assignment of error, the petitioners insist that as regards the
unfinished building, Rebecca Boyer-Roxas is a builder in good faith.

The construction of the unfinished building started when Eriberto Roxas,

husband of Rebecca Boyer-Roxas, was still alive and was the general manager
of the respondent corporation. The couple used their own funds to finance the
construction of the building. The Board of Directors of the corporation,
however, did not object to the construction. They allowed the construction to
continue despite the fact that it was within the property of the corporation.
Under these circumstances, we agree with the petitioners that the provision of
Article 453 of the Civil Code should have been applied by the lower courts.

Article 453 of the Civil Code provides:

If there was bad faith, not only on the part of the person who built, planted or
sown on the land of another but also on the part of the owner of such land, the
rights of one and the other shall be the same as though both had acted in good
faith.

In such a case, the provisions of Article 448 of the Civil Code govern the
relationship between petitioner Rebecca-Boyer-Roxas and the respondent
corporation, to wit:

Art. 448 — The owner of the land on which anything has been built, sown or
planted in good faith, shall have the right to appropriate as his own the works,
sowing or planting after payment of the indemnity provided for in articles 546
and 548, or to oblige the one who built or planted to pay the price of the land,
and the one who sowed, the proper rent. However, the builder or planter
cannot be obliged to buy the land if its value is considerably more than that of
the building or trees. In such case, he shall pay reasonable rent, if the owner of
the land does not choose to appropriate the buildings or trees after proper
indemnity. The parties shall agree upon the terms of the lease and in case of
disagreement, the court shall fix the terms thereof.

WHEREFORE, the present petition is partly GRANTED. The questioned

decision of the Court of Appeals affirming the decision of the Regional Trial
Court of Laguna, Branch 37, in RTC Civil Case No. 802-84-C is MODIFIED in
that subparagraphs (c) and (d) of Paragraph 1 of the dispositive portion of the
decision are deleted. In their stead, the petitioner Rebecca Boyer-Roxas and the
respondent corporation are ordered to follow the provisions of Article 448 of the
Civil Code as regards the questioned unfinished building in RTC Civil Case No.
802-84-C. The questioned decision is affirmed in all other respects.

SO ORDERED.

15. MARUBENI CORP. V. LIRAG

The case is an appeal via certiorari to annul and set aside the decision1 of the
Court of Appeals finding petitioners Ryoichi Tanaka, Ryohei Kimura and
Shoichi One, as officers of petitioner Marubeni Corporation, jointly and
severally liable with the corporation for the commission claimed by respondent
Felix Lirag in the amount of six million (P6,000,000.00) pesos arising from an
oral consultancy agreement.

Petitioner Marubeni Corporation (hereafter, Marubeni) is a foreign corporation

organized and existing under the laws of Japan. It was doing business in the
Philippines through its duly licensed, wholly owned subsidiary, Marubeni
Philippines Corporation. Petitioners Ryoichi Tanaka, Ryohei Kimura and
Shoichi One were officers of Marubeni assigned to its Philippine branch.2

On January 27, 1989, respondent Felix Lirag filed with the Regional Trial
Court, Makati a complaint3 for specific performance and damages claiming
that petitioners owed him the sum of P6,000,000.00 representing commission
pursuant to an oral consultancy agreement with Marubeni. Lirag claimed that
on February 2, 1987, petitioner Ryohei Kimura hired his consultancy group for
the purpose of obtaining government contracts of various projects. Petitioner
Kimura authorized him to work on the following projects: (1) National
Telephone Project, (2) Regional Telecommunications Project; (3) Cargo Handling
Equipment; (4) Maritime Communications; (5) Philippine National Railways
Depot; and (6) Bureau of Posts (Phase II).4 Petitioners promised to pay him six
percent (6%) consultancy fee based on the total costs of the projects obtained.

The consultancy agreement was not reduced into writing because of the
mutual trust between Marubeni and the Lirag family.5 Their close business
and personal relationship dates back to 1960, when respondent's family was
engaged in the textile fabric manufacturing business, in which Marubeni
supplied the needed machinery, equipment, spare parts and raw materials.6

In compliance with the agreement, respondent Lirag made representations with

various government officials, arranged for meetings and conferences, relayed
pertinent information as well as submitted feasibility studies and project
proposals, including pertinent documents required by petitioners. As
petitioners had been impressed with respondent's performance, six (6)
additional projects were given to his group under the same undertaking.7

One of the projects handled by respondent Lirag, the Bureau of Post project,
amounting to P100,000,000.00 was awarded to the "Marubeni-Sanritsu
tandem."8 Despite respondent's repeated formal verbal demands for payment
of the agreed consultancy fee, petitioners did not pay. In response to the first
demand letter, petitioners promised to reply within fifteen (15) days, but they
did not do so.

Pursuant to the consultancy agreement, respondent claimed a commission of

six percent (6%) of the total contract price, or a total of P6,000,000.00, or in
the alternative, that he be paid the same amount by way of damages or as the
reasonable value of the services he rendered to petitioners, and further claimed
twenty percent (20%) of the amount recoverable as attorney's fees and the costs
of suit.

In their answer, petitioners denied the consultancy agreement. Petitioner

Ryohei Kimura did not have the authority to enter into such agreement in
behalf of Marubeni. Only Mr. Morihiko Maruyama, the general manager, upon
issuance of a special power of attorney by the principal office in Tokyo, Japan,
could enter into any contract in behalf of the corporation. Mr. Maruyama did
not discuss with respondent Lirag any of the matters alleged in the complaint,
nor agreed to the payment of commission. Moreover, Marubeni did not
participate in the bidding for the Bureau of Post project, nor benefited from the
supposed project. Thus, petitioners moved for the dismissal of the complaint.

Petitioner Shoichi One submitted a separate answer raising similar arguments.

With regard to petitioner Ryohei Kimura, the trial court did not acquire
jurisdiction over his person because he was recalled to the principal office in
Tokyo, Japan before the complaint and the summons could be served on him.

During the pre-trial conferences held on September 18 and October 16, 1989
and on January 24, March 15 and May 17, 1990, no amicable settlement was
reached. Trial on the merits ensued.

On April 29, 1993, the trial court promulgated a decision and ruled that
respondent is entitled to a commission. Respondent was led to believe that
there existed an oral consultancy agreement. Hence, he performed his part of
the agreement and helped petitioners get the project. The dispositive portion of
the decision reads:
"WHEREFORE, defendants are ordered, jointly and severally, to pay to the
plaintiff: (1) the amount of P6,000,000.00, with interest at the legal rate (12%
per annum) from January 10, 1989 until fully paid; (2) 20% of this amount to
serve as reimbursement of plaintiff's attorney's fees; and (3) to pay the cost of
the suit.

"SO ORDERED.

"Makati, Metro Manila, April 29, 1993.

"[Original Signed]
"SALVADOR P. DE GUZMAN, Jr.
"Pairing Judge"9

On May 26, 1993, petitioners interposed an appeal from the decision to the
Court of Appeals.10

After due proceedings, on October 9, 1997, the Court of Appeals promulgated a

decision affirming the decision of the trial court. The Court of Appeals ruled
that preponderance of evidence favored the existence of a consultancy
agreement between the parties. It upheld the factual findings of the trial court,
thus:

"Plaintiff's evidence details the efforts he exerted after having been extended an
appointment by Marubeni as its consultant. He tendered a thanksgiving dinner
for the defendants at the Nandau Restaurant; he and Napoleon Rama visited
Marubeni's Morihiko Maruyama in the latter's office during which they
discussed the BOP II project. He arranged several conferences between the
Marubeni officials and Postmaster General Angelito Banayo. In one meeting
which took place in the office of Mr. Banayo at Liwasang Bonifacio, a Mr. Ida,
the General Manager of Sanritsu, was conspicuously present. Mr. Banayo
testified that Mr. Ida told him that Sanritsu was representing Marubeni in the
BOP II project (tsn., 6/11/90, pp. 15-17; 5/15/91, pp. 10-12). At least thirty
(30) conferences between plaintiff and defendants took place at the Marubeni
offices, lasting at least two hours each meeting. Eventually, the bid was
awarded by the Bureau of Post to Sanritsu. Aware that Sanritsu represented
Marubeni, and in fact Marubeni assigned Sanritsu to enter its bid, plaintiff
sent his bill for his services to the defendants in a letter dated April 20, 1988.
This was followed by a letter dated September 26, 1990 of plaintiff's counsel.
This time Mr. Tanaka asked for 15 days within which to contact their Head
Office to seek instructions."11
The Court of Appeals relied on the doctrine of admission by silence12 in
upholding the existence of a consultancy agreement, noting that petitioner
Tanaka's reaction to respondent's September 26, 1988 demand letter was not
consistent with their claim that there was no consultancy agreement. On the
contrary, it lent credence to respondent's claim that they had an existing
consultancy agreement. Petitioner Tanaka's response dated October 13, 1988
to the demand letter of September 26, 1988 reads:

"Referring to your letter dated September 26, 1988, we are pleased to inform
you that the issue is currently being reviewed by us and we would like to reply
to you within fifteen (15) days."13

The Court of Appeals observed that if indeed there were no consultancy

agreement, it would have been easy for petitioners to simply deny respondent's
claim. Yet, they did not do so. The conglomeration of these circumstances
bolstered the existence of the oral consultancy agreement. The dispositive
portion of the decision reads:

"WHEREFORE, the decision appealed from is hereby AFFIRMED."14

Hence, this appeal.15

In this appeal, petitioners raise the following issues: (1) whether or not there
was a consultancy agreement between petitioners and respondent; and
corollary to this, (2) whether or not respondent is entitled to receive a
commission if there was, in fact, a consultancy agreement.16

We find the appeal meritorious.

In deciding this appeal, we rely on the rule that a party who has the burden of
proof in a civil case must establish his case by a preponderance of evidence.17
When the evidence of the parties is in equipoise, or when there is a doubt as to
where the preponderance of evidence lies, the party with the burden of proof
fails and the petition must thus be denied.18

As a general rule, factual findings of the Court of Appeals are conclusive on the
parties and are not reviewed by the Supreme Court — and they carry even
more weight when the Court of Appeals affirmed the factual findings of the trial
court. It is not the function of the Supreme Court to weigh anew the evidence
passed upon by the Court of Appeals.19 Moreover, only questions of law may
be raised before the Supreme Court in a petition for review under Rule 45 of
the Revised Rules of Court.20
However, the rule is subject to exceptions,21 such as when the conclusion is
grounded on speculation, surmises, or conjectures,22 as in the instant case.

An assiduous scrutiny of the testimonial and documentary evidence extant

leads us to the conclusion that the evidence could not support a solid
conclusion that a consultancy agreement, oral or written, was agreed between
petitioners and respondent. Respondent attempted to fortify his own testimony
by presenting several corroborative witnesses. However, what was apparent in
the testimonies of these witnesses was the fact that they learned about the
existence of the consultancy agreement only because that was what respondent
told them.23

In civil cases, he who alleges a fact has the burden of proving it; a mere
allegation is not evidence.24 He must establish his cause by a preponderance
of evidence,25 which respondent failed to establish in the instant case.

Assuming for the sake of argument that an oral consultancy agreement has
been perfected between the parties, respondent Lirag could not still claim fees
on the project that has not been awarded to Marubeni.

If respondent's contentions were to be taken as truth, he would be entitled to

6% consulting fee based on the total cost of the projects obtained,26 or on
success basis.27 However, even respondent admitted that the Bureau of Post
project was not awarded to Marubeni, but to Sanritsu.28 Marubeni did not
even join the bidding for the Bureau of Post project.

Respondent could not claim from Sanritsu because of the absence of any
agreement between him and the latter. When asked to clarify whether he has
an existing consultancy agreement with Sanritsu, respondent answered in the
negative, thus:

"COURT:

One clarificatory question —

Do you have any consultancy service contract with Marubeni/San Ritsu — do

you have?

A: No, sir. I have only Consultancy Agreement on verbal basis with

Marubeni."29
Hence, how could he be entitled to the 6% commission, when it was not his
client who won in the bidding?

Respondent tried to justify his commission of roughly about P6,000,000.00 in

the guise that Marubeni and Sanritsu are sister corporations, thereby implying
the need to pierce the veil of corporate fiction. Respondent claimed that
Marubeni as the supplier and real contractor of the project hired and sub-
contracted the project to Sanritsu.

We believe that this line of reasoning is too far-fetched. Not because two foreign
companies came from the same country and closely worked together on certain
projects would the conclusion arise that one was the conduit of the other, thus
piercing the veil of corporate fiction.

To disregard the separate juridical personality of a corporation, the wrongdoing

must be clearly and convincingly established. It cannot be presumed. The
separate personality of the corporation may be disregarded only when the
corporation is used as a cloak or cover for fraud or illegality, or to work
injustice, or where necessary for the protection of creditors.30 We could not
just rely on respondent's testimony regarding the existence of the "Marubeni-
Sanritsu tandem" to justify his claim for payment of commission. This
conclusion is too conjectural to be believed.

Aside from the self-serving testimony of respondent regarding the existence of a

close working relationship between Marubeni and Sanritsu, there was nothing
that would support the conclusion that Sanritsu was an agent of Marubeni.
Mr. Lito Banayo, whom respondent presented to corroborate his testimony on
this particular issue said, thus:

"ATTY. VALERO

My question is — do you know for a fact whether the impression you have
about Japanese Trading Firm working through Agents was the relationship
between Marubeni and San Ritsu when Mr. Ida said that they were working
together?

"A: I did not know for a fact because I did not see any contract between
Marubeni and San Ritsu presented to me."31

Contrary to the trial court's finding that petitioners led respondent to believe
that they hired respondent's services as consultant, the evidence proved
otherwise. Petitioner Shoichi One, one of the officers of Marubeni Phils.,
testified that at the onset, Marubeni Phils. informed respondent that it had no
authority to commit to anything, as it all depended on the decision of the
principal headquarters in Tokyo, Japan. However, respondent Lirag insisted on
providing assistance to Marubeni to get coveted government contracts because
Marubeni might encounter difficulties due to discrimination from the
government.32 Despite such knowledge, respondent said that "it's alright" with
him as he "believes Marubeni was an old time friend so he wanted to work for
those projects."33 Hence, how could petitioners be guilty of misleading
respondent on the acceptance of the latter's offer of consultancy service?

With regard to the Court of Appeal's ratiocination that petitioner Tanaka's

response dated October 13, 1988 to the demand letter of September 26, 1988,
amounted to an implied admission of the consultancy agreement, the records
showed that, to the contrary, this fact strengthened petitioners' allegation that
Marubeni Phils. lacked the requisite authority to enter into any binding
agreement.

As explained by petitioner Shoichi One, Marubeni Phils. could enter into a

consultancy agreement only after submitting a recommendation to the
principal headquarters in Tokyo, Japan. If the office in Tokyo, Japan agrees to
hire consultants, it would then give a power of attorney to its general manager
in Manila authorizing the latter to enter into such agreement.

In the instant case, the parties did not reach the second stage as the
headquarters in Tokyo, Japan did not see it fit to hire a consultant as they
decided not to participate in the bidding. Hence, no consultancy agreement was
perfected, whether oral or written. There was no absolute acceptance of
respondent's offer of consultancy services.

Assuming arguendo that the petitioner accepted respondent's offer of

consultancy services, we could not give legal imprimatur to the agreement. The
service rendered by respondent contemplated the exploitation of personal
influence and solicitation on a public officer.

Respondent said that petitioners sought out his services because they "needed
somebody who can help them 'penetrate' and establish goodwill" with the
government.34 Petitioners found it difficult to arrange a meeting with
Postmaster General Angelito Banayo because of petitioners' reputation of
engaging in questionable transactions.35 Suddenly, through the intervention of
respondent, the postmaster general became accessible to petitioners. This
became possible because of respondent's close personal relationship with the
postmaster general, his trusted and long-time friend.36 Respondent testified,
to wit:
"Q: In other words you are saying that Marubeni and San Ritsu
representatives had a conference with the Post Master General Banayo in
connection with this Project?

"A: Yes and I was the one who made the arrangement."37

In another instance, respondent said, thus:

"WITNESS:

What we have done by that . . . first, Mr. Banayo went to Tokyo and when he
was in Tokyo we were able to arrange the Marubeni representative in Tokyo to
meet and talk with Mr. Banayo in Tokyo . . .

"COURT:

Mr. . . . ?

"A. . . . Banayo, the Post Master General and representatives of Marubeni

in Tokyo — this was done because of my intervention."38

Any agreement entered into because of the actual or supposed influence which
the party has, engaging him to influence executive officials in the discharge of
their duties, which contemplates the use of personal influence and solicitation
rather than an appeal to the judgment of the official on the merits of the object
sought is contrary to public policy.39 Consequently, the agreement, assuming
that the parties agreed to the consultancy, is null and void as against public
policy.40 Therefore, it is unenforceable before a court of justice.41

In light of the foregoing, we rule that the preponderance of evidence established

no consultancy agreement between petitioners and respondent from which the
latter could anchor his claim for a six percent (6%) consultancy fee on a project
that was not awarded to petitioners.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals

42 is hereby SET ASIDE. Civil Case No. 89-3037 filed before the Regional Trial
Court, Branch 143, Makati City is hereby DISMISSED.

No costs.
SO ORDERED.

16. CONCEPT BUILDER, INC. V. NLRC

Thus, where a sister corporation is used as a shield to evade a corporation's
subsidiary liability for damages, the corporation may not be heard to say that it
has a personality separate and distinct from the other corporation. The
piercing of the corporate veil comes into play.

This special civil action ostensibly raises the question of whether the National
Labor Relations Commission committed grave abuse of discretion when it
issued a "break-open order" to the sheriff to be enforced against personal
property found in the premises of petitioner's sister company.

Petitioner Concept Builders, Inc., a domestic corporation, with principal office

at 355 Maysan Road, Valenzuela, Metro Manila, is engaged in the construction
business. Private respondents were employed by said company as laborers,
carpenters and riggers.

On November, 1981, private respondents were served individual written notices

of termination of employment by petitioner, effective on November 30, 1981. It
was stated in the individual notices that their contracts of employment had
expired and the project in which they were hired had been completed.

Public respondent found it to be, the fact, however, that at the time of the
termination of private respondent's employment, the project in which they were
hired had not yet been finished and completed. Petitioner had to engage the
services of sub-contractors whose workers performed the functions of private
respondents.

Aggrieved, private respondents filed a complaint for illegal dismissal, unfair

labor practice and non-payment of their legal holiday pay, overtime pay and
thirteenth-month pay against petitioner.

On December 19, 1984, the Labor Arbiter rendered judgment1 ordering

petitioner to reinstate private respondents and to pay them back wages
equivalent to one year or three hundred working days.

On November 27, 1985, the National Labor Relations Commission (NLRC)

dismissed the motion for reconsideration filed by petitioner on the ground that
the said decision had already become final and executory.2
On October 16, 1986, the NLRC Research and Information Department made
the finding that private respondents' back wages amounted to P199,800.00.3

On October 29, 1986, the Labor Arbiter issued a writ of execution directing the
sheriff to execute the Decision, dated December 19, 1984. The writ was
partially satisfied through garnishment of sums from petitioner's debtor, the
Metropolitan Waterworks and Sewerage Authority, in the amount of
P81,385.34. Said amount was turned over to the cashier of the NLRC.

On February 1, 1989, an Alias Writ of Execution was issued by the Labor

Arbiter directing the sheriff to collect from herein petitioner the sum of
P117,414.76, representing the balance of the judgment award, and to reinstate
private respondents to their former positions.

On July 13, 1989, the sheriff issued a report stating that he tried to serve the
alias writ of execution on petitioner through the security guard on duty but the
service was refused on the ground that petitioner no longer occupied the
premises.

On September 26, 1986, upon motion of private respondents, the Labor Arbiter
issued a second alias writ of execution.

The said writ had not been enforced by the special sheriff because, as stated in
his progress report, dated November 2, 1989:

1. All the employees inside petitioner's premises at 355 Maysan Road,

Valenzuela, Metro Manila, claimed that they were employees of Hydro Pipes
Philippines, Inc. (HPPI) and not by respondent;

2. Levy was made upon personal properties he found in the premises;

3. Security guards with high-powered guns prevented him from removing the
properties he had levied upon.4

The said special sheriff recommended that a "break-open order" be issued to

enable him to enter petitioner's premises so that he could proceed with the
public auction sale of the aforesaid personal properties on November 7, 1989.

On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim

with the Labor Arbiter alleging that the properties sought to be levied upon by
the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-
President.

On November 23, 1989, private respondents filed a "Motion for Issuance of a

Break-Open Order," alleging that HPPI and petitioner corporation were owned
by the same incorporator/stockholders. They also alleged that petitioner
temporarily suspended its business operations in order to evade its legal
obligations to them and that private respondents were willing to post an
indemnity bond to answer for any damages which petitioner and HPPI may
suffer because of the issuance of the break-open order.

In support of their claim against HPPI, private respondents presented duly

certified copies of the General Informations Sheet, dated May 15, 1987,
submitted by petitioner to the Securities Exchange Commission (SEC) and the
General Information Sheet, dated May 25, 1987, submitted by HPPI to the
Securities and Exchange Commission.

The General Information Sheet submitted by the petitioner revealed the

following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

HPPI P 6,999,500.00

Antonio W. Lim 2,900,000.00

Dennis S. Cuyegkeng 300.00

Elisa C. Lim 100,000.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors
Antonio W. Lim Chairman

Dennis S. Cuyegkeng Member

Elisa C. Lim Member

Teodulo R. Dino Member

Virgilio O. Casino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa O. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road

Valenzuela, Metro Manila.5

On the other hand, the General Information Sheet of HPPI revealed the
following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

Antonio W. Lim P 400,000.00

Elisa C. Lim 57,700.00

AWL Trading 455,000.00

Dennis S. Cuyegkeng 40,100.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Elisa C. Lim Member

Dennis S. Cuyegkeng Member

Virgilio O. Casino Member

Teodulo R. Dino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa C. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila.6

On February 1, 1990, HPPI filed an Opposition to private respondents' motion

for issuance of a break-open order, contending that HPPI is a corporation
which is separate and distinct from petitioner. HPPI also alleged that the two
corporations are engaged in two different kinds of businesses, i.e., HPPI is a
manufacturing firm while petitioner was then engaged in construction.

On March 2, 1990, the Labor Arbiter issued an Order which denied private
respondents' motion for break-open order.

Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC
set aside the order of the Labor Arbiter, issued a break-open order and directed
private respondents to file a bond. Thereafter, it directed the sheriff to proceed
with the auction sale of the properties already levied upon. It dismissed the
third-party claim for lack of merit.

Petitioner moved for reconsideration but the motion was denied by the NLRC in
a Resolution, dated December 3, 1992.

Hence, the resort to the present petition.

Petitioner alleges that the NLRC committed grave abuse of discretion when it
ordered the execution of its decision despite a third-party claim on the levied
property. Petitioner further contends, that the doctrine of piercing the
corporate veil should not have been applied, in this case, in the absence of any
showing that it created HPPI in order to evade its liability to private
respondents. It also contends that HPPI is engaged in the manufacture and
sale of steel, concrete and iron pipes, a business which is distinct and separate
from petitioner's construction business. Hence, it is of no consequence that
petitioner and HPPI shared the same premises, the same President and the
same set of officers and subscribers.7

We find petitioner's contention to be unmeritorious.

It is a fundamental principle of corporation law that a corporation is an entity

separate and distinct from its stockholders and from other corporations to
which it may be connected.8 But, this separate and distinct personality of a
corporation is merely a fiction created by law for convenience and to promote
justice.9 So, when the notion of separate juridical personality is used to defeat
public convenience, justify wrong, protect fraud or defend crime, or is used as
a device to defeat the labor laws,10 this separate personality of the corporation
may be disregarded or the veil of corporate fiction pierced.11 This is true
likewise when the corporation is merely an adjunct, a business conduit or an
alter ego of another corporation.12

The conditions under which the juridical entity may be disregarded vary
according to the peculiar facts and circumstances of each case. No hard and
fast rule can be accurately laid down, but certainly, there are some probative
factors of identity that will justify the application of the doctrine of piercing the
corporate veil, to wit:

1. Stock ownership by one or common ownership of both corporations.

2. Identity of directors and officers.

3. The manner of keeping corporate books and records.

4. Methods of conducting the business.13

The SEC en banc explained the "instrumentality rule" which the courts have
applied in disregarding the separate juridical personality of corporations as
follows:

Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other,
the fiction of the corporate entity of the "instrumentality" may be disregarded.
The control necessary to invoke the rule is not majority or even complete stock
control but such domination of instances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of
its own, and is but a conduit for its principal. It must be kept in mind that the
control must be shown to have been exercised at the time the acts complained
of took place. Moreover, the control and breach of duty must proximately cause
the injury or unjust loss for which the complaint is made.

The test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows:

1. Control, not mere majority or complete stock control, but complete

domination, not only of finances but of policy and business practice in respect
to the transaction attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty or
dishonest and unjust act in contravention of plaintiff's legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury
or unjust loss complained of.

The absence of any one of these elements prevents "piercing the corporate veil."
In applying the "instrumentality" or "alter ego" doctrine, the courts are
concerned with reality and not form, with how the corporation operated and
the individual defendant's relationship to that operation.14

Thus the question of whether a corporation is a mere alter ego, a mere sheet or
paper corporation, a sham or a subterfuge is purely one of fact.15

In this case, the NLRC noted that, while petitioner claimed that it ceased its
business operations on April 29, 1986, it filed an Information Sheet with the
Securities and Exchange Commission on May 15, 1987, stating that its office
address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand,
HPPI, the third-party claimant, submitted on the same day, a similar
information sheet stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila.

Furthermore, the NLRC stated that:

Both information sheets were filed by the same Virgilio O. Casiño as the
corporate secretary of both corporations. It would also not be amiss to note
that both corporations had the same president, the same board of directors,
the same corporate officers, and substantially the same subscribers.

From the foregoing, it appears that, among other things, the respondent (herein
petitioner) and the third-party claimant shared the same address and/or
premises. Under this circumstances, (sic) it cannot be said that the property
levied upon by the sheriff were not of respondents.16

Clearly, petitioner ceased its business operations in order to evade the payment
to private respondents of back wages and to bar their reinstatement to their
former positions. HPPI is obviously a business conduit of petitioner corporation
and its emergence was skillfully orchestrated to avoid the financial liability that
already attached to petitioner corporation.
The facts in this case are analogous to Claparols v. Court of Industrial
Relations, 17 where we had the occasion to rule:

Respondent court's findings that indeed the Claparols Steel and Nail Plant,
which ceased operation of June 30, 1957, was SUCCEEDED by the Claparols
Steel Corporation effective the next day, July 1, 1957, up to December 7, 1962,
when the latter finally ceased to operate, were not disputed by petitioner. It is
very clear that the latter corporation was a continuation and successor of the
first entity . . . . Both predecessors and successor were owned and controlled
by petitioner Eduardo Claparols and there was no break in the succession and
continuity of the same business. This "avoiding-the-liability" scheme is very
patent, considering that 90% of the subscribed shares of stock of the Claparols
Steel Corporation (the second corporation) was owned by respondent . . .
Claparols himself, and all the assets of the dissolved Claparols Steel and Nail
plant were turned over to the emerging Claparols Steel Corporation.

It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced
as it was deliberately and maliciously designed to evade its financial obligation
to its employees.

In view of the failure of the sheriff, in the case at bar, to effect a levy upon the
property subject of the execution, private respondents had no other recourse
but to apply for a break-open order after the third-party claim of HPPI was
dismissed for lack of merit by the NLRC. This is in consonance with Section 3,
Rule VII of the NLRC Manual of Execution of Judgment which provides that:

Should the losing party, his agent or representative, refuse or prohibit the
Sheriff or his representative entry to the place where the property subject of
execution is located or kept, the judgment creditor may apply to the
Commission or Labor Arbiter concerned for a break-open order.

Furthermore, our perusal of the records shows that the twin requirements of
due notice and hearing were complied with. Petitioner and the third-party
claimant were given the opportunity to submit evidence in support of their
claim.

Hence, the NLRC did not commit any grave abuse of discretion when it affirmed
the break-open order issued by the Labor Arbiter.

Finally, we do not find any reason to disturb the rule that factual findings of
quasi-judicial agencies supported by substantial evidence are binding on this
Court and are entitled to great respect, in the absence of showing of grave
abuse of a discretion.18
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the
NLRC, dated April 23, 1992 and December 3, 1992, are AFFIRMED.

SO ORDERED.

17. PACIFIC REHOUSE CORP. V. CA

On the scales of justice precariously lie the right of a prevailing party to his
victor's cup, no more, no less; and the right of a separate entity from being
dragged by the ball and chain of the vanquished party.

The facts of this case as garnered from the Decision1 dated April 26, 2012 of
the Court of Appeals (CA) in CA-G.R. SP No. 120979 are as follows:

We trace the roots of this case to a complaint instituted with the Makati City
Regional Trial Court (RTC), Branch 66, against EIB Securities Inc. (E-
Securities) for unauthorized sale of 32,180,000 DMCI shares of private
respondents Pacific Rehouse Corporation, Pacific Concorde Corporation,
Mizpah Holdings, Inc., Forum Holdings Corporation, and East Asia Oil
Company, Inc. In its October 18, 2005 Resolution, the RTC rendered judgment
on the pleadings. The fallo reads:

WHEREFORE, premises considered, judgment is hereby rendered directing the

defendant [E-Securities] to return the plaintiffs’ [private respondents herein]
32,180,000 DMCI shares, as of judicial demand.

On the other hand, plaintiffs are directed to reimburse the defendant the
amount of [P]10,942,200.00, representing the buy back price of the 60,790,000
KPP shares of stocks at [P]0.18 per share.

SO ORDERED. x x x

The Resolution was ultimately affirmed by the Supreme Court and attained
finality.

When the Writ of Execution was returned unsatisfied, private respondents

moved for the issuance of an alias writ of execution to hold Export and
Industry Bank, Inc. liable for the judgment obligation as E- Securities is "a
wholly-owned controlled and dominated subsidiary of Export and Industry
Bank, Inc., and is[,] thus[,] a mere alter ego and business conduit of the latter.
E-Securities opposed the motion[,] arguing that it has a corporate personality
that is separate and distinct from petitioner. On July 27, 2011, private
respondents filed their (1) Reply attaching for the first time a sworn statement
executed by Atty. Ramon F. Aviado, Jr., the former corporate secretary of
petitioner and E-Securities, to support their alter ego theory; and (2) Ex-Parte
Manifestation alleging service of copies of the Writ of Execution and Motion for
Alias Writ of Execution on petitioner.

On July 29, 2011, the RTC concluded that E-Securities is a mere business
conduit or alter ego of petitioner, the dominant parent corporation, which
justifies piercing of the veil of corporate fiction. The trial court brushed aside E-
Securities’ claim of denial of due process on petitioner as "xxx case records
show that notices regarding these proceedings had been tendered to the latter,
which refused to even receive them. Clearly, [petitioner] had been sufficiently
put on notice and afforded the chance to give its side[,] yet[,] it chose not to."
Thus, the RTC disposed as follows:

WHEREFORE, xxx,

Let an Alias Writ of Execution be issued relative to the above-entitled case and
pursuant to the RESOLUTION dated October 18, 2005 and to this Order
directing defendant EIB Securities, Inc., and/or Export and Industry Bank,
Inc., to fully comply therewith.

The Branch Sheriff of this Court is directed to cause the immediate

implementation of the given alias writ in accordance with the Order of
Execution to be issued anew by the Branch Clerk of Court.

SO ORDERED. x x x

With this development, petitioner filed an Omnibus Motion (Ex Abundanti

Cautela) questioning the alias writ because it was not impleaded as a party to
the case. The RTC denied the motion in its Order dated August 26, 2011 and
directed the garnishment of P1,465,799,000.00, the total amount of the
32,180,000 DMCI shares at P45.55 per share, against petitioner and/or E-
Securities.2 x x x. (Citations omitted)

The Regional Trial Court (RTC) ratiocinated that being one and the same entity
in the eyes of the law, the service of summons upon EIB Securities, Inc. (E-
Securities) has bestowed jurisdiction over both the parent and wholly-owned
subsidiary.3 The RTC cited the cases of Sps. Violago v. BA Finance Corp. et
al.4 and Arcilla v. Court of Appeals5 where the doctrine of piercing the veil of
corporate fiction was applied notwithstanding that the affected corporation was
not brought to the court as a party. Thus, the RTC held in its Order6 dated
August 26, 2011:

WHEREFORE, premises considered, the Motion for Reconsideration with

Motion to Inhibit filed by defendant EIB Securities, Inc. is denied for lack of
merit. The Omnibus Motion Ex Abundanti C[au]tela is likewise denied for lack
of merit.

Pursuant to Rule 39, Section 10 (a) of the Rules of Court, the Branch Clerk of
Court or the Branch Sheriff of this Court is hereby directed to acquire
32,180,000 DMCI shares of stock from the Philippine Stock Exchange at the
cost of EIB Securities, Inc. and Export and Industry Bank[,] Inc. and to deliver
the same to the plaintiffs pursuant to this Court’s Resolution dated October 18,
2005.

To implement this Order, let GARNISHMENT issue against ALL THOSE

HOLDING MONEYS, PROPERTIES OF ANY AND ALL KINDS, REAL OR
PERSONAL BELONGING TO OR OWNED BY DEFENDANT EIB SECURITIES,
INC. AND/OR EXPORT AND INDUSTRY BANK[,] INC., [sic] in such amount as
may be sufficient to acquire 32,180,000 DMCI shares of stock to the Philippine
Stock Exchange, based on the closing price of Php45.55 per share of DMCI
shares as of August 1, 2011, the date of the issuance of the Alias Writ of
Execution, or the total amount of PhP1,465,799,000.00.

SO ORDERED.7

CA-G.R. SP No. 120979

Export and Industry Bank, Inc. (Export Bank) filed before the CA a petition for
certiorari with prayer for the issuance of a temporary restraining order (TRO)8
seeking the nullification of the RTC Order dated August 26, 2011 for having
been made with grave abuse of discretion amounting to lack or excess of
jurisdiction. In its petition, Export Bank made reference to several rulings9 of
the Court upholding the separate and distinct personality of a corporation.

In a Resolution10 dated September 2, 2011, the CA issued a 60-day TRO

enjoining the execution of the Orders of the RTC dated July 29, 2011 and
August 26, 2011, which granted the issuance of an alias writ of execution and
ordered the garnishment of the properties of E-Securities and/or Export Bank.
The CA also set a hearing to determine the necessity of issuing a writ of
injunction, viz:
Considering the amount ordered to be garnished from petitioner Export and
Industry Bank, Inc. and the fiduciary duty of the banking institution to the
public, there is grave and irreparable injury that may be caused to [Export
Bank] if the assailed Orders are immediately implemented. We thus resolve to
GRANT the Temporary Restraining Order effective for a period of sixty (60) days
from notice, restraining/enjoining the Sheriff of the Regional Trial Court of
Makati City or his deputies, agents, representatives or any person acting in
their behalf from executing the July 29, 2011 and August 26, 2011 Orders.
[Export Bank] is DIRECTED to POST a bond in the sum of fifty million pesos
(P50,000,000.00) within ten (10) days from notice, to answer for any damage
which private respondents may suffer by reason of this Temporary Restraining
Order; otherwise, the same shall automatically become ineffective.

Let the HEARING be set on September 27, 2011 at 2:00 in the afternoon at the
Paras Hall, Main Building, Court of Appeals, to determine the necessity of
issuing a writ of preliminary injunction. The Division Clerk of Court is
DIRECTED to notify the parties and their counsel with dispatch.

xxxx

SO ORDERED.11

Pacific Rehouse Corporation (Pacific Rehouse), Pacific Concorde Corporation,

Mizpah Holdings, Inc., Forum Holdings Corporation and East Asia Oil
Company, Inc. (petitioners) filed their Comment12 to Export Bank’s petition
and proffered that the cases mentioned by Export Bank are inapplicable owing
to their clearly different factual antecedents. The petitioners alleged that unlike
the other cases, there are circumstances peculiar only to E-Securities and
Export Bank such as: 499,995 out of 500,000 outstanding shares of stocks of
E-Securities are owned by Export Bank;13 Export Bank had actual knowledge
of the subject matter of litigation as the lawyers who represented E-Securities
are also lawyers of Export Bank.14 As an alter ego, there is no need for a
finding of fraud or illegality before the doctrine of piercing the veil of corporate
fiction can be applied.15

After oral arguments before the CA, the parties were directed to file their
respective memoranda.16

On October 25, 2011, the CA issued a Resolution,17 granting Export Bank’s

application for the issuance of a writ of preliminary injunction, viz:

WHEREFORE, finding [Export Bank’s] application for the ancillary injunctive

relief to be meritorious, and it further appearing that there is urgency and
necessity in restraining the same, a Writ of Preliminary Injunction is hereby
GRANTED and ISSUED against the Sheriff of the Regional Trial Court of
Makati City, Branch 66, or his deputies, agents, representatives or any person
acting in their behalf from executing the July 29, 2011 and August 26, 2011
Orders. Public respondents are ordered to CEASE and DESIST from enforcing
and implementing the subject orders until further notice from this Court.18

The petitioners filed a Manifestation19 and Supplemental Manifestation20

challenging the above-quoted CA resolution for lack of concurrence of Associate
Justice Socorro B. Inting (Justice Inting), who was then on official leave.

On December 22, 2011, the CA, through a Special Division of Five, issued
another Resolution,21 which reiterated the Resolution dated October 25, 2011
granting the issuance of a writ of preliminary injunction.

On January 2, 2012, one of the petitioners herein, Pacific Rehouse filed before
the Court a petition for certiorari22 under Rule 65, docketed as G.R. No.
199687, demonstrating its objection to the Resolutions dated October 25, 2011
and December 22, 2011 of the CA.

On April 26, 2012, the CA rendered the assailed Decision23 on the merits of
the case, granting Export Bank’s petition. The CA disposed of the case in this
wise:

We GRANT the petition. The Orders dated July 29, 2011 and August 26, 2011
of the Makati City Regional Trial Court, Branch 66, insofar as [Export Bank] is
concerned, are NULLIFIED. The Writ of Preliminary Injunction (WPI) is
rendered PERMANENT.

SO ORDERED.24

The CA explained that the alter ego theory cannot be sustained because
ownership of a subsidiary by the parent company is not enough justification to
pierce the veil of corporate fiction. There must be proof, apart from mere
ownership, that Export Bank exploited or misused the corporate fiction of E-
Securities. The existence of interlocking incorporators, directors and officers
between the two corporations is not a conclusive indication that they are one
and the same.25 The records also do not show that Export Bank has complete
control over the business policies, affairs and/or transactions of E-Securities.
It was solely E-Securities that contracted the obligation in furtherance of its
legitimate corporate purpose; thus, any fall out must be confined within its
limited liability.26
The petitioners, without filing a motion for reconsideration, filed a Petition for
Review27 under Rule 45 docketed as G.R. No. 201537,28 impugning the
Decision dated April 26, 2012 of the CA.

Considering that G.R. Nos. 199687 and 201537 originated from the same set of
facts, involved the same parties and raised intertwined issues, the cases were
then consolidated per Resolution dated September 26, 2012, for a thorough
discussion of the merits of the case.

Issues

In précis, the issues for resolution of this Court are the following:

In G.R. No. 199687,

WHETHER THE CA COMMITTED GRAVE ABUSE OF DISCRETION IN

GRANTING EXPORT BANK’S APPLICATION FOR THE ISSUANCE OF A WRIT
OF PRELIMINARY INJUNCTION.

In G.R. No. 201537,

I.

WHETHER THE CA COMMITTED A REVERSIBLE ERROR IN RULING THAT

EXPORT BANK MAY NOT BE HELD LIABLE FOR A FINAL AND EXECUTORY
JUDGMENT AGAINST E-SECURITIES IN AN ALIAS WRIT OF EXECUTION BY
PIERCING ITS VEIL OF CORPORATE FICTION; and

II.

WHETHER THE CA COMMITTED A REVERSIBLE ERROR IN RULING THAT

THE ALTER EGO DOCTRINE IS NOT APPLICABLE.

Ruling of the Court

G.R. No. 199687

The Resolution dated October 25, 2011 was initially challenged by the
petitioners in its Manifestation29 and Supplemental Manifestation30 due to
the lack of concurrence of Justice Inting, which according to the petitioners
rendered the aforesaid resolution null and void.

To the petitioners’ mind, Section 5, Rule VI of the Internal Rules of the CA

(IRCA)31 requires the submission of the resolution granting an application for
TRO or preliminary injunction to the absent Justice/s when they report back
to work for ratification, modification or recall, such that when the absent
Justice/s do not agree with the issuance of the TRO or preliminary injunction,
the resolution is recalled and without force and effect.32 Since the resolution
which granted the application for preliminary injunction appears short of the
required number of consensus, owing to the absence of Justice Inting’s
signature, the petitioners contest the validity of said resolution.

The petitioners also impugn the CA Resolution dated December 22, 2011
rendered by the Special Division of Five. The petitioners maintain that
pursuant to Batas Pambansa Bilang 12933 and the IRCA,34 such division is
created only when the three members of a division cannot reach a unanimous
vote in deciding a case on the merits.35 Furthermore, for petitioner Pacific
Rehouse, this Resolution is likewise infirm because the purpose of the
formation of the Special Division of Five is to decide the case on the merits and
not to grant Export Bank’s application for a writ of preliminary injunction.36

We hold that the opposition to the CA resolutions is already nugatory because

the CA has already rendered its Decision on April 16, 2012, which disposed of
the substantial merits of the case. Consequently, the petitioners’ concern that
the Special Division of Five should have been created to resolve cases on the
merits has already been addressed by the rendition of the CA Decision dated
April 16, 2012.

"It is well-settled that courts will not determine questions that have become
moot and academic because there is no longer any justiciable controversy to
speak of. The judgment will not serve any useful purpose or have any practical
legal effect because, in the nature of things, it cannot be enforced."37 In such
cases, there is no actual substantial relief to which the petitioners would be
entitled to and which would be negated by the dismissal of the petition.38
Thus, it would be futile and pointless to address the issue in G.R. No. 199687
as this has become moot and academic.

G.R. No. 201537

The petitioners bewail that the certified true copy of the CA Decision dated
April 26, 2012 along with its Certification at the bottom portion were not
signed by the Chairperson39 of the Special Division of Five; thus, it is not
binding upon the parties.40 The petitioners quoted this Court’s
pronouncement in Limkaichong v. Commission on Elections,41 that a decision
must not only be signed by the Justices who took part in the deliberation, but
must also be promulgated to be considered a Decision.42

A cursory glance on a copy of the signature page43 of the decision attached to

the records would show that, indeed, the same was not signed by CA Associate
Justice Magdangal M. De Leon. However, it must be noted that the CA, on May
7, 2012, issued a Resolution44 explaining that due to inadvertence, copies of
the decision not bearing the signature of the Chairperson were sent to the
parties on the same day of promulgation. The CA directed the Division Clerk of
Court to furnish the parties with copies of the signature page with the
Chairperson’s signature. Consequently, as the mistake was immediately
clarified and remedied by the CA, the lack of the Chairperson’s signature on
the copies sent to the parties has already become a non-issue.

It must be emphasized that the instant cases sprang from Pacific Rehouse
Corporation v. EIB Securities, Inc.45 which was decided by this Court last
October 13, 2010. Significantly, Export Bank was not impleaded in said case
but was unexpectedly included during the execution stage, in addition to E-
Securities, against whom the writ of execution may be enforced in the Order46
dated July 29, 2011 of the RTC. In including Export Bank, the RTC considered
E-Securities as a mere business conduit of Export Bank.47 Thus, one of the
arguments interposed by the latter in its Opposition48 that it was never
impleaded as a defendant was simply set aside.

This action by the RTC begs the question: may the RTC enforce the alias writ of
execution against Export Bank?

The question posed before us is not novel.

The Court already ruled in Kukan International Corporation v. Reyes49 that

compliance with the recognized modes of acquisition of jurisdiction cannot be
dispensed with even in piercing the veil of corporate fiction, to wit:

The principle of piercing the veil of corporate fiction, and the resulting
treatment of two related corporations as one and the same juridical person
with respect to a given transaction, is basically applied only to determine
established liability; it is not available to confer on the court a jurisdiction it
has not acquired, in the first place, over a party not impleaded in a case.
Elsewise put, a corporation not impleaded in a suit cannot be subject to the
court’s process of piercing the veil of its corporate fiction. In that situation, the
court has not acquired jurisdiction over the corporation and, hence, any
proceedings taken against that corporation and its property would infringe on
its right to due process. Aguedo Agbayani, a recognized authority on
Commercial Law, stated as much:

"23. Piercing the veil of corporate entity applies to determination of liability not
of jurisdiction. x x x

This is so because the doctrine of piercing the veil of corporate fiction comes to
play only during the trial of the case after the court has already acquired
jurisdiction over the corporation. Hence, before this doctrine can be applied,
based on the evidence presented, it is imperative that the court must first have
jurisdiction over the corporation. x x x"50 (Citations omitted)

From the preceding, it is therefore correct to say that the court must first and
foremost acquire jurisdiction over the parties; and only then would the parties
be allowed to present evidence for and/or against piercing the veil of corporate
fiction. If the court has no jurisdiction over the corporation, it follows that the
court has no business in piercing its veil of corporate fiction because such
action offends the corporation’s right to due process.

"Jurisdiction over the defendant is acquired either upon a valid service of

summons or the defendant’s voluntary appearance in court. When the
defendant does not voluntarily submit to the court’s jurisdiction or when there
is no valid service of summons, ‘any judgment of the court which has no
jurisdiction over the person of the defendant is null and void.’"51 "The
defendant must be properly apprised of a pending action against him and
assured of the opportunity to present his defenses to the suit. Proper service of
summons is used to protect one’s right to due process."52

As Export Bank was neither served with summons, nor has it voluntarily
appeared before the court, the judgment sought to be enforced against E-
Securities cannot be made against its parent company, Export Bank. Export
Bank has consistently disputed the RTC jurisdiction, commencing from its
filing of an Omnibus Motion53 by way of special appearance during the
execution stage until the filing of its Comment54 before the Court wherein it
was pleaded that "RTC [of] Makati[, Branch] 66 never acquired jurisdiction over
Export [B]ank. Export [B]ank was not pleaded as a party in this case. It was
never served with summons by nor did it voluntarily appear before RTC [of]
Makati[, Branch] 66 so as to be subjected to the latter’s jurisdiction."55

In dispensing with the requirement of service of summons or voluntary

appearance of Export Bank, the RTC applied the cases of Violago and Arcilla.
The RTC concluded that in these cases, the Court decided that the doctrine of
piercing the veil of corporate personality can be applied even when one of the
affected parties has not been brought to the Court as a party.56
A closer perusal on the rulings of this Court in Violago and Arcilla, however,
reveals that the RTC misinterpreted the doctrines on these cases. We agree
with the CA that these cases are not congruent to the case at bar. In Violago,
Spouses Pedro and Florencia Violago (Spouses Violago) filed a third party
complaint against their cousin Avelino Violago (Avelino), who is also the
president of Violago Motor Sales Corporation (VMSC), for selling them a vehicle
which was already sold to someone else. VMSC was not impleaded as a third
party defendant. Avelino contended that he was not a party to the transaction
personally, but VMSC. The Court ruled that "[t]he fact that VMSC was not
included as defendant in [Spouses Violago’s] third party complaint does not
preclude recovery by Spouses Violago from Avelino; neither would such non-
inclusion constitute a bar to the application of the piercing-of-the-corporate-
veil doctrine."57 It should be pointed out that although VMSC was not made a
third party defendant, the person who was found liable in Violago, Avelino, was
properly made a third party defendant in the first instance. The present case
could not be any more poles apart from Violago, because Export Bank, the
parent company which was sought to be accountable for the judgment against
E-Securities, is not a party to the main case.

In Arcilla, meanwhile, Calvin Arcilla (Arcilla) obtained a loan in the name of

Csar Marine Resources, Inc. (CMRI) from Emilio Rodulfo. A complaint was then
filed against Arcilla for non-payment of the loan. CMRI was not impleaded as a
defendant. The trial court eventually ordered Arcilla to pay the judgment
creditor for such loan. Arcilla argued that he is not personally liable for the
adjudged award because the same constitutes a corporate liability which
cannot even bind the corporation as the latter is not a party to the collection
suit. The Court made the succeeding observations:

[B]y no stretch of even the most fertile imagination may one be able to conclude
that the challenged Amended Decision directed Csar Marine Resources, Inc. to
pay the amounts adjudged. By its clear and unequivocal language, it is the
petitioner who was declared liable therefor and consequently made to pay. x x
x, even if We are to assume arguendo that the obligation was incurred in the
name of the corporation, the petitioner would still be personally liable therefor
because for all legal intents and purposes, he and the corporation are one and
the same. Csar Marine Resources, Inc. is nothing more than his business
conduit and alter ego. The fiction of a separate juridical personality conferred
upon such corporation by law should be disregarded. x x x.58 (Citation
omitted)

It is important to bear in mind that although CMRI was not a party to the suit,
it was Arcilla, the defendant himself who was found ultimately liable for the
judgment award. CMRI and its properties were left untouched from the main
case, not only because of the application of the alter ego doctrine, but also
because it was never made a party to that case.
The disparity between the instant case and those of Violago and Arcilla is that
in said cases, although the corporations were not impleaded as defendant, the
persons made liable in the end were already parties thereto since the inception
of the main case. Consequently, it cannot be said that the Court had, in the
absence of fraud and/or bad faith, applied the doctrine of piercing the veil of
corporate fiction to make a non-party liable. In short, liabilities attached only
to those who are parties. None of the non-party corporations (VMSC and CMRI)
were made liable for the judgment award against Avelino and Arcilla.

The Alter Ego Doctrine is not applicable

"The question of whether one corporation is merely an alter ego of another is

purely one of fact. So is the question of whether a corporation is a paper
company, a sham or subterfuge or whether petitioner adduced the requisite
quantum of evidence warranting the piercing of the veil of respondent’s
corporate entity."59

As a rule, the parties may raise only questions of law under Rule 45, because
the Supreme Court is not a trier of facts. Generally, we are not duty-bound to
analyze again and weigh the evidence introduced in and considered by the
tribunals below.60 However, justice for all is of primordial importance that the
Court will not think twice of reviewing the facts, more so because the RTC and
the CA arrived in contradicting conclusions.

"It is a fundamental principle of corporation law that a corporation is an entity

separate and distinct from its stockholders and from other corporations to
which it may be connected. But, this separate and distinct personality of a
corporation is merely a fiction created by law for convenience and to promote
justice. So, when the notion of separate juridical personality is used to defeat
public convenience, justify wrong, protect fraud or defend crime, or is used as
a device to defeat the labor laws, this separate personality of the corporation
may be disregarded or the veil of corporate fiction pierced. This is true likewise
when the corporation is merely an adjunct, a business conduit or an alter ego
of another corporation."61

"Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other,
the fiction of the corporate entity of the "instrumentality" may be disregarded.
The control necessary to invoke the rule is not majority or even complete stock
control but such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of
its own, and is but a conduit for its principal. It must be kept in mind that the
control must be shown to have been exercised at the time the acts complained
of took place. Moreover, the control and breach of duty must proximately cause
the injury or unjust loss for which the complaint is made."62
The Court has laid down a three-pronged control test to establish when the
alter ego doctrine should be operative:

(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances 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.63

The absence of any one of these elements prevents ‘piercing the corporate veil’
in applying the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are
concerned with reality and not form, with how the corporation operated and
the individual defendant’s relationship to that operation.64 Hence, all three
elements should concur for the alter ego doctrine to be applicable.

In its decision, the RTC maintained that the subsequently enumerated factors
betray the true nature of E-Securities as a mere alter ego of Export Bank:

1. Defendant EIB Securities, a subsidiary corporation 100% totally owned by

Export and Industry Bank, Inc., was only re-activated by the latter in 2002-
2003 and the continuance of its operations was geared for no other reason
tha[n] to serve as the securities brokerage arm of said parent corporation bank;

2. It was the parent corporation bank that provided and infused the fresh
working cash capital needed by defendant EIB Securities which prior thereto
was non-operating and severely cash-strapped. [This was so attested by the
then Corporate Secretary of both corporations, Atty. Ramon Aviado, Jr., in his
submitted Sworn Statement which is deemed allowable "evidence on motion",
under Sec. 7, Rule 133, Rules on Evidence; Bravo vs. Borja, 134 SCRA 438];

3. For effective control purposes, defendant EIB Securities and its operating
office and staff are all housed in Exportbank Plaza located at Chino Roces cor.
Sen. Gil Puyat Avenue, Makati City which is the same building w[h]ere the
bank parent corporation has its headquarters;
4. As shown in the General Information Sheets annually filed with the S.E.C.
from 2002 to 2011, both defendant EIB Securities and the bank parent
corporation share common key Directors and corporate officers. Three of the 5-
man Board of Directors of defendant EIB Securities are Directors of the bank
parent corporation, namely: Jaime C. Gonzales, Pauline C. Tan and Dionisio E.
Carpio, Jr. In addition, Mr. Gonzales is Chairman of the Board of both
corporations, whereas Pauline C. Tan is concurrently President/General
Manager of EIB Securities, and Dionisio Carpio Jr., is not only director of the
bank, but also Director Treasurer of defendant EIB Securities;

5. As admitted by the bank parent corporation in its consolidated audited

financial statements[,] EIB Securities is a CONTROLLED SUBSIDIARY, and for
which reason its financial condition and results of operations are included and
integrated as part of the group’s consolidated financial statements, examined
and audited by the same auditing firm;

6. The lawyers handling the suits and legal matters of defendant EIB Securities
are the same lawyers in the Legal Department of the bank parent
corporation.1âwphi1 The Court notes that in [the] above-entitled suit, the
lawyers who at the start represented said defendant EIB Securities and filed all
the pleadings and filings in its behalf are also the lawyers in the Legal Services
Division of the bank parent corporation. They are Attys. Emmanuel A. Silva,
Leonardo C. Bool, Riva Khristine E. Maala and Ma. Esmeralda R. Cunanan, all
of whom worked at the Legal Services Division of Export Industry Bank located
at 36/F, Exportbank Plaza, Don Chino Roces Avenue, cor. Sen. Gil Puyat
Avenue, Makati City.

7. Finally[,] and this is very significant, the control and sway that the bank
parent corporation held over defendant EIB Securities was prevailing in June
2004 when the very act complained of in plaintiff’s Complaint took place,
namely the unauthorized disposal of the 32,180,000 DMCI shares of stock.
Being then under the direction and control of the bank parent corporation, the
unauthorized disposal of those shares by defendant EIB Securities is
attributable to, and the responsibility of the former.65

All the foregoing circumstances, with the exception of the admitted stock
ownership, were however not properly pleaded and proved in accordance with
the Rules of Court.66 These were merely raised by the petitioners for the first
time in their Motion for Issuance of an Alias Writ of Execution67 and Reply,68
which the Court cannot consider. "Whether the separate personality of the
corporation should be pierced hinges on obtaining facts appropriately pleaded
or proved."69

Albeit the RTC bore emphasis on the alleged control exercised by Export Bank
upon its subsidiary E-Securities, "[c]ontrol, by itself, does not mean that the
controlled corporation is a mere instrumentality or a business conduit of the
mother company. Even control over the financial and operational concerns of a
subsidiary company does not by itself call for disregarding its corporate fiction.
There must be a perpetuation of fraud behind the control or at least a
fraudulent or illegal purpose behind the control in order to justify piercing the
veil of corporate fiction. Such fraudulent intent is lacking in this case."70

Moreover, there was nothing on record demonstrative of Export Bank’s

wrongful intent in setting up a subsidiary, E-Securities. If used to perform
legitimate functions, a subsidiary’s separate existence shall be respected, and
the liability of the parent corporation as well as the subsidiary will be confined
to those arising in their respective business.71 To justify treating the sole
stockholder or holding company as responsible, it is not enough that the
subsidiary is so organized and controlled as to make it "merely an
instrumentality, conduit or adjunct" of its stockholders. It must further appear
that to recognize their separate entities would aid in the consummation of a
wrong.72

As established in the main case73 and reiterated by the CA, the subject
32,180,000 DMCI shares which E-Securities is obliged to return to the
petitioners were originally bought at an average price of P0.38 per share and
were sold for an average price of P0.24 per share. The proceeds were then used
to buy back 61,100,000 KPP shares earlier sold by E-Securities. Quite
unexpectedly however, the total amount of these DMCI shares ballooned to
P1,465,799,000.00.74 It must be taken into account that this unexpected
turnabout did not inure to the benefit of E-Securities, much less Export Bank.

Furthermore, ownership by Export Bank of a great majority or all of stocks of

E-Securities and the existence of interlocking directorates may serve as badges
of control, but ownership of another corporation, per se, without proof of
actuality of the other conditions are insufficient to establish an alter ego
relationship or connection between the two corporations, which will justify the
setting aside of the cover of corporate fiction. The Court has declared that
"mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not of itself sufficient ground
for disregarding the separate corporate personality." The Court 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."75

While the courts have been granted the colossal authority to wield the sword
which pierces through the veil of corporate fiction, concomitant to the exercise
of this power, is the responsibility to uphold the doctrine of separate entity,
when rightly so; as it has for so long encouraged businessmen to enter into
economic endeavors fraught with risks and where only a few dared to venture.
Hence, any application of the doctrine of piercing the corporate 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 its 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.76

In closing, we understand that the petitioners are disgruntled at the turnout of

this case-that they cannot enforce the award due them on its entirety; however,
the Court cannot supplant a remedy which is not sanctioned by our laws and
prescribed rules.

WHEREFORE, the petition in G.R. No. 199687 is hereby DISMISSED for having
been rendered moot and academic. The petition in G.R. No. 201537,
meanwhile, is hereby DENIED for lack of merit. Consequently, the Decision
dated April 26, 2012 of the Court of Appeals in CA-G.R. SP No. 120979 is
AFFIRMED.

SO ORDERED.

18. REPUBLIC V. MEGA PCIFIC ESOLUTIONS, INC.

The instant case is an offshoot of this Court's Decision dated 13 January 2004
(2004 Decision) in a related case entitled Information Technology Foundation of
the Philippines v. Commission on Elections.1chanrobleslaw

In the 2004 case, We declared void the automation contract executed by

respondent Mega Pacific eSolutions, Inc. (MPEI) and the Commission on
Elections (COMELEC) for the supply of automated counting machines (ACMs)
for the 2004 national elections.

The present case involves the attempt of petitioner Republic of the Philippines
to cause the attachment of the properties owned by respondent MPEI, as well
as by its incorporators and stockholders (individual respondents in this case),
in order to secure petitioner's interest and to ensure recovery of the payments
it made to respondents for the invalidated automation contract.

At bench is a Rule 45 Petition assailing the Amended Decision dated 22

September 2008 (Amended Decision) issued by the Court of Appeals (CA) in
CA-G.R. SP No. 95988.2 In said Amended Decision, the CA directed the
remand of the case to the Regional Trial Court of Makati City, Branch 59 (RTC
Makati) for the reception of evidence in relation to petitioner's application for
the issuance of a writ of preliminary attachment. The CA had reconsidered and
set aside its previous Decision dated 31 January 2008 (First Decision)3
entitling petitioner to the issuance of said writ.

Summarized below are the relevant facts of the case, some of which have
already been discussed in this Court's 2004 Decision:

chanRoblesvirtualLawlibrary

The Facts

Republic Act No. 8436 authorized the COMELEC to use an automated election
system for the May 1998 elections. However, the automated system failed to
materialize and votes were canvassed manually during the 1998 and the 2001
elections.

For the 2004 elections, the COMELEC again attempted to implement the
automated election system. For this purpose, it invited bidders to apply for the
procurement of supplies, equipment, and services. Respondent MPEI, as lead
company, purportedly formed a joint venture - known as the Mega Pacific
Consortium (MPC) - together with We Solv, SK C & C, ePLDT, Election.com and
Oracle. Subsequently, MPEI, on behalf of MPC, submitted its bid proposal to
COMELEC.

The COMELEC evaluated various bid offers and subsequently found MPC and
another company eligible to participate in the next phase of the bidding
process.4 The two companies were referred to the Department of Science and
Technology (DOST) for technical evaluation. After due assessment, the Bids
and Awards Committee (BAC) recommended that the project be awarded to
MPC. The COMELEC favorably acted on the recommendation and issued
Resolution No. 6074, which awarded the automation project to MPC.

Despite the award to MPC, the COMELEC and MPEI executed on 2 June 2003
the Automated Counting and Canvassing Project Contract (automation
contract)5 for the aggregate amount of P1,248,949,088. MPEI agreed to supply
and deliver 1,991 units of ACMs and such other equipment and materials
necessary for the computerized electoral system in the 2004 elections.
Pursuant to the automation contract, MPEI delivered 1,991 ACMs to the
COMELEC. The latter, for its part, made partial payments to MPEI in the
aggregate amount of P1.05 billion.

The full implementation of the automation contract was rendered impossible by

the fact that, after a painstaking legal battle, this Court in its 2004 Decision
declared the contract null and void.6 We held that the COMELEC committed a
clear violation of law and jurisprudence, as well as a reckless disregard of its
own bidding rules and procedure. In addition, the COMELEC entered into the
contract with inexplicable haste, and without adequately checking and
observing mandatory financial, technical, and legal requirements. In a
subsequent Resolution, We summarized the COMELEC's grave abuse of
discretion as having consisted of the following:7
By a formal Resolution, it awarded the project to "Mega Pacific Consortium," an
entity that had not participated in the bidding. Despite this grant, Comelec
entered into the actual Contract with "Mega Pacific eSolutions, Inc." (MPEI), a
company that joined the bidding process but did not meet the eligibility
requirements.

Comelec accepted and irregularly paid for MPEI's ACMs that had failed the
accuracy requirement of 99.9995 percent set up by the Comelec bidding rules.
Acknowledging that this rating could have been too steep, the Court
nonetheless noted that "the essence of public bidding is violated by the practice
of requiring very high standards or unrealistic specifications that cannot be
met, x x x only to water them down after the award is made. Such scheme,
which discourages the entry of bona fide bidders, is in fact a sure indication of
fraud in the bidding, designed to eliminate fair competition."

The software program of the counting machines likewise failed to detect

previously downloaded precinct results and to prevent them from being
reentered. This failure, which has not been corrected x x x, would have allowed
unscrupulous persons to repeatedly feed into the computers the results
favorable to a particular candidate, an act that would have translated into
massive election fraud by just a few key strokes.

Neither were the ACMs able to print audit trails without loss of data - a
mandatory requirement under Section 7 of Republic Act No. 8436. Audit trails
would enable the Comelec to document the identities of the ACM operators
responsible for data entry and downloading, as well as the times when the
various data were processed, in order to forestall fraud and to identify the
perpetrators. The absence of audit trails would have posed a serious threat to
free and credible elections.

Comelec failed to explain satisfactorily why it had ignored its own bidding rules
and requirements. It admitted that the software program used to test the ACMs
was merely a "demo" version, and that the final one to be actually used in the
elections was still being developed. By awarding the Contract and irregularly
paying for the supply of the ACMs without having seen — much less, evaluated
— the final product being purchased, Comelec desecrated the law on public
bidding. It would have allowed the winner to alter its bid substantially, without
any public bidding.
All in all, Comelec subverted the essence of public bidding: to give the public
an opportunity for fair competition and a clear basis for a precise comparison
of bids.8 (Emphasis supplied)
As a consequence of the nullification of the automation contract, We directed
the Office of the Ombudsman to determine the possible criminal liability of
persons responsible for the contract.9 This Court likewise directed the Office of
the Solicitor General to protect the government from the ill effects of the illegal
disbursement of public funds in relation to the automation
contract.10chanrobleslaw

After the declaration of nullity of the automation contract, the following

incidents transpired:ChanRoblesVirtualawlibrary
Private respondents in the 2004 case moved for reconsideration of the 2004
Decision, but the motion was denied by this Court in a Resolution dated 17
February 2004 (2004 Resolution).11chanrobleslaw

The COMELEC filed a "Most Respectful Motion for Leave to Use the Automated
Counting Machines in the Custody of the Commission on Elections for use in
the 8 August 2005 Elections in the Autonomous Region for Muslim Mindanao"
dated 9 December 2004 (Motion for Leave to Use ACMs), which was denied by
this Court in its Resolution dated 15 June 2005 (2005 Resolution).

Atty. Romulo B. Macalintal (Macalintal) filed an "Omnibus Motion for Leave of

Court (1) to Reopen the Case; and (2) to Intervene and Admit the Attached
Petition in Intervention," which was denied by this Court in its Resolution
dated 22 August 2006 (2006 Resolution); and cralawlawlibrary

Respondent MPEI filed a Complaint for Damages12 (Complaint) with the RTC
Makati, from which the instant case arose.
The above-mentioned incidents are discussed in more detail below.

BACKGROUND PROCEEDINGS

Private respondents' Motion for Reconsideration

Private respondents in the 2004 case moved for reconsideration of the 2004
Decision. Aside from reiterating the procedural and substantive arguments
they had raised, they also argued that the 2004 Decision had exposed them to
possible criminal prosecution.13chanrobleslaw

This Court denied the motion in its 2004 Resolution and ruled that no
prejudgment had been made on private respondents' criminal liability. We
further ruled that although the 2004 Decision stated that the Ombudsman
shall "determine the criminal liability, if any, of the public officials (and
conspiring private individuals, if any) involved in the subject Resolution and
Contract," We did not make any premature conclusion on any wrongdoing, but
precisely directed the Ombudsman to make that determination after
conducting appropriate proceedings and observing due process.

Similarly, it appears from the record that several criminal and administrative
Complaints had indeed been filed with the Ombudsman in relation to the
declaration of nullity of the automation contract.14 The Complaints were filed
against several public officials and the individual respondents in this
case.15chanrobleslaw

In a Resolution issued on 28 June 2006,16 the Ombudsman recommended the

filing of informations before the Sandiganbayan against some of the public
officials and the individual respondents17 for violation of Section 3(e) of
Republic Act No. 3019 (the Anti-Graft and Corrupt Practices Act). However, on
27 September 2006,18 upon reconsideration, the Ombudsman reversed its
earlier ruling in a Supplemental Resolution (September Resolution), directing
the dismissal of the criminal cases against the public officials, as well as the
individual respondents, for lack of probable cause.19chanrobleslaw

With this development, a Petition for Certiorari was filed with this Court on 13
October 2006 and docketed as G.R. No. 174777.20 In the Petition, several
individuals21 assailed the September Resolution of the Ombudsman finding no
probable cause to hold respondents criminally liable. The case remains
pending with this Court as of this date.

COMELEC's Motion for Leave to Use ACMs in the ARMM Elections

The COMELEC filed a motion with this Court requesting permission to use the
1,991 ACMs previously delivered by respondent MPEI, for the ARMM elections,
then slated to be held on 8 August 2005. In its motion, the COMELEC claimed
that automation of the ARMM elections was mandated by Republic Act No.
9333, and since the government had no available funds to finance the
automation of those elections, the ACMs could be utilized for the 2005
elections.

This Court denied the Motion in Our 2005 Resolution. We ruled that allowing
the use of the ACMs would have the effect of illegally reversing and subverting
a final decision We had promulgated. We further ruled that the COMELEC was
asking for permission to do what it had precisely been prohibited from doing
under the 2004 Decision. This Court also ruled that the grant of the motion
would bar or jeopardize the recovery of government funds paid to respondents.
Considering that the COMELEC did not present any evidence to prove that the
defects had been addressed, We held that the use of the ACMs and the
software would expose the ARMM elections to the same electoral ills pointed
out in the 2004 Decision.

Atty. Macalintal's Omnibus Motion

Atty. Romulo Macalintal sought to reopen the 2004 case in order that he may
be allowed to intervene as a taxpayer and citizen. His purpose for intervening
was to seek another testing of the ACMs with the ultimate objective of allowing
the COMELEC to use them, this time for the 2007 national elections.

This Court denied his motion in Our 2006 Resolution, ruling that Atty.
Macalintal failed to demonstrate that certain supervening events and legal
circumstances had transpired to justify the reliefs sought. We in fact found
that, after Our determination that the ACMs had failed to pass legally
mandated technical requirements in 2004, they were simply put in storage.
The ACMs had remained idle and unused since the last evaluation, at which
they failed to hurdle crucial tests. Consequently, We ruled that if the ACMs
were not good enough for the 2004 national elections or the 2005 ARMM
elections, then neither would they be good enough for the 2007 national
elections, considering that nothing was done to correct the flaws that had been
previously underscored in the 2004 Decision. We held that granting the motion
would be tantamount to rendering the 2004 Decision totally ineffective and
nugatory.

Moreover, because of our categorical ruling that the whole bidding process was
void and fraudulent, the proposal to use the illegally procured, demonstratively
defective, and fraud-prone ACMs was rendered nonsensical.
Thus:ChanRoblesVirtualawlibrary
We stress once again that the Contract entered into by the Comelec for the
supply of the ACMs was declared VOID by the Court in its Decision, because of
clear violations of law and jurisprudence, as well as the reckless disregard by
the Commission of its own bidding rules and procedure. In addition, the poll
body entered into the Contract with inexplicable haste, without adequately
checking and observing mandatory financial, technical and legal requirements.
As explained in our Decision, Comelec's gravely abusive acts consisted of the
following:

chanRoblesvirtualLawlibraryx x x x

To muddle the issue, Comelec keeps on saying that the "winning" bidder
presented a lower price than the only other bidder. It ignored the fact that the
whole bidding process was VOID and FRAUDULENT. How then could there
have been a "winning" bid?22 (Emphasis supplied)
THE INSTANT CASE

Complaint for Damages filed by respondents with the RTC Makati and
petitioner's Answer with Counterclaim, with an application for a writ of
preliminary attachment, from which the instant case arose

Upon the finality of the declaration of nullity of the automation contract,

respondent MPEI filed a Complaint for Damages before the RTC Makati,
arguing that, notwithstanding the nullification of the automation contract, the
COMELEC was still bound to pay the amount of P200,165,681.89. This
amount represented the difference between the value of the ACMs and the
support services delivered on one hand, and on the other, the payment
previously made by the COMELEC.23chanrobleslaw

Petitioner filed its Answer with Counterclaim24 and argued that respondent
MPEI could no longer recover the unpaid balance from the void automation
contract, since the payments made were illegal disbursements of public funds.
It contended that a null and void contract vests no rights and creates no
obligations, and thus produces no legal effect at all. Petitioner further posited
that respondent MPEI could not hinge its claim upon the principles of unjust
enrichment and quasi-contract, because such presume that the acts by which
the authors thereof become obligated to each other are lawful, which was not
the case herein.25cralawredchanrobleslaw

By way of a counterclaim, petitioner demanded from respondents the return of

the payments made pursuant to the automation contract.26 It argued that
individual respondents, being the incorporators of MPEI, likewise ought to be
impleaded and held accountable for MPEI's liabilities. The creation of MPC was,
after all, merely an ingenious scheme to feign eligibility to bid.27chanrobleslaw

Pursuant to Section 1(d) of Rule 57 of the Rules of Court, petitioner prayed for
the issuance of a writ of preliminary attachment against the properties of MPEI
and individual respondents. The application was grounded upon the fraudulent
misrepresentation of respondents as to their eligibility to participate in the
bidding for the COMELEC automation project and the failure of the ACMs to
comply with mandatory technical requirements.28chanrobleslaw

Subsequently, the trial court denied the prayer for the issuance of a writ of
preliminary attachment,29 ruling that there was an absence of factual
allegations as to how the fraud was actually committed.

The allegations of petitioner were found to be unreliable, as the latter merely

copied from the declarations of the Supreme Court in Information Technology
Foundation of the Phils, v. COMELEC the factual allegations of MPEI's lack of
qualification and noncompliance with bidding requirements. The trial court
further ruled that the allegations of fraud on the part of MPEI were not
supported by the COMELEC, the office in charge of conducting the bidding for
the election automation contract. It was likewise held that there was no
evidence that respondents harbored a preconceived plan not to comply with the
obligation; neither was there any evidence that MPEI's corporate fiction was
used to perpetrate fraud. Thus, it found no sufficient basis to pierce the veil of
corporate fiction or to cause the attachment of the properties owned by
individual respondents.

Petitioner moved to set aside the trial court's Order denying the writ of
attachment,30 but its motion was denied.31chanrobleslaw

Appeal before the CA and the First Decision

Aggrieved, petitioner filed an appeal with the CA, arguing that the trial court
had acted with grave abuse of discretion in denying the application for a writ of
attachment.

As mentioned earlier, the CA in its First Decision32 reversed and set aside the
trial court's Orders and ruled that there was sufficient basis for the issuance of
a writ of attachment in favor of petitioner.

The appellate court explained that the averments of petitioner in support of the
latter's application actually reflected pertinent conclusions reached by this
Court in its 2004 Decision. It held that the trial court erred in disregarding the
following findings of fact, which remained unaltered and unreversed: (1)
COMELEC bidding rules provided that the eligibility and capacity of a bidder
may be proved through financial documents including, among others, audited
financial statements for the last three years; (2) MPEI was incorporated only on
27 February 2003, or 11 days prior to the bidding itself; (3) in an attempt to
disguise its ineligibility, MPEI participated in the bidding as lead company of
MPC, a putative consortium, and submitted the incorporation papers and
financial statements of the members of the consortium; and (4) no proof of the
joint venture agreement, consortium agreement, memorandum of agreement,
or business plan executed among the members of the purported consortium
was ever submitted to the COMELEC.33chanrobleslaw

According to the CA, the foregoing were glaring indicia or badges of fraud,
which entitled petitioner to the issuance of the writ. It further ruled that there
was sufficient reason to pierce the corporate veil of MPEI. Thus, the CA allowed
the attachment of the properties belonging to both MPEI and individual
respondents.34 The CA likewise ruled that even if the COMELEC committed
grave abuse of discretion in capriciously disregarding the rules on public
bidding, this should not preclude or deter petitioner from pursuing its claim
against respondents. After all, the State is not estopped by the mistake of its
officers and employees.35chanrobleslaw

Respondents moved for reconsideration36 of the First Decision of the CA.

Motion for Reconsideration before the CA and the Amended Decision

Upon review, the CA reconsidered its First Decision37 and directed the remand
of the case to the RTC Makati for the reception of evidence of allegations of
fraud and to determine whether attachment should necessarily
issue.38chanrobleslaw

The CA explained in its Amended Decision that respondents could not be

considered to have fostered a fraudulent intent to dishonor their obligation,
since they had delivered 1,991 units of ACMs.39 It directed petitioner to
present proof of respondents' intent to defraud COMELEC during the execution
of the automation contract.40 The CA likewise emphasized that the Joint
Affidavit submitted in support of petitioner's application for the writ contained
allegations that needed to be substantiated.41 It added that proof must
likewise be adduced to verify the requisite fraud that would justify the piercing
of the corporate veil of respondent MPEI.42chanrobleslaw

The CA further clarified that the 2004 Decision did not make a definite finding
as to the identities of the persons responsible for the illegal disbursement or of
those who participated in the fraudulent dealings.43 It instructed the trial
court to consider, in its determination of whether the writ of attachment should
issue, the illegal, imprudent and hasty acts in awarding the automation
contract by the COMELEC. In particular, these acts consisted of: (1) awarding
the automation contract to MPC, an entity that did not participate in the
bidding; and (2) signing the actual automation contract with respondent MPEI,
the company that joined the bidding without meeting the eligibility
requirement.44chanrobleslaw

Rule 45 Petition before Us

Consequently, petitioner filed the instant Rule 45 Petition,45 arguing that the
CA erred in ordering the remand of the case to the trial court for the reception
of evidence to determine the presence of fraud. Petitioner contends that this
Court's 2004 Decision was sufficient proof of the fraud committed by
respondents in the execution of the voided automation contract.46
Respondents allegedly committed fraud by securing the automation contract,
although MPEI was not qualified to bid in the first place.47 Their claim that the
members of MPC bound themselves to the automation contract was an
indication of bad faith as the contract was executed by MPEI alone.48 Neither
could they deny that the software submitted during the bidding process was
not the same one that would be used on election day.49 They could not
dissociate themselves from telltale signs such as purportedly supplying
software that later turned out to be non-existent.50chanrobleslaw

In their respective Comments, respondents Willy Yu, Bonnie Yu, Enrique

Tansipek, and Rosita Tansipek counter51 that this Court never ruled that
individual respondents were guilty of any fraud or bad faith in connection with
the automation contract, and that it was incumbent upon petitioner to present
evidence on the allegations of fraud to justify the issuance of the writ.52 They
likewise argue that the 2004 Decision cannot be invoked against them, since
petitioner and MPEI were co-respondents in the 2004 case and not adverse
parties therein.53 Respondents further contend that the allegations of fraud
are belied by their actual delivery of 1,991 units of ACMs to the COMELEC,
which they claim is proof that they never had any intention to evade
performance.54chanrobleslaw

They further allege that this Court, in its 2004 Decision, even recognized that it
had not found any wrongdoing on their part, and that the Ombudsman had
already made a determination that no probable cause existed with respect to
charges of violation of Anti-Graft and Corrupt Practices Act.55chanrobleslaw

Echoing the other respondents' arguments on the lack of particularity in the

allegations of fraud,56 respondents MPEI, Johnson Wong, Bernard Fong, Pedro
Tan, and Lauriano Barrios likewise argue that they were not parties to the
2004 case; thus, the 2004 Decision thereon is not binding on them.57
Individual respondents likewise argue that the findings of fact in the 2004
Decision were not conclusive,58 considering that eight (8) of the fifteen (15)
justices allegedly refused to go along with the factual findings as stated in the
majority opinion.59 Thereafter, petitioner filed its Reply to the
Comments.60chanrobleslaw

Based on the submissions of both parties, the following issues are presented to
this Court for resolution:
Whether petitioner has sufficiently established fraud on the part of
respondents to justify the issuance of a writ of preliminary attachment in its
favor; and cralawlawlibrary

Whether a writ of preliminary attachment may be issued against the properties

of individual respondents, considering that they were not parties to the 2004
case.
The Court's Ruling
The Petition is meritorious. A writ of preliminary attachment should issue in
favor of petitioner over the properties of respondents MPEI, Willy Yu (Willy) and
the remaining individual respondents, namely: Bonnie S. Yu (Bonnie), Enrique
T. Tansipek (Enrique), Rosita Y. Tansipek (Rosita), Pedro O. Tan (Pedro),
Johnson W. Fong (Johnson), Bernard I. Fong (Bernard), and Lauriano Barrios
(Lauriano). The bases for the writ are the following:
Fraud on the part of respondent MPEI was sufficiently established by the
factual findings of this Court in its 2004 Decision and subsequent
pronouncements.

A writ of preliminary attachment may issue over the properties of the individual
respondents using the doctrine of piercing the corporate veil.

The factual findings of this Court that have become final cannot be modified or
altered, much less reversed, and are controlling in the instant case.

The delivery of 1,991 units of ACMs does not negate fraud on the part of
respondents MPEI and Willy.

Estoppel does not lie against the state when it acts to rectify mistakes, errors
or illegal acts of its officials and agents.

The findings of the Ombudsman are not controlling in the instant case.
DISCUSSION

I.
Fraud on the part of respondent MPEI was sufficiently established by the
factual findings of this Court in the latter's 2004 Decision and subsequent
pronouncements.

Petitioner argues that the findings of this Court in the 2004 Decision serve as
sufficient basis to prove that, at the time of the execution of the automation
contract, there was fraud on the part of respondents that justified the issuance
of a writ of attachment. Respondents, however, argue the contrary. They claim
that fraud had not been sufficiently established by petitioner.

We rule in favor of petitioner. Fraud on the part of respondents MPEI and

Willy, as well as of the other individual respondents — Bonnie, Enrique, Rosita,
Pedro, Johnson, Bernard, and Lauriano — has been established.
A writ of preliminary attachment is a provisional remedy issued upon the order
of the court where an action is pending. Through the writ, the property or
properties of the defendant may be levied upon and held thereafter by the
sheriff as security for the satisfaction of whatever judgment might be secured
by the attaching creditor against the defendant.61 The provisional remedy of
attachment is available in order that the defendant may not dispose of the
property attached, and thus prevent the satisfaction of any judgment that may
be secured by the plaintiff from the former.62chanrobleslaw

The purpose and function of an attachment or garnishment is twofold. First, it

seizes upon property of an alleged debtor in advance of final judgment and
holds it subject to appropriation, thereby preventing the loss or dissipation of
the property through fraud or other means. Second, it subjects the property of
the debtor to the payment of a creditor's claim, in those cases in which
personal service upon the debtor cannot be obtained.63 This remedy is meant
to secure a contingent lien on the defendant's property until the plaintiff can,
by appropriate proceedings, obtain a judgment and have the property applied
to its satisfaction, or to make some provision for unsecured debts in cases in
which the means of satisfaction thereof are liable to be removed beyond the
jurisdiction, or improperly disposed of or concealed, or otherwise placed
beyond the reach of creditors.64chanrobleslaw

Petitioner relied upon Section 1(d), Rule 57 of the Rules of Court as basis for its
application for a writ of preliminary attachment. This provision
states:ChanRoblesVirtualawlibrary
Section 1. Grounds upon which attachment may issue. At the commencement
of the action or at any time before entry of judgment, a plaintiff or any proper
party may have the property of the adverse party attached as security for the
satisfaction of any judgment that may be recovered in the following cases:

chanRoblesvirtualLawlibrary
xxxx

(d) In an action against a party who has been guilty of a fraud in contracting
the debt or incurring the obligation upon which the action is brought, or in the
performance thereof. (Emphasis supplied)
For a writ of preliminary attachment to issue under the above-quoted rule, the
applicant must sufficiently show the factual circumstances of the alleged
fraud.65 In Metro, Inc. v. Lara's Gift and Decors, Inc.,66 We
explained:ChanRoblesVirtualawlibrary
To sustain an attachment on this ground, it must be shown that the debtor in
contracting the debt or incurring the obligation intended to defraud the
creditor. The fraud must relate to the execution of the agreement and must
have been the reason which induced the other party into giving consent which
he would not have otherwise given. To constitute a ground for attachment in
Section 1(d), Rule 57 of the Rules of Court, fraud should be committed upon
contracting the obligation sued upon. A debt is fraudulently contracted if at the
time of contracting it the debtor has a preconceived plan or intention not to
pay, as it is in this case. x x x.
The applicant for a writ of preliminary attachment must sufficiently show the
factual circumstances of the alleged fraud because fraudulent intent cannot be
inferred from the debtor's mere non-payment of the debt or failure to comply
with his obligation. (Emphasis supplied)
An amendment to the Rules of Court added the phrase "in the performance
thereof" to include within the scope of the grounds for issuance of a writ of
preliminary attachment those instances relating to fraud in the performance of
the obligation.67chanrobleslaw

Fraud is a generic term that is used in various senses and assumes so many
different degrees and forms that courts are compelled to content themselves
with comparatively few general rules for its discovery and defeat. For the same
reason, the facts and circumstances peculiar to each case are allowed to bear
heavily on the conscience and judgment of the court or jury in determining the
presence or absence of fraud. In fact, the fertility of man's invention in devising
new schemes of fraud is so great that courts have always declined to define it,
thus, reserving for themselves the liberty to deal with it in whatever form it
may present itself.68chanrobleslaw

Fraud may be characterized as the voluntary execution of a wrongful act or a

wilful omission, while knowing and intending the effects that naturally and
necessarily arise from that act or omission.69 In its general sense, fraud is
deemed to comprise anything calculated to deceive—including all acts and
omission and concealment involving a breach of legal or equitable duty, trust,
or confidence justly reposed—resulting in damage to or in undue advantage
over another.70 Fraud is also described as embracing all multifarious means
that human ingenuity can device, and is resorted to for the purpose of securing
an advantage over another by false suggestions or by suppression of truth; and
it includes all surprise, trick, cunning, dissembling, and any other unfair way
by which another is cheated.71chanrobleslaw

While fraud cannot be presumed, it need not be proved by direct evidence and
can well be inferred from attendant circumstances.72 Fraud by its nature is
not a thing susceptible of ocular observation or readily demonstrable
physically; it must of necessity be proved in many cases by inferences from
circumstances shown to have been involved in the transaction in
question.73chanrobleslaw

In the case at bar, petitioner has sufficiently discharged the burden of

demonstrating the commission of fraud by respondent MPEI in the execution of
the automation contract in the two ways that were enumerated earlier and
discussed below:
chanRoblesvirtualLawlibraryA. Respondent MPEI had perpetrated a scheme
against petitioner to secure the automation contract by using MPC as
supposed bidder and eventually succeeding in signing the automation contract
as MPEI alone, an entity which was ineligible to bid in the first place.

To avoid any confusion relevant to the basis of fraud, We quote herein the
pertinent portions of this Court's 2004 Decision with regard to the identity,
existence, and eligibility of MPC as bidder:74
On the question of the identity and the existence of the real bidder,
respondents insist that, contrary to petitioners' allegations, the bidder was not
Mega Pacific eSolutions, Inc. (MPEI), which was incorporated only on February
27, 2003, or 11 days prior to the bidding itself. Rather, the bidder was Mega
Pacific Consortium (MPC), of which MPEI was but a part. As proof thereof, they
point to the March 7, 2003 letter of intent to bid, signed by the president of
MPEI allegedly for and on behalf of MPC. They also call attention to the official
receipt issued to MPC, acknowledging payment for the bidding documents, as
proof that it was the "consortium" that participated in the bidding process.

We do not agree. The March 7, 2003 letter, signed by only one signatory —
"Willy U. Yu, President, Mega Pacific eSolutions, Inc., (Lead
Company/Proponent) For: Mega Pacific Consortium" — and without any
further proof, does not by itself prove the existence of the consortium. It does
not show that MPEI or its president have been duly pre-authorized by the other
members of the putative consortium to represent them, to bid on their
collective behalf and, more important, to commit them jointly and severally to
the bid undertakings. The letter is purely self-serving and uncorroborated.

Neither does an official receipt issued to MPC, acknowledging payment for the
bidding documents, constitute proof that it was the purported consortium that
participated in the bidding. Such receipts are issued by cashiers without any
legally sufficient inquiry as to the real identity or existence of the supposed
payor.

To assure itself properly of the due existence (as well as eligibility and
qualification) of the putative consortium, Comelec's BAC should have examined
the bidding documents submitted on behalf of MPC. They would have easily
discovered the following fatal flaws.

xxxx

The Eligibility Envelope was to contain legal documents such as articles of

incorporation, x x x to establish the bidder's financial capacity.
In the case of a consortium or joint venture desirous of participating in the
bidding, it goes without saying that the Eligibility Envelope would necessarily
have to include a copy of the joint venture agreement, the consortium
agreement or memorandum of agreement — or a business plan or some other
instrument of similar import — establishing the due existence, composition
and scope of such aggrupation. Otherwise, how would Comelec know who it
was dealing with, and whether these parties are qualified and capable of
delivering the products and services being offered for bidding?

In the instant case, no such instrument was submitted to Comelec during the
bidding process. x x x

xxxx

However, there is no sign whatsoever of any joint venture agreement,

consortium agreement, memorandum of agreement, or business plan executed
among the members of the purported consortium.

The only logical conclusion is that no such agreement was ever submitted to
the Comelec for its consideration, as part of the bidding process.

It thus follows that, prior the award of the Contract, there was no documentary
or other basis for Comelec to conclude that a consortium had actually been
formed amongst MPEI, SK C&C and WeSolv, along with Election.com and
ePLDT. Neither was there anything to indicate the exact relationships between
and among these firms; their diverse roles, undertakings and prestations, if
any, relative to the prosecution of the project, the extent of their respective
investments (if any) in the supposed consortium or in the project; and the
precise nature and extent of their respective liabilities with respect to the
contract being offered for bidding. And apart from the self-serving letter of
March 7, 2003, there was not even any indication that MPEI was the lead
company duly authorized to act on behalf of the others.

xxxx

Hence, had the proponent MPEI been evaluated based solely on its own
experience, financial and operational track record or lack thereof, it would
surely not have qualified and would have been immediately considered
ineligible to bid, as respondents readily admit.

xxxx
At this juncture, one might ask: What, then, if there are four MOAs instead of
one or none at all? Isn't it enough that there are these corporations coming
together to carry out the automation project? Isn't it true, as respondent aver,
that nowhere in the RFP issued by Comelec is it required that the members of
the joint venture execute a single written agreement to prove the existence of a
joint venture. x x x

xxxx

The problem is not that there are four agreements instead of only one. The
problem is that Comelec never bothered to check. It never based its decision on
documents or other proof that would concretely establish the existence of the
claimed consortium or joint venture or agglomeration.

xxxx

True, copies of financial statements and incorporation papers of the alleged

"consortium" members were submitted. But these papers did not establish the
existence of a consortium, as they could have been provided by the companies
concerned for purposes other than to prove that they were part of a consortium
or joint venture.

xxxx

In brief, despite the absence of competent proof as to the existence and

eligibility of the alleged consortium (MPC), its capacity to deliver on the
Contract, and the members' joint and several liability therefor, Comelec
nevertheless assumed that such consortium existed and was eligible. It then
went ahead and considered the bid of MPC, to which the Contract was
eventually awarded, in gross violation of the former's own bidding rules and
procedures contained in its RFP. Therein lies Comclec's grave abuse of
discretion.

Sufficiency of the Four Agreements

Instead of one multilateral agreement executed by, and effective and binding
on, all the five "consortium members" — as earlier claimed by Commissioner
Tuason in open court — it turns out that what was actually executed were four
(4) separate and distinct bilateral Agreements. Obviously, Comelec was
furnished copies of these Agreements only after the bidding process had been
terminated, as these were not included in the Eligibility Documents. x x x
xxxx

At this point, it must be stressed most vigorously that the submission of the
four bilateral Agreements to Comelec after the end of the bidding process did
nothing to eliminate the grave abuse of discretion it had already committed on
April 15, 2003.

Deficiencies Have Not Been "Cured"

In any event, it is also claimed that the automation Contract awarded by

Comelec incorporates all documents executed by the "consortium" members,
even if these documents are not referred to therein. x x x

xxxx

Thus, it is argued that whatever perceived deficiencies there were in the

supplementary contracts - those entered into by MPEI and the other members
of the "consortium" as regards their joint and several undertakings — have
been cured. Better still, such deficiencies have supposedly been prevented from
arising as a result of the above-quoted provisions, from which it can be
immediately established that each of the members of MPC assumes the same
joint and several liability as the other members.

The foregoing argument is unpersuasive. First, the contract being referred to,
entitled "The Automated Counting and Canvassing Project Contract," is
between Comelec and MPEI, not the alleged consortium, MPC. To repeat, it is
MPEI - not MPC - that is a party to the Contract. Nowhere in that Contract is
there any mention of a consortium or joint venture, of members thereof, much
less of joint and several liability. Supposedly executed sometime in May 2003,
the Contract bears a notarization date of June 30, 2003, and contains the
signature of Willy U. Yu signing as president of MPEI (not for and on behalf of
MPC), along with that of the Comelec chair. It provides in Section 3.2 that
MPEI (not MPC) is to supply the Equipment and perform the Services under the
Contract, in accordance with the appendices thereof; nothing whatsoever is
said about any consortium or joint venture or partnership.

xxxx

Eligibility of a Consortium Based on the Collective Qualifications of Its

Members
Respondents declare that, for purposes of assessing the eligibility of the bidder,
the members of MPC should be evaluated on a collective basis. Therefore, they
contend, the failure of MPEI to submit financial statements (on account of its
recent incorporation) should not by itself disqualify MPC, since the other
members of the "consortium" could meet the criteria set out in the RFP.

xxxx

Unfortunately, this argument seems to assume that the "collective" nature of

the undertaking of the members of MPC, their contribution of assets and
sharing of risks, and the "community" of their interest in the performance of
the Contract entitle MPC to be treated as a joint venture or consortium; and to
be evaluated accordingly on the basis of the members' collective qualifications
when, in fact, the evidence before the Court suggest otherwise.

xxxx

Going back to the instant case, it should be recalled that the automation
Contract with Comelec was not executed by the "consortium" MPC - or by MPEI
for and on behalf of MPC - but by MPEI, period. The said Contract contains no
mention whatsoever of any consortium or members thereof. This fact alone
seems to contradict all the suppositions about a joint undertaking that would
normally apply to a joint venture or consortium: that it is a commercial
enterprise involving a community of interest, a sharing of risks, profits and
losses, and so on.

xxxx

To the Court, this strange and beguiling arrangement of MPEI with the other
companies does not qualify them to be treated as a consortium or joint
venture, at least of the type that government agencies like the Comelec should
be dealing with. With more reason is it unable to agree to the proposal to
evaluate the members of MPC on a collective basis. (Emphases supplied)
These findings found their way into petitioner's application for a writ of
preliminary attachment,75 in which it claimed the following as bases for fraud:
(1) respondents committed fraud by securing the election automation contract
and, in order to perpetrate the fraud, by misrepresenting the actual bidder as
MPC and MPEI as merely acting on MPC's behalf; (2) while knowing that MPEI
was not qualified to bid for the automation contract, respondents still signed
and executed the contract; and (3) respondents acted in bad faith when they
claimed that they had bound themselves to the automation contract, because it
was not executed by MPC—or by MPEI on MPC's behalf—but by MPEI
alone.76chanrobleslaw
We agree with petitioner that respondent MPEI committed fraud by securing
the election automation contract; and, in order to perpetrate the fraud, by
misrepresenting that the actual bidder was MPC and not MPEI, which was only
acting on behalf of MPC. We likewise rule that respondent MPEI has defrauded
petitioner, since the former still executed the automation contract despite
knowing that it was not qualified to bid for the same.

The established facts surrounding the eligibility, qualification and existence of

MPC — and of MPEI for that matter — and the subsequent execution of the
automation contract with the latter, when all taken together, constitute badges
of fraud that We simply cannot ignore. MPC was considered an illegitimate
entity, because its existence as a joint venture had not been established.
Notably, the essential document/s that would have shown its eligibility as a
joint venture/consortium were not presented to the COMELEC at the most
opportune time, that is, during the qualification stage of the bidding process.
The concealment by respondent MPEI of the essential documents showing its
eligibility to bid as part a joint venture is too obvious to be missed. How could
it not have known that the very document showing MPC as a joint venture
should have been included in their eligibility envelope?

Likewise notable is the fact that these supposed agreements, allegedly among
the supposed consortium members, were belatedly provided to the COMELEC
after the bidding process had been terminated; these were not included in the
Eligibility Documents earlier submitted by MPC. Similarly, as found by this
Court, these documents did not prove any joint venture agreement among the
parties in the first place, but were actually individual agreements executed by
each member of the supposed consortium with respondent MPEI.

More startling to the dispassionate mind is the incongruence between the

supposed actual bidder MPC, on one hand, and, on the other, respondent
MPEI, which executed the automation contract. Significantly, respondent MPEI
was not even eligible and qualified to bid in the first place; and yet, the
automation contract itself was executed and signed singly by respondent MPEI,
not on behalf of the purported bidder MPC, without any mention whatsoever of
the members of the supposed consortium.

From these established facts, We can surmise that in order to secure the
automation contract, respondent MPEI perpetrated a scheme against petitioner
by using MPC as supposed bidder and eventually succeeding in signing the
automation contract as MPEI alone. Worse, it was respondent MPEI alone, an
entity that was ineligible to bid in the first place, that eventually executed the
automation contract.

To a reasonable mind, the entire situation reeks of fraud, what with the
misrepresentation of identity and misrepresentation as to creditworthiness. It
is in these kinds of fraudulent instances, when the ability to abscond is
greatest, to which a writ of attachment is precisely responsive.

Further, the failure to attach the eligibility documents is tantamount to failure

on the part of respondent MPEI to disclose material facts. That omission
constitutes fraud.

Pursuant to Article 1339 of the Civil Code,77 silence or concealment does not,
by itself, constitute fraud, unless there is a special duty to disclose certain
facts, or unless the communication should be made according to good faith
and the usages of commerce.78chanrobleslaw

Fraud has been defined to include an inducement through insidious

machination. Insidious machination refers to a deceitful scheme or plot with an
evil or devious purpose. Deceit exists where the party, with intent to deceive,
conceals or omits to state material facts and, by reason of such omission or
concealment, the other party was induced to give consent that would not
otherwise have been given.79chanrobleslaw

One form of inducement is covered within the scope of the crime of estafa
under Article 315, paragraph 2, of the Revised Penal Code, in which, any
person who defrauds another by using fictitious name, or falsely pretends to
possess power, influence, qualifications, property, credit, agency, business or
imaginary transactions, or by means of similar deceits executed prior to or
simultaneously with the commission of fraud is held criminally liable. In Joson
v. People,80 this Court explained the element of defraudation by means of
deceit, by giving a definition of fraud and deceit, in this
wise:ChanRoblesVirtualawlibrary
What needs to be determined therefore is whether or not the element of
defraudation by means of deceit has been established beyond reasonable
doubt.

In the case of People v. Menil, Jr., the Court has defined fraud and deceit in
this wise:ChanRoblesVirtualawlibrary
Fraud, in its general sense, is deemed to comprise anything calculated to
deceive, including all acts, omissions, and concealment involving a breach of
legal or equitable duty, trust, or confidence justly reposed, resulting in damage
to another, or by which an undue and unconscientious advantage is taken of
another. It is a generic term embracing all multifarious means which human
ingenuity can devise, and which are resorted to by one individual to secure an
advantage over another by false suggestions or by suppression of truth and
includes all surprise, trick, cunning, dissembling and any unfair way by which
another is cheated. On the other hand, deceit is the false representation of a
matter of fact, whether by words or conduct, by false or misleading allegations,
or by concealment of that which should have been disclosed which deceives or
is intended to deceive another so that he shall act upon it to his legal injury.
(Emphases supplied)
For example, in People v. Comila,81 both accused-appellants therein
represented themselves to the complaining witnesses to have the capacity to
send them to Italy for employment, even as they did not have the authority or
license for the purpose. It was such misrepresentation that induced the
complainants to part with their hard-earned money for placement and medical
fees. Both accused-appellants were criminally held liable for estafa.

In American jurisprudence, fraud may be predicated on a false introduction or

identification.82 In Union Co. v. Cobb,83 the defendant therein procured the
merchandise by misrepresenting that she was Mrs. Taylor Ray and at another
time she was Mrs. Ben W. Chiles, and she forged their name on charge slips as
revealed by the exhibits of the plaintiff. The sale of the merchandise was
induced by these representations, resulting in injury to the plaintiff.

In Raser v. Moomaw,84 it was ruled that the essential elements necessary to

constitute actionable fraud and deceit were present in the complaint. It was
alleged that, to induce plaintiff to procure a loan, defendant introduced him to
a woman who was falsely represented to be Annie L. Knowles of Seattle,
Washington, the owner of the property, and that plaintiff had no means of
ascertaining her true identity. On the other hand, defendant knew, or in the
exercise of reasonable caution should have known, that she was an impostor,
and that plaintiff relied on the representations, induced his client to make the
loan, and had since been compelled to repay it. In the same case, the Court
ruled that false representations as to the identity of a person are actionable, if
made to induce another to act thereon, and such other does so act thereon to
his prejudice.85chanrobleslaw

In this case, analogous to the fraud and deceit exhibited in the above-
mentioned circumstances, respondent MPEI had no excuse not to be forthright
with the documents showing MPC's eligibility to bid as a joint venture. The
Invitation to Bid, as quoted in our 2004 Decision, could not have been any
clearer when it stated that only bids from qualified entities, such as a joint
venture, would be entertained:ChanRoblesVirtualawlibrary
INVITATION TO APPLY FOR ELIGIBILITY AND TO BID

The Commission on Elections (COMELEC), pursuant to the mandate of

Republic Act Nos. 8189 and 8436, invites interested offerers, vendors,
suppliers or lessors to apply for eligibility and to bid for the procurement by
purchase, lease, lease with option to purchase, or otherwise, supplies,
equipment, materials and services needed for a comprehensive Automated
Election System, consisting of three (3) phases: (a) registration/verification of
voters, (b) automated counting and consolidation of votes, and (c) electronic
transmission of election results, with an approved budget of TWO BILLION
FIVE HUNDRED MILLION (Php2,500,000,000) Pesos.
Only bids from the following entities shall be entertained:

xxxx

d. Manufacturers, suppliers and/or distributors forming themselves into a joint

venture, i.e., a group of two (2) or more manufacturers, suppliers and/or
distributors that intend to be jointly and severally responsible or liable for a
particular contract, provided that Filipino ownership thereof shall be at least
sixty percent (60%); and cralawlawlibrary

e. Cooperatives duly registered with the Cooperatives Development

Authority.86 (Emphases supplied)
No reasonable mind would argue that documents showing the very existence of
a joint venture need not be included in the bidding envelope showing its
existence, qualification, and eligibility to undertake the project, considering
that the purpose of prequalification in any public bidding is to determine, at
the earliest opportunity, the ability of the bidder to undertake the
project.87chanrobleslaw

As found by this Court in its 2004 Decision, it appears that the documents
that were submitted after the bidding, which respondents claimed would prove
the existence of the relationship among the members of the consortium, were
actually separate agreements individually executed by the supposed members
with MPEI. We had ruled that these documents were highly irregular,
considering that each of the four different and separate bilateral Agreements
was valid and binding only between MPEI and the other contracting party,
leaving the other "consortium" members total strangers thereto. Consequently,
the other consortium members had nothing to do with one another, as each
one dealt only with MPEI.88chanrobleslaw

Considering that they merely showed MPEI's individual agreements with the
other supposed members, these agreements confirm to our mind the
fraudulent intent on the part of respondent MPEI to deceive the relevant
officials about MPC. The intent was to cure the deficiency of the winning bid,
which intent miserably failed. Said this Court:89
We are unconvinced, PBAC was guided by the rules, regulations or guidelines
existing before the bid proposals were opened on November 10, 1989. The basic
rule in public bidding is that bids should be evaluated based on the required
documents submitted before and not after the opening of bids. Otherwise, the
foundation of a fair and competitive public bidding would be defeated. Strict
observance of the rules, regulations, and guidelines of the bidding process is
the only safeguard to a fair, honest and competitive public bidding.
In underscoring the Court's strict application of the pertinent rules, regulations
and guidelines of the public bidding process, We have ruled in C & C
Commercial vs. Menor (L-28360, January 27, 1983, 120 SCRA 112), that
Nawasa properly rejected a bid of C & C Commercial to supply asbestos cement
pressure which bid did not include a tax clearance certificate as required by
Administrative Order No. 66 dated June 26, 1967. In Caltex (Phil.) Inc., et. al.
vs. Delgado Brothers, Inc. et. al., (96 Phil. 368, 375), We stressed that public
biddings are held for the protection of the public and the public should be
given the best possible advantages by means of open competition among the
bidders.

xxxx

INTER TECHNICAL's failure to comply with what is perceived to be an

elementary and customary practice in a public bidding process, that is, to
enclose the Form of Bid in the original and eight separate copies of the bidding
documents submitted to the bidding committee is fatal to its cause. All the four
pre-qualified bidders which include INTER TECHNICAL were subject to Rule IB
2.1 of the Implementing Rules and Regulations of P.D. 1594 in the preparation
of bids, bid bonds, and pre-qualification statement and Rule IB 2.8 which
states that the Form of Bid, among others, shall form part of the contract.
INTER TECHNICAL's explanation that its bid form was inadvertently left in the
office (p. 6, Memorandum for Private Respondent, p. 355, Rollo) will not excuse
compliance with such a simple and basic requirement in the public bidding
process involving a multi-million project of the Government. There should be
strict application of the pertinent public bidding rules, otherwise the essential
requisites of fairness, good faith, and competitiveness in the public bidding
process would be rendered meaningless. (Emphases supplied)
All these circumstances, taken together, reveal a scheme on the part of
respondent MPEI to perpetrate fraud against the government. The purpose of
the scheme was to ensure that MPEI, an entity that was ineligible to bid in the
first place, would eventually be awarded the contract. While respondent argues
that it was merely a passive participant in the bidding process, We cannot
ignore its cavalier disregard of its participation in the now voided automation
contract.

B. Fraud on the part of respondent MPEI was further shown by the fact that
despite the failure of its ACMs to pass the tests conducted by the DOST,
respondent still acceded to being awarded the automation contract.

Another token of fraud is established by Our findings in relation to the failure

of the ACMs to pass the tests of the DOST. We quote herein the pertinent
portions of this Court's 2004 Decision in relation
thereto:ChanRoblesVirtualawlibrary
After respondent "consortium" and the other bidder, TIM, had submitted their
respective bids on March 10, 2003, the Comelec's BAC — through its Technical
Working Group (TWG) and the DOST — evaluated their technical proposals.

xxxx

According to respondents, it was only after the TWG and the DOST had
conducted their separate tests and submitted their respective reports that the
BAC, on the basis of these reports formulated its comments/recommendations
on the bids of the consortium and TIM.

The BAG, in its Report dated April 21, 2003, recommended that the Phase II
project involving the acquisition of automated counting machines be awarded
to MPEI. x x x

xxxx

The BAC, however, also stated on page 4 of its Report: "Based on the 14 April
2003 report (Table 6) of the DOST, it appears that both Mega-Pacific and TIM
(Total Information Management Corporation) failed to meet some of the
requirements. x x x

xxxx

Failure to Meet the Required Accuracy Rating

The first of the key requirements was that the counting machines were to have
an accuracy rating of at least 99.9995 percent. The BAC Report indicates that
both Mega Pacific and TIM failed to meet this standard.

The key requirement of accuracy rating happens to be part and parcel of the
Comelec's Request for Proposal (RFP). x x x

xxxx

x x x Whichever accuracy rating is the right standard — whether 99.995 or

99.9995 percent — the fact remains that the machines of the so-called "consort
him" failed to even reach the lesser of the two. On this basis alone, it ought to
have been disqualified and its bid rejected outright.
At this point, the Court stresses that the essence of public bidding is violated
by the practice of requiring very high standards or unrealistic specifications
that cannot be met — like the 99.9995 percent accuracy rating in this case —
only to water them down after the bid has been award.[sic] Such scheme,
which discourages the entry of prospective bona fide bidders, is in fact a sure
indication of fraud in the bidding, designed to eliminate fair competition.
Certainly, if no bidder meets the mandatory requirements, standards or
specifications, then no award should be made and a failed bidding declared.

xxxx

Failure of Software to Detect Previously Downloaded Data

Furthermore, on page 6 of the BAC Report, it appears that the "consortium" as

well as TIM failed to meet another key requirement — for the counting
machine's software program to be able to detect previously downloaded
precinct results and to prevent these from being entered again into the
counting machine. This same deficiency on the part of both bidders reappears
on page 7 of the BAC Report, as a result of the recurrence of their failure to
meet the said key requirement.

That the ability to detect previously downloaded data at different canvassing or

consolidation levels is deemed of utmost importance can be seen from the fact
that it is repeated three times in the RFP. x x x.

Once again, though, Comelec chose to ignore this crucial deficiency, which
should have been a cause for the gravest concern. x x x.

xxxx

Inability to Print the Audit Trail

But that grim prospect is not all. The BAC Report, on pages 6 and 7, indicate
that the ACMs of both bidders were unable to print the audit trail without any
loss of data. In the case of MPC, the audit trail system was "not yet
incorporated" into its ACMs.

xxxx

Thus, the RFP on page 27 states that the ballot counting machines and ballot
counting software must print an audit trail of all machine operations for
documentation and verification purposes. Furthermore, the audit trail must be
stored on the internal storage device and be available on demand for future
printing and verifying. On pages 30-31, the RFP also requires that the
city/municipal canvassing system software be able to print an audit trail of the
canvassing operations, including therein such data as the date and time the
canvassing program was started, the log-in of the authorized users (the identity
of the machine operators), the date and time the canvass data were
downloaded into the canvassing system, and so on and so forth. On page 33 of
the RFP, we find the same audit trail requirement with respect to the
provincial/district canvassing system software; and again on pages 35-36
thereof, the same audit trail requirement with respect to the national
canvassing system software.

xxxx

The said provision which respondents have quoted several times, provides that
ACMs are to possess certain features divided into two classes: those that the
statute itself considers mandatory and other features or capabilities that the
law deems optional. Among those considered mandatory are "provisions for
audit trails"! x x x.

In brief, respondents cannot deny that the provision requiring audit trails is
indeed mandatory, considering the wording of Section 7 of RA 8436. Neither
can Respondent Comelec deny that it has relied on the BAC Report, which
indicates that the machines or the software was deficient in that respect. And
yet, the Commission simply disregarded this shortcoming and awarded the
Contract to private respondent, thereby violating the very law it was supposed
to implement.90 (Emphases supplied)
The above-mentioned findings were further echoed by this Court in its 2006
Resolution with a categorical conclusion that the bidding process was void and
fraudulent.91chanrobleslaw

Again, these factual findings found their way into the application of petitioner
for a writ of preliminary attachment,92 as it claimed that respondents could
not dissociate themselves from their telltale acts of supplying defective
machines and nonexistent software.93 The latter offered no defense in relation
to these claims.

We see no reason to deviate from our finding of fraud on the part of respondent
MPEI in the 2004 Decision and 2006 Resolution. Despite its failure to meet the
mandatory requirements set forth in the bidding procedure, respondent still
acceded to being awarded the contract. These circumstances reveal its ploy to
gain undue advantage over the other bidders in general, even to the extent of
cheating the government.
The word "bidding" in its comprehensive sense means making an offer or an
invitation to prospective contractors, whereby the government manifests its
intention to make proposals for the purpose of securing supplies, materials,
and equipment for official business or public use, or for public works or
repair.94 Three principles involved in public bidding are as follows: (1) the offer
to the public; (2) an opportunity for competition, and (3) a basis for an exact
comparison of bids. A regulation of the matter, which excludes any of these
factors, destroys the distinctive character of the system and thwarts the
purpose of its adoption.95chanrobleslaw

In the instant case, We infer from the circumstances that respondent MPEI
welcomed and allowed the award of the automation contract, as it executed the
contract despite the full knowledge that it had not met the mandatory
requirements set forth in the RFP. Respondent acceded to and benefitted from
the watering down of these mandatory requirements, resulting in undue
advantage in its favor. The fact that there were numerous mandatory
requirements that were simply set aside to pave the way for the award of the
automation contract does not escape the attention of this Court. Respondent
MPEI, through respondent Willy, signed and executed the automation contract
with COMELEC. It is therefore preposterous for respondent argue that it was a
"passive participant" in the whole bidding process.

We reject the CA's denial of petitioner's plea for the ancillary remedy of
preliminary attachment, considering that the cumulative effect of the factual
findings of this Court establishes a sufficient basis to conclude that fraud had
attended the execution of the automation contract. Such fraud is deducible
from the 2004 Decision and further upheld in the 2006 Resolution. It was
incongruous, therefore, for the CA to have denied the application for a writ of
preliminary attachment, when the evidence on record was the same that was
used to demonstrate the propriety of the issuance of the writ of preliminary
attachment. This was the same evidence that We had already considered and
passed upon, and on which We based Our 2004 Decision to nullify the
automation contract. It would not be right for this Court to ignore these illegal
transactions, as to do so would be tantamount to abandoning its constitutional
duty of safeguarding public interest.

II.
Application of the piercing doctrine justifies the issuance of a writ of
preliminary attachment over the properties of the individual respondents.

Individual respondents argue that since they were not parties to the 2004 case,
any factual findings or conclusions therein should not be binding upon
them.96 Since they were strangers to that case, they are not bound by the
judgment rendered by this Court.97 They claim that their fundamental right to
due process would be violated if their properties were to be attached for a
purported corporate debt on the basis of a court ruling in a case in which they
were not given the right or opportunity to be heard.98chanrobleslaw
We cannot subscribe to this argument. In the first place, it could not be
reasonably expected that individual respondents would be impleaded in the
2004 case. As admitted by respondents, the issues resolved in the 2004
Decision were limited to the following: (1) whether to declare Resolution No.
6074 of the COMELEC null and void; (2) whether to enjoin the implementation
of any further contract that may have been entered into by COMELEC with
MPC or MPEI; and (3) whether to compel COMELEC to conduct a rebidding of
the project. To implead individual respondents then was improper, considering
that the automation contract was entered into by respondent MPEI. This Court
even acknowledged this fact by directing that the liabilities of persons
responsible for the nullity of the contract be determined in another appropriate
proceeding and by directing the OSG to undertake measures to protect the
interests of the government.

At any rate, individual respondents have been fully afforded the right to due
process by being impleaded and heard in the subsequent proceedings before
the courts a quo. Finally, they cannot argue violation of due process, as
respondent MPEI, of which they are incorporators/stockholders, remains
vulnerable to the piercing of its corporate veil.

A. There are red flags indicating that MPEI was used to perpetrate the fraud
against petitioner, thus allowing the piercing of its corporate veil.

Petitioner seeks the issuance of a writ of preliminary attachment over the

personal assets of the individual respondents, notwithstanding the doctrine of
separate juridical personality.99 It invokes the use of the doctrine of piercing
the corporate veil, to which the canon of separate juridical personality is
vulnerable, as a way to reach the personal properties of the individual
respondents. Petitioner paints a picture of a sham corporation set up by all the
individual respondents for the purpose of securing the automation contract.

We agree with petitioner.

Veil-piercing in fraud cases requires that the legal fiction of separate juridical
personality is used for fraudulent or wrongful ends.100 For reasons discussed
below, We see red flags of fraudulent schemes in public procurement, all of
which were established in the 2004 Decision, the totality of which strongly
indicate that MPEI was a sham corporation formed merely for the purpose of
perpetrating a fraudulent scheme.

The red flags are as follows: (1) overly narrow specifications; (2) unjustified
recommendations and unjustified winning bidders; (3) failure to meet the terms
of the contract; and (4) shell or fictitious company. We shall discuss each in
detail.
Overly Narrow Specifications

The World Bank's Fraud and Corruption Awareness Handbook: A Handbook

for Civil Servants Involved in Public Procurement, (Handbook) identifies an
assortment of fraud and corruption indicators and relevant schemes in public
procurement.101 One of the schemes recognized by the Handbook is rigged
specifications:ChanRoblesVirtualawlibrary
Scheme: Rigged specifications. In a competitive market for goods and services,
any specifications that seem to be drafted in a way that favors a particular
company deserve closer scrutiny. For example, specifications that are too
narrow can be used to exclude other qualified bidders or justify improper sole
source awards. Unduly vague or broad specifications can allow an unqualified
bidder to compete or justify fraudulent change orders after the contract is
awarded. Sometimes, project officials will go so far as to allow the favored
bidder to draft the specifications.102chanroblesvirtuallawlibrary
In Our 2004 Decision, We identified a red flag of rigged bidding in the form of
overly narrow specifications. As already discussed, the accuracy requirement of
99.9995 percent was set up by COMELEC bidding rules. This Court recognized
that this rating was "too high and was a sure indication of fraud in the bidding,
designed to eliminate fair competition."103 Indeed, "the essence of public
bidding is violated by the practice of requiring very high standards or
unrealistic specifications that cannot be met...only to water them down after
the bid has been award(ed)."104chanrobleslaw

Unjustified Recommendations and Unjustified Winning Bidders

Questionable evaluation in a Bid Evaluation Report (BER) is an indicator of bid

rigging. The Handbook expounds:ChanRoblesVirtualawlibrary
Questionable evaluation and unusual bid patterns may emerge in the BER.
After the completion of the evaluation process, the Bid Evaluation Committee
should present to the implementing agency its BER, which describes the
results and the process by which the BEC has evaluated the bids received. The
BER may include a number of indicators of bid rigging, e.g., questionable
disqualifications, and unusual bid patterns.105chanroblesvirtuallawlibrary
The Handbook lists unjustified recommendations and unjustified winning
bidders as red flags of a rigged bidding.106chanrobleslaw

The red flags of questionable recommendation and unjustified awards are

raised in this case. As earlier discussed, the project was awarded to MPC,
which proved to be a nonentity. It was MPEI that actually participated in the
bidding process, but it was not qualified to be a bidder in the first place.
Moreover, its ACMs failed the accuracy requirement set by COMELEC. Yet,
MPC — the nonentity — obtained a favorable recommendation from the BAC,
and the automation contract was awarded to the former.
Failure to Meet Contract Terms

Failure to meet the terms of a contract is regarded as a fraud by the

Handbook:ChanRoblesVirtualawlibrary
Scheme: Failure to meet contract terms. Firms may deliberately fail to comply
with contract requirements. The contractor will attempt to conceal such
actions often by falsifying or forging supporting documentation and bill for the
work as if it were done in accordance with specifications. In many cases, the
contractors must bribe inspection or project personnel to accept the
substandard goods or works, or supervision agents are coerced to approve
substandard work. x x x107chanroblesvirtuallawlibrary
As mentioned earlier, this Court already found the ACMs to be below the
standards set by the COMELEC. We reiterated their noncompliant status in
Our 2005 and 2006 Resolutions.

As early as 2005, when the COMELEC sought permission from this Court to
utilize the ACMs in the then scheduled ARMM elections, We declared that the
proposed use of the machines would expose the ARMM elections to the same
dangers of massive electoral fraud that would have been inflicted by the
projected automation of the 2004 national elections. We based this
pronouncement on the fact that the COMELEC failed to show that the
deficiencies had been cured.108 Yet again, this Court in 2006 blocked another
attempt to use the ACMs, this time for the 2007 elections. We reiterated that
because the ACMs had merely remained idle and unused since their last
evaluation, in which they failed to hurdle the crucial tests, then their defects
and deficiencies could not have been cured by then.109chanrobleslaw

Based on the foregoing, the ACMs delivered were plagued with defects that
made them fail the requirements set for the automation project.

Shell or fictitious company

The Handbook regards a shell or fictitious company as a "serious red flag," a

concept that it elaborates upon:ChanRoblesVirtualawlibrary
Fictitious companies are by definition fraudulent and may also serve as fronts
for government officials. The typical scheme involves corrupt government
officials creating a fictitious company that will serve as a "vehicle" to secure
contract awards. Often, the fictitious—or ghost— company will subcontract
work to lower cost and sometimes unqualified firms. The fictitious company
may also utilize designated losers as subcontractors to deliver the work, thus
indicating collusion.
Shell companies have no significant assets, staff or operational capacity. They
pose a serious red flag as a bidder on public contracts, because they often hide
the interests of project or government officials, concealing a conflict of interest
and opportunities for money laundering. Also, by definition, they have no
experience.110chanroblesvirtuallawlibrary
MPEI qualifies as a shell or fictitious company. It was nonexistent at the time
of the invitation to bid; to be precise, it was incorporated only 11 days before
the bidding. It was a newly formed corporation and, as such, had no track
record to speak of.

Further, MPEI misrepresented itself in the bidding process as "lead company"

of the supposed joint venture. The misrepresentation appears to have been an
attempt to justify its lack of experience. As a new company, it was not eligible
to participate as a bidder. It could do so only by pretending that it was acting
as an agent of the putative consortium.

The timing of the incorporation of MPEI is particularly noteworthy. Its close

nexus to the date of the invitation to bid and the date of the bidding (11 days)
provides a strong indicium of the intent to use the corporate vehicle for
fraudulent purposes. This proximity unmistakably indicates that the
automation contract served as motivation for the formation of MPEI: a
corporation had to be organized so it could participate in the bidding by
claiming to be an agent of a pretended joint venture.

The timing of the formation of MPEI did not escape the scrutiny of Justice
Angelina Sandoval-Gutierrez, who made this observation in her Concurring
Opinion in the 2004 Decision:ChanRoblesVirtualawlibrary
At this juncture, it bears stressing that MPEI was incorporated only on
February 27, 2003 as evidenced by its Certificate of Incorporation. This goes to
show that from the time the COMELEC issued its Invitation to Bid (January
28, 2003) and Request for Proposal (February 17, 2003) up to the time it
convened the Pre-bid Conference (February 18, 2003), MPEI was literally a
non-existent entity. It came into being only on February 27, 2003 or eleven (11)
days prior to the submission of its bid, i.e. March 10, 2003. This poses a legal
obstacle to its eligibility as a bidder. The Request for Proposal requires the
bidder to submit financial documents that will establish to the BAC's
satisfaction its financial capability which include:ChanRoblesVirtualawlibrary
(1) audited financial statements of the Bidder's firm for the last three (3)
calendar years, stamped "RECEIVED" by the appropriate government agency,
to show its capacity to finance the manufacture and supply of Goods called for
and a statement or record of volumes of sales;

(2) Balance Sheet;

(3) Income Statement; and cralawlawlibrary

(4) Statement of Cash Flow.
As correctly pointed out by petitioners, how could MPEI comply with the above
requirement of audited financial statements for the last three (3) calendar years
if it came into existence only eleven (11) days prior to the bidding?

To do away with such complication, MPEI asserts that it was MP

CONSORTIUM who submitted the bid on March 10, 2003. It pretends
compliance with the requirements by invoking the financial capabilities and
long time existence of the alleged members of the MP CONSORTIUM, namely,
Election.Com, WeSolv, SK CeC, ePLDT and Oracle. It wants this Court to
believe that it is MP CONSORTIUM who was actually dealing with the
COMELEC and that its (MPEI) participation is merely that of a "lead company
and proponent" of the joint venture. This is hardly convincing. For one, the
contract for the supply and delivery of ACM was between COMELEC and MPEI,
not MP CONSORTIUM. As a matter of fad, there cannot be found in the
contract any reference to the MP CONSORTIUM or any member thereof for that
matter. For another, the agreements among the alleged members of MP
CONSORTIUM do not show the existence of a joint-venture agreement. Worse,
MPEI cannot produce the agreement as to the "joint and several liability" of the
alleged members of the MP CONSORTIUM as required by this Court in its
Resolution dated October 7, 2003.111chanroblesvirtuallawlibrary
Respondent MPEI was formed to perpetrate the fraud against petitioner.

The totality of the red flags found in this case leads Us to the inevitable
conclusion that MPEI was nothing but a sham corporation formed for the
purpose of defrauding petitioner. Its ultimate objective was to secure the
P1,248,949,088 automation contract. The scheme was to put up a corporation
that would participate in the bid and enter into a contract with the COMELEC,
even if the former was not qualified or authorized to do so.

Without the incorporation of MPEI, the defraudation of the government would

not have been possible. The formation of MPEI paved the way for its
participation in the bid, through its claim that it was an agent of a supposed
joint venture, its misrepresentations to secure the automation contract, its
misrepresentation at the time of the execution of the contract, its delivery of
the defective ACMs, and ultimately its acceptance of the benefits under the
automation contract.

The foregoing considered, veil-piercing is justified in this case.

We shall next consider the question of whose assets shall be reached by the
application of the piercing doctrine.
B. Because all the individual respondents actively participated in the
perpetration of the fraud against petitioner, their personal assets may be
subject to a writ of preliminary attachment by piercing the corporate veil.

A corporation's privilege of being treated as an entity distinct and separate from

the stockholders is confined to legitimate uses, and is subject to equitable
limitations to prevent its being exercised for fraudulent, unfair, or illegal
purposes.112 As early as the 19th century, it has been held
that:ChanRoblesVirtualawlibrary
The general proposition that a corporation is to be regarded as a legal entity,
existing separate and apart from the natural persons composing it, is not
disputed; but that the statement is a mere fiction, existing only in idea, is well
understood, and not controverted by any one who pretends to accurate
knowledge on the subject. It has been introduced for the convenience of the
company in making contracts, in acquiring property for corporate purposes, in
suing and being sued, and to preserve the limited liability of the stockholder by
distinguishing between the corporate debts and property of the company and of
the stockholders in their capacity as individuals. All fictions of law have been
introduced for the purpose of convenience, and to subserve the ends of justice.
It is in this sense that the maxim in fictione juris subsistit aequitas is used,
and the doctrine of fictions applied. But when they are urged to an intent and
purpose not within the reason and policy of the fiction, they have always been
disregarded by the courts. Broom's, Legal Maxims 130. "It is a certain rule,"
says Lord Mansfield, C.J., "that a fiction of law never be contradicted so as to
defeat the end for which it was invented, but for every other purpose it may be
contradicted." Johnson v. Smith, 2 Burr, 962.113chanroblesvirtuallawlibrary
The main effect of disregarding the corporate fiction is that stockholders will be
held personally liable for the acts and contracts of the corporation, whose
existence, at least for the purpose of the particular situation involved, is
ignored.114chanrobleslaw

We have consistently held that when the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, the law will
regard the corporation as an association of persons.115 Thus, considering that
We find it justified to pierce the corporate veil in the case before Us, MPEI
must, perforce, be treated as a mere association of persons whose assets are
unshielded by corporate fiction. Such persons' individual liability shall now be
determined with respect to the matter at hand.

Contrary to respondent Willy's claims, his participation in the fraud is clearly

established by his unequivocal agreement to the execution of the automation
contract with the COMELEC, and his signature that appears on the voided
contract. As far back as in the 2004 Decision, his participation as a signatory'
to the automation contract was already
established:ChanRoblesVirtualawlibrary
The foregoing argument is unpersuasive. First, the contract being referred to,
entitled "The Automated Counting and Canvassing Project Contract," is
between Comelec and MPEI, not the alleged consortium, MPC. To repeat, it is
MPEI - not MPC - that is a party to the Contract. Nowhere in that Contract is
there any mention of a consortium or joint venture, of members thereof much
less of joint and several liability. Supposedly executed sometime in May 2003,
the Contract bears a notarization date of June 30, 2003, and contains the
signature of Willy U. Yu signing as president of MPEI (not for and on behalf of
MPC), along with that of the Comelec chair. It provides in Section 3.2 that
MPEI (not MPC) is to supply the Equipment and perform the Services under the
Contract, in accordance with the appendices thereof; nothing whatsoever is
said about any consortium or joint venture or partnership. x x x (Emphasis
supplied)
That his signature appears on the automation contract means that he agreed
and acceded to its terms.116 His participation in the fraud involves his signing
and executing the voided contract.

The execution of the automation contract with a non-eligible entity and the
subsequent award of the contract despite the failure to meet the mandatory
requirements were "badges of fraud" in the procurement process that should
have been recognized by the CA to justify the issuance of the writ of
preliminary attachment against the properties of respondent Willy.

With respect to the other individual respondents, petitioner, in its Answer with
Counterclaim, alleged:ChanRoblesVirtualawlibrary
30. Also, inasmuch as MPEI is in truth a mere shell corporation with no real
assets in its name, incorporated merely to feign eligibility for the bidding of the
automated contract when it in fact had none, to the great prejudice of the
Republic, plaintiffs individual incorporators should likewise be made liable
together with MPEI for the automated contract amount paid to and received by
the latter. The following circumstances altogether manifest that the individual
incorporators merely cloaked themselves with the veil of corporate fiction to
perpetrate a fraud and to eschew liability therefor, thus:

chanRoblesvirtualLawlibraryx x x x

f.
From the time it was incorporated until today, MPEI has not complied with the
reportorial requirements of the Securities and Exchange Commission;
g.
Individual incorporators, acting fraudulently through MPEI, and in violation of
the bidding rules, then subcontracted the automation contract to four (4) other
corporations, namely: WeSolve Corporation, SK C&C, ePLDT and election.com,
to comply with the capital requirements, requisite five (5)-year corporate
standing and the technical qualifications of the Request for Proposal;
x x x x117chanroblesvirtuallawlibrary
In response to petitioner's allegations, respondents Willy and Bonnie stated in
their Reply and Answer (Re: Answer with Counterclaim dated 28 June
2004):118
3.3 As far as plaintiff MPEI and defendants-in-counterclaim are concerned,
they dealt with the COMELEC with full transparency and in utmost good faith.
All documents support its eligibility to bid for the supply of the ACMs and their
peripheral services, were submitted to the COMELEC for its evaluation in full
transparency. Pertinently, neither plaintiff MPEI nor any of its directors,
stockholders, officers or employees had any participation in the evaluation of
the bids and eventual choice of the winning
bidder.119chanroblesvirtuallawlibrary
Respondents Johnson's and Bernard's denials were made in paragraphs 2.17
and 3.3 of their Answer with Counterclaim to the Republic's Counterclaim, to
wit:120
2.17 The erroneous conclusion of fact and law in paragraph 30 (f) and (g) of the
Republic's answer is denied, having been pleaded in violation of the
requirement, that only ultimate facts arc to be stated in the pleadings and they
are falsehoods. The truth of the matter is that there could not have been fraud,
as these agreements were submitted to the COMELEC for its evaluation and
assessment, as to the qualification of the Consortium as a bidder, a showing of
transparency in plaintiffs dealings with the Republic.121chanrobleslaw

3.3 As far as plaintiff MPEI and defendants-in-counterclaim are concerned,

they dealt with the COMELEC with full transparency and in utmost good faith.
All documents support its eligibility to bid for the supply of the automated
counting machines and its peripheral services, were submitted to the
COMELEC for its evaluation in full transparency. Pertinently, the plaintiff or
any of its directors, stockholders, officers or employees had no participation in
the evaluation of the bids and eventual choice of the winning
bidder.122chanroblesvirtuallawlibrary
As regards Enrique and Rosita, the relevant paragraphs in the Answer with
Counterclaim to the Republic's Counterclaim123 are quoted
below:ChanRoblesVirtualawlibrary
2.17. The erroneous conclusion of fact and law in paragraph 30 (F) and (G) of
the Republic's answer is denied, having been pleaded in violation of the
requirement, that only ultimate facts are to be stated in the pleadings and they
are falsehoods. The truth of the matter is that there could not have been fraud,
as these agreements were submitted to the COMELEC for its evaluation and
assessment, as to the qualification of the Consortium as a bidder, a showing of
transparency in plaintiffs dealings with the Republic.124chanrobleslaw

3.3. As far as the plaintiff and herein answering defendants-in-counterclaim

are concerned, they dealt with the Commission on Elections with full
transparency and in utmost good faith. All documents in support of its
eligibility to bid for the supply of the automated counting machines and its
peripheral services were submitted to the Commission on Elections for its
evaluation in full transparency. Pertinently, the plaintiff or any of its directors,
stockholders, officers or employees had no participation in the evaluation of the
bids and eventual choice of the winning bidder.125chanroblesvirtuallawlibrary
Pedro and Laureano offer a similar defense in paragraph 3.3 of their Reply and
Answer with Counterclaim to the Republic's Counterclaim126 dated 28 June
2004, which reads:ChanRoblesVirtualawlibrary
3.3. As far as plaintiff MPEI and defendants-in-counterclaim are concerned,
they dealt with the COMELEC with full transparency and in utmost good faith.
All documents support its eligibility to bid for the supply of the ACMs and their
peripheral services, were submitted to the COMELEC for its evaluation in full
transparency. Pertinently, neither plaintiff MPEI nor any of its directors,
stockholders, officers or employees had any participation in the evaluation of
the bids and eventual choice of the winning
bidder.127chanroblesvirtuallawlibrary
It can be seen from the above-quoted paragraphs that the individual
respondents never denied their participation in the questioned transactions of
MPEI, merely raising the defense of good faith and shifting the blame to the
COMELEC. The individual respondents have, in effect, admitted that they had
knowledge of and participation in the fraudulent subcontracting of the
automation contract to the four corporations.

It bears stressing that the remaining individual respondents, together with

respondent Willy, incorporated MPEI. As incorporators, they are expected to be
involved in the management of the corporation and they are charged with the
duty of care. This is one of the reasons for the requirement of ownership of at
least one share of stock by an incorporator:ChanRoblesVirtualawlibrary
The reason for this, as explained by the lawmakers, is to avoid the confusion
and/or ambiguities arising in a situation under the old corporation law where
there exists one set of incorporators who are not even shareholders and
another set of directors/incorporators who must all be shareholders of the
corporation. The people who deal with said corporation at such an early stage
are confused as to who are the persons or group really authorized to act in
behalf of the corporation. (Proceedings of the Batasan Pambansa on the
Proposed Corporation Code). Another reason may be anchored on the
presumption that when an incorporator has pecuniary interest in the
corporation, no matter how minimal, he will be more involved in the
management of corporate affairs and to a greater degree, be concerned with the
welfare of the corporation.128chanroblesvirtuallawlibrary
As incorporators and businessmen about to embark on a new business venture
involving a sizeable capital (P300 million), the remaining individual
respondents should have known of Willy's scheme to perpetrate the fraud
against petitioner, especially because the objective was a billion peso
automation contract. Still, they proceeded with the illicit business venture.

It is clear to this Court that inequity would result if We do not attach personal
liability to all the individual respondents. With a definite finding that MPEI was
used to perpetrate the fraud against the government, it would be a great
injustice if the remaining individual respondents would enjoy the benefits of
incorporation despite a clear finding of abuse of the corporate vehicle. Indeed,
to allow the corporate fiction to remain intact would not subserve, but instead
subvert, the ends of justice.

III.
The factual findings of this Court that have become final cannot be modified or
altered, much less reversed, and are controlling in the instant case.

Respondents argue that the 2004 Decision did not resolve and could not have
resolved the factual issue of whether they had committed any fraud, as the
Supreme Court is not a trier of facts; and the 2004 case, being a certiorari
case, did not deal with questions of fact.129chanrobleslaw

Further, respondents argue that the findings of this Court ought to be confined
only to those issues actually raised and resolved in the 2004 case, in
accordance with the principle of conclusiveness of judgment.130 They explain
that the issues resolved in the 2004 Decision were only limited to the following:
(1) whether to declare COMELEC Resolution No. 6074 null and void; (2)
whether to enjoin the implementation of any further contract that may have
been entered into by COMELEC with MPC or MPEI; and (3) whether to compel
COMELEC to conduct a rebidding of the project.131chanrobleslaw

It is obvious that respondents are merely trying to escape the implications or

effects of the nullity of the automation contract that they had executed. Section
1, Rule 65 of the Rules of Court, clearly sets forth the instances when a
petition for certiorari can be used as a proper
remedy:ChanRoblesVirtualawlibrary
Section 1. Petition for certiorari. — When any tribunal, board or officer
exercising judicial or quasi-judicial functions has acted without or in excess of
its jurisdiction, or with grave abuse of discretion amounting to lack or excess of
jurisdiction, and there is no appeal, or any plain, speedy, and adequate remedy
in the ordinary course of law. a person aggrieved thereby may file a verified
petition in the proper court, alleging the facts with certainty and praying that
judgment be rendered annulling or modifying the proceedings of such tribunal,
board or officer, and granting such incidental reliefs as law and justice may
require.
The term "grave abuse of discretion" has a specific meaning. An act of a court
or tribunal can only be considered to have been committed with grave abuse of
discretion when the act is done in a "capricious or whimsical exercise of
judgment as is equivalent to lack of jurisdiction."132 The abuse of discretion
must be so patent and gross as to amount to an "evasion of a positive duty or
to a virtual refusal to perform a duty enjoined by law, or to act at all in
contemplation of law, as where the power is exercised in an arbitrary and
despotic manner by reason of passion and hostility."133 Furthermore, the use
of a petition for certiorari is restricted only to "truly extraordinary cases
wherein the act of the lower court or quasi-judicial body is wholly void."134
From the foregoing definition, it is clear that the special civil action of certiorari
under Rule 65 can only strike down an act for having been done with grave
abuse of discretion if the petitioner could manifestly show that such act was
patent and gross.135chanrobleslaw

We had to ascertain from the evidence whether the COMELEC committed grave
abuse of discretion, and in the process, were justified in making some factual
findings. The conclusions derived from the factual findings are inextricably
intertwined with this Court's determination of grave abuse of discretion. They
have a direct bearing and are in fact necessary to illustrate that the award of
the automation contract was done hastily and in direct violation of law. This
Court has indeed made factual findings based on the evidence presented before
it; in turn, these factual findings constitute the controlling legal rule between
the parties that cannot be modified or amended by any of them. This Court is
bound to consider the factual findings made in the 2004 Decision in order to
declare that there is fraud for the purpose of issuing the writ of preliminary
attachment.

Respondents appear to have misunderstood the implications of the principle of

conclusiveness of judgment on their cause. Contrary to their claims, the
factual findings are conclusive and have been established as the controlling
legal rule in the instant case, on the basis of the principle of res judicata—more
particularly, the principle of conclusiveness of judgment.

This doctrine of res judicata which is set forth in Section 47 of Rule 39 of the
Rules of Court136 lays down two main rules, namely: (1) the judgment or
decree of a court of competent jurisdiction on the merits concludes the
litigation between the parties and their privies and constitutes a bar to a new
action or suit involving the same cause of action either before the same or any
other tribunal; and (2) any right, fact, or matter in issue directly adjudicated or
necessarily involved in the determination of an action before a competent court
in which a judgment or decree is rendered on the merits is conclusively settled
by the judgment therein and cannot again be litigated between the parties and
their privies whether or not the claims or demands, purposes, or subject
matters of the two suits are the same.137chanrobleslaw

These two main rules mark the distinction between the principles governing
the two typical cases in which a judgment may operate as evidence.138 The
first general rule stated above and corresponding to the afore-quoted
paragraph (b) of Section 47, Rule 39 of the Rules of Court, is referred to as "bar
by former judgment"; while the second general rule, which is embodied in
paragraph (c) of the same section and rule, is known as "conclusiveness of
judgment."139chanrobleslaw
In Calalang v. Register of Deeds of Quezon City,140 We discussed the concept
of conclusiveness of judgment as pertaining even to those matters essentially
connected with the subject of litigation in the first action. This Court explained
therein that the bar on re-litigation extends to those questions necessarily
implied in the final judgment, although no specific finding may have been
made in reference thereto, and although those matters were directly referred to
in the pleadings and were not actually or formally presented. If the record of
the former trial shows that the judgment could not have been rendered without
deciding a particular matter, it will be considered as having settled that matter
as to all future actions between the parties; and if a judgment necessarily
presupposes certain premises, they are as conclusive as the judgment
itself:ChanRoblesVirtualawlibrary
The second concept — conclusiveness of judgment — states that a fact or
question which was in issue in a former suit and was there judicially passed
upon and determined by a court of competent jurisdiction, is conclusively
settled by the judgment therein as far as the parties to that action and persons
in privity with them are concerned and cannot be again litigated in any future
action between such parties or their privies, in the same court or any other
court of concurrent jurisdiction on either the same or different cause of action,
while the judgment remains unreversed by proper authority. It has been held
that in order that a judgment in one action can be conclusive as to a particular
matter in another action between the same parties or their privies, it is
essential that the issue be identical. If a particular point or question is in issue
in the second action, and the judgment will depend on the determination of
that particular point or question, a former judgment between the same parties
or their privies will be final and conclusive in the second if that same point or
question was in issue and adjudicated in the first suit (Nabus v. Court of
Appeals, 193 SCRA 732 [1991]). Identity of cause of action is not required but
merely identity of issue.

Justice Fcliciano, in Smith Bell & Company (Phils.), Inc. v. Court of Appeals
(197 SCRA 201, 210 [1991]), reiterated Lopez v. Reyes (76 SCRA 179 [1977]) in
regard to the distinction between bar by former judgment which bars the
prosecution of a second action upon the same claim, demand, or cause of
action, and conclusiveness of judgment which bars the relitigation of particular
facts or issues in another litigation between the same parties on a different
claim or cause of action.
The general rule precluding the re-litigation of material facts or questions
which were in issue and adjudicated in former action are commonly applied to
all matters essentially connected with the subject matter of the litigation. Thus,
it extends to questions necessarily implied in the final judgment, although no
specific finding may have been made in reference thereto and although such
matters were directly referred to in the pleadings and were not actually or
formally presented. Under this rule, if the record of the former trial shows that
the judgment could not have been rendered without deciding the particular
matter, it will be considered as having settled that matter as to all future
actions between the parties and if a judgment necessarily presupposes certain
premises, they are as conclusive as the judgment itself.141 (Emphases
supplied)
The foregoing disquisition finds application to the case at bar.

Undeniably, the present case is merely an adjunct of the 2004 case, in which
the automation contract was declared to be a nullity. Needless to say, the 2004
Decision has since become final. As earlier explained, this Court arrived at
several factual findings showing the illegality of the automation contract; in
turn, these findings were used as basis to justify the declaration of nullity.

A closer scrutiny of the 2004 Decision would reveal that the judgment could
not have been rendered without deciding particular factual matters in relation
to the following: (1) identity, existence and eligibility of MPC as a bidder; (2)
failure of the ACMs to pass DOST technical tests; and (3) remedial measures
undertaken by the COMELEC after the award of the automation contract.
Under the principle of conclusiveness of judgment, We are precluded from re-
litigating these facts, as these were essential to the question of nullity.
Otherwise stated, the judgment could not have been rendered without
necessarily deciding on the above-enumerated factual matters.

Thus, under the principle of conclusiveness of judgment, those material facts

became binding and conclusive on the parties, in this case MPEI and,
ultimately, the persons that comprised it. When a right or fact has been
judicially tried and determined by a court of competent jurisdiction, or when an
opportunity for that trial has been given, the judgment of the court—as long as
it remains unreversed—should be conclusive upon the parties and those in
privity with them.142 Thus, the CA should not have required petitioner to
present further evidence of fraud on the part of respondent Willy and MPEI, as
it was already necessarily adjudged in the 2004 case.

To allow respondents to argue otherwise would be violative of the principle of

immutability of judgment. When a final judgment becomes executory, it
becomes immutable and unalterable and may no longer undergo any
modification, much less any reversal.143 In Navarro v. Metropolitan Bank &
Trust Company144 this Court explained that the underlying reason behind
this principle is to avoid delay in the administration of justice and to avoid
allowing judicial controversies to drag on indefinitely,
viz.:ChanRoblesVirtualawlibrary
No other procedural law principle is indeed more settled than that once a
judgment becomes final, it is no longer subject to change, revision, amendment
or reversal, except only for correction of clerical errors, or the making of nunc
pro tunc entries which cause no prejudice to any party, or where the judgment
itself is void. The underlying reason for the rule is two-fold: (1) to avoid delay in
the administration of justice and thus make orderly the discharge of judicial
business, and (2) to put judicial controversies to an end, at the risk of
occasional errors, inasmuch as controversies cannot be allowed to drag on
indefinitely and the rights and obligations of every litigant must not hang in
suspense for an indefinite period of time. As the Court declared in Yau v.
Silverio,
Litigation must end and terminate sometime and somewhere, and it is
essential to an effective and efficient administration of justice that, once a
judgment has become final, the winning party be, not through a mere
subterfuge, deprived of the fruits of the verdict. Courts must therefore guard
against any scheme calculated to bring about that result. Constituted as they
are to put an end to controversies, courts should frown upon any attempt to
prolong them.
Indeed, just as a losing party has the right to file an appeal within the
prescribed period, the winning party also has the correlative right to enjoy the
finality of the resolution of his case by the execution and satisfaction of the
judgment. Any attempt to thwart this rigid rule and deny the prevailing litigant
his right to savor the fruit of his victory must immediately be struck down. x x
x. (Emphasis supplied)145chanroblesvirtuallawlibrary
In the instant case, adherence to respondents' position would mean a complete
disregard of the factual findings We made in the 2004 Decision, and would
certainly be tantamount to reversing the same. This would invariably cause
further delay in the efforts to recover the amounts of government money
illegally disbursed to respondents back in 2004.

Next, respondents argue that the findings of fact in the 2004 Decision are not
conclusive146 considering that eight (8) of the fifteen (15) justices of this Court
refused to go along with the factual findings as stated in the majority
opinion.147 This argument fails to convince.

Fourteen (14) Justices participated in the promulgation of the 2004 Decision.

Out of the fourteen (14) Justices, three (3) Justices registered their dissent,148
and two (2) Justices wrote their Separate Opinions, each recommending the
dismissal of the Petition.149 Of the nine (9) Justices who voted to grant the
Petition, four (4) joined the ponente in his disposition of the case,150 and two
(2) Justices wrote Separate Concurring Opinions.151 As to the remaining two
(2) Justices, one (1) Justice152 merely concurred in the result, while the other
joined another Justice in her Separate Opinion.153chanrobleslaw

Contrary to the allegations of respondents, an examination of the voting shows

that nine (9) Justices voted in favor of the majority opinion, without any
qualification regarding the factual findings made therein. In fact, the two (2)
Justices who wrote their own Concurring Opinions echoed the lack of eligibility
of MPC and the failure of the ACMs to pass the mandatory requirements.

Finally, respondents cannot argue that, from the line of questioning of then
Justice Leonardo A. Quisumbing during the oral arguments in the 2004 case,
he did not agree with the factual findings of this Court. Oral arguments before
this Court are held precisely to test the soundness of each proponent's
contentions. The questions and statements propounded by Justices during
such an exercise are not to be construed as their definitive opinions. Neither
are they indicative of how a Justice shall vote on a particular issue; indeed,
Justice Quisumbing clearly states in the 2004 Decision that he concurs in the
results. At any rate, statements made by Our Members during oral arguments
are not stare decisis; what is conclusive are the decisions reached by the
majority of the Court.

IV.
The delivery of 1,991 units of ACMs does not negate fraud on the part of
respondents Willy and MPEI.

The CA in its Amended Decision explained that respondents could not be

considered to have fostered a fraudulent intent to not honor their obligation,
since they delivered 1,991 units of ACMs.154 In turn, respondents argue that
respondent MPEI had every intention of fulfilling its obligation, because it in
fact delivered the ACMs as required by the automation
contract.155chanrobleslaw

We disagree with the CA and respondents. The fact that the ACMs were
delivered cannot induce this Court to disregard the fraud respondent MPEI had
employed in securing the award of the automation contract, as established
above. Furthermore, they cannot cite the fact of delivery in their favor,
considering that the ACMs delivered were substandard and noncompliant with
the requirements initially set for the automation project.

In Our 2004 Decision, We already found the ACMs to be below the standards
set by the COMELEC. The noncompliant status of these ACMs was reiterated
by this Court in its 2005 and 2006 Resolutions. The CA therefore gravely erred
in considering the delivery of 1,991 ACMs as evidence of respondents'
willingness to perform the obligation (and thus, their lack of fraud) considering
that, as exhaustively discussed earlier, the ACMs delivered were plagued with
defects and failed to meet the requirements set for the automation project.

Under Article 1233 of the New Civil Code, a debt shall not be understood to
have been paid, unless the thing or service in which the obligation consists has
been completely delivered or rendered. In this case, respondents cannot be
considered to have performed their obligation, because the ACMs were
defective.

V.
Estoppel does not lie against the State when it acts to rectify the mistakes,
errors or illegal acts of its officials and agents.

Respondents claim that the 2004 Decision may not be invoked against them,
since the petitioner and the respondents were co-respondents and not adverse
parties in the 2004 case. Respondents further explain that since petitioner and
respondents were on the same side at the time, had the same interest, and
took the same position on the validity and regularity of the automation
contract, petitioner cannot now invoke the 2004 Decision against
them.156chanrobleslaw

Contrary to respondents' contention, estoppel generally finds no application

against the State when it acts to rectify mistakes, errors, irregularities, or
illegal acts of its officials and agents, irrespective of rank. This principle
ensures the efficient conduct of the affairs of the State without any hindrance
to the implementation of laws and regulations by the government. This holds
true even if its agents' prior mistakes or illegal acts shackle government
operations and allow others—some by malice—to profit from official error or
misbehavior, and even if the rectification prejudices parties who have
meanwhile received benefit.157 Indeed, in the 2004 Decision, this Court even
directed the Ombudsman to determine the possible criminal liability of public
officials and private persons responsible for the contract, and the OSG to
undertake measures to protect the government from the ill effects of the illegal
disbursement of public funds.158chanrobleslaw

The equitable doctrine of estoppel for the prevention of injustice and is for the
protection of those who have been misled by that which on its face was fair and
whose character, as represented, parties to the deception will not, in the
interest of justice, be heard to deny.159 It cannot therefore be utilized to
insulate from liability the very perpetrators of the injustice complained of.

VI.
The findings of the Office of the Ombudsman are not controlling in the instant
case.

Respondents further claim that this Court has recognized the fact that it did
not determine or adjudge any fraud that may have been committed by
individual respondents. Rather, it referred the matter to the Ombudsman for
the determination of criminal liability.160 The Ombudsman in fact made its
own determination that there was no probable cause to hold individual
respondents criminally liable.161chanrobleslaw

Respondents miss the point. The main issue in the instant case is whether
respondents are guilty of fraud in obtaining and executing the automation
contract, to justify the issuance of a writ of preliminary attachment in
petitioner's favor. Meanwhile, the issue relating to the proceedings before the
Ombudsman (and this Court in G.R. No. 174777) pertains to the finding of lack
of probable cause for the possible criminal liability of respondents under the
Anti-Graft and Corrupt Practices Act.
The matter before Us involves petitioner's application for a writ of preliminary
attachment in relation to its recovery of the expended amount under the voided
contract, and not the determination of whether there is probable cause to hold
respondents liable for possible criminal liability due to the nullification of the
automation contract. Whether or not the Ombudsman has found probable
cause for possible criminal liability on the part of respondents is not controlling
in the instant case.

CONCLUSION

If the State is to be serious in its obligation to develop and implement

coordinated anti-corruption policies that promote proper management of public
affairs and public property, integrity, transparency and accountability,162 it
needs to establish and promote effective practices aimed at the prevention of
corruption,163 as well as strengthen our efforts at asset
recovery.164chanrobleslaw

As a signatory to the United Nations Convention Against Corruption

(UNCAC),165 the Philippines acknowledges its obligation to establish
appropriate systems of procurement based on transparency, competition and
objective criteria in decision-making that are effective in preventing
corruption.166 To promote transparency, and in line with the country's efforts
to curb corruption, it is useful to identify certain fraud indicators or "red flags"
that can point to corrupt activity.167 This case - arguably the first to provide
palpable examples of what could be reasonably considered as "red flags" of
fraud and malfeasance in public procurement - is the Court's contribution to
the nation's continuing battle against corruption, in accordance with its
mandate to dispense justice and safeguard the public interest.

WHEREFORE, premises considered, the Petition is GRANTED. The Amended

Decision dated 22 September 2008 of the Court of Appeals in CA-G.R. SP. No.
95988 is ANNULLED AND SET ASIDE. A new one is entered DIRECTING the
Regional Trial Court of Makati City, Branch 59, to ISSUE in Civil Case No. 04-
346, entitled Mega Pacific eSolutions, Inc., vs. Republic of the Philippines, the
Writ of Preliminary Attachment prayed for by petitioner Republic of the
Philippines against the properties of respondent Mega Pacific eSolutions, Inc.,
and Willy U. Yu, Bonnie S. Yu, Enrique T. Tansipek, Rosita Y. Tansipek, Pedro
O. Tan, Johnson W. Fong, Bernard I. Fong and Lauriano Barrios.

No costs.

SO ORDERED.chanRoblesvirtualLawlibrary
For a number of years prior to the times alleged in the complaint, the plaintiff
was in the employ of the International Banking Corporation of Manila, and it is
conceded that he is a competent and experienced business man. July 31,
1916, C. D. Willits and I. L. Patterson were partners doing business in San
Francisco, California, under the name of Willits & Patterson. The plaintiff was
then in San Francisco, and as a result of negotiations the plaintiff and the firm
entered into a written contract, known in the record as Exhibit A, by which the
plaintiff was employed as the agent of the firm in the Philippine Islands for
certain purposes for the period of five years at a minimum salary of $200 per
month and travelling expenses. The plaintiff returned to Manila and entered on
the discharge of his duties under the contract. As a result of plaintiff's
employment and the world war conditions, the business of the firm in the
Philippines very rapidly increased and grew beyond the fondest hopes of either
party. A dispute arose between the plaintiff and the firm as to the construction
of Exhibit A as to the amount which plaintiff should receive for his services.
Meanwhile Patterson retired from the firm and Willits became the sole owner of
its assets. For convenience of operation and to serve his own purpose, Willits
organized a corporation under the laws of California with its principal office at
San Francisco, in and by which he subscribed for, and became the exclusive
owner of all the capital stock except a few shares for organization purposes
only, and the name of the firm was used as the name of the corporation. A
short time after that Willits came to Manila and organized a corporation here
known as Willits & Patterson, Ltd., in and to which he again subscribed for all
of the capital stock except the nominal shares necessary to qualify the
directors. In legal effect, the San Francisco corporation took over and acquired
all of the assets and liabilities of the Manila corporation. At the time that Willits
was in Manila and while to all intents and purposes he was the sole owner of
the stock of corporations, there was a conference between him and the plaintiff
over the disputed construction of Exhibit A. As a result of which another
instrument, known in the record as Exhibit B, was prepared in the form of a
letter which the plaintiff addressed to Willits at Manila on November 10, 1919,
the purpose of which was to more clearly define and specify the compensation
which the plaintiff was to receive for his services. Willits received and
confirmed this letter by signing the name of Willits & Patterson, By C.d. Willits.
At the time both corporations were legally organized, and there is nothing in
the corporate minutes to show that Exhibit B was ever formally ratified or
approved by either corporation. After its organization, the Manila corporation
employed a regular accountant whose duty it was to audit the accounts of the
company and render financial statements both for the use of the local banks
and the local and parent corporations at San Francisco. From time to time and
in the ordinary course of business such statements of account were prepared
by the accountant and duly forwarded to the home office, and among other
things was a statement of July 31, 1921, showing that there was due and
owing the plaintiff under Exhibit B the sum of P106,277.50. A short time
previous to that date, the San Francisco corporation became involved in
financial trouble, and all of its assets were turned over to a "creditors'
committee." When this statement was received, the "creditors' committee"
immediately protested its allowance. An attempt was made without success to
adjust the matter on a friendly basis and without litigation. January 10, 1922,
the plaintiff brought this action to recover from the defendant the sum of
P106,277.50 with legal interest and costs, and written instruments known in
the record as Exhibits A and B were attached to, and made a part of, the
complaint.

For answer, the defendant admits the formal parts of the complaint, the
execution of Exhibit A and denies each and every other allegation, except as
specifically admitted, and alleges that what is known as Exhibit B was signed
by Willits without the authority of the defendant corporation or the firm of
Willits & Patterson, and that it is not an agreement which was ever entered into
with the plaintiff by the defendant or the firm, and, as a separate defense and
counterclaim, it alleges that on the 30th of June, 1920, there was a balance
due and owing the plaintiff from the defendant under the contract Exhibit A of
the sum of P8,741.05. That his salary from June 30, 1920, to July 31, 1921,
under Exhibit A was $400 per month, or a total of P10,400. That about July 6,
1921, the plaintiff wrongfully took P30,000 from the assets of the firm, and
that he is now indebted to the firm in the sum of P10,858.95, with interest and
costs, from which it prays judgement.

The plaintiff admits that he withdrew the P30,000, but alleges that it was with
the consent and authority of the defendant, and denies all other new matter in
the answer.

Upon such issues a trial was had, and the lower court rendered judgment in
favor of the defendant as prayed for in its counterclaim, from which the
plaintiff appeals, contending that the trial court erred in not holding that the
contract between the parties is that which is embodied in Exhibits A and B,
and that the defendant assumed all partnership obligations, and in failing to
render judgment for the plaintiff, as prayed for, and in dismissing his
complaint, and denying plaintiff's motion for a new trial.

JOHNS, J.:

In their respective briefs opposing counsel agree that the important questions
involved are "what was the contract under which the plaintiff rendered services
for five years ending July 31, 1921," and "what is due the plaintiff under that
contract." Plaintiff contends that his services were performed under Exhibits A
and B, and that the defendant assumed all of the obligations of the original
partnership under Exhibit A, and is now seeking to deny its liability under, and
repudiate, Exhibit B. The defendant admits that Exhibit A was the original
contract between Arnold and the firm of Willits & Patterson by which he came
to the Philippine Islands, and that it was therein agreed that he was to be
employed for a period of five years as the agent of Willits & Patterson in the
Philippine Islands to operate a certain oil mill, and to do such other business
as might be deemed advisable for which he was to receive, first, the travelling
expenses of his wife and self from San Francisco to Manila, second, the
minimum salary of $200 per month, third, a brokerage of 1 per cent upon all
purchases and sales of merchandise, except for the account of the coconut oil
mill, fourth, one-half of the profits on any transaction in the name of the firm
or himself not provided for in the agreement. That the agreement also provided
that if it be found that the business was operated at a loss, Arnold should
receive a monthly salary of $400 during such period. That the business was
operated at a loss from June 30, 1920, to July 31, 1921, and that for such
reason, he was entitled to nothing more than a salary of $400 per month, or for
that period P10,400. Adding this amount to the P8,741.05, which the
defendant admits he owed Arnold on June 30, 1920, makes a total of
P19,141.05, leaving a balance due the defendant as set out in the
counterclaim. In other words, that the plaintiff's compensation was measured
by, and limited to, the above specified provisions in the contract Exhibit A, and
that the defendant corporation is not bound by the terms or provisions of
Exhibit B, which is as follows:

WILLITS & PATTERSON, LTD.

MANILA, P. I., Nov. 10, 1919.

CHAS. D. WILLITS, Esq.,

Present.

DEAR MR. WILLITS: My understanding of the intent of my agreement with

Willits & Patterson is as under:

Commissions. Willits & Patterson, San Francisco, pay me a commission of one

per cent on all purchases made for them in the Philippines or sales made to
them by Manila and one per cent on all sales made for them in the Philippines,
or purchases made from them by Manila. If such purchases or sales are on an
f. o. b. basis the commission is on the f. o. b. price; if on a c. i. f. basis the
commission is computed on the c. i. f. price

These commissions are credited to me in San Francisco.

I do not participate in any profits on business transacted between Willits &

Patterson, San Francisco, and Willits & Patterson, Ltd., Manila.

Profits. On all business transacted between Willits & Patterson, Ltd. and others
than Willits & Patterson, San Francisco, half the profits are to be credited to
my account and half to the Profit & Loss account of Willits & Patterson, Ltd.,
Manila.
On all other business, such as the Cooperative Coconut Products Co. account,
or any other business we may undertake as agents or managers, half the
profits are to be credited to my account and half to the Profit & Loss account of
Willits & Patterson, Ltd., Manila.

Where Willits & Patterson, San Francisco, or Willits & Patterson, Ltd., Manila,
have their own funds invested in the capital stock or a corporation, I of course
do not participate in the earnings of such stock, any more than Willits &
Patterson would participate in the earnings of stock held by me on my account.

If the foregoing conforms to your understanding of our agreement, please

confirm below.

Yours faithfully,

(Sgd.) G. C. ARNOLD

Confirmed:

WILLITS & PATTERSON

By (Sgd.) CHAS. D. WILLITS

There is no dispute about any of the following facts: That at the inception C.D.
Willits and I. L. Patterson constituted the firm of Willits & Patterson doing
business in the City of San Francisco; that later Patterson retired from the
firm, and Willits acquired all of his interests and thereafter continued the
business under the name and style of Willits & Patterson; that the original
contract Exhibit A was made between the plaintiff and the old firm at San
Francisco on July 31, 1916, to cover a period of five years from that date; that
plaintiff entered upon the discharged of his duties and continued his services
in the Philippine Islands to someone for the period of five years; that on
November 10, 1919, and as a result of conferences between Willits and the
plaintiff, Exhibit B was addressed and signed in the manner and form above
stated in the City of Manila. A short time prior to that date Willits organized a
corporation in San Francisco, in the State of California, which took over and
acquired all of the assets of the firm's business in California then being
conducted under the name and style of Willits & Patterson; that he subscribed
for all of the capital stock of the corporation, and that in truth and in fact he
was the owner of all of its capital stock. After this was done he caused a new
corporation to be organized under the laws of the Philippine Islands with
principal office at Manila, which took over and acquired all the business and
assets of the firm of Willits & Patterson in the Philippine Islands, in and to
which, in legal effect, he subscribed for all of its capital stock, and was the
owner of all of its stock. After both corporations were organized the above letter
was drafted and signed. The plaintiff contends that the signing of Exhibit B in
the manner and under the conditions in which it was signed, and through the
subsequent acts and conduct of the parties, was ratified and, in legal effect,
became and is now binding upon the defendant.

It will be noted that Exhibit B was executed in Manila, and that at the time it
was signed by Willits, he was to all intents and purposes the legal owner of all
the stock in both corporations. It also appears from the evidence that the
parent corporation at San Francisco took over and acquired all of the assets
and liabilities of the local corporation at Manila. That after it was organized the
Manila corporation kept separate records and account books of its own, and
that from time to time financial statements were made and forwarded to the
home office, from which it conclusively appears that plaintiff was basing his
claim for services upon Exhibit A, as it was modified by Exhibit B. That at no
time after Exhibit B was signed was there ever any dispute between plaintiff
and Willits as to the compensation for plaintiff's services. That is to say, as
between the plaintiff and Willits, Exhibit B was approved, followed and at all
times in force and effect, after it was signed November 10, 1919. It appears
from an analysis of Exhibit B that it was for the mutual interest of both parties.
From a small beginning, the business was then in a very flourishing conditions
and growing fast, and the profits were very large and were running into big
money.

Among other things, Exhibit A provided: "(a) That the net profits from said
coconut oil business shall be divided in equal shares between the said parties
hereto; (b) that Arnold should receive a brokerage of 1 per cent from all
purchases and sales of merchandise, except for the account of the coconut
mills; (c) that the net profits from all other business should be divided in equal
half shares between the parties hereto."

Under the above provisions, the plaintiff might well contend that he was
entitled to one-half of all the profits and a brokerage of 1 per cent from all
purchases and sales, except those for the account of the coconut oil mills,
which under the volume of business then existing would run into a very large
sum of money. It was for such reason and after personal conferences between
them, and to settle all disputed questions, that Exhibit B was prepared and
signed.

The record recites that "the defendant admits that from July 31, 1916 to July
31, 1921, the plaintiff faithfully performed all the duties incumbent upon him
under his contract of employment, it being understood, however, that this
admission does not include an admission that the plaintiff placed a proper
interpretation upon his right to remuneration under said contract of
employment."
It being admitted that the plaintiff worked "under his contract of employment"
for the period of five years, the question naturally arises, for whom was he
working? His contract was made with the original firm of Willits & Patterson,
and that firm was dissolved and it ceased to exist, and all of its assets were
merged in, and taken over by, the parent corporation at San Francisco. In the
very nature of things, after the corporation was formed, the plaintiff could not
and did not continue to work for the firm, and, yet, he continued his
employment for the full period of five years. For whom did he work after the
partnership was merged in the corporation and ceased to exist?

It is very apparent that, under the conditions then existing, the signing of
Exhibit B was for the mutual interests of both parties, and that if the contract
Exhibit A was to be enforced according to its terms, that Arnold might well
contend for a much larger sum of money for his services. In truth and in fact
Willits and both corporations recognized his employment and accepted the
benefits of his services. He continued his employment and rendered his
services after the corporation were organized and Exhibit B was signed just the
same as he did before, and both corporations recognized and accepted his
services. Although the plaintiff was president of the local corporation, the
testimony is conclusive that both of them were what is known as a one man
corporation, and Willits, as the owner of all of the stock, was the force and
dominant power which controlled them. After Exhibit B was signed it was
recognized by Willits that the plaintiff's services were to be performed and
measured by its term and provisions, and there never was any dispute between
plaintiff and Willits upon that question.

The controversy first arose after the corporation was in financial trouble and
the appointment of what is known in the record as a "creditors' committee."
There is no claim or pretense that there was any fraud or collusion between
plaintiff and Willits, and it is very apparent that Exhibit B was to the mutual
interest of both parties. It is elementary law that if Exhibit B is a binding
contract between the plaintiff and Willits and the corporations, it is equally
binding upon the creditors' committee. It would not have any higher or better
legal right than the corporation itself, and could not make any defense which it
could not make. It is very significant that the claim or defense which is now
interposed by the creditors' committee was never made or asserted at any
previous time by the defendant, and that it never was made by Willits, and it is
very apparent that if he had remained in control of the corporation, it would
never have made the defense which is now made by the creditors' committee.
The record is conclusive that at the time he signed Exhibit B, Willits was, in
legal effect, the owner and holder of all the stock in both corporations, and that
he approved it in their interest, and to protect them from the plaintiff having
and making a much larger claim under Exhibit A. As a matter of fact, it
appears from the statement of Mr. Larkin, the accountant, in the record that if
plaintiff's cause of action was now founded upon Exhibit A, he would have a
claim for more than P160,000.
Thompson on Corporations, 2d ed., vol. I, section 10, says:

The proposition that a corporation has an existence separate and distinct from
its membership has its limitations. It must be noted that this separate
existence is for particular purposes. It must also be remembered that there can
be no corporate existence without persons to compose it; there can be no
association without associates. This separate existence is to a certain extent a
legal fiction. Whenever necessary for the interests of the public or for the
protection or enforcement of the rights of the membership, courts will disregard
this legal fiction and operate upon both the corporation and the persons
composing it.

In the same section, the author quotes from a decision in 49 Ohio State, 1371;
15 L. R. A., 145, in which the Supreme Court of Ohio says:

"So long as a proper use is made of the fiction that a corporation is an entity
apart from its shareholders, it is harmless, and, because convenient, should
not be called in question; but where it is urged to an end subversive of its
policy, or such is the issue, the fiction must be ignored, and the question
determined whether the act in question, though done by shareholders, — that
is to say, by the persons uniting in one body, — was done simply as
individuals, and with respect to their individual interest as shareholders, or
was done ostensibly as such, but, as a matter of fact, to control the
corporation, and affect the transaction of its business, in the same manner as
if the act had been clothed with all the formalities of a corporate act. This must
be so, because, the stockholders having a dual capacity, and capable of acting
in either, and a possible interest to conceal their character when acting in their
corporate capacity, the absence of the formal evidence of the character of the
act cannot preclude judicial inquiry on the subject. If it were otherwise, then in
that department of the law fraud would enjoy an immunity awarded to it in no
other."

Where the stock of a corporation is owned by one person whereby the

corporation functions only for the benefit of such individual owner, the
corporation and the individual should be deemed to be the same. (U. S.
Gypsum Co. vs. Mackay Wall Plaster Co., 199 Pac., 249.)

Ruling Case Law, vol. 7, section 663, says:

While of course a corporation cannot ratify a contract which is strictly ultra

vires, and which it in the first instance could not have made, it may by
ratification render binding on it a contract, entered into on its behalf by its
officers or agents without authority. As a general rule such ratification need
not be manifested by any voted or formal resolution of the corporation or be
authenticated by the corporate seal; no higher degree of evidence is requisite in
establishing ratification on the part of a corporation, than is requisite in
showing an antecedent authorization.

xxx xxx xxx

SEC. 666. The assent or approval of a corporation to acts done on its account
may be inferred in the same manner that the absent of a natural person may
be, and it is well settled that where a corporation with full knowledge of the
unauthorized act of its officer or agents acquiesces in and consents to such
acts, it thereby ratifies them, especially where the acquiescence results in
prejudice to a third person.

xxx xxx xxx

SEC. 669. So, when, in the usual course of business of a corporation, an officer
has been allowed in his official capacity to manage its affair, his authority to
represent the corporation may be inferred from the manner in which he has
been permitted by the directors to transact its business.

SEC. 656. In accordance with a well-known rule of the law of agency, notice to
corporate officers or agents within the scope or apparent scope of their
authority is attributed to the corporation.

SEC. 667. As a general rule, if a corporation with knowledge of its agents

unauthorized act received and enjoys the benefits thereof, it impliedly ratifies
the unauthorized act if it is one capable of ratification by parol.

In its article on corporations, Corpus Juris, in section 2241 says:

Ratification by a corporation of a transaction not previously authorized is more

easily inferred where the corporation receives and retains property under it,
and as a general rule where a corporation, through its proper officers or board,
takes and retains the benefits of the unauthorized act or contract of an officer
or agent, with full knowledge of all the material facts, it thereby ratifies and
becomes bound by such act of contract, together with all the liabilities and
burdens resulting therefrom, and in some jurisdiction this rule is, in effect,
declared by statute. Thus the corporation is liable on the ground of ratification
where, with knowledge of the facts, it accepts the benefit of services rendered
under an unauthorized contract of employment . . . .

Applying the law to the facts.

Mr. Larkin, an experienced accountant, was employed by the local corporation,
and from time to time and in the ordinary course of business made and
prepared financial statements showing its assets and liabilities, true copies of
which were sent to the home office in San Francisco. It appears upon their face
that plaintiff's compensation was made and founded on Exhibit B, and that
such statements were made and prepared by the accountant on the
assumption that Exhibit B was in full force and effect as between the plaintiff
and the defendant. In the course of business in the early part of 1920, plaintiff,
as manager of the defendant, sold 500 tons of oil for future delivery at P740 per
ton. Due to break in the market, plaintiff was able to purchase the oil at P380
per ton or a profit of P180,000.

It appears from Exhibit B under the heading of "Profits" that:

On all the business transacted between Willits & Patterson, Ltd. and others
than Willits & Patterson, San Francisco, half the profit are to be credited to
may account and half to the Profit & Loss account Willits & Patterson, Ltd.,
Manila.

The purchasers paid P105,000 on the contracts and gave their notes for
P75,000, and it was agreed that all of the oil purchased should be held as
security for the full payment of the purchase price. As a result, the defendant
itself received the P105,000 in cash, P75,000 in notes, and still holds the 500
tons of oil as security for the balance of the purchase price. This transaction
was shown in the semi-annual financial statement for the period ending
December 31, 1920. That is to say, the business was transacted by and
through the plaintiff, and the defendant received and accepted all of the profits
on the deal, and the statement which was rendered gave him a credit for
P90,737.88, or half the profit as provided in the contract Exhibit B, with
interest.

Although the previous financial statements show upon their face that the
account of plaintiff was credit with several small items on the same basis, it
was not until the 23d of March, 1921, that any objection was ever made by
anyone, and objection was made for the first time by the creditors' committee
in a cable of that date.

As we analyze the facts Exhibit B was, in legal effect, ratified and approved and
is now binding upon the defendant corporation, and the plaintiff is entitled to
recover for his services on that writing as it modified the original contract
Exhibit A.

It appears from the statement prepared by accountant Larkin founded upon

Exhibit B that the plaintiff is entitled to recover P106,277.50. It is very
apparent that his statement was based upon the assumption that there was a
net profit of P180,000 on the 500 tons of oil, of which the plaintiff was entitled
to one-half.

In the absence of any other proof, we have the right to assume that the 500
tons of oil was worth the amount which the defendant paid for them at the time
of the purchase or P380 per ton, and the record shows that the defendant took
and now has the possession of all of the oil secure the payment of the price at
which it was sold. Hence, the profit on the deal to the defendant at the time of
the sale would amount to the difference between what the defendant paid for
the oil and the amount which it received for the oil at the time it sold the oil. It
appears that at the time of the sale the defendant only received P105,000 in
cash, and that it took and accepted the promissory notes of Cruz & Tan Chong
Say, the purchasers, for P75,000 more which have been collected and may
never be. Hence, it must follow that the amount evidence by the notes cannot
now be deemed or treated as profits on the deal and cannot be until such times
as the notes are paid.

The judgment of the lower court is reversed, and a money judgment will be
entered here in favor of the plaintiff and against the defendant for the sum of
P68,527.50, with thereon at the rate of 6 per cent per annum from the 10th
day of January, 1922. In addition thereto, judgment will be rendered against
the defendant in substance and to the effect that the plaintiff is the owner of an
undivided one-half interest in the promissory notes for P75,000 which were
executed by Cruz & Tan Chong Say, as a part of the purchase price of the oil,
and that he is entitled to have and receive one-half of all the proceeds from the
notes or either of them, and that also he have judgment against the defendant
for costs. So ordered.

19. ARNOLD V. WILLETS AND PATTERSON, LRTD.

For a number of years prior to the times alleged in the complaint, the plaintiff
was in the employ of the International Banking Corporation of Manila, and it is
conceded that he is a competent and experienced business man. July 31,
1916, C. D. Willits and I. L. Patterson were partners doing business in San
Francisco, California, under the name of Willits & Patterson. The plaintiff was
then in San Francisco, and as a result of negotiations the plaintiff and the firm
entered into a written contract, known in the record as Exhibit A, by which the
plaintiff was employed as the agent of the firm in the Philippine Islands for
certain purposes for the period of five years at a minimum salary of $200 per
month and travelling expenses. The plaintiff returned to Manila and entered on
the discharge of his duties under the contract. As a result of plaintiff's
employment and the world war conditions, the business of the firm in the
Philippines very rapidly increased and grew beyond the fondest hopes of either
party. A dispute arose between the plaintiff and the firm as to the construction
of Exhibit A as to the amount which plaintiff should receive for his services.
Meanwhile Patterson retired from the firm and Willits became the sole owner of
its assets. For convenience of operation and to serve his own purpose, Willits
organized a corporation under the laws of California with its principal office at
San Francisco, in and by which he subscribed for, and became the exclusive
owner of all the capital stock except a few shares for organization purposes
only, and the name of the firm was used as the name of the corporation. A
short time after that Willits came to Manila and organized a corporation here
known as Willits & Patterson, Ltd., in and to which he again subscribed for all
of the capital stock except the nominal shares necessary to qualify the
directors. In legal effect, the San Francisco corporation took over and acquired
all of the assets and liabilities of the Manila corporation. At the time that Willits
was in Manila and while to all intents and purposes he was the sole owner of
the stock of corporations, there was a conference between him and the plaintiff
over the disputed construction of Exhibit A. As a result of which another
instrument, known in the record as Exhibit B, was prepared in the form of a
letter which the plaintiff addressed to Willits at Manila on November 10, 1919,
the purpose of which was to more clearly define and specify the compensation
which the plaintiff was to receive for his services. Willits received and
confirmed this letter by signing the name of Willits & Patterson, By C.d. Willits.
At the time both corporations were legally organized, and there is nothing in
the corporate minutes to show that Exhibit B was ever formally ratified or
approved by either corporation. After its organization, the Manila corporation
employed a regular accountant whose duty it was to audit the accounts of the
company and render financial statements both for the use of the local banks
and the local and parent corporations at San Francisco. From time to time and
in the ordinary course of business such statements of account were prepared
by the accountant and duly forwarded to the home office, and among other
things was a statement of July 31, 1921, showing that there was due and
owing the plaintiff under Exhibit B the sum of P106,277.50. A short time
previous to that date, the San Francisco corporation became involved in
financial trouble, and all of its assets were turned over to a "creditors'
committee." When this statement was received, the "creditors' committee"
immediately protested its allowance. An attempt was made without success to
adjust the matter on a friendly basis and without litigation. January 10, 1922,
the plaintiff brought this action to recover from the defendant the sum of
P106,277.50 with legal interest and costs, and written instruments known in
the record as Exhibits A and B were attached to, and made a part of, the
complaint.

For answer, the defendant admits the formal parts of the complaint, the
execution of Exhibit A and denies each and every other allegation, except as
specifically admitted, and alleges that what is known as Exhibit B was signed
by Willits without the authority of the defendant corporation or the firm of
Willits & Patterson, and that it is not an agreement which was ever entered into
with the plaintiff by the defendant or the firm, and, as a separate defense and
counterclaim, it alleges that on the 30th of June, 1920, there was a balance
due and owing the plaintiff from the defendant under the contract Exhibit A of
the sum of P8,741.05. That his salary from June 30, 1920, to July 31, 1921,
under Exhibit A was $400 per month, or a total of P10,400. That about July 6,
1921, the plaintiff wrongfully took P30,000 from the assets of the firm, and
that he is now indebted to the firm in the sum of P10,858.95, with interest and
costs, from which it prays judgement.
The plaintiff admits that he withdrew the P30,000, but alleges that it was with
the consent and authority of the defendant, and denies all other new matter in
the answer.

Upon such issues a trial was had, and the lower court rendered judgment in
favor of the defendant as prayed for in its counterclaim, from which the
plaintiff appeals, contending that the trial court erred in not holding that the
contract between the parties is that which is embodied in Exhibits A and B,
and that the defendant assumed all partnership obligations, and in failing to
render judgment for the plaintiff, as prayed for, and in dismissing his
complaint, and denying plaintiff's motion for a new trial.

JOHNS, J.:

In their respective briefs opposing counsel agree that the important questions
involved are "what was the contract under which the plaintiff rendered services
for five years ending July 31, 1921," and "what is due the plaintiff under that
contract." Plaintiff contends that his services were performed under Exhibits A
and B, and that the defendant assumed all of the obligations of the original
partnership under Exhibit A, and is now seeking to deny its liability under, and
repudiate, Exhibit B. The defendant admits that Exhibit A was the original
contract between Arnold and the firm of Willits & Patterson by which he came
to the Philippine Islands, and that it was therein agreed that he was to be
employed for a period of five years as the agent of Willits & Patterson in the
Philippine Islands to operate a certain oil mill, and to do such other business
as might be deemed advisable for which he was to receive, first, the travelling
expenses of his wife and self from San Francisco to Manila, second, the
minimum salary of $200 per month, third, a brokerage of 1 per cent upon all
purchases and sales of merchandise, except for the account of the coconut oil
mill, fourth, one-half of the profits on any transaction in the name of the firm
or himself not provided for in the agreement. That the agreement also provided
that if it be found that the business was operated at a loss, Arnold should
receive a monthly salary of $400 during such period. That the business was
operated at a loss from June 30, 1920, to July 31, 1921, and that for such
reason, he was entitled to nothing more than a salary of $400 per month, or for
that period P10,400. Adding this amount to the P8,741.05, which the
defendant admits he owed Arnold on June 30, 1920, makes a total of
P19,141.05, leaving a balance due the defendant as set out in the
counterclaim. In other words, that the plaintiff's compensation was measured
by, and limited to, the above specified provisions in the contract Exhibit A, and
that the defendant corporation is not bound by the terms or provisions of
Exhibit B, which is as follows:

WILLITS & PATTERSON, LTD.

MANILA, P. I., Nov. 10, 1919.

CHAS. D. WILLITS, Esq.,

Present.

DEAR MR. WILLITS: My understanding of the intent of my agreement with

Willits & Patterson is as under:

Commissions. Willits & Patterson, San Francisco, pay me a commission of one

per cent on all purchases made for them in the Philippines or sales made to
them by Manila and one per cent on all sales made for them in the Philippines,
or purchases made from them by Manila. If such purchases or sales are on an
f. o. b. basis the commission is on the f. o. b. price; if on a c. i. f. basis the
commission is computed on the c. i. f. price

These commissions are credited to me in San Francisco.

I do not participate in any profits on business transacted between Willits &

Patterson, San Francisco, and Willits & Patterson, Ltd., Manila.

Profits. On all business transacted between Willits & Patterson, Ltd. and others
than Willits & Patterson, San Francisco, half the profits are to be credited to
my account and half to the Profit & Loss account of Willits & Patterson, Ltd.,
Manila.

On all other business, such as the Cooperative Coconut Products Co. account,
or any other business we may undertake as agents or managers, half the
profits are to be credited to my account and half to the Profit & Loss account of
Willits & Patterson, Ltd., Manila.

Where Willits & Patterson, San Francisco, or Willits & Patterson, Ltd., Manila,
have their own funds invested in the capital stock or a corporation, I of course
do not participate in the earnings of such stock, any more than Willits &
Patterson would participate in the earnings of stock held by me on my account.

If the foregoing conforms to your understanding of our agreement, please

confirm below.
Yours faithfully,

(Sgd.) G. C. ARNOLD

Confirmed:

WILLITS & PATTERSON

By (Sgd.) CHAS. D. WILLITS

There is no dispute about any of the following facts: That at the inception C.D.
Willits and I. L. Patterson constituted the firm of Willits & Patterson doing
business in the City of San Francisco; that later Patterson retired from the
firm, and Willits acquired all of his interests and thereafter continued the
business under the name and style of Willits & Patterson; that the original
contract Exhibit A was made between the plaintiff and the old firm at San
Francisco on July 31, 1916, to cover a period of five years from that date; that
plaintiff entered upon the discharged of his duties and continued his services
in the Philippine Islands to someone for the period of five years; that on
November 10, 1919, and as a result of conferences between Willits and the
plaintiff, Exhibit B was addressed and signed in the manner and form above
stated in the City of Manila. A short time prior to that date Willits organized a
corporation in San Francisco, in the State of California, which took over and
acquired all of the assets of the firm's business in California then being
conducted under the name and style of Willits & Patterson; that he subscribed
for all of the capital stock of the corporation, and that in truth and in fact he
was the owner of all of its capital stock. After this was done he caused a new
corporation to be organized under the laws of the Philippine Islands with
principal office at Manila, which took over and acquired all the business and
assets of the firm of Willits & Patterson in the Philippine Islands, in and to
which, in legal effect, he subscribed for all of its capital stock, and was the
owner of all of its stock. After both corporations were organized the above letter
was drafted and signed. The plaintiff contends that the signing of Exhibit B in
the manner and under the conditions in which it was signed, and through the
subsequent acts and conduct of the parties, was ratified and, in legal effect,
became and is now binding upon the defendant.

It will be noted that Exhibit B was executed in Manila, and that at the time it
was signed by Willits, he was to all intents and purposes the legal owner of all
the stock in both corporations. It also appears from the evidence that the
parent corporation at San Francisco took over and acquired all of the assets
and liabilities of the local corporation at Manila. That after it was organized the
Manila corporation kept separate records and account books of its own, and
that from time to time financial statements were made and forwarded to the
home office, from which it conclusively appears that plaintiff was basing his
claim for services upon Exhibit A, as it was modified by Exhibit B. That at no
time after Exhibit B was signed was there ever any dispute between plaintiff
and Willits as to the compensation for plaintiff's services. That is to say, as
between the plaintiff and Willits, Exhibit B was approved, followed and at all
times in force and effect, after it was signed November 10, 1919. It appears
from an analysis of Exhibit B that it was for the mutual interest of both parties.
From a small beginning, the business was then in a very flourishing conditions
and growing fast, and the profits were very large and were running into big
money.

Among other things, Exhibit A provided: "(a) That the net profits from said
coconut oil business shall be divided in equal shares between the said parties
hereto; (b) that Arnold should receive a brokerage of 1 per cent from all
purchases and sales of merchandise, except for the account of the coconut
mills; (c) that the net profits from all other business should be divided in equal
half shares between the parties hereto."

Under the above provisions, the plaintiff might well contend that he was
entitled to one-half of all the profits and a brokerage of 1 per cent from all
purchases and sales, except those for the account of the coconut oil mills,
which under the volume of business then existing would run into a very large
sum of money. It was for such reason and after personal conferences between
them, and to settle all disputed questions, that Exhibit B was prepared and
signed.

The record recites that "the defendant admits that from July 31, 1916 to July
31, 1921, the plaintiff faithfully performed all the duties incumbent upon him
under his contract of employment, it being understood, however, that this
admission does not include an admission that the plaintiff placed a proper
interpretation upon his right to remuneration under said contract of
employment."

It being admitted that the plaintiff worked "under his contract of employment"
for the period of five years, the question naturally arises, for whom was he
working? His contract was made with the original firm of Willits & Patterson,
and that firm was dissolved and it ceased to exist, and all of its assets were
merged in, and taken over by, the parent corporation at San Francisco. In the
very nature of things, after the corporation was formed, the plaintiff could not
and did not continue to work for the firm, and, yet, he continued his
employment for the full period of five years. For whom did he work after the
partnership was merged in the corporation and ceased to exist?

It is very apparent that, under the conditions then existing, the signing of
Exhibit B was for the mutual interests of both parties, and that if the contract
Exhibit A was to be enforced according to its terms, that Arnold might well
contend for a much larger sum of money for his services. In truth and in fact
Willits and both corporations recognized his employment and accepted the
benefits of his services. He continued his employment and rendered his
services after the corporation were organized and Exhibit B was signed just the
same as he did before, and both corporations recognized and accepted his
services. Although the plaintiff was president of the local corporation, the
testimony is conclusive that both of them were what is known as a one man
corporation, and Willits, as the owner of all of the stock, was the force and
dominant power which controlled them. After Exhibit B was signed it was
recognized by Willits that the plaintiff's services were to be performed and
measured by its term and provisions, and there never was any dispute between
plaintiff and Willits upon that question.

The controversy first arose after the corporation was in financial trouble and
the appointment of what is known in the record as a "creditors' committee."
There is no claim or pretense that there was any fraud or collusion between
plaintiff and Willits, and it is very apparent that Exhibit B was to the mutual
interest of both parties. It is elementary law that if Exhibit B is a binding
contract between the plaintiff and Willits and the corporations, it is equally
binding upon the creditors' committee. It would not have any higher or better
legal right than the corporation itself, and could not make any defense which it
could not make. It is very significant that the claim or defense which is now
interposed by the creditors' committee was never made or asserted at any
previous time by the defendant, and that it never was made by Willits, and it is
very apparent that if he had remained in control of the corporation, it would
never have made the defense which is now made by the creditors' committee.
The record is conclusive that at the time he signed Exhibit B, Willits was, in
legal effect, the owner and holder of all the stock in both corporations, and that
he approved it in their interest, and to protect them from the plaintiff having
and making a much larger claim under Exhibit A. As a matter of fact, it
appears from the statement of Mr. Larkin, the accountant, in the record that if
plaintiff's cause of action was now founded upon Exhibit A, he would have a
claim for more than P160,000.

Thompson on Corporations, 2d ed., vol. I, section 10, says:

The proposition that a corporation has an existence separate and distinct from
its membership has its limitations. It must be noted that this separate
existence is for particular purposes. It must also be remembered that there can
be no corporate existence without persons to compose it; there can be no
association without associates. This separate existence is to a certain extent a
legal fiction. Whenever necessary for the interests of the public or for the
protection or enforcement of the rights of the membership, courts will disregard
this legal fiction and operate upon both the corporation and the persons
composing it.

In the same section, the author quotes from a decision in 49 Ohio State, 1371;
15 L. R. A., 145, in which the Supreme Court of Ohio says:
"So long as a proper use is made of the fiction that a corporation is an entity
apart from its shareholders, it is harmless, and, because convenient, should
not be called in question; but where it is urged to an end subversive of its
policy, or such is the issue, the fiction must be ignored, and the question
determined whether the act in question, though done by shareholders, — that
is to say, by the persons uniting in one body, — was done simply as
individuals, and with respect to their individual interest as shareholders, or
was done ostensibly as such, but, as a matter of fact, to control the
corporation, and affect the transaction of its business, in the same manner as
if the act had been clothed with all the formalities of a corporate act. This must
be so, because, the stockholders having a dual capacity, and capable of acting
in either, and a possible interest to conceal their character when acting in their
corporate capacity, the absence of the formal evidence of the character of the
act cannot preclude judicial inquiry on the subject. If it were otherwise, then in
that department of the law fraud would enjoy an immunity awarded to it in no
other."

Where the stock of a corporation is owned by one person whereby the

corporation functions only for the benefit of such individual owner, the
corporation and the individual should be deemed to be the same. (U. S.
Gypsum Co. vs. Mackay Wall Plaster Co., 199 Pac., 249.)

Ruling Case Law, vol. 7, section 663, says:

While of course a corporation cannot ratify a contract which is strictly ultra

vires, and which it in the first instance could not have made, it may by
ratification render binding on it a contract, entered into on its behalf by its
officers or agents without authority. As a general rule such ratification need
not be manifested by any voted or formal resolution of the corporation or be
authenticated by the corporate seal; no higher degree of evidence is requisite in
establishing ratification on the part of a corporation, than is requisite in
showing an antecedent authorization.

xxx xxx xxx

SEC. 666. The assent or approval of a corporation to acts done on its account
may be inferred in the same manner that the absent of a natural person may
be, and it is well settled that where a corporation with full knowledge of the
unauthorized act of its officer or agents acquiesces in and consents to such
acts, it thereby ratifies them, especially where the acquiescence results in
prejudice to a third person.

xxx xxx xxx

SEC. 669. So, when, in the usual course of business of a corporation, an officer
has been allowed in his official capacity to manage its affair, his authority to
represent the corporation may be inferred from the manner in which he has
been permitted by the directors to transact its business.

SEC. 656. In accordance with a well-known rule of the law of agency, notice to
corporate officers or agents within the scope or apparent scope of their
authority is attributed to the corporation.

SEC. 667. As a general rule, if a corporation with knowledge of its agents

unauthorized act received and enjoys the benefits thereof, it impliedly ratifies
the unauthorized act if it is one capable of ratification by parol.

In its article on corporations, Corpus Juris, in section 2241 says:

Ratification by a corporation of a transaction not previously authorized is more

easily inferred where the corporation receives and retains property under it,
and as a general rule where a corporation, through its proper officers or board,
takes and retains the benefits of the unauthorized act or contract of an officer
or agent, with full knowledge of all the material facts, it thereby ratifies and
becomes bound by such act of contract, together with all the liabilities and
burdens resulting therefrom, and in some jurisdiction this rule is, in effect,
declared by statute. Thus the corporation is liable on the ground of ratification
where, with knowledge of the facts, it accepts the benefit of services rendered
under an unauthorized contract of employment . . . .

Applying the law to the facts.

Mr. Larkin, an experienced accountant, was employed by the local corporation,

and from time to time and in the ordinary course of business made and
prepared financial statements showing its assets and liabilities, true copies of
which were sent to the home office in San Francisco. It appears upon their face
that plaintiff's compensation was made and founded on Exhibit B, and that
such statements were made and prepared by the accountant on the
assumption that Exhibit B was in full force and effect as between the plaintiff
and the defendant. In the course of business in the early part of 1920, plaintiff,
as manager of the defendant, sold 500 tons of oil for future delivery at P740 per
ton. Due to break in the market, plaintiff was able to purchase the oil at P380
per ton or a profit of P180,000.

It appears from Exhibit B under the heading of "Profits" that:

On all the business transacted between Willits & Patterson, Ltd. and others
than Willits & Patterson, San Francisco, half the profit are to be credited to
may account and half to the Profit & Loss account Willits & Patterson, Ltd.,
Manila.

The purchasers paid P105,000 on the contracts and gave their notes for
P75,000, and it was agreed that all of the oil purchased should be held as
security for the full payment of the purchase price. As a result, the defendant
itself received the P105,000 in cash, P75,000 in notes, and still holds the 500
tons of oil as security for the balance of the purchase price. This transaction
was shown in the semi-annual financial statement for the period ending
December 31, 1920. That is to say, the business was transacted by and
through the plaintiff, and the defendant received and accepted all of the profits
on the deal, and the statement which was rendered gave him a credit for
P90,737.88, or half the profit as provided in the contract Exhibit B, with
interest.

Although the previous financial statements show upon their face that the
account of plaintiff was credit with several small items on the same basis, it
was not until the 23d of March, 1921, that any objection was ever made by
anyone, and objection was made for the first time by the creditors' committee
in a cable of that date.

As we analyze the facts Exhibit B was, in legal effect, ratified and approved and
is now binding upon the defendant corporation, and the plaintiff is entitled to
recover for his services on that writing as it modified the original contract
Exhibit A.

It appears from the statement prepared by accountant Larkin founded upon

Exhibit B that the plaintiff is entitled to recover P106,277.50. It is very
apparent that his statement was based upon the assumption that there was a
net profit of P180,000 on the 500 tons of oil, of which the plaintiff was entitled
to one-half.

In the absence of any other proof, we have the right to assume that the 500
tons of oil was worth the amount which the defendant paid for them at the time
of the purchase or P380 per ton, and the record shows that the defendant took
and now has the possession of all of the oil secure the payment of the price at
which it was sold. Hence, the profit on the deal to the defendant at the time of
the sale would amount to the difference between what the defendant paid for
the oil and the amount which it received for the oil at the time it sold the oil. It
appears that at the time of the sale the defendant only received P105,000 in
cash, and that it took and accepted the promissory notes of Cruz & Tan Chong
Say, the purchasers, for P75,000 more which have been collected and may
never be. Hence, it must follow that the amount evidence by the notes cannot
now be deemed or treated as profits on the deal and cannot be until such times
as the notes are paid.

The judgment of the lower court is reversed, and a money judgment will be
entered here in favor of the plaintiff and against the defendant for the sum of
P68,527.50, with thereon at the rate of 6 per cent per annum from the 10th
day of January, 1922. In addition thereto, judgment will be rendered against
the defendant in substance and to the effect that the plaintiff is the owner of an
undivided one-half interest in the promissory notes for P75,000 which were
executed by Cruz & Tan Chong Say, as a part of the purchase price of the oil,
and that he is entitled to have and receive one-half of all the proceeds from the
notes or either of them, and that also he have judgment against the defendant
for costs. So ordered.

20. LIPAT V. PACIFIC BANKING CORP.

The facts, as culled from records, are as follows:

Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned "Bela's
Export Trading" (BET), a single proprietorship with principal office at No. 814
Aurora Boulevard, Cubao, Quezon City. BET was engaged in the manufacture
of garments for domestic and foreign consumption. The Lipats also owned the
"Mystical Fashions" in the United States, which sells goods imported from the
Philippines through BET. Mrs. Lipat designated her daughter, Teresita B. Lipat,
to manage BET in the Philippines while she was managing "Mystical Fashions"
in the United States.

In order to facilitate the convenient operation of BET, Estelita Lipat executed

on December 14, 1978, a special power of attorney appointing Teresita Lipat as
her attorney-in-fact to obtain loans and other credit accommodations from
respondent Pacific Banking Corporation (Pacific Bank). She likewise authorized
Teresita to execute mortgage contracts on properties owned or co-owned by her
as security for the obligations to be extended by Pacific Bank including any
extension or renewal thereof.

Sometime in April 1979, Teresita, by virtue of the special power of attorney,

was able to secure for and in behalf of her mother, Mrs. Lipat and BET, a loan
from Pacific Bank amounting to P583,854.00 to buy fabrics to be
manufactured by BET and exported to "Mystical Fashions" in the United
States. As security therefor, the Lipat spouses, as represented by Teresita,
executed a Real Estate Mortgage over their property located at No. 814 Aurora
Blvd., Cubao, Quezon City. Said property was likewise made to secure "other
additional or new loans, discounting lines, overdrafts and credit
accommodations, of whatever amount, which the Mortgagor and/or Debtor
may subsequently obtain from the Mortgagee as well as any renewal or
extension by the Mortgagor and/or Debtor of the whole or part of said original,
additional or new loans, discounting lines, overdrafts and other credit
accommodations, including interest and expenses or other obligations of the
Mortgagor and/or Debtor owing to the Mortgagee, whether directly, or
indirectly, principal or secondary, as appears in the accounts, books and
records of the Mortgagee."4

On September 5, 1979, BET was incorporated into a family corporation named

Bela's Export Corporation (BEC) in order to facilitate the management of the
business. BEC was engaged in the business of manufacturing and exportation
of all kinds of garments of whatever kind and description5 and utilized the
same machineries and equipment previously used by BET. Its incorporators
and directors included the Lipat spouses who owned a combined 300 shares
out of the 420 shares subscribed, Teresita Lipat who owned 20 shares, and
other close relatives and friends of the Lipats.6 Estelita Lipat was named
president of BEC, while Teresita became the vice-president and general
manager.

Eventually, the loan was later restructured in the name of BEC and
subsequent loans were obtained by BEC with the corresponding promissory
notes duly executed by Teresita on behalf of the corporation. A letter of credit
was also opened by Pacific Bank in favor of A. O. Knitting Manufacturing Co.,
Inc., upon the request of BEC after BEC executed the corresponding trust
receipt therefor. Export bills were also executed in favor of Pacific Bank for
additional finances. These transactions were all secured by the real estate
mortgage over the Lipats' property.

The promissory notes, export bills, and trust receipt eventually became due
and demandable. Unfortunately, BEC defaulted in its payments. After receipt of
Pacific Bank's demand letters, Estelita Lipat went to the office of the bank's
liquidator and asked for additional time to enable her to personally settle BEC's
obligations. The bank acceded to her request but Estelita failed to fulfill her
promise.

Consequently, the real estate mortgage was foreclosed and after compliance
with the requirements of the law the mortgaged property was sold at public
auction. On January 31, 1989, a certificate of sale was issued to respondent
Eugenio D. Trinidad as the highest bidder.

On November 28, 1989, the spouses Lipat filed before the Quezon City RTC a
complaint for annulment of the real estate mortgage, extrajudicial foreclosure
and the certificate of sale issued over the property against Pacific Bank and
Eugenio D. Trinidad. The complaint, which was docketed as Civil Case No. Q-
89-4152, alleged, among others, that the promissory notes, trust receipt, and
export bills were all ultra vires acts of Teresita as they were executed without
the requisite board resolution of the Board of Directors of BEC. The Lipats also
averred that assuming said acts were valid and binding on BEC, the same were
the corporation's sole obligation, it having a personality distinct and separate
from spouses Lipat. It was likewise pointed out that Teresita's authority to
secure a loan from Pacific Bank was specifically limited to Mrs. Lipat's sole use
and benefit and that the real estate mortgage was executed to secure the
Lipats' and BET's P583,854.00 loan only.

In their respective answers, Pacific Bank and Trinidad alleged in common that
petitioners Lipat cannot evade payments of the value of the promissory notes,
trust receipt, and export bills with their property because they and the BEC are
one and the same, the latter being a family corporation. Respondent Trinidad
further claimed that he was a buyer in good faith and for value and that
petitioners are estopped from denying BEC's existence after holding themselves
out as a corporation.

After trial on the merits, the RTC dismissed the complaint, thus:

WHEREFORE, this Court holds that in view of the facts contained in the
record, the complaint filed in this case must be, as is hereby, dismissed.
Plaintiffs however has five (5) months and seventeen (17) days reckoned from
the finality of this decision within which to exercise their right of redemption.
The writ of injunction issued is automatically dissolved if no redemption is
effected within that period.

The counterclaims and cross-claim are likewise dismissed for lack of legal and
factual basis.

No costs.

IT IS SO ORDERED.7

The trial court ruled that there was convincing and conclusive evidence proving
that BEC was a family corporation of the Lipats. As such, it was a mere
extension of petitioners' personality and business and a mere alter ego or
business conduit of the Lipats established for their own benefit. Hence, to allow
petitioners to invoke the theory of separate corporate personality would
sanction its use as a shield to further an end subversive of justice.8 Thus, the
trial court pierced the veil of corporate fiction and held that Bela's Export
Corporation and petitioners (Lipats) are one and the same. Pacific Bank had
transacted business with both BET and BEC on the supposition that both are
one and the same. Hence, the Lipats were estopped from disclaiming any
obligations on the theory of separate personality of corporations, which is
contrary to principles of reason and good faith.
The Lipats timely appealed the RTC decision to the Court of Appeals in CA-G.R.
CV No. 41536. Said appeal, however, was dismissed by the appellate court for
lack of merit. The Court of Appeals found that there was ample evidence on
record to support the application of the doctrine of piercing the veil of corporate
fiction. In affirming the findings of the RTC, the appellate court noted that Mrs.
Lipat had full control over the activities of the corporation and used the same
to further her business interests.9 In fact, she had benefited from the loans
obtained by the corporation to finance her business. It also found unnecessary
a board resolution authorizing Teresita Lipat to secure loans from Pacific Bank
on behalf of BEC because the corporation's by-laws allowed such conduct even
without a board resolution. Finally, the Court of Appeals ruled that the
mortgage property was not only liable for the original loan of P583,854.00 but
likewise for the value of the promissory notes, trust receipt, and export bills as
the mortgage contract equally applies to additional or new loans, discounting
lines, overdrafts, and credit accommodations which petitioners subsequently
obtained from Pacific Bank.

The Lipats then moved for reconsideration, but this was denied by the
appellate court in its Resolution of February 23, 2000.10

Hence, this petition, with petitioners submitting that the court a quo erred —

1) . . . IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF

CORPORATE FICTION APPLIES IN THIS CASE.

2) . . . IN HOLDING THAT PETITIONERS' PROPERTY CAN BE HELD LIABLE

UNDER THE REAL ESTATE MORTGAGE NOT ONLY FOR THE AMOUNT OF
P583,854.00 BUT ALSO FOR THE FULL VALUE OF PROMISSORY NOTES,
TRUST RECEIPTS AND EXPORT BILLS OF BELA'S EXPORT CORPORATION.

3) . . . IN HOLDING THAT "THE IMPOSITION OF 15% ATTORNEY'S FEES IN

THE EXTRA-JUDICIAL FORECLOSURE IS BEYOND THIS COURT'S
JURISDICTION FOR IT IS BEING RAISED FOR THE FIRST TIME IN THIS
APPEAL."

4) . . . IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE

DISPUTED PROMISSORY NOTES, THE DOLLAR ACCOMMODATIONS AND
TRUST RECEIPTS DESPITE THE EVIDENT FACT THAT THEY WERE NOT
SIGNED BY HIM AND THEREFORE ARE NOT VALID OR ARE NOT BINDING
TO HIM.

5) . . . IN DENYING PETITIONERS' MOTION FOR RECONSIDERATION AND IN

HOLDING THAT SAID MOTION FOR RECONSIDERATION IS "AN
UNAUTHORIZED MOTION, A MERE SCRAP OF PAPER WHICH CAN NEITHER
BIND NOR BE OF ANY CONSEQUENCE TO APPELLANTS."11

In sum, the following are the relevant issues for our resolution:

1. Whether or not the doctrine of piercing the veil of corporate fiction is

applicable in this case;

2. Whether or not petitioners' property under the real estate mortgage is liable
not only for the amount of P583,854.00 but also for the value of the promissory
notes, trust receipt, and export bills subsequently incurred by BEC; and

3. Whether or not petitioners are liable to pay the 15% attorney's fees
stipulated in the deed of real estate mortgage.

On the first issue, petitioners contend that both the appellate and trial courts
erred in holding them liable for the obligations incurred by BEC through the
application of the doctrine of piercing the veil of corporate fiction absent any
clear showing of fraud on their part.

Respondents counter that there is clear and convincing evidence to show fraud
on part of petitioners given the findings of the trial court, as affirmed by the
Court of Appeals, that BEC was organized as a business conduit for the benefit
of petitioners.

Petitioners' contentions fail to persuade this Court. A careful reading of the

judgment of the RTC and the resolution of the appellate court show that in
finding petitioners' mortgaged property liable for the obligations of BEC, both
courts below relied upon the alter ego doctrine or instrumentality rule, rather
than fraud in piercing the veil of corporate fiction. When the corporation is the
mere alter ego or business conduit of a person, the separate personality of the
corporation may be disregarded.12 This is commonly referred to as the
"instrumentality rule" or the alter ego doctrine, which the courts have applied
in disregarding the separate juridical personality of corporations. As held in
one case,

Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other,
the fiction of the corporate entity of the 'instrumentality' may be disregarded.
The control necessary to invoke the rule is not majority or even complete stock
control but such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of
its own, and is but a conduit for its principal. x x x .13
We find that the evidence on record demolishes, rather than buttresses,
petitioners' contention that BET and BEC are separate business entities. Note
that Estelita Lipat admitted that she and her husband, Alfredo, were the
owners of BET14 and were two of the incorporators and majority stockholders
of BEC.15 It is also undisputed that Estelita Lipat executed a special power of
attorney in favor of her daughter, Teresita, to obtain loans and credit lines from
Pacific Bank on her behalf.16 Incidentally, Teresita was designated as
executive-vice president and general manager of both BET and BEC,
respectively.17 We note further that: (1) Estelita and Alfredo Lipat are the
owners and majority shareholders of BET and BEC, respectively;18 (2) both
firms were managed by their daughter, Teresita;19 (3) both firms were engaged
in the garment business, supplying products to "Mystical Fashion," a U.S. firm
established by Estelita Lipat; (4) both firms held office in the same building
owned by the Lipats;20 (5) BEC is a family corporation with the Lipats as its
majority stockholders; (6) the business operations of the BEC were so merged
with those of Mrs. Lipat such that they were practically indistinguishable; (7)
the corporate funds were held by Estelita Lipat and the corporation itself had
no visible assets; (8) the board of directors of BEC was composed of the Burgos
and Lipat family members;21 (9) Estelita had full control over the activities of
and decided business matters of the corporation;22 and that (10) Estelita Lipat
had benefited from the loans secured from Pacific Bank to finance her business
abroad23 and from the export bills secured by BEC for the account of "Mystical
Fashion."24 It could not have been coincidental that BET and BEC are so
intertwined with each other in terms of ownership, business purpose, and
management. Apparently, BET and BEC are one and the same and the latter is
a conduit of and merely succeeded the former. Petitioners' attempt to isolate
themselves from and hide behind the corporate personality of BEC so as to
evade their liabilities to Pacific Bank is precisely what the classical doctrine of
piercing the veil of corporate entity seeks to prevent and remedy. In our view,
BEC is a mere continuation and successor of BET, and petitioners cannot
evade their obligations in the mortgage contract secured under the name of
BEC on the pretext that it was signed for the benefit and under the name of
BET. We are thus constrained to rule that the Court of Appeals did not err
when it applied the instrumentality doctrine in piercing the corporate veil of
BEC.

On the second issue, petitioners contend that their mortgaged property should
not be made liable for the subsequent credit lines and loans incurred by BEC
because, first, it was not covered by the mortgage contract of BET which only
covered the loan of P583,854.00 and which allegedly had already been paid;
and, second, it was secured by Teresita Lipat without any authorization or
board resolution of BEC.

We find petitioners' contention untenable. As found by the Court of Appeals,

the mortgaged property is not limited to answer for the loan of P583,854.00.
Thus:
Finally, the extent to which the Lipats' property can be held liable under the
real estate mortgage is not limited to P583,854.00. It can be held liable for the
value of the promissory notes, trust receipt and export bills as well. For the
mortgage was executed not only for the purpose of securing the Bela's Export
Trading's original loan of P583,854.00, but also for "other additional or new
loans, discounting lines, overdrafts and credit accommodations, of whatever
amount, which the Mortgagor and/or Debtor may subsequently obtain from
the mortgagee as well as any renewal or extension by the Mortgagor and/or
Debtor of the whole or part of said original, additional or new loans,
discounting lines, overdrafts and other credit accommodations, including
interest and expenses or other obligations of the Mortgagor and/or Debtor
owing to the Mortgagee, whether directly, or indirectly principal or secondary,
as appears in the accounts, books and records of the mortgagee.25

As a general rule, findings of fact of the Court of Appeals are final and
conclusive, and cannot be reviewed on appeal by the Supreme Court, provided
they are borne out by the record or based on substantial evidence.26 As noted
earlier, BEC merely succeeded BET as petitioners' alter ego; hence, petitioners'
mortgaged property must be held liable for the subsequent loans and credit
lines of BEC.

Further, petitioners' contention that the original loan had already been paid,
hence, the mortgaged property should not be made liable to the loans of BEC,
is unsupported by any substantial evidence other than Estelita Lipat's self-
serving testimony. Two disputable presumptions under the rules on evidence
weigh against petitioners, namely: (a) that a person takes ordinary care of his
concerns;27 and (b) that things have happened according to the ordinary
course of nature and the ordinary habits of life.28 Here, if the original loan had
indeed been paid, then logically, petitioners would have asked from Pacific
Bank for the required documents evidencing receipt and payment of the loans
and, as owners of the mortgaged property, would have immediately asked for
the cancellation of the mortgage in the ordinary course of things. However, the
records are bereft of any evidence contradicting or overcoming said disputable
presumptions.

Petitioners contend further that the mortgaged property should not bind the
loans and credit lines obtained by BEC as they were secured without any
proper authorization or board resolution. They also blame the bank for its
laxity and complacency in not requiring a board resolution as a requisite for
approving the loans.

Such contentions deserve scant consideration.

Firstly, it could not have been possible for BEC to release a board resolution
since per admissions by both petitioner Estelita Lipat and Alice Burgos,
petitioners' rebuttal witness, no business or stockholder's meetings were
conducted nor were there election of officers held since its incorporation. In
fact, not a single board resolution was passed by the corporate board29 and it
was Estelita Lipat and/or Teresita Lipat who decided business matters.30

Secondly, the principle of estoppel precludes petitioners from denying the

validity of the transactions entered into by Teresita Lipat with Pacific Bank,
who in good faith, relied on the authority of the former as manager to act on
behalf of petitioner Estelita Lipat and both BET and BEC. While the power and
responsibility to decide whether the corporation should enter into a contract
that will bind the corporation is lodged in its board of directors, subject to the
articles of incorporation, by-laws, or relevant provisions of law, yet, just as a
natural person may authorize another to do certain acts for and on his behalf,
the board of directors may validly delegate some of its functions and powers to
officers, committees, or agents. The authority of such individuals to bind the
corporation is generally derived from law, corporate by-laws, or authorization
from the board, either expressly or impliedly by habit, custom, or acquiescence
in the general course of business.31 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.32

In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage
contract by virtue of a special power of attorney executed by Estelita Lipat.
Recall that Teresita Lipat acted as the manager of both BEC and BET and had
been deciding business matters in the absence of Estelita Lipat. Further, the
export bills secured by BEC were for the benefit of "Mystical Fashion" owned by
Estelita Lipat.33 Hence, Pacific Bank cannot be faulted for relying on the same
authority granted to Teresita Lipat by Estelita Lipat by virtue of a special power
of attorney. It is a familiar doctrine that if a corporation knowingly permits one
of its officers or any other agent to act within the scope of an apparent
authority, it holds him out to the public as possessing the power to do those
acts; thus, the corporation will, as against anyone who has in good faith dealt
with it through such agent, be estopped from denying the agent's authority.34

We find no necessity to extensively deal with the liability of Alfredo Lipat for the
subsequent credit lines of BEC. Suffice it to state that Alfredo Lipat never
disputed the validity of the real estate mortgage of the original loan; hence, he
cannot now dispute the subsequent loans obtained using the same mortgage
contract since it is, by its very terms, a continuing mortgage contract.

On the third and final issue, petitioners assail the decision of the Court of
Appeals for not taking cognizance of the issue on attorney's fees on the ground
that it was raised for the first time on appeal. We find the conclusion of the
Court of Appeals to be in accord with settled jurisprudence. Basic is the rule
that matters not raised in the complaint cannot be raised for the first time on
appeal.35 A close perusal of the complaint yields no allegations disputing the
attorney's fees imposed under the real estate mortgage and petitioners cannot
now allege that they have impliedly disputed the same when they sought the
annulment of the contract.

In sum, we find no reversible error of law committed by the Court of Appeals in

rendering the decision and resolution herein assailed by petitioners.

WHEREFORE, the petition is DENIED. The Decision dated October 21, 1999
and the Resolution dated February 23, 2000 of the Court of Appeals in CA-G.R.
CV No. 41536 are AFFIRMED. Costs against petitioners.

SO ORDERED.

21. LA CAMPANA COFFEE FACTORY V. KAISAHAN NG MANGGAGAWA

Tan Tong, one of the herein petitioners, has since 1932 been engaged in the
business of buying and selling gaugau under the trade name La Campana
Gaugau Packing with an establishment in Binondo, Manila, which was later
transferred to España Extension, Quezon City. But on July 6, 1950, Tan Tong,
with himself and members of his family corporation known as La Campana
Factory Co., Inc., with its principal office located in the same place as that of
La Campana Gaugau Packing.

About a year before the formation of the corporation, or on July 11, 1949, Tan
Tong had entered into a collective bargaining agreement with the Philippine
Legion of Organized Workers, known as PLOW for short, to which the union of
Tan Tong's employees headed by Manuel E. Sadde was then affiliated.
Seceding, however, from the PLOW, Tan Tong's employees later formed their
own organization known as Kaisahan Ng Mga Manggagawa Sa La Campana,
one of the herein respondents, and applied for registration in the Department
of Labor as an independent entity. Pending consideration of this application,
the Department gave the new organization legal standing by issuing it a permit
as an affiliate to the Kalipunan Ng Mga Manggagawa.

On July 19, 1951, the Kaisahan Ng Mga Manggagawa Sa La Campana,

hereinafter to be referred to as the respondent Kaisahan, which, as of that
date, counted with 66 members — workers all of them of both La Campana
Gaugau Packing and La Campana Coffee Factory Co., Inc. — presented a
demand for higher wages and more privileges, the demand being addressed to
La Campana Starch and Coffee Factory, by which name they sought to
designate, so it appears, the La Campana Gaugau Packing and the La
Campana Coffee Factory Co., Inc. As the demand was not granted and an
attempt at settlement through the mediation of the Conciliation Service of the
Department of Labor had given no result, the said Department certified the
dispute to the Court of Industrial Relations on July 17, 1951, the case being
there docketed as Case No. 584-V.

With the case already pending in the industrial court, the Secretary of Labor,
on September 5, 1951, revoked the Kalipunan Ng Mga Kaisahang
Manggagawa's permit as a labor union on the strength of information received
that it was dominated by subversive elements, and, in consequence, on the
20th of the same month, also suspended the permit of its affiliate, the
respondent Kaisahan.

We have it from the court's order of January 15, 1952, which forms one of the
annexes to the present petition, that following the revocation of the Kaisahan's
permit, "La Campana Gaugau and Coffee Factory" (obviously the combined
name of La Campana Gaugau Packing and La Campana Coffee Factory Co.,
Inc,) and the PLOW, which had been allowed to intervene as a party having an
interest in the dispute, filed separate motions for the dismissal of the case on
the following grounds:

1. That the action is directed against two different entities with distinct
personalities, with "La Campana Starch Factory" and the "La Campana Coffee
Factory, Inc.";

2. That the workers of the "La Campana Coffee Factory, Inc." are less than
thirty-one;

3. That the petitioning union has no legal capacity to sue, because its
registration as an organized union has been revoked by the Department of
Labor on September 5, 1951; and

4. That there is an existing valid contract between the respondent "La

Campana Gaugau Packing" and the intervenor PLOW, where-in the petitioner's
members are contracting parties bound by said contract.

Several hearings were held on the above motions, in the course of which ocular
inspections were also made, and on the basis of the evidence received and the
facts observed in the ocular inspections, the Court of Industrial Relations
denied the said motions in its order of January 14, 1952, because if found as a
fact that:
A. While the coffee corporation is a family corporation with Mr. Tan Tong, his
wife, and children as the incorporations and stockhelders (Exhibit 1), the La
Campana Gaugau Packing is merely a business name (Exhibit 4).

B. According to the contract of lease (Exhibit 23), Mr. Tan Tong., propriety and
manager of the Ka Campana Gaugau Factory, leased a space of 200 square
meters in the bodega housing the gaugau factory to his son Tan Keng Lim,
manager of the La Campana Coffee Factory. But the lease was executed only on
September 1, 1951, while the dispute between the parties was pending before
the Court.

C. There is only one entity La Campana Starch and Coffee Factory, as shown
by the signboard (Exhibit 1), the advertisement in the delivery trucks (Exhibit I-
1), the packages of gaugau(Exhibit K), and delivery forms (Exhibits J, J-1, and
J-2).

D. All the laborers working in the gaugau or in the coffee factory receive their
pay from the same person, the cashier, Miss Natividad Garcia, secretary of Mr.
Tan Tong; and they are transferred from the gaugau to the coffee and vice-
versa as the management so requires.

E. There has been only one payroll for the entire La Campana personnel and
only one person preparing the same — Miss Natividad Garcia, secretary of Mr.
Tan Tong. But after the case at bar was certified to this Court on July 17,
1951, the company began making separate payrolls for the coffee factory
(Exhibits M-2 and M-3, and for the gaugau factory (Exhibits O-2, O-3 and O-4).
It is to be noted that before July 21, 1951, the coffee payrolls all began with
number "41-Maria Villanueva" with 24 or more laborers (Exhibits M and M-1),
whereas beginning July 21, 1951, the payrolls for the coffee factory began with
No. 1-Loreta Bernabe with only 14 laborers (Exhibits M-2 and M-3).

F. During the ocular inspection made in the factory on August 26, 1951 the
Court has found the following:

In the ground floor and second floor of the gaugau factory there were hundreds
of bags of raw coffee behind the pile of gaugau sacks. There were also women
employees working paper wrappers for gaugau, and, in the same place there
were about 3,000 cans to be used as containers for coffee.

The Court found out also that there were 16 trucks used both for the delivery
of coffee and gaugau. To show that those trucks carried both coffee and
gaugau, the union president invited the Court to examine the contents of
delivery truck No. T-582 parked in a garage between the gaugau building and
the coffee factory, and upon examination, there were found inside the said
truck boxes of gaugau and cans of coffee,

and held that:

. . . there is only one management for the business of gaugau and coffee with
whom the laborers are dealing regarding their work. Hence, the filing of action
against the Ka Campana Starch and Coffee Factory is proper and justified.

With regards to the alleged lack of personality, it is to be noted that before the
certification of the case to this Court on July 17, 1951, the petitioner Kaisahan
Ng Mga Manggagawa Sa La Campana, had a separate permit from the
Department of Labor. This permit was suspended on September 30, 1951.
(Exhibit M-Intervenor, page 55, of the record). It is not true that, on July 17,
1951, when this case forwarded to this Court, the petitioner's permit, as an
independent union, had not yet been issued, for the very Exhibit MM-
Intervenor regarding the permit, conclusively shows the preexistence of said
permit. (Annex G.)

Their motion for reconsideration of the above order having been denied, Tan
Tong and La Campana Coffee Factory, Inc. (same as La Campana Coffee
Factory Co., Inc.), later joined by the PLOW, filed the present petition for
certiorari on the grounds that the Court of Industrial Relations had no
jurisdiction to take cognizance of the case, for the reason, according to them,
"(1) that the petitioner La Campana Coffee Factory, Inc. has only 14 employees,
only 5 of whom are members of the respondent union and therefore the
absence of the jurisdictional number (30) as provided by sections 1 and 4 of
Commonwealth Act No. 103; and, (2) that the suspension of respondent
union's permit by the Secretary of Labor has the effect of taking away the
union's right to collective bargaining under section 2 of Commonwealth Act No.
213 and consequently, its personality to sue for ad in behalf of its members."

As to the first ground, petitioners obviously do not question the fact that the
number of employees of the La Campana Gaugau Packing involved in the case
is more than the jurisdictional number (31) required bylaw, but they do
contend that the industrial court has no jurisdiction to try the case as against
La Campana Coffee Factory, Inc. because the latter has allegedly only 14
laborers and only of these are members of the respondent Kaisahan. This
contention loses force when it is noted that, as found by the industrial court —
and this finding is conclusive upon us — La Campana Gaugau Packing and La
Campana Coffee Factory Co. Inc., are operating under one single management,
that is, as one business though with two trade names. True, the coffee factory
is a corporation and, by legal fiction, an entity existing separate and apart fro
the persons composing it, that is, Tan Tong and his family. But it is settled that
this fiction of law, which has been introduced as a matter of convenience and
to subserve the ends of justice cannot be invoked to further an end subversive
of that purpose.

Disregarding Corporate Entity. — The doctrine that a corporation is a legal

entity existing separate and apart from the person composing it is a legal
theory introduced for purposes of convenience and to subserve the ends of
justice. The concept cannot, therefore, be extended to a point beyond its reason
and policy, and when invoked in support of an end subversive of this policy,
will be disregarded by the courts. Thus, in an appropriate case and in
furtherance of the ends of justice, a corporation and the individual or
individuals owning all its stocks and assets will be treated as identical, the
corporate entity being disregarded where used as a cloak or cover for fraud or
illegality. (13 Am. Jur., 160-161.)

. . . A subsidiary or auxiliary corporation which is created by a parent

corporation merely as an agency for the latter may sometimes be regarded as
identical with the parent corporation, especially if the stockholders or officers
of the two corporations are substantially the same or their system of operation
unified. (Ibid. 162; see Annotation 1 A. L. R. 612, s. 34 A. L. R. 599.)

In the present case Tan Tong appears to be the owner of the gaugau factory.
And the coffee factory, though an incorporated business, is in reality owned
exclusively by Tan Tong and his family. As found by the Court of industrial
Relations, the two factories have but one office, one management and one
payroll, except after July 17, the day the case was certified to the Court of
Industrial Relations, when the person who was discharging the office of cashier
for both branches of the business began preparing separate payrolls for the
two. And above all, it should not be overlooked that, as also found by the
industrial court, the laborers of the gaugau factory and the coffee factory were
interchangeable, that is, the laborers from the gaugau factory were sometimes
transferred to the coffee factory and vice-versa. In view of all these, the attempt
to make the two factories appears as two separate businesses, when in reality
they are but one, is but a device to defeat the ends of the law (the Act governing
capital and labor relations) and should not be permitted to prevail.

The second point raised by petitioners is likewise with-out merit. In the first
place, there being more than 30 laborers involved and the Secretary of Labor
having certified the dispute to the Court of Industrial Relations, that court duly
acquired jurisdiction over the case (International Oil Factory vs. NLU, Inc. 73
Phil., 401; section 4, C. A. 103). This jurisdiction was not when the Department
of Labor suspended the permit of the respondent Kaisahan as a labor
organization. For once jurisdiction is acquired by the Court of Industrial
Relations it is retained until the case is completely decided. (Manila Hotel
Employees Association vs. Manila Hotel Co. et al., 73 Phil., 374.)

In view of the foregoing, the petition is denied, with costs against the petitioner.