G.R. No.
L-15092 May 18, 1962
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First Instance of Occidental
Negros, in its Civil Case No. 2603, dismissing plaintiff's complaint that sought to compel
the defendant Milling Company to increase plaintiff's share in the sugar produced from
their cane, from 60% to 62.33%, starting from the 1951-1952 crop year. 1äwphï1.ñët
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano,
and the Limited co-partnership Gonzaga and Company, had been and are sugar planters
adhered to the defendant-appellee's sugar central mill under identical milling contracts.
Originally executed in 1919, said contracts were stipulated to be in force for 30 years
starting with the 1920-21 crop, and provided that the resulting product should be divided
in the ratio of 45% for the mill and 55% for the planters. Sometime in 1936, it was
proposed to execute amended milling contracts, increasing the planters' share to 60% of
the manufactured sugar and resulting molasses, besides other concessions, but
extending the operation of the milling contract from the original 30 years to 45 years. To
this effect, a printed Amended Milling Contract form was drawn up. On August 20, 1936,
the Board of Directors of the appellee Bacolod-Murcia Milling Co., Inc., adopted a
resolution (Acts No. 11, Acuerdo No. 1) granting further concessions to the planters over
and above those contained in the printed Amended Milling Contract. The bone of
contention is paragraph 9 of this resolution, that reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
xxx xxx xxx
Acuerdo No. 1. — Previa mocion debidamente secundada, la Junta en
consideracion a una peticion de los plantadores hecha por un comite
nombrado por los mismos, acuerda enmendar el contrato de molienda
enmendado medientelas siguentes:
xxx xxx xxx
9.a Que si durante la vigencia de este contrato de Molienda Enmendado,
lascentrales azucareras, de Negros Occidental, cuya produccion anual
de azucar centrifugado sea mas de una tercera parte de la produccion
total de todas lascentrales azucareras de Negros Occidental,
concedieren a sus plantadores mejores condiciones que la estipuladas
en el presente contrato, entonces esas mejores condiciones se
concederan y por el presente se entenderan concedidas a los platadores
que hayan otorgado este Contrato de Molienda Enmendado.
Appellants signed and executed the printed Amended Milling Contract on September 10,
1936, but a copy of the resolution of August 10, 1936, signed by the Central's General
Manager, was not attached to the printed contract until April 17, 1937; with the notation
—
Las enmiendas arriba transcritas forman parte del contrato de molienda
enmendado, otorgado por — y la Bacolod-Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending that three Negros sugar
centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production
exceeding one-third of the production of all the sugar central mills in the province, had
already granted increased participation (of 62.5%) to their planters, and that under
paragraph 9 of the resolution of August 20, 1936, heretofore quoted, the appellee had
become obligated to grant similar concessions to the plaintiffs (appellants herein). The
appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging that
the stipulations contained in the resolution were made without consideration; that the
resolution in question was, therefore, null and void ab initio, being in effect a donation
that was ultra vires and beyond the powers of the corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the defendant
Milling company, and dismissed the complaint. Thereupon, plaintiffs duly appealed to this
Court.
We agree with appellants that the appealed decisions can not stand. It must be
remembered that the controverted resolution was adopted by appellee corporation as a
supplement to, or further amendment of, the proposed milling contract, and that it was
approved on August 20, 1936, twenty-one days prior to the signing by appellants on
September 10, of the Amended Milling Contract itself; so that when the Milling Contract
was executed, the concessions granted by the disputed resolution had been already
incorporated into its terms. No reason appears of record why, in the face of such
concessions, the appellants should reject them or consider them as separate and apart
from the main amended milling contract, specially taking into account that appellant
Alfredo Montelibano was, at the time, the President of the Planters Association (Exhibit
4, p. 11) that had agitated for the concessions embodied in the resolution of August 20,
1936. That the resolution formed an integral part of the amended milling contract, signed
on September 10, and not a separate bargain, is further shown by the fact that a copy of
the resolution was simply attached to the printed contract without special negotiations or
agreement between the parties.
It follows from the foregoing that the terms embodied in the resolution of August 20, 1936
were supported by the same causa or consideration underlying the main amended
milling contract; i.e., the promises and obligations undertaken thereunder by the planters,
and, particularly, the extension of its operative period for an additional 15 years over and
beyond the 30 years stipulated in the original contract. Hence, the conclusion of the court
below that the resolution constituted gratuitous concessions not supported by any
consideration is legally untenable.
All disquisition concerning donations and the lack of power of the directors of the
respondent sugar milling company to make a gift to the planters would be relevant if the
resolution in question had embodied a separate agreement after the appellants had
already bound themselves to the terms of the printed milling contract. But this was not
the case. When the resolution was adopted and the additional concessions were made
by the company, the appellants were not yet obligated by the terms of the printed
contract, since they admittedly did not sign it until twenty-one days later, on September
10, 1936. Before that date, the printed form was no more than a proposal that either
party could modify at its pleasure, and the appellee actually modified it by adopting the
resolution in question. So that by September 10, 1936 defendant corporation already
understood that the printed terms were not controlling, save as modified by its resolution
of August 20, 1936; and we are satisfied that such was also the understanding of
appellants herein, and that the minds of the parties met upon that basis. Otherwise there
would have been no consent or "meeting of the minds", and no binding contract at all.
But the conduct of the parties indicates that they assumed, and they do not now deny,
that the signing of the contract on September 10, 1936, did give rise to a binding
agreement. That agreement had to exist on the basis of the printed terms as modified by
the resolution of August 20, 1936, or not at all. Since there is no rational explanation for
the company's assenting to the further concessions asked by the planters before the
contracts were signed, except as further inducement for the planters to agree to the
extension of the contract period, to allow the company now to retract such concessions
would be to sanction a fraud upon the planters who relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of appellees. There can
be no novation unless two distinct and successive binding contracts take place, with the
later designed to replace the preceding convention. Modifications introduced before a
bargain becomes obligatory can in no sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not
attached to the printed contract until April 17, 1937. But, except in the case of statutory
forms or solemn agreements (and it is not claimed that this is one), it is the assent and
concurrence (the "meeting of the minds") of the parties, and not the setting down of its
terms, that constitutes a binding contract. And the fact that the addendum is only signed
by the General Manager of the milling company emphasizes that the addition was made
solely in order that the memorial of the terms of the agreement should be full and
complete.
Much is made of the circumstance that the report submitted by the Board of Directors of
the appellee company in November 19, 1936 (Exhibit 4) only made mention of 90%, the
planters having agreed to the 60-40 sharing of the sugar set forth in the printed
"amended milling contracts", and did not make any reference at all to the terms of the
resolution of August 20, 1936. But a reading of this report shows that it was not intended
to inventory all the details of the amended contract; numerous provisions of the printed
terms are alao glossed over. The Directors of the appellee Milling Company had no
reason at the time to call attention to the provisions of the resolution in question, since it
contained mostly modifications in detail of the printed terms, and the only major change
was paragraph 9 heretofore quoted; but when the report was made, that paragraph was
not yet in effect, since it was conditioned on other centrals granting better concessions to
their planters, and that did not happen until after 1950. There was no reason in 1936 to
emphasize a concession that was not yet, and might never be, in effective operation.
There can be no doubt that the directors of the appellee company had authority to modify 64.2% for 1952-53;
the proposed terms of the Amended Milling Contract for the purpose of making its terms
more acceptable to the other contracting parties. The rule is that — 64.3% for 1953-54;
64.5% for 1954-55; and
It is a question, therefore, in each case of the logical relation of the act to the
corporate purpose expressed in the charter. If that act is one which is lawful in 63.5% for 1955-56,
itself, and not otherwise prohibited, is done for the purpose of serving corporate
ends, and is reasonably tributary to the promotion of those ends, in a substantial,
the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of
and not in a remote and fanciful sense, it may fairly be considered within charter
August 20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein.
powers. The test to be applied is whether the act in question is in direct and
immediate furtherance of the corporation's business, fairly incident to the express
powers and reasonably necessary to their exercise. If so, the corporation has the WHEREFORE, the decision under appeal is reversed and set aside; and judgment is
power to do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. decreed sentencing the defendant-appellee to pay plaintiffs-appellants the differential or
266-268) increase of participation in the milled sugar in accordance with paragraph 9 of the
appellee Resolution of August 20, 1936, over and in addition to the 60% expressed in the
printed Amended Milling Contract, or the value thereof when due, as follows:
As the resolution in question was passed in good faith by the board of directors, it is valid
and binding, and whether or not it will cause losses or decrease the profits of the central,
the court has no authority to review them. 0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants
having received an additional 2% corresponding to said year in October, 1953;
They hold such office charged with the duty to act for the corporation according
to their best judgment, and in so doing they cannot be controlled in the 2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all
reasonable exercise and performance of such duty. Whether the business of a appellants thereafter —
corporation should be operated at a loss during depression, or close down at a 4.2% for the 1952-1953 crop year;
smaller loss, is a purely business and economic problem to be determined by the 4.3% for the 1953-1954 crop year;
directors of the corporation and not by the court. It is a well-known rule of law that 4.5% for the 1954-1955 crop year;
questions of policy or of management are left solely to the honest decision of 3.5% for the 1955-1956 crop year;
officers and directors of a corporation, and the court is without authority to
substitute its judgment of the board of directors; the board is the business with interest at the legal rate on the value of such differential during the time they were
manager of the corporation, and so long as it acts in good faith its orders are not withheld; and the right is reserved to plaintiffs-appellants to sue for such additional
reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390). increases as they may be entitled to for the crop years subsequent to those herein
adjudged.
And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian
Philippines, San Carlos and Binalbagan (which produce over one-third of the entire Costs against appellee, Bacolod-Murcia Milling Co.
annual sugar production in Occidental Negros) have granted progressively increasing
participations to their adhered planter at an average rate of Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes and Dizon, JJ.,
concur.
62.333% for the 1951-52 crop year;
G.R. No. L-5377 December 29, 1954
MARIA CLARA PIROVANA ET AL., plaintiffs-appellees,
vs.
THE DE LA RAMA STEAMSHIP CO., defendant-appellant.
BAUTISTA ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of Rizal declaring the
donation made by the defendant in favor of the minor children of the late Enrico Pirovano
of the proceeds of the insurance policies taken on his life valid and binding, and ordering
said defendant to pay to said minor children the sum of P583,813.59, with interest
thereon at the rate of per cent from the date of filing of the complaint, plus an additional
amount equivalent to 20 per cent of said sum of P538,813.59 as damages by way of
attorney's fees and the costs of action.
Plaintiffs herein are the minor children of the late Enrico Pirovano represented by their
mother and judicial guardian Estefania R. Pirovano. They seek to enforce certain
resolutions adopted by the Board of Directors and stockholders of the defendant
company giving to said minor children of the proceeds of the insurance policies taken on
the life of their deceased father Enrico Pirovano with the company as beneficiary.
Defendant's main defense is: that said resolutions and the contract executed pursuant
thereto are ultra vires, and, if valid, the obligation to pay the amount given is not yet due
and demandable.
The trial court resolved all the issues raised by the parties in favor of the plaintiffs and,
after considering the evidence, both oral and documentary, arrived at the following
conclusions:
First. — That the contract executed between the plaintiffs and the defendant is a
renumerative donation.
Second. — That said contract or donation is not ultra vires, but an act executed
within the powers of the defendant corporation in accordance with its articles of
incorporation and by laws, sanctioned and approved by its Board of Directors
and stockholders; and subsequently ratified by other subsequent acts of the
defendant company.
Third. — That the said donation is in accordance with the trend of modern and
more enlightened legislation in its treatment of questions between labor and
capital.
Fourth. — That the condition mentioned in the donation is null and void because
it depends on the provisions of Article 1115 of the old Civil Code.
Fifth. — That if the condition is valid, its non-fulfillment is due to the desistance of
the defendant company from obeying and doing the wishes and mandates of the
majority of the stockholders.
Sixth. — That the non-payment of the debt in favor of the National Development
Company is not due to the lack of funds, nor to lack of authority, but the desire of
the President of the corporation to preserve and continue the Government
participation in the company.
Seventh. — That due demands were made by the plaintiffs and their attorneys
and these demands were rejected for no justifiable or legal grounds.
The important facts which need to be considered for purposes of this appeal may be
briefly stated as follows: Defendant is a corporation duly organized in accordance with
law with an authorized capital of P500,000, divided into 5,000 shares, with a par value of
P100 each share. The stockholders were: Esteban de la Rama, 1,800 shares, Leonor de
la Rama, 100 shares, Estefania de la Rama, 100 shares, and Eliseo Hervas, Tomas
Concepcion, Antonio G. Juanco, and Gaudencio Volasote with 5 shares each. Leonor
and Estefania are daughters of Don Esteban, while the rest his employees. Estefania de
la Rama was married to the late Enrico Pirovano and to them four children were born
who are the plaintiffs in this case.
Enrico Pirovano became the president of the defendant company and under his
management the company grew and progressed until it became a multi-million
corporation by the time Pirovano was executed by the Japanese during the occupation.
On May 13, 1941, the capital stock of the corporation was increased to P2,000,000, after
which a 100 per cent stock dividend was declared. Subsequently, or before the outbreak
of the war , new stock dividends of 200 per cent and 33 1/3 per cent were again
declared. On December 4, 1941, the capital stock was once more increased to
P5,000,000. Under Pirovano's management, the assets of the company grew and
increased from an original paid up capital of around P240,000 to P15,538,024.37 by
September 30, 1941 (Exhibit HH).
In the meantime, Don Esteban de la Rama, who practically owned and controlled the
stock of the defendant corporation, distributed his shareholding among his five
daughters, namely, Leonor, Estefania, Lourdes, Lolita and Conchita and his wife
Natividad Aguilar so that, at that time, or on July 10, 1946, the stockholding of the
corporation stood as follows: Esteban de la Rama, 869 shares, Leonor de la Rama,
3,375 shares, Estefania de la Rama, 3,368 shares, Lourdes de la Rama, 3,368 shares,
Lolita de la Rama, 3,368 shares, Conchita de la Rama, 3,376 shares, and Natividad
Aguilar, 2,136 shares. The other stockholders , namely, Eliseo Hervas, Tomas
Concepcion, Antonio Juanco, and Jose Aguilar, who were merely employees of Don
Esteban, were given 40 shares each, while Pio Pedrosa, Marcial P. Lichauco and Rafael
Roces, one share each, because they merely represented the National Development
Company. This Company was given representation in the Board Of Directors of the
corporation because at that time the latter had an outstanding bonded indebtedness to
the National Development Company.
This bonded indebtedness was incurred on February 26, 1940 and was in the amount of
P7,500.00. The bond held by the National Development Company was redeemable
within a period of 20 years from March 1, 1940,. bearing interest at the rate of 5 per cent
per annum. To secure said bonded indebtedness, all the assets of the De la Rama
Steamship Co., Inc., and properties of Don Esteban de la Rama, as well as those of the
Hijos de I. de la Rama and Co., Inc., a sister corporation owned by Don Esteban and his
family, were mortgaged to the National Development Company (Annexes A, B, C, D of
Exhibit 3, Deed of Trust). Payments made by the corporation under the management of
Pirovano reduced this bonded indebtedness to P3,260,855.77.
Upon arrangement made with the National Development Company, the outstanding
bonded indebtedness was converted into non-voting preferred shares of stock of the De
la Rama company under the express condition that they would bear affixed cumulative
dividend of 6 per cent per annum and would be redeemable within 15 years (Exhibits 5
and 7). This conversion was carried out on September 23, 1949, when the National
Development Company executed a "Deed of Termination of Trust and Release of
Mortgage" in favor of the De la Rama company (Exhibit 6.) The immediate effect of this
conversion was the released from incumbrance of all the properties Of Don Esteban and
of the Hijos de I. de la Rama and Co., Inc., which was apparently favorable to the
interests of the De la Rama company, but, on the other hand, it resulted in the
inconvenience that, as holder of the preferred stock, the National Development
Company, was given to the right to 40 per cent of the membership of the Board of
Directors of the De la Rama company, which meant an increase in the representation of
the National Development Company from 2 to 4 of the 9 members of said Board of
Directors.
The first resolution granting to the Pirovano children the proceeds of the insurance
policies taken on his life by the defendant company was adopted by the Board of
Directors at a meeting held on July 10, 1946, (Exhibit B). This grant was called in the
resolution as "Special Payment to Minor Heirs of the late Enrico Pirovano". Because of
its direct hearing on the issues involved in this case, said resolution is hereunder
reproduced in toto:
SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE ENRICO PIROVANO
The President stated that the principal purpose for which the meeting had been
called was to discuss the advisability of making some form of compensation to
the minor heirs of the late Enrico Pirovano, former President and General
Manager of the Company. As every member of the Board knows, said the
President, the late Enrico Pirovano who was largely responsible for the very
successful development of the activities of the Company prior to war was killed
by the Japanese in Manila sometime in 1944 leaving as his only heirs four minor
children, Maria Carla, Esteban, Enrico and John Albert. Early in 1941, explained
the President, the Company had insured the life of Mr. Pirovano for a million
pesos. Following the occupation of the Philippines by Japanese forces the
Company was unable to pay the premiums on those policies issued by Filipino
companies and these policies had lapsed. But with regards to the York Office of
the De la Rama Steamship Co., Inc. had kept up payment of the premiums from
year to year. The payments made on account of these premiums, however, are
very small compared to the amount which the Company will now receive as a
result of Mr. Pirovano's death. The President proposed therefore that out of the
proceeds of these policies the sum of P400,000 be set aside for the minor
children of the deceased, said sum of money to be convertible into 4,000 shares
of the stock of the Company, at par, or 1,000 shares for each child. This
proposal, explained the President as being made by him upon suggestion of
President Roxas, but, he added, that he himself was very much in favor of it also.
On motion of Miss Leonor de la Rama duly seconded by Mrs. Lourdes de la
Rama de Osmeña, the following resolution was, thereupon, unanimously
approved:
Whereas, the late Enrico Pirovano, President and General Manager of the De la
Rama Steamship Company, died in Manila sometime in November, 1944:
Whereas, the said Enrico Pirovano was largely responsible for the rapid and very
successful development of the activities of thus company;
Whereas, early in 1941 this company insured the life of said Enrico Pirovano in
various Philippine and American Life Insurance companies for the total sum of
P1,000,000;
Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano
and four minor children, to wit: Esteban, Maria Carla, Enrico and John Albert, all
surnamed Pirovano;
lawphil.net
Whereas, said Enrico Pirovano left practically nothing to his heirs and it is but fit
proper that this company which owes so much to the deceased should make
some provision for his children;
Whereas, this company paid premium on Mr. Pirovano's life insurance policies
for a period of only 4 years so that it will receive from the insurance companies
sums of money greatly in excess of the premiums paid by this company.
Be it resolved, That out of the proceeds to be collected from the life insurance
policies on the life of the late Enrico Pirovano, the sum of P400,000 be set aside
for equal division among the 4 minor children of the deceased, to wit: Esteban,
Maria Carla, Enrico and John Albert, all surnamed Pirovano, which sum of money
shall be convertible into shares of stock of the De la Rama Steamship Company,
at par and, for that purpose, that the present registered stockholders of the
corporation be requested to waive their preemptive right to 4,000 shares of the
unissued stock of the company in order to enable each of the 4 minor heirs of the
deceased, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamed
Pirovano, to obtain 1,000 shares at par;
Resolved, further, that in view of the fact that under the provisions of the
indenture with the National Development Company, it is necessary that action
herein proposed to be confirmed by the Board of Directors of that company, the
Secretary is hereby instructed to send a copy of this resolution to the proper
officers of the National Development Company for appropriate action. (Exhibit B)
The above resolution, which was adopted on July 10, 1946, was submitted to the
stockholders of the De la Rama company at a meeting properly convened, and on that
same date, July 10, 1946, the same was duly approved.
It appears that, although Don Esteban and the Members of his family were agreeable to
giving to the Pirovano children the amount of P400,000 out of the proceeds of the
insurance policies taken on the life of Enrico Pirovano, they did not realize that when
they provided in the above referred two resolutions that said Amount should be paid in
the form of shares of stock, they would be actually giving to the Pirovano children more
than what they intended to give. This came about when Lourdes de la Rama, wife of
Sergio Osmeña, Jr., showed to the latter copies of said resolutions and asked him to
explain their import and meaning, and it was value then that Osmeña explained that
because the value then of the shares of stock was actually 3.6 times their par value, the
donation their value, the donation, although purporting to be only P400,00, would actually
amount to a total of P1,440,000. He further explained that if the Pirovano children would
given shares of stock in lieu of the amount to be donated, the voting strength of the five
daughters of Don Esteban in the company would be adversely affected in the sense that
Mrs. Pirovano would be adversely affected in the sense that Mrs. Pirovano would have a
voting power twice as much as that of her sisters. This caused Lourdes de la Rama to
write to the secretary of the corporation, Atty. Marcial Lichauco, asking him to cancel the
waiver she supposedly gave of her pre-emptive rights. Osmeña elaborated on this matter
at the annual meeting of the stockholders held on December 12, 1946 but at said
meeting it was decided to leave the matter in abeyance pending further action on the part
of the members of the De la Rama family.
Osmeña, in the meantime, took up the matter with Don Esteban and, as consequence,
the latter, on December 30, 1946, addressed to Marcial Lichauco a letter stating, among
other things, that "in view of the total lack of understanding by me and my daughters of
the two Resolutions abovementioned, namely, Directors' and Stockholders' dated July
10, 1946, as finally resolved by the majority of the Stockholders and Directors present
yesterday, that you consider the abovementioned resolutions nullified." (Exhibit CC).
On January 6, 1947, the Board of Directors of the De la Rama company, as a
consequence of the change of attitude of Don Esteban, adopted a resolution changing
the form of the donation to the Pirovano children from a donation of 4,000 shares of
stock as originally planned into a renunciation in favor of the children of all the company's
"right, title, and interest as beneficiary in and to the proceeds of the abovementioned life
insurance policies", subject to the express condition that said proceeds should be
retained by the company as a loan drawing interest at the rate of 5 per cent per annum
and payable to the Pirovano children after the company "shall have first settled in full the
balance of its present remaining bonded indebtedness in the sum of approximately
P5,000,000" (Exhibit C). This resolution was concurred in by the representatives of the
National Development Company. The pertinent portion of the resolution reads as follows:
Be resolved, that out of gratitude to the late Enrico Pirovano this Company
renounce as it hereby renounces, all of his right, title, and interest as beneficiary
in and to the proceeds of the abovementioned life insurance policies in favor of
Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano, subject to
the terms and conditions herein after provided;
That the proceeds of said insurance policies shall be retained by the Company in
the nature of a loan drawing interest at the rate of 5 per cent annum from the
date of receipt of payment by the Company from the various insurance
companies above-mentioned until the time the time the same amounts are paid
to the minor heirs of Enrico Pirovano previously mentioned;
That all amounts received from the above-mentioned policies shall be divided
equally among the minors heirs of said Enrico Pirovano;
That the company shall proceed to pay the proceeds of said insurance policies
plus interests that may have accrued to each of the heirs of the said Enrico
Pirovano or their duly appointed representatives after the Company shall have
first settled in full the balance of its present remaining bonded indebtedness in
the sum of the approximately P5,000,000.
The above resolution was carried out by the company and Mrs. Estefania R. Pirovano,
the latter acting as guardian of her children, by executing a Memorandum Agreement on
January 10, 1947 and June 17, 1947, respectively, stating therein that the De la Rama
Steamship Co., Inc., shall enter in its books as a loan the proceeds of the life insurance
policies taken on the life of Pirovano totalling S321,500, which loan would earn interest at
the rate of 5 per cent per annum. Mrs. Pirovano, in executing the agreement, acted with
the express authority granted to her by the court in an order dated March 26, 1947.
On June 24, 1947, the Board of Directors approved a resolution providing therein that
instead of the interest on the loan being payable, together with the principal, only after
the company shall have first settled in full its bonded indebtedness, said interest may be
paid to the Pirovano children "whenever the company is in a position to met said
obligation" (Exhibit D), and on February 26, 1948, Mrs. Pirovano executed a public
document in which she formally accepted the donation (Exhibit H). The Dela Rama
company took "official notice" of this formal acceptance at a meeting held by its Board of
Directors on February 26, 1948.
In connection with the above negotiations, the Board of Directors took up at its meeting
on July 25, 1949, the proposition of Mrs. Pirovano to buy the house at New Rochelle,
New York, owned by the Demwood Realty, a subsidiary of the De la Rama company at
its original costs of $75,000, which would be paid from the funds held in trust belonging
to her minor children. After a brief discussion relative to the matter, the proposition was
approved in a resolution adopted on the same date.
The formal transfer was made in an agreement signed on September 5, 1949 by Mrs.
Pirovano, as guardian of her children, and by the De la Rama company, represented by
its new General Manager, Sergio Osmeña, Jr. The transfer of this property was approved
by the court in its order of September 20, 1949. lawphil.net
On September 13, 1949, or two years and 3 months after the donation had been
approved in the various resolutions herein above mentioned, the stockholders of the De
la Rama company formally ratified the donation (Exhibit E), with certain clarifying
modifications, including the resolution approving the transfer of the Demwood property to
the Pirovano children. The clarifying modifications are quoted hereunder:
1. That the payment of the above-mentioned donation shall not be affected until
such time as the Company shall have first duly liquidated its present bonded
indebtedness in the amount of P3,260,855.77 with The National Development
Company, or fully redeemed the preferred shares of stock in the amount which
shall be issued to the National Development Company in lieu thereof;
 2. That any and all taxes, legal fees, and expenses in any way connected with
the above transaction shall be chargeable and deducted from the proceeds of the
life insurance policies mentioned in the resolutions of the Board of Directors.
(Exhibit E)
Sometime in March 1950, the President of the corporation, Sergio Osmeña, Jr.,
addressed an inquiry to the Securities and Exchange Commission asking for opinion
regarding the validity of the donation of the proceeds of the insurance policies to the
Pirovano children. On June 20, 1950 that office rendered its opinion that the donation
was void because the corporation could not dispose of its assets by gift and therefore the
corporation acted beyond the scope of its corporate powers. This opinion was submitted
to the Board of Directors at its meting on July 12, 1950, on which occasion the president
recommend that other legal ways be studied whereby the donation could be carried out.
On September 14, 1950, another meeting was held to discuss the propriety of the
donation. At this meeting the president expressed the view that, since the corporation
was not authorized by its charter to make the donation to the Pirovano children and the
majority of the stockholders was in favor of making provision for said children, the
manner he believed this could be done would be to declare a cash dividend in favor of
the stockholders in the exact amount of the insurance proceeds and thereafter have the
stockholders make the donation to the children in their individual capacity.
Notwithstanding this proposal of the president, the board took no action on the matter,
and on March 8, 1951, at a stockholders' meeting convened on that date the majority of
the stockholders' voted to revoke the resolution approving the donation to the Pirovano
children. The pertinent portion of the resolution reads as follows:
Be it resolved, as it is hereby resolved, that in view of the failure of compliance
with the above conditions to which the above donation was made subject, and in
view of the opinion of the Securities and Exchange Commissioner, the
stockholders revoke, rescind and annul, as they do thereby revoke, rescind and
annul, its ratification and approval on September 13, 1949 of the aforementioned
resolution of the Board of Directors of January 6, 1947, as amended on June 24,
1947. (Exhibit T)
In view of the resolution declaring that the corporation failed to comply with the condition
set for the effectivity of the donation and revoking at the same time the approval given to
it by the corporation, and considering that the corporation can no longer set aside said
donation because it had no longer set aside said donation because it had long been
perfected and consummated, the minor children of the late Enrico Pirovano, represented
by their mother and guardian, Estefania R. de Pirovano, demanded the payment of the
credit due them as of December 31, 1951, amounting to P564,980.89, and this payment
having been refused, they instituted the present action in the Court of First Instance of
Rizal wherein they prayed that the be granted an alternative relief of the following tenor:
(1) sentencing defendant to pay to the plaintiff the sum of P564,980.89 as of December
31, 1951, with the corresponding interest thereon; (2) as an alternative relief, sentencing
defendant to pay to the plaintiffs the interests on said sum of P564,980.89 at the rate of 5
per cent per annum, and the sum of P564,980.89 after the redemption of the preferred
shares of the corporation held by the National Development Company; and (3) in any
event, sentencing defendant to pay the plaintiffs damages in the amount of not less than
20 per cent of the sum that may be adjudged to the plaintiffs, and the costs of action.
The only issues which in the opinion of the court need to be determined in order to reach
a decision in this appeal are: (1) Is the grant of the proceeds of the insurance policies
taken on the life of the late Enrico Pirovano as embodied in the resolution of the Board of
Directors of defendant corporation adopted on January 6, 1947 and June 24, 1947 a
remunerative donation as found by the lower court?; (2) IN the affirmative case, has that
donation been perfected before its rescission or nullification by the stockholders of the
corporation on March 8, 1951?; (3) Can defendant corporation give by way of donation
the proceeds of said insurance policies to the minor children of the late Enrico Pirovano
under the law or its articles of corporation, or is that donation an ultra vires act?; and (4)
has the defendant corporation, by the acts it performed subsequent to the granting of the
donation, deliberately prevented the fulfillment of the condition precedent to the payment
of said donation such that it can be said it has forfeited its right to demand its fulfillment
and has made the donation entirely due and demandable?
We will discuss these issues separately.
1. To determine the nature of the grant made by the defendant corporation to the minor
children of the late Enrico Pirovano, we do not need to go far nor dig into the voluminous
record that lies at the bottom of this case. We do not even need to inquire into the
interest which has allegedly been shown by President Roxas in the welfare of the
children of his good friend Enrico Pirovano. Whether President Roxas has taken the
initiative in the move to give something to said children which later culminated in the
donation now in dispute, is of no moment for the fact is that, from the mass of evidence
on hand, such a donation has been given the full indorsement and encouraging support
by Don Esteban de la Rama who was practically the owner of the corporation. We only
need to fall back to accomplish this purpose on the several resolutions of the Board of
Directors of the corporations containing said grant for they clearly state the reasons and
purposes why the donation has been given.
Before we proceed further, it is convenient to state here in passing that, before the Board
of Directors had approved its resolution of January 6, 1947, as later amended by another
resolution adopted on June 24, 1947, the corporation had already decided to give to the
minor children of the late Enrico Pirovano the sum of P400,000 out of the proceeds of the
insurance policies taken on his life in the form of shares, and that when this form was
considered objectionable because its result and effect would be to give to said children a
much greater amount considering the value then of the stock of the corporation, the
Board of Directors decided to amend the donation in the form and under the terms stated
in the aforesaid resolutions. Thus, in the original resolution approved by the Board of
Directors on July 10, 1946, wherein the reasons for granting the donation to the minor
children of the late Enrico Pirovano were clearly, we find out the following revealing
statements:
Whereas, the late Enrico Pirovano President and General Manager of the De la
Rama Steamship Company, died in Manila sometime in November, 1944;
Whereas, the said Enrico Pirovano was largely responsible for the rapid and very
successful development of the activities of this company;
Whereas, early in 1941 this company insured the life of said Enrico Pirovano in
various Philippine and American Life Insurance companies for the total sum of
P1,000,000;
Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano
and 4 minor children, to wit: Esteban, Maria Carla, Enrico and John Albert, all
surnamed Pirovano;
Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is but
fit and proper that this company which owes so much to the deceased should
make some provisions for his children;
Whereas, this company paid premiums on Mr. Pirovano's life insurance policies
for a period of only 4 years so that it will receive from the insurance companies
sums of money greatly in excess of the premiums paid by the company,
Again, in the resolution approved by the Board of Directors on January 6, 1947, we also
find the following expressive statements which are but a reiteration of those already
expressed in the original resolution:
Whereas, the late Enrico Pirovano, President and General Manager of the De la
Rama Steamship Co., Inc., died in Manila sometime during the latter part of the
year 1944;
Whereas, the said Enrico Pirovano was to a large extent responsible for the rapid
and very successful development and expansion of the activities of this company;
Whereas, early in 1941, the life of the said Enrico Pirovano was insured in
various life companies, to wit:
Whereas, the said Enrico Pirovano is survived by 4 minor children, to wit:
Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano; and
Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is but
fit and proper that this Company which owes so much to the deceased should
make some provision for his children;
Be it resolved, that out of gratitude to the late Enrico Pirovano this Company
renounce as it hereby renounces, . . . .
From the above it clearly appears that the corporation thought of giving the donation to
the children of the late Enrico Pirovano because he "was to a large extent responsible for
the rapid and very successful development and expansion of the activities of this
company"; and also because he "left practically nothing to his heirs and it is but fit and
proper that this company which owes so much to the deceased should make some
provision to his children", and so, the donation was given "out of gratitude to the late
Enrico Pirovano." We do not need to stretch our imagination to see that a grant or
donation given under these circumstances is remunerative in nature in contemplation of
law.
That which is made to a person in consideration of his merits or for services
rendered to the donor, provided they do not constitute recoverable debts, or that
 in which a burden less than the value of the thing given is imposed upon the
donee, is also a donation." (Art. 619, old Civil Code.)
In donations made to a person for services rendered to the donor, the donor's will
is moved by acts which directly benefit him. The motivating cause is gratitude,
acknowledgment of a favor, a desire to compensate. A donation made to one
who saved the donor's life, or a lawyer who renounced his fees for services
rendered to the donor, would fall under this class of donations. These donations
are called remunerative donations . (Sinco and Capistrano, The Civil Code, Vol.
1, p. 676; Manresa, 5th ed., pp. 72-73.)
2. The next question to be determined is whether the donation has been perfected such
that the corporation can no longer rescind it even if it wanted to. The answer to this
question cannot but be in the affirmative considering that the same has not only been
granted in several resolutions duly adopted by the Board of Directors of the defendant
corporation, and in all these corporate acts the concurrence of the representatives of the
National Development Company, the only creditor whose interest may be affected by the
donation, has been expressly given. The corporation has even gone further. It actually
transferred the ownership of the credit subject of donation to the Pirovano children with
the express understanding that the money would be retained by the corporation subject
to the condition that the latter would pay interest thereon at the rate of 5 per cent per
annum payable whenever said corporation may be in a financial position to do so. Thus,
the following acts of the corporation as reflected from the evidence bear this out:
(a) The donation was embodied in a resolution duly approved by the Board of Directors
on January 6, 19437. In this resolution, the representatives of the National Development
Company, have given their concurrence. This is the only creditor which can be
considered as being adversely affected by the donation. The resolution of June 24, 1947
did not modify the substance of the former resolution for it merely provided that instead
of the interest on the loan being payable, together with the principal, only after the
corporation had first settled in full its bonded indebtedness, said interest would be paid
"whenever the company is in a position to meet said obligation."
(b) The resolution of January 6, 1947 was actually carried out when the company and
Mrs. Estefania R. Pirovano, executed a memorandum agreement stating therein hat the
proceeds of the insurance policies would be entered in the books of the corporation as a
loan which would bear an interest at the rate of 5 per cent per annum, and said
agreement was signed by Mrs. Pirovano as judicial guardian of her children after she had
been expressly authorized by the court to accept the donation in behalf of her children.
(c) While the donation can be considered as duly executed by the execution of the
document stated in the preceding paragraph, and by the entry in the books of the
corporation of the donation as a loan, a further record of said execution was made when
Mrs. Pirovano executed a public document on February 26, 1948 making similar
acceptance of the donation. And this acceptance was officially recorded by the
corporation when on the same date its Board of Directors approved a resolution taking
"official notice" of said acceptance.
(d) On July 25, 1949, the Board of Directors approved the proposal of Mrs. Pirovano to
buy the house at New Rochelle, New York, owned by a subsidiary of the corporation at
the costs of S75,000 which would be paid from the sum held in trust belonging to her
minor children. And this agreement was actually carried out in a document signed by the
general manager of the corporation and by Mrs. Pirovano, who acted on the matter with
the express authority of the court.
(e) And on September 30, 1949, or two years and 3 months after the donation had been
executed, the stockholders of the defendant corporation formally ratified and gave
approval to the donation as embodied in the resolutions above referred to, subject to
certain modifications which did not materially affect the nature of the donation.
There can be no doubt from the foregoing relation of facts the donation was a corporate
act carried out by the corporation not only with the sanction of its Board of Directors but
also of its stockholders. It is evident that the donation has reached the stage of perfection
which is valid and binding upon the corporation and as such cannot be rescinded unless
there is exists legal grounds for doing so. In this case, we see none. The two reasons
given for the rescission of said donation in the resolution of the corporation adopted on
March 8, 1951, to wit: that the corporation failed to comply with the conditions to which
the above donation was made subject, and that in the opinion of the Securities and
Exchange Commission said donation is ultra vires, are not, in our opinion, valid and legal
as to justify the rescission of a perfected donation. These reasons, as we will discuss in
the latter part of this decision, cannot be invoked by the corporation to rescind or set at
naught the donation, and the only way by which this can be done is to show that the
donee has been in default, or that the donation has not been validly executed, or is illegal
or ultra vires, and such is not the case as we will see hereafter. We therefore declare that
the resolution approved by the stockholders of the defendant corporation on March 8,
1951 did not and cannot have the effect of nullifying the donation in question.
3. The third question to be determined is: Can defendant corporation give by way of
donation the proceeds of said insurance policies to the minor children of the late Enrico
Pirovano under the law or its articles of corporation, or is that donation an ultra vires act?
To answer this question it is important for us to examine the articles of incorporation of
the De la Rama company to see this question it is important for us to examine the
articles of incorporation of the De la Rama company to see if the act or donation is
outside of their scope. Paragraph second of said articles provides:
Second.— The purposes for which said corporation is formed are:
(a) To purchase, charter, hire, build, or otherwise acquire steam or other ships or
vessels, together with equipments and furniture therefor, and to employ the same
in conveyance and carriage of goods, wares and merchandise of every
description, and of passengers upon the high seas.
(b) To sell, let, charter, or otherwise dispose of the said vessels or other property
of the company.
(c) To carry on the business of carriers by water.
(d) To carry on the business of shipowners in all of its branches.
(e) To purchase or take on lease, lands, wharves, stores, lighters, barges and
other things which the company may deem necessary or advisable to be
purchased or leased for the necessary and proper purposes of the business of
the company, and from time to time to sell the dispose of the same.
(f) To promote any company or companies for the purposes of acquiring all or
any of the property or liabilities of this company, or both, or for any other purpose
which may seem directly or indirectly calculated to benefit the company.
(g) To invest and deal with the moneys of the company and immediately
required, in such manner as from time to time may be determined.
(h) To borrow, or raise, or secure the payment of money in such manner as the
company shall think fit.
(i) Generally, to do all such other thing and to transact all business as may be
directly or indirectly incidental or conducive to the attainment of the above object,
or any of them respectively.
(j) Without in any particular limiting or restricting any of the objects and powers of
the corporation, it is hereby expressly declared and provided that the corporation
shall have power to issue bonds and provided that the corporation shall have
power to issue bonds and other obligations, to mortgage or pledge any stocks,
bonds or other obligations or any property which may be required by said
corporations; to secure any bonds, guarantees or other obligations by it issued or
incurred; to lend money or credit to and to aid in any other manner any person,
association, or corporation of which any obligation or in which any interest is held
by this corporation or in the affairs or prosperity of which this corporation or in the
affairs or prosperity of which this corporation has a lawful interest, and to do such
acts and things as may be necessary to protect, preserve, improve, or enhance
the value of any such obligation or interest; and, in general, to do such other acts
in connection with the purposes for which this corporation has been formed which
is calculated to promote the interest of the corporation or to enhance the value of
its property and to exercise all the rights, powers and privileges which are now or
may hereafter be conferred by the laws of the Philippines upon corporations
formed under the Philippine Corporation Act; to execute from time to time general
or special powers of attorney to persons, firms, associations or corporations
either in the Philippines, in the United States, or in any other country and to
revoke the same as and when the Directors may determine and to do any and or
all of the things hereinafter set forth and to the same extent as natural persons
might or could do.
After a careful perusal of the provisions above quoted we find that the corporation was
given broad and almost unlimited powers to carry out the purposes for which it was
organized among them, (1) "To invest and deal with the moneys of the company not
immediately required, in such manner as from time to time may be determined" and, (2)
"to aid in any other manner any person, association, or corporation of which any
obligation or in which any interest is held by this corporation or in the affairs or prosperity
of which this corporation has a lawful interest." The world deal is broad enough to include
any manner of disposition, and refers to moneys not immediately required by the
corporation, and such disposition may be made in such manner as from time to time may
be determined by the corporations. The donation in question undoubtedly comes within
the scope of this broad power for it is a fact appearing in the evidence that the insurance
proceeds were not immediately required when they were given away. In fact, the
evidence shows that the corporation declared a 100 per cent cash dividend, or
P2,000,000, and later on another 30 per cent cash dividend. This is clear proof of the
solvency of the corporation. It may be that, as insinuated, Don Esteban wanted to make
use of the insurance money to rehabilitate the central owned by a sister corporation,
known as Hijos de I. de la Rama and Co., Inc., situated in Bago, Negros Occidental, but
this, far from reflecting against the solvency of the De la Rama company, only shows that
the funds were not needed by the corporation.
Under the second broad power we have the above stated, that is, to aid in any other
manner any person in the affairs and prosperity of whom the corporation has a lawful
interest, the record of this case is replete with instances which clearly show that the
corporation knew well its scope and meaning so much so that, with the exception of the
instant case, no one has lifted a finger to dispute their validity. Thus, under this broad
grant of power, this corporation paid to the heirs of one Florentino Nonato, an engineer of
one of the ships of the company who died in Japan, a gratuity of P7,000, equivalent to
one month salary for each year of service. It also gave to Ramon Pons, a captain of one
of its ships , a retirement gratuity equivalent to one month salary for every year of
service, the same to be based upon his highest salary. And it contributed P2,000 to the
fund raised by the Associated Steamship Lines for the widow of the late Francis Gispert,
secretary of said Association, of which the De la Rama Steamship Co., Inc., was a
member along with about 30 other steamship companies. In this instance, Gispert was
not even an employee of the corporation. And invoking this vast power, the corporation
even went to the extent of contributing P100,000 to the Liberal Party campaign funds,
apparently in the hope that by conserving its cordial relations with that party it might
continue to retain the patronage of the administration. All these acts executed before and
after the donation in question have never been questioned and were willingly and
actually carried out.
We don't see much distinction between these acts of generosity or benevolence
extended to some employees of the corporation, and even to some in whom the
corporation was merely interested because of certain moral or political considerations,
and the donation which the corporation has seen fit to give to the children of the late
Enrico Pirovano from the point of view of the power of the corporation as expressed in its
articles of incorporation. And if the former had been sanctioned and had been considered
valid and intra vires, we see no plausible reasons why the latter should now be
deemed ultra vires. It may perhaps be argued that the donation given to the children of
the late Enrico Pirovano is so large and disproportionate that it can hardly be considered
a pension of gratuity that can be placed on a par with the instances above mentioned,
but this argument overlooks one consideration: the gratuity here given was not merely
motivated by pure liberality or act of generosity, but by a deep sense of recognition of the
valuable services rendered by the late Enrico Pirovano which had immensely contributed
to the growth of the corporation to the extent that from its humble capitalization it
blossomed into a multi-million corporation that it is today. In other words of the very
resolutions granting the donation or gratuity, said donation was given not only because
the company was so indebted to him that it saw fit and proper to make provisions for his
children, but it did so out of a sense of gratitude. Another factor that we should bear in
mind is that Enrico Pirovano was not only a high official of the company but was at the
same time a member of the De la Rama family, and the recipient of the donation are the
grandchildren of Don Esteban de la Rama. This we, may say, is the motivating root
cause behind the grant of this bounty.
It may be contended that a donation is different from a gratuity. While technically this
may be so in substance they are the same. They are even similar to a pension. Thus, it
was granted for services previously rendered, and which at the time they were rendered
gave rise to no legal obligation. " (Words and Phrases, Permanent Edition, p. 675; O'Dea
vs. Cook,, 169 Pac., 306, 176 Cal., 659.) Or stated in another way, a "Gratuity is mere
bounty given by the Government in consideration or recognition or meritorious services
and springs from the appreciation an d graciousness of the Government", (Ilagan vs.
Ilaya, G.R. No. 33507, Dec. 20 1930) or "A gratuity is something given freely, or without
recompense, a gift, something voluntarily given in return for a favor or services; a bounty;
a tip." Wood Mercantile Co. vs. Cole, 209 S.W. 2d. 290; Mendoza vs. Dizon, 77 Phil.,
533, 43 Off. Gaz. p. 4633. We do not see much difference between this definition of
gratuity and a remunerative donation contemplated in the Civil Code. In essence they are
the same. Such being the case, it may be said that this donation is gratuity in a large
sense for it was given for valuable services rendered an ultra vires act in the light of the
following authorities:
Indeed, some cases seem to hold that the giving of a pure gratuity to directors
is ultra vires of corporation, so that it could not be legalized even if the approval
of the shareholders; but this position has no sound reason to support it, and is
opposed to the weight of authority (Suffaker vs. Kierger's Assignee, 53 S.W. Rep.
288; !07 Ky. 200; 46 L.R.A. 384).
 But although business corporations cannot contribute to charity or benevolence,
yet they are not required always to insist on the full extent of their legal rights.
They are not forbidden for the recognizing moral obligation of which strict law
takes no cognizance. They are not prohibited from establishing a reputation for
board, liberal, equitable dealing which may stand them in good stead in
competition with less fair rivals. Thus, an incorporated fire insurance company
which policies except losses from explosions may nevertheless pay a loss from
that cause when other companies are accustomed to do so, such liberal dealing
being deemed conducive to the prosperity of the corporation." (Modern Law of
Corporations, Machen, Vol. 1, p. 81).
So, a bank may grant a five years pension to the family at one of its officers. In all
cases in this sorts, the amount of the gratuity rests entirely within the discretion of
the company, unless indeed it be all together out of the reason and fitness. But
where the company has ceased to be going concerned, this power to make gifts
or present it at the end. (Modern Law of Corporations, Machen, Vol. 1, p. 82.).
Payment of Gratitude out of Capital.— There seems on principle no reason to
doubt that gifts or gratuities wherever they are lawful may be paid out of capital
as well as out of profits. (Modern Law of corporations, Machen, Vol. 1 p. 83.).
Whether desirable to supplement implied powers of this kind by express
provisions.— Enough has been said to show that the implied powers of a
corporation to give gratuities to its servants and officers, as well as to strangers,
are ample, so that there is therefore no need to supplement them by express
provisions." (modern Law of Corporations, Machen, Vol. 1, p. 83.) 1
Granting arguendo that the donation given by Pirovano children is outside the scope of the powers of the defendant
corporation, or the scope of the powers that it may exercise under the law, or it is an ultra vires act, still it may said that the
same can not be invalidated, or declared legally ineffective for the reason alone, it appearing that the donation represents
not only the act of the Board of Directors but of the stockholders themselves as shown by the fact that the same has been
expressly ratified in a resolution duly approved by the latter. By this ratification, the infirmity of the corporate act, it may has
been obliterated thereby making the cat perfectly valid and enforceable. This is specially so if the donation is not merely
executory but executed and consummated and no creditors are prejudice, or if there are creditors affected, the latter has
expressly given their confirmity.
In making this pronouncement, advertence should made of the nature of the ultra
vires act that is in question. A little digression needs be made on this matter to show the
different legal effect that may result consequent upon the performance of a
particular ultra vires act on the part of the corporation. may authorities may be cited
interpreting or defining, extent, and scope of an ultra vires act, but all of them are uniform
and unanimous that the same may be either an act performed merely outside the scope
of the powers granted to it by it articles of incorporation, or one which is contrary to law
or violative of any principle which will void any contract whether done individually or
collectively. In other words, a distinction should be made between corporate acts or
contracts which are illegal and those which are merely ultra vires. The former
contemplates the doing of an act which is contrary to law, morals, or public policy or
public duty, and are, like similar transactions between the individuals void. They cannot
serve as basis of a court action, nor require validity ultra vires acts on the other hand, or
those which are not illegal and void ab initio, but are merely within are not illegal and
void ab initio, but are not merely within the scope of the articles of incorporation, are
merely voidable and may become binding and enforceable when ratified by the
stockholders.
Strictly speaking, an ultra vires act is one outside the scope of the power
conferred by the legislature, and although the term has been used
indiscriminately, it is properly distinguishable from acts which are illegal, in
excess or abuse of power, or executed in an unauthorized manner, or acts within
corporate powers but outside the authority of particular officers or agents (19 C.
J. S. 419).
Corporate transactions which are illegal because prohibited by statute or against
public policy are ordinarily void and unenforceable regardless of the part
performance, ratification, or estoppel; but general prohibitions against exceeding
corporate powers and prohibitions intended to protect a particular class or
specifying the consequences of violation may not preclude enforcement of the
transaction and an action may be had for the part unaffected by the illegality or
for equitable restitution. (19 C.J.S. 421.)
Generally, a transaction within corporate powers but executed in an irregular or
unauthorized manner is voidable only, and may become enforceable by reason
of ratification or express or implied assent by the stockholders or by reason of
estoppel of the corporation or the other party to the transaction to raise the
objection, particularly where the benefits are retained
As appears in paragraphs 960-964 supra, the general rule is that a corporation
must act in the manner and with the formalities, if any, prescribed by its character
or by the general law. However, a corporation transaction or contract which is
 within the corporation powers, which is neither wrong in itself nor against public
policy, but which is defective from a failure to observe in its execution a
requirement of law enacted for the benefit or protection of a certain class, is
voidable and is valid until avoided, not void until validated; the parties for whose
benefit the requirement was enacted may ratify it or be estoppel to assert its
invalidity, and third persons acting in good faith are not usually affected by an
irregularity on the part of the corporation in the exercise of its granted powers.
(19 C.J.S., 423-24.)
It is true that there are authorities which told that ultra vires acts, or those performed
beyond the powers conferred upon the corporation either by law or by its articles of
incorporation, are not only voidable, but wholly void and of no legal effect, and that such
acts cannot be validated by ratification or be the basis of any action in court; but such
ruling does not constitute the weight of authority, the reason being that they fail to make
the important distinction we have above adverted to. Because rule has been rejected by
most of the state courts and even by the modern treaties or corporations (7 Flethcer,
Cyc. Corps., 563-564). And now it can be said that the majority of the cases hold that
acts which are merely ultra vires, or acts which are not illegal, may be ratified by the
stockholders of a corporation (Brooklyn Heights R. Co. vs. Brooklyn City R. Co., 135 N.Y.
Supp. 1001).
Strictly speaking, an act of a corporation outside of its character powers is just as
such ultra vires where all the stockholders consent thereto as in a case where
none of the stockholders expressly or cannot be ratified so as to make it valid,
even though all the stockholders consent thereto; but inasmuch as the
stockholders in reality constitute the corporation, it should , it would seem, be
estopped to allege ultra vires, and it is generally so held where there are no
creditors, or the creditors are not injured thereby, and where the rights of the
state or the public are not involved, unless the act is not only ultra vires but in
addition illegal and void. of course, such consent of all the stockholders cannot
adversely affect creditors of the corporation nor preclude a proper attack by the
state because of such ultra vires act. (7 Fletcher Corp., Sec. 3432, p. 585)
Since it is not contended that the donation under consideration is illegal, or contrary to
any of the express provision of the articles of incorporation, nor prejudicial to the
creditors of the defendant corporation, we cannot but logically conclude, on the strength
of the authorities we have quoted above, that said donation, even if ultra vires in the
supposition we have adverted to, is not void, and if voidable its infirmity has been cured
by ratification and subsequent acts of the defendant corporation. The defendant
corporation, therefore, is now prevented or estopped from contesting the validity of the
donation. This is specially so in this case when the very directors who conceived the idea
of granting said donation are practically the stockholders themselves, with few nominal
exception. This applies to the new stockholder Jose Cojuangco who acquired his interest
after the donation has been made because of the rule that a "purchaser of shares of
stock cannot avoid ultra vires acts of the corporation authorized by its vendor, except
those done after the purchase" (7 Fletcher, Cyc. Corps. section 3456, p. 603; Pascual vs.
Del Saz Orozco, 19 Phil., 82.) Indeed, how can the stockholders now pretend to revoke
the donation which has been partly consummated? How can the corporation now set at
naught the transfer made to Mrs. Pirovano of the property in New York, U.S.A., the price
of which was paid by her but of the proceeds of the insurance policies given as donation.
To allow the corporation to undo what it has done would only be most unfair but would
contravene the well-settled doctrine that the defense of ultra vires cannot be set up or
availed of in completed transactions (7 Fletcher, Cyc. Corps. Section 3497, p. 652; 19
C.J.S., 431).
4. We now come to the fourth and last question that the defendant corporation, by the
acts it has performed subsequent to the granting of the donation, deliberately prevented
the fulfillment of the condition precedent to the payment of said donation such that it can
be said it has forfeited entirely due and demandable.
It should be recalled that the original resolution of the Board of Directors adopted on July
10, 1946 which provided for the donation of P400,000 out of the proceeds which the De
la Rama company would collect on the insurance policies taken on the life of the late
Enrico Pirovano was, as already stated above, amended on January 6, 1947 to include,
among the conditions therein provided, that the corporation shall proceed to pay said
amount, as well as the interest due thereon, after it shall have settled in full balance of its
bonded indebtedness in the sum of P5,000,000. It should be recalled that on September
13, 1949, or more than 2 years after the last amendment referred too above, the
stockholders adopted another resolution whereby they formally ratified said donation but
subject to the following clarifications: (1) that the amount of the donation shall not be
effected until such time as the company shall have first duly liquidated its present bonded
indebtedness in the amount of P3,260,855.77 to the National Development Company, or
shall have first fully redeemed the preferred shares of stock in the amount to be issued to
said company in lieu thereof, and (2) that any and all taxes, legal fees, and expenses
connected with the transaction shall be chargeable from the proceeds of said insurance
policies.
The trial court, in considering these conditions in the light of the acts subsequently
performed by the corporation in connection with the proceeds of the insurance policies,
considered said conditions null and void, or at most not written because in its pinion their
non-fulfillment was due to a deliberate desistance of the corporation and not to lack of
funds to redeem the preferred shares of the National Development Company. The
conclusions arrived at by the trial court on this point are as follows:
Fourth. — that the condition mentioned in the donation is null and void because it
depends on the exclusive will of the donor, in accordance with the provisions of
Article 1115 of the Old Civil Code.
Fifth. — That if the condition is valid, its non-fulfillment is due to the desistance of
the defendant company from obeying and doing the wishes and mandate of the
majority of the stockholders.
Sixth. — That the non-payment of the debt in favor of the National Development
Company is due to the lack of funds, nor to lack of authority, but to the desire of
the President of the corporation to preserve and continue the Government
participation in the company.
To this views of the trial court, we fail to agree. There are many factors we can consider
why the failure to immediately redeem the preferred shares issued to the National
Development Company as desired by the minor children of the late Enrico Pirovano
cannot or should not be attributed to a mere desire on the part of the corporation to delay
the redemption, or to prejudice the interest of the minors, but rather to protect the interest
of the corporation itself. One of them is the text of the very resolution approved by the
National Development Company on February 18, 1949 which prescribed the terms and
conditions under which it expressed its conformity to the conversion of the bonded
indebtedness into preferred shares of stock. The text of the resolution above mentioned
reads:
Resolved: That the outstanding bonded indebtedness of the Dela Rama
Steamship Co., Inc., in the approximate amount of P3,260,855.77 be converted
into non-voting preferred shares of stock of said company, said shares to bear a
fixed dividend of 6 percent per annum which shall be cumulative and redeemable
within 15 years. Said shares shall be preferred as to assets in the event of
liquidation or dissolution of said company but shall be non-participating.
It is plain from the text of the above resolution that the defendant corporation had 15
years from February 18, 1949, or until 1964, within which to effect the redemption of the
preferred shares issued to the National Development Company. This condition cannot
but be binding and obligatory upon the donees, if they desire to maintain the validity of
the donation, for it is not only the basis upon which the stockholders of the defendant
corporation expressed their willingness to ratify the donation, but it is also by way which
its creditor, the National Development Company, would want it to be. If the defendant
corporation is given 15 years within which to redeem the preferred shares, and that
period would expire in 1964, one cannot blame the corporation for availing itself of this
period if in its opinion it would redound to its best interest. It cannot therefore be said that
the fulfillment of the condition for the payment of the donation is one that wholly depends
on the exclusive will of the donor, as the lower court has concluded, simply because it
failed to meet the redemption of said shares in her manner desired by the donees. While
it may be admitted that because of the disposition of the assets of the corporation upon
the suggestion of its general manager more than enough funds had been raised to effect
the immediate redemption of the above shares, it is not correct to say that the
management has completely failed in its duty to pay its obligations for, according to the
evidence, a substantial portion of the indebtedness has been paid and only a balance of
about P1,805,169.98 was outstanding when the stockholders of the corporation decided
to revoke or cancel the donation. (Exhibit P.)
But there are other good reasons why all the available funds have not been actually
applied to the redemption of the preferred shares, one of them being the "desire of the
president of the corporation to preserve and continue the government participation in the
company" which even the lower court found it to be meritorious, which is one way by
which it could continue receiving the patronage and protection of the government.
Another reason is that the redemption of the shares does not depend on the will of the
corporation alone but to a great extent on the will of a third party, the National
Development Company. In fact, as the evidence shows, this Company had pledged
these shares to the Philippine National Bank and the Rehabilitation Finance Corporation
as a security to obtain certain loans to finance the purchase of certain ships to be built for
the use of the company under management contract entered into between the
corporation and the National Development Company, and this was what prevented the
corporation from carrying out its offer to pay the sum P1,956,513.07 on April 5, 1951.
Had this offer been accepted, or favorably acted upon by the National Development
Company, the indebtedness would have been practically liquidated, leaving outstanding
only one certificate worth P217,390.45. Of course, the corporation could have insisted in
redeeming the shares if it wanted to even to the extent of taking a court action if
necessary to force its creditor to relinquish the shares that may be necessary to
accomplish the redemption, but such would be a drastic step which would have not been
advisable considering the policy right along maintained by the corporation to preserve its
cordial and smooth relation with the government. At any rate, whether such attitude be
considered as a mere excuse to justify the delay in effecting the redemption of the
shares, or a mere desire on the part of the corporation to retain in its possession more
funds available to attend to other pressing need as demanded by the interest of the
corporation, we fail to see in such an attitude an improper motive to circumvent the early
realization of the desire of the minors to obtain the immediate payment of the donation
which was made dependent upon the redemption of said shares there being no clear
evidence that may justify such design. Anyway, a great portion of the funds went to the
stockholders themselves by way of dividends to offset, so it appears, the huge advances
that the corporation had made to them which were entered in the books of the
corporation as loans and, therefore, they were invested for their own benefit. As General
Manager Osmeña said, "we were first confronted with the problem of the withdrawals of
the family which had to be repaid back to the National Development Company and one
of the most practical solutions to that was to declare dividends and reduce the amounts
of their withdrawals", which then totalled about P3,000,000.
Wherefore, the decision appealed from should be modified as follows: (a) that the
donation made in favor of the children of the late Enrico Pirovano of the proceeds of the
insurance policies taken on his life is valid and binding on the defendant corporation, (b)
that said donation, which amounts to a total of P583,813.59, including interest, as it
appears in the books of the corporation as of August 31, 1951, plus interest thereon at
the rate of 5 per cent per annum from the filing of the complaint, should be paid to the
plaintiffs after the defendant corporation shall have fully redeemed the preferred shares
issued to the National Development Company under the terms and conditions stated in
the resolutions of the Board of Directors of January 6, 1947 and June 24, 1947, as
amended by the resolution of the stockholders adopted on September 13,1949; and (c)
defendant shall pay to plaintiffs an additional amount equivalent to 10 per cent of said
amount of P583,813.59 as damages by way of attorney's fees, and to pay the costs of
action.

All things considered, we are of the opinion that the finding of the lower court that the
failure of the defendant corporation to comply with the condition of the donation is merely
due to its desistance from obeying the mandate of the majority of the stockholders and
not to lack of funds, or to lack of authority, has no foundation in law or in fact, and,
therefore, its conclusion that because of such desistance that condition should be
deemed as fulfilled and the payment of the donation due and demandable, is not
justified. In this respect, the decision of the lower court should be reversed.

Having reached the foregoing conclusion, we deem it unnecessary to discuss the other
issues raised by the parties in their briefs.

The lower court adjudicated to plaintiff an additional amount equivalent to 20 per cent of
the amount claimed as damages by way of attorney's fees, and in our opinion, this award
can be justified under Article 2208, paragraph 2, of the new Civil Code, which provides:
"When the defendant's act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest", attorney's fees nay be awarded as
damages. However, the majority believes that this award should be reduced to 10 per
cent.
 G.R. No. L-17716 July 31, 1962 Commission for the approval of the sale, and the same was approved on January 26,
1957, subject to the mortgage lien in favor of petitioner. chanroblesvirtualawlibrarychanrobles virtual law library

LUNETA MOTOR COMPANY, Petitioner, vs. A.D. SANTOS, INC., ET

AL., Respondents. On June 9, 1958 the Court of First Instance of Manila rendered judgment in Civil Case
No. 20853, amended on August 1, 1958, adjudging Concepcion indebted to petitioner in
DIZON, J.: chanrobles virtual law library
the sum of P15,197.84, with 12% interest thereon from December 2, 1941 until full
payment, plus other assessments, and ordered that the certificate of public convenience
Appeal from the decision of the Public Service Commission in case No. 123401 subject matter of the chattel mortgage be sold at public auction in accordance with law.
dismissing petitioner's application for the approval of the sale in its favor, made by the Accordingly, on March 3, 1959 said certificate was sold at public auction to petitioner,
Sheriff of the City of Manila, of the certificate of public convenience granted before the and six days thereafter the Sheriff of the City of Manila issued in its favor the
war to Nicolas Concepcion (Commission Cases Nos. 60604 and 60605, reconstituted corresponding certificate of sale. Thereupon petitioner filed the application mentioned
after the war in Commission Case No. 1470) to operate a taxicab service of 27 units in heretofore for the approval of the sale. In the meantime and before his death, Amador D.
the City of Manila and therefrom to any point in Luzon. Santos sold and transferred (Commission Case No. 1272231) all his rights and interests
in the certificate of public convenience in question in favor of the now respondent A.D.
chanroblesvirtualawlibrarychanrobles virtual law library

Santos, Inc., who opposed petitioner's application.

It appears that on December 31, 1941, to secure payment of a loan evidenced by a
chanroblesvirtualawlibrarychanrobles virtual law library

promissory note executed by Nicolas Concepcion and guaranteed by one Placido

Esteban in favor of petitioner, Concepcion executed a chattel mortgage covering the The record discloses that in the course of the hearing on said application and after
above mentioned certificate in favor of petitioner. petitioner had rested its case, the respondent A. D. Santos, Inc., with leave of court, filed
a motion to dismiss based on the following grounds:
chanroblesvirtualawlibrarychanrobles virtual law library

To secure payment of a subsequent loan obtained by Concepcion from the Rehabilitation

Finance Corporation (now Development Bank of the Philippines) he constituted a second a) under the petitioner's Articles of Incorporation, it was not authorized to engage in the
mortgage on the same certificate. This second mortgage was approved by the taxicab business or operate as a common carrier; chanrobles virtual law library

respondent Commission, subject to the mortgage lien in favor of petitioner. chanroblesvirtualawlibrarychanrobles virtual law library

b) the decision in Civil Case No. 20853 of the Court of First Instance of Manila did not
The certificate was later sold to Francisco Benitez, Jr., who resold it to Rodi Taxicab affect the oppositor nor its predecessor Amador D. Santos inasmuch as neither of them
Company. Both sales were made with assumption of the mortgage in favor of the RFC, had been impleaded into the case; chanrobles virtual law library

and were also approved provisionally by the Commission, subject to petitioner's lien. chanroblesvirtualawlibrarychanrobles virtual law

c) that what was sold to the petitioner were only the "rights, interests and participation" of
library

On October 10, 1953 petitioner filed an action to foreclose the chattel mortgage executed Nicolas Concepcion in the certificate that had been granted to him which were no longer
in its favor by Concepcion (Civil Case No. 20853 of the Court of First Instance of Manila) existing at the time of the sale.
in view of the failure of the latter and his guarantor, Placido Esteban, to pay their overdue
account. chanroblesvirtualawlibrarychanrobles virtual law library
On October 18, 1960, the respondent Commission, after considering the memoranda
submitted by the parties, rendered the appealed decision sustaining the first ground
While the above case was pending, the RFC also instituted foreclosure proceedings on relied upon in support thereof, namely, that under petitioner's articles of incorporation it
its second chattel mortgage, and as a result of the decision in its favor therein rendered, had no authority to engage in the taxicab business or operate as a common carrier, and
the certificate of public convenience was sold at public auction in favor of Amador D. that, is a result, it could not acquire by purchase the certificate of public convenience
Santos for P24,010.00 on August 31, 1956. Santos immediately applied with the referred to above. Hence, the present appeal interposed by petitioner who claims that, in
accordance with the Corporation Law and its articles of incorporation, it can acquire by land transportation - an entirely different line of business. If it could not thus engage in
purchase the certificate of public convenience in question, maintaining inferentially that, the line of business, it follows that it may not acquire an certificate of public convenience
after acquiring said certificate, it could make use of it by operating a taxicab business or to operate a taxicab service, such as the one in question, because such acquisition
operate is a common carrier by land. chanroblesvirtualawlibrarychanrobles virtual law library would be without purpose and would have no necessary connection with petitioner's
legitimate business. chanroblesvirtualawlibrarychanrobles virtual law library

There is no question that a certificate of public convenience granted to the public

operator is liable to execution (Raymundo vs. Luneta Motor Co., 58 Phil. 889) and may In view of the conclusion we have arrived at on the decisive issue involved in this appeal,
be acquired by purchase. The question involved in the present appeal, however, is not we deem it unnecessary to resolve the other incidental questions raised by petitioner.
virtual law library
chanroblesvirtualawlibrarychanrobles

only whether, under the Corporation Law and petitioner's articles of incorporation, it may
acquire by purchase a certificate of public convenience, such as the one in question, but WHEREFORE, the appealed decision is affirmed, with costs.
also whether, after its acquisition, petitioner may hold the certificate and thereunder
operate as a common carrier by land. chanroblesvirtualawlibrarychanrobles virtual law library

It is not denied that under Section 13 (5) of the Corporation Law, a corporation created
thereunder may purchase, hold, etc., and otherwise deal in such real and personal
property is the purpose for which the corporation was formed may permit, and the
transaction of its lawful business may reasonably and necessarily require. The issue
here is precisely whether the purpose for which petitioner was organized and the
transaction of its lawful business reasonably and necessarily require the purchase and
holding by it of a certificate of public convenience like the one in question and thus give it
additional authority to operate thereunder as a common carrier by land. chanroblesvirtualawlibrarychanrobles virtual law library

Petitioner claims in this regard that its corporate purposes are to carry on a general
mercantile and commercial business, etc., and that it is authorized in its articles of
incorporation to operate and otherwise deal in and concerning automobiles and
automobile accessories' business in all its multifarious ramification (petitioner's brief p. 7)
and to operate, etc., and otherwise dispose of vessels and boats, etc., and to own and
operate steamship and sailing ships and other floating craft and deal in the same and
engage in the Philippine Islands and elsewhere in the transportation of persons,
merchandise and chattels by water; all this incidental to the transportation of automobiles
(id. pp. 7-8 and Exhibit B).
chanroblesvirtualawlibrarychanrobles virtual law library

We find nothing in the legal provision and the provisions of petitioner's articles of
incorporation relied upon that could justify petitioner's contention in this case. To the
contrary, they are precisely the best evidence that it has no authority at all to engage in
the business of land transportation and operate a taxicab service. That it may operate
and otherwise deal in automobiles and automobile accessories; that it may engage in the
transportation of persons by water does not mean that it may engage in the business of
G.R. No. L-18062 February 28, 1963
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
ACOJE MINING COMPANY, INC., defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.
Jalandoni & Jamir for defendant-appellant.
BAUTISTA ANGELO, J.:
On May 17, 1948, the Acoje Mining Company, Inc. wrote the Director of Posts requesting
the opening of a post, telegraph and money order offices at its mining camp at Sta. Cruz,
Zambales, to service its employees and their families that were living in said camp.
Acting on the request, the Director of Posts wrote in reply stating that if aside from free
quarters the company would provide for all essential equipment and assign a responsible
employee to perform the duties of a postmaster without compensation from his office
until such time as funds therefor may be available he would agree to put up the offices
requested. The company in turn replied signifying its willingness to comply with all the
requirements outlined in the letter of the Director of Posts requesting at the same time
that it be furnished with the necessary forms for the early establishment of a post office
branch.
On April 11, 1949, the Director of Posts again wrote a letter to the company stating
among other things that "In cases where a post office will be opened under
circumstances similar to the present, it is the policy of this office to have the company
assume direct responsibility for whatever pecuniary loss may be suffered by the Bureau
of Posts by reason of any act of dishonesty, carelessness or negligence on the part of
the employee of the company who is assigned to take charge of the post office," thereby
suggesting that a resolution be adopted by the board of directors of the company
expressing conformity to the above condition relative to the responsibility to be assumed
buy it in the event a post office branch is opened as requested. On September 2, 1949,
the company informed the Director of Posts of the passage by its board of directors of a
resolution of the following tenor: "That the requirement of the Bureau of Posts that the
Company should accept full responsibility for all cash received by the Postmaster be
complied with, and that a copy of this resolution be forwarded to the Bureau of Posts."
The letter further states that the company feels that that resolution fulfills the last
condition imposed by the Director of Posts and that, therefore, it would request that an
inspector be sent to the camp for the purpose of acquainting the postmaster with the
details of the operation of the branch office.
The post office branch was opened at the camp on October 13, 1949 with one Hilario M.
Sanchez as postmaster. He is an employee of the company. On May 11, 1954, the
postmaster went on a three-day leave but never returned. The company immediately
informed the officials of the Manila Post Office and the provincial auditor of Zambales of
Sanchez' disappearance with the result that the accounts of the postmaster were
checked and a shortage was found in the amount of P13,867.24.
The several demands made upon the company for the payment of the shortage in line
with the liability it has assumed having failed, the government commenced the present
action on September 10, 1954 before the Court of First Instance of Manila seeking to
recover the amount of Pl3,867.24. The company in its answer denied liability for said
amount contending that the resolution of the board of directors wherein it assumed
responsibility for the act of the postmaster is ultra vires, and in any event its liability under
said resolution is only that of a guarantor who answers only after the exhaustion of the
properties of the principal, aside from the fact that the loss claimed by the plaintiff is not
supported by the office record.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted
and approved by this Honorable Court, without prejudice to the parties adducing other
evidence to prove their case not covered by this stipulation of facts. 1äwphï1.ñët
After trial, the court a quo found that, of the amount claimed by plaintiff totalling
P13,867.24, only the sum of P9,515.25 was supported by the evidence, and so it
rendered judgment for the plaintiff only for the amount last mentioned. The court rejected
the contention that the resolution adopted by the company is ultra vires and that the
obligation it has assumed is merely that of a guarantor.
Defendant took the present appeal.
The contention that the resolution adopted by the company dated August 31, 1949 is
ultra vires in the sense that it has no authority to act on a matter which may render the
company liable as a guarantor has no factual or legal basis. In the first place, it should be
noted that the opening of a post office branch at the mining camp of appellant
corporation was undertaken because of a request submitted by it to promote the
convenience and benefit of its employees. The idea did not come from the government,
and the Director of Posts was prevailed upon to agree to the request only after studying
the necessity for its establishment and after imposing upon the company certain
requirements intended to safeguard and protect the interest of the government. Thus,
after the company had signified its willingness to comply with the requirement of the
government that it furnish free quarters and all the essential equipment that may be
necessary for the operation of the office including the assignment of an employee who
will perform the duties of a postmaster, the Director of Posts agreed to the opening of the
post office stating that "In cases where a post office will be opened under circumstances
similar to the present, it is the policy of this office to have the company assume direct
responsibility for whatever pecuniary loss may be suffered by the Bureau of Posts by
reason of any act of dishonesty, carelessness or negligence on the part of the employee
of the company who is assigned to take charge of the post office," and accepting this
condition, the company, thru its board of directors, adopted forthwith a resolution of the
following tenor: "That the requirement of the Bureau of Posts that the company should
accept full responsibility for all cash received by the Postmaster, be complied with, and
that a copy of this resolution be forwarded to the Bureau of Posts." On the basis of the
foregoing facts, it is evident that the company cannot now be heard to complain that it is
not liable for the irregularity committed by its employee upon the technical plea that the
resolution approved by its board of directors is ultra vires. The least that can be said is
that it cannot now go back on its plighted word on the ground of estoppel.
The claim that the resolution adopted by the board of directors of appellant company is
an ultra vires act cannot also be entertained it appearing that the same covers a subject
which concerns the benefit, convenience and welfare of its employees and their families.
While as a rule an ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore beyond the
powers conferred upon it by law (19 C.J.S., Section 965, p. 419), there are however
certain corporate acts that may be performed outside of the scope of the powers
expressly conferred if they are necessary to promote the interest or welfare of the
corporation. Thus, it has been held that "although not expressly authorized to do so a
corporation may become a surety where the particular transaction is reasonably
necessary or proper to the conduct of its business,"1 and here it is undisputed that the
establishment of the local post office is a reasonable and proper adjunct to the conduct
of the business of appellant company. Indeed, such post office is a vital improvement in
the living condition of its employees and laborers who came to settle in its mining camp
which is far removed from the postal facilities or means of communication accorded to
people living in a city or municipality..
Even assuming arguendo that the resolution in question constitutes an ultra vires act, the
same however is not void for it was approved not in contravention of law, customs, public
order or public policy. The term ultra vires should be distinguished from an illegal act for
the former is merely voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated.2 It being merely voidable, an
ultra vires act can be enforced or validated if there are equitable grounds for taking such
action. Here it is fair that the resolution be upheld at least on the ground of estoppel. On
this point, the authorities are overwhelming:
The weight of authority in the state courts is to the effect that a transaction which
is merely ultra vires and not malum in se or malum prohibitum, is, if performed by
one party, not void as between the parties to all intents and purposes, and that
an action may be brought directly on the transaction and relief had according to
its terms. (19 C.J.S., Section 976, p. 432, citing Nettles v. Rhett, C.C.A.S.C., 94
F. 2d, reversing, D.C., 20 F. Supp. 48)
This rule is based on the consideration that as between private corporations, one
party cannot receive the benefits which are embraced in total performance of a
contract made with it by another party and then set up the invalidity of the
transaction as a defense." (London & Lancashire Indemnity Co. of America v.
Fairbanks Steam Shovel Co., 147 N.E. 329, 332, 112 Ohio St. 136.)
The defense of ultra vires rests on violation of trust or duty toward stockholders,
and should not be entertained where its allowance will do greater wrong to
innocent parties dealing with corporation..
The acceptance of benefits arising from the performance by the other party may
give rise to an estoppel precluding repudiation of the transaction. (19 C.J.S.,
Section 976, p. 433.)
The current of modern authorities favors the rule that where the ultra vires
transaction has been executed by the other party and the corporation has
received the benefit of it, the law interposes an estoppel, and will not permit the
validity of the transaction or contract to be questioned, and this is especially true
 where there is nothing in the circumstances to put the other party to the G.R. No. 80599 September 15, 1989
transaction on notice that the corporation has exceeded its powers in entering
into it and has in so doing overstepped the line of corporate privileges. (19 C.J.S., ERNESTINA CRISOLOGO-JOSE, petitioner,
Section 977, pp. 435-437, citing Williams v. Peoples Building & Loan Ass'n, 97 vs.
S.W. 2d 930, 193 Ark. 118; Hays v. Galion Gas Light Co., 29 Ohio St. 330) COURT OF APPEALS and RICARDO S. SANTOS, JR. in his own behalf and as
Vice-President for Sales of Mover Enterprises, Inc., respondents.
Neither can we entertain the claim of appellant that its liability is only that of a guarantor.
On this point, we agree with the following comment of the court a quo: "A mere reading Melquiades P. de Leon for petitioner.
of the resolution of the Board of Directors dated August 31, 1949, upon which the plaintiff
based its claim would show that the responsibility of the defendant company is not just Rogelio A. Ajes for private respondent.
that of a guarantor. Notice that the phraseology and the terms employed are so clear and
sweeping and that the defendant assumed 'full responsibility for all cash received by the
Postmaster.' Here the responsibility of the defendant is not just that of a guarantor. It is
clearly that of a principal."
REGALADO, J.:
WHEREFORE, the decision appealed from is affirmed. No costs.
Petitioner seeks the annulment of the decision of respondent Court of Appeals,
1

promulgated on September 8, 1987, which reversed the decision of the trial

Court dismissing the complaint for consignation filed by therein plaintiff Ricardo S.
2

Santos, Jr.

The parties are substantially agreed on the following facts as found by both lower courts:

In 1980, plaintiff Ricardo S. Santos, Jr. was the vice-president of Mover

Enterprises, Inc. in-charge of marketing and sales; and the president of
the said corporation was Atty. Oscar Z. Benares. On April 30, 1980, Atty.
Benares, in accommodation of his clients, the spouses Jaime and Clarita
Ong, issued Check No. 093553 drawn against Traders Royal Bank, dated
June 14, 1980, in the amount of P45,000.00 (Exh- 'I') payable to
defendant Ernestina Crisologo-Jose. Since the check was under the
account of Mover Enterprises, Inc., the same was to be signed by its
president, Atty. Oscar Z. Benares, and the treasurer of the said
corporation. However, since at that time, the treasurer of Mover
Enterprises was not available, Atty. Benares prevailed upon the plaintiff,
Ricardo S. Santos, Jr., to sign the aforesaid chEck as an alternate story.
Plaintiff Ricardo S. Santos, Jr. did sign the check.
It appears that the check (Exh. '1') was issued to defendant Ernestina
Crisologo-Jose in consideration of the waiver or quitclaim by said
defendant over a certain property which the Government Service
Insurance System (GSIS) agreed to sell to the clients of Atty. Oscar
Benares, the spouses Jaime and Clarita Ong, with the understanding that
upon approval by the GSIS of the compromise agreement with the
spouses Ong, the check will be encashed accordingly. However, since
the compromise agreement was not approved within the expected period
of time, the aforesaid check for P45,000.00 (Exh. '1') was replaced by
Atty. Benares with another Traders Royal Bank cheek bearing No.
379299 dated August 10, 1980, in the same amount of P45,000.00
(Exhs. 'A' and '2'), also payable to the defendant Jose. This replacement
check was also signed by Atty. Oscar Z. Benares and by the plaintiff
Ricardo S. Santos, Jr. When defendant deposited this replacement check
(Exhs. 'A' and '2') with her account at Family Savings Bank, Mayon
Branch, it was dishonored for insufficiency of funds. A subsequent
redepositing of the said check was likewise dishonored by the bank for
the same reason. Hence, defendant through counsel was constrained to
file a criminal complaint for violation of Batas Pambansa Blg. 22 with the
Quezon City Fiscal's Office against Atty. Oscar Z. Benares and plaintiff
Ricardo S. Santos, Jr. The investigating Assistant City Fiscal, Alfonso
Llamas, accordingly filed an amended information with the court charging
both Oscar Benares and Ricardo S. Santos, Jr., for violation of Batas
Pambansa Blg. 22 docketed as Criminal Case No. Q-14867 of then Court
of First Instance of Rizal, Quezon City.
Meanwhile, during the preliminary investigation of the criminal charge
against Benares and the plaintiff herein, before Assistant City Fiscal
Alfonso T. Llamas, plaintiff Ricardo S. Santos, Jr. tendered cashier's
check No. CC 160152 for P45,000.00 dated April 10, 1981 to the
defendant Ernestina Crisologo-Jose, the complainant in that criminal
case. The defendant refused to receive the cashier's check in payment of
the dishonored check in the amount of P45,000.00. Hence, plaintiff
encashed the aforesaid cashier's check and subsequently deposited said
amount of P45,000.00 with the Clerk of Court on August 14, 1981 (Exhs.
'D' and 'E'). Incidentally, the cashier's check adverted to above was
purchased by Atty. Oscar Z. Benares and given to the plaintiff herein to
be applied in payment of the dishonored check. 3
After trial, the court a quo, holding that it was "not persuaded to believe that consignation
referred to in Article 1256 of the Civil Code is applicable to this case," rendered judgment
dismissing plaintiff s complaint and defendant's counterclaim. 4
As earlier stated, respondent court reversed and set aside said judgment of dismissal
and revived the complaint for consignation, directing the trial court to give due course
thereto.
Hence, the instant petition, the assignment of errors wherein are prefatorily stated and
discussed seriatim.
1. Petitioner contends that respondent Court of Appeals erred in holding
that private respondent, one of the signatories of the check issued under
the account of Mover Enterprises, Inc., is an accommodation party under
the Negotiable Instruments Law and a debtor of petitioner to the extent of
the amount of said check.
Petitioner avers that the accommodation party in this case is Mover Enterprises, Inc. and
not private respondent who merely signed the check in question in a representative
capacity, that is, as vice-president of said corporation, hence he is not liable thereon
under the Negotiable Instruments Law.
The pertinent provision of said law referred to provides:
Sec. 29. Liability of accommodation party an accommodation party is one
who has signed the instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose of lending his name
to some other person. Such a person is liable on the instrument to a
holder for value, notwithstanding such holder, at the time of taking the
instrument, knew him to be only an accommodation party.
Consequently, to be considered an accommodation party, a person must (1) be a party
to the instrument, signing as maker, drawer, acceptor, or indorser, (2) not receive value
therefor, and (3) sign for the purpose of lending his name for the credit of some other
person.
Based on the foregoing requisites, it is not a valid defense that the accommodation party
did not receive any valuable consideration when he executed the instrument. From the
standpoint of contract law, he differs from the ordinary concept of a debtor therein in the
sense that he has not received any valuable consideration for the instrument he signs.
Nevertheless, he is liable to a holder for value as if the contract was not for
accommodation in whatever capacity such accommodation party signed the instrument,
5
whether primarily or secondarily. Thus, it has been held that in lending his name to the
accommodated party, the accommodation party is in effect a surety for the latter. 6
Assuming arguendo that Mover Enterprises, Inc. is the accommodation party in this
case, as petitioner suggests, the inevitable question is whether or not it may be held
liable on the accommodation instrument, that is, the check issued in favor of herein
petitioner.
We hold in the negative.
The aforequoted provision of the Negotiable Instruments Law which holds an
accommodation party liable on the instrument to a holder for value, although such holder
at the time of taking the instrument knew him to be only an accommodation party, does
not include nor apply to corporations which are accommodation parties. This is because
7
the issue or indorsement of negotiable paper by a corporation without consideration and
for the accommodation of another is ultra vires. Hence, one who has taken the
8
instrument with knowledge of the accommodation nature thereof cannot recover against
a corporation where it is only an accommodation party. If the form of the instrument, or
the nature of the transaction, is such as to charge the indorsee with knowledge that the
issue or indorsement of the instrument by the corporation is for the accommodation of
another, he cannot recover against the corporation thereon. 9
By way of exception, an officer or agent of a corporation shall have the power to execute
or indorse a negotiable paper in the name of the corporation for the accommodation of a
third person only if specifically authorized to do so. Corollarily, corporate officers, such
10
as the president and vice-president, have no power to execute for mere accommodation
a negotiable instrument of the corporation for their individual debts or transactions arising
from or in relation to matters in which the corporation has no legitimate concern. Since
such accommodation paper cannot thus be enforced against the corporation, especially
since it is not involved in any aspect of the corporate business or operations, the
inescapable conclusion in law and in logic is that the signatories thereof shall be
personally liable therefor, as well as the consequences arising from their acts in
connection therewith.
The instant case falls squarely within the purview of the aforesaid decisional rules. If we
indulge petitioner in her aforesaid postulation, then she is effectively barred from
recovering from Mover Enterprises, Inc. the value of the check. Be that as it may,
petitioner is not without recourse.
The fact that for lack of capacity the corporation is not bound by an accommodation
paper does not thereby absolve, but should render personally liable, the signatories of
said instrument where the facts show that the accommodation involved was for their
personal account, undertaking or purpose and the creditor was aware thereof.
Petitioner, as hereinbefore explained, was evidently charged with the knowledge that the
cheek was issued at the instance and for the personal account of Atty. Benares who
merely prevailed upon respondent Santos to act as co-signatory in accordance with the
arrangement of the corporation with its depository bank. That it was a personal
undertaking of said corporate officers was apparent to petitioner by reason of her
personal involvement in the financial arrangement and the fact that, while it was the
corporation's check which was issued to her for the amount involved, she actually had no
transaction directly with said corporation.
There should be no legal obstacle, therefore, to petitioner's claims being directed
personally against Atty. Oscar Z. Benares and respondent Ricardo S. Santos, Jr.,
president and vice-president, respectively, of Mover Enterprises, Inc.
2. On her second assignment of error, petitioner argues that the Court of
Appeals erred in holding that the consignation of the sum of P45,000.00,
made by private respondent after his tender of payment was refused by
petitioner, was proper under Article 1256 of the Civil Code.
Petitioner's submission is that no creditor-debtor relationship exists between the parties,
hence consignation is not proper. Concomitantly, this argument was premised on the
assumption that private respondent Santos is not an accommodation party.
As previously discussed, however, respondent Santos is an accommodation party and is,
therefore, liable for the value of the check. The fact that he was only a co-signatory does
not detract from his personal liability. A co-maker or co-drawer under the circumstances
in this case is as much an accommodation party as the other co-signatory or, for that
matter, as a lone signatory in an accommodation instrument. Under the doctrine
in Philippine Bank of Commerce vs. Aruego, supra, he is in effect a co-surety for the
accommodated party with whom he and his co-signatory, as the other co-surety, assume
solidary liability ex lege for the debt involved. With the dishonor of the check, there was
created a debtor-creditor relationship, as between Atty. Benares and respondent Santos,
on the one hand, and petitioner, on the other. This circumstance enables respondent
Santos to resort to an action of consignation where his tender of payment had been
refused by petitioner.
We interpose the caveat, however, that by holding that the remedy of consignation is
proper under the given circumstances, we do not thereby rule that all the operative facts
for consignation which would produce the effect of payment are present in this case.
Those are factual issues that are not clear in the records before us and which are for the
Regional Trial Court of Quezon City to ascertain in Civil Case No. Q-33160, for which
reason it has advisedly been directed by respondent court to give due course to the
complaint for consignation, and which would be subject to such issues or claims as may
be raised by defendant and the counterclaim filed therein which is hereby ordered
similarly revived.
3. That respondent court virtually prejudged Criminal Case No. Q-14687
of the Regional Trial Court of Quezon City filed against private
respondent for violation of Batas Pambansa Blg. 22, by holding that no
criminal liability had yet attached to private respondent when he
deposited with the court the amount of P45,000.00 is the final plaint of
petitioner.
We sustain petitioner on this score.
Indeed, respondent court went beyond the ratiocination called for in the appeal to it in
CA-G.R. CV. No. 05464. In its own decision therein, it declared that "(t)he lone issue
dwells in the question of whether an accommodation party can validly consign the
amount of the debt due with the court after his tender of payment was refused by the
creditor." Yet, from the commercial and civil law aspects determinative of said issue, it
digressed into the merits of the aforesaid Criminal Case No. Q-14867, thus:
Section 2 of B.P. 22 establishes the prima facie evidence of knowledge of
such insufficiency of funds or credit. Thus, the making, drawing and
issuance of a check, payment of which is refused by the drawee because
of insufficient funds in or credit with such bank is prima facie evidence of
knowledge of insufficiency of funds or credit, when the check is presented
within 90 days from the date of the check.
It will be noted that the last part of Section 2 of B.P. 22 provides that the
element of knowledge of insufficiency of funds or credit is not present
and, therefore, the crime does not exist, when the drawer pays the holder
the amount due or makes arrangements for payment in full by the drawee
of such check within five (5) banking days after receiving notice that such
check has not been paid by the drawee.
Based on the foregoing consideration, this Court finds that the plaintiff-
appellant acted within Ms legal rights when he consigned the amount of
P45,000.00 on August 14, 1981, between August 7, 1981, the date when
plaintiff-appellant receive (sic) the notice of non-payment, and August 14,
1981, the date when the debt due was deposited with the Clerk of Court
(a Saturday and a Sunday which are not banking days) intervened. The
fifth banking day fell on August 14, 1981. Hence, no criminal liability has
yet attached to plaintiff-appellant when he deposited the amount of
P45,000.00 with the Court a quo on August 14, 1981. 11
That said observations made in the civil case at bar and the intrusion into the merits of
the criminal case pending in another court are improper do not have to be belabored. In
the latter case, the criminal trial court has to grapple with such factual issues as, for
instance, whether or not the period of five banking days had expired, in the process
determining whether notice of dishonor should be reckoned from any prior notice if any
has been given or from receipt by private respondents of the subpoena therein with
supporting affidavits, if any, or from the first day of actual preliminary investigation; and
whether there was a justification for not making the requisite arrangements for payment
in full of such check by the drawee bank within the said period. These are matters alien
to the present controversy on tender and consignation of payment, where no such period
and its legal effects are involved.
These are aside from the considerations that the disputed period involved in the criminal
case is only a presumptive rule, juris tantum at that, to determine whether or not there
was knowledge of insufficiency of funds in or credit with the drawee bank; that payment
of civil liability is not a mode for extinguishment of criminal liability; and that the requisite
quantum of evidence in the two types of cases are not the same.
To repeat, the foregoing matters are properly addressed to the trial court in Criminal
Case No. Q-14867, the resolution of which should not be interfered with by respondent
Court of Appeals at the present posture of said case, much less preempted by the
inappropriate and unnecessary holdings in the aforequoted portion of the decision of said
respondent court. Consequently, we modify the decision of respondent court in CA-G.R.
CV No. 05464 by setting aside and declaring without force and effect its pronouncements
and findings insofar as the merits of Criminal Case No. Q-14867 and the liability of the
accused therein are concerned.
WHEREFORE, subject to the aforesaid modifications, the judgment of respondent Court
of Appeals is AFFIRMED.
SO ORDERED.
G.R. No. L-36207 October 26, 1932
IRINEO G. CARLOS, plaintiff-appellant,
vs.
MINDORO SUGAR CO., ET AL., defendants-appellees.
IMPERIAL, J.:
The plaintiff brought this action to recover from the defendants the value of four bonds,
Nos. 1219, 1220, 1221, and 1222, with due and unpaid interest thereon, issued by the
Mindoro Sugar Company and placed in trust with the Philippine Trust Company which, in
turn, guaranteed them for value received. Said plaintiff appealed from the judgment
rendered by the Court of First Instance of Manila absolving the defendants from the
complaint, excepting the Mindoro Sugar Company, which was sentenced to pay the
value of the four bonds with interest at 8 per cent per annum, plus costs.
The Mindoro Sugar Company is a corporation constituted in accordance with the laws of
the country and registered on July 30, 1917. According to its articles of incorporation,
Exhibit 5, one of its principal purposes was to acquire and exercise the franchise granted
by Act No. 2720 to George H. Fairchild, to substitute the organized corporation, the
Mindoro Company, and to acquire all the rights and obligations of the latter and of
Horace Havemeyer and Charles J. Welch in the so-called San Jose Estate in the
Province of Mindoro.
The Philippine Trust Company is another domestic corporation, registered on October
21, 1917. In its articles of incorporation, Exhibit A, some of its purposes are expressed
thus: "To acquire by purchase, subscription, or otherwise, and to invest in, hold, sell, or
otherwise dispose of stocks, bonds, mortgages, and other securities, or any interest in
either, or any obligations or evidences of indebtedness, of any other corporation or
corporations, domestic or foreign. . . . Without in any particular limiting any of the powers
of the corporation, it is hereby expressly declared that the corporation shall have power
to make any guaranty respecting the dividends, interest, stock, bonds, mortgages, notes,
contracts or other obligations of any corporation, so far as the same may be permitted by
the laws of the Philippine Islands now or hereafter in force." Its principal purpose, then,
as its name indicates, is to engage in the trust business.
On November 17, 1917, the board of directors of the Philippine Trust Company,
composed of Phil, C. Whitaker, chairman, and James Ross, Otto Vorster, Charles D.
Ayton, and William J. O'Donovan, members, adopted a resolution authorizing its
president, among other things, to purchase at par and in the name and for the use of the
trust corporation all or such part as he may deem expedient, of the bonds in the value of
P3,000,000 that the Mindoro Sugar Company was about to issue, and to resell them,
with or without the guarantee of said trust corporation, at a price not less than par, and to
guarantee to the Philippine National Bank the payment of the indebtedness to said bank
by the Mindoro Sugar Company or Charles J. Welch and Horace Havemeyer, up to
P2,000,000. The relevant part of the resolution, Exhibit 3, reads as follows:
Resolved that Mr. Phil. C. Whitaker, president of this company, be and he hereby
is authorized to purchase at par in the name and for the use of this company all,
or such part as he may deem expedient, of the said P3,000,000 of 20-year 8 per
cent coupon bonds of the said Mindoro Sugar Company, and to resell or
otherwise dispose of the said bonds, with or without this company's guaranty, at
a price not less than par; and it was further
Resolved that Mr. Phil. C. Whitaker, president of the company be and he hereby
is authorized in the name of this company alone or in connection with others, by
joint and several obligations, to guarantee to the Philippine National Bank the
due and punctual payment of any and all indebtedness owing to the said Bank by
either the Mindoro Sugar Company, the Mindoro Company, or Charles J. Welch
and Horace Havemeyer, up to P2,000,000; and it was further
Resolved that the said president, Mr. Phil. C. Whitaker, be and he hereby is
authorized to execute in the name of this company any and all notes, mortgages,
bonds, guaranties, or instruments in writing whatever necessary for the carrying
into effect of the authority hereby granted.
In pursuance of this resolution, on December 21, 1917, the Mindoro Sugar Company
executed in favor of the Philippine Trust Company the deed of trust, Exhibit 6,
transferring all of its property to it in consideration of the bonds it had issued to the value
of P3,000,000, the value of each bond being $1,000, which par value, with interest at 8
per cent per annum, the Philippine Trust Company had guaranteed to the holders, and in
consideration, furthermore, of said trust corporation having guaranteed to the Philippine
National Bank all the obligations contracted by the Mindoro Sugar Company, Charles J.
Welch and Horace Havemeyer up to the aforesaid amount of P2,000,000. The
aforementioned deed was approved by his Excellency, the Governor-General, upon
recommendation of the Secretary of Agriculture and Natural Resources, and in
accordance with the provisions of Act No. 2720 of the Philippine Legislature. Following
are the clauses of said Exhibit 6 material to this decision:
Whereas, for the purposes aforesaid, and in further pursuance of said resolutions
of its board of directors and of its stockholders, the company, in order to secure
the payment of said First Mortgage, Twenty Year, Eight Per Cent, Gold Bonds,
has determined to execute and deliver to said Philippine Trust Company, as
trustee, a deed of trust of its properties hereinafter described, and the board of
directors of the Company has approved the form of this indenture and directed
that the same be executed and delivered to said trustee; and
Whereas, all things necessary to make said bonds, when certified by said trustee
as in this indenture provided, valid, binding, legal and negotiable obligations of
the company and this indenture a valid deed of trust to secure the payment of
said bonds, have been done and performed, and the creation and issue of said
bonds, and the execution, acknowledgment and delivery of this deed of trust
have been duly authorized;
Now, therefore, in order to secure the payment of the principal and interest of all
such bonds at any time issued and outstanding under this indenture, according to
their tenor, purport and effect, and to secure the performance and observance of
all the covenants and conditions herein contained and to declare the terms and
conditions upon which said bonds are issued, received and held, and for and in
consideration of the premises, and of the purchase or acceptance of such bonds
by the holders thereof, and of the sum of one dollar, United States currency, to it
duly paid at or before the ensealing and delivery of these presents, the receipt
whereof is hereby acknowledged, the Mindoro Sugar Company, party of the first
part, has sold and conveyed, and by these presents does sell and convey to the
Philippine Trust Company, party of the second part, its successors and assigns
forever;
(Description of the property.)
In consequence of this transaction, the bonds, with their coupons were placed on the
market and sold by the Philippine Trust Company, all endorsed as follows:
 This is to certify that the within bond is one of the series described in the
trust deed therein mentioned.
PHILIPPINE TRUST COMPANY
by: (Sgd.) PHIL. C. WHITAKER
President
The lower court, without a proof to support it or an averment in defense by the
defendant Philippine Trust Company, erred in finding hypothetically that if the
guarantee made by this company be held valid, the trust funds and deposits in its
hands would probably be endangered.
THIRD ERROR

For values received, the Philippine Trust Company hereby guarantees The lower court erred in holding that the Philippine Trust Company has no power
the payment of principal and interest of the within bond. to guarantee the obligation of another juridical personality, for value received.

Manila, Jan.—2, 1918 FOURTH ERROR

PHILIPPINE TRUST COMPANY
by: (Sgd.) PHIL. C. WHITAKER
President
The Philippine Trust Company sold thirteen bonds, Nos. 1219 to 1231, to Ramon Diaz
for P27,300, at a net profit of P100 per bond. The four bonds Nos. 1219, 1220, 1221, and
1222, here in litigation, are included in the thirteen sold to Diaz.
The Philippine Trust Company paid the appellant, upon presentation of the coupons, the
stipulated interest from the date of their maturity until the 1st of July, 1928, when it
stopped payments; and thenceforth it alleged that it did not deem itself bound to pay
such interest or to redeem the obligation because the guarantee given for the bonds was
illegal and void.
The appellant now contends that the judgment appealed from is untenable, assigning the
following errors:
FIRST ERROR
The lower court erred in sustaining the demurrer against the amended complaint,
filed by defendant J. S. Reis (Reese) and consequently in dismissing the same
with regard to this defendant.
The lower court erred in not recognizing the validity and effect of the guarantee
subscribed by the Philippine Trust Company for the payment of the four bonds
claimed in the complaint, endorsed upon them, and in absolving said institution
from the complaint.
FIFTH ERROR
The lower court erred in absolving the ex-directors of the Philippine Trust
Company, Phil. C. Whitaker, O. Vorster, and Charles D. Ayton, from the
complaint.
We shall not follow the order of the appellant's argument, deeming it unnecessary, but
shall decide only the third and fourth assignments of error upon which the merits of the
case depend. For the clear understanding of this decision and to avoid erroneous
interpretations, however, we wish to state that in this decision we shall decide only the
rights of the parties with regard to the four bonds in question and whatever we say in no
wise affects or applies to the rest of the bonds.
We shall begin by saying that the majority of the justices of this court who took part in the
case are of opinion that the only point of law to be decided is whether the Philippine
Trust Company acquired the four bonds in question, and whether as such it bound itself
legally and acted within its corporate powers in guaranteeing them. This question was
answered in the affirmative.1awphil.net

SECOND ERROR
In adopting this conclusion we have relied principally upon the following facts and
circumstances: Firstly, that the Philippine Trust Company, although secondarily engaged
in banking, was primarily organized as a trust corporation with full power to acquire
personal property such as the bonds in question according to both section 13 (par. 5) of
the Corporation Law and its duly registered by-laws and articles of incorporation;
secondly, that being thus authorized to acquire the bonds, it was given implied power to
guarantee them in order to place them upon the market under better, more
advantageous conditions, and thereby secure the profit derived from their sale:
It is not, however, ultra vires for a corporation to enter into contracts of guaranty
or suretyship where it does so in the legitimate furtherance of its purposes and
business. And it is well settled that where a corporation acquires commercial
paper or bonds in the legitimate transaction of its business it may sell them, and
in furtherance of such a sale it may, in order to make them the more readily
marketable, indorse or guarantee their payment. (7 R. C. L., p. 604 and cases
cited.)
"Whenever a corporation has the power to take and dispose of the securities of another
corporation, of whatsoever kind, it may, for the purpose of giving them a marketable
quality, guarantee their payment, even though the amount involved in the guaranty may
subject the corporation to liabilities in excess of the limit of indebtedness which it is
authorized to incur. A corporation which has power by its charter to issue its own bonds
has power to guarantee the bonds of another corporation, which has been taken in
payment of a debt due to it, and which it sells or transfers in payment of its own debt, the
guaranty being given to enable it to dispose of the bond to better advantage. And so
guaranties of payment of bonds taken by a loan and trust company in the ordinary
course of its business, made in connection with their sale, are not ultra vires, and are
binding." (14-A C. J., pp. 742-743 and cases cited); thirdly, that although it does not
clearly appear in the deed of trust (Exhibit 6) that the Mindoro Sugar Company
transferred the bonds therein referred to, to the Philippine Trust Company, nevertheless,
in the resolution of the board of directors (Exhibit 3), the president of the Philippine Trust
Company was expressly authorized to purchase all or some of the bonds and to
guarantee them; whence it may be inferred that subsequent purchasers of the bonds in
the market relied upon the belief that they were acquiring securities of the Philippine
Trust Company, guaranteed by this corporation; fourthly, that as soon as P3,000,000
worth of bonds was issued, and by the deed of trust the Mindoro, Sugar Company
transferred all its real property to the Philippine Trust Company, the cause or
consideration of the transfer being, (1) the guarantee given by the purchaser to the
bonds, and (2) its having likewise guaranteed its obligations and those of Welch and
Havemeyer in favor of the Philippine National Bank up to the amount of P2,000,000;
fifthly, that in transferring its real property as aforesaid the Mindoro Sugar Company was
reduced to a real state of bankruptcy, as the parties specifically agreed during the
hearing of the case, to the point of having become a nominal corporation without any
assets whatsoever; sixthly, that such operation or transaction cannot mean anything
other than that the real intention of the parties was that the Philippine Trust Company
acquired the bonds issued and at the same time guaranteed the payment of their par
value with interest, because otherwise the transaction would be fraudulent, inasmuch as
nobody would be answerable to the bond-holders for their value and interest; seventhly,
that the Philippine Trust Company had been paying the appellant the interest accrued
upon the four bonds from the date of their issuance until July 1, 1928, such payment of
interest being another proof that said corporation had really become the owner of the
aforesaid bonds; and, eightly, that the Philippine Trust Company has not adduced any
evidence to show any other conclusions.
There are other considerations leading to the same result even in the supposition that
the Philippine Trust Company did not acquire the bonds in question, but only guaranteed
them. In such a case the guarantee of these bonds would at any rate, be valid and the
said corporation would be bound to pay the appellant their value with the accrued
interest in view of the fact that they become due on account of the lapse of sixty (60)
days, without the accrued interest due having been paid; and the reason is that it is
estopped from denying the validity of its guarantee.
. . . On the other hand, according to the view taken by other courts, which it must
be acknowledged are in the majority, a recovery directly upon the contract is
permitted, on the ground that the corporation, having received money or property
by virtue of a contract not immoral or illegal of itself, is estopped to deny liability;
and that the only remedy is one on behalf of the state to punish the corporation
for violating the law. (7 R. C. L., pp. 680-681 and cases cited.)
. . . The doctrine of ultra vires has been declared to be entirely the creation of the
courts and is of comparatively modern origin. The defense is by some courts
regarded as an ungracious and odious one, to be sustained only where the most
persuasive considerations of public policy are involved, and there are numerous
decisions and dicta to the effect that the plea should not as a general rule prevail
whether interposed for or against the corporation, where it will not advance
 justice but on the contrary will accomplish a legal wrong. (14-A C. J., pp. 314-
315.)
The doctrine of the Supreme Court of the United States together with the English
courts and some of the state courts is that no performance upon either side can
validate an ultra vires transaction or authorize an action to be maintained directly
upon it. However, the great weight of authority in the state courts is to the effect
that a transaction which is merely ultra vires and not malum in se or malum
prohibitum although it may be made by the state a basis for the forfeiture of the
corporate charter or the dissolution of the corporation, is, if performed by one
party, not void as between the parties to all intents and purposes, and that an
action may be brought directly upon the transaction and relief had according to
its terms. ( 14-A C. J., pp. 319-320.)
When a contract is not on its face necessarily beyond the scope of the power of
the corporation by which it was made, it will, in the absence of proof to the
contrary, be presumed to be valid. Corporations are presumed to contract within
their powers. The doctrine of ultra vires, when invoked for or against a
corporation, should not be allowed to prevail where it would defeat the ends of
justice or work a legal wrong. (Coleman vs. Hotel de France Co., 29 Phil., 323.)
Guaranties of payment of bonds taken by a loan and trust company in the
ordinary course of its business, made in connection with their sale, are not ultra
vires, and are binding. (Broadway Nat. Bank vs. Baker, 57 N. E., p. 603.)
It has been intimated according to section 121 of the Corporation Law, the Philippine
Trust Company, as a banking institution, could not guarantee the bonds to the value of
P3,000,000 because this amount far exceeds its capital of P1,000,000 of which only one-
half has been subscribed and paid. Section 121 reads as follows:
SEC. 212. No such bank shall at any time be indebted or in any way liable to an
amount exceeding the amount of its capital stock at such time actually paid in
and remaining undiminished by losses or otherwise, except on account of
demands of the following nature:
(1) Moneys deposited with or collected by the bank;
(2) Bills of exchange or drafts drawn against money actually on deposit to
the credit of the bank or due thereto;
(3) Liabilities to the stockholders of the bank for dividends and reserve
profits.
This difficulty is easily obviated by bearing in mind that, as we stated above, the banking
operations are not the primary aim of said corporation, which is engaged essentially in
the trust business, and that the prohibition of the law is not applicable to the Philippine
Trust Company, for the evidence shows that Mindoro Sugar Company transferred all its
real property, with the improvements, to it, and the value of both, which surely could not
be less than the value of the obligation guaranteed, became a part of its capital and
assets; in other words, with the value of the real property transferred to it, the Philippine
Trust Company had enough capital and assets to meet the amount of the bonds
guaranteed with interest thereon.
Wherefore, the decision appealed from is reversed and the Philippine Trust Company is
sentenced to pay to the appellant the sum of four thousand dollars ($4,000) with interest
at eight per cent (8%) per annum from July 1, 1928 until fully paid, and the costs of both
instances. So ordered.
Avanceña, C.J., Ostrand, Villa-Real, Abad Santos and Butte, JJ., concur.
Malcolm and Hull, JJ., concur in the result.
G.R. No. L-27155 May 18, 1978
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS, RITA GUECO TAPNIO, CECILIO GUECO and THE
PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, INC., respondents.
ANTONIO, J.:
Certiorari to review the decision of the Court of Appeals which affirmed the judgment of
the Court of First Instance of Manila in Civil Case No. 34185, ordering petitioner, as third-
party defendant, to pay respondent Rita Gueco Tapnio, as third-party plaintiff, the sum of
P2,379.71, plus 12% interest per annum from September 19, 1957 until the same is fully
paid, P200.00 attorney's fees and costs, the same amounts which Rita Gueco Tapnio
was ordered to pay the Philippine American General Insurance Co., Inc., to be paid
directly to the Philippine American General Insurance Co., Inc. in full satisfaction of the
judgment rendered against Rita Gueco Tapnio in favor of the former; plus P500.00
attorney's fees for Rita Gueco Tapnio and costs. The basic action is the complaint filed
by Philamgen (Philippine American General Insurance Co., Inc.) as surety against Rita
Gueco Tapnio and Cecilio Gueco, for the recovery of the sum of P2,379.71 paid by
Philamgen to the Philippine National Bank on behalf of respondents Tapnio and Gueco,
pursuant to an indemnity agreement. Petitioner Bank was made third-party defendant by
Tapnio and Gueco on the theory that their failure to pay the debt was due to the fault or
negligence of petitioner.
The facts as found by the respondent Court of Appeals, in affirming the decision of the
Court of First Instance of Manila, are quoted hereunder:
Plaintiff executed its Bond, Exh. A, with defendant Rita Gueco Tapnio as
principal, in favor of the Philippine National Bank Branch at San
Fernando, Pampanga, to guarantee the payment of defendant Rita
Gueco Tapnio's account with said Bank. In turn, to guarantee the
payment of whatever amount the bonding company would pay to the
Philippine National Bank, both defendants executed the indemnity
agreement, Exh. B. Under the terms and conditions of this indemnity
agreement, whatever amount the plaintiff would pay would earn interest
at the rate of 12% per annum, plus attorney's fees in the amount of 15 %
of the whole amount due in case of court litigation.
The original amount of the bond was for P4,000.00; but the amount was
later reduced to P2,000.00.
It is not disputed that defendant Rita Gueco Tapnio was indebted to the
bank in the sum of P2,000.00, plus accumulated interests unpaid, which
she failed to pay despite demands. The Bank wrote a letter of demand to
plaintiff, as per Exh. C; whereupon, plaintiff paid the bank on September
18, 1957, the full amount due and owing in the sum of P2,379.91, for and
on account of defendant Rita Gueco's obligation (Exhs. D and D-1).
Plaintiff, in turn, made several demands, both verbal and written, upon
defendants (Exhs. E and F), but to no avail.
Defendant Rita Gueco Tapnio admitted all the foregoing facts. She
claims, however, when demand was made upon her by plaintiff for her to
pay her debt to the Bank, that she told the Plaintiff that she did not
consider herself to be indebted to the Bank at all because she had an
agreement with one Jacobo-Nazon whereby she had leased to the latter
her unused export sugar quota for the 1956-1957 agricultural year,
consisting of 1,000 piculs at the rate of P2.80 per picul, or for a total of
P2,800.00, which was already in excess of her obligation guaranteed by
plaintiff's bond, Exh. A. This lease agreement, according to her, was with
the knowledge of the bank. But the Bank has placed obstacles to the
consummation of the lease, and the delay caused by said obstacles
forced 'Nazon to rescind the lease contract. Thus, Rita Gueco Tapnio
filed her third-party complaint against the Bank to recover from the latter
any and all sums of money which may be adjudged against her and in
favor of the plaitiff plus moral damages, attorney's fees and costs.
Insofar as the contentions of the parties herein are concerned, we quote
with approval the following findings of the lower court based on the
evidence presented at the trial of the case:
It has been established during the trial that Mrs. Tapnio
had an export sugar quota of 1,000 piculs for the
agricultural year 1956-1957 which she did not need. She
agreed to allow Mr. Jacobo C. Tuazon to use said quota
for the consideration of P2,500.00 (Exh. "4"-Gueco). This
agreement was called a contract of lease of sugar
allotment.
At the time of the agreement, Mrs. Tapnio was indebted to
the Philippine National Bank at San Fernando,
Pampanga. Her indebtedness was known as a crop loan
and was secured by a mortgage on her standing crop
including her sugar quota allocation for the agricultural
year corresponding to said standing crop. This
arrangement was necessary in order that when Mrs.
Tapnio harvests, the P.N.B., having a lien on the crop,
may effectively enforce collection against her. Her sugar
cannot be exported without sugar quota allotment
Sometimes, however, a planter harvest less sugar than
her quota, so her excess quota is utilized by another who
pays her for its use. This is the arrangement entered into
between Mrs. Tapnio and Mr. Tuazon regarding the
former's excess quota for 1956-1957 (Exh. "4"-Gueco).
Since the quota was mortgaged to the P.N.B., the
contract of lease had to be approved by said Bank, The
same was submitted to the branch manager at San
Fernando, Pampanga. The latter required the parties to
raise the consideration of P2.80 per picul or a total of
P2,800.00 (Exh. "2-Gueco") informing them that "the
minimum lease rental acceptable to the Bank, is P2.80
per picul." In a letter addressed to the branch manager on
August 10, 1956, Mr. Tuazon informed the manager that
he was agreeable to raising the consideration to P2.80
per picul. He further informed the manager that he was
ready to pay said amount as the funds were in his folder
which was kept in the bank.
Explaining the meaning of Tuazon's statement as to the
funds, it was stated by him that he had an approved loan
from the bank but he had not yet utilized it as he was
intending to use it to pay for the quota. Hence, when he
said the amount needed to pay Mrs. Tapnio was in his
folder which was in the bank, he meant and the manager
understood and knew he had an approved loan available
to be used in payment of the quota. In said Exh. "6-
Gueco", Tuazon also informed the manager that he would
want for a notice from the manager as to the time when
the bank needed the money so that Tuazon could sign
the corresponding promissory note.
Further Consideration of the evidence discloses that when the branch
manager of the Philippine National Bank at San Fernando recommended
the approval of the contract of lease at the price of P2.80 per picul (Exh.
1 1-Bank), whose recommendation was concurred in by the Vice-
president of said Bank, J. V. Buenaventura, the board of directors
required that the amount be raised to 13.00 per picul. This act of the
board of directors was communicated to Tuazon, who in turn asked for a
reconsideration thereof. On November 19, 1956, the branch manager
submitted Tuazon's request for reconsideration to the board of directors
with another recommendation for the approval of the lease at P2.80 per
picul, but the board returned the recommendation unacted upon,
considering that the current price prevailing at the time was P3.00 per
picul (Exh. 9-Bank).
The parties were notified of the refusal on the part of the board of
directors of the Bank to grant the motion for reconsideration. The matter
stood as it was until February 22, 1957, when Tuazon wrote a letter (Exh.
10-Bank informing the Bank that he was no longer interested to continue
the deal, referring to the lease of sugar quota allotment in favor of
defendant Rita Gueco Tapnio. The result is that the latter lost the sum of
P2,800.00 which she should have received from Tuazon and which she
could have paid the Bank to cancel off her indebtedness,
The court below held, and in this holding we concur that failure of the
negotiation for the lease of the sugar quota allocation of Rita Gueco
 Tapnio to Tuazon was due to the fault of the directors of the Philippine
National Bank, The refusal on the part of the bank to approve the lease at
the rate of P2.80 per picul which, as stated above, would have enabled
Rita Gueco Tapnio to realize the amount of P2,800.00 which was more
than sufficient to pay off her indebtedness to the Bank, and its insistence
on the rental price of P3.00 per picul thus unnecessarily increasing the
value by only a difference of P200.00. inevitably brought about the
rescission of the lease contract to the damage and prejudice of Rita
Gueco Tapnio in the aforesaid sum of P2,800.00. The unreasonableness
of the position adopted by the board of directors of the Philippine National
Bank in refusing to approve the lease at the rate of P2.80 per picul and
insisting on the rate of P3.00 per picul, if only to increase the retail value
by only P200.00 is shown by the fact that all the accounts of Rita Gueco
Tapnio with the Bank were secured by chattel mortgage on standing
crops, assignment of leasehold rights and interests on her properties, and
surety bonds, aside from the fact that from Exh. 8-Bank, it appears that
she was offering to execute a real estate mortgage in favor of the Bank to
replace the surety bond This statement is further bolstered by the fact
that Rita Gueco Tapnio apparently had the means to pay her obligation
fact that she has been granted several value of almost P80,000.00 for the
agricultural years from 1952 to 56. 1
Its motion for the reconsideration of the decision of the Court of Appeals having been
denied, petitioner filed the present petition.
The petitioner contends that the Court of Appeals erred:
(1) In finding that the rescission of the lease contract of the 1,000 piculs of sugar quota
allocation of respondent Rita Gueco Tapnio by Jacobo C. Tuazon was due to the
unjustified refusal of petitioner to approve said lease contract, and its unreasonable
insistence on the rental price of P3.00 instead of P2.80 per picul; and
(2) In not holding that based on the statistics of sugar price and prices of sugar quota in
the possession of the petitioner, the latter's Board of Directors correctly fixed the rental of
price per picul of 1,000 piculs of sugar quota leased by respondent Rita Gueco Tapnio to
Jacobo C. Tuazon at P3.00 per picul.
Petitioner argued that as an assignee of the sugar quota of Tapnio, it has the right, both
under its own Charter and under the Corporation Law, to safeguard and protect its rights
and interests under the deed of assignment, which include the right to approve or
disapprove the said lease of sugar quota and in the exercise of that authority, its
Board of Directors necessarily had authority to determine and fix the rental price per picul
of the sugar quota subject of the lease between private respondents and Jacobo C.
Tuazon. It argued further that both under its Charter and the Corporation Law, petitioner,
acting thru its Board of Directors, has the perfect right to adopt a policy with respect to
fixing of rental prices of export sugar quota allocations, and in fixing the rentals at P3.00
per picul, it did not act arbitrarily since the said Board was guided by statistics of sugar
price and prices of sugar quotas prevailing at the time. Since the fixing of the rental of the
sugar quota is a function lodged with petitioner's Board of Directors and is a matter of
policy, the respondent Court of Appeals could not substitute its own judgment for that of
said Board of Directors, which acted in good faith, making as its basis therefore the
prevailing market price as shown by statistics which were then in their possession.
Finally, petitioner emphasized that under the appealed judgment, it shall suffer a great
injustice because as a creditor, it shall be deprived of a just claim against its debtor
(respondent Rita Gueco Tapnio) as it would be required to return to respondent
Philamgen the sum of P2,379.71, plus interest, which amount had been previously paid
to petitioner by said insurance company in behalf of the principal debtor, herein
respondent Rita Gueco Tapnio, and without recourse against respondent Rita Gueco
Tapnio.
We must advert to the rule that this Court's appellate jurisdiction in proceedings of this
nature is limited to reviewing only errors of law, accepting as conclusive the factual fin
dings of the Court of Appeals upon its own assessment of the evidence. 2
The contract of lease of sugar quota allotment at P2.50 per picul between Rita Gueco
Tapnio and Jacobo C. Tuazon was executed on April 17, 1956. This contract was
submitted to the Branch Manager of the Philippine National Bank at San Fernando,
Pampanga. This arrangement was necessary because Tapnio's indebtedness to
petitioner was secured by a mortgage on her standing crop including her sugar quota
allocation for the agricultural year corresponding to said standing crop. The latter
required the parties to raise the consideration to P2.80 per picul, the minimum lease
rental acceptable to the Bank, or a total of P2,800.00. Tuazon informed the Branch
Manager, thru a letter dated August 10, 1956, that he was agreeable to raising the
consideration to P2.80 per picul. He further informed the manager that he was ready to
pay the said sum of P2,800.00 as the funds were in his folder which was kept in the said
Bank. This referred to the approved loan of Tuazon from the Bank which he intended to
use in paying for the use of the sugar quota. The Branch Manager submitted the contract
of lease of sugar quota allocation to the Head Office on September 7, 1956, with a
recommendation for approval, which recommendation was concurred in by the Vice-
President of the Bank, Mr. J. V. Buenaventura. This notwithstanding, the Board of
Directors of petitioner required that the consideration be raised to P3.00 per picul.
Tuazon, after being informed of the action of the Board of Directors, asked for a
reconsideration thereof. On November 19, 1956, the Branch Manager submitted the
request for reconsideration and again recommended the approval of the lease at P2.80
per picul, but the Board returned the recommendation unacted, stating that the current
price prevailing at that time was P3.00 per picul.
On February 22, 1957, Tuazon wrote a letter, informing the Bank that he was no longer
interested in continuing the lease of sugar quota allotment. The crop year 1956-1957
ended and Mrs. Tapnio failed to utilize her sugar quota, resulting in her loss in the sum of
P2,800.00 which she should have received had the lease in favor of Tuazon been
implemented.
It has been clearly shown that when the Branch Manager of petitioner required the
parties to raise the consideration of the lease from P2.50 to P2.80 per picul, or a total of
P2,800-00, they readily agreed. Hence, in his letter to the Branch Manager of the Bank
on August 10, 1956, Tuazon informed him that the minimum lease rental of P2.80 per
picul was acceptable to him and that he even offered to use the loan secured by him
from petitioner to pay in full the sum of P2,800.00 which was the total consideration of
the lease. This arrangement was not only satisfactory to the Branch Manager but it was
also approves by Vice-President J. V. Buenaventura of the PNB. Under that
arrangement, Rita Gueco Tapnio could have realized the amount of P2,800.00, which
was more than enough to pay the balance of her indebtedness to the Bank which was
secured by the bond of Philamgen.
There is no question that Tapnio's failure to utilize her sugar quota for the crop year
1956-1957 was due to the disapproval of the lease by the Board of Directors of
petitioner. The issue, therefore, is whether or not petitioner is liable for the damage
caused.
As observed by the trial court, time is of the essence in the approval of the lease of sugar
quota allotments, since the same must be utilized during the milling season, because any
allotment which is not filled during such milling season may be reallocated by the Sugar
Quota Administration to other holders of allotments. There was no proof that there was
3
any other person at that time willing to lease the sugar quota allotment of private
respondents for a price higher than P2.80 per picul. "The fact that there were isolated
transactions wherein the consideration for the lease was P3.00 a picul", according to the
trial court, "does not necessarily mean that there are always ready takers of said price. "
The unreasonableness of the position adopted by the petitioner's Board of Directors is
shown by the fact that the difference between the amount of P2.80 per picul offered by
Tuazon and the P3.00 per picul demanded by the Board amounted only to a total sum of
P200.00. Considering that all the accounts of Rita Gueco Tapnio with the Bank were
secured by chattel mortgage on standing crops, assignment of leasehold rights and
interests on her properties, and surety bonds and that she had apparently "the means to
pay her obligation to the Bank, as shown by the fact that she has been granted several
sugar crop loans of the total value of almost P80,000.00 for the agricultural years from
1952 to 1956", there was no reasonable basis for the Board of Directors of petitioner to
have rejected the lease agreement because of a measly sum of P200.00.
While petitioner had the ultimate authority of approving or disapproving the proposed
lease since the quota was mortgaged to the Bank, the latter certainly cannot escape its
responsibility of observing, for the protection of the interest of private respondents, that
degree of care, precaution and vigilance which the circumstances justly demand in
approving or disapproving the lease of said sugar quota. The law makes it imperative
that every person "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, This
4
petitioner failed to do. Certainly, it knew that the agricultural year was about to expire,
that by its disapproval of the lease private respondents would be unable to utilize the
sugar quota in question. In failing to observe the reasonable degree of care and vigilance
which the surrounding circumstances reasonably impose, petitioner is consequently
liable for the damages caused on private respondents. Under Article 21 of the New Civil
Code, "any person who wilfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for the
damage." The afore-cited provisions on human relations were intended to expand the
concept of torts in this jurisdiction by granting adequate legal remedy for the untold
number of moral wrongs which is impossible for human foresight to specifically provide in
the statutes.5
A corporation is civilly liable in the same manner as natural persons for torts, because
"generally speaking, the rules governing the liability of a principal or master for a tort
committed by an agent or servant are the same whether the principal or master be a
natural person or a corporation, and whether the servant or agent be a natural or artificial
person. All of the authorities agree that a principal or master is liable for every tort which
he expressly directs or authorizes, and this is just as true of a corporation as of a natural
person, A corporation is liable, therefore, whenever a tortious act is committed by an
officer or agent under express direction or authority from the stockholders or members
acting as a body, or, generally, from the directors as the governing body." 6
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby
AFFIRMED.
Fernando, Aquino, Concepcion, Jr., and Santos, JJ., concur.
[G.R. No. 32652. March 15, 1930.]
THE PEOPLE OF THE PHILIPPINE ISLANDS, Plaintiff-Appellant, v. TAN BOON
KONG, Defendant-Appellee.
This is an appeal from an order of the Judge of the Twenty-third Judicial District
sustaining a demurrer to an information charging the defendant Tan Boon Kong with
the violation of section 1458 of Act No. 2711 as amended. The information reads as
follows:
jgc:chanrobles.com.ph
"That on and during the four quarters of the year 1924, in the municipality of Iloilo,
Province of Iloilo, Philippine Islands, the said accused, as manager of the Visayan
General Supply Co., Inc., a corporation organized under the laws of the Philippine
Islands and engaged in the purchase and sale of sugar, ’bayon,’ coprax, and other
native products and as such subject to the payment of internal-revenue taxes upon
its sales, did then and there voluntarily, illegally, and criminally declare in 1924 for
the purpose of taxation only the sum of P2,352,761.94, when in truth and in fact, and
the accused well knew that the total gross sales of said corporation during that year
amounted to P2,543,303.44, thereby failing to declare for the purpose of taxation the
amount of P190,541.50, and voluntarily and illegally not paying the Government as
internal-revenue percentage taxes the sum of P2,960.12, corresponding to 1½ per
cent of said undeclared sales." cralaw virtua1aw library
The question to be decided is whether the information sets forth facts rendering the
defendant, as manager of the corporation liable criminally under section 2723 of the
Act No. 2711 for violation of section 1458 of the same Act for the benefit of said
corporation. Sections 1458 and 2723 read as follows: jgc:chanrobles.com.ph
"SEC. 1458. Payment of percentage taxes — Quarterly report of earnings. — The
percentage taxes on business shall be payable at the end of each calendar quarter
in the amount lawfully due on the business transacted during each quarter; and it
shall be the duty of every person conducting a business subject to such tax, within
the same period as is allowed for the payment of the quarterly installments of the
fixed taxes without penalty, to make a true and complete return of the amount of the
receipts or earnings of his business during the preceding quarter and pay the tax due
thereon. . . ." (Act No. 2711.)
"SEC. 2723. Failure to make true return of receipts and sales. — Any person who,
being required by law to make a return of the amount of his receipts, sales, or
business, shall fail or neglect to make such return within the time required, shall be
punished by a fine not exceeding two thousand pesos or by imprisonment for a term
not exceeding one year, or both.
"And any such person who shall make a false or fraudulent return shall be punished
by a fine not exceeding ten thousand pesos or by imprisonment for a term not
exceeding two years, or both." (Act No. 2711.)
Apparently, the court below based the appealed ruling on the ground that the offense
charged must be regarded as committed by the corporation and not by its officials or
agents. This view is in direct conflict with the great weight of authority. A corporation
can act only through its officers and agents, and where the business itself involves a
violation of the law, the correct rule is that all who participate in it are liable (Grall and
Ostrander’s Case, 103 Va., 855, and authorities there cited).
In case of State v. Burnam (71 Wash., 199), the court went so far as to hold that the
manager of a dairy corporation was criminally liable for the violation of a statute by
the corporation though he was not present when the offense was committed.
In the present case the information or complaint alleges that the defendant was the
manager of a corporation which was engaged in business as a merchant, and as
such manager, he made a false return, for purposes of taxation, of the total amount
of sales made by said corporation during the year 1924. As the filing of such false
return constitutes a violation of law, the defendant, as the author of the illegal act,
must necessarily answer for its consequences, provided that the allegations are
proven.
The ruling of the court below sustaining the demurrer to the complaint is therefore
reversed, and the case will be returned to said court for further proceedings not
inconsistent with our view as hereinbefore stated. Without costs. So ordered.
G.R. No. L-30896 April 28, 1983
JOSE O. SIA, petitioner,
vs.
THE PEOPLE OF THE PHILIPPINES, respondent.
DE CASTRO, J.:
Petition for review of the decision of the Court of Appeals affirming the decision of the
Court of First Instance of Manila convicting the appellant of estafa, under an information
which reads:
That in, about or during the period comprised' between July 24, 1963 and
December 31, 1963, both dates inclusive, in the City of Manila,
Philippines, the said accused did then and there willfully, unlawfully and
feloniously defraud the Continental Bank, a banking institution duly
organized and doing business in the City of Manila, in the following
manner, to wit: the said accused, in his capacity as president and general
manager of the Metal Manufacturing of the Philippines, Inc. (MEMAP)
and on behalf of said company, obtained delivery of 150 M/T Cold Rolled
Steel Sheets valued at P 71,023.60 under a trust receipt agreement
under L/C No. 63/109, which cold rolled steel sheets were consigned to
the Continental Bank, under the express obligation on the part of said
accused of holding the said steel sheets in trust and selling them and
turning over the proceeds of the sale to the Continental Bank; but the
said accused, once in possession of the said goods, far from complying
with his aforesaid obligation and despite demands made upon him to do
so, with intent to defraud, failed and refused to return the said cold rolled
sheets or account for the proceeds thereof, if sold, which the said
accused willfully, unlawfully and feloniously misappropriated, misapplied
and converted to his own personal use and benefit, to the damage and
prejudice of the said Continental Bank in the total amount of
P146,818.68, that is the balance including the interest after deducting the
sum of P28,736.47 deposited by the said accused with the bank as
marginal deposit and forfeited by the said from the value of the said
goods, in the said sum of P71,023.60. (Original Records, p. 1).
In reviewing the evidence, the Court of Appeals came up with the following findings of
facts which the Solicitor General alleges should be conclusive upon this Court:
There is no debate on certain antecedents: Accused Jose 0. Sia
sometime prior to 24 May, 1963, was General Manager of the Metal
Manufacturing Company of the Philippines, Inc. engaged in the
manufacture of steel office equipment; on 31 May, 1963, because his
company was in need of raw materials to be imported from abroad, he
applied for a letter of credit to import steel sheets from Mitsui Bussan
Kaisha, Ltd. of Tokyo, Japan, the application being directed to the
Continental Bank, herein complainant, Exhibit B and his application
having been approved, the letter of credit was opened on 5 June, 1963 in
the amount of $18,300, Exhibit D; and the goods arrived sometime in
July, 1963 according to accused himself, tsn. II:7; now from here on there
is some debate on the evidence; according to Complainant Bank, there
was permitted delivery of the steel sheets only upon execution of a trust
receipt, Exhibit A; while according to the accused, the goods were
delivered to him sometime before he executed that trust receipt in fact
they had already been converted into steel office equipment by the time
he signed said trust receipt, tsn. II:8; but there is no question - and this is
not debated - that the bill of exchange issued for the purpose of collecting
the unpaid account thereon having fallen due (see Exh. B) neither
accused nor his company having made payment thereon notwithstanding
demands, Exh. C and C-1, dated 17 and 27 December, 1963, and the
accounts having reached the sum in pesos of P46,818.68 after deducting
his deposit valued at P28,736.47; that was the reason why upon
complaint by Continental Bank, the Fiscal filed the information after
preliminary investigation as has been said on 22 October, 1964. (Rollo
[CA], pp. 103- 104).
The first issue raised, which in effect combines the first three errors assigned, is whether
petitioner Jose O. Sia, having only acted for and in behalf of the Metal Manufacturing
Company of the Philippines (Metal Company, for short) as President thereof in dealing
with the complainant, the Continental Bank, (Bank for short) he may be liable for the
crime charged.
In discussing this question, petitioner proceeds, in the meantime, on the assumption that
the acts imputed to him would constitute the crime of estafa, which he also disputes, but
seeks to avoid liability on his theory that the Bank knew all along that petitioner was
dealing with him only as an officer of the Metal Company which was the true and actual
applicant for the letter of credit (Exhibit B) and which, accordingly, assumed sole
obligation under the trust receipt (Exhibit A). In disputing the theory of petitioner, the
Solicitor General relies on the general principle that when a corporation commits an act
which would constitute a punishable offense under the law, it is the responsible officers
thereof, acting for the corporation, who would be punished for the crime, The Court of
Appeals has subscribed to this view when it quoted approvingly from the decision of the
trial court the following:
A corporation is an artificial person, an abstract being. If the defense
theory is followed unscrupulously legions would form corporations to
commit swindle right and left where nobody could be convicted, for it
would be futile and ridiculous to convict an abstract being that can not be
pinched and confined in jail like a natural, living person, hence the result
of the defense theory would be hopeless chose in business and finance.
It is completely untenable. (Rollo [CA], p. 108.)
The above-quoted observation of the trial court would seem to be merely restating a
general principle that for crimes committed by a corporation, the responsible officers
thereof would personally bear the criminal liability. (People vs. Tan Boon Kong, 54 Phil.
607. See also Tolentino, Commercial Laws of the Philippines, p. 625, citing cases.)
The case cited by the Court of Appeals in support of its stand-Tan Boon Kong
case, supra-may however not be squarely applicable to the instant case in that the
corporation was directly required by law to do an act in a given manner, and the same
law makes the person who fails to perform the act in the prescribed manner expressly
liable criminally. The performance of the act is an obligation directly imposed by the law
on the corporation. Since it is a responsible officer or officers of the corporation who
actually perform the act for the corporation, they must of necessity be the ones to
assume the criminal liability; otherwise this liability as created by the law would be
illusory, and the deterrent effect of the law, negated.
In the present case, a distinction is to be found with the Tan Boon Kong case in that the
act alleged to be a crime is not in the performance of an act directly ordained by law to
be performed by the corporation. The act is imposed by agreement of parties, as a
practice observed in the usual pursuit of a business or a commercial transaction. The
offense may arise, if at all, from the peculiar terms and condition agreed upon by the
parties to the transaction, not by direct provision of the law. The intention of the parties,
therefore, is a factor determinant of whether a crime was committed or whether a civil
obligation alone intended by the parties. With this explanation, the distinction adverted to
between the Tan Boon Kong case and the case at bar should come out clear and
meaningful. In the absence of an express provision of law making the petitioner liable for
the criminal offense committed by the corporation of which he is a president as in fact
there is no such provisions in the Revised Penal Code under which petitioner is being
prosecuted, the existence of a criminal liability on his part may not be said to be beyond
any doubt. In all criminal prosecutions, the existence of criminal liability for which the
accused is made answerable must be clear and certain. The maxim that all doubts must
be resolved in favor of the accused is always of compelling force in the prosecution of
offenses. This Court has thus far not ruled on the criminal liability of an officer of a
corporation signing in behalf of said corporation a trust receipt of the same nature as that
involved herein. In the case of Samo vs. People, L-17603-04, May 31, 1962, the accused
was not clearly shown to be acting other than in his own behalf, not in behalf of a
corporation.
The next question is whether the violation of a trust receipt constitutes estafa under Art.
315 (1-[2]) of the Revised Penal Code, as also raised by the petitioner. We now entertain
grave doubts, in the light of the promulgation of P.D. 115 providing for the regulation of
trust receipts transaction, which is a very comprehensive piece of legislation, and
includes an express provision that if the violation or offense is committed by a
corporation, partnership, association or other juridical entities the penalty provided for in
this Decree shall be imposed upon the directors, officers, employees or other officials or
persons therein responsible for the offense, without prejudice to civil liabilities arising
from the criminal offense. The question that suggests itself is, therefore, whether the
provisions of the Revised Penal Code, Article 315, par. 1 (b) are not adequate to justify
the punishment of the act made punishable by P.D. 115, that the necessity was felt for
the promulgation of the decree. To answer this question, it is imperative to make an
indepth analysis of the conditions usually embodied in a trust receipt to best their legal
sufficiency to constitute the basis for holding the violation of said conditions as estafa
under Article 315 of the Revised Penal Code which P.D. 115 now seeks to punish
expressly.
As executed, the trust receipt in question reads:
I/WE HEREBY AGREE TO HOLD SAID GOODS IN TRUST FOR THE
SAID BANK as its property with liberty to sell the same for its account but
without authority to make any other disposition whatsoever of the said
goods or any part thereof (or the proceeds thereof) either way of
conditional sale, pledge or otherwise;
In case of sale I/we further agree to hand the proceeds as soon as
received to the BANK to apply against the relative acceptance (as
described above) and for the payment of any other indebtedness of
mine/ours to CONTINENTAL BANK. (Original Records, p. 108)
One view is to consider the transaction as merely that of a security of a loan, and that the
trust element is but and inherent feature of the security aspect of the arrangement where
the goods are placed in the possession of the "entrustee," to use the term used in P.D.
115, violation of the element of trust not being intended to be in the same concept as
how it is understood in the criminal sense. The other view is that the bank as the owner
and "entrustor" delivers the goods to the "entrustee, " with the authority to sell the goods,
but with the obligation to give the proceeds to the "entrustor" or return the goods
themselves if not sold, a trust being thus created in the full sense as contemplated by
Art. 315, par. 1 (b).
We consider the view that the trust receipt arrangement gives rise only to civil liability as
the more feasible, before the promulgation of P.D. 115. The transaction being
contractual, the intent of the parties should govern. Since the trust receipt has, by its
nature, to be executed upon the arrival of the goods imported, and acquires legal
standing as such receipt only upon acceptance by the "entrustee," the trust receipt
transaction itself, the antecedent acts consisting of the application of the L/C, the
approval of the L/C and the making of the marginal deposit and the effective importation
of the goods, all through the efforts of the importer who has to find his supplier, arrange
for the payment and shipment of the imported goods-all these circumstances would
negate any intent of subjecting the importer to criminal prosecution, which could possibly
give rise to a case of imprisonment for non-payment of a debt. The parties, therefore, are
deemed to have consciously entered into a purely commercial transaction that could give
rise only to civil liability, never to subject the "entrustee" to criminal prosecution. Unlike,
for instance, when several pieces of jewelry are received by a person from the owner for
sale on commission, and the former misappropriates for his personal use and benefit,
either the jewelries or the proceeds of the sale, instead of returning them to the owner as
is his obligation, the bank is not in the same concept as the jewelry owner with full power
of disposition of the goods, which the bank does not have, for the bank has previously
extended a loan which the L/C represents to the importer, and by that loan, the importer
should be the real owner of the goods. If under the trust receipt the bank is made to
appear as the owner, it was but an artificial expedient, more of a legal fiction than fact,
for if it were really so, it could dispose of the goods in any manner it wants, which it
cannot do, just to give consistency with the purpose of the trust receipt of giving a
stronger security for the loan obtained by the importer. To consider the bank as the true
owner from the inception of the transaction would be to disregard the loan feature
thereof, a feature totally absent in the case of the transaction between the jewel-owner
and his agent.
Consequently, if only from the fact that the trust receipt transaction is susceptible to two
reasonable interpretation, one as giving rise only to civil liability for the violation of the
condition thereof, and the other, as generating also criminal liability, the former should be
adopted as more favorable to the supposed offender. (Duran vs. CA, L-39758, May 7,
1976, 71 SCRA 68; People vs. Parayno, L-24804, July 5, 1968, 24 SCRA 3; People vs.
Abendan, L-1481, January 28,1949,82 Phil. 711; People vs. Bautista, L-1502, May 24,
1948, 81 Phil. 78; People vs. Abana, L-39, February 1, 1946, 76 Phil. 1.)
There is, moreover, one circumstance appearing on record, the significance of which
should be properly evaluated. As stated in petitioner's brief (page 2), not denied by the
People, "before the Continental Bank approved the application for a letter of credit
(Exhibit 'D'), subsequently covered by the trust receipt, the Continental Bank examined
the financial capabilities of the applicant, Metal Manufacturing Company of the
Philippines because that was the bank's standard procedure (Testimony of Mr. Ernesto
Garlit, Asst. Manager of the Foreign Department, Continental Bank, t.s.n., August 30,
1965). The Continental Bank did not examine the financial capabilities of herein
petitioner, Jose O. Sia, in connection with the same letter of credit. (Ibid). " From this fact,
it would appear as positively established that the intention of the parties in entering into
the "trust receipt" agreement is merely to afford a stronger security for the loan
evidenced by the letter of credit, may be not as an ordinary pledge as observed in P.N.B.
vs. Viuda e Hijos de Angel Jose, et al., 63 Phil. 814, citing In re Dunlap C (206 Fed. 726)
but neither as a transaction falling under Article 315-1 (b) of the Revised Penal Code
giving rise to criminal liability, as previously explained and demonstrated.
any violation of the trust receipt. This is made clearly so upon consideration of the fact
that in the violation of the trust agreement and in the absence of positive evidence to the
contrary, only the corporation benefited, not the petitioner personally, yet, the allegation
of the information is to effect that the misappropriation or conversion was for the personal
use and benefit of the petitioner, with respect to which there is variance between the
allegation and the evidence.
It is also worthy of note that while the trust receipt speaks of authority to sell, the fact is
undisputed that the imported goods were to be manufactured into finished products first
before they could be sold, as the Bank had full knowledge of. This fact is, however, not
embodied in the trust agreement, thus impressing on the trust receipt vagueness and
ambiguity which should not be the basis for criminal prosecution, in the event of a
violation of the terms of the trust receipt. Again, P.D. 115 has express provision relative
to the "manufacture or process of the good with the purpose of ultimate sale," as a
distinct condition from that of "to sell the goods or procure their sale" (Section 4, (1). Note
that what is embodied in the receipt in question is the sale of imported goods, the
manufacture thereof not having been mentioned. The requirement in criminal
prosecution, that there must be strict harmony, not variance, between the allegation and
the evidence, may therefore, not be said to have been satisfied in the instance case.
FOR ALL THE FOREGOING, We reverse the decision of the Court of Appeals and
hereby acquit the petitioner, with costs de oficio.
SO ORDERED.

It is worthy of note that the civil liability imposed by the trust receipt is exclusively on the
Metal Company. Speaking of such liability alone, as one arising from the contract, as
distinguished from the civil liability arising out of a crime, the petitioner was never
intended to be equally liable as the corporation. Without being made so liable personally
as the corporation is, there would then be no basis for holding him criminally liable, for
 G.R. No. 128690 January 21, 1999
ABS-CBN BROADCASTING CORPORATION, petitioner,
vs.
HONORABLE COURT OF APPEALS, REPUBLIC BROADCASTING CORP, VIVA
PRODUCTION, INC., and VICENTE DEL ROSARIO, respondents.
DAVIDE, JR., CJ.:
In this petition for review on certiorari, petitioner ABS-CBN Broadcasting Corp. (hereafter
ABS-CBN) seeks to reverse and set aside the decision of 31 October 1996 and the
1
resolution of 10 March 1997 of the Court of Appeals in CA-G.R. CV No. 44125. The
2
former affirmed with modification the decision of 28 April 1993 of the Regional Trial
3
Court (RTC) of Quezon City, Branch 80, in Civil Case No. Q-92-12309. The latter denied
the motion to reconsider the decision of 31 October 1996.
The antecedents, as found by the RTC and adopted by the Court of Appeals, are as
follows:
In 1990, ABS-CBN and Viva executed a Film Exhibition Agreement (Exh.
"A") whereby Viva gave ABS-CBN an exclusive right to exhibit some Viva
films. Sometime in December 1991, in accordance with paragraph 2.4
[sic] of said agreement stating that —.
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four
(24) Viva films for TV telecast under such terms as may be agreed upon
by the parties hereto, provided, however, that such right shall be
exercised by ABS-CBN from the actual offer in writing.
Viva, through defendant Del Rosario, offered ABS-CBN, through its vice-
president Charo Santos-Concio, a list of three(3) film packages (36 title)
from which ABS-CBN may exercise its right of first refusal under the
afore-said agreement (Exhs. "1" par, 2, "2," "2-A'' and "2-B"-Viva). ABS-
CBN, however through Mrs. Concio, "can tick off only ten (10) titles" (from
the list) "we can purchase" (Exh. "3" - Viva) and therefore did not accept
said list (TSN, June 8, 1992, pp. 9-10). The titles ticked off by Mrs.
Concio are not the subject of the case at bar except the film ''Maging Sino
Ka Man."
For further enlightenment, this rejection letter dated January 06, 1992
(Exh "3" - Viva) is hereby quoted:
6 January 1992
Dear Vic,
This is not a very formal business letter I am writing to you as I would like
to express my difficulty in recommending the purchase of the three film
packages you are offering ABS-CBN.
From among the three packages I can only tick off 10 titles we can
purchase. Please see attached. I hope you will understand my position.
Most of the action pictures in the list do not have big action stars in the
cast. They are not for primetime. In line with this I wish to mention that I
have not scheduled for telecast several action pictures in out very first
contract because of the cheap production value of these movies as well
as the lack of big action stars. As a film producer, I am sure you
understand what I am trying to say as Viva produces only big action
pictures.
In fact, I would like to request two (2) additional runs for these movies as I
can only schedule them in our non-primetime slots. We have to cover the
amount that was paid for these movies because as you very well know
that non-primetime advertising rates are very low. These are the unaired
titles in the first contract.
1. Kontra Persa [sic].
2. Raider Platoon.
3. Underground guerillas
4. Tiger Command
5. Boy de Sabog
6. Lady Commando
7. Batang Matadero
8. Rebelyon
I hope you will consider this request of mine.
The other dramatic films have been offered to us before and have been
rejected because of the ruling of MTRCB to have them aired at 9:00 p.m.
due to their very adult themes.
As for the 10 titles I have choosen [sic] from the 3 packages please
consider including all the other Viva movies produced last year. I have
quite an attractive offer to make.
Thanking you and with my warmest regards.
On February 27, 1992, defendant Del Rosario approached ABS-CBN's
Ms. Concio, with a list consisting of 52 original movie titles (i.e. not yet
aired on television) including the 14 titles subject of the present case, as
well as 104 re-runs (previously aired on television) from which ABS-CBN
may choose another 52 titles, as a total of 156 titles, proposing to sell to
ABS-CBN airing rights over this package of 52 originals and 52 re-runs
for P60,000,000.00 of which P30,000,000.00 will be in cash and
P30,000,000.00 worth of television spots (Exh. "4" to "4-C" Viva; "9" -
Viva).
On April 2, 1992, defendant Del Rosario and ABS-CBN general manager,
Eugenio Lopez III, met at the Tamarind Grill Restaurant in Quezon City to
discuss the package proposal of Viva. What transpired in that lunch
meeting is the subject of conflicting versions. Mr. Lopez testified that he
and Mr. Del Rosario allegedly agreed that ABS-CRN was granted
exclusive film rights to fourteen (14) films for a total consideration of P36
million; that he allegedly put this agreement as to the price and number of
films in a "napkin'' and signed it and gave it to Mr. Del Rosario (Exh. D;
TSN, pp. 24-26, 77-78, June 8, 1992). On the other hand, Del Rosario
denied having made any agreement with Lopez regarding the 14 Viva
films; denied the existence of a napkin in which Lopez wrote something;
and insisted that what he and Lopez discussed at the lunch meeting was
Viva's film package offer of 104 films (52 originals and 52 re-runs) for a
total price of P60 million. Mr. Lopez promising [sic]to make a counter
proposal which came in the form of a proposal contract Annex "C" of the
complaint (Exh. "1"·- Viva; Exh. "C" - ABS-CBN).
On April 06, 1992, Del Rosario and Mr. Graciano Gozon of RBS Senior
vice-president for Finance discussed the terms and conditions of Viva's
offer to sell the 104 films, after the rejection of the same package by
ABS-CBN.
On April 07, 1992, defendant Del Rosario received through his secretary,
a handwritten note from Ms. Concio, (Exh. "5" - Viva), which reads:
"Here's the draft of the contract. I hope you find everything in order," to
which was attached a draft exhibition agreement (Exh. "C''- ABS-CBN;
Exh. "9" - Viva, p. 3) a counter-proposal covering 53 films, 52 of which
came from the list sent by defendant Del Rosario and one film was added
by Ms. Concio, for a consideration of P35 million. Exhibit "C" provides
that ABS-CBN is granted films right to 53 films and contains a right of first
refusal to "1992 Viva Films." The said counter proposal was however
rejected by Viva's Board of Directors [in the] evening of the same day,
April 7, 1992, as Viva would not sell anything less than the package of
104 films for P60 million pesos (Exh. "9" - Viva), and such rejection was
relayed to Ms. Concio.
On April 29, 1992, after the rejection of ABS-CBN and following several
negotiations and meetings defendant Del Rosario and Viva's President
Teresita Cruz, in consideration of P60 million, signed a letter of
agreement dated April 24, 1992. granting RBS the exclusive right to air
104 Viva-produced and/or acquired films (Exh. "7-A" - RBS; Exh. "4" -
RBS) including the fourteen (14) films subject of the present case. 4
On 27 May 1992, ABS-CBN filed before the RTC a complaint for specific performance
with a prayer for a writ of preliminary injunction and/or temporary restraining order
against private respondents Republic Broadcasting Corporation (hereafter RBS ), Viva
5
Production (hereafter VIVA), and Vicente Del Rosario. The complaint was docketed as
Pending resolution of its motion for reconsideration, ABS-CBN filed with the Court of
Appeals a petition challenging the RTC's Orders of 3 August and 15 October 1992 and
17

Civil Case No. Q-92-12309. praying for the issuance of a writ of preliminary injunction to enjoin the RTC from
enforcing said orders. The case was docketed as CA-G.R. SP No. 29300.
On 27 May 1992, RTC issued a temporary restraining order enjoining private
6

respondents from proceeding with the airing, broadcasting, and televising of the fourteen On 3 November 1992, the Court of Appeals issued a temporary restraining order to 18

VIVA films subject of the controversy, starting with the film Maging Sino Ka Man, which enjoin the airing, broadcasting, and televising of any or all of the films involved in the
was scheduled to be shown on private respondents RBS' channel 7 at seven o'clock in controversy.
the evening of said date.
On 18 December 1992, the Court of Appeals promulgated a decision dismissing the
19

On 17 June 1992, after appropriate proceedings, the RTC issued an petition in CA -G.R. No. 29300 for being premature. ABS-CBN challenged the dismissal
order directing the issuance of a writ of preliminary injunction upon ABS-CBN's posting
7
in a petition for review filed with this Court on 19 January 1993, which was docketed as
of P35 million bond. ABS-CBN moved for the reduction of the bond, while private
8
G.R. No. 108363.
respondents moved for reconsideration of the order and offered to put up a
counterbound. 9
In the meantime the RTC received the evidence for the parties in Civil Case No. Q-192-
1209. Thereafter, on 28 April 1993, it rendered a decision in favor of RBS and VIVA
20

In the meantime, private respondents filed separate answers with counterclaim. RBS 10
and against ABS-CBN disposing as follows:
also set up a cross-claim against VIVA..
WHEREFORE, under cool reflection and prescinding from the foregoing,
On 3 August 1992, the RTC issued an order dissolving the writ of preliminary injunction
11
judgments is rendered in favor of defendants and against the plaintiff.
upon the posting by RBS of a P30 million counterbond to answer for whatever damages
ABS-CBN might suffer by virtue of such dissolution. However, it reduced petitioner's (1) The complaint is hereby dismissed;
injunction bond to P15 million as a condition precedent for the reinstatement of the writ of
preliminary injunction should private respondents be unable to post a counterbond. (2) Plaintiff ABS-CBN is ordered to pay defendant RBS the following:

At the pre-trial on 6 August 1992, the parties, upon suggestion of the court, agreed to
12
a) P107,727.00, the amount of premium paid by RBS to the surety which issued
explore the possibility of an amicable settlement. In the meantime, RBS prayed for and defendant RBS's bond to lift the injunction;
was granted reasonable time within which to put up a P30 million counterbond in the
event that no settlement would be reached.
b) P191,843.00 for the amount of print advertisement for "Maging Sino Ka Man" in
various newspapers;
As the parties failed to enter into an amicable settlement RBS posted on 1 October 1992
a counterbond, which the RTC approved in its Order of 15 October 1992. 13

c) Attorney's fees in the amount of P1 million;

On 19 October 1992, ABS-CBN filed a motion for reconsideration of the 3 August and
14

d) P5 million as and by way of moral damages;

15 October 1992 Orders, which RBS opposed. 15

e) P5 million as and by way of exemplary damages;

On 29 October 1992, the RTC conducted a pre-trial. 16
(3) For defendant VIVA, plaintiff ABS-CBN is ordered to pay P212,000.00 by way of
reasonable attorney's fees.
(4) The cross-claim of defendant RBS against defendant VIVA is dismissed.
(5) Plaintiff to pay the costs.
According to the RTC, there was no meeting of minds on the price and terms of the offer.
The alleged agreement between Lopez III and Del Rosario was subject to the approval of
the VIVA Board of Directors, and said agreement was disapproved during the meeting of
the Board on 7 April 1992. Hence, there was no basis for ABS-CBN's demand that VIVA
signed the 1992 Film Exhibition Agreement. Furthermore, the right of first refusal under
the 1990 Film Exhibition Agreement had previously been exercised per Ms. Concio's
letter to Del Rosario ticking off ten titles acceptable to them, which would have made the
1992 agreement an entirely new contract.
On 21 June 1993, this Court denied ABS-CBN's petition for review in G.R. No. 108363,
21
as no reversible error was committed by the Court of Appeals in its challenged decision
and the case had "become moot and academic in view of the dismissal of the main
action by the court a quo in its decision" of 28 April 1993.
Aggrieved by the RTC's decision, ABS-CBN appealed to the Court of Appeals claiming
that there was a perfected contract between ABS-CBN and VIVA granting ABS-CBN the
exclusive right to exhibit the subject films. Private respondents VIVA and Del Rosario
also appealed seeking moral and exemplary damages and additional attorney's fees.
In its decision of 31 October 1996, the Court of Appeals agreed with the RTC that the
contract between ABS-CBN and VIVA had not been perfected, absent the approval by
the VIVA Board of Directors of whatever Del Rosario, it's agent, might have agreed with
Lopez III. The appellate court did not even believe ABS-CBN's evidence that Lopez III
actually wrote down such an agreement on a "napkin," as the same was never produced
in court. It likewise rejected ABS-CBN's insistence on its right of first refusal and
ratiocinated as follows:
As regards the matter of right of first refusal, it may be true that a Film Exhibition
Agreement was entered into between Appellant ABS-CBN and appellant VIVA under
Exhibit "A" in 1990, and that parag. 1.4 thereof provides:
1.4 ABS-CBN shall have the right of first refusal to the next twenty-four (24) VIVA films
for TV telecast under such terms as may be agreed upon by the parties hereto, provided,
however, that such right shall be exercised by ABS-CBN within a period of fifteen (15)
days from the actual offer in writing (Records, p. 14).
[H]owever, it is very clear that said right of first refusal in favor of ABS-CBN shall still be
subject to such terms as may be agreed upon by the parties thereto, and that the said
right shall be exercised by ABS-CBN within fifteen (15) days from the actual offer in
writing.
Said parag. 1.4 of the agreement Exhibit "A" on the right of first refusal did not fix the
price of the film right to the twenty-four (24) films, nor did it specify the terms thereof. The
same are still left to be agreed upon by the parties.
In the instant case, ABS-CBN's letter of rejection Exhibit 3 (Records, p. 89) stated that it
can only tick off ten (10) films, and the draft contract Exhibit "C" accepted only fourteen
(14) films, while parag. 1.4 of Exhibit "A'' speaks of the next twenty-four (24) films.
The offer of V1VA was sometime in December 1991 (Exhibits 2, 2-A. 2-B; Records, pp.
86-88; Decision, p. 11, Records, p. 1150), when the first list of VIVA films was sent by
Mr. Del Rosario to ABS-CBN. The Vice President of ABS-CBN, Ms. Charo Santos-
Concio, sent a letter dated January 6, 1992 (Exhibit 3, Records, p. 89) where ABS-CBN
exercised its right of refusal by rejecting the offer of VIVA.. As aptly observed by the trial
court, with the said letter of Mrs. Concio of January 6, 1992, ABS-CBN had lost its right
of first refusal. And even if We reckon the fifteen (15) day period from February 27, 1992
(Exhibit 4 to 4-C) when another list was sent to ABS-CBN after the letter of Mrs. Concio,
still the fifteen (15) day period within which ABS-CBN shall exercise its right of first
refusal has already expired. 22
Accordingly, respondent court sustained the award of actual damages consisting in the
cost of print advertisements and the premium payments for the counterbond, there being
adequate proof of the pecuniary loss which RBS had suffered as a result of the filing of
the complaint by ABS-CBN. As to the award of moral damages, the Court of Appeals
found reasonable basis therefor, holding that RBS's reputation was debased by the filing
of the complaint in Civil Case No. Q-92-12309 and by the non-showing of the film
"Maging Sino Ka Man." Respondent court also held that exemplary damages were
correctly imposed by way of example or correction for the public good in view of the filing
of the complaint despite petitioner's knowledge that the contract with VIVA had not been
perfected, It also upheld the award of attorney's fees, reasoning that with ABS-CBN's act
of instituting Civil Case No, Q-92-1209, RBS was "unnecessarily forced to litigate." The
appellate court, however, reduced the awards of moral damages to P2 million, exemplary
damages to P2 million, and attorney's fees to P500, 000.00.
On the other hand, respondent Court of Appeals denied VIVA and Del Rosario's appeal
because it was "RBS and not VIVA which was actually prejudiced when the complaint
was filed by ABS-CBN."
Its motion for reconsideration having been denied, ABS-CBN filed the petition in this
case, contending that the Court of Appeals gravely erred in
I positions during the hearings for the purpose. The filing of the counterbond was an
. . . RULING THAT THERE WAS NO PERFECTED CONTRACT
BETWEEN PETITIONER AND PRIVATE RESPONDENT VIVA
NOTWITHSTANDING PREPONDERANCE OF EVIDENCE ADDUCED
BY PETITIONER TO THE CONTRARY.
II
. . . IN AWARDING ACTUAL AND COMPENSATORY DAMAGES IN
FAVOR OF PRIVATE RESPONDENT RBS.
III
. . . IN AWARDING MORAL AND EXEMPLARY DAMAGES IN FAVOR
OF PRIVATE RESPONDENT RBS.
IV
. . . IN AWARDING ATTORNEY'S FEES IN FAVOR OF RBS.
ABS-CBN claims that it had yet to fully exercise its right of first refusal over twenty-four
titles under the 1990 Film Exhibition Agreement, as it had chosen only ten titles from the
first list. It insists that we give credence to Lopez's testimony that he and Del Rosario met
at the Tamarind Grill Restaurant, discussed the terms and conditions of the second list
(the 1992 Film Exhibition Agreement) and upon agreement thereon, wrote the same on a
paper napkin. It also asserts that the contract has already been effective, as the
elements thereof, namely, consent, object, and consideration were established. It then
concludes that the Court of Appeals' pronouncements were not supported by law and
jurisprudence, as per our decision of 1 December 1995 in Limketkai Sons Milling, Inc. v.
Court of Appeals, which cited Toyota Shaw, Inc. v. Court of Appeals, Ang Yu
23 24
Asuncion v. Court of Appeals, and Villonco Realty Company v. Bormaheco. Inc.
25 26
Anent the actual damages awarded to RBS, ABS-CBN disavows liability therefor. RBS
spent for the premium on the counterbond of its own volition in order to negate the
injunction issued by the trial court after the parties had ventilated their respective
option available to RBS, but it can hardly be argued that ABS-CBN compelled RBS to
incur such expense. Besides, RBS had another available option, i.e., move for the
dissolution or the injunction; or if it was determined to put up a counterbond, it could have
presented a cash bond. Furthermore under Article 2203 of the Civil Code, the party
suffering loss or injury is also required to exercise the diligence of a good father of a
family to minimize the damages resulting from the act or omission. As regards the cost of
print advertisements, RBS had not convincingly established that this was a loss
attributable to the non showing "Maging Sino Ka Man"; on the contrary, it was brought
out during trial that with or without the case or the injunction, RBS would have spent such
an amount to generate interest in the film.
ABS-CBN further contends that there was no clear basis for the awards of moral and
exemplary damages. The controversy involving ABS-CBN and RBS did not in any way
originate from business transaction between them. The claims for such damages did not
arise from any contractual dealings or from specific acts committed by ABS-CBN against
RBS that may be characterized as wanton, fraudulent, or reckless; they arose by virtue
only of the filing of the complaint, An award of moral and exemplary damages is not
warranted where the record is bereft of any proof that a party acted maliciously or in bad
faith in filing an action. In any case, free resort to courts for redress of wrongs is a
27
matter of public policy. The law recognizes the right of every one to sue for that which he
honestly believes to be his right without fear of standing trial for damages where by lack
of sufficient evidence, legal technicalities, or a different interpretation of the laws on the
matter, the case would lose ground. One who makes use of his own legal right does no
28
injury. If damage results front the filing of the complaint, it is damnum absque
29
injuria. Besides, moral damages are generally not awarded in favor of a juridical
30
person, unless it enjoys a good reputation that was debased by the offending party
resulting in social humiliation.
31
As regards the award of attorney's fees, ABS-CBN maintains that the same had no
factual, legal, or equitable justification. In sustaining the trial court's award, the Court of
Appeals acted in clear disregard of the doctrines laid down in Buan
v. Camaganacan that the text of the decision should state the reason why attorney's
32
fees are being awarded; otherwise, the award should be disallowed. Besides, no bad
faith has been imputed on, much less proved as having been committed by, ABS-CBN. It
has been held that "where no sufficient showing of bad faith would be reflected in a party'
s persistence in a case other than an erroneous conviction of the righteousness of his
cause, attorney's fees shall not be recovered as cost." 33
On the other hand, RBS asserts that there was no perfected contract between ABS-CBN
and VIVA absent any meeting of minds between them regarding the object and
consideration of the alleged contract. It affirms that the ABS-CBN's claim of a right of first
refusal was correctly rejected by the trial court. RBS insist the premium it had paid for the
counterbond constituted a pecuniary loss upon which it may recover. It was obliged to
put up the counterbound due to the injunction procured by ABS-CBN. Since the trial
court found that ABS-CBN had no cause of action or valid claim against RBS and,
therefore not entitled to the writ of injunction, RBS could recover from ABS-CBN the
premium paid on the counterbond. Contrary to the claim of ABS-CBN, the cash bond
would prove to be more expensive, as the loss would be equivalent to the cost of money
RBS would forego in case the P30 million came from its funds or was borrowed from
banks.
RBS likewise asserts that it was entitled to the cost of advertisements for the cancelled
showing of the film "Maging Sino Ka Man" because the print advertisements were put out
to announce the showing on a particular day and hour on Channel 7, i.e., in its entirety at
one time, not a series to be shown on a periodic basis. Hence, the print advertisement
were good and relevant for the particular date showing, and since the film could not be
shown on that particular date and hour because of the injunction, the expenses for the
advertisements had gone to waste.
As regards moral and exemplary damages, RBS asserts that ABS-CBN filed the case
and secured injunctions purely for the purpose of harassing and prejudicing RBS.
Pursuant then to Article 19 and 21 of the Civil Code, ABS-CBN must be held liable for
such damages. Citing Tolentino, damages may be awarded in cases of abuse of rights
34
even if the act done is not illicit and there is abuse of rights were plaintiff institutes and
action purely for the purpose of harassing or prejudicing the defendant.
In support of its stand that a juridical entity can recover moral and exemplary damages,
private respondents RBS cited People v. Manero, where it was stated that such entity
35
may recover moral and exemplary damages if it has a good reputation that is debased
resulting in social humiliation. it then ratiocinates; thus:
There can be no doubt that RBS' reputation has been debased by ABS-CBN's acts in
this case. When RBS was not able to fulfill its commitment to the viewing public to show
the film "Maging Sino Ka Man" on the scheduled dates and times (and on two occasions
that RBS advertised), it suffered serious embarrassment and social humiliation. When
the showing was canceled, late viewers called up RBS' offices and subjected RBS to
verbal abuse ("Announce kayo nang announce, hindi ninyo naman ilalabas," "nanloloko
yata kayo") (Exh. 3-RBS, par. 3). This alone was not something RBS brought upon itself.
it was exactly what ABS-CBN had planned to happen.
The amount of moral and exemplary damages cannot be said to be excessive. Two
reasons justify the amount of the award.
The first is that the humiliation suffered by RBS is national extent. RBS operations as a
broadcasting company is [sic] nationwide. Its clientele, like that of ABS-CBN, consists of
those who own and watch television. It is not an exaggeration to state, and it is a matter
of judicial notice that almost every other person in the country watches television. The
humiliation suffered by RBS is multiplied by the number of televiewers who had
anticipated the showing of the film "Maging Sino Ka Man" on May 28 and November 3,
1992 but did not see it owing to the cancellation. Added to this are the advertisers who
had placed commercial spots for the telecast and to whom RBS had a commitment in
consideration of the placement to show the film in the dates and times specified.
The second is that it is a competitor that caused RBS to suffer the humiliation. The
humiliation and injury are far greater in degree when caused by an entity whose ultimate
business objective is to lure customers (viewers in this case) away from the
competition. 36
For their part, VIVA and Vicente del Rosario contend that the findings of fact of the trial
court and the Court of Appeals do not support ABS-CBN's claim that there was a
perfected contract. Such factual findings can no longer be disturbed in this petition for
review under Rule 45, as only questions of law can be raised, not questions of fact. On
the issue of damages and attorneys fees, they adopted the arguments of RBS.
The key issues for our consideration are (1) whether there was a perfected contract
between VIVA and ABS-CBN, and (2) whether RBS is entitled to damages and attorney's
fees. It may be noted that the award of attorney's fees of P212,000 in favor of VIVA is not
assigned as another error.
I.
The first issue should be resolved against ABS-CBN. A contract is a meeting of minds
between two persons whereby one binds himself to give something or to render some
service to another for a consideration. there is no contract unless the following
37
requisites concur: (1) consent of the contracting parties; (2) object certain which is the
subject of the contract; and (3) cause of the obligation, which is established. A contract
38
undergoes three stages:
(a) preparation, conception, or generation, which is the period of
negotiation and bargaining, ending at the moment of agreement of the
parties;
(b) perfection or birth of the contract, which is the moment when the
parties come to agree on the terms of the contract; and
(c) consummation or death, which is the fulfillment or performance of the
terms agreed upon in the contract. 39
Contracts that are consensual in nature are perfected upon mere meeting of the minds,
Once there is concurrence between the offer and the acceptance upon the subject
matter, consideration, and terms of payment a contract is produced. The offer must be
certain. To convert the offer into a contract, the acceptance must be absolute and must
not qualify the terms of the offer; it must be plain, unequivocal, unconditional, and without
variance of any sort from the proposal. A qualified acceptance, or one that involves a
new proposal, constitutes a counter-offer and is a rejection of the original offer.
Consequently, when something is desired which is not exactly what is proposed in the
offer, such acceptance is not sufficient to generate consent because any modification or
variation from the terms of the offer annuls the offer.
40
When Mr. Del Rosario of VIVA met with Mr. Lopez of ABS-CBN at the Tamarind Grill on
2 April 1992 to discuss the package of films, said package of 104 VIVA films was VIVA's
offer to ABS-CBN to enter into a new Film Exhibition Agreement. But ABS-CBN, sent,
through Ms. Concio, a counter-proposal in the form of a draft contract proposing
exhibition of 53 films for a consideration of P35 million. This counter-proposal could be
nothing less than the counter-offer of Mr. Lopez during his conference with Del Rosario
at Tamarind Grill Restaurant. Clearly, there was no acceptance of VIVA's offer, for it was
met by a counter-offer which substantially varied the terms of the offer.
ABS-CBN's reliance in Limketkai Sons Milling, Inc. v. Court of
Appeals and Villonco Realty Company v. Bormaheco, Inc., is misplaced. In these
41 42
cases, it was held that an acceptance may contain a request for certain changes in the
terms of the offer and yet be a binding acceptance as long as "it is clear that the meaning
of the acceptance is positively and unequivocally to accept the offer, whether such
request is granted or not." This ruling was, however, reversed in the resolution of 29
March 1996, which ruled that the acceptance of all offer must be unqualified and
43
absolute, i.e., it "must be identical in all respects with that of the offer so as to produce
consent or meeting of the minds."
On the other hand, in Villonco, cited in Limketkai, the alleged changes in the revised
counter-offer were not material but merely clarificatory of what had previously been
agreed upon. It cited the statement in Stuart v. Franklin Life Insurance Co. that "a
44
vendor's change in a phrase of the offer to purchase, which change does not essentially
change the terms of the offer, does not amount to a rejection of the offer and the tender
of a counter-offer." However, when any of the elements of the contract is modified upon
45
acceptance, such alteration amounts to a counter-offer.
In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's offer. Hence,
they underwent a period of bargaining. ABS-CBN then formalized its counter-proposals
or counter-offer in a draft contract, VIVA through its Board of Directors, rejected such
counter-offer, Even if it be conceded arguendo that Del Rosario had accepted the
counter-offer, the acceptance did not bind VIVA, as there was no proof whatsoever that
Del Rosario had the specific authority to do so.
Under Corporation Code, unless otherwise provided by said Code, corporate powers,
46
such as the power; to enter into contracts; are exercised by the Board of Directors.
However, the Board may delegate such powers to either an executive committee or
officials or contracted managers. The delegation, except for the executive committee,
must be for specific purposes, Delegation to officers makes the latter agents of the
47
corporation; accordingly, the general rules of agency as to the bindings effects of their
acts would
apply. For such officers to be deemed fully clothed by the corporation to exercise a
48
power of the Board, the latter must specially authorize them to do so. That Del Rosario
did not have the authority to accept ABS-CBN's counter-offer was best evidenced by his
submission of the draft contract to VIVA's Board of Directors for the latter's approval. In
any event, there was between Del Rosario and Lopez III no meeting of minds. The
following findings of the trial court are instructive:
A number of considerations militate against ABS-CBN's claim that a contract was
perfected at that lunch meeting on April 02, 1992 at the Tamarind Grill.
FIRST, Mr. Lopez claimed that what was agreed upon at the Tamarind Grill referred to
the price and the number of films, which he wrote on a napkin. However, Exhibit "C"
contains numerous provisions which, were not discussed at the Tamarind Grill, if Lopez
testimony was to be believed nor could they have been physically written on a napkin.
There was even doubt as to whether it was a paper napkin or a cloth napkin. In short
what were written in Exhibit "C'' were not discussed, and therefore could not have been
agreed upon, by the parties. How then could this court compel the parties to sign Exhibit
"C" when the provisions thereof were not previously agreed upon?
SECOND, Mr. Lopez claimed that what was agreed upon as the subject matter of the
contract was 14 films. The complaint in fact prays for delivery of 14 films. But Exhibit "C"
mentions 53 films as its subject matter. Which is which If Exhibits "C" reflected the true
intent of the parties, then ABS-CBN's claim for 14 films in its complaint is false or if what
it alleged in the complaint is true, then Exhibit "C" did not reflect what was agreed upon
by the parties. This underscores the fact that there was no meeting of the minds as to the
subject matter of the contracts, so as to preclude perfection thereof. For settled is the
rule that there can be no contract where there is no object which is its subject matter (Art.
1318, NCC).
THIRD, Mr. Lopez [sic] answer to question 29 of his affidavit testimony (Exh. "D") states:
We were able to reach an agreement. VIVA gave us the exclusive license to show these
fourteen (14) films, and we agreed to pay Viva the amount of P16,050,000.00 as well as
grant Viva commercial slots worth P19,950,000.00. We had already earmarked this P16,
050,000.00.
which gives a total consideration of P36 million (P19,950,000.00 plus
P16,050,000.00. equals P36,000,000.00).
On cross-examination Mr. Lopez testified:
Q. What was written in this napkin?
A. The total price, the breakdown the known Viva movies, the 7 blockbuster movies and
the other 7 Viva movies because the price was broken down accordingly. The none [sic]
Viva and the seven other Viva movies and the sharing between the cash portion and the
concerned spot portion in the total amount of P35 million pesos.
Now, which is which? P36 million or P35 million? This weakens ABS-CBN's claim.
FOURTH. Mrs. Concio, testifying for ABS-CBN stated that shetransmitted Exhibit "C" to
Mr. Del Rosario with a handwritten note, describing said Exhibit "C" as a "draft." (Exh. "5"
- Viva; tsn pp. 23-24 June 08, 1992). The said draft has a well defined meaning.
Since Exhibit "C" is only a draft, or a tentative, provisional or preparatory writing prepared
for discussion, the terms and conditions thereof could not have been previously agreed
upon by ABS-CBN and Viva Exhibit "C'' could not therefore legally bind Viva, not having
agreed thereto. In fact, Ms. Concio admitted that the terms and conditions embodied in
Exhibit "C" were prepared by ABS-CBN's lawyers and there was no discussion on said
terms and conditions. . . .
As the parties had not yet discussed the proposed terms and conditions in Exhibit "C,"
and there was no evidence whatsoever that Viva agreed to the terms and conditions
thereof, said document cannot be a binding contract. The fact that Viva refused to sign
Exhibit "C" reveals only two [sic] well that it did not agree on its terms and conditions,
and this court has no authority to compel Viva to agree thereto.
FIFTH. Mr. Lopez understand [sic] that what he and Mr. Del Rosario agreed upon at the
Tamarind Grill was only provisional, in the sense that it was subject to approval by the
Board of Directors of Viva. He testified:
Q. Now, Mr. Witness, and after that Tamarind meeting ... the second meeting wherein
you claimed that you have the meeting of the minds between you and Mr. Vic del
Rosario, what happened?
A. Vic Del Rosario was supposed to call us up and tell us specifically the result of the
discussion with the Board of Directors.
Q. And you are referring to the so-called agreement which you wrote in [sic] a piece of
paper?
A. Yes, sir.
Q. So, he was going to forward that to the board of Directors for approval?
A. Yes, sir. (Tsn, pp. 42-43, June 8, 1992)
Q. Did Mr. Del Rosario tell you that he will submit it to his Board for approval?
A. Yes, sir. (Tsn, p. 69, June 8, 1992).
The above testimony of Mr. Lopez shows beyond doubt that he knew Mr. Del Rosario
had no authority to bind Viva to a contract with ABS-CBN until and unless its Board of
Directors approved it. The complaint, in fact, alleges that Mr. Del Rosario "is the
Executive Producer of defendant Viva" which "is a corporation." (par. 2, complaint). As a
mere agent of Viva, Del Rosario could not bind Viva unless what he did is ratified by its
Board of Directors. (Vicente vs. Geraldez, 52 SCRA 210; Arnold vs. Willets and
Paterson, 44 Phil. 634). As a mere agent, recognized as such by plaintiff, Del Rosario
could not be held liable jointly and severally with Viva and his inclusion as party
defendant has no legal basis. (Salonga vs. Warner Barner [sic] , COLTA , 88 Phil. 125;
Salmon vs. Tan, 36 Phil. 556).
The testimony of Mr. Lopez and the allegations in the complaint are clear admissions
that what was supposed to have been agreed upon at the Tamarind Grill between Mr.
Lopez and Del Rosario was not a binding agreement. It is as it should be because
corporate power to enter into a contract is lodged in the Board of Directors. (Sec. 23,
Corporation Code). Without such board approval by the Viva board, whatever agreement
Lopez and Del Rosario arrived at could not ripen into a valid contract binding upon Viva
(Yao Ka Sin Trading vs. Court of Appeals, 209 SCRA 763). The evidence adduced
shows that the Board of Directors of Viva rejected Exhibit "C" and insisted that the film
package for 140 films be maintained (Exh. "7-1" - Viva ). 49
The contention that ABS-CBN had yet to fully exercise its right of first refusal over
twenty-four films under the 1990 Film Exhibition Agreement and that the meeting
between Lopez and Del Rosario was a continuation of said previous contract is
untenable. As observed by the trial court, ABS-CBN right of first refusal had already been
exercised when Ms. Concio wrote to VIVA ticking off ten films, Thus:
[T]he subsequent negotiation with ABS-CBN two (2) months after this letter was sent,
was for an entirely different package. Ms. Concio herself admitted on cross-examination
to having used or exercised the right of first refusal. She stated that the list was not
acceptable and was indeed not accepted by ABS-CBN, (TSN, June 8, 1992, pp. 8-10).
Even Mr. Lopez himself admitted that the right of the first refusal may have been already
exercised by Ms. Concio (as she had). (TSN, June 8, 1992, pp. 71-75). Del Rosario
himself knew and understand [sic] that ABS-CBN has lost its rights of the first refusal
when his list of 36 titles were rejected (Tsn, June 9, 1992, pp. 10-11) 50
II
However, we find for ABS-CBN on the issue of damages. We shall first take up actual
damages. Chapter 2, Title XVIII, Book IV of the Civil Code is the specific law on actual or
compensatory damages. Except as provided by law or by stipulation, one is entitled to
compensation for actual damages only for such pecuniary loss suffered by him as he has
duly proved. The indemnification shall comprehend not only the value of the loss
51
suffered, but also that of the profits that the obligee failed to obtain. In contracts and
52
quasi-contracts the damages which may be awarded are dependent on whether the
obligor acted with good faith or otherwise, It case of good faith, the damages recoverable
are those which are the natural and probable consequences of the breach of the
obligation and which the parties have foreseen or could have reasonably foreseen at the
time of the constitution of the obligation. If the obligor acted with fraud, bad faith, malice,
or wanton attitude, he shall be responsible for all damages which may be reasonably
attributed to the non-performance of the obligation. In crimes and quasi-delicts, the
53
defendant shall be liable for all damages which are the natural and probable
consequences of the act or omission complained of, whether or not such damages has
been foreseen or could have reasonably been foreseen by the defendant. 54
Actual damages may likewise be recovered for loss or impairment of earning capacity in
cases of temporary or permanent personal injury, or for injury to the plaintiff's business
standing or commercial credit. 55
The claim of RBS for actual damages did not arise from contract, quasi-contract, delict,
or quasi-delict. It arose from the fact of filing of the complaint despite ABS-CBN's alleged
knowledge of lack of cause of action. Thus paragraph 12 of RBS's Answer with
Counterclaim and Cross-claim under the heading COUNTERCLAIM specifically alleges:
12. ABS-CBN filed the complaint knowing fully well that it has no cause of
action RBS. As a result thereof, RBS suffered actual damages in the
amount of P6,621,195.32. 56
Needless to state the award of actual damages cannot be comprehended under the
above law on actual damages. RBS could only probably take refuge under Articles 19,
20, and 21 of the Civil Code, which read as follows:
Art. 19. Every person 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.
Art. 20. Every person who, contrary to law, wilfully or negligently causes
damage to another, shall indemnify the latter for tile same.
Art. 21. Any person who wilfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.
It may further be observed that in cases where a writ of preliminary injunction is issued,
the damages which the defendant may suffer by reason of the writ are recoverable from
the injunctive bond. In this case, ABS-CBN had not yet filed the required bond; as a
57
matter of fact, it asked for reduction of the bond and even went to the Court of Appeals to
challenge the order on the matter, Clearly then, it was not necessary for RBS to file a
counterbond. Hence, ABS-CBN cannot be held responsible for the premium RBS paid
for the counterbond.
Neither could ABS-CBN be liable for the print advertisements for "Maging Sino Ka Man"
for lack of sufficient legal basis. The RTC issued a temporary restraining order and later,
a writ of preliminary injunction on the basis of its determination that there existed
sufficient ground for the issuance thereof. Notably, the RTC did not dissolve the
injunction on the ground of lack of legal and factual basis, but because of the plea of
RBS that it be allowed to put up a counterbond.
As regards attorney's fees, the law is clear that in the absence of stipulation, attorney's
fees may be recovered as actual or compensatory damages under any of the
circumstances provided for in Article 2208 of the Civil Code. 58
The general rule is that attorney's fees cannot be recovered as part of damages because
of the policy that no premium should be placed on the right to litigate. They are not to be
59
awarded every time a party wins a suit. The power of the court to award attorney's fees
under Article 2208 demands factual, legal, and equitable justification. Even when
60
claimant is compelled to litigate with third persons or to incur expenses to protect his
rights, still attorney's fees may not be awarded where no sufficient showing of bad faith
could be reflected in a party's persistence in a case other than erroneous conviction of
the righteousness of his cause. 61
As to moral damages the law is Section 1, Chapter 3, Title XVIII, Book IV of the Civil
Code. Article 2217 thereof defines what are included in moral damages, while Article
2219 enumerates the cases where they may be recovered, Article 2220 provides that
moral damages may be recovered in breaches of contract where the defendant acted
fraudulently or in bad faith. RBS's claim for moral damages could possibly fall only under
item (10) of Article 2219, thereof which reads:
(10) Acts and actions referred to in Articles 21, 26, 27, 28, 29, 30, 32, 34,
and 35.
Moral damages are in the category of an award designed to compensate the claimant for
actual injury suffered. and not to impose a penalty on the wrongdoer. The award is not
62
meant to enrich the complainant at the expense of the defendant, but to enable the
injured party to obtain means, diversion, or amusements that will serve to obviate then
moral suffering he has undergone. It is aimed at the restoration, within the limits of the
possible, of the spiritual status quo ante, and should be proportionate to the suffering
inflicted. Trial courts must then guard against the award of exorbitant damages; they
63
Verily then, malice or bad faith is at the core of Articles 19, 20, and 21. Malice or bad
faith implies a conscious and intentional design to do a wrongful act for a dishonest
purpose or moral obliquity. Such must be substantiated by evidence.
73 74

should exercise balanced restrained and measured objectivity to avoid suspicion that it
was due to passion, prejudice, or corruption on the part of the trial court. 64
The award of moral damages cannot be granted in favor of a corporation because, being
an artificial person and having existence only in legal contemplation, it has no feelings,
no emotions, no senses, It cannot, therefore, experience physical suffering and mental
anguish, which call be experienced only by one having a nervous system. The 65
statement in People v. Manero and Mambulao Lumber Co. v. PNB that a corporation
66 67
There is no adequate proof that ABS-CBN was inspired by malice or bad faith. It was
honestly convinced of the merits of its cause after it had undergone serious negotiations
culminating in its formal submission of a draft contract. Settled is the rule that the
adverse result of an action does not per se make the action wrongful and subject the
actor to damages, for the law could not have meant to impose a penalty on the right to
litigate. If damages result from a person's exercise of a right, it is damnum absque
injuria.
75

may recover moral damages if it "has a good reputation that is debased, resulting in
social humiliation" is an obiter dictum. On this score alone the award for damages must WHEREFORE, the instant petition is GRANTED. The challenged decision of the Court of
be set aside, since RBS is a corporation. Appeals in CA-G.R. CV No, 44125 is hereby REVERSED except as to unappealed
award of attorney's fees in favor of VIVA Productions, Inc. 1âwphi1.nêt

The basic law on exemplary damages is Section 5, Chapter 3, Title XVIII, Book IV of the
Civil Code. These are imposed by way of example or correction for the public good, in No pronouncement as to costs.
addition to moral, temperate, liquidated or compensatory damages. They are
68

recoverable in criminal cases as part of the civil liability when the crime was committed SO ORDERED.
with one or more aggravating circumstances; in quasi-contracts, if the defendant acted
69

with gross negligence; and in contracts and quasi-contracts, if the defendant acted in a
70

wanton, fraudulent, reckless, oppressive, or malevolent manner. 71

It may be reiterated that the claim of RBS against ABS-CBN is not based on contract,
quasi-contract, delict, or quasi-delict, Hence, the claims for moral and exemplary
damages can only be based on Articles 19, 20, and 21 of the Civil Code.

The elements of abuse of right under Article 19 are the following: (1) the existence of a
legal right or duty, (2) which is exercised in bad faith, and (3) for the sole intent of
prejudicing or injuring another. Article 20 speaks of the general sanction for all other
provisions of law which do not especially provide for their own sanction; while Article 21
deals with acts contra bonus mores, and has the following elements; (1) there is an act
which is legal, (2) but which is contrary to morals, good custom, public order, or public
policy, and (3) and it is done with intent to injure.
72
G.R. No. 141994 January 17, 2005
FILIPINAS BROADCASTING NETWORK, INC., petitioner,
vs.
AGO MEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF
MEDICINE, (AMEC-BCCM) and ANGELITA F. AGO, respondents.
DECISION
CARPIO, J.:
The Case
This petition for review assails the 4 January 1999 Decision and 26 January 2000
1 2
Resolution of the Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals
affirmed with modification the 14 December 1992 Decision3 of the Regional Trial Court of
Legazpi City, Branch 10, in Civil Case No. 8236. The Court of Appeals held Filipinas
Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima
liable for libel and ordered them to solidarily pay Ago Medical and Educational Center-
Bicol Christian College of Medicine moral damages, attorney’s fees and costs of suit.
The Antecedents
"Exposé" is a radio documentary4 program hosted by Carmelo ‘Mel’ Rima ("Rima") and
Hermogenes ‘Jun’ Alegre ("Alegre").5 Exposé is aired every morning over DZRC-AM
which is owned by Filipinas Broadcasting Network, Inc. ("FBNI"). "Exposé" is heard over
Legazpi City, the Albay municipalities and other Bicol areas.6
In the morning of 14 and 15 December 1989, Rima and Alegre exposed various alleged
complaints from students, teachers and parents against Ago Medical and Educational
Center-Bicol Christian College of Medicine ("AMEC") and its administrators. Claiming
that the broadcasts were defamatory, AMEC and Angelita Ago ("Ago"), as Dean of
AMEC’s College of Medicine, filed a complaint for damages7 against FBNI, Rima and
Alegre on 27 February 1990. Quoted are portions of the allegedly libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking medical course at
AMEC-BCCM, advise them to pass all subjects because if they fail in any subject
they will repeat their year level, taking up all subjects including those they have
passed already. Several students had approached me stating that they had consulted
with the DECS which told them that there is no such regulation. If [there] is no such
regulation why is AMEC doing the same?
xxx
Second: Earlier AMEC students in Physical Therapy had complained that the
course is not recognized by DECS. xxx
Third: Students are required to take and pay for the subject even if the subject
does not have an instructor - such greed for money on the part of AMEC’s
administration. Take the subject Anatomy: students would pay for the subject upon
enrolment because it is offered by the school. However there would be no instructor for
such subject. Students would be informed that course would be moved to a later date
because the school is still searching for the appropriate instructor.
xxx
It is a public knowledge that the Ago Medical and Educational Center has survived and
has been surviving for the past few years since its inception because of funds support
from foreign foundations. If you will take a look at the AMEC premises you’ll find out that
the names of the buildings there are foreign soundings. There is a McDonald Hall. Why
not Jose Rizal or Bonifacio Hall? That is a very concrete and undeniable evidence that
the support of foreign foundations for AMEC is substantial, isn’t it? With the report which
is the basis of the expose in DZRC today, it would be very easy for detractors and
enemies of the Ago family to stop the flow of support of foreign foundations who assist
the medical school on the basis of the latter’s purpose. But if the purpose of the
institution (AMEC) is to deceive students at cross purpose with its reason for being it is
possible for these foreign foundations to lift or suspend their donations temporarily.8
xxx
On the other hand, the administrators of AMEC-BCCM, AMEC Science High School
and the AMEC-Institute of Mass Communication in their effort to minimize
expenses in terms of salary are absorbing or continues to accept "rejects". For
example how many teachers in AMEC are former teachers of Aquinas University but
were removed because of immorality? Does it mean that the present administration of
AMEC have the total definite moral foundation from catholic administrator of Aquinas
University. I will prove to you my friends, that AMEC is a dumping ground, garbage,
not merely of moral and physical misfits. Probably they only qualify in terms of
intellect. The Dean of Student Affairs of AMEC is Justita Lola, as the family name
implies. She is too old to work, being an old woman. Is the AMEC administration
exploiting the very [e]nterprising or compromising and undemanding Lola? Could it be
that AMEC is just patiently making use of Dean Justita Lola were if she is very old. As in
atmospheric situation – zero visibility – the plane cannot land, meaning she is very old,
low pay follows. By the way, Dean Justita Lola is also the chairman of the committee on
scholarship in AMEC. She had retired from Bicol University a long time ago but AMEC
has patiently made use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground for moral and
physically misfit people. What does this mean? Immoral and physically misfits as
teachers.
May I say I’m sorry to Dean Justita Lola. But this is the truth. The truth is this, that your
are no longer fit to teach. You are too old. As an aviation, your case is zero visibility.
Don’t insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the
scholarship committee at that. The reason is practical cost saving in salaries, because an
old person is not fastidious, so long as she has money to buy the ingredient of beetle
juice. The elderly can get by – that’s why she (Lola) was taken in as Dean.
xxx
xxx On our end our task is to attend to the interests of students. It is likely that the
students would be influenced by evil. When they become members of society outside
of campus will be liabilities rather than assets. What do you expect from a doctor
who while studying at AMEC is so much burdened with unreasonable imposition? What
do you expect from a student who aside from peculiar problems – because not all
students are rich – in their struggle to improve their social status are even more
burdened with false regulations. xxx9 (Emphasis supplied)
The complaint further alleged that AMEC is a reputable learning institution. With the
supposed exposés, FBNI, Rima and Alegre "transmitted malicious imputations, and as
such, destroyed plaintiffs’ (AMEC and Ago) reputation." AMEC and Ago included FBNI
as defendant for allegedly failing to exercise due diligence in the selection and
supervision of its employees, particularly Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an
Answer10 alleging that the broadcasts against AMEC were fair and true. FBNI, Rima and
Alegre claimed that they were plainly impelled by a sense of public duty to report the
"goings-on in AMEC, [which is] an institution imbued with public interest."
Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty.
Edmundo Cea, collaborating counsel of Atty. Lozares, filed a Motion to Dismiss11 on
FBNI’s behalf. The trial court denied the motion to dismiss. Consequently, FBNI filed a
separate Answer claiming that it exercised due diligence in the selection and supervision
of Rima and Alegre. FBNI claimed that before hiring a broadcaster, the broadcaster
should (1) file an application; (2) be interviewed; and (3) undergo an apprenticeship and
training program after passing the interview. FBNI likewise claimed that it always reminds
its broadcasters to "observe truth, fairness and objectivity in their broadcasts and to
refrain from using libelous and indecent language." Moreover, FBNI requires all
broadcasters to pass the Kapisanan ng mga Brodkaster sa Pilipinas ("KBP")
accreditation test and to secure a KBP permit.
On 14 December 1992, the trial court rendered a Decision12 finding FBNI and Alegre
liable for libel except Rima. The trial court held that the broadcasts are libelous per se.
The trial court rejected the broadcasters’ claim that their utterances were the result of
straight reporting because it had no factual basis. The broadcasters did not even verify
their reports before airing them to show good faith. In holding FBNI liable for libel, the
trial court found that FBNI failed to exercise diligence in the selection and supervision of
its employees.
In absolving Rima from the charge, the trial court ruled that Rima’s only participation was
when he agreed with Alegre’s exposé. The trial court found Rima’s statement within the
"bounds of freedom of speech, expression, and of the press." The dispositive portion of
the decision reads:
WHEREFORE, premises considered, this court finds for the plaintiff. Considering the
degree of damages caused by the controversial utterances, which are not found
by this court to be really very serious and damaging, and there being no showing
that indeed the enrollment of plaintiff school dropped, defendants Hermogenes
"Jun" Alegre, Jr. and Filipinas Broadcasting Network (owner of the radio station DZRC),
are hereby jointly and severally ordered to pay plaintiff Ago Medical and Educational
Center-Bicol Christian College of Medicine (AMEC-BCCM) the amount of ₱300,000.00
moral damages, plus ₱30,000.00 reimbursement of attorney’s fees, and to pay the costs
of suit.
SO ORDERED. 13 (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on the
other, appealed the decision to the Court of Appeals. The Court of Appeals affirmed the
trial court’s judgment with modification. The appellate court made Rima solidarily liable
with FBNI and Alegre. The appellate court denied Ago’s claim for damages and
attorney’s fees because the broadcasts were directed against AMEC, and not against
her. The dispositive portion of the Court of Appeals’ decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the
modification that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I]
and Hermo[g]enes Alegre.
SO ORDERED.14
FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals
denied in its 26 January 2000 Resolution.
Hence, FBNI filed this petition.15
The Ruling of the Court of Appeals
The Court of Appeals upheld the trial court’s ruling that the questioned broadcasts are
libelous per se and that FBNI, Rima and Alegre failed to overcome the legal presumption
of malice. The Court of Appeals found Rima and Alegre’s claim that they were actuated
by their moral and social duty to inform the public of the students’ gripes as insufficient to
justify the utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMEC’s administrators, the Court of
Appeals ruled that the broadcasts were made "with reckless disregard as to whether they
were true or false." The appellate court pointed out that FBNI, Rima and Alegre failed to
present in court any of the students who allegedly complained against AMEC. Rima and
Alegre merely gave a single name when asked to identify the students. According to the
Court of Appeals, these circumstances cast doubt on the veracity of the broadcasters’
claim that they were "impelled by their moral and social duty to inform the public about
the students’ gripes."
The Court of Appeals found Rima also liable for libel since he remarked that "(1) AMEC-
BCCM is a dumping ground for morally and physically misfit teachers; (2) AMEC
obtained the services of Dean Justita Lola to minimize expenses on its employees’
salaries; and (3) AMEC burdened the students with unreasonable imposition and false
regulations."16
The Court of Appeals held that FBNI failed to exercise due diligence in the selection and
supervision of its employees for allowing Rima and Alegre to make the radio broadcasts
without the proper KBP accreditation. The Court of Appeals denied Ago’s claim for
damages and attorney’s fees because the libelous remarks were directed against AMEC,
and not against her. The Court of Appeals adjudged FBNI, Rima and Alegre solidarily
liable to pay AMEC moral damages, attorney’s fees and costs of suit. 1awphi1.nét
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEY’S FEES IS PROPER; and
 IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR
PAYMENT OF MORAL DAMAGES, ATTORNEY’S FEES AND COSTS OF SUIT.
The Court’s Ruling
We deny the petition.
This is a civil action for damages as a result of the allegedly defamatory remarks of Rima
and Alegre against AMEC.17 While AMEC did not point out clearly the legal basis for its
complaint, a reading of the complaint reveals that AMEC’s cause of action is based on
Articles 30 and 33 of the Civil Code. Article 3018 authorizes a separate civil action to
recover civil liability arising from a criminal offense. On the other hand, Article
3319 particularly provides that the injured party may bring a separate civil action for
damages in cases of defamation, fraud, and physical injuries. AMEC also invokes Article
1920 of the Civil Code to justify its claim for damages. AMEC cites Articles 217621 and
218022 of the Civil Code to hold FBNI solidarily liable with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel is a public and malicious imputation of a crime, or of a vice or defect, real or
23
imaginary, or any act or omission, condition, status, or circumstance tending to cause the
dishonor, discredit, or contempt of a natural or juridical person, or to blacken the memory
of one who is dead.24
There is no question that the broadcasts were made public and imputed to AMEC
defects or circumstances tending to cause it dishonor, discredit and contempt. Rima and
Alegre’s remarks such as "greed for money on the part of AMEC’s administrators";
"AMEC is a dumping ground, garbage of xxx moral and physical misfits"; and AMEC
students who graduate "will be liabilities rather than assets" of the society are
libelous per se. Taken as a whole, the broadcasts suggest that AMEC is a money-
making institution where physically and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that Rima
and Alegre were plainly impelled by their civic duty to air the students’ gripes. FBNI
alleges that there is no evidence that ill will or spite motivated Rima and Alegre in making
the broadcasts. FBNI further points out that Rima and Alegre exerted efforts to obtain
AMEC’s side and gave Ago the opportunity to defend AMEC and its administrators. FBNI
concludes that since there is no malice, there is no libel.
FBNI’s contentions are untenable.
Every defamatory imputation is presumed malicious.25 Rima and Alegre failed to show
adequately their good intention and justifiable motive in airing the supposed gripes of the
students. As hosts of a documentary or public affairs program, Rima and Alegre should
have presented the public issues "free from inaccurate and misleading
information."26 Hearing the students’ alleged complaints a month before the
exposé,27 they had sufficient time to verify their sources and information. However, Rima
and Alegre hardly made a thorough investigation of the students’ alleged gripes. Neither
did they inquire about nor confirm the purported irregularities in AMEC from the
Department of Education, Culture and Sports. Alegre testified that he merely went to
AMEC to verify his report from an alleged AMEC official who refused to disclose any
information. Alegre simply relied on the words of the students "because they were many
and not because there is proof that what they are saying is true."28 This plainly shows
Rima and Alegre’s reckless disregard of whether their report was true or not.
Contrary to FBNI’s claim, the broadcasts were not "the result of straight reporting."
Significantly, some courts in the United States apply the privilege of "neutral reportage"
in libel cases involving matters of public interest or public figures. Under this privilege, a
republisher who accurately and disinterestedly reports certain defamatory statements
made against public figures is shielded from liability, regardless of the republisher’s
subjective awareness of the truth or falsity of the accusation.29 Rima and Alegre cannot
invoke the privilege of neutral reportage because unfounded comments abound in the
broadcasts. Moreover, there is no existing controversy involving AMEC when the
broadcasts were made. The privilege of neutral reportage applies where the defamed
person is a public figure who is involved in an existing controversy, and a party to that
controversy makes the defamatory statement.30
However, FBNI argues vigorously that malice in law does not apply to this case.
Citing Borjal v. Court of Appeals,31 FBNI contends that the broadcasts "fall within the
coverage of qualifiedly privileged communications" for being commentaries on matters of
public interest. Such being the case, AMEC should prove malice in fact or actual malice.
Since AMEC allegedly failed to prove actual malice, there is no libel.
FBNI’s reliance on Borjal is misplaced. In Borjal, the Court elucidated on the "doctrine of
fair comment," thus:
[F]air commentaries on matters of public interest are privileged and constitute a valid
defense in an action for libel or slander. The doctrine of fair comment means that while in
general every discreditable imputation publicly made is deemed false, because every
man is presumed innocent until his guilt is judicially proved, and every false imputation is
deemed malicious, nevertheless, when the discreditable imputation is directed against a
public person in his public capacity, it is not necessarily actionable. In order that such
discreditable imputation to a public official may be actionable, it must either be a
false allegation of fact or a comment based on a false supposition. If the comment
is an expression of opinion, based on established facts, then it is immaterial that the
opinion happens to be mistaken, as long as it might reasonably be inferred from the
facts.32 (Emphasis supplied)
True, AMEC is a private learning institution whose business of educating students is
"genuinely imbued with public interest." The welfare of the youth in general and AMEC’s
students in particular is a matter which the public has the right to know. Thus, similar to
the newspaper articles in Borjal, the subject broadcasts dealt with matters of public
interest. However, unlike in Borjal, the questioned broadcasts are not based
on established facts. The record supports the following findings of the trial court:
xxx Although defendants claim that they were motivated by consistent reports of students
and parents against plaintiff, yet, defendants have not presented in court, nor even gave
name of a single student who made the complaint to them, much less present written
complaint or petition to that effect. To accept this defense of defendants is too dangerous
because it could easily give license to the media to malign people and establishments
based on flimsy excuses that there were reports to them although they could not
satisfactorily establish it. Such laxity would encourage careless and irresponsible
broadcasting which is inimical to public interests.
Secondly, there is reason to believe that defendant radio broadcasters, contrary to the
mandates of their duties, did not verify and analyze the truth of the reports before they
aired it, in order to prove that they are in good faith.
Alegre contended that plaintiff school had no permit and is not accredited to offer
Physical Therapy courses. Yet, plaintiff produced a certificate coming from DECS that as
of Sept. 22, 1987 or more than 2 years before the controversial broadcast, accreditation
to offer Physical Therapy course had already been given the plaintiff, which certificate is
signed by no less than the Secretary of Education and Culture herself, Lourdes R.
Quisumbing (Exh. C-rebuttal). Defendants could have easily known this were they
careful enough to verify. And yet, defendants were very categorical and sounded too
positive when they made the erroneous report that plaintiff had no permit to offer
Physical Therapy courses which they were offering.
The allegation that plaintiff was getting tremendous aids from foreign foundations like
Mcdonald Foundation prove not to be true also. The truth is there is no Mcdonald
Foundation existing. Although a big building of plaintiff school was given the name
Mcdonald building, that was only in order to honor the first missionary in Bicol of
plaintiffs’ religion, as explained by Dr. Lita Ago. Contrary to the claim of defendants over
the air, not a single centavo appears to be received by plaintiff school from the
aforementioned McDonald Foundation which does not exist.
Defendants did not even also bother to prove their claim, though denied by Dra. Ago,
that when medical students fail in one subject, they are made to repeat all the other
subject[s], even those they have already passed, nor their claim that the school charges
laboratory fees even if there are no laboratories in the school. No evidence was
presented to prove the bases for these claims, at least in order to give semblance of
good faith.
As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers,
defendant[s] singled out Dean Justita Lola who is said to be so old, with zero visibility
already. Dean Lola testified in court last Jan. 21, 1991, and was found to be 75 years old.
xxx Even older people prove to be effective teachers like Supreme Court Justices who
are still very much in demand as law professors in their late years. Counsel for
defendants is past 75 but is found by this court to be still very sharp and effective. So is
l^vvphi1.net
plaintiffs’ counsel.
Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally
infirmed, but is still alert and docile.
The contention that plaintiffs’ graduates become liabilities rather than assets of our
society is a mere conclusion. Being from the place himself, this court is aware that
majority of the medical graduates of plaintiffs pass the board examination easily and
become prosperous and responsible professionals.33
Had the comments been an expression of opinion based on established facts, it is
immaterial that the opinion happens to be mistaken, as long as it might reasonably be
inferred from the facts.34 However, the comments of Rima and Alegre were not backed
up by facts. Therefore, the broadcasts are not privileged and remain libelous per se.
The broadcasts also violate the Radio Code35 of the Kapisanan ng mga Brodkaster sa
Pilipinas, Ink. ("Radio Code"). Item I(B) of the Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES
1. x x x
4. Public affairs program shall present public issues free from personal bias,
prejudice and inaccurate and misleading information. x x x Furthermore, the
station shall strive to present balanced discussion of issues. x x x.
xxx
7. The station shall be responsible at all times in the supervision of public affairs,
public issues and commentary programs so that they conform to the provisions
and standards of this code.
8. It shall be the responsibility of the newscaster, commentator, host and
announcer to protect public interest, general welfare and good order in the
presentation of public affairs and public issues.36 (Emphasis supplied)
The broadcasts fail to meet the standards prescribed in the Radio Code, which lays
down the code of ethical conduct governing practitioners in the radio broadcast industry.
The Radio Code is a voluntary code of conduct imposed by the radio broadcast industry
on its own members. The Radio Code is a public warranty by the radio broadcast
industry that radio broadcast practitioners are subject to a code by which their conduct
are measured for lapses, liability and sanctions.
The public has a right to expect and demand that radio broadcast practitioners live up to
the code of conduct of their profession, just like other professionals. A professional code
of conduct provides the standards for determining whether a person has acted justly,
honestly and with good faith in the exercise of his rights and performance of his duties as
required by Article 1937 of the Civil Code. A professional code of conduct also provides
the standards for determining whether a person who willfully causes loss or injury to
another has acted in a manner contrary to morals or good customs under Article 2138 of
the Civil Code.
II.
Whether AMEC is entitled to moral damages
FBNI contends that AMEC is not entitled to moral damages because it is a corporation.39
A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish or moral shock.40 The Court of Appeals cites Mambulao
Lumber Co. v. PNB, et al.41 to justify the award of moral damages. However, the Court’s
statement in Mambulao that "a corporation may have a good reputation which, if
besmirched, may also be a ground for the award of moral damages" is an obiter dictum.42
Nevertheless, AMEC’s claim for moral damages falls under item 7 of Article 221943 of the
Civil Code. This provision expressly authorizes the recovery of moral damages in cases
of libel, slander or any other form of defamation. Article 2219(7) does not qualify whether
the plaintiff is a natural or juridical person. Therefore, a juridical person such as a
corporation can validly complain for libel or any other form of defamation and claim for
moral damages.44
Moreover, where the broadcast is libelous per se, the law implies damages.45 In such a
case, evidence of an honest mistake or the want of character or reputation of the party
libeled goes only in mitigation of damages.46 Neither in such a case is the plaintiff
required to introduce evidence of actual damages as a condition precedent to the
recovery of some damages.47 In this case, the broadcasts are libelous per se. Thus,
AMEC is entitled to moral damages.
However, we find the award of ₱300,000 moral damages unreasonable. The record
shows that even though the broadcasts were libelous per se, AMEC has not suffered any
substantial or material damage to its reputation. Therefore, we reduce the award of moral
damages from ₱300,000 to ₱150,000.
III.
Whether the award of attorney’s fees is proper
FBNI contends that since AMEC is not entitled to moral damages, there is no basis for
the award of attorney’s fees. FBNI adds that the instant case does not fall under the
enumeration in Article 220848 of the Civil Code.
The award of attorney’s fees is not proper because AMEC failed to justify satisfactorily its
claim for attorney’s fees. AMEC did not adduce evidence to warrant the award of
attorney’s fees. Moreover, both the trial and appellate courts failed to explicitly state in
their respective decisions the rationale for the award of attorney’s fees.49 In Inter-Asia
Investment Industries, Inc. v. Court of Appeals ,50 we held that:
[I]t is an accepted doctrine that the award thereof as an item of damages is the exception
rather than the rule, and counsel’s fees are not to be awarded every time a party wins a
suit. The power of the court to award attorney’s fees under Article 2208 of the Civil
Code demands factual, legal and equitable justification, without which the award is
a conclusion without a premise, its basis being improperly left to speculation and
conjecture. In all events, the court must explicitly state in the text of the decision, and
not only in the decretal portion thereof, the legal reason for the award of attorney’s
fees.51 (Emphasis supplied)
While it mentioned about the award of attorney’s fees by stating that it "lies within the
discretion of the court and depends upon the circumstances of each case," the Court of
Appeals failed to point out any circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre for moral damages, attorney’s
fees and costs of suit
FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of
damages and attorney’s fees because it exercised due diligence in the selection and
supervision of its employees, particularly Rima and Alegre. FBNI maintains that its
broadcasters, including Rima and Alegre, undergo a "very regimented process" before
they are allowed to go on air. "Those who apply for broadcaster are subjected to
interviews, examinations and an apprenticeship program."
FBNI further argues that Alegre’s age and lack of training are irrelevant to his
competence as a broadcaster. FBNI points out that the "minor deficiencies in the KBP
accreditation of Rima and Alegre do not in any way prove that FBNI did not exercise the
diligence of a good father of a family in selecting and supervising them." Rima’s
accreditation lapsed due to his non-payment of the KBP annual fees while Alegre’s
accreditation card was delayed allegedly for reasons attributable to the KBP Manila
Office. FBNI claims that membership in the KBP is merely voluntary and not required by
any law or government regulation.
FBNI’s arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly and severally liable
for the tort which they commit.52 Joint tort feasors are all the persons who command,
instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the
commission of a tort, or who approve of it after it is done, if done for their benefit.53 Thus,
AMEC correctly anchored its cause of action against FBNI on Articles 2176 and 2180 of
the Civil Code.1a\^/phi1.net
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to
pay for damages arising from the libelous broadcasts. As stated by the Court of Appeals,
"recovery for defamatory statements published by radio or television may be had from
the owner of the station, a licensee, the operator of the station, or a person who
procures, or participates in, the making of the defamatory statements."54 An employer
and employee are solidarily liable for a defamatory statement by the employee within the
course and scope of his or her employment, at least when the employer authorizes or
ratifies the defamation.55 In this case, Rima and Alegre were clearly performing their
official duties as hosts of FBNI’s radio program Exposé when they aired the broadcasts.
FBNI neither alleged nor proved that Rima and Alegre went beyond the scope of their
work at that time. There was likewise no showing that FBNI did not authorize and ratify
the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due diligence in
the selection and supervision of its employees, particularly Rima and Alegre. FBNI
merely showed that it exercised diligence in the selection of its broadcasters without
introducing any evidence to prove that it observed the same diligence in
the supervision of Rima and Alegre. FBNI did not show how it exercised diligence in
supervising its broadcasters. FBNI’s alleged constant reminder to its broadcasters to
"observe truth, fairness and objectivity and to refrain from using libelous and indecent
language" is not enough to prove due diligence in the supervision of its broadcasters.
Adequate training of the broadcasters on the industry’s code of conduct, sufficient
information on libel laws, and continuous evaluation of the broadcasters’ performance
are but a few of the many ways of showing diligence in the supervision of broadcasters.
FBNI claims that it "has taken all the precaution in the selection of Rima and Alegre as
broadcasters, bearing in mind their qualifications." However, no clear and convincing
evidence shows that Rima and Alegre underwent FBNI’s "regimented process" of
application. Furthermore, FBNI admits that Rima and Alegre had deficiencies in their
KBP accreditation,56 which is one of FBNI’s requirements before it hires a broadcaster.
Significantly, membership in the KBP, while voluntary, indicates the broadcaster’s strong
commitment to observe the broadcast industry’s rules and regulations. Clearly, these
circumstances show FBNI’s lack of diligence in selecting and supervising Rima and
Alegre. Hence, FBNI is solidarily liable to pay damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January
1999 and Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No.
40151 with the MODIFICATION that the award of moral damages is reduced from
₱300,000 to ₱150,000 and the award of attorney’s fees is deleted. Costs against
petitioner.
SO ORDERED.
G.R. No. L-33205 August 31, 1987
LIRAG TEXTILE MILLS, INC., and BASILIO L. LIRAG, petitioners,
vs.
SOCIAL SECURITY SYSTEM, and HON. PACIFICO DE CASTRO, respondents.
FERNAN, J.:
This is an appeal by certiorari involving purely questions of law from the decision
rendered by respondent judge in Civil Case No. Q-12275 entitled "Social Security
System versus Lirag Textile Mills, Inc. and Basilio L. Lirag."
The antecedent facts, as stipulated by the parties during the trial, are as follows:
1. That on September 4, 1961, the plaintiff [herein respondent Social Security System]
and the defendants [herein petitioners] Lirag Textile Mills, Inc. and Basilio Lirag entered
into a Purchase Agreement under which the plaintiff agreed to purchase from the said
defendant preferred shares of stock worth ONE MILLION PESOS [P1,000,000.00]
subject to the conditions set forth in such agreement;...
2. That pursuant to the Purchase Agreement of September 4, 1961, the plaintiff, on
January 31, 1962, paid the defendant Lirag Textile Mills, Inc. the sum of FIVE
HUNDRED THOUSAND PESOS [P500,000.00] for which the said defendant issued to
plaintiff 5,000 preferred shares with a par value of one hundred pesos [P10000] per
share as evidenced by stock Certificate No. 128, ...
3. That further in pursuance of the Purchase Agreement of September 4, 1961, the
plaintiff paid to the Lirag Textile Mills, Inc. the sum of FIVE UNDRED THOUSAND
PESOS [P500,000.00] for which the said defendant issued to plaintiff 5,000 preferred
shares with a par value of one hundred pesos [P100.00] per share as evidenced by
Stock Certificate No. 139, ...
4. That in accordance with paragraph 3 of the Purchase Agreement of September 4,
1961 which provides for the repurchase by the Lirag Textile Mills, Inc. of the shares of
stock at regular intervals of one year beginning with the 4th year following the date of
issue, Stock Certificates Nos. 128 and 139 were to be repurchased by the Lirag Textile
Mills, Inc. thus:
CERT. No. AMOUNT DATE OF REDEMPTION 6. That defendant corporation failed to redeem certificates of Stock Nos. 128 and 139 by
payment of the amounts mentioned in paragraph 4 above;
128 P100,000.00 February 14, 1965
7. That the Lirag Textile Mills, lnc. has not paid dividends in the amounts and within the
100,000.00 February 14, 1966 period set forth in paragraph 10 of the complaint;*

100,000.00 February 14, 1967
100,000.00 February 14, 1968
100,000.00 February 14, 1969
139 P100,000.00 July 3, 1966
100,000.00 July 3,1967
100,000.00 July 3,1968
100,000.00 July 3, 1969
100,000.00 July 3,1970
5. That to guarantee the redemption of the stocks purchased by the plaintiff, the payment
of dividends, as well as the other obligations of the Lirag Textile Mills, Inc., defendants
Basilio L. Lirag signed the Purchase Agreement of September 4, 1961 not only as
president of the defendant corporation, but also as surety so that should the Lirag Textile
Mills, Inc. fail to perform any of its obligations in the said Purchase Agreement, the surety
shall immediately pay to the vendee the amounts then outstanding pursuant to Condition
No. 4, to wit:
To guarantee the redemption of the stocks herein purchased, the payment of the
dividends, as well as other obligations of the VENDOR herein, the SURETY hereby
binds himself jointly and severally liable with the VENDOR so that should the VENDOR
fail to perform any of its obligations hereunder, the SURETY shall immediately pay to the
VENDEE the amounts then outstanding. '
8. That letters of demands have been sent by the plaintiff to the defendant to redeem the
foregoing stock certificates and pay the dividends set forth in paragraph 10 of the
complaint, but the Lirag Textile Mills, Inc. has not made such redemption nor made such
dividend payments;
9. That defendant Basilio L. Lirag likewise received letters of demand from the plaintiff
requiring him to make good his obligation as surety;
10. That notwithstanding such letters of demand to the defendant Basilio L. Lirag, Stock
Certificates Nos. 128 and 139 issued to plaintiff are still unredeemed and no dividends
have been paid on said stock certificates;
11. That paragraph 5 of the Purchase Agreement provides that should the Lirag Textile
Mills, Inc. fail to effect any of the redemptions stipulated therein, the entire obligation
shall immediately become due and demandable and the Lirag Textile Mills, Inc., shall,
furthermore, be liable to the plaintiff in an amount equivalent to twelve per cent [12%] of
the amount then outstanding as liquidated damages;
12. That the failure of the Lirag Textile Mills, Inc. to redeem the foregoing certificates of
stock and pay dividends thereon were due to financial reverses, to wit:
[a] Unrestrained smuggling into the country of textiles from the United States and other
countries;
[b] Unrestricted entry of supposed remmants which competed with textiles of domestic
produce to the disadvantage and economic prejudice of the latter;
[c] Scarcity of money and the unavailability of financing facilities;
[d] Payment of interest on matured loans extended to defendant corporation;
[e] Construction of the Montalban plant of the defendant corporation financed largely
through reparation benefits;
[f] Labor problems occasioned by the fact that the defendant company is financial (sic)
unable to improve, in a substantial way, the economic plight of its workers as a result of
which two costly strikes had occurred, one in 1965 and another in 1968; and
[g] The occurrence of a fire which destroyed more than 1 million worth of raw cotton,
paralyzed operations partially, increased overhead costs and wiped out any expected
profits that year;
13. That it has been the policy of the plaintiff to be represented in the board of directors
of the corporation or entity which has obtained financial assistance from the System be it
in terms of loans, mortgages or equity investments. Thus, pursuant to paragraph 6 of the
Purchase Agreement of September 4, 1961 which provides as follows:
The VENDEE shall be allowed to have a representative in the Board of Directors of the
VENDOR with the right to participate in the discussions and to vote therein;
14. That Messrs. Rene Espina, Bernardino Abes and Heber Catalan were each issued
one common share of stock as a qualifying share to their election to the Board of
Directors of the Lirag Textiles Mills, Inc.;
15. That Messrs. Rene Espina, Bernardino Abes and Heber Catalan, during their
respective tenure as member of the Board of Directors of the Lirag Textile Mills, Inc.
attended the meetings of the said Board, received per diems for their attendance therein
in the same manner and in the same amount as any other member of the Board of
Directors, participated in the deliberations therein and freely exercised their right to vote
in such meetings. However, the per diems received by the SSS representative do not go
to the coffers of the System but personally to the representative in the said board of
directors. 1
For failure of Lirag Textile Mills, Inc. and Basilio L. Lirag to comply with the terms of the
Purchase Agreement, the SSS filed an action for specific performance and damages
before the then Court of First Instance of Rizal, Quezon City, praying that therein
defendants Lirag Textile Mills, Inc. and Basilio L. Lirag be adjudged liable for [1] the
entire obligation of P1M which became due and demandable upon defendants' failure to
repurchase the stocks as scheduled; [21 dividends in the amount of P220,000.00; [31
liquidated damages in an amount equivalent to twelve percent (12%) of the amount then
outstanding; [4] exemplary damages in the amount of P100,000.00 and [5] attorney's
fees of P20,000.00.
Lirag Textile Mills, Inc. and Basilio L. Lirag moved for the dismissal of the complaint, but
were denied the relief sought. Thus, they filed their answer with counterclaim, denying
the existence of any obligation on their part to redeem the preferred stocks, on the
ground that the SSS became and still is a preferred stockholder of the corporation so that
redemption of the shares purchased depended upon the financial ability of said
corporation. Insofar as defendant Basilio Lirag is concerned, it was alleged that his
liability arises only if the corporation is liable and does not perform its obligations under
the Purchase Agreement. They further contended that no liability on their part has arisen
because of the financial condition of the corporation upon which such liability was made
to depend, particularly the non-realization of any profit or earned surplus. Thus, the other
claims for dividends, liquidated damages and exemplary damages are allegedly without
basis.
After entering into the Stipulation of Facts above-quoted, the parties filed their respective
memoranda and submitted the case for decision.
The lower court, ruling that the purchase agreement was a debt instrument, decided in
favor of SSS and sentenced Lirag Textile Mills, Inc. and Basilio L. Lirag to pay SSS
jointly and severally P1,000,000.00 plus legal interest until the said amount is fully paid;
P220,000.00 representing the 8% per annum dividends on the preferred shares plus
legal interest up to the time of actual payment; P146,400.00 as liquidated damages; and
P10,000.00 as attorney's fees. The counterclaim of Lirag Textile Mills, Inc. and Basilio L.
Lirag was dismissed.
Hence, this petition.
Petitioners assign the following errors:
1. The trial court erred in deciding that the Purchase Agreement is a debt
instrument;
 2. Respondent judge erred in holding petitioner corporation liable for the
payment of the 8% preferred and cumulative dividends on the preferred
shares since the purchase agreement provides that said dividends shall
be paid from the net profits and earned surplus of petitioner corporation
and respondent SSS has admitted that due to losses sustained since -
1964, no dividends had been and can be declared by petitioner
corporation;
3. Respondent judge erred in sentencing petitioners to pay P146,400.00
in liquidated damages;
4. Respondent judge erred in sentencing petitioners to pay P10,000.00
by way of attorney's fees;
5. Respondent judge erred in sentencing petitioners to pay interest from
the time of firing the complaint u to the time of full payment both on the
P1,000,000.00 invested by respondent SSS in petitioner's corporation
and on the P220,000.00 which the SSS claims as dividends due on its
investments;
6. Respondent judge erred in holding that petitioner Lirag is liable to
redeem the P1,000,000.00 worth of preferred shares purchased by
respondent SSS from petitioner corporation and the 8% cumulative
dividend, it appearing that Lirag was merely a surety and not an insurer of
the obligation;
7. Respondent judge erred in dismissing the counterclaim of petitioners.
The fundamental issue in this case is whether or not the Purchase Agreement entered
into by petitioners and respondent SSS is a debt instrument.
Petitioners claim that respondent SSS merely became and still is a preferred stockholder
of the petitioner corporation, the redemption of the shares purchased by said respondent
being dependent upon the financial ability of petitioner corporation. Petitioner
corporation, thus, has no obligation to redeem the preferred stocks.
On the other hand, respondent SSS claims that the Purchase Agreement is a debt
instrument, imposing upon the petitioners the obligation to pay the amount owed, and
creating as between them the relation of creditor and debtor, not that of a stockholder
and a corporation.
We uphold the lower court's finding that the Purchase Agreement is, indeed, a debt
instrument. Its terms and conditions unmistakably show that the parties intended the
repurchase of the preferred shares on the respective scheduled dates to be an absolute
obligation which does not depend upon the financial ability of petitioner corporation. This
absolute obligation on the part of petitioner corporation is made manifest by the fact that
a surety was required to see to it that the obligation is fulfilled in the event of the principal
debtor's inability to do so. The unconditional undertaking of petitioner corporation to
redeem the preferred shares at the specified dates constitutes a debt which is defined
"as an obligation to pay money at some fixed future time, or at a time which becomes
definite and fixed by acts of either party and which they expressly or impliedly, agree to
perform in the contract. 2
A stockholder sinks or swims with the corporation and there is no obligation to return the
value of his shares by means of repurchase if the corporation incurs losses and financial
reverses, much less guarantee such repurchase through a surety.
As private respondent rightly contends, if the parties intended it [SSS] to be merely a
stockholder of petitioner corporation, it would have been sufficient that Preferred
Certificates Nos. 128 and 139 were issued in its name as the preferred certificates
contained all the rights of a stockholder as well as certain obligations on the part of
petitioner corporation. However, the parties did in fact execute the Purchase Agreement,
at the same time that the petitioner corporation issued its preferred stock to the
respondent SSS. The Purchase Agreement serves to define the rights and obligations of
the parties and to establish firmly the liability of petitioners in case of breach of contract.
The Certificates of Preferred Stock serve as additional evidence of the agreement
between the parties, though the precise terms and conditions thereof must be read
together with, and regarded as qualified by the terms and conditions of the Purchase
Agreement.
The rights given by the Purchase Agreement to respondent SSS are rights not enjoyed
by ordinary stockholders. This fact could only lead to the conclusion made by the trial
court that:
The aforementioned rights specially stipulated for the benefit of the plaintiff [respondent
SSS] suggest eloquently an intention on the part of the plaintiff [respondent SSS] to
facilitate a loan to the defendant corporation upon the latter's request. In order to afford
protection to the plaintiff which otherwise is provided by means of collaterals, as the
plaintiff exacts in its grants of loans in its ordinary transactions of this kind, as it is looked
upon more as a lending institution rather than as an investing agency, the purchase
agreement supplied these protective rights which would otherwise be furnished by
collaterals to the loan. Thus, the membership in the board is to have a watchdog in the
operation of the business of the corporation, so as to insure against mismanagement
which may result in losses not entirely unavoidable since payment for purposes of
redemption as well as the dividends is expressly stipulated to come from profits and/or
surplus. Such a right is never exacted by an ordinary stockholder merely investing in the
corporation. 3
Moreover, the Purchase Agreement provided that failure on the part of petitioner to
repurchase the preferred shares on the scheduled due dates renders the entire
obligation due and demandable, with petitioner in such eventuality liable to pay 12% of
the then outstanding obligation as liquidated damages. These features of the Purchase
Agreement, taken collectively, clearly show the intent of the parties to be bound therein
as debtor and creditor, and not as corporation and stockholder.
Petitioners' contention that it is beyond the power and competence of petitioner
corporation to redeem the preferred shares or pay the accrued dividends due to financial
reverses can not serve as legal justification for their failure to perform under the
Purchase Agreement. The Purchase Agreement constitutes the law between the parties
and obligations arising ex contractu must be fulfilled in accordance with the
stipulations. Besides, it was precisely this eventuality that was sought to be avoided
4
when respondent SSS required a surety for the obligation.
Thus, it follows that petitioner Basilio L. Lirag cannot deny liability for petitioner
corporation's default. As surety, Basilio L. Lirag is bound immediately to pay respondent
SSS the amount then outstanding.
The obligation of a surety differs from that of a guarantor in that the
surety insures the debt, whereas the guarantor merely insures solvency
of the debtor; and the surety undertakes to pay if the principal does not
pay, whereas a guarantor merely binds itself to pay if the principal is
unable to pay. 5
On the liability of petitioners to pay 8% cumulative dividend, We agree with the
observation of the lower court that the dividends stipulated by the parties served
evidently as interests. The amount thereof was fixed at 8% per annum and was not
6
made to depend upon or to fluctuate with the amount of profits or surplus realized, a
clear indication that the parties intended to give a sure and fixed earnings on the
principal loan. The fact that the dividends were supposed to be paid out of net profits and
earned surplus, of which there were none, does not excuse petitioners from the payment
thereof, again for the reason that the undertaking of petitioner Basilio L. Lirag as surety,
included the payment of dividends and other obligations then outstanding.
The award of the sum of P146,400.00 in liquidated damages representing 12% of the
amount then outstanding is correct, considering that petitioners in the stipulation of facts
admitted having failed to fulfill their obligations under the Purchase Agreement. The grant
of liquidated damages in the amount stated is expressly provided for in the Purchase
Agreement in case of contractual breach.
The pronouncement of the lower court for the payment of interests on both the
unredeemed shares and unpaid dividends is also in order. Per stipulation of facts,
petitioners did not deny the fact of non-payment of dividends nor their failure to purchase
the preferred shares. Since these involve sums of money which are overdue, they are
bound to earn legal interest from the time of demand, in this case, judicial, i.e., the time
of filing the action.
Petitioner Basilio L. Lirag is precluded from denying his liability under the- Purchase
Agreement. After his firm representation to "pay immediately to the VENDEE the
amounts then outstanding" evidencing his commitment as SURETY, he is estopped from
denying the same. His signature in the agreement carries with it the official imprimatur as
petitioner corporation's president, in his personal capacity as majority stockholder, as
surety and as solidary obligor. The essence of his obligation as surety is to pay
immediately without qualification whatsoever if petitioner corporation does not pay. To
have another interpretation of petitioner Lirag's liability as surety would violate the
integrity of the Purchase Agreement as well as the clear and unmistakable intent of the
parties to the same.
WHEREFORE, the decision in Civil Case No. Q-12275 entitled "Social Security System
vs. Lirag Textile Mills, Inc. and Basilio L. Lirag" is hereby affirmed in toto. Costs against
petitioners. SO ORDERED.
G.R. No. L-39427 February 24, 1934
TIRSO GARCIA, in his capacity as receiver of the Mercantile Bank of
China, plaintiff-appellee,
vs.
LIM CHU SING, defendant-appellant.
VILLA-REAL, J.:
This is an appeal taken by the defendant Lim Chu Sing from the judgment rendered by
the Court of First Instance of Manila, the dispositive part of which reads as follows:
Wherefore, judgment is rendered sentencing the defendant to pay the sum of
P9,105.17 with interest thereon at the rate of six per cent per annum from
September 1, 1932, until fully paid, plus the sum of P910.51, as attorney's fees,
with the costs of this suit.
In conformity with the stipulation, this judgment shall be subject to execution after
ninety (90) days. So ordered.
In support of his appeal, the appellant assigns the following alleged errors as committed
by the court a quo in its decision, to wit:
1. In denying the motion dated December 27, 1932, praying for the inclusion of
Lim Cuan Sy, being the principal debtor, as party to this suit.
2. In holding as improper the compensation of the defendant's debt of P9,106.17,
claimed in the complaint, with his credit amounting to P10,000 with the Mercantile
Bank of China.
3. In not ordering that after the compensation the plaintiff-appellee, as receiver of
the Mercantile Bank of China, should liquidate the dividends of the defendant-
appellant's shares.
4. In sentencing the defendant-appellant to pay to the plaintiff-appellee the sum
of P910.51 as attorney's fees, plus interest at 6 per cent per annum on the sum
of P9,105.17, with costs.
5. In denying the motion for a new trial.
When the case was called for hearing, the parties submitted the following stipulation of
facts for the consideration of the trial court, to wit:
Come now both parties and to this Honorable Court respectfully submit the
following stipulation:
1. The defendant admits the facts alleged in the complaint.
2. The plaintiff admits the allegations in the answer, particularly with reference to
the fact that the defendant is the owner of two hundred shares at a par value of
fifty pesos (P50) each, that is (Pl0,000).
3. The court may render judgment in accordance with this stipulation, but the
same shall be subject to execution after ninety (90) days.
Wherefore, they respectfully submit this stipulation and pray that judgment be
rendered in accordance therewith.
The facts alleged in the complaint and admitted by both parties under the above quoted
stipulation of facts are as follows:
On June 20, 1930, the defendant-appellant Lim Chu Sing executed and delivered to the
Mercantile Bank of China promissory note for the sum of P19,605.17 with interest
thereon at 6 per cent per annum, payable monthly as follows: P1,000 on July 1, 1930;
P500 on August 1, 1930; and P500 on the first of every month thereafter until the amount
of the promissory note together with the interest thereon is fully paid (Exhibit A). One of
the conditions stipulated in said promissory note is that in case of defendant's default in
the payment of any of the monthly installments, as they become due, the entire amount
or the unpaid balance thereof together with interest thereon at 6 per cent per annum,
shall become due and payable on demand. The defendant had been, making several
partial payments thereon, leaving an unpaid balance of P9,105.17. However, he
defaulted in the payment of several installments by reason of which the unpaid balance
of P9,105.17 on the promissory note has ipso facto become due and demandable.
The facts alleged in the answer and admitted by both parties under the same stipulation
of facts are as follows:
The debt which is the subject matter of the complaint was not really an indebtedness of
the defendant but of Lim Cuan Sy, who had an account with the plaintiff bank in the form
of "trust receipts" guaranteed by the defendant as surety and with chattel mortgage
securities. The plaintiff bank, without the knowledge and consent of the defendant,
foreclosed the chattel mortgage and privately sold the property covered thereby.
Inasmuch as Lim Cuan Sy failed to comply with his obligations, the plaintiff required the
defendant, as surety, to sign a promissory note for the sum of P19,105.17 payable in the
manner hereinbefore stated (Exhibit A). The defendant had been paying the
corresponding installments until the debt was reduced to the sum of P9,105.17 claimed
in the complaint. The defendant is the owner of shares of stock of the plaintiff Mercantile
Bank of China amounting to P10,000. The plaintiff bank is now under liquidation.
On December 27, 1932, the defendant-appellant Lim Chu Sing filed a motion praying for
the inclusion of the principal debtor Lim Cuan Sy as party defendant so that he could
avail himself of the benefit of the exhaustion of the property of said Lim Cuan Sy. Said
motion was denied in open court by the presiding judge without the defendant-appellant
having excepted to such order of denial.
The proceeds of the sale of the mortgaged chattels together with other payments made
were applied to the amount of the promissory note in question, leaving the balance which
the plaintiff now seeks to collect.
The first question to be decided in this appeal is whether or not the court a quo erred in
denying the motion for inclusion of a party a defendant, filed by the defendant-appellant.
According to the provisions of section 141 of the Code of Civil Procedure, ". . . Rulings of
the court upon minor matters, such as adjournments, postponements of trials, the
extension of time for filing pleadings or motions, and other matters addressed to the
discretion of the court in the performance of its duty, shall not be subject to exception.
But exception may be taken to any other ruling, order, or judgment of the court made
during the pendency of the action in the Court of First Instance." "An `exception' has
been defined as an objection taken to the decision of the trial court upon a matter of law,
and is a notice that the party taking it preserves for the consideration of the appellate
court a ruling deemed erroneous. (8 Am. Enc. P. and P., 157.)" " `Errors in a judgment or
decree will not be noticed on appeal in the absence of objections and exceptions taken
below, and they should be sufficiently specific to direct the attention of the court to the
alleged defects.' (8 Enc. Pl and Pr., 289.)" (Garcia de Lara vs. Gonzales de Lara, 2 Phil.,
297.) Inasmuch as an exception is an objection taken to the decision of the trial court
upon a matter of law and is a notice that the party taking it will submit for the
consideration of the appellate court the ruling deemed erroneous, failure to interpose it
deprived the appellant of the right to raise the question whether or not the court a
quo committed the alleged error attributed to it in its ruling which had not been excepted
to by the said appellant. The inclusion in, or exclusion from an action of a certain party is
a question of law. The herein defendant-appellant, not having excepted to the order of
the Court of First Instance of Manila denying his motion for the inclusion of Lim Cuan Sy
as party defendant, is estopped from raising such question upon appeal (Roman Catholic
Bishop of Lipa vs. Municipality of San Jose, 27 Phil., 571; Vergara vs. Laciapag, 28 Phil.,
439; Andrews vs. Morente Rosario, 9 Phil., 634).
The second question to be decided is whether or not it is proper to compensate the
defendant-appellant's indebtedness of P9,105.17, which is claimed in the complaint, with
the sum of P10,000 representing the value of his shares of stock with the plaintiff entity,
the Mercantile Bank of China.
According to the weight of authority, a share of stock or the certificate thereof is not an
indebtedness to the owner nor evidence of indebtedness and, therefore, it is not a credit
(14 Corpus Juris, p. 388, see. 511). Stockholders, as such, are not creditors of the
corporation (14 Corpus Juris, p. 848, Sec. 1289). It is the prevailing doctrine of the
American courts, repeatedly asserted in the broadest terms, that the capital stock of a
corporation is a trust fund to be used more particularly for the security of creditors of the
corporation, who presumably deal with it on the credit of its capital stock (14 Corpus
Juris, p. 383, sec. 505). Therefore, the defendant-appellant Lim Chu Sing not being a
creditor of the Mercantile Bank of China, although the latter is a creditor of the former,
there is no sufficient ground to justify a compensation (art. 1195, Civil Code; Acuña Co
Chongco vs. Dievas, 12 Phil., 250).
The third question to be decided in this appeal is whether or not the court a quo erred in
sentencing the said defendant-appellant to pay the sum of P910.51 as attorney's fees in
addition to interest at 6 per cent per annum on the amount sought in the complaint.
The pertinent clause of the promissory note Exhibit A reads as follows: "In case of default
of any of the above installments, the total amount of the balance still unpaid of this note
will become due and payable on demand plus interest thereon at the rate of 6 per cent G.R. No. 207246
per annum from date of this note until payment is made. And I further agree to pay an
additional sum equivalent to 10 per cent of the said note to cover cost and attorney's fees JOSE M. ROY III, Petitioner
for collection." vs.
CHAIRPERSON TERESITA HERBOSA, THE SECURITIES AND EXCHANGE
The stipulation relative to the payment of interest at the rate of 6 per cent per annum on COMMISSION, and PHILIPPINE LONG DISTANCE TELEPHONE COMP ANY,,
the unpaid balance of the promissory note Exhibit A refers to the capital and the 10 per Respondents
cent stipulated for costs and attorney's fees cannot be considered as interest but an
indemnity for damages occasioned by the collection of the indebtedness through judicial x-----------------------x
process. Therefore the two rates in question cannot be combined and considered
usurious interest. WILSON C. GAMBOA, JR., DANIEL V. CARTAGENA, JOHN WARREN P. GABINETE,
ANTONIO V. PESINA, JR., MODESTO MARTINY. MAMON III, and GERARDO C.
With reference to the costs, the 10 per cent stipulated in the promissory note is for costs EREBAREN, Petitioners-in-Intervention,
and attorney's fees which may be incurred in the collection of the indebtedness through
judicial process. Therefore, the defendant-appellant should not again be made to pay for x-----------------------x
them (Bank of the Philippine Islands vs. Yulo, 31 Phil., 476).
PHILIPPINE STOCK EXCHANGE, INC. Respondent-in-Intervention,
In view of the foregoing, this court is of the opinion and so holds: (1) That failure to file an
exception to a ruling rendered in open court denying a motion for the inclusion of a party
x-----------------------x
as defendant deprives the petitioner, upon appeal of the right to raise the question
whether such denial proper or improper; (2) that the shares of a banking corporation do
not constitute an indebtedness of the corporation to the stockholder and, therefore, the SHAREHOLDERS' ASSOCIATION OF THE PHILIPPINES, INC., Respondent-in-
latter is not a creditor of the former for such shares; (3) that the indebtedness of a Intervention.
shareholder to a banking corporation cannot be compensated with the amount of his
shares therein, there being no relation of creditor and debtor with respect to such shares; RESOLUTION
and (4) that the percentage stipulated in a contract, for costs and attorney's fees for the
collection of an indebtedness, includes judicial costs. CAGUIOA, J.:

Wherefore, with the sole modification that the costs be eliminated from the appealed Before the Court is the Motion for Reconsideration dated January 19, 2017 (the Motion)
1

judgment, the same is hereby affirmed, without special pronouncement as to costs of this filed by petitioner Jose M. Roy III (movant) seeking the reversal and setting aside of the
instance. So ordered. Decision dated November 22, 2016 (the Decision) which denied the movant's petition,
2

and declared that the Securities and Exchange Commission (SEC) did not commit grave
abuse of discretion in issuing Memorandum Circular No. 8, Series of 2013 (SEC-MC No.
8) as the same was in compliance with, and in fealty to, the decision of the Court
in Gamboa v. Finance Secretary Teves, (Gamboa Decision) and the resolution denying
3 4

the Motion for Reconsideration therein (Gamboa Resolution).

The Motion presents no compelling and new arguments to justify the reconsideration of
the Decision.
The grounds raised by movant are: (1) He has the requisite standing because this case
is one of transcendental importance; (2) The Court has the constitutional duty to exercise
judicial review over any grave abuse of discretion by any instrumentality of government;
(3) He did not rely on an obiter dictum; and (4) The Court should have treated the petition
as the appropriate device to explain the Gamboa Decision.
The Decision has already exhaustively discussed and directly passed upon these
grounds. Movant's petition was dismissed based on both procedural and substantive
grounds.
Regarding the procedural grounds, the Court ruled that petitioners (movant and
petitioners-in-intervention) failed to sufficiently allege and establish the existence of a
case or controversy and locus standi on their part to warrant the Court's exercise of
judicial review; the rule on the hierarchy of courts was violated; and petitioners failed to
implead indispensable parties such as the Philippine Stock Exchange, Inc. and
Shareholders' Association of the Philippines, Inc. 5
In connection with the failure to implead indispensable parties, the Court's Decision held:
Under Section 3, Rule 7 of the Rules of Court, an indispensable party is a party-in-
interest without whom there can be no final determination of an action. Indispensable
parties are those with such a material and direct interest in the controversy that a final
decree would necessarily affect their rights, so that the court cannot proceed without
their presence. The interests of such indispensable parties in the subject matter of the
suit and the relief are so bound with those of the other parties that their legal presence as
parties to the proceeding is an absolute necessity and a complete and efficient
determination of the equities and rights of the parties is not possible if they are not
joined.
Other than PLDT, the petitions failed to join or implead other public utility corporations
subject to the same restriction imposed by Section 11, Article XII of the Constitution.
These corporations are in danger of losing their franchise and property if they are found
not compliant with the restrictive interpretation of the constitutional provision under
review which is being espoused by petitioners. They should be afforded due notice and
opportunity to be heard, lest they be deprived of their property without due process.
Not only are public utility corporations other than PLDT directly and materially affected by
the outcome of the petitions, their shareholders also stand to suffer in case they will be
forced to divest their shareholdings to ensure compliance with the said restrictive
interpretation of the term "capital". As explained by SHAREPHIL, in five corporations
alone, more than Php158 Billion worth of shares must be divested by foreign
shareholders and absorbed by Filipino investors if petitioners' position is upheld.
Petitioners' disregard of the rights of these other corporations and numerous
shareholders constitutes another fatal procedural flaw, justifying the dismissal of their
petitions. Without giving all of them their day in court, they will definitely be
deprived of their property without due process of law. 6
This is highlighted to clear any misimpression that the Gamboa Decision
and Gamboa Resolution made a categorical ruling on the meaning of the word "capital"
under Section 11, Article XII of the Constitution only in respect of, or only confined to,
respondent Philippine Long Distance Telephone Company (PLDT). Nothing is further
from the truth. Indeed, a fair reading of the Gamboa Decision and Gamboa Resolution
shows that the Court's pronouncements therein would affect all public utilities, and not
just respondent PLDT.
On the substantive grounds, the Court disposed of the issue on whether the SEC gravely
abused its discretion in ruling that respondent PLDT is compliant with the limitation on
foreign ownership under the Constitution and other relevant laws as without merit. The
Court reasoned that "in the absence of a definitive ruling by the SEC on PLDT's
compliance with the capital requirement pursuant to the Gamboa Decision and
Resolution, any question relative to the inexistent ruling is premature."7
In resolving the other substantive issue raised by petitioners, the Court held that:
[E]ven if the resolution of the procedural issues were conceded in favor of petitioners, the
petitions, being anchored on Rule 65, must nonetheless fail because the SEC
did not commit grave abuse of discretion amounting to lack or excess of jurisdiction
when it issued SEC-MC No. 8. To the contrary, the Court finds SEC-MC No. 8 to have
been issued in fealty to the Gamboa Decision and Resolution. 8
To belabor the point, movant's petition is not a continuation of the Gamboa case as
the Gamboa Decision attained finality on October 18, 2012, and thereafter Entry of
Judgment was issued on December 11, 2012. 9
As regards movant's repeated invocation of the transcendental importance of
the Gamboa case, this does not ipso facto accord locus standi to movant. Being a new
petition, movant had the burden to justify his locus standi in his own petition. The Court,
however, was not persuaded by his justification.
Pursuant to the Court's constitutional duty to exercise judicial review, the Court has
conclusively found no grave abuse of discretion on the part of SEC in issuing SEC-MC
No. 8.
The Decision has painstakingly explained why it considered as obiter dictum that
pronouncement in the Gamboa Resolution that the constitutional requirement on Filipino
ownership should "apply uniformly and across the board to all classes of shares,
regardless of nomenclature and category, comprising the capital of a corporation."[[9-a]]
The Court stated that:
[T]he fallo or decretal/dispositive portions of both the Gamboa Decision and Resolution
are definite, clear and unequivocal. While there is a passage in the body of
the Gamboa Resolution that might have appeared contrary to the fallo of
the Gamboa Decision x x x the definiteness and clarity of the fallo of
the Gamboa Decision must control over the obiter dictum in the Gamboa Resolution
regarding the application of the 60-40 Filipino-foreign ownership requirement to "each
class of shares, regardless of differences in voting rights, privileges and restrictions." 10
To the Court's mind and, as exhaustively demonstrated in the Decision, the dispositive
portion of the Gamboa Decision was in no way modified by the Gamboa Resolution.
The heart of the controversy is the interpretation of Section 11, Article XII of the
Constitution, which provides: "No franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to citizens of the Philippines or
to corporations or associations organized under the laws of the Philippines at least sixty
per centum of whose capital is owned by such citizens x x x."
The Gamboa Decision already held, in no uncertain terms, that what the Constitution
requires is "[fJull [and legal] beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights x x x must rest in the hands of Filipino
nationals x x x." And, precisely that is what SEC-MC No. 8 provides, viz.: "x x x For
11
purposes of determining compliance [with the constitutional or statutory ownership], the
required percentage of Filipino ownership shall be applied to BOTH (a) the total number
of outstanding shares of stock entitled to vote in the election of directors; AND (b) the
total number of outstanding shares of stock, whether or not entitled to vote x x x." 12
In construing "full beneficial ownership," the Implementing Rules and Regulations of the
Foreign Investments Act of 1991 (FIA-IRR) provides:
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals,
mere legal title is not enough to meet the required Filipino equity. Full beneficial
ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks,
the voting rights of which have been assigned or transferred to aliens cannot be
considered held by Philippine citizens or Philippine nationals. 13
In turn, "beneficial owner" or "beneficial ownership" is defined in the Implementing Rules
and Regulations of the Securities Regulation Code (SRC-IRR) as:
[A]ny person who, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares voting power (which includes the
power to vote or direct the voting of such security) and/or investment returns or power
(which includes the power to dispose of, or direct the disposition of such security) x x x. 14
Thus, the definition of "beneficial owner or beneficial ownership" in the SRC-IRR, which
is in consonance with the concept of "full beneficial ownership" in the FIA-IRR, is, as
stressed in the Decision, relevant in resolving only the question of who is the beneficial
owner or has beneficial ownership of each "specific stock" of the public utility company
whose stocks are under review. If the Filipino has the voting power of the "specific
stock", i.e., he can vote the stock or direct another to vote for him, or the Filipino has
the investment power over the "specific stock", i.e., he can dispose of the stock or
direct another to dispose of it for him, or both, i.e., he can vote and dispose of that
"specific stock" or direct another to vote or dispose it for him, then such Filipino is the
"beneficial owner" of that "specific stock." Being considered Filipino, that "specific stock"
is then to be counted as part of the 60% Filipino ownership requirement under the
Constitution. The right to the dividends, jus fruendi - a right emanating from ownership of
that "specific stock" necessarily accrues to its Filipino "beneficial owner."
Once more, this is emphasized anew to disabuse any notion that the dividends accruing
to any particular stock are determinative of that stock's "beneficial ownership." Dividend
declaration is dictated by the corporation's unrestricted retained earnings. On the other
hand, the corporation's need of capital for expansion programs and special reserve for
probable contingencies may limit retained earnings available for dividend declaration. It 15
bears repeating here that the Court in the Gamboa Decision adopted the foregoing
definition of the term "capital" in Section 11, Article XII of the 1987 Constitution in
express recognition of the sensitive and vital position of public utilities both in the national
economy and for national security, so that the evident purpose of the citizenship
requirement is to prevent aliens from assuming control of public utilities, which may be
inimical to the national interest. This purpose prescinds from the "benefits"/dividends
16
that are derived from or accorded to the particular stocks held by Filipinos vis-a-vis the
stocks held by aliens. So long as Filipinos have controlling interest of a public utility
corporation, their decision to declare more dividends for a particular stock over other
kinds of stock is their sole prerogative - an act of ownership that would presumably be for
the benefit of the public utility corporation itself. Thus, as explained in the Decision:
In this regard, it would be apropos to state that since Filipinos own at least 60% of the
outstanding shares of stock entitled to vote directors, which is what the Constitution
precisely requires, then the Filipino stockholders control the corporation, i.e., they
dictate corporate actions and decisions, and they have all the rights of ownership
including, but not limited to, offering certain preferred shares that may have greater
economic interest to foreign investors - as the need for capital for corporate pursuits
(such as expansion), may be good for the corporation that they own. Surely, these "true
owners" will not allow any dilution of their ownership and control if such move will not be
beneficial to them. 17
Finally, as to how the SEC will classify or treat certain stocks with voting rights held by a
trust fund that is created by the public entity whose compliance with the limitation on
foreign ownership under the Constitution is under scrutiny, and how the SEC will
determine if such public utility does, in fact, control how the said stocks will be voted, and
whether, resultantly, the trust fund would be considered as Philippine national or not -
lengthily discussed in the dissenting opinion of Justice Carpio - is speculative at this
juncture. The Court cannot engage in guesswork. Thus, there is need of an actual case
or controversy before the Court may exercise its power of judicial review. The movant's
petition is not that actual case or controversy.
Thus, the discussion of Justice Carpio' s dissenting opinion as to the voting preferred
shares created by respondent PLDT, their acquisition by BTF Holdings, Inc., which
appears to be a wholly-owned company of the PLDT Beneficial Trust Fund (BTF), and
whether or not it is respondent PLDT's management that controls BTF and BTF
Holdings, Inc. - all these are factual matters that are outside the ambit of this Court's
review which, as stated in the beginning, is confined to determining whether or not the
SEC committed grave abuse of discretion in issuing SEC-MC No. 8; that is, whether or
not SEC-MC No. 8 violated the ruling of the Court in Gamboa v. Finance Secretary
Teves, and the resolution in Heirs of Wilson P. Gamboa v. Finance Sec.
18
Teves denying the Motion for Reconsideration therein as to the proper understanding of
19
"capital".
To be sure, it would be more prudent and advisable for the Court to await the SEC's prior
determination of the citizenship of specific shares of stock held in trust - based on
proven facts - before the Court proceeds to pass upon the legality of such
determination.
As to whether respondent PLDT is currently in compliance with the Constitutional
provision regarding public utility entities, the Court must likewise await the SEC's
determination thereof applying SEC-MC No. 8. After all, as stated in the Decision, it is
the SEC which is the government agency with the competent expertise and the mandate
of law to make such determination.
In conclusion, the basic issues raised in the Motion having been duly considered and
passed upon by the Court in the Decision and no substantial argument having been
adduced to warrant the reconsideration sought, the Court resolves to DENY the Motion
with FINALITY.
WHEREFORE, the subject Motion for Reconsideration is hereby DENIED WITH
FINALITY. No further pleadings or motions shall be entertained in this case. Let entry of
final judgment be issued immediately.
SO ORDERED.
G.R. No. L-39427 February 24, 1934
TIRSO GARCIA, in his capacity as receiver of the Mercantile Bank of
China, plaintiff-appellee,
vs.
LIM CHU SING, defendant-appellant.
VILLA-REAL, J.:
This is an appeal taken by the defendant Lim Chu Sing from the judgment rendered by
the Court of First Instance of Manila, the dispositive part of which reads as follows:
Wherefore, judgment is rendered sentencing the defendant to pay the sum of
P9,105.17 with interest thereon at the rate of six per cent per annum from
September 1, 1932, until fully paid, plus the sum of P910.51, as attorney's fees,
with the costs of this suit.
In conformity with the stipulation, this judgment shall be subject to execution after
ninety (90) days. So ordered.
In support of his appeal, the appellant assigns the following alleged errors as committed
by the court a quo in its decision, to wit:
1. In denying the motion dated December 27, 1932, praying for the inclusion of
Lim Cuan Sy, being the principal debtor, as party to this suit.
2. In holding as improper the compensation of the defendant's debt of P9,106.17,
claimed in the complaint, with his credit amounting to P10,000 with the Mercantile
Bank of China.
3. In not ordering that after the compensation the plaintiff-appellee, as receiver of
the Mercantile Bank of China, should liquidate the dividends of the defendant-
appellant's shares.
4. In sentencing the defendant-appellant to pay to the plaintiff-appellee the sum
of P910.51 as attorney's fees, plus interest at 6 per cent per annum on the sum
of P9,105.17, with costs.
5. In denying the motion for a new trial.
When the case was called for hearing, the parties submitted the following stipulation of
facts for the consideration of the trial court, to wit:
Come now both parties and to this Honorable Court respectfully submit the
following stipulation:
1. The defendant admits the facts alleged in the complaint.
2. The plaintiff admits the allegations in the answer, particularly with reference to
the fact that the defendant is the owner of two hundred shares at a par value of
fifty pesos (P50) each, that is (Pl0,000).
3. The court may render judgment in accordance with this stipulation, but the
same shall be subject to execution after ninety (90) days.
Wherefore, they respectfully submit this stipulation and pray that judgment be
rendered in accordance therewith.
The facts alleged in the complaint and admitted by both parties under the above quoted
stipulation of facts are as follows:
On June 20, 1930, the defendant-appellant Lim Chu Sing executed and delivered to the
Mercantile Bank of China promissory note for the sum of P19,605.17 with interest
thereon at 6 per cent per annum, payable monthly as follows: P1,000 on July 1, 1930;
P500 on August 1, 1930; and P500 on the first of every month thereafter until the amount
of the promissory note together with the interest thereon is fully paid (Exhibit A). One of
the conditions stipulated in said promissory note is that in case of defendant's default in
the payment of any of the monthly installments, as they become due, the entire amount
or the unpaid balance thereof together with interest thereon at 6 per cent per annum,
shall become due and payable on demand. The defendant had been, making several
partial payments thereon, leaving an unpaid balance of P9,105.17. However, he
defaulted in the payment of several installments by reason of which the unpaid balance
of P9,105.17 on the promissory note has ipso facto become due and demandable.
The facts alleged in the answer and admitted by both parties under the same stipulation
of facts are as follows:
The debt which is the subject matter of the complaint was not really an indebtedness of
the defendant but of Lim Cuan Sy, who had an account with the plaintiff bank in the form
of "trust receipts" guaranteed by the defendant as surety and with chattel mortgage
securities. The plaintiff bank, without the knowledge and consent of the defendant,
foreclosed the chattel mortgage and privately sold the property covered thereby.
Inasmuch as Lim Cuan Sy failed to comply with his obligations, the plaintiff required the
defendant, as surety, to sign a promissory note for the sum of P19,105.17 payable in the
manner hereinbefore stated (Exhibit A). The defendant had been paying the
corresponding installments until the debt was reduced to the sum of P9,105.17 claimed
in the complaint. The defendant is the owner of shares of stock of the plaintiff Mercantile
Bank of China amounting to P10,000. The plaintiff bank is now under liquidation.
On December 27, 1932, the defendant-appellant Lim Chu Sing filed a motion praying for
the inclusion of the principal debtor Lim Cuan Sy as party defendant so that he could
avail himself of the benefit of the exhaustion of the property of said Lim Cuan Sy. Said
motion was denied in open court by the presiding judge without the defendant-appellant
having excepted to such order of denial.
The proceeds of the sale of the mortgaged chattels together with other payments made
were applied to the amount of the promissory note in question, leaving the balance which
the plaintiff now seeks to collect.
The first question to be decided in this appeal is whether or not the court a quo erred in
denying the motion for inclusion of a party a defendant, filed by the defendant-appellant.
According to the provisions of section 141 of the Code of Civil Procedure, ". . . Rulings of
the court upon minor matters, such as adjournments, postponements of trials, the
extension of time for filing pleadings or motions, and other matters addressed to the
discretion of the court in the performance of its duty, shall not be subject to exception.
But exception may be taken to any other ruling, order, or judgment of the court made
during the pendency of the action in the Court of First Instance." "An `exception' has
been defined as an objection taken to the decision of the trial court upon a matter of law,
and is a notice that the party taking it preserves for the consideration of the appellate
court a ruling deemed erroneous. (8 Am. Enc. P. and P., 157.)" " `Errors in a judgment or
decree will not be noticed on appeal in the absence of objections and exceptions taken
below, and they should be sufficiently specific to direct the attention of the court to the
alleged defects.' (8 Enc. Pl and Pr., 289.)" (Garcia de Lara vs. Gonzales de Lara, 2 Phil.,
297.) Inasmuch as an exception is an objection taken to the decision of the trial court
upon a matter of law and is a notice that the party taking it will submit for the
consideration of the appellate court the ruling deemed erroneous, failure to interpose it
deprived the appellant of the right to raise the question whether or not the court a
quo committed the alleged error attributed to it in its ruling which had not been excepted
to by the said appellant. The inclusion in, or exclusion from an action of a certain party is
a question of law. The herein defendant-appellant, not having excepted to the order of
the Court of First Instance of Manila denying his motion for the inclusion of Lim Cuan Sy
as party defendant, is estopped from raising such question upon appeal (Roman Catholic
Bishop of Lipa vs. Municipality of San Jose, 27 Phil., 571; Vergara vs. Laciapag, 28 Phil.,
439; Andrews vs. Morente Rosario, 9 Phil., 634).
The second question to be decided is whether or not it is proper to compensate the
defendant-appellant's indebtedness of P9,105.17, which is claimed in the complaint, with
the sum of P10,000 representing the value of his shares of stock with the plaintiff entity,
the Mercantile Bank of China.
According to the weight of authority, a share of stock or the certificate thereof is not an
indebtedness to the owner nor evidence of indebtedness and, therefore, it is not a credit
(14 Corpus Juris, p. 388, see. 511). Stockholders, as such, are not creditors of the
corporation (14 Corpus Juris, p. 848, Sec. 1289). It is the prevailing doctrine of the
American courts, repeatedly asserted in the broadest terms, that the capital stock of a
corporation is a trust fund to be used more particularly for the security of creditors of the
corporation, who presumably deal with it on the credit of its capital stock (14 Corpus
Juris, p. 383, sec. 505). Therefore, the defendant-appellant Lim Chu Sing not being a
creditor of the Mercantile Bank of China, although the latter is a creditor of the former,
there is no sufficient ground to justify a compensation (art. 1195, Civil Code; Acuña Co
Chongco vs. Dievas, 12 Phil., 250).
The third question to be decided in this appeal is whether or not the court a quo erred in
sentencing the said defendant-appellant to pay the sum of P910.51 as attorney's fees in
addition to interest at 6 per cent per annum on the amount sought in the complaint.
The pertinent clause of the promissory note Exhibit A reads as follows: "In case of default
of any of the above installments, the total amount of the balance still unpaid of this note
will become due and payable on demand plus interest thereon at the rate of 6 per cent
per annum from date of this note until payment is made. And I further agree to pay an
additional sum equivalent to 10 per cent of the said note to cover cost and attorney's fees
for collection."
The stipulation relative to the payment of interest at the rate of 6 per cent per annum on
the unpaid balance of the promissory note Exhibit A refers to the capital and the 10 per
cent stipulated for costs and attorney's fees cannot be considered as interest but an
indemnity for damages occasioned by the collection of the indebtedness through judicial
process. Therefore the two rates in question cannot be combined and considered
usurious interest.
With reference to the costs, the 10 per cent stipulated in the promissory note is for costs
and attorney's fees which may be incurred in the collection of the indebtedness through
judicial process. Therefore, the defendant-appellant should not again be made to pay for
them (Bank of the Philippine Islands vs. Yulo, 31 Phil., 476).
In view of the foregoing, this court is of the opinion and so holds: (1) That failure to file an
exception to a ruling rendered in open court denying a motion for the inclusion of a party
as defendant deprives the petitioner, upon appeal of the right to raise the question
whether such denial proper or improper; (2) that the shares of a banking corporation do
not constitute an indebtedness of the corporation to the stockholder and, therefore, the
latter is not a creditor of the former for such shares; (3) that the indebtedness of a
shareholder to a banking corporation cannot be compensated with the amount of his
shares therein, there being no relation of creditor and debtor with respect to such shares;
and (4) that the percentage stipulated in a contract, for costs and attorney's fees for the
collection of an indebtedness, includes judicial costs.
Wherefore, with the sole modification that the costs be eliminated from the appealed
judgment, the same is hereby affirmed, without special pronouncement as to costs of this
instance. So ordered.
G.R. No. L-27872 February 25, 1928
THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee,
vs.
I. B. DEXTER, defendant-appellant.
STREET, J.:
This action was instituted in the Court of First Instance of Manila by the National
Exchange Co., Inc., as assignee (through the Philippine National Bank) of C. S. Salmon
& Co., for the purpose of recovering from I. B. Dexter a balance of P15,000, the par
value of one hundred fifty shares of the capital stock of C. S. Salmon & co., with interest
and costs. Upon hearing the cause the trial judge gave judgment for the plaintiff to
recover the amount claimed, with lawful interest from January 1, 1920, and with costs.
From this judgment the defendant appealed.
It appears that on August 10, 1919, the defendant, I. B. Dexter, signed a written
subscription to the corporate stock of C. S. Salmon & Co. in the following form:
I hereby subscribe for three hundred (300) shares of the capital stock of C. S.
Salmon and Company, payable from the first dividends declared on any and all
shares of said company owned by me at the time dividends are declared, until
the full amount of this subscription has been paid.
Upon this subscription the sum of P15,000 was paid in January, 1920, from a dividend
declared at about that time by the company, supplemented by money supplied
personally by the subscriber. Beyond this nothing has been paid on the shares and no
further dividend has been declared by the corporation. There is therefore a balance of
P15,000 still paid upon the subscription.
As the case reaches this court the sole question here presented for consideration is one
of law, namely, whether the stipulation contained in the subscription to the effect that the
subscription is payable from the first dividends declared on the shares has the effect of
relieving the subscriber from personal liability in an action to recover the value of the
shares. The trial court held, in effect, that the stipulation mentioned is invalid.
In discussing this problem we accept as sound law the proposition propounded by the
appellant's attorneys and taken from Fletcher's Cyclopedia as follows:
In the absence of restrictions in its character, a corporation, under its general
power to contract, has the power to accept subscriptions upon any special terms
not prohibited by positive law or contrary to public policy, provided they are not
such as to require the performance of acts which are beyond the powers
conferred upon the corporation by its character, and provided they do not
constitute a fraud upon other subscribers or stockholders, or upon persons who
are or may become creditors of the corporation. (Fletcher, Cyc. Corp., sec. 602,
p. 1314.)
Under the American regime corporate franchises in the Philippine Islands are granted
subject to the provisions of section 74 of the Organic Act of July 1, 1902, which, in the
part here material, is substantially reproduced in section 28 of the Autonomy Act of
August 29, 1916. In the Organic Act it is among other things, declared: "That all
franchises, privileges, or concessions granted under this Act shall forbid the issue of
stock or bonds except in exchange for actual cash or for property at a fair valuation equal
to the par value of the stock or bonds so issued; . . . ." (Act of Congress of July 1, 1902,
sec. 74.)
Pursuant to this provision we find that the Philippine Commission inserted in the
Corporation Law, enacted March 1, 1906, the following provision: ". . . no corporation
shall issue stock or bonds except in exchange for actual cash paid to the corporation or
for property actually received by it at a fair valuation equal to the par value of the stock or
bonds so issued." (Act No. 1459, sec. 16 as amended by Act No. 2792, sec. 2.)
The prohibition against the issuance of shares by corporations except for actual cash to
the par value of the stock to its full equivalent in property is thus enshrined in both the
organic and statutory law of the Philippine; Islands; and it would seem that our
lawmakers could scarely have chosen language more directly suited to secure absolute
equality stockholders with respect to their liability upon stock subscriptions. Now, if it is
unlawful to issue stock otherwise than as stated it is self-evident that a stipulation such
as that now under consideration, in a stock subcription, is illegal, for this stipulation
obligates the subcriber to pay nothing for the shares except as dividends may accrue
upon the stock. In the contingency that dividends are not paid, there is no liability at all.
This is a discrimination in favor of the particular subcriber, and hence the stipulation is
unlawful.
The general doctrine of corporation law is in conformity with this conclusion, as may be
seen from the following proposition taken from the standard encyclopedia treatise,
Corpus Juris:
Nor has a corporation the power to receive a subscription upon such terms as will
operate as a fraud upon the other subscribers or stockholders by subjecting the
particular subcriber to lighter burdens, or by giving him greater rights and
privileges, or as a fraud upon creditors of the corporation by withdrawing or
decreasing the capital. It is well settled therefore, as a general rule, that an
agreement between a corporation and a particular subscriber, by which the
subscription is not to be payable, or is to be payable in part only, whether it is for
the purpose of pretending that the stock is really greater than it is, or for the
purpose of preventing the predominance of certain stockholders, or for any other
purpose, is illegal and void as in fraud of other stockholders or creditors, or both,
and cannot be either enforced by the subcriber or interposed as a defense in an
action on the subcription. (14 C. J., p. 570.)
The rule thus stated is supported by a long line of decisions from numerous courts, with
little or no diversity of opinion. As stated in the headnote to the opinion of the Supreme
Court of United States in the case of Putnan vs. New Albany, etc. Railroad Co. as
reported in 21 Law. ed., 361, the rule is that "Conditions attached to subcriptions, which,
if valid, lessen the capital of the company, are a fraud upon the grantor of the franchise,
and upon those who may become creditors of the corporation, and upon unconditional
stockholders."
In the appellant's brief attention is called to the third headnote to Bank vs. Cook (125
Iowa, 111), where it is stated that a collateral agreement with a subcriber to stock that his
subcription shall not be collectible except from dividends on the stock, is valid as
between the parties and a complete defense to a suit on notes given for the amount of
the subscription. A careful persual of the decision will show that the rule thus broadly
stated in the headnote is not justified by anything in the reported decision; for what the
court really held was that the making of such promise by the agent of the corporation
who sold the stock is admissible in evidence in support of the defense of fraud and
failure of consideration. Moreover, even if the decision had been to the effect supposed,
the relu announced in the headnote could have no weight in a jurisdiction like this were
there is a statutory provision prohibiting such agreements.
We may add that the law in force in this jurisdiction makes no distinction, in respect to G.R. No. L-4824 June 30, 1953
the liability of the subcriber, between shares subscribed before incorporation is effected
and shares subscribed thereafter. All like are bound to pay full value in cash or its LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellant,
equivalent, and any attempt to discriminate in favor of one subscriber by relieving him of vs.
this liability wholly or in part is forbidden. In what is here said we have reference of IRINEO BALTAZAR, defendant-appellee.
course primarily to subcriptions to shares that have not been previously issued. It is
conceivable that the power of the corporation to make terms with the purchaser would be x---------------------------------------------------------x
greater where the shares which are the subject of the transaction have been acquired by
the corporation in course of commerce, after they have already been once issued. But
G.R. No. L-6244 June 30, 1953
the shares with which are here concerned are not of this sort.
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellee,
The judgment appealed from must be affirmed, and it is so ordered, with costs against
vs.
the appellant.
IRINEO BALTAZAR, defendant and appellant.
Malcolm, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.
MONTEMAYOR, J.:

These two cases here on appeal stem from the same case, that of civil case No. 10944
of the Court of First Instance of Pangasinan. From the trial court's decision, plaintiff
Lingayen Gulf Electric Power Company, Inc. appealed directly to this court under G.R.
No. L-4824. Defendant Irineo Baltazar appealed to the Court of Appeals. By a resolution
of that appellate tribunal, the appeal was certified to this court pursuant to section 17, (5)
and (6) of the Judiciary Act of 1948, and is now listed here under G.R. No. L-6344.

The main facts of the case are not disputed, and we are reproducing and making our
own the relation of facts contained in the decision appealed from.

The plaintiff, Lingayen Gulf Electric Power Company is a domestic corporation with an
authorized capital stock of P300,000 divided into 3,000 shares with a par value of P100
per share. The defendant, Irineo Baltazar appears to have subscribed for 600 shares on
account of which he had paid upon the organization of the corporation the sum of
P15,000. (See Exhibit A, page 2). After incorporation, the defendant made further
payments on account of his subscription, leaving a balance of P18,500 unpaid for, which
amount, the plaintiff now claims in this action.

On July 23, 1946, a majority of the stockholders of the corporation, among them the
herein defendant, held a meeting and adopted stockholders' resolution No. 17. By said
resolution, it was agreed upon by the stockholders present to call the balance of all
unpaid subscribed capital stock as of July 23, 1946, the first 50 per cent payable within
60 days beginnning August 1, 1946, and the remaining 50 per cent payable within 60
days beginning October 1, 1946. The resolution also provided, that all unpaid
subscription after the due dates of both calls would be subject to 12 per cent interest per
annum. Lastly, the resolution provided, that after the expiration of 60 days' grace which
would be on December 1, 1946, for the first call, and on February 1, 1947, for the second
call, all subscribed stocks remaining unpaid would revert to the corporation. (See Exhibit
F and Exhibit I).
On September 22, 1946, the plaintiff corporation wrote a letter to the defendant
reminding him that the first 50 per cent of his unpaid subscription would be due on
October 1, 1946. The plaintiff requested the defendant to "kindly advise the company
thru the undersigned your decision regarding this matter." (See Exhibit 4). The defendant
answered on September 25, 1946, asking the corporation that he be allowed to pay his
unpaid subscription by February 1, 1947. In his answer, the defendant also agreed that if
he could not pay the balance of his subscription by February 1, 1947, his unpaid
subscription would be reverted to the corporation. (See Exhibit 5).
On December 19, 1947, the defendant wrote another letter to the members of the Board
of Directors of the plaintiff corporation, offering to withdraw completely from the
corporation by selling out to the corporation all his shares of stock in the total amount of
P23,000. (See Exhibit 8). Apparently this offer of the defendant was left unacted upon by
the plaintiff.
On April 17, 1948, the Board of Directors of the plaintiff corporation held a meeting, and
in the course of the said meeting they adopted Resolution No. 17. This resolution in
effect set aside the stockholders resolution approved on June 23, 1946 (Exhibit D), on
the ground that said stockholders' resolution was null and void, and because the plaintiff
corporation was not in a financial position to absorb the unpaid balance of the subscribed
capital stock. At the said meeting the directors also decided to call 50 per cent of the
unpaid subscription within 30 days from April 17, 1948, the call payable within 60 days
from receipt of notice from the Secretary-Treasurer. This resolution also authorized legal
counsel of the company to take all the necessary legal steps for the collection of the
payment of the call. (See Exhibit E-2).
On June 10, 1949, the stockholders of the corporation held another meeting in which the
stockholders were all present, either in person or by proxy. At such meeting, the
stockholders adopted resolution No. 4, whereby it was agreed to revalue the stocks and
assets of the company so as to attract outside investors to put in money for the
rehabilitation of the company. The president was authorized to make all arrangement for
such appraisal and the Secretary to call a meeting upon completion of the reassessment.
(See Exhibit 2).
It was admitted by the defendant that he received notice from the Secretary-Treasurer of
the company, demanding payment of the unpaid balance of his subscription. It was
agreed by the parties that the call of the Board of Directors was not published in a
newspaper of general circulation as required by section 40 of the Corporation Law.
On September 28, 1949, the legal counsel of the plaintiff corporation wrote a letter to the
defendant, demanding the payment of the unpaid balance of his subscription amounting
to P18,500. Copy of this letter was sent by registered mail to the defendant on
September 29,1 949. (See Exhibit G). The defendant ignored the said demand. Hence
this action.
The defendant, in his answer, disclaims liability tot he plaintiff corporation on the
following grounds:
1. That the plaintiffs' action is premature because there was no valid call; and
2. That granting that there was a valid call, he was released from the obligation of the
balance of his subscription by stockholders' resolution No. 17 and No. 4.
By way of counterclaim, the defendant also claims from the plaintiff a reasonable
compensation at the rate of P700 per month as president of the company, for the period
from March 1, 1946 to December 31, 1948.
In the light of the foregoing undisputed facts, the only questions are as follows:
1. Was the call Exhibit E-2 valid?
2. Was the defendant released from the obligation of the unpaid balance of his
subscription by virtue of stockholders' resolution Nos. 17 and 4?
3. Is the defendant entitled to compensation as president of the plaintiff corporation?
In an exhaustive and well prepared decision, Judge M. Mejia of the lower court found
that the call for payment embodied in resolution No. 17 of July 23, 1946 was null and
void for lack of publication; consequently, he dismissed the complaint as premature. He
further held said resolution null and void in so far as it tried to relieve the defend- ant
from liability on his unpaid subscription, on the ground that the resolution was not
approved by all the stockholders of the corporation. He also dismissed the defendant's
counterclaim for compensation as president of the corporation.
Inasmuch as in the two appeals, the assignment of errors are related to each other, and
because they refer to the same case, we propose to determine both appeals in one
single decision.
We agree with the lower court that the law requires that notice of any call for the payment
of unpaid subscription should be made not only personally but also by publication. This is
clear from the provisions of section 40 of the Corporation Law, Act No. 1459, as
amended, which reads as follows:
SEC. 40. Notice of call for unpaid subscriptions must be either personally served upon
each stockholder or deposited in the post office, postage prepaid, addressed to him at
his place of residence, if known, and if not known, addressed to the place where the
principal office of the corporation is situated. The notice must also be published once a
week for four successive weeks in some newspaper of general circulation devoted to the
publication of general news published at the place where the principal office of the
corporation is established or located, and posted in some prominent place at the works
of the corporation if any such there be. If there be no newspaper published at the place
where the principal office of the corporation is established or located, then such notice
may be published in any newspaper of general news in the Philippines.
It will be noted that section 40 is mandatory as regards publication, using the word
"must". As correctly stated by the trial court, the reason for the mandatory provision is not
only to assure notice to all subscribers, but also to assure equality and uniformity in the
assessment on stockholders. (14 C.J. 639).
This rule finds support in authorities on corporation law, such as, Thompson on
Corporations, Vol. 5, 3rd edition, pages 588-590, from which we make the following
quotation:
SEC. 3744. Provisions requiring notice of calls. — The governing statute, charter or by-
laws usually require that notice of calls be given the subscriber or stockholder. If any
particular notice or demand is required by either of these, or by the contract of
subscription, then such notice or demand must be given, and must be alleged and
proved in order to maintain an action for the call.
xxx xxx xxx
SEC. 3745. Notice. — Compliance with requirements-From what has preceded it is clear
that where any particular form or kind of notice is required, such form or kind must be
given-the requirement must be complied with. Thus, where the charter expressly
required notice to be given in certain newspapers for a certain number of days, the
corporation must show compliance with the conditions before recovery on the call. An
action is ordinarily made effective by notice thereof to the subscribers, in accordance
with the by-laws or general regulations of the corporation in that regard. So, where there
are statutory or other regulations as to the form and sufficiency of the notice, these must
be followed. Thus, where such a notice was required to be signed by the directors, a
notice with the names of the directors signed by a clerk, was held insufficient. These
cases and others proceed on the theory that where the manner of giving notice is
prescribed by law every condition precedent must be strictly and literally complied with.
(Thompson on Corporations, Vol. 5, 3rd ed.)
This view is shared by Justice Fisher. In his book "The Philippine Law on Stock
Corporations" he says: "Not only must personal notice be given in one of these manners,
but the notice must also be published once a week, for four consecutive weeks, in some
newspaper." (p. 110.).
We find the citation of authorities made by the plaintiff and appellant inapplicable. In the
case of Velasco vs. Poizat (37 Phil. 805), the corporation involved was insolvent, in
which case all unpaid stock subscriptions become payable on demand and are
immediately recoverable in an action instituted by the assignee. Said the court in that
case:
. . . . it is now quite well settled that when the corporation becomes insolvent, with
proceedings instituted by creditors to wind up and distribute its assets, no call or
assessment is necessary before the institution of suits to collect unpaid balance on
subscription.
But when the corporation is a solvent concern, the rule is:
It is again insisted that plaintiffs cannot recover because the suit was not proceeded by a
call or assessment against the defendant as a subscriber, and that until this is done no
right of action accrues. In a suit by a solvent going corporation to collect a subscription,
and in certain suits provided by statute this would be true;. . . . . (Id.)
Going to the claim of defendant and appellant that Resolution No. 17 of 1946 released
him from the obligation to pay for his unpaid subscription, the authorities are generally
agreed that in order to effect the release, there must be unanimous consent of the
stockholders of the corporation. We quote some authorities:
Subject to certain exceptions, considered in subdivision (3) of this section, the general
rule is that a valid and binding subscription for stock of a corporation cannot be cancelled
so as to release the subscriber from liability thereon without the consent of all the
stockholders or subscribers. Furthermore, a subscription cannot be cancelled by the
company, even under a secret or collateral agreement for cancellation made with the
subscriber at the time of the subscription, as against persons who subsequently
subscribed or purchased without notice of such agreement. (18 C.J.S. 874).
(3) Exceptions.
In particular circumstances, as where it is given pursuant to a bona fide compromise, or
to set off a debt due from the corporation, a release, supported by consideration, will be
effectual as against dissenting stockholders and subsequent and existing creditors. A
release which might originally have been held invalid may be sustained after a
considerable lapse of time. (18 C.J.S. 874).
In the present case, the release claimed by defendant and appellant does not fall under
the exception above referred to, because it was not given pursuant to a bona
fide compromise, or to set off a debt due from the corporation, and there was no
consideration for it.
Another authority:
SEC. 850. Unanimous consent of stockholders necessary to release subscriber. — It
may be asserted as the first rule under this proposition that, after a valid subscription to
the capital stock of a corporation has been made and accepted, there can be no
cancellation or release from the obligation without the consent of the corporation and all
the stockholders; . . . . (2 Thompson on Corporation, p. 186).
He states the reason for the rule as follows:
SEC. 855. Right to withdraw as against subscribers. — A contract of subscription is, at
least in the sense which creates as estoppel, a contract among the several subscribers.
For this reason no one of the subscribers can withdraw from the contract without the
consent of all the others, and thereby diminish, without the universal consent, the
common fund in which all have acquired an interest. . . . (2 Thompson on Corporations,
p. 194.).
As already found by the trial court, the release attempted in Resolution No. 17 of 1946
was not valid for lack of a unanimous vote. If found that at least seven stockholders were
absent from the meeting when said resolution was approved.
Defendant and appellant, however, contends that after dismissing the complaint for being
premature, there was no necessity or reason for the trial court to go further and say that
defendant was not validly released from the payment for his unpaid subscription. It must
be borne in mind, however, that this was one of the principal issues involved in the case
and the trial court was called upon to pass upon it, because unless so passed upon and
deter- mined, it might decisively affect the case on appeal. Supposing that on appeal the
appellate court decides that the call was valid, then it would be important to know
whether or not in spite of the validity of the call, defendant was nevertheless not liable
because he had been validly released by a resolution of the corporation. If that question
was not decided by the trial court, and naturally was not touched upon in the appeal,
then the appellate court would have no occasion to pass upon it, and it might be
necessary to bring another action to determine the point, which means multiplicity of
suits. Moreover, the authority given to the courts to render judgments for declaratory
relief in order to determine the rights or duties of parties over a certain transaction or
under a certain written instrument, or to remove the uncertainty or controversy over the
same (Rule 66 of the Rules of Court), justified the trial court in passing upon this
question of release.
As regards the compensation of President claimed by defendant and appellant, it is clear
that he is not entitled to the same. The by-laws of the company are silent as to the salary
of the President. And, while resolutions of the incorporators and stockholders (Exhibits
G-1 and I-1) provide salaries for the general manager, secretary-treasurer and other
employees, there was no provision for the salary of the President. On the other hand,
other resolutions (Exhibits H-1 and J-3) provide for per diems to be paid to the President
and the directors of each meeting attended, P10 for the President and P8 for each
director, which were later increased to P25 and P15, respectively. This leads to the
conclusions that the President and the board of directors were expected to serve without
salary, and that the per diems paid to them were sufficient compensation for their
services. Furthermore, for defendant's several years of service as President and up to
the filing of the action against him, he never filed a claim for salary. He thought of
claiming it only when this suit was brought against him.
In conclusion we hold that under the Corporation Law, notice of call for payment for
unpaid subscribed stock must be published, except when the corporation is insolvent, in
which case, payment is immediately demandable. We also rule that release from such
payment must be made by all the stockholders.
In view of the foregoing and finding no reversible error in the decision appealed, the
same is hereby affirmed.
No pronouncement as to costs.
G.R. No. L-68097 January 16, 1986
EDWARD A. KELLER & CO., LTD., petitioner-appellant,
vs.
COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE CASTRO,
JOHNNY DE LA FUENTE, SERGIO C. ORDOÑEZ, TRINIDAD C. ORDOÑEZ, MAGNO
C. ORDOÑEZ, ADORACION C. ORDOÑEZ, TOMAS C. LORENZO, JR., LUIZ M.
AGUILA-ADAO, MOISES P. ADAO, ASUNCION MANAHAN and INTERMEDIATE
APPELLATE COURT, respondents-appellees.
AQUINO, C.J.:
This case is about the liability of a marketing distributor under its sales agreements with
the owner of the products. The petitioner presented its evidence before Judges Castro
Bartolome and Benipayo. Respondents presented their evidence before Judge Tamayo
who decided the case.
A review of the record shows that Judge Tamayo acted under a misapprehension of
facts and his findings are contradicted by the evidence. The Appellate Court adopted the
findings of Judge Tamayo. This is a case where this Court is not bound by the factual
findings of the Appellate Court. (See Director of Lands vs. Zartiga, L-46068-69,
September 30, 1982, 117 SCRA 346, 355).
Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc. as exclusive
distributor of its household products, Brite and Nuvan in Panay and Negros, as shown in
the sales agreement dated March 14, 1970 (32-33 RA). Under that agreement Keller
sold on credit its products to COB Group Marketing.
As security for COB Group Marketing's credit purchases up to the amount of P35,000,
one Asuncion Manahan mortgaged her land to Keller. Manahan assumed solidarily with
COB Group Marketing the faithful performance of all the terms and conditions of the
sales agreement (Exh. D).
In July, 1970 the parties executed a second sales agreement whereby COB Group
Marketing's territory was extended to Northern and Southern Luzon. As security for the
credit purchases up to P25,000 of COB Group Marketing for that area, Tomas C.
Lorenzo, Jr. and his father Tomas, Sr. (now deceased) executed a mortgage on their
land in Nueva Ecija. Like Manahan, the Lorenzos were solidarily liable with COB Group
Marketing for its obligations under the sales agreement (Exh. E).
The credit purchases of COB Group Marketing, which started on October 15, 1969,
limited up to January 22, 1971. On May 8, the board of directors of COB Group
Marketing were apprised by Jose E. Bax the firm's president and general manager, that
the firm owed Keller about P179,000. Bax was authorized to negotiate with Keller for the
settlement of his firm's liability (Exh. 1, minutes of the meeting).
On the same day, May 8, Bax and R. Oefeli of Keller signed the conditions for the
settlement of COB Group Marketing's liability, Exhibit J, reproduced as follows:
This formalizes our conditions for the settlement of C.O.B.'s account with Edward Keller
Ltd.
1. Increase of mortgaged collaterals to the full market value (estimated by Edak at
P90,000.00).
2. Turn-over of receivables (estimated outstandings P70,000.00 to P80,000.00).
3. Turn-over of 4 (four) trucks for outright sale to Edak, to be credited against C.0.B.'s
account.
4. Remaining 8 (eight) trucks to be assigned to Edak, C.O.B will continue operation with
these 8 trucks. They win be returned to COB after settlement of full account.
5. C.O.B has to put up securities totalling P200,000.00. P100,000.00 has to be liquidated
within one year. The remaining P100,000.00 has to be settled within the second year.
6. Edak wig agree to allow C.O.B. to buy goods to the value of the difference between
P200,000.00 and their outstandings, provided C.O.B. is in a position to put up securities
amounting to P200,000.00.
Discussion held on May 8, 1971.
Twelve days later, or on May 20, COB Group Marketing, through Bax executed two
second chattel mortgages over its 12 trucks (already mortgaged to Northern Motors, Inc.)
as security for its obligation to Keller amounting to P179,185.16 as of April 30, 1971
(Exh. PP and QQ). However, the second mortgages did not become effective because
the first mortgagee, Northern Motors, did not give its consent. But the second mortgages
served the purpose of being admissions of the liability COB Group Marketing to Keller.
The stockholders of COB Group Marketing, Moises P. Adao and Tomas C. Lorenzo, Jr.,
in a letter dated July 24, 1971 to Keller's counsel, proposed to pay Keller P5,000 on
November 30, 1971 and thereafter every thirtieth day of the month for three years until
COB Group Marketing's mortgage obligation had been fully satisfied. They also proposed
to substitute the Manahan mortgage with a mortgage on Adao's lot at 72 7th Avenue,
Cubao, Quezon City (Exh. L).
These pieces of documentary evidence are sufficient to prove the liability of COB Group
Marketing and to justify the foreclosure of the two mortgages executed by Manahan and
Lorenzo (Exh. D and E).
Section 22, Rule 130 of the Rules of Court provides that the act, declaration or omission
of a party as to a relevant fact may be given in evidence against him "as admissions of a
party".
The admissions of Bax are supported by the documentary evidence. It is noteworthy
that all the invoices, with delivery receipts, were presented in evidence by Keller, Exhibits
KK-1 to KK-277-a and N to N-149-a, together with a tabulation thereof, Exhibit KK,
covering the period from October 15, 1969 to January 22, 1971. Victor A. Mayo, Keller's
finance manager, submitted a statement of account showing that COB Group Marketing
owed Keller P184,509.60 as of July 31, 1971 (Exh. JJ). That amount is reflected in the
customer's ledger, Exhibit M.
On the other hand, Bax although not an accountant, presented his own reconciliation
statements wherein he showed that COB Group Marketing overpaid Keller P100,596.72
(Exh. 7 and 8). He claimed overpayment although in his answer he did not allege at all
that there was an overpayment to Keller.
The statement of the Appellate Court that COB Group Marketing alleged in its answer
that it overpaid Keller P100,596.72 is manifestly erroneous first, because COB Group
Marketing did not file any answer, having been declared in default, and second, because
Bax and the other stockholders, who filed an answer, did not allege any overpayment. As
already stated, even before they filed their answer, Bax admitted that COB Group
Marketing owed Keller around P179,000 (Exh. 1).
Keller sued on September 16, 1971 COB Group Marketing, its stockholders and the
mortgagors, Manahan and Lorenzo.
COB Group Marketing, Trinidad C. Ordonez and Johnny de la Fuente were declared in
default (290 Record on Appeal).
After trial, the lower court (1) dismissed the complaint; (2) ordered Keller to pay COB
Group Marketing the sum of P100,596.72 with 6% interest a year from August 1, 1971
until the amount is fully paid: (3) ordered Keller to pay P100,000 as moral damages to be
allocated among the stockholders of COB Group Marketing in proportion to their unpaid
capital subscriptions; (4) ordered the petitioner to pay Manahan P20,000 as moral
damages; (5) ordered the petitioner to pay P20,000 as attomey's fees to be divided
among the lawyers of all the answering defendants and to pay the costs of the suit; (6)
declared void the mortgages executed by Manahan and Lorenzo and the cancellation of
the annotation of said mortgages on the Torrens titles thereof, and (7) dismissed
Manahan's cross-claim for lack of merit.
The petitioner appealed. The Appellate Court affirmed said judgment except the award of
P20,000 as moral damages which it eliminated. The petitioner appealed to this Court.
Bax and the other respondents quoted the six assignments of error made by the
petitioner in the Appellate Court, not the four assignments of error in its brief herein.
Manahan did not file any appellee's brief.
We find that the lower courts erred in nullifying the admissions of liability made in 1971
by Bax as president and general manager of COB Group Marketing and in giving
credence to the alleged overpayment computed by Bax .
The lower courts not only allowed Bax to nullify his admissions as to the liability of COB
Group Marketing but they also erroneously rendered judgment in its favor in the amount
of its supposed overpayment in the sum of P100,596.72 (Exh. 8-A), in spite of the fact
that COB Group Marketing was declared in default and did not file any counterclaim for
the supposed overpayment.
The lower courts harped on Keller's alleged failure to thresh out with representatives of
COB Group Marketing their "diverse statements of credits and payments". This
contention has no factual basis. In Exhibit J, quoted above, it is stated by Bax and
Keller's Oefeli that "discussion (was) held on May 8, 1971."
That means that there was a conference on the COB Group Marketing's liability. Bax in
that discussion did not present his reconciliation statements to show overpayment. His
Exhibits 7 and 8 were an afterthought. He presented them long after the case was filed.
The petitioner regards them as "fabricated" (p. 28, Appellant's Brief).
Bax admitted that Keller sent his company monthly statements of accounts (20-21 tsn,
September 2, 1976) but he could not produce any formal protest against the supposed
inaccuracy of the said statements (22). He lamely explained that he would have to dig up
his company's records for the formal protest (23-24). He did not make any written
demand for reconciliation of accounts (27-28).
As to the liability of the stockholders, it is settled that a stockholder is personally liable for
the financial obligations of a corporation to the extent of his unpaid subscription (Vda. de
Salvatierra vs. Garlitos 103 Phil. 757, 763; 18 CJs 1311-2).
While the evidence shows that the amount due from COB Group Marketing is
P184,509.60 as of July 31, 1971 or P186,354.70 as of August 31, 1971 (Exh. JJ), the
amount prayed for in Keller's complaint is P182,994.60 as of July 31, 1971 (18-19
Record on Appeal). This latter amount should be the one awarded to Keller because a
judgment entered against a party in default cannot exceed the amount prayed for (Sec.
5, Rule 18, Rules of Court).
WHEREFORE, the decisions of the trial court and the Appellate Court are reversed and
set aside.
COB Group marketing, Inc. is ordered to pay Edward A. Keller & Co., Ltd. the sum of
P182,994.60 with 12% interest per annum from August 1, 1971 up to the date of
payment plus P20,000 as attorney's fees.
Asuncion Manahan and Tomas C. Lorenzo, Jr. are ordered to pay solidarity with COB
Group Marketing the sums of P35,000 and P25,000, respectively.
The following respondents are solidarity liable with COB Group Marketing up to the
amounts of their unpaid subscription to be applied to the company's liability herein: Jose
E. Bax P36,000; Francisco C. de Castro, P36,000; Johnny de la Fuente, P12,000; Sergio
C. Ordonez, P12,000; Trinidad C. Ordonez, P3,000; Magno C. Ordonez, P3,000;
Adoracion C. Ordonez P3,000; Tomas C. Lorenzo, Jr., P3,000 and Luz M. Aguilar-Adao,
P6,000.
If after ninety (90) days from notice of the finality of the judgment in this case the
judgment against COB Group Marketing has not been satisfied fully, then the mortgages
executed by Manahan and Lorenzo should be foreclosed and the proceeds of the sales
applied to the obligation of COB Group Marketing. Said mortgage obligations should
bear six percent legal interest per annum after the expiration of the said 90-day period.
Costs against the private respondents.
SO ORDERED.
G.R. No. L-19761 January 29, 1923
PHILIPPINE TRUST COMPANY, as assignee in insolvency of "La Cooperativa
Naval Filipina," plaintiff-appellee,
vs.
MARCIANO RIVERA, defendant-appellant.
STREET, J.:
This action was instituted on November 21, 1921, in the Court of First Instance of Manila,
by the Philippine Trust Company, as assignee in insolvency of La Cooperativa Naval
Filipina, against Marciano Rivera, for the purpose of recovering a balance of P22,500,
alleged to be due upon defendant's subscription to the capital stock of said insolvent
corporation. The trial judge having given judgment in favor of the plaintiff for the amount
sued for, the defendant appealed.
It appears in evidence that in 1918 the Cooperativa Naval Filipina was duly incorporated
under the laws of the Philippine Islands, with a capital of P100,000, divided into one
thousand shares of a par value of P100 each. Among the incorporators of this company
was numbered the defendant Mariano Rivera, who subscribed for 450 shares
representing a value of P45,000, the remainder of the stock being taken by other
persons. The articles of incorporation were duly registered in the Bureau of Commerce
and Industry on October 30 of the same year.
In the course of time the company became insolvent and went into the hands of the
Philippine Trust Company, as assignee in bankruptcy; and by it this action was instituted
to recover one-half of the stock subscription of the defendant, which admittedly has
never been paid.
The reason given for the failure of the defendant to pay the entire subscription is, that not
long after the Cooperativa Naval Filipina had been incorporated, a meeting of its
stockholders occurred, at which a resolution was adopted to the effect that the capital
should be reduced by 50 per centum and the subscribers released from the obligation to
pay any unpaid balance of their subscription in excess of 50 per centum of the same. As
a result of this resolution it seems to have been supposed that the subscription of the
various shareholders had been cancelled to the extent stated; and fully paid certificate
were issued to each shareholders for one-half of his subscription. It does not appear that
the formalities prescribed in section 17 of the Corporation Law (Act No. 1459), as
amended, relative to the reduction of capital stock in corporations were observed, and in
particular it does not appear that any certificate was at any time filed in the Bureau of
Commerce and Industry, showing such reduction.
His Honor, the trial judge, therefore held that the resolution relied upon the defendant
was without effect and that the defendant was still liable for the unpaid balance of his
subscription. In this we think his Honor was clearly right.
It is established doctrine that subscription to the capital of a corporation constitute a find
to which creditors have a right to look for satisfaction of their claims and that the
assignee in insolvency can maintain an action upon any unpaid stock subscription in
order to realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A
corporation has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such release; and
as against creditors a reduction of the capital stock can take place only in the manner an
under the conditions prescribed by the statute or the charter or the articles of
incorporation. Moreover, strict compliance with the statutory regulations is necessary (14
C. J., 498, 620).
In the case before us the resolution releasing the shareholders from their obligation to
pay 50 per centum of their respective subscriptions was an attempted withdrawal of so
much capital from the fund upon which the company's creditors were entitled ultimately
to rely and, having been effected without compliance with the statutory requirements,
was wholly ineffectual.
The judgment will be affirmed with cost, and it is so ordered.
[G.R. No. 35961. December 2, 1932.]
ROMANA MIRANDA, in her capacity as judicial administratrix of the intestate
estate of her deceased father, Alberto Miranda, Plaintiff-Appellant, v. THE
TARLAC RICE MILL CO., INC., Defendant-Appellee.
Fausto & Ramos for Appellant.
Enrique Maglanoc for Appellee.
DECISION
VICKERS, J.:
This is an appeal by the plaintiff from a decision of Judge A.M. Recto of the Court of
First Instance of Tarlac, dismissing the case without a special finding as to costs.
The case was tried on the following agreed statement of facts:
jgc:chanrobles.com.ph
"Comparecen las partes — la demandante, asistida de su infrascrito abogado, y la
demandada, por medio de su presidente y abogado que subscriben — y para
abreviar la vista de esta causa y sin perjuicio de practicarse pruebas adicionales
sobre hechos en los que las partes no estan de acuerdo, respetuosamente someten,
para la decision de esta causa, las siguientes estipulaciones:
jgc:chanrobles.com.ph
"1. Que la demandante Romana Miranda es la administradora judicial, debidamente
nombrada, del Intestado del finado Don Alberto Miranda, Civil No. 3090, de este
mismo Juzgado; y la entidad demandada es una corporacion debidamente
organizada de acuerdo con las leyes en vigor en estas Islas, teniendo su domicilio
legal, lo mismo que la demandante, en esta cabecera de Tarlac, Provincia de Tarlac;
"2. Que, con fecha 8 de junio de 1926, el hoy difunto Don Alberto Miranda — de
cuyo intestado es administradora judicial la aqui damandante — subscribio acciones
de la corporacion, demandada, otorgando al efecto un contrato de subscripcion,
copia autentica del cual se une al presente y se hace parte integrante del mismo,
como Exhibit A;
"3. Que, en relacion con el contrato de subscripcion Exhibit A, a que se contrae el
parrafo que precede, Don Alberto Miranda otorgo luego una escritura de poder a
favor de la demandada, cuyo original se une asimismo al presente, haciendose parte
integrante del mismo, como Exhibit B;
"4. Que, por virtud de los documentos a que se contraen los dos parrafos
inmediatamente anteriores la corporacion demandada contrajo una deuda de
P10,000 a los Sres. Mariano Tablante y Carmen Gueco, de Angeles, Pampanga,
como se acredita por la escritura de prestamo hipotecario otorgada al efecto, que
tambien se adjunta a la presente, como Exhibits C y C-1;
"5. Que la demandada no ha pagado en ningun tiempo ni el capital, ni los intereses,
de prestamo arriba mencionado, motivo por el cual el referido Don Alberto Miranda
hubo de entrar en arreglo amistoso con los acreedores, al expirar el plazo convenido
para el pago, satisfaciendo dicho prestamo y sus intereses devengados, segun
consta en la carta de pago extendida al efecto, que se hace parte integrante del
presente convenio como Anexo o Exhibit D;
"6. Que, a partir desde el año 1928 hasta esta fecha, la demandada ha dejado de
hacer negocios y operaciones de ninguna clase;
"7. Que, con excepcion del citado Don Alberto Miranda, ninguno de las otras
accionistas y directores de la corporacion demandada ha pagado o se la ha hecho
pagar, conforme los terminos de los contratos de subscripcion otorgados al efecto, el
importe de sus respectivas acciones, y a pesar de esta morosidad de los referidos
accionistas y directores, la corporacion demandada no ha dado, hasta la fecha,
ningun paso tendente a compeler la efectividad de las referidas acciones morosas."
virtua1aw library
cralaw
The only additional evidence presented was the testimony of Marciano David, which
is of no consequence in our view of the case.
The appellant makes the following assignment of errors: jgc:chanrobles.com.ph
"The trial court erred: jgc:chanrobles.com.ph
"1. In declaring that the defendant corporation did not violate the terms of the power
of attorney Exhibit B, for the plaintiff, when she obtained the loan Exhibit C;
"2. In declaring that ’all responsibility originating in the execution by the officers of the
defendant corporation of the mortgage contract Exhibit C has already ceased’;
"3. In pretending to base the decision in this case upon theories neither presented by
the pleadings of the parties nor deduced from the evidence produced by the parties’
"4. In denying the motion for new trial of the plaintiff-appellant; and
"5. In not sentencing the defendant to pay the plaintiff the sum of P10,000, with
interest thereon at P1,200 a year, from the year 1927 until paid, plus the sum of
P1,500, which the principal had to pay in the form of a penal clause for the violation
of the terms of the mortgage contract Exhibit C, aside from the legal interests of all
these amounts from the presentation of the present complaint, and the costs of the
suit."
cralaw virtua1aw library
It appears from the evidence that on June 8, 1926 Alberto Miranda executed a
written contract whereby he subscribed for 100 shares of the capital stock of a
corporation to be organized under the laws of the Philippine Islands for the purpose
of operating a rice mill in Tarlac, said corporation to be known as Tarlac Rice Mill
Company, Inc.; that the par value of each share was P100; and that Alberto Miranda
obligated himself to pay to the treasurer of the corporation or its assign the sum of
P10,000 as follows: chanrob1es virtual 1aw library
On or before September 21, 1926 P1,000.00
On or before January 21, 1927 2,000.00
On or before January 21, 1928 2,000.00
On or before January 21, 1929 2,500.00
On or before January 21, 1930 2,500.00
On July 10, 1926 Alberto Miranda by means of a public document "assigned,
mortgaged, or transferred in lieu of cash for the benefit and to the credit of the Tarlac
Rice Mill Company, Inc., a corporation to be organized and to exist under and by
virtue of the laws of the Philippine Islands", the parcel of land described in certificate
No. 751 in the land records of the Province of Tarlac; and "to carry out the true intent,
meaning, and purposes thereof I have hereby further voluntarily made, constituted,
and appointed and by these presents do make, constitute and appoint, either jointly,
Evaristo Magbag, duly elected President and Treasurer of said Company, Eusebio
R. Cabrera and Marcos P. Puno, duly elected Vice-Presidents of the same company,
or anyone of the three named elected officers of the Tarlac Rice Mill Company, Inc.,
jointly with C. M. Dizon to be my true and lawful attorneys-in-fact, for me and in my
name, and in my behalf to transfer, mortgage, convey or confirm or in any way
convenient to them to any local or foreign bank, firm or individual in order to obtain,
secure or solicit credit against my above described property in an amount not to
exceed ten thousand pesos (P10,000), Philippine currency, in accordance with the
subscription contract voluntary executed by me, for or to increase the capital of the
said Tarlac Rice Mill Company, Inc., in order to carry out the purposes for which such
firm is to be organized.
"That for the foregoing purposes, I hereby transfer my right and interest in the said
described properties, and by these presents do hereby give and grant unto my said
attorneys-in-fact full power and authority to do and perform all and every act and
thing whatsoever requisite and necessary to be done in all about the premises as
fully to all intents and purposes as I might or could do if personally present with full
power of substitution or revocation, hereby ratify and confirm all that my said
attorneys-in-fact, anyone or all of the three, Evaristo Magbag, Eusebio R. Cabrera,
and Marcos P. Puno, jointly with C.M. Dizon or their substitutes shall lawfully do or
cause to be done by virtue of these presents." cralaw virtua1aw library
On February 19, 1927 the president and vice-president of the Tarlac Rice Mill
Company, Inc., and C.M. Dizon, acting on behalf of said corporation and Alberto
Miranda, borrowed P10,000 from Mariano Tablante, and agreed to repay said sum
on or before February 19, 1928, with interest at 12 per cent per annum, and to pay a
further sum of 25 per cent of the principal for attorney’s fees and expenses of
collection in case the promissory note should not be paid at maturity. Marcos Puno,
Evaristo Magbag, and Dizon & Co., Inc., jointly and severally guaranteed the
payment of this sum; and the president and vice-president of the Tarlac Rice Mill
Company, Inc., and C.M. Dizon as attorneys-in-fact of Alberto Miranda mortgaged to
Mariano Tablante the aforementioned parcel of land to secure the payment of said
promissory note.
The sum of P10,000 obtained from Mariano Tablante was retained by the
corporation. When the promissory note became due, Alberto Miranda arranged for
an extension of time in which to pay it, and on July 19, 1929 he sold the
aforementioned parcel of land under pacto de retro to Vicente Panlilio for P10,000,
and paid Mariano Tablante.
According to an allegation in the complaint, Alberto Miranda died on May 24, 1930.
It is agreed that the defendant corporation ceased to do business from the year
1928, and that the other stockholders have not paid for their shares in accordance
with their subscription agreement, and that no action has been taken by the
corporation to require them to do so.
The principal contention of the appellant is that the officers of the corporation violated
the terms of the power of attorney in mortgaging the land on February 19, 1927 for
P10,000, because the only sum then due and payable by Alberto Miranda to the
corporation was P3,000, and that when the remaining installments of the stock
subscription became due, Alberto Miranda was under no obligation to pay them,
because the corporation had already ceased to do business, and it had taken no
steps to compel the other stockholders to pay for the shares for which they had
subscribed.
No question as to the validity of subscription agreement is raised, and no fraud on
the part of the officers of the corporation is alleged or proved. We shall therefore
confine ourselves to the issues raised by the pleading.
It is true that when the property was mortgaged on February 19, 1927 the amount
due from Alberto Miranda in accordance with the subscription agreement was only
P3,000, and it is likewise true that it does not appear from the evidence that any call
was issued by the directors for the payment of any subscriptions.
The fact that Alberto Miranda agreed on June 8, 1926 to pay the amount of his
subscription in installments on certain fixed dates did not, of course, prevent him
from authorizing the officers of the corporation as his attorneys-in-fact to pay his
subscription prior to the dates fixed in the subscription agreement. Great stress is
laid by the appellant upon the fact that in one paragraph of the power of attorney it is
stated that the attorneys-in-fact of Alberto Miranda are authorized to mortgage or
convey the property in any way convenient to them in the amount not to exceed
P10,000 in accordance with the subscription contract, but the phrase "in accordance
with the subscription contract" is followed by the following words "for or to increase
the capital of the said Tarlac Rice Mill Company, Inc., in order to carry out the
purposes for which said firm is to be organized." Under the circumstances, it seems
to us that it would be a strained construction of the power of attorney, taking into
consideration the whole document, to hold that the officers of the corporation acting
as attorneys-in-fact of Alberto Miranda were authorized to mortgage or convey the
land for only the amount then due from Alberto Miranda in accordance with the
subscription agreement. It can hardly be contended that the power of attorney
contemplated that the property should be mortgaged three times, that is, each time
that an installment became due. We are inclined to the view that it was the intention
of the parties that the property should be mortgaged immediately for a sum not to
exceed P10,000, not only for the purpose of paying the subscription agreement of
Alberto Miranda, but also for the purpose, as stated in the power of attorney, of
increasing the capital of the corporation, not the capital stock, in order to carry out
the purposes for which it was to be organized. This view of the matter is confirmed
by the subsequent conduct of the parties. Although the corporation retained the full
amount of the loan obtained from Mariano Tablante, and Alberto Miranda had to pay
that obligation, he never sought, so far as the record shows, to recover from the
corporation any part of the sum of P10,000. As we have already stated, the
mortgage was executed on February 19, 1927; it was satisfied by Alberto Miranda on
July 19, 1929, and he lived until May 24, 1930. It does not appear that he ever
sought to evade the satisfaction of the mortgage by alleging that his attorneys-in-fact
exceeded their authority in mortgaging the property on February 19, 1927 for
P10,000. On the contrary he repaid to Mariano Tablante the amount which the
officers of the corporation had borrowed. The fact that he at no time sought to
recover from the corporation any part of the sum borrowed by the officers of the
corporation in his name certainly tends to show that he acquiesced in the action
taken by them. The phrase "in accordance with the subscription contract" found in
the power of attorney probably was intended to mean "in pursuance of the
subscription agreement", that is, it referred to the obligation, and had no particular
reference to the dates when the different installments were to be paid.
Section 38 of the Corporation Law provides that the board of directors of every
corporation may at any time declared due and payable to the corporation unpaid
subscriptions to the capital stock and may collect the same with interest accrued
thereon or such percentage of said unpaid subscriptions as it may deem necessary.
In his work, "The Philippine Law of Stock Corporations", page 97, Justice Fisher
expressed the opinion that this power of the directors is absolute and cannot be
limited by the subscription contract, but this does not mean that the directors may not
rely on the subscription contract it they see fit to do so.
"No call is necessary when a subscription is payable, not upon call or demand by the
directors or stockholders, but immediately, or on a specified day, or on or before a
specified day, or when it is payable in installments at specified times. In such cases it
is the duty of the subscriber to pay the subscription or installment thereof as soon as
it is due, without any call or demand, and , if fails to do so, an action may be brought
at any time." (Flecther: Cyclopedia of the Law of Private Corporations, vol. 2, page
1509.)
When this action was filed on September 2, 1930, the last of the installments had
already become payable in accordance with the subscription agreement. It must be
borne in mind that this is not an action by the corporation to recover on a
subscription agreement, but an action by the administratrix of a stockholder to
recover what was paid in to the corporation by the stockholder. It does not appear
from the evidence whether or not the corporation has any debts. Neither the fact that
the corporation has ceased to do business nor the fact that the other stockholders
have not been required to pay for their shares in accordance with their subscription
agreement justifies us in ordering the corporation to return to the plaintiff the amount
paid in by Alberto Miranda. If the directors have failed to perform their duty with
respect to the other stockholders, the law provides a remedy therefor.
In the case of Velasco v. Poizat (37 Phil., 802), this court held that a stock
subscription is a contract between the corporation and the subscriber, and courts will
enforce it for or against either; that a corporation has no legal capacity to release a
subscriber to its capital stock from the obligation to pay for his shares, and that any
agreement to this effect is invalid.

In the case at bar it is not contended that Alberto Miranda cancelled his subscription
agreement, or that the corporation attempted to release him therefrom.
For the foregoing reasons, the decision appealed from is affirmed, with the costs
against the Appellant.
Street, Malcolm, Ostrand and Imperial, JJ., concur.
G.R. No. L-19893 March 31, 1923
ARNALDO F. DE SILVA, plaintiff-appellant,
vs.
ABOITIZ & COMPANY, INC., defendant-appellee.
ARAULLO, C. J.:
The plaintiff subscribed for 650 shares of stock of the defendant corporation of the value
of P500 each, of which he has paid only the total value of 200 shares, there remaining
450 shares unpaid, for which he was indebted to the corporation in the sum of P225,000,
the value thereof. On April 22, 1922, he was notified by the secretary of the corporation
of a resolution adopted by the board of directors of the corporation on the preceding day,
declaring the unpaid subscriptions to the capital stock of the corporation to have become
due and payable on the following May 31st at the office thereof, the payment to be made
to the treasurer, and stating that all such shares as may have not been paid then, with
the accrued interest up to that date, will be declared delinquent, advertised for sale at
public auction, and sold on the following June 16th, for the purpose of paying up the
amount of the subscription and accrued interest, with the expenses of the advertisement
and sale, unless said payment was made before. The proper advertisement having been
published, as announced in the aforesaid notice, the plaintiff filed a complaint in the
Court of First Instance of Cebu on May 5th of the same year against the said corporation,
wherein, after relating the above-mentioned facts, he prayed for a judgment in his favor,
decreeing that, in prescribing another method of paying the subscription to the capital
stock different from that provided in article 46 of its by-laws, in declaring the aforesaid
450 shares delinquent, and in directing the sale thereof, as advertised, the corporation
had exceeded its executive authority, and as a consequence thereof he asked that a writ
of injunction be issued against the said defendant, enjoining it from taking any further
action of whatever nature in connection with the acts complained of and that it pay the
costs of this suit.
The plaintiff alleged as the grounds of his petition: (1) That, according to aforesaid article
46 of the by-law of the corporation, which was inserted in the complaint, all the shares
subscribed to by the incorporation that were not paid for at the time of the incorporation,
shall be paid out of the 70 per cent of the profit obtained, the same to be distributed
among the subscribers, who shall not receive any dividend until said shares were paid in
full; (2) that in declaring the plaintiff's unpaid subscription to the capital stock to have
become due and payable on May 31st, and in publishing the aforesaid notice declaring
his unpaid shares delinquent, the defendant corporation has violated the aforesaid
article, which prescribes an operative method of paying for the shares continuously until
their full amortization, thus violating and disregarding a right of the plaintiff vested under
the said by-laws; (3) that the aforesaid acts of the defendant corporation were in excess
of its powers and executive authority and the plaintiff had no other plain, speedy and
adequate remedy in the ordinary course of law than that prayed for in the said complaint,
to prevent the defendant from taking any further action in connection with the sale and
alienation of the said shares.
A preliminary injunction having been issued against the defendant, as prayed for by the
plaintiff, upon the giving of the proper bond, and the defendant having been summoned,
the latter filed a demurrer to the complaint on the ground that the facts alleged therein did
not constitute a cause of action, and that even supposing the plaintiff to have any lawful
claim against the defendant corporation, the special remedy applied for by the plaintiff
was not the most adequate and speedy.
Hearing having been had the court below by an order dated September 21, 1922,
sustained the aforesaid demurrer on the first ground, giving the plaintiff five days within
which to amend his complaint, but the said period having elapsed without the plaintiff
having amended his complaint, upon motion of the defendant, that court, by an order
dated the 2d of the following month of October, dismissed the complaint and ordered the
dissolution of the preliminary injunction previously issued, with costs, to which orders the
plaintiff excepted, asking at the same time for the annulment thereof and a new hearing,
which motion was denied by the lower court. To that ruling the plaintiff also excepted,
and brought the case to this court by the proper bill of exceptions.
Assuming the truth of the facts alleged in the complaint filed against the herein
defendant, as the filling of a demurrer to a complaint is made on that assumption, the
question to be decided reduces itself to determining whether or not, under the provision
of article 46 of the by-laws of the defendant corporation, the latter may declare the
unpaid shares delinquent, or collect their value by another method different from that
prescribed in the aforecited article.
Said article reads thus:
ART. 46. The net profit resulting from the annual liquidation shall be distributed
as follows: Ten per cent (10%) for the Board of Directors and in the manner
prescribed in article twenty-six (26) of these by-laws; ten per cent (10%) for the
general manager; ten per cent (10%) for the reserve fund, and seventy per cent
(70%) for the shareholders in equal parts; Provided, however, That from this
seventy per cent dividend the Board of Directors may deduct such amount as it
may deem fit for the payment of the unpaid subscription to the capital stock and
not pay any dividend to the holders of the said unpaid shares until they are fully
paid; Provided, further, That when all the shares have been paid in full as
provided in the preceding paragraph, the Board of Directors may also
deduct such amount as it may deem fit for the creation of an emergency special
fund, or extraordinary reserve fund when in its judgment the same may
convenient for the development of the business of the corporation or for meeting
any such contingencies as may arise from its operation, whenever the
distributable dividend is found, after the foregoing deduction, to be not less than
ten per cent (10%) of the paid up capital stock.
No dividend shall be declared or paid, except when there remains a net profit
after the payment of all the expenses incurred, or allowances made, by the
corporation to carry out the operation of its business; so that no such dividend
may be declared as may affect the capital of the corporation.
As will be seen from the context of the said article, its first part specifies the manner in
which the net profit from the annual liquidation should be distributed, fixing a certain per
cent for the board of directors; another for the general manager; another for the reserve
fund, and the remaining 70 per cent to be distributed in equal parts among the
shareholders. But it authorizes or empowers the board of directors to collect the value of
the shares subscribed to and not fully paid by deducting from the 70 per cent,
distributable in equal parts among the shareholders, such amount as may be deemed
convenient, to be applied on the payment of the said shares, and not to pay the
subscriber until the same are fully paid up. In no other way can the words "Provided,
however, that from this seventy per cent dividend the board of directors may deduct such
amount as it may deem fit for the payment, etc." And this is so clear that in that same
article the board of directors is also authorized to create a special emergency fund or
extraordinary reserve fund, when, in its judgment, and in case all the shares subscribed
to have been fully paid, the same is convenient for the development of the business of
the corporation or for meeting any such contingencies as my arise from its operation,
applying said 70 per cent of the profit on the payment of the shares that may have not
been fully paid, provided that the distributable dividend remaining after the deduction to
be made for the creation of the said special emergency fund or extraordinary reserve
fund is not less than 10 per cent of the capital actually paid. So that it is discretionary on
the part of the board of directors to do whatever is provided in the said article relative to
the application of a part of the 70 per cent of the profit distributable in equal parts on the
payment of the shares subscribed to and not fully paid, and to the creation of a special
emergency fund or extraordinary reserve fund; and the fact itself that said special fund
may not be created when the dividend appearing to be distributable, after deducting from
the said 70 per cent the amount to be applied on the payment of the unpaid subscription,
is less than 10 per cent of the capital actually paid, shows that it is the board of directors
and not the delinquent subscriber that may and must judge and decide whether or not
such value must be paid out of a part of the 70 per cent of the profit distributable in equal
parts among the shareholders, as provided in the first part of the said article. It lies
therefore, within the discretion of the board of directors to make use of such authority.
If the board of directors does not wish to make, or does not make, use of said authority it
has two other remedies for accomplishing the same purpose. As was said by this court in
the case of Velasco vs. Poizat (37 Phil., 802):
The first and most special remedy given by the statute consists in permitting the
corporation to put the unpaid stock for sale and dispose of it for the account of
the delinquent subscriber. In this case the provisions of sections 38 to 48,
inclusive, of the Corporation Law are applicable and must be followed. The other
remedy is by action in court concerning which we find in section 49 the following
provision:
"Nothing in this Act prevent the directors from collecting, by action in any court of
proper jurisdiction, the amount due on any unpaid subscription, together with
accrued interest and costs and expenses incurred."
In the instant case the board of directors of the defendant corporation elected to avail
itself of the first of said two remedies, and, complying strictly with the provisions of
sections 37 to 49, inclusive, of the aforesaid Corporation Law, which is binding upon it
and its stockholders. it being an artificial entity created by virtue of that same law (sec.
2), the board of directors made use of the discretionary power granted to it by that law
and declared that payment of plaintiff's subscription to 450 shares which had not been
paid by him was due, and that said shares were delinquent, and performed all the other
acts subsequent to said declaration that are mentioned in the complaint, as it did not
deem it advantageous to the corporation to apply on the payment of said shares, as was
authorized by the by-law, a part of the profit that was, or might have been realized, and
was distributable among the stockholders in equal parts, as to the existence of which
profit no allegation is made in the complaint, or to enforce payment of such shares by
bringing in court the proper action against the debtor or delinquent stockholders. It is,
however, alleged by the appellant that the by-law of the corporation being of the nature
of a contract between it and its stockholders or members, and article 46 of the by-laws of
the said corporation providing an operative method for the payment of stock
subscriptions continuously until the full amortization thereof, application cannot be made
in the present case of the provisions above cited of the Corporation Law for the purpose
contemplated by the defendant, as the provision of said article must prevail against that
law.
Admitting that the provision of article 46 of the said by-laws maybe regarded as a
contract between the defendant corporation and its stockholders , yet as it is only to the
board of directors of the corporation that said articles gives the authority or right to apply
on the payment of unpaid subscriptions such amount of the 70 per cent of the profit
distributable among the shareholders in equal parts as may be deemed fit, it cannot be
maintained that the said article has prescribe an operative method for the payment of
said subscription continuously until their full amortization, or, what would be the same
thing, that said article has prescribe that sole and exclusive method for that purpose, for,
in the first place, the adoption of that method for the purpose of collecting the value of
subscriptions due and unpaid lies, according to said article, within the discretion of the
board of directions, that is, it is subject to this condition, and this can in no way be
reconciled with the idea of method, which implies something fixed as a rule or permanent
standard, and not variable at the will of somebody and according to the circumstances;
and, in the second place, in connection with the provision of the said article relative to the
aforesaid discretionary power of the board of directors to adopt that method, there is also
the discretionary power granted the same board of directors to avail itself, for the same
purpose, to either of the two remedies prescribed in sections 38 to 49, inclusive, of the
aforecited Corporation Law.
In the instant case, the defendant corporation, through its board of directors, made use of
its discretionary power, taking advantage of the first of the two remedies provided by the
aforesaid law. On the other hand, the plaintiff has no right whatsoever under the
provision of the above cited article 46 of the said by-laws to prevent the board of
directors from following, for that purpose, any other method than that mentioned in the
said article, for the very reason that the same does not give the stockholders any right in
connection with the determination of the question whether or not there should be
deducted from the 70 per cent of the profit distributable among the stockholders such
amount as may be deemed fit for the payment of subscriptions due and unpaid.
Therefore, it is evident that the defendant corporation has not violated, nor disregarded
any right of the plaintiff recognized by the said by-laws, nor exceeded its authority in the
discharge of its executive functions, nor abused its discretion when it performed the acts
mentioned in the complaint as grounds thereof, and, consequently, the facts therein
alleged do not constitute a cause of action.

For the foregoing, the orders appealed from are affirmed, with the costs of both instances
against the appellant. So ordered.

Street, Malcolm, Avanceña, Ostrand, Johns, and Romualdez, JJ., concur.