COMMERCIAL LAW REVIEW

CASE DIGESTS

TOPIC – Piercing the veil

CASE TITLE International Academy of Management GR NO. 191525

and Economics (I/AME) vs. Litton and
Company, Inc.

PONENTE Cereno, J. DATE December 13,

2017

TICKLER IAME as alter ego

DOCTRINE(S) In the United States, from which we have adopted our law on corporations,
non-profit corporations are not immune from the doctrine of piercing the
corporate veil. Their courts view piercing of the corporation as an equitable
remedy, which justifies said courts to scrutinize any organization however
organized and in whatever manner it operates. Moreover, control of
ownership does not hinge on stock ownership.

The piercing of the corporate veil may apply to corporations as well as natural
persons involved with corporations. This Court has held that the "corporate
mask may be lifted and the corporate veil may be pierced when a corporation
is just but the alter ego of a person or of another corporation.”

As held in the U.S. Case, C.F. Trust, Inc., v. First Flight Limited Partnership,
"in a traditional veil-piercing
action, a court disregards the existence of the corporate entity so a claimant
can reach the assets of a
corporate insider. In a reverse piercing action, however, the plaintiff seeks to
reach the assets of a
corporation to satisfy claims against a corporate insider."

"Reverse-piercing flows in the opposite direction (of traditional corporate veil-

piercing) and makes the corporation liable for the debt of the shareholders."

In this case, the plaintiff seeks to reach the assets of the corporation to satisfy
the claims against corporate insiders. It may apply to both corporations and
natural persons.

FACTS Atty. Emmanuel T. Santos (Santos), a lessee of 2 buildings owned by Litton,

owed the latter rental arrears and share in RPT. Litton then filed a complaint
for unlawful detainer and collection for sums of money. The judgment was not
executed, prompting Litton to file for a revival of judgment. The sheriff of MeTC
 COMMERCIAL LAW REVIEW
CASE DIGESTS
then levied on a piece of real property registered in the name of IAME to
execute judgment against Santos, only up to the extent of his share.

IAME avers the following:

1. It has separate and distinct personality from Santos, hence, its properties
should not be made to answer for Santos’ liabilities.
2. The doctrine of piercing the veil applies only to stock corporations and not
to IAME as a nonstock, nonprofit educational institution since there are no
stockholders to be held liable.
3. The piercing of the corporate veil cannot be applied to a natural person, as
he has no corporate veil shrouding or covering his person.

In CA’s ruling, it was noted how Santos utilized IAME to insulate the real
property from the execution of judgment against him. Santos, as the President
of IAME, represented the latter in a deed of sale of the subject property in
1979 when in fact, IAME was only incorporated in 1985. The subject property
was transferred to IAME during the pendency of the appeal for the revival of
judgment in the ejectment case in the CA. In sum, Santos merely used IAME
as a shield to protect his property from the coverage of writ of execution.

ISSUES (MAIN) Whether piercing the veil of IAME is proper – YES

Whether the doctrine applies to a non-stock corporation – YES
Whether the doctrine applies to a natural person - YES

RULING In general, corporations, whether stock or nonstock, are treated as separate

and distinct legal entities from the natural persons composing them. The
privilege of being considered a distinct and separate entity is confined to
 COMMERCIAL LAW REVIEW
CASE DIGESTS
legitimate uses, and is subject to equitable limitations to prevent its being
exercised for fraudulent, unfair or illegal purposes. However, once equitable
limitations are breached using the coverture of the corporate veil, courts may
step in to pierce the same. In determining the propriety of applicability of
piercing the veil of corporate fiction, the Court did not put in issue whether a
corporation is a stock or nonstock corporation. Since the law does not make
a distinction between a stock and nonstock corporation, neither should there
be a distinction in case the doctrine has to be applied. Courts view piercing of
the corporation as an equitable remedy, which justifies said courts to
scrutinize any organization however organized and in whatever manner it
operates. Moreover, control of ownership does not hinge on stock ownership.

The concept of equitable ownership, for stock or nonstock corporations, in

piercing of the corporate veil scenarios, may also be considered. An equitable
owner is an individual who is a non-shareholder defendant, who exercises
sufficient control or considerable authority over the corporation to the point of
completely disregarding the corporate form and acting as though its assets
are his or her alone to manage and distribute.

The piercing of the corporate veil is premised on the fact that the corporation
concerned must have been properly served with summons or properly
subjected to the jurisdiction of the court a quo. Corollary thereto, it cannot be
subjected to a writ of execution meant for another in violation of its right to due
process. There exists, however, an exception to this rule: if it is shown “by
clear and convincing proof that the separate and distinct personality of the
corporation was purposefully employed to evade a legitimate and binding
commitment and perpetuate a fraud or like wrongdoings.” The resistance of
the Court to offend the right to due process of a corporation that is a nonparty
in a main case, may disintegrate not only when its director, officer,
shareholder, trustee or member is a party to the main case, but when it finds
facts which show that piercing of the corporate veil is merited. In this case,
Santos had an existing obligation based on a court judgment that he owed
monthly rentals and unpaid realty taxes under a lease contract with Litton,
which he refused to comply. Santos used IAME to defeat judicial processes
and to evade his obligation. Thus, even while IAEM was not impleaded in the
main case and yet was so named in a writ of execution to satisfy a court
judgment, it is vulnerable to the piercing of its corporate veil.

The piercing of the corporate veil may apply to corporations as well as natural
persons involved with corporations. It was held that the “corporate mask may
be lifted and the corporate veil may be pierced when a corporation is just but
the alter ego of a person or of another corporation.” A deceased natural
person is considered as one and the same with his corporation to protect the
succession rights of his legal heirs to his estate. IAME is the alter ego of
 COMMERCIAL LAW REVIEW
CASE DIGESTS
Santos, and Santos, of IAME, based on IAME’s own admission in its pleadings
before the trial court.

In a traditional veil-piercing action, a court disregards the existence of the

corporate entity so a claimant can reach the assets of a corporate insider. In
a reverse piercing action, however, the plaintiff seeks to reach the assets of a
corporation to satisfy claims against a corporate insider. Reverse piercing
flows in the opposite direction (of traditional corporate veil-piercing) and
makes the corporation liable for the debt of the shareholders.” It has two (2)
types: outsider reverse piercing and insider reverse piercing. Outsider reverse
piercing occurs when a party with a claim against an individual or corporation
attempts to be repaid with assets of a corporation owned or substantially
controlled by the defendant. In contrast, in insider reverse piercing, the
controlling members will attempt to ignore the corporate fiction in order to take
advantage of a benefit available to the corporation, such as an interest in a
lawsuit or protection of personal assets. The equitable remedy of reverse
corporate piercing was not meant to encourage a creditor’s failure to
undertake such remedies that could have otherwise been available to the
detriment of other creditors.
 COMMERCIAL LAW REVIEW
CASE DIGESTS

NOTES: PNB’s act of releasing the proceeds of the check prior to the lapse of the 15-day
clearing period was the proximate cause of the loss. That while PNB highlights Ofelia’s fault in
accommodating a stranger’s check and depositing it to the bank, it remains mum in its release
of the proceeds thereof without exhausting the 15-day clearing period, an act which
contravened established banking rules and practice.

It is worthy of notice that the 15-day clearing period alluded to is construed as 15 banking days.
As declared by Josephine Estella, the Administrative Service Officer who was the bank’s
Remittance Examiner, what was unusual in the processing of the check was that the "lapse of
15 banking days was not observed." Even PNB’s agreement with Philadelphia National Bank
regarding the rules on the collection of the proceeds of US dollar checks refers to "business/
banking days." Ofelia deposited the subject check on November 4, 1992. Hence, the 15th
banking day from the date of said deposit should fall on November 25, 1992. However, what
happened was that PNB Buendia Branch, upon calling up Ofelia that the check had been
cleared, allowed the proceeds thereof to be withdrawn on November 17 and 18, 1992, a week
before the lapse of the standard 15-day clearing period.

DISPOSITION:

The Court concurs with the findings of the CA that PNB and the spouses Cheah are equally
negligent and should therefore equally suffer the loss. The two must both bear the
consequences of their mistakes.

WHEREFORE, premises considered, the Petitions for Review on Certiorari in G.R. No.
170865 and in G.R. No. 170892 are both DENIED. The assailed August 22, 2005 Decision
and December 21, 2005 Resolution of the Court of Appeals in CA-G.R. CV No. 63948 are
hereby AFFIRMED in toto.
COMMERCIAL LAW REVIEW
CASE DIGESTS