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G.R. No.

L-13203

January 28, 1961

YUTIVO SONS HARDWARE COMPANY, petitioner,


vs.
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.
Sycip, Quisumbing, Salazar & Associates for petitioner.
Office of the Solicitor General for respondents.
GUTIERREZ DAVID, J.:
This is a petition for review of a decision of the Court of Tax Appeals ordering petitioner to pay to respondent
Collector of Internal Revenue the sum of P1,266,176.73 as sales tax deficiency for the third quarter of 1947 to the
fourth quarter of 1950; inclusive, plus 75% surcharge thereon, equivalent to P349,632.54, or a sum total of
P2,215,809.27, plus costs of the suit.
From the stipulation of facts and the evidence adduced by both parties, it appears that petitioner Yutivo Sons
Hardware Co. (hereafter referred to as Yutivo) is a domestic corporation, organized under the laws of the
Philippines, with principal office at 404 Dasmarias St., Manila. Incorporated in 1916, it was engaged, prior to the
last world war, in the importation and sale of hardware supplies and equipment. After the liberation, it resumed
its business and until June of 1946 bought a number of cars and trucks from General Motors Overseas
Corporation (hereafter referred to as GM for short), an American corporation licensed to do business in the
Philippines. As importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis
of its selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no further sales tax
on its sales to the public.
On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM) was organized to engage in the
business of selling cars, trucks and spare parts. Its original authorized capital stock was P1,000,000 divided into
10,000 shares with a par value of P100 each.
At the time of its incorporation 2,500 shares worth P250,000 appear to have been subscribed into equal
proportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington Sycip. The first three named
subscribers are brothers, being sons of Yu Tiong Yee, one of Yutivo's founders. The latter two are respectively sons
of Yu Tiong Sin and Albino Sycip, who are among the founders of Yutivo.
After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of 1947, the cars
and tracks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the
Visayas and Mindanao.
When GM decided to withdraw from the Philippines in the middle of 1947, the U.S. manufacturer of GM cars and
trucks appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its previous arrangement
of selling exclusively to SM. In the same way that GM used to pay sales taxes based on its sales to Yutivo, the
latter, as importer, paid sales tax prescribed on the basis of its selling price to SM, and since such sales tax, as
already stated, is collected only once on original sales, SM paid no sales tax on its sales to the public.
On November 7, 1950, after several months of investigation by revenue officers started in July, 1948, the
Collector of Internal Revenue made an assessment upon Yutivo and demanded from the latter P1,804,769.85 as
deficiency sales tax plus surcharge covering the period from the third quarter of 1947 to the fourth quarter of
1949; or from July 1, 1947 to December 31, 1949, claiming that the taxable sales were the retail sales by SM to
the public and not the sales at wholesale made by, Yutivo to the latter inasmuch as SM and Yutivo were one and
the same corporation, the former being the subsidiary of the latter.
The assessment was disputed by the petitioner, and a reinvestigation of the case having been made by the
agents of the Bureau of Internal Revenue, the respondent Collector in his letter dated November 15, 1952
countermanded his demand for sales tax deficiency on the ground that "after several investigations conducted
into the matter no sufficient evidence could be gathered to sustain the assessment of this Office based on the
theory that Southern Motors is a mere instrumentality or subsidiary of Yutivo." The withdrawal was subject,
however, to the general power of review by the now defunct Board of Tax Appeals. The Secretary of Finance to
whom the papers relative to the case were endorsed, apparently not agreeing with the withdrawal of the
assessment, returned them to the respondent Collector for reinvestigation.

After another investigation, the respondent Collector, in a letter to petitioner dated December 16, 1954,
redetermined that the aforementioned tax assessment was lawfully due the government and in addition assessed
deficiency sales tax due from petitioner for the four quarters of 1950; the respondents' last demand was in the
total sum of P2,215,809.27 detailed as follows:

Deficiency
Sales Tax

75%
Total
Surcharge Amount Due

Assessment (First) of November 7, 1950


for deficiency sales Tax for the period
from 3rd Qrtr 1947 to 4th Qrtr 1949
inclusive

P1,031,296. P773,473. P1,804,769.


60
45
05

Additional Assessment for period from


1st to 4th Qrtr 1950, inclusive

234,880.13

Total amount demanded per letter of


December 16, 1954

P1,266,176. P949,632. P2,215,809.


73
54
27

176,160.0
9

411,040.22

This second assessment was contested by the petitioner Yutivo before the Court of Tax Appeals, alleging that
there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner
Yutivo; (2) that assuming the separate personality of SM may be disregarded, the sales tax already paid by Yutivo
should first be deducted from the selling price of SM in computing the sales tax due on each vehicle; and (3) that
the surcharge has been erroneously imposed by respondent. Finding against Yutivo and sustaining the
respondent Collector's theory that there was no legitimate or bona fide purpose in the organization of SM the
apparent objective of its organization being to evade the payment of taxes and that it was owned (or the
majority of the stocks thereof are owned) and controlled by Yutivo and is a mere subsidiary, branch, adjunct,
conduit, instrumentality or alter ego of the latter, the Court of Tax Appeals with Judge Roman Umali not taking
part disregarded its separate corporate existence and on April 27, 1957, rendered the decision now
complained of. Of the two Judges who signed the decision, one voted for the modification of the computation of
the sales tax as determined by the respondent Collector in his decision so as to give allowance for the reduction
of the tax already paid (resulting in the reduction of the assessment to P820,509.91 exclusive of surcharges),
while the other voted for affirmance. The dispositive part of the decision, however, affirmed the assessment
made by the Collector. Reconsideration of this decision having been denied, Yutivo brought the case to this Court
thru the present petition for review.
It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and
distinct from its stockholders and from other corporation petitions to which it may be connected. However, "when
the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime," the
law will regard the corporation as an association of persons, or in the case of two corporations merge them into
one. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 496, citing I Fletcher Cyclopedia of Corporation, Perm Ed., pp. 135 136;
United States vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.) Another rule is that,
when the corporation is the "mere alter ego or business conduit of a person, it may be disregarded." (Koppel
[Phil.], Inc. vs. Yatco, supra.)
After going over the voluminous record of the present case, we are inclined to rule that the Court of Tax Appeals
was not justified in finding that SM was organized for no other purpose than to defraud the Government of its
lawful revenues. In the first place, this corporation was organized in June, 1946 when it could not have caused
Yutivo any tax savings. From that date up to June 30, 1947, or a period of more than one year, GM was the
importer of the cars and trucks sold to Yutivo, which, in turn resold them to SM. During that period, it is not
disputed that GM as importer, was the one solely liable for sales taxes. Neither Yutivo or SM was subject to the
sales taxes on their sales of cars and trucks. The sales tax liability of Yutivo did not arise until July 1, 1947 when it
became the importer and simply continued its practice of selling to SM. The decision, therefore, of the Tax Court
that SM was organized purposely as a tax evasion device runs counter to the fact that there was no tax to evade.

Making the observation from a newspaper clipping (Exh. "T") that "as early as 1945 it was known that GM was
preparing to leave the Philippines and terminate its business of importing vehicles," the court below speculated
that Yutivo anticipated the withdrawal of GM from business in the Philippines in June, 1947. This observation,
which was made only in the resolution on the motion for reconsideration, however, finds no basis in the record.
On the other hand, GM had been an importer of cars in the Philippines even before the war and had but recently
resumed its operation in the Philippines in 1946 under an ambitious plan to expand its operation by establishing
an assembly plant here, so that it could not have been expected to make so drastic a turnabout of not merely
abandoning the assembly plant project but also totally ceasing to do business as an importer. Moreover, the
newspaper clipping, Exh. "T", was published on March 24, 1947, and clipping, merely reported a rumored plan
that GM would abandon the assembly plant project in the Philippines. There was no mention of the cessation of
business by GM which must not be confused with the abandonment of the assembly plant project. Even as
respect the assembly plant, the newspaper clipping was quite explicit in saying that the Acting Manager refused
to confirm that rumor as late as March 24, 1947, almost a year after SM was organized.
At this juncture, it should be stated that the intention to minimize taxes, when used in the context of fraud, must
be proved to exist by clear and convincing evidence amounting to more than mere preponderance, and cannot
be justified by a mere speculation. This is because fraud is never lightly to be presumed. (Vitelli & Sons vs. U.S
250 U.S. 355; Duffin vs. Lucas, 55 F (2d) 786; Budd vs. Commr., 43 F (2d) 509; Maryland Casualty Co. vs.
Palmette Coal Co., 40 F (2d) 374; Schoonfield Bros., Inc. vs. Commr., 38 BTA 943; Charles Heiss vs. Commr 36
BTA 833; Kerbaugh vs. Commr 74 F (2d) 749; Maddas vs. Commr., 114 F. (2d) 548; Moore vs. Commr., 37 BTA
378; National City Bank of New York vs. Commr., 98 (2d) 93; Richard vs. Commr., 15 BTA 316; Rea Gane vs.
Commr., 19 BTA 518). (See also Balter, Fraud Under Federal Law, pp. 301-302, citing numerous authorities:
Arroyo vs. Granada, et al., 18 Phil. 484.) Fraud is never imputed and the courts never sustain findings of fraud
upon circumstances which, at the most, create only suspicion. (Haygood Lumber & Mining Co. vs. Commr., 178 F
(2d) 769; Dalone vs. Commr., 100 F (2d) 507).
In the second place, SM was organized and it operated, under circumstance that belied any intention to evade
sales taxes. "Tax evasion" is a term that connotes fraud thru the use of pretenses and forbidden devices to lessen
or defeat taxes. The transactions between Yutivo and SM, however, have always been in the open, embodied in
private and public documents, constantly subject to inspection by the tax authorities. As a matter of fact, after
Yutivo became the importer of GM cars and trucks for Visayas and Mindanao, it merely continued the method of
distribution that it had initiated long before GM withdrew from the Philippines.
On the other hand, if tax saving was the only justification for the organization of SM, such justification certainly
ceased with the passage of Republic Act No. 594 on February 16, 1951, governing payment of advance sales tax
by the importer based on the landed cost of the imported article, increased by mark-ups of 25%, 50%, and 100%,
depending on whether the imported article is taxed under sections 186, 185 and 184, respectively, of the Tax
Code. Under Republic Act No. 594, the amount at which the article is sold is immaterial to the amount of the sales
tax. And yet after the passage of that Act, SM continued to exist up to the present and operates as it did many
years past in the promotion and pursuit of the business purposes for which it was organized.
In the third place, sections 184 to 186 of the said Code provides that the sales tax shall be collected "once only
on every original sale, barter, exchange . . , to be paid by the manufacturer, producer or importer." The use of the
word "original" and the express provision that the tax was collectible "once only" evidently has made the
provisions susceptible of different interpretations. In this connection, it should be stated that a taxpayer has the
legal right to decrease the amount of what otherwise would be his taxes or altogether avoid them by means
which the law permits. (U.S. vs. Isham 17 Wall. 496, 506; Gregory vs. Helvering 293 U.S. 465, 469; Commr. vs.
Tower, 327 U.S. 280; Lawton vs. Commr 194 F (2d) 380). Any legal means by the taxpayer to reduce taxes are all
right Benry vs. Commr. 25 T. Cl. 78). A man may, therefore, perform an act that he honestly believes to be
sufficient to exempt him from taxes. He does not incur fraud thereby even if the act is thereafter found to be
insufficient. Thus in the case ofCourt Holding Co. vs. Commr. 2 T. Cl. 531, it was held that though an incorrect
position in law had been taken by the corporation there was no suppression of the facts, and a fraud penalty was
not justified.
The evidence for the Collector, in our opinion, falls short of the standard of clear and convincing proof of fraud. As
a matter of fact, the respondent Collector himself showed a great deal of doubt or hesitancy as to the existence
of fraud. He even doubted the validity of his first assessment dated November 7, 1959. It must be remembered
that the fraud which respondent Collector imputed to Yutivo must be related to its filing of sales tax returns of
less taxes than were legally due. The allegation of fraud, however, cannot be sustained without the showing that
Yutivo, in filing said returns, did so fully knowing that the taxes called for therein called for therein were less than
what were legally due. Considering that respondent Collector himself with the aid of his legal staff, and after
some two years of investigation and duty of investigation and study concluded in 1952 that Yutivo's sales tax
returns were correct only to reverse himself after another two years it would seem harsh and unfair for him
to say in 1954 that Yutivo fully knew in October 1947 that its sales tax returns were inaccurate.

On this point, one other consideration would show that the intent to save taxes could not have existed in the
minds of the organizers of SM. The sales tax imposed, in theory and in practice, is passed on to the vendee, and
is usually billed separately as such in the sales invoice. As pointed out by petitioner Yutivo, had not SM handled
the retail, the additional tax that would have been payable by it, could have been easily passed off to the
consumer, especially since the period covered by the assessment was a "seller's market" due to the post-war
scarcity up to late 1948, and the imposition of controls in the late 1949.
It is true that the arrastre charges constitute expenses of Yutivo and its non-inclusion in the selling price by Yutivo
cost the Government P4.00 per vehicle, but said non-inclusion was explained to have been due to an inadvertent
accounting omission, and could hardly be considered as proof of willful channelling and fraudulent evasion of
sales tax. Mere understatement of tax in itself does not prove fraud. (James Nicholson, 32 BTA 377, affirmed 90 F.
(2) 978, cited in Merten's Sec. 55.11 p. 21) The amount involved, moreover, is extremely small inducement for
Yutivo to go thru all the trouble of organizing SM. Besides, the non-inclusion of these small arrastre charges in the
sales tax returns of Yutivo is clearly shown in the records of Yutivo, which is uncharacteristic of fraud (See Insular
Lumber Co. vs. Collector, G.R. No. L-719, April 28, 1956.)
We are, however, inclined to agree with the court below that SM was actually owned and controlled by petitioner
as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and
maintaining stores for spare parts as well as service repair shops. It is not disputed that the petitioner, which is
engaged principally in hardware supplies and equipment, is completely controlled by the Yutivo, Young or Yu
family. The founders of the corporation are closely related to each other either by blood or affinity, and most of its
stockholders are members of the Yu (Yutivo or Young) family. It is, likewise, admitted that SM was organized by
the leading stockholders of Yutivo headed by Yu Khe Thai. At the time of its incorporation 2,500 shares worth
P250,000.00 appear to have been subscribed in five equal proportions by Yu Khe Thai, Yu Khe Siong, Yu Khe Jin,
Yu Eng Poh and Washington Sycip. The first three named subscribers are brothers, being the sons of Yu Tien Yee,
one of Yutivo's founders. Yu Eng Poh and Washington Sycip are respectively sons of Yu Tiong Sing and Alberto
Sycip who are co-founders of Yutivo. According to the Articles of Incorporation of the said subscriptions, the
amount of P62,500 was paid by the aforenamed subscribers, but actually the said sum was advanced by Yutivo.
The additional subscriptions to the capital stock of SM and subsequent transfers thereof were paid by Yutivo itself.
The payments were made, however, without any transfer of funds from Yutivo to SM. Yutivo simply charged the
accounts of the subscribers for the amount allegedly advanced by Yutivo in payment of the shares. Whether a
charge was to be made against the accounts of the subscribers or said subscribers were to subscribe shares
appears to constitute a unilateral act on the part of Yutivo, there being no showing that the former initiated the
subscription.
The transactions were made solely by and between SM and Yutivo. In effect, it was Yutivo who undertook the
subscription of shares, employing the persons named or "charged" with corresponding account as nominal
stockholders. Of course, Yu Khe Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were manifestly aware of these
subscriptions, but considering that they were the principal officers and constituted the majority of the Board of
Directors of both Yutivo and SM, their subscriptions could readily or easily be that of Yutivo's Moreover, these
persons were related to death other as brothers or first cousins. There was every reason for them to agree in
order to protect their common interest in Yutivo and SM.
The issued capital stock of SM was increased by additional subscriptions made by various person's but except Ng
Sam Bak and David Sycip, "payments" thereof were effected by merely debiting 'or charging the accounts of said
stockholders and crediting the corresponding amounts in favor of SM, without actually transferring cash from
Yutivo. Again, in this instance, the "payments" were Yutivo, by effected by the mere unilateral act of Yutivo a
accounts of the virtue of its control over the individual persons charged, would necessarily exercise preferential
rights and control directly or indirectly, over the shares, it being the party which really undertook to pay or
underwrite payment thereof.
The shareholders in SM are mere nominal stockholders holding the shares for and in behalf of Yutivo, so even
conceding that the original subscribers were stockholders bona fide Yutivo was at all times in control of the
majority of the stock of SM and that the latter was a mere subsidiary of the former.
True, petitioner and other recorded stockholders transferred their shareholdings, but the transfers were made to
their immediate relatives, either to their respective spouses and children or sometimes brothers or sisters.
Yutivo's shares in SM were transferred to immediate relatives of persons who constituted its controlling
stockholders, directors and officers. Despite these purported changes in stock ownership in both corporations,
the Board of Directors and officers of both corporations remained unchanged and Messrs. Yu Khe Thai, Yu Khe
Siong Hu Khe Jin and Yu Eng Poll (all of the Yu or Young family) continued to constitute the majority in both
boards. All these, as observed by the Court of Tax Appeals, merely serve to corroborate the fact that there was a
common ownership and interest in the two corporations.

SM is under the management and control of Yutivo by virtue of a management contract entered into between the
two parties. In fact, the controlling majority of the Board of Directors of Yutivo is also the controlling majority of
the Board of Directors of SM. At the same time the principal officers of both corporations are identical. In addition
both corporations have a common comptroller in the person of Simeon Sy, who is a brother-in-law of Yutivo's
president, Yu Khe Thai. There is therefore no doubt that by virtue of such control, the business, financial and
management policies of both corporations could be directed towards common ends.
Another aspect relative to Yutivo's control over SM operations relates to its cash transactions. All cash assets of
SM were handled by Yutivo and all cash transactions of SM were actually maintained thru Yutivo. Any and all
receipts of cash by SM including its branches were transmitted or transferred immediately and directly to Yutivo
in Manila upon receipt thereof. Likewise, all expenses, purchases or other obligations incurred by SM are referred
to Yutivo which in turn prepares the corresponding disbursement vouchers and payments in relation there, the
payment being made out of the cash deposits of SM with Yutivo, if any, or in the absence thereof which occurs
generally, a corresponding charge is made against the account of SM in Yutivo's books. The payments for and
charges against SM are made by Yutivo as a matter of course and without need of any further request, the latter
would advance all such cash requirements for the benefit of SM. Any and all payments and cash vouchers are
made on Yutivo stationery and made under authority of Yutivo's corporate officers, without any copy thereof
being furnished to SM. All detailed records such as cash disbursements, such as expenses, purchases, etc. for the
account of SM, are kept by Yutivo and SM merely keeps a summary record thereof on the basis of information
received from Yutivo.
All the above plainly show that cash or funds of SM, including those of its branches which are directly remitted to
Yutivo, are placed in the custody and control of Yutivo, resources and subject to withdrawal only by Yutivo. SM's
being under Yutivo's control, the former's operations and existence became dependent upon the latter.
Consideration of various other circumstances, especially when taken together, indicates that Yutivo treated SM
merely as its department or adjunct. For one thing, the accounting system maintained by Yutivo shows that it
maintained a high degree of control over SM accounts. All transactions between Yutivo and SM are recorded and
effected by mere debit or credit entries against the reciprocal account maintained in their respective books of
accounts and indicate the dependency of SM as branch upon Yutivo.
Apart from the accounting system, other facts corroborate or independently show that SM is a branch or
department of Yutivo. Even the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat Yutivo Manila as their
"Head Office" or "Home Office" as shown by their letters of remittances or other correspondences. These
correspondences were actually received by Yutivo and the reference to Yutivo as the head or home office is
obvious from the fact that all cash collections of the SM's branches are remitted directly to Yutivo. Added to this
fact, is that SM may freely use forms or stationery of Yutivo
The fact that SM is a mere department or adjunct of Yutivo is made more patent by the fact that arrastre
conveying, and charges paid for the "operation of receiving, loading or unloading" of imported cars and trucks on
piers and wharves, were charged against SM. Overtime charges for the unloading of cars and trucks as requested
by Yutivo and incurred as part of its acquisition cost thereof, were likewise charged against and treated as
expenses of SM. If Yutivo were the importer, these arrastre and overtime charges were Yutivo's expenses in
importing goods and not SM's. But since those charges were made against SM, it plainly appears that Yutivo had
sole authority to allocate its expenses even as against SM in the sense that the latter is a mere adjunct, branch or
department of the former.
Proceeding to another aspect of the relation of the parties, the management fees due from SM to Yutivo were
taken up as expenses of SM and credited to the account of Yutivo. If it were to be assumed that the two
organizations are separate juridical entities, the corresponding receipts or receivables should have been treated
as income on the part of Yutivo. But such management fees were recorded as "Reserve for Bonus" and were
therefore a liability reserve and not an income account. This reserve for bonus were subsequently distributed
directly to and credited in favor of the employees and directors of Yutivo, thereby clearly showing that the
management fees were paid directly to Yutivo officers and employees.
Briefly stated, Yutivo financed principally, if not wholly, the business of SM and actually extended all the credit to
the latter not only in the form of starting capital but also in the form of credits extended for the cars and vehicles
allegedly sold by Yutivo to SM as well as advances or loans for the expenses of the latter when the capital had
been exhausted. Thus, the increases in the capital stock were made in advances or "Guarantee" payments by
Yutivo and credited in favor of SM. The funds of SM were all merged in the cash fund of Yutivo. At all times Yutivo
thru officers and directors common to it and SM, exercised full control over the cash funds, policies, expenditures
and obligations of the latter.

Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court of Tax Appeals correctly
disregarded the technical defense of separate corporate entity in order to arrive at the true tax liability of Yutivo.
Petitioner contends that the respondent Collector had lost his right or authority to issue the disputed assessment
by reason of prescription. The contention, in our opinion, cannot be sustained. It will be noted that the first
assessment was made on November 7, 1950 for deficiency sales tax from 1947 to 1949. The corresponding
returns filed by petitioner covering the said period was made at the earliest on October 1, as regards the third
quarter of 1947, so that it cannot be claimed that the assessment was not made within the five-year period
prescribed in section 331 of the Tax Code invoked by petitioner. The assessment, it is admitted, was withdrawn by
the Collector on insufficiency of evidence, but November 15, 1952 due to insufficiency of evidence, but the
withdrawal was made subject to the approval of the Secretary of Finance and the Board of Tax Appeals, pursuant
to the provisions of section 9 of Executive Order No. 401-A, series of 1951. The decision of the previous
assessment of November 7, Collector countermanding the as 1950 was forwarded to the Board of Tax Appeals
through the Secretary of Finance but that official, apparently disagreeing with the decision, sent it back for reinvestigation. Consequently, the assessment of November 7, 1950 cannot be considered to have been finally
withdrawn. That the assessment was subsequently reiterated in the decision of respondent Collector on
December 16, 1954 did not alter the fact that it was made seasonably. In this connection, it would appear that a
warrant of distraint and levy had been issued on March 28, 1951 in relation with this case and by virtue thereof
the properties of Yutivo were placed under constructive distraint. Said warrant and constructive distraint have not
been lifted up to the present, which shows that the assessment of November 7, 1950 has always been valid and
subsisting.
Anent the deficiency sale tax for 1950, considering that the assessment thereof was made on December 16,
1954, the same was assessed well within the prescribed five-year period.
Petitioner argues that the original assessment of November 7, 1950 did not extend the prescriptive period on
assessment. The argument is untenable, for, as already seen, the assessment was never finally withdrawn, since
it was not approved by the Secretary of Finance or of the Board of Tax Appeals. The authority of the Secretary to
act upon the assessment cannot be questioned, for he is expressly granted such authority under section 9 of
Executive Order No. 401-And under section 79 (c) of the Revised Administrative Code, he has "direct control,
direction and supervision over all bureaus and offices under his jurisdiction and may, any provision of existing law
to the contrary not withstanding, repeal or modify the decision of the chief of said Bureaus or offices when
advisable in public interest."
It should here also be stated that the assessment in question was consistently protested by petitioner, making
several requests for reinvestigation thereof. Under the circumstances, petitioner may be considered to have
waived the defense of prescription.
"Estoppel has been employed to prevent the application of the statute of limitations against the
government in certain instances in which the taxpayer has taken some affirmative action to prevent the
collection of the tax within the statutory period. It is generally held that a taxpayer is estopped to
repudiate waivers of the statute of limitations upon which the government relied. The cases frequently
involve dissolved corporations. If no waiver has been given, the cases usually show come conduct
directed to a postponement of collection, such, for example, as some variety of request to apply an
overassessment. The taxpayer has 'benefited' and 'is not in a position to contest' his tax liability. A
definite representation of implied authority may be involved, and in many cases the taxpayer has
received the 'benefit' of being saved from the inconvenience, if not hardship of immediate collection. "
Conceivably even in these cases a fully informed Commissioner may err to the sorrow of the revenues,
but generally speaking, the cases present a strong combination of equities against the taxpayer, and few
will seriously quarrel with their application of the doctrine of estoppel." (Mertens Law of Federal Income
Taxation, Vol. 10-A, pp. 159-160.)
It is also claimed that section 9 of Executive Order No. 401-A, series of 1951 es involving an original
assessment of more than P5,000 refers only to compromises and refunds of taxes, but not to total withdrawal
of the assessment. The contention is without merit. A careful examination of the provisions of both sections 8 and
9 of Executive Order No. 401-A, series of 1951, reveals the procedure prescribed therein is intended as a check or
control upon the powers of the Collector of Internal Revenue in respect to assessment and refunds of taxes. If it
be conceded that a decision of the Collector of Internal Revenue on partial remission of taxes is subject to review
by the Secretary of Finance and the Board of Tax Appeals, then with more reason should the power of the
Collector to withdraw totally an assessment be subject to such review.

We find merit, however, in petitioner's contention that the Court of Tax Appeals erred in the imposition of the 5%
fraud surcharge. As already shown in the early part of this decision, no element of fraud is present.
Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge should be added to the
deficiency sales tax "in case a false or fraudulent return is willfully made." Although the sales made by SM are in
substance by Yutivo this does not necessarily establish fraud nor the willful filing of a false or fraudulent return.
The case of Court Holding Co. v. Commissioner of Internal Revenue (August 9, 1943, 2 TC 531, 541-549) is in
point. The petitioner Court Holding Co. was a corporation consisting of only two stockholders, to wit: Minnie Miller
and her husband Louis Miller. The only assets of third husband and wife corporation consisted of an apartment
building which had been acquired for a very low price at a judicial sale. Louis Miller, the husband, who directed
the company's business, verbally agreed to sell this property to Abe C. Fine and Margaret Fine, husband and wife,
for the sum of $54,000.00, payable in various installments. He received $1,000.00 as down payment. The sale of
this property for the price mentioned would have netted the corporation a handsome profit on which a large
corporate income tax would have to be paid. On the afternoon of February 23, 1940, when the Millers and the
Fines got together for the execution of the document of sale, the Millers announced that their attorney had called
their attention to the large corporate tax which would have to be paid if the sale was made by the corporation
itself. So instead of proceeding with the sale as planned, the Millers approved a resolution to declare a dividend to
themselves "payable in the assets of the corporation, in complete liquidation and surrender of all the outstanding
corporate stock." The building, which as above stated was the only property of the corporation, was then
transferred to Mr. and Mrs. Miller who in turn sold it to Mr. and Mrs. Fine for exactly the same price and under the
same terms as had been previously agreed upon between the corporation and the Fines.
The return filed by the Court Holding Co. with the respondent Commissioner of Internal Revenue reported no
taxable gain as having been received from the sale of its assets. The Millers, of course, reported a long term
capital gain on the exchange of their corporate stock with the corporate property. The Commissioner of Internal
Revenue contended that the liquidating dividend to stockholders had no purpose other than that of tax avoidance
and that, therefore, the sale by the Millers to the Fines of the corporation's property was in substance a sale by
the corporation itself, for which the corporation is subject to the taxable profit thereon. In requiring the
corporation to pay the taxable profit on account of the sale, the Commissioner of Internal Revenue, imposed a
surcharge of 25% for delinquency, plus an additional surcharge as fraud penalties.
The U. S. Court of Tax Appeals held that the sale by the Millers was for no other purpose than to avoid the tax and
was, in substance, a sale by the Court Holding Co., and that, therefore, the said corporation should be liable for
the assessed taxable profit thereon. The Court of Tax Appeals also sustained the Commissioner of Internal
Revenue on the delinquency penalty of 25%. However, the Court of Tax Appeals disapproved the fraud penalties,
holding that an attempt to avoid a tax does not necessarily establish fraud; that it is a settled principle that a
taxpayer may diminish his tax liability by means which the law permits; that if the petitioner, the Court Holding
Co., was of the opinion that the method by which it attempted to effect the sale in question was legally sufficient
to avoid the imposition of a tax upon it, its adoption of that methods not subject to censure; and that in taking a
position with respect to a question of law, the substance of which was disclosed by the statement indorsed on it
return, it may not be said that that position was taken fraudulently. We quote in full the pertinent portion of the
decision of the Court of Tax Appeals: .
". . . The respondent's answer alleges that the petitioner's failure to report as income the taxable profit on
the real estate sale was fraudulent and with intent to evade the tax. The petitioner filed a reply denying
fraud and averring that the loss reported on its return was correct to the best of its knowledge and belief.
We think the respondent has not sustained the burden of proving a fraudulent intent. We have concluded
that the sale of the petitioner's property was in substance a sale by the petitioner, and that the liquidating
dividend to stockholders had no purpose other than that of tax avoidance. But the attempt to avoid tax
does not necessarily establish fraud. It is a settled principle that a taxpayer may diminish his liability by
any means which the law permits. United States v. Isham, 17 Wall. 496; Gregory v. Helvering, supra;
Chrisholm v. Commissioner, 79 Fed. (2d) 14. If the petitioner here was of the opinion that the method by
which it attempted to effect the sale in question was legally sufficient to avoid the imposition of tax upon
it, its adoption of that method is not subject to censure. Petitioner took a position with respect to a
question of law, the substance of which was disclosed by the statement endorsed on its return. We can
not say, under the record before us, that that position was taken fraudulently. The determination of the
fraud penalties is reversed."
When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the sales tax was paid only once
and on the original sales by the former and neither the latter nor SM paid taxes on their subsequent sales. Yutivo
might have, therefore, honestly believed that the payment by it, as importer, of the sales tax was enough as in
the case of GM Consequently, in filing its return on the basis of its sales to SM and not on those by the latter to

the public, it cannot be said that Yutivo deliberately made a false return for the purpose of defrauding the
government of its revenues which will justify the imposition of the surcharge penalty.
We likewise find meritorious the contention that the Tax Court erred in computing the alleged deficiency sales tax
on the selling price of SM without previously deducting therefrom the sales tax due thereon. The sales tax
provisions (sees. 184.186, Tax Code) impose a tax on original sales measured by "gross selling price" or "gross
value in money". These terms, as interpreted by the respondent Collector, do not include the amount of the sales
tax, if invoiced separately. Thus, General Circular No. 431 of the Bureau of Internal Revenue dated July 29, 1939,
which implements sections 184.186 of the Tax Code provides: "
. . .'Gross selling price' or gross value in money' of the articles sold, bartered, exchanged, transferred as
the term is used in the aforecited sections (sections 184, 185 and 186) of the National Internal Revenue
Code, is the total amount of money or its equivalent which the purchaser pays to the vendor to receive or
get the goods. However, if a manufacturer, producer, or importer, in fixing the gross selling price of an
article sold by him has included an amount intended to cover the sales tax in the gross selling price of the
articles, the sales tax shall be based on the gross selling price less the amount intended to cover the tax,
if the same is billed to the purchaser as a separate item.
General Circular No. 440 of the same Bureau reads:
Amount intended to cover the tax must be billed as a separate em so as not to pay a tax on the tax. On
sales made after he third quarter of 1939, the amount intended to cover the sales tax must be billed to
the purchaser as separate items in the, invoices in order that the reduction thereof from the gross ailing
price may be allowed in the computation of the merchants' percentage tax on the sales. Unless billed to
the purchaser as a separate item in the invoice, the amounts intended to cover the sales tax shall be
considered as part of the gross selling price of the articles sold, and deductions thereof will not be
allowed, (Cited in Dalupan, Nat. Int. Rev. Code, Annotated, Vol. II, pp. 52-53.)
Yutivo complied with the above circulars on its sales to SM, and as separately billed, the sales taxes did not form
part of the "gross selling price" as the measure of the tax. Since Yutivo had previously billed the sales tax
separately in its sales invoices to SM General Circulars Nos. 431 and 440 should be deemed to have been
complied. Respondent Collector's method of computation, as opined by Judge Nable in the decision complained of

. . . is unfair, because . . .(it is) practically imposing tax on a tax already paid. Besides, the adoption of the
procedure would in certain cases elevate the bracket under which the tax is based. The late payment is
already penalized, thru the imposition of surcharges, by adopting the theory of the Collector, we will be
creating an additional penalty not contemplated by law."
If the taxes based on the sales of SM are computed in accordance with Gen. Circulars Nos. 431 and 440 the total
deficiency sales taxes, exclusive of the 25% and 50% surcharges for late payment and for fraud, would amount
only to P820,549.91 as shown in the following computation:

Gross Sales of
Rates of Vehicles
Sales Tax Exclusive of
Sales Tax

Sales Taxes Due


and Computed
under Gen. Cir
Nos. 431 & 400

Total Gross
Selling Price
Charged to the
Public

5%

P11,912,219.57

P595,610.98

P12,507,83055

7%

909,559.50

63,669.16

973,228.66

10%

2,618,695.28

261,869.53

2,880,564.81

15%

3,602,397.65

540,359.65

4,142,757.30

20%

267,150.50

53,430.10

320,580.60

30%

837,146.97

251,114.09

1,088,291.06

50%

74,244.30

37,122.16

111,366.46

75%

8,000.00

6,000.00

14,000.00

TOTAL

P20,220,413.77

P1,809,205.67

P22,038,619.44

Less Taxes Paid by


Yutivo

988,655.7
6

Deficiency Tax still due

P820,549.
91

This is the exact amount which, according to Presiding Judge Nable of the Court of Tax Appeals, Yutivo would pay,
exclusive of the surcharges.
Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of its jurisdiction in promulgating
judgment for the affirmance of the decision of respondent Collector by less than the statutory requirement of at
least two votes of its judges. Anent this contention, section 2 of Republic Act No. 1125, creating the Court of Tax
Appeals, provides that "Any two judges of the Court of Tax Appeals shall constitute a quorum, and the
concurrence of two judges shall be necessary to promulgate decision thereof. . . . " It is on record that the present
case was heard by two judges of the lower court. And while Judge Nable expressed his opinion on the issue of
whether or not the amount of the sales tax should be excluded from the gross selling price in computing the
deficiency sales tax due from the petitioner, the opinion, apparently, is merely an expression of his general or
"private sentiment" on the particular issue, for he concurred the dispositive part of the decision. At any rate,
assuming that there is no valid decision for lack of concurrence of two judges, the case was submitted for
decision of the court below on March 28, 1957 and under section 13 of Republic Act 1125, cases brought before
said court hall be decided within 30 days after submission thereof. "If no decision is rendered by the Court within
thirty days from the date a case is submitted for decision, the party adversely affected by said ruling, order or
decision, may file with said Court a notice of his intention to appeal to the Supreme Court, and if no decision has
as yet been rendered by the Court, the aggrieved party may file directly with the Supreme Court an appeal from
said ruling, order or decision, notwithstanding the foregoing provisions of this section." The case having been
brought before us on appeal, the question raised by petitioner as become purely academic.
IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under review is hereby modified in that
petitioner shall be ordered to pay to respondent the sum of P820,549.91, plus 25% surcharge thereon for late
payment.
So ordered without costs.
G.R. No. 82797

February 27, 1991

GOOD EARTH EMPORIUM INC., and LIM KA PING, petitioners,


vs.
HONORABLE COURT OF APPEALS and ROCES-REYES REALTY INC., respondents.
A.E. Dacanay for petitioners.
Antonio Quintos Law Office for private respondent.

PARAS, J.:
This is a petition for review on certiorari of the December 29, 1987 decision * of the Court of Appeals in CA-G.R.
No. 11960 entitled "ROCES-REYES REALTY, INC. vs. HONORABLE JUDGE REGIONAL TRIAL COURT OF MANILA,
BRANCH 44, GOOD EARTH EMPORIUM, INC. and LIM KA PING" reversing the decision of respondent Judge ** of the
Regional Trial Court of Manila, Branch 44 in Civil Case No. 85-30484, which reversed the resolution of the
Metropolitan Trial Court Of Manila, Branch 28 in Civil Case No. 09639, *** denying herein petitioners' motion to
quash thealias writ of execution issued against them.
As gathered from the records, the antecedent facts of this case, are as follows:
A Lease Contract, dated October 16, 1981, was entered into by and between ROCES-REYES REALTY, INC., as
lessor, and GOOD EARTH EMPORIUM, INC., as lessee, for a term of three years beginning November 1, 1981 and
ending October 31, 1984 at a monthly rental of P65,000.00 (Rollo, p. 32; Annex "C" of Petition). The building
which was the subject of the contract of lease is a five-storey building located at the corner of Rizal Avenue and
Bustos Street in Sta. Cruz, Manila.
From March 1983, up to the time the complaint was filed, the lessee had defaulted in the payment of rentals, as a
consequence of which, private respondent ROCES-REYES REALTY, INC., (hereinafter designated as ROCES for
brevity) filed on October 14, 1984, an ejectment case (Unlawful Detainer) against herein petitioners, GOOD
EARTH EMPORIUM, INC. and LIM KA PING, hereinafter designated as GEE, (Rollo, p. 21; Annex "B" of the Petition).
After the latter had tendered their responsive pleading, the lower court (MTC, Manila) on motion of Roces
rendered judgment on the pleadings dated April 17, 1984, the dispositive portion of which states:
Judgment is hereby rendered ordering defendants (herein petitioners) and all persons claiming title under
him to vacate the premises and surrender the same to the plaintiffs (herein respondents); ordering the
defendants to pay the plaintiffs the rental of P65,000.00 a month beginning March 1983 up to the time
defendants actually vacate the premises and deliver possession to the plaintiff; to pay attorney's fees in
the amount of P5,000.00 and to pay the costs of this suit. (Rollo, p. 111; Memorandum of Respondents)
On May 16, 1984, Roces filed a motion for execution which was opposed by GEE on May 28, 1984 simultaneous
with the latter's filing of a Notice of Appeal (Rollo, p. 112, Ibid.). On June 13, 1984, the trial court resolved such
motion ruling:
After considering the motion for the issuance of a writ of execution filed by counsel for the plaintiff (herein
respondents) and the opposition filed in relation thereto and finding that the defendant failed to file the
necessary supersedeas bond, this court resolved to grant the same for being meritorious. (Rollo, p. 112)
On June 14, 1984, a writ of execution was issued by the lower court. Meanwhile, the appeal was assigned to the
Regional Trial Court (Manila) Branch XLVI. However, on August 15, 1984, GEE thru counsel filed with the Regional
Trial Court of Manila, a motion to withdraw appeal citing as reason that they are satisfied with the decision of the
Metropolitan Trial Court of Manila, Branch XXVIII, which said court granted in its Order of August 27, 1984 and the
records were remanded to the trial court (Rollo, p. 32; CA Decision). Upon an ex-parte Motion of ROCES, the trial
court issued an Alias Writ of Execution dated February 25, 1985 (Rollo, p. 104; Annex "D" of Petitioner's
Memorandum), which was implemented on February 27, 1985. GEE thru counsel filed a motion to quash the writ
of execution and notice of levy and an urgent Ex-parte Supplemental Motion for the issuance of a restraining
order, on March 7, and 20, 1985, respectively. On March 21, 1985, the lower court issued a restraining order to
the sheriff to hold the execution of the judgment pending hearing on the motion to quash the writ of execution
(Rollo, p. 22; RTC Decision). While said motion was pending resolution, GEE filed a Petition for Relief from
judgment before another court, Regional Trial Court of Manila, Branch IX, which petition was docketed as Civil
Case No. 80-30019, but the petition was dismissed and the injunctive writ issued in connection therewith set
aside. Both parties appealed to the Court of Appeals; GEE on the order of dismissal and Roces on denial of his

motion for indemnity, both docketed as CA-G.R. No. 15873-CV. Going back to the original case, the Metropolitan
Trial Court after hearing and disposing some other incidents, promulgated the questioned Resolution, dated April
8, 1985, the dispositive portion of which reads as follows:
Premises considered, the motion to quash the writ is hereby denied for lack of merit.
The restraining orders issued on March 11 and 23, 1985 are hereby recalled, lifted and set aside. (Rollo, p.
20, MTC Decision)
GEE appealed and by coincidence. was raffled to the same Court, RTC Branch IX. Roces moved to dismiss the
appeal but the Court denied the motion. On certiorari, the Court of Appeals dismissed Roces' petition and
remanded the case to the RTC. Meantime, Branch IX became vacant and the case was re-raffled to Branch XLIV.
On April 6, 1987, the Regional Trial Court of Manila, finding that the amount of P1 million evidenced by Exhibit "I"
and another P1 million evidenced by the pacto de retro sale instrument (Exhibit "2") were in full satisfaction of
the judgment obligation, reversed the decision of the Municipal Trial Court, the dispositive portion of which reads:
Premises considered, judgment is hereby rendered reversing the Resolution appealed from quashing the
writ of execution and ordering the cancellation of the notice of levy and declaring the judgment debt as
having been fully paid and/or Liquidated. (Rollo, p. 29).
On further appeal, the Court of Appeals reversed the decision of the Regional Trial Court and reinstated the
Resolution of the Metropolitan Trial Court of Manila, the dispositive portion of which is as follows:
WHEREFORE, the judgment appealed from is hereby REVERSED and the Resolution dated April 8, 1985, of
the Metropolitan Trial Court of Manila Branch XXXIII is hereby REINSTATED. No pronouncement as to costs.
(Rollo, p. 40).
GEE's Motion for Reconsideration of April 5, 1988 was denied (Rollo, p. 43). Hence, this petition.
The main issue in this case is whether or not there was full satisfaction of the judgment debt in favor of
respondent corporation which would justify the quashing of the Writ of Execution.
A careful study of the common exhibits (Exhibits 1/A and 2/B) shows that nowhere in any of said exhibits was
there any writing alluding to or referring to any settlement between the parties of petitioners' judgment
obligation (Rollo, pp. 45-48).
Moreover, there is no indication in the receipt, Exhibit "1", that it was in payment, full or partial, of the judgment
obligation. Likewise, there is no indication in the pacto de retro sale which was drawn in favor of Jesus Marcos
Roces and Marcos V. Roces and not the respondent corporation, that the obligation embodied therein had
something to do with petitioners' judgment obligation with respondent corporation.
Finding that the common exhibit, Exhibit 1/A had been signed by persons other than judgment creditors (RocesReyes Realty, Inc.) coupled with the fact that said exhibit was not even alleged by GEE and Lim Ka Ping in their
original motion to quash the alias writ of execution (Rollo, p. 37) but produced only during the hearing (Ibid.)
which production resulted in petitioners having to claim belatedly that there was an "overpayment" of about half
a million pesos (Rollo, pp. 25-27) and remarking on the utter absence of any writing in Exhibits "1/A" and "2/B" to
indicate payment of the judgment debt, respondent Appellate Court correctly concluded that there was in
fact no payment of the judgment debt. As aptly observed by the said court:
What immediately catches one's attention is the total absence of any writing alluding to or referring to
any settlement between the parties of private respondents' (petitioners') judgment obligation. In moving
for the dismissal of the appeal Lim Ka Ping who was then assisted by counsel simply stated that
defendants (herein petitioners) are satisfied with the decision of the Metropolitan Trial Court (Records of
CA, p. 54).
Notably, in private respondents' (petitioners') Motion to Quash the Writ of Execution and Notice of Levy
datedMarch 7, 1985, there is absolutely no reference to the alleged payment of one million pesos as
evidenced by Exhibit 1 dated September 20, 1984. As pointed out by petitioner (respondent corporation)
this was brought out by Linda Panutat, Manager of Good Earth only in the course of the latter's testimony.
(Rollo, p. 37)

Article 1240 of the Civil Code of the Philippines provides that:


Payment shall be made to the person in whose favor the obligation has been constituted, or his successor
in interest, or any person authorized to receive it.
In the case at bar, the supposed payments were not made to Roces-Reyes Realty, Inc. or to its successor in
interest nor is there positive evidence that the payment was made to a person authorized to receive it. No such
proof was submitted but merely inferred by the Regional Trial Court (Rollo, p. 25) from Marcos Roces having
signed the Lease Contract as President which was witnessed by Jesus Marcos Roces. The latter, however, was no
longer President or even an officer of Roces-Reyes Realty, Inc. at the time he received the money (Exhibit "1")
and signed the sale with pacto de retro (Exhibit "2"). He, in fact, denied being in possession of authority to
receive payment for the respondent corporation nor does the receipt show that he signed in the same capacity as
he did in the Lease Contract at a time when he was President for respondent corporation (Rollo, p. 20, MTC
decision).
On the other hand, Jesus Marcos Roces testified that the amount of P1 million evidenced by the receipt (Exhibit
"1") is the payment for a loan extended by him and Marcos Roces in favor of Lim Ka Ping. The assertion is home
by the receipt itself whereby they acknowledged payment of the loan in their names and in no other capacity.
A corporation has a personality distinct and separate from its individual stockholders or members. Being an
officer or stockholder of a corporation does not make one's property also of the corporation, and vice-versa, for
they are separate entities (Traders Royal Bank v. CA-G.R. No. 78412, September 26, 1989; Cruz v. Dalisay, 152
SCRA 482). Shareowners are in no legal sense the owners of corporate property (or credits) which is owned by
the corporation as a distinct legal person (Concepcion Magsaysay-Labrador v. CA-G.R. No. 58168, December 19,
1989). As a consequence of the separate juridical personality of a corporation, the corporate debt or credit is not
the debt or credit of the stockholder, nor is the stockholder's debt or credit that of the corporation (Prof. Jose
Nolledo's "The Corporation Code of the Philippines, p. 5, 1988 Edition, citing Professor Ballantine).
The absence of a note to evidence the loan is explained by Jesus Marcos Roces who testified that the IOU was
subsequently delivered to private respondents (Rollo, pp. 97-98). Contrary to the Regional Trial Court's premise
that it was incumbent upon respondent corporation to prove that the amount was delivered to the Roces brothers
in the payment of the loan in the latter's favor, the delivery of the amount to and the receipt thereof by the Roces
brothers in their names raises the presumption that the said amount was due to them.1wphi1 There is a
disputable presumption that money paid by one to the other was due to the latter (Sec. 5(f) Rule 131, Rules of
Court). It is for GEE and Lim Ka Ping to prove otherwise. In other words, it is for the latter to prove that the
payments made were for the satisfaction of their judgment debt and not vice versa.
The fact that at the time payment was made to the two Roces brothers, GEE was also indebted to respondent
corporation for a larger amount, is not supportive of the Regional Trial Court's conclusions that the payment was
in favor of the latter, especially in the case at bar where the amount was not receipted for by respondent
corporation and there is absolutely no indication in the receipt from which it can be reasonably inferred, that said
payment was in satisfaction of the judgment debt. Likewise, no such inference can be made from the execution of
the pacto de retro sale which was not made in favor of respondent corporation but in favor of the two Roces
brothers in their individual capacities without any reference to the judgment obligation in favor of respondent
corporation.
In addition, the totality of the amount covered by the receipt (Exhibit "1/A") and that of the sale with pacto de
retro(Exhibit "2/B") all in the sum of P2 million, far exceeds petitioners' judgment obligation in favor of
respondent corporation in the sum of P1,560,000.00 by P440,000.00, which militates against the claim of
petitioner that the aforesaid amount (P2M) was in full payment of the judgment obligation.
Petitioners' explanation that the excess is interest and advance rentals for an extension of the lease contract
(Rollo, pp. 25-28) is belied by the absence of any interest awarded in the case and of any agreement as to the
extension of the lease nor was there any such pretense in the Motion to Quash the Alias Writ of Execution.
Petitioners' averments that the respondent court had gravely abused its discretion in arriving at the assailed
factual findings as contrary to the evidence and applicable decisions of this Honorable Court are therefore,
patently unfounded. Respondent court was correct in stating that it "cannot go beyond what appears in the
documents submitted by petitioners themselves (Exhibits "1" and "2") in the absence of clear and convincing
evidence" that would support its claim that the judgment obligation has indeed been fully satisfied which would
warrant the quashal of the Alias Writ of Execution.

It has been an established rule that when the existence of a debt is fully established by the evidence (which has
been done in this case), the burden of proving that it has been extinguished by payment devolves upon the
debtor who offers such a defense to the claim of the plaintiff creditor (herein respondent corporation) (Chua
Chienco v. Vargas, 11 Phil. 219; Ramos v. Ledesma, 12 Phil. 656; Pinon v. De Osorio, 30 Phil. 365). For indeed, it is
well-entrenched in Our jurisprudence that each party in a case must prove his own affirmative allegations by the
degree of evidence required by law (Stronghold Insurance Co. v. CA, G.R. No. 83376, May 29,1989; Tai Tong
Chuache & Co. v. Insurance Commission, 158 SCRA 366).
The appellate court cannot, therefore, be said to have gravely abused its discretion in finding lack of convincing
and reliable evidence to establish payment of the judgment obligation as claimed by petitioner. The burden of
evidence resting on the petitioners to establish the facts upon which their action is premised has not been
satisfactorily discharged and therefore, they have to bear the consequences.
PREMISES CONSIDERED, the petition is hereby DENIED and the Decision of the Respondent court is hereby
AFFIRMED, reinstating the April 8, 1985 Resolution of the Metropolitan Trial Court of Manila.
SO ORDERED.
G.R. No. 89561 September 13, 1990
BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M. CASTILLO, BERTILLA C. RADA,
MARIETTA C. ABAEZ, LEOVINA C. JALBUENA and SANTIAGO M. RIVERA, petitioners,
vs.
COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS MANUFACTURING CO.,
INC.,respondents.
Edmundo T. Zepeda for petitioners.
Martin M. De Guzman for respondent BORMAHECO, Inc.
Renato J. Robles for P.M. Parts Manufacturing Co., Inc.

REGALADO, J.:
This is a petition to review the decision of respondent Court of Appeals, dated August 3, 1989, in CA-GR CV No.
15412, entitled "Buenaflor M. Castillo Umali, et al. vs. Philippine Machinery Parts Manufacturing Co., Inc., et
al.," 1the dispositive portion whereof provides:
WHEREFORE, viewed in the light of the entire record, the judgment appealed from must be, as it is
hereby REVERSED. In lieu thereof, a judgment is hereby rendered1) Dismissing the complaint, with cost against plaintiffs;
2) Ordering plaintiffs-appellees to vacate the subject properties; and
3) Ordering plaintiffs-appellees to pay upon defendants' counterclaims:
a) To defendant-appellant PM Parts: (i) damages consisting of the value of the fruits
in the subject parcels of land of which they were deprived in the sum of P26,000.00
and (ii) attorney's fees of P15,000.00
b) To defendant-appellant Bormaheco: (i) expenses of litigation in the amount of
P5,000.00 and (ii) attorney's fees of P15,000.00.
SO ORDERED.

The original complaint for annulment of title filed in the court a quo by herein petitioners included as party
defendants the Philippine Machinery Parts Manufacturing Co., Inc. (PM Parts), Insurance Corporation of the
Philippines (ICP), Bormaheco, Inc., (Bormaheco) and Santiago M. Rivera (Rivera). A Second Amended Complaint
was filed, this time impleading Santiago M. Rivera as party plaintiff.
During the pre-trial conference, the parties entered into the following stipulation of facts:
As between all parties: Plaintiff Buenaflor M. Castillo is the judicial administratrix of
the estate of Felipe Castillo in Special Proceeding No. 4053, pending before Branch
IX, CFI of Quezon (per Exhibit A) which intestate proceedings was instituted by
Mauricia Meer Vda. de Castillo, the previous administratrix of the said proceedings
prior to 1970 (per exhibits A-1 and A-2) which case was filed in Court way back in
1964;
b) The four (4) parcels of land described in paragraph 3 of the Complaint were
originally covered by TCT No. T-42104 and Tax Dec. No. 14134 with assessed value
of P3,100.00; TCT No. T 32227 and Tax Dec. No. 14132, with assessed value of
P5,130,00; TCT No. T-31762 and Tax Dec. No. 14135, with assessed value of
P6,150.00; and TCT No. T-42103 with Tax Dec. No. 14133, with assessed value of
P3,580.00 (per Exhibits A-2 and B, B-1 to B-3 C, C-1 -to C3
c) That the above-enumerated four (4) parcels of land were the subject of the Deed
of Extra-Judicial Partition executed by the heirs of Felipe Castillo (per Exhibit D) and
by virtue thereof the titles thereto has (sic) been cancelled and in lieu thereof, new
titles in the name of Mauricia Meer Vda. de Castillo and of her children, namely:
Buenaflor, Bertilla, Victoria, Marietta and Leovina, all surnamed Castillo has (sic)
been issued, namely: TCT No. T-12113 (Exhibit E ); TCT No. T-13113 (Exhibit F); TCT
No. T-13116 (Exhibit G ) and TCT No. T13117 (Exhibit H )
d) That mentioned parcels of land were submitted as guaranty in the Agreement of
Counter-Guaranty with Chattel-Real Estate Mortgage executed on 24 October 1970
between Insurance Corporation of the Philippines and Slobec Realty Corporation
represented by Santiago Rivera (Exhibit 1);
e) That based on the Certificate of Sale issued by the Sheriff of the Province of
Quezon in favor of Insurance Corporation of the Philippines it was able to transfer
to itself the titles over the lots in question, namely: TCT No. T-23705 (Exhibit M),
TCT No. T 23706 (Exhibit N ), TCT No. T-23707 (Exhibit 0) and TCT No. T 23708
(Exhibit P);
f) That on 10 April 1975, the Insurance Corporation of the Philippines sold to PM
Parts the immovables in question (per Exhibit 6 for PM Parts) and by reason
thereof, succeeded in transferring unto itself the titles over the lots in dispute,
namely: per TCT No. T-24846 (Exhibit Q ), per TCT No. T-24847 (Exhibit R ), TCT No.
T-24848 (Exhibit), TCT No. T-24849 (Exhibit T );
g) On 26 August l976, Mauricia Meer Vda. de Castillo' genther letter to Modesto N.
Cervantes stating that she and her children refused to comply with his demands
(Exhibit V-2);
h) That from at least the months of October, November and December 1970 and
January 1971, Modesto N. Cervantes was the Vice-President of Bormaheco, Inc.
later President thereof, and also he is one of the Board of Directors of PM Parts; on
the other hand, Atty. Martin M. De Guzman was the legal counsel of Bormaheco,
Inc., later Executive Vice-President thereof, and who also is the legal counsel of
Insurance Corporation of the Philippines and PM Parts; that Modesto N. Cervantes

served later on as President of PM Parts, and that Atty. de Guzman was retained by
Insurance Corporation of the Philippines specifically for foreclosure purposes only;
i) Defendant Bormaheco, Inc. on November 25, 1970 sold to Slobec Realty and
Development, Inc., represented by Santiago Rivera, President, one (1) unit
Caterpillar Tractor D-7 with Serial No. 281114 evidenced by a contract marked
Exhibit J and Exhibit I for Bormaheco, Inc.;
j) That the Surety Bond No. 14010 issued by co-defendant ICP was likewise secured
by an Agreement with Counter-Guaranty with Real Estate Mortgage executed by
Slobec Realty & Development, Inc., Mauricia Castillo Meer, Buenaflor Castillo,
Bertilla Castillo, Victoria Castillo, Marietta Castillo and Leovina Castillo, as
mortgagors in favor of ICP which document was executed and ratified before notary
public Alberto R. Navoa of the City of Manila on October 24,1970;
k) That the property mortgaged consisted of four (4) parcels of land situated in
Lucena City and covered by TCT Nos. T-13114, T13115,
T-13116 and T-13117 of the Register of Deeds of Lucena City;
l) That the tractor sold by defendant Bormaheco, Inc. to Slobec Realty &
Development, Inc. was delivered to Bormaheco, Inc. on or about October 2,1973,
by Mr. Menandro Umali for purposes of repair;
m) That in August 1976, PM Parts notified Mrs. Mauricia Meer about its ownership
and the assignment of Mr. Petronilo Roque as caretaker of the subject property;
n) That plaintiff and other heirs are harvest fruits of the property (daranghita)
which is worth no less than Pl,000.00 per harvest.
As between plaintiffs and
defendant Bormaheco, Inc
o) That on 25 November 1970, at Makati, Rizal, Same Rivera, in representation of
the Slobec Realty & Development Corporation executed in favor of Bormaheco,
Inc., represented by its Vice-President Modesto N. Cervantes a Chattel Mortgage
concerning one unit model CAT D7 Caterpillar Crawler Tractor as described therein
as security for the payment in favor of the mortgagee of the amount of
P180,000.00 (per Exhibit K) that Id document was superseded by another chattel
mortgage dated January 23, 1971 (Exhibit 15);
p) On 18 December 1970, at Makati, Rizal, the Bormaheco, Inc., represented by its
Vice-President Modesto Cervantes and Slobec Realty Corporation represented by
Santiago Rivera executed the sales agreement concerning the sale of one (1) unit
Model CAT D7 Caterpillar Crawler Tractor as described therein for the amount of
P230,000.00 (per Exhibit J) which document was superseded by the Sales
Agreement dated January 23,1971 (Exhibit 16);
q) Although it appears on the document entitled Chattel Mortgage (per Exhibit K)
that it was executed on 25 November 1970, and in the document entitled Sales
Agreement (per Exhibit J) that it was executed on 18 December 1970, it appears in
the notarial register of the notary public who notarized them that those two
documents were executed on 11 December 1970. The certified xerox copy of the
notarial register of Notary Public Guillermo Aragones issued by the Bureau of
Records Management is hereto submitted as Exhibit BB That said chattel mortgage
was superseded by another document dated January 23, 1971;

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


by Santiago Rivera, received from Bormaheco, Inc. one (1) tractor Caterpillar Model
D-7 pursuant to Invoice No. 33234 (Exhibits 9 and 9-A, Bormaheco, Inc.) and
delivery receipt No. 10368 (per Exhibits 10 and 10-A for Bormaheco, Inc
s) That on 28 September 1973, Atty. Martin M. de Guzman, as counsel of Insurance
Corporation of the Philippines purchased at public auction for said corporation the
four (4) parcels of land subject of tills case (per Exhibit L), and which document was
presented to the Register of Deeds on 1 October 1973;
t) Although it appears that the realties in issue has (sic) been sold by Insurance
Corporation of the Philippines in favor of PM Parts on 1 0 April 1975, Modesto N.
Cervantes, formerly Vice- President and now President of Bormaheco, Inc., sent his
letter dated 9 August 1976 to Mauricia Meer Vda. de Castillo (Exhibit V),
demanding that she and her children should vacate the premises;
u) That the Caterpillar Crawler Tractor Model CAT D-7 which was received by Slobec
Realty Development Corporation was actually reconditioned and repainted. " 2
We cull the following antecedents from the decision of respondent Court of Appeals:
Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de Castillo. The Castillo
family are the owners of a parcel of land located in Lucena City which was given as security for a
loan from the Development Bank of the Philippines. For their failure to pay the amortization,
foreclosure of the said property was about to be initiated. This problem was made known to
Santiago Rivera, who proposed to them the conversion into subdivision of the four (4) parcels of
land adjacent to the mortgaged property to raise the necessary fund. The Idea was accepted by
the Castillo family and to carry out the project, a Memorandum of Agreement (Exh. U p. 127,
Record) was executed by and between Slobec Realty and Development, Inc., represented by its
President Santiago Rivera and the Castillo family. In this agreement, Santiago Rivera obliged
himself to pay the Castillo family the sum of P70,000.00 immediately after the execution of the
agreement and to pay the additional amount of P400,000.00 after the property has been
converted into a subdivision. Rivera, armed with the agreement, Exhibit U , approached Mr.
Modesto Cervantes, President of defendant Bormaheco, and proposed to purchase from
Bormaheco two (2) tractors Model D-7 and D-8 Subsequently, a Sales Agreement was executed on
December 28,1970 (Exh. J, p. 22, Record).
On January 23, 1971, Bormaheco, Inc. and Slobec Realty and Development, Inc., represented by
its President, Santiago Rivera, executed a Sales Agreement over one unit of Caterpillar Tractor D-7
with Serial No. 281114, as evidenced by the contract marked Exhibit '16'. As shown by the
contract, the price was P230,000.00 of which P50,000.00 was to constitute a down payment, and
the balance of P180,000.00 payable in eighteen monthly installments. On the same date, Slobec,
through Rivera, executed in favor of Bormaheco a Chattel Mortgage (Exh. K, p. 29, Record) over
the said equipment as security for the payment of the aforesaid balance of P180,000.00. As
further security of the aforementioned unpaid balance, Slobec obtained from Insurance
Corporation of the Phil. a Surety Bond, with ICP (Insurance Corporation of the Phil.) as surety and
Slobec as principal, in favor of Bormaheco, as borne out by Exhibit '8' (p. 111, Record). The
aforesaid surety bond was in turn secured by an Agreement of Counter-Guaranty with Real Estate
Mortgage (Exhibit I, p. 24, Record) executed by Rivera as president of Slobec and Mauricia Meer
Vda. de Castillo, Buenaflor Castillo Umali, Bertilla Castillo-Rada, Victoria Castillo, Marietta Castillo
and Leovina Castillo Jalbuena, as mortgagors and Insurance Corporation of the Philippines (ICP) as
mortgagee. In this agreement, ICP guaranteed the obligation of Slobec with Bormaheco in the
amount of P180,000.00. In giving the bond, ICP required that the Castillos mortgage to them the
properties in question, namely, four parcels of land covered by TCTs in the name of the
aforementioned mortgagors, namely TCT Nos. 13114, 13115, 13116 and 13117 all of the Register
of Deeds for Lucena City.

On the occasion of the execution on January 23, 1971, of the Sales Agreement Exhibit '16', Slobec,
represented by Rivera received from Bormaheco the subject matter of the said Sales Agreement,
namely, the aforementioned tractor Caterpillar Model D-7 as evidenced by Invoice No. 33234
(Exhs. 9 and 9-A, p. 112, Record) and Delivery Receipt No. 10368 (Exhs. 10 and 10-A, p. 113). This
tractor was known by Rivera to be a reconditioned and repainted one [Stipulation of Facts, Pre-trial
Order, par. (u)].
Meanwhile, for violation of the terms and conditions of the Counter-Guaranty Agreement (Exh. 1),
the properties of the Castillos were foreclosed by ICP As the highest bidder with a bid of
P285,212.00, a Certificate of Sale was issued by the Provincial Sheriff of Lucena City and Transfer
Certificates of Title over the subject parcels of land were issued by the Register of Deeds of Lucena
City in favor of ICP namely, TCT Nos. T-23705, T 23706, T-23707 and T-23708 (Exhs. M to P, pp. 3845). The mortgagors had one (1) year from the date of the registration of the certificate of sale,
that is, until October 1, 1974, to redeem the property, but they failed to do so. Consequently, ICP
consolidated its ownership over the subject parcels of land through the requisite affidavit of
consolidation of ownership dated October 29, 1974, as shown in Exh. '22'(p. 138, Rec.). Pursuant
thereto, a Deed of Sale of Real Estate covering the subject properties was issued in favor of ICP
(Exh. 23, p. 139, Rec.).
On April 10, 1975, Insurance Corporation of the Phil. ICP sold to Phil. Machinery Parts
Manufacturing Co. (PM Parts) the four (4) parcels of land and by virtue of said conveyance, PM
Parts transferred unto itself the titles over the lots in dispute so that said parcels of land are now
covered by TCT Nos. T-24846, T-24847, T-24848 and T-24849 (Exhs. Q-T, pp. 46-49, Rec.).
Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a letter dated August
9,1976 addressed to plaintiff Mrs. Mauricia Meer Castillo requesting her and her children to vacate
the subject property, who (Mrs. Castillo) in turn sent her reply expressing her refusal to comply
with his demands.
On September 29, 1976, the heirs of the late Felipe Castillo, particularly plaintiff Buenaflor M.
Castillo Umali as the appointed administratrix of the properties in question filed an action for
annulment of title before the then Court of First Instance of Quezon and docketed thereat as Civil
Case No. 8085. Thereafter, they filed an Amended Complaint on January 10, 1980 (p. 444, Record).
On July 20, 1983, plaintiffs filed their Second Amended Complaint, impleading Santiago M. Rivera
as a party plaintiff (p. 706, Record). They contended that all the aforementioned transactions
starting with the Agreement of Counter-Guaranty with Real Estate Mortgage (Exh. I), Certificate of
Sale (Exh. L) and the Deeds of Authority to Sell, Sale and the Affidavit of Consolidation of
Ownership (Annexes F, G, H, I) as well as the Deed of Sale (Annexes J, K, L and M) are void for
being entered into in fraud and without the consent and approval of the Court of First Instance of
Quezon, (Branch IX) before whom the administration proceedings has been pending. Plaintiffs pray
that the four (4) parcels of land subject hereof be declared as owned by the estate of the late
Felipe Castillo and that all Transfer Certificates of Title Nos. 13114,13115,13116,13117, 23705,
23706, 23707, 23708, 24846, 24847, 24848 and 24849 as well as those appearing as
encumbrances at the back of the certificates of title mentioned be declared as a nullity and
defendants to pay damages and attorney's fees (pp. 71071 1, Record).
In their amended answer, the defendants controverted the complaint and alleged, by way of
affirmative and special defenses that the complaint did not state facts sufficient to state a cause
of action against defendants; that plaintiffs are not entitled to the reliefs demanded; that plaintiffs
are estopped or precluded from asserting the matters set forth in the Complaint; that plaintiffs are
guilty of laches in not asserting their alleged right in due time; that defendant PM Parts is an
innocent purchaser for value and relied on the face of the title before it bought the subject
property (p. 744, Record). 3
After trial, the court a quo rendered judgment, with the following decretal portion:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants,
declaring the following documents:
Agreement of Counter-Guaranty with Chattel-Real Estate Mortgage dated October
24,1970 (Exhibit 1);
Sales Agreement dated December 28, 1970 (Exhibit J)
Chattel Mortgage dated November 25, 1970 (Exhibit K)
Sales Agreement dated January 23, 1971 (Exhibit 16);
Chattel Mortgage dated January 23, 1971 (Exhibit 17);
Certificate of Sale dated September 28, 1973 executed by the Provincial Sheriff of
Quezon in favor of Insurance Corporation of the Philippines (Exhibit L);
null and void for being fictitious, spurious and without consideration. Consequently, Transfer
Certificates of Title Nos. T 23705, T-23706, T23707 and T-23708 (Exhibits M, N, O and P) issued in
the name of Insurance Corporation of the Philippines, are likewise null and void.
The sale by Insurance Corporation of the- Philippines in favor of defendant Philippine Machinery
Parts Manufacturing Co., Inc., over Id four (4) parcels of land and Transfer Certificates of Title Nos.
T 24846, T-24847, T-24848 and T-24849 subsequently issued by virtue of said sale in the name of
Philippine Machinery Parts Manufacturing Co., Inc., are similarly declared null and void, and the
Register of Deeds of Lucena City is hereby directed to issue, in lieu thereof, transfer certificates of
title in the names of the plaintiffs, except Santiago Rivera.
Orders the defendants jointly and severally to pay the plaintiffs moral damages in the sum of
P10,000.00, exemplary damages in the amount of P5,000.00, and actual litigation expenses in the
sum of P6,500.00.
Defendants are likewise ordered to pay the plaintiffs, jointly and severally, the sum of P10,000.00
for and as attomey's fees. With costs against the defendants.
SO ORDERED.

As earlier stated, respondent court reversed the aforequoted decision of the trial court and rendered the
judgment subject of this petitionPetitioners contend that respondent Court of Appeals erred:
1. In holding and finding that the actions entered into between petitioner Rivera with Cervantes
are all fair and regular and therefore binding between the parties thereto;
2. In reversing the decision of the lower court, not only based on erroneous conclusions of facts,
erroneous presumptions not supported by the evidence on record but also, holding valid and
binding the supposed payment by ICP of its obligation to Bormaheco, despite the fact that the
surety bond issued it had already expired when it opted to foreclose extrajudically the mortgage
executed by the petitioners;
3. In aside the finding of the lower court that there was necessity to pierce the veil of corporate
existence; and
4. In reversing the decision of the lower court of affirming the same

I. Petitioners aver that the transactions entered into between Santiago M. Rivera, as President of Slobec Realty
and Development Company (Slobec) and Mode Cervantes, as Vice-President of Bormaheco, such as the Sales
Agreement, 6 Chattel Mortgage 7 and the Agreement of Counter-Guaranty with Chattel/Real Estate
Mortgage, 8 are all fraudulent and simulated and should, therefore, be declared nun and void. Such allegation is
premised primarily on the fact that contrary to the stipulations agreed upon in the Sales Agreement (Exhibit J),
Rivera never made any advance payment, in the alleged amount of P50,000.00, to Bormaheco; that the tractor
was received by Rivera only on January 23, 1971 and not in 1970 as stated in the Chattel Mortgage (Exhibit K);
and that when the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage was executed on October
24, 1970, to secure the obligation of ICP under its surety bond, the Sales Agreement and Chattel Mortgage had
not as yet been executed, aside from the fact that it was Bormaheco, and not Rivera, which paid the premium for
the surety bond issued by ICP
At the outset, it will be noted that petitioners submission under the first assigned error hinges purely on
questions of fact. Respondent Court of Appeals made several findings to the effect that the questioned
documents are valid and binding upon the parties, that there was no fraud employed by private respondents in
the execution thereof, and that, contrary to petitioners' allegation, the evidence on record reveals that petitioners
had every intention to be bound by their undertakings in the various transactions had with private respondents. It
is a general rule in this jurisdiction that findings of fact of said appellate court are final and conclusive and, thus,
binding on this Court in the absence of sufficient and convincing proof, inter alia, that the former acted with
grave abuse of discretion. Under the circumstances, we find no compelling reason to deviate from this longstanding jurisprudential pronouncement.
In addition, the alleged failure of Rivera to pay the consideration agreed upon in the Sales Agreement, which
clearly constitutes a breach of the contract, cannot be availed of by the guilty party to justify and support an
action for the declaration of nullity of the contract. Equity and fair play dictates that one who commits a breach of
his contract may not seek refuge under the protective mantle of the law.
The evidence of record, on an overall calibration, does not convince us of the validity of petitioners' contention
that the contracts entered into by the parties are either absolutely simulated or downright fraudulent.
There is absolute simulation, which renders the contract null and void, when the parties do not intend to be
bound at all by the same. 9 The basic characteristic of this type of simulation of contract is the fact that the
apparent contract is not really desired or intended to either produce legal effects or in any way alter the juridical
situation of the parties. The subsequent act of Rivera in receiving and making use of the tractor subject matter of
the Sales Agreement and Chattel Mortgage, and the simultaneous issuance of a surety bond in favor of
Bormaheco, concomitant with the execution of the Agreement of Counter-Guaranty with Chattel/Real Estate
Mortgage, conduce to the conclusion that petitioners had every intention to be bound by these contracts. The
occurrence of these series of transactions between petitioners and private respondents is a strong indication that
the parties actually intended, or at least expected, to exact fulfillment of their respective obligations from one
another.
Neither will an allegation of fraud prosper in this case where petitioners failed to show that they were induced to
enter into a contract through the insidious words and machinations of private respondents without which the
former would not have executed such contract. To set aside a document solemnly executed and voluntarily
delivered, the proof of fraud must be clear and convincing. 10 We are not persuaded that such quantum of proof
exists in the case at bar.
The fact that it was Bormaheco which paid the premium for the surety bond issued by ICP does not per se affect
the validity of the bond. Petitioners themselves admit in their present petition that Rivera executed a Deed of
Sale with Right of Repurchase of his car in favor of Bormaheco and agreed that a part of the proceeds thereof
shall be used to pay the premium for the bond. 11 In effect, Bormaheco accepted the payment of the premium as
an agent of ICP The execution of the deed of sale with a right of repurchase in favor of Bormaheco under such
circumstances sufficiently establishes the fact that Rivera recognized Bormaheco as an agent of ICP Such
payment to the agent of ICP is, therefore, binding on Rivera. He is now estopped from questioning the validity of
the suretyship contract.

II. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction
that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders
may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The
members or stockholders of the corporation will be considered as the corporation, that is, liability will attach
directly to the officers and stockholders. 12 The doctrine applies when the corporate fiction is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, 13 or when it is made as a shield to confuse the
legitimate issues 14 or where a corporation is the mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.15
In the case at bar, petitioners seek to pierce the V621 Of corporate entity of Bormaheco, ICP and PM Parts,
alleging that these corporations employed fraud in causing the foreclosure and subsequent sale of the real
properties belonging to petitioners While we do not discount the possibility of the existence of fraud in the
foreclosure proceeding, neither are we inclined to apply the doctrine invoked by petitioners in granting the relief
sought. It is our considered opinion that piercing the veil of corporate entity is not the proper remedy in order
that the foreclosure proceeding may be declared a nullity under the circumstances obtaining in the legal case at
bar.
In the first place, the legal corporate entity is disregarded only if it is sought to hold the officers and stockholders
directly liable for a corporate debt or obligation. In the instant case, petitioners do not seek to impose a claim
against the individual members of the three corporations involved; on the contrary, it is these corporations which
desire to enforce an alleged right against petitioners. Assuming that petitioners were indeed defrauded by private
respondents in the foreclosure of the mortgaged properties, this fact alone is not, under the circumstances,
sufficient to justify the piercing of the corporate fiction, since petitioners do not intend to hold the officers and/or
members of respondent corporations personally liable therefor. Petitioners are merely seeking the declaration of
the nullity of the foreclosure sale, which relief may be obtained without having to disregard the aforesaid
corporate fiction attaching to respondent corporations. Secondly, petitioners failed to establish by clear and
convincing evidence that private respondents were purposely formed and operated, and thereafter transacted
with petitioners, with the sole intention of defrauding the latter.
The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a justification for
disregarding their separate personalities, 16 absent sufficient showing that the corporate entity was purposely
used as a shield to defraud creditors and third persons of their rights.
III. The main issue for resolution is whether there was a valid foreclosure of the mortgaged properties by ICP
Petitioners argue that the foreclosure proceedings should be declared null and void for two reasons, viz.: (1) no
written notice was furnished by Bormaheco to ICP anent the failure of Slobec in paying its obligation with the
former, plus the fact that no receipt was presented to show the amount allegedly paid by ICP to Bormaheco; and
(b) at the time of the foreclosure of the mortgage, the liability of ICP under the surety bond had already expired.
Respondent court, in finding for the validity of the foreclosure sale, declared:
Now to the question of whether or not the foreclosure by the ICP of the real estate mortgage was
in the exercise of a legal right, We agree with the appellants that the foreclosure proceedings
instituted by the ICP was in the exercise of a legal right. First, ICP has in its favor the legal
presumption that it had indemnified Bormaheco by reason of Slobec's default in the payment of its
obligation under the Sales Agreement, especially because Bormaheco consented to ICPs
foreclosure of the mortgage. This presumption is in consonance with pars. R and Q Section 5, Rule
5, * New Rules of Court which provides that it is disputably presumed that private transactions
have been fair and regular. likewise, it is disputably presumed that the ordinary course of business
has been followed: Second, ICP had the right to proceed at once to the foreclosure of the
mortgage as mandated by the provisions of Art. 2071 Civil Code for these further reasons: Slobec,
the principal debtor, was admittedly insolvent; Slobec's obligation becomes demandable by
reason of the expiration of the period of payment; and its authorization to foreclose the mortgage
upon Slobec's default, which resulted in the accrual of ICPS liability to Bormaheco. Third, the
Agreement of Counter-Guaranty with Real Estate Mortgage (Exh. 1) expressly grants to ICP the

right to foreclose the real estate mortgage in the event of 'non-payment or non-liquidation of the
entire indebtedness or fraction thereof upon maturity as stipulated in the contract'. This is a valid
and binding stipulation in the absence of showing that it is contrary to law, morals, good customs,
public order or public policy. (Art. 1306, New Civil Code). 17
1. Petitioners asseverate that there was no notice of default issued by Bormaheco to ICP which would have
entitled Bormaheco to demand payment from ICP under the suretyship contract.
Surety Bond No. B-1401 0 which was issued by ICP in favor of Bormaheco, wherein ICP and Slobec undertook to
guarantee the payment of the balance of P180,000.00 payable in eighteen (18) monthly installments on one unit
of Model CAT D-7 Caterpillar Crawler Tractor, pertinently provides in part as follows:
1. The liability of INSURANCE CORPORATION OF THE PHILIPPINES, under this BOND will expire
Twelve (I 2) months from date hereof. Furthermore, it is hereby agreed and understood that the
INSURANCE CORPORATION OF THE PHILIPPINES will not be liable for any claim not presented in
writing to the Corporation within THIRTY (30) DAYS from the expiration of this BOND, and that the
obligee hereby waives his right to bring claim or file any action against Surety and after the
termination of one (1) year from the time his cause of action accrues. 18
The surety bond was dated October 24, 1970. However, an annotation on the upper part thereof states:
"NOTE: EFFECTIVITY DATE OF THIS BOND SHALL BE ON JANUARY 22, 1971." 19
On the other hand, the Sales Agreement dated January 23, 1971 provides that the balance of P180,000.00 shall
be payable in eighteen (18) monthly installments. 20 The Promissory Note executed by Slobec on even date in
favor of Bormaheco further provides that the obligation shall be payable on or before February 23, 1971 up to July
23, 1972, and that non-payment of any of the installments when due shall make the entire obligation
immediately due and demandable. 21
It is basic that liability on a bond is contractual in nature and is ordinarily restricted to the obligation expressly
assumed therein. We have repeatedly held that the extent of a surety's liability is determined only by the clause
of the contract of suretyship as well as the conditions stated in the bond. It cannot be extended by implication
beyond the terms the contract. 22
Fundamental likewise is the rule that, except where required by the provisions of the contract, a demand or
notice of default is not required to fix the surety's liability. 23 Hence, where the contract of suretyship stipulates
that notice of the principal's default be given to the surety, generally the failure to comply with the condition will
prevent recovery from the surety. There are certain instances, however, when failure to comply with the condition
will not extinguish the surety's liability, such as a failure to give notice of slight defaults, which are waived by the
obligee; or on mere suspicion of possible default; or where, if a default exists, there is excuse or provision in the
suretyship contract exempting the surety for liability therefor, or where the surety already has knowledge or is
chargeable with knowledge of the default. 24
In the case at bar, the suretyship contract expressly provides that ICP shag not be liable for any claim not filed in
writing within thirty (30) days from the expiration of the bond. In its decision dated May 25 1987, the court a
quocategorically stated that '(n)o evidence was presented to show that Bormaheco demanded payment from ICP
nor was there any action taken by Bormaheco on the bond posted by ICP to guarantee the payment of plaintiffs
obligation. There is nothing in the records of the proceedings to show that ICP indemnified Bormaheco for the
failure of the plaintiffs to pay their obligation. " 25 The failure, therefore, of Bormaheco to notify ICP in writing
about Slobec's supposed default released ICP from liability under its surety bond. Consequently, ICP could not
validly foreclose that real estate mortgage executed by petitioners in its favor since it never incurred any liability
under the surety bond. It cannot claim exemption from the required written notice since its case does not fall
under any of the exceptions hereinbefore enumerated.
Furthermore, the allegation of ICP that it has paid Bormaheco is not supported by any documentary evidence.
Section 1, Rule 131 of the Rules of Court provides that the burden of evidence lies with the party who asserts an
affirmative allegation. Since ICP failed to duly prove the fact of payment, the disputable presumption that private

transactions have been fair and regular, as erroneously relied upon by respondent Court of Appeals, finds no
application to the case at bar.
2. The liability of a surety is measured by the terms of his contract, and, while he is liable to the full extent
thereof, such liability is strictly limited to that assumed by its terms. 26 While ordinarily the termination of a
surety's liability is governed by the provisions of the contract of suretyship, where the obligation of a surety is,
under the terms of the bond, to terminate at a specified time, his obligation cannot be enlarged by an
unauthorized extension thereof. 27 This is an exception to the general rule that the obligation of the surety
continues for the same period as that of the principal debtor.28
It is possible that the period of suretyship may be shorter than that of the principal obligation, as where the
principal debtor is required to make payment by installments. 29 In the case at bar, the surety bond issued by ICP
was to expire on January 22, 1972, twelve (1 2) months from its effectivity date, whereas Slobec's installment
payment was to end on July 23, 1972. Therefore, while ICP guaranteed the payment by Slobec of the balance of
P180,000.00, such guaranty was valid only for and within twelve (1 2) months from the date of effectivity of the
surety bond, or until January 22, 1972. Thereafter, from January 23, 1972 up to July 23, 1972, the liability of
Slobec became an unsecured obligation. The default of Slobec during this period cannot be a valid basis for the
exercise of the right to foreclose by ICP since its surety contract had already been terminated. Besides, the
liability of ICP was extinguished when Bormaheco failed to file a written claim against it within thirty (30) days
from the expiration of the surety bond. Consequently, the foreclosure of the mortgage, after the expiration of the
surety bond under which ICP as surety has not incurred any liability, should be declared null and void.
3. Lastly, it has been held that where The guarantor holds property of the principal as collateral surety for his
personal indemnity, to which he may resort only after payment by himself, until he has paid something as such
guarantor neither he nor the creditor can resort to such collaterals. 30
The Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage states that it is being issued for and in
consideration of the obligations assumed by the Mortgagee-Surety Company under the terms and conditions of
ICP Bond No. 14010 in behalf of Slobec Realty Development Corporation and in favor of Bormaheco, Inc. 31 There
is no doubt that said Agreement of Counter-Guaranty is issued for the personal indemnity of ICP Considering that
the fact of payment by ICP has never been established, it follows, pursuant to the doctrine above adverted to,
that ICP cannot foreclose on the subject properties,
IV. Private respondent PM Parts posits that it is a buyer in good faith and, therefore, it acquired a valid title over
the subject properties. The submission is without merit and the conclusion is specious
We have stated earlier that the doctrine of piercing the veil of corporate fiction is not applicable in this case.
However, its inapplicability has no bearing on the good faith or bad faith of private respondent PM Parts. It must
be noted that Modesto N. Cervantes served as Vice-President of Bormaheco and, later, as President of PM Parts.
On this fact alone, it cannot be said that PM Parts had no knowledge of the aforesaid several transactions
executed between Bormaheco and petitioners. In addition, Atty. Martin de Guzman, who is the Executive VicePresident of Bormaheco, was also the legal counsel of ICP and PM Parts. These facts were admitted without
qualification in the stipulation of facts submitted by the parties before the trial court. Hence, the defense of good
faith may not be resorted to by private respondent PM Parts which is charged with knowledge of the true relations
existing between Bormaheco, ICP and herein petitioners. Accordingly, the transfer certificates of title issued in its
name, as well as the certificate of sale, must be declared null and void since they cannot be considered
altogether free of the taint of bad faith.
WHEREFORE, the decision of respondent Court of Appeals is hereby REVERSED and SET ASIDE, and judgment is
hereby rendered declaring the following as null and void: (1) Certificate of Sale, dated September 28,1973,
executed by the Provincial Sheriff of Quezon in favor of the Insurance Corporation of the Philippines; (2) Transfer
Certificates of Title Nos. T-23705, T-23706, T-23707 and T-23708 issued in the name of the Insurance Corporation
of the Philippines; (3) the sale by Insurance Corporation of the Philippines in favor of Philippine Machinery Parts
Manufacturing Co., Inc. of the four (4) parcels of land covered by the aforesaid certificates of title; and (4)
Transfer Certificates of Title Nos. T-24846, T-24847, T-24848 and T24849 subsequently issued by virtue of said
sale in the name of the latter corporation.

The Register of Deeds of Lucena City is hereby directed to cancel Transfer Certificates of Title Nos. T-24846, T24847, T24848 and T-24849 in the name of Philippine Machinery Parts Manufacturing Co., Inc. and to issue in lieu
thereof the corresponding transfer certificates of title in the name of herein petitioners, except Santiago Rivera.
The foregoing dispositions are without prejudice to such other and proper legal remedies as may be available to
respondent Bormaheco, Inc. against herein petitioners.
SO ORDERED.

G.R. No. L-22973

January 30, 1968

MAMBULAO LUMBER COMPANY, plaintiff-appellant,


vs.
PHILIPPINE NATIONAL BANK and ANACLETO HERALDO Deputy Provincial Sheriff of Camarines
Norte,defendants-appellees.
Ernesto P. Vilar and Arthur Tordesillas for plaintiff-appellant.
Tomas Besa and Jose B. Galang for defendants-appellees.
ANGELES, J.:
An appeal from a decision, dated April 2, 1964, of the Court of First Instance of Manila in Civil Case No. 52089,
entitled "Mambulao Lumber Company, plaintiff, versus Philippine National Bank and Anacleto Heraldo,
defendants", dismissing the complaint against both defendants and sentencing the plaintiff to pay to defendant
Philippine National Bank (PNB for short) the sum of P3,582.52 with interest thereon at the rate of 6% per annum
from December 22, 1961 until fully paid, and the costs of suit.
In seeking the reversal of the decision, the plaintiff advances several propositions in its brief which may be
restated as follows:
1. That its total indebtedness to the PNB as of November 21, 1961, was only P56,485.87 and not
P58,213.51 as concluded by the court a quo; hence, the proceeds of the foreclosure sale of its real
property alone in the amount of P56,908.00 on that date, added to the sum of P738.59 it remitted to the
PNB thereafter was more than sufficient to liquidate its obligation, thereby rendering the subsequent
foreclosure sale of its chattels unlawful;
2. That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees and the additional sum of
P298.54 as expenses of the foreclosure sale;
3. That the subsequent foreclosure sale of its chattels is null and void, not only because it had already
settled its indebtedness to the PNB at the time the sale was effected, but also for the reason that the said
sale was not conducted in accordance with the provisions of the Chattel Mortgage Law and the venue
agreed upon by the parties in the mortgage contract;
4. That the PNB, having illegally sold the chattels, is liable to the plaintiff for its value; and
5. That for the acts of the PNB in proceeding with the sale of the chattels, in utter disregard of plaintiff's
vigorous opposition thereto, and in taking possession thereof after the sale thru force, intimidation,
coercion, and by detaining its "man-in-charge" of said properties, the PNB is liable to plaintiff for damages
and attorney's fees.
The antecedent facts of the case, as found by the trial court, are as follows:
On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga Branch of defendant
PNB and the former offered real estate, machinery, logging and transportation equipments as collaterals.
The application, however, was approved for a loan of P100,000 only. To secure the payment of the loan,
the plaintiff mortgaged to defendant PNB a parcel of land, together with the buildings and improvements
existing thereon, situated in the poblacion of Jose Panganiban (formerly Mambulao), province of

Camarines Norte, and covered by Transfer Certificate of Title No. 381 of the land records of said province,
as well as various sawmill equipment, rolling unit and other fixed assets of the plaintiff, all situated in its
compound in the aforementioned municipality.
On August 2, 1956, the PNB released from the approved loan the sum of P27,500, for which the plaintiff
signed a promissory note wherein it promised to pay to the PNB the said sum in five equal yearly
installments at the rate of P6,528.40 beginning July 31, 1957, and every year thereafter, the last of which
would be on July 31, 1961.
On October 19, 1956, the PNB made another release of P15,500 as part of the approved loan granted to
the plaintiff and so on the said date, the latter executed another promissory note wherein it agreed to pay
to the former the said sum in five equal yearly installments at the rate of P3,679.64 beginning July 31,
1957, and ending on July 31, 1961.
The plaintiff failed to pay the amortization on the amounts released to and received by it. Repeated
demands were made upon the plaintiff to pay its obligation but it failed or otherwise refused to do so.
Upon inspection and verification made by employees of the PNB, it was found that the plaintiff had
already stopped operation about the end of 1957 or early part of 1958.
On September 27, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte requesting him
to take possession of the parcel of land, together with the improvements existing thereon, covered by
Transfer Certificate of Title No. 381 of the land records of Camarines Norte, and to sell it at public auction
in accordance with the provisions of Act No. 3135, as amended, for the satisfaction of the unpaid
obligation of the plaintiff, which as of September 22, 1961, amounted to P57,646.59, excluding attorney's
fees. In compliance with the request, on October 16, 1961, the Provincial Sheriff of Camarines Norte
issued the corresponding notice of extra-judicial sale and sent a copy thereof to the plaintiff. According to
the notice, the mortgaged property would be sold at public auction at 10:00 a.m. on November 21, 1961,
at the ground floor of the Court House in Daet, Camarines Norte.
On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte requesting him to
take possession of the chattels mortgaged to it by the plaintiff and sell them at public auction also on
November 21, 1961, for the satisfaction of the sum of P57,646.59, plus 6% annual interest therefore from
September 23, 1961, attorney's fees equivalent to 10% of the amount due and the costs and expenses of
the sale. On the same day, the PNB sent notice to the plaintiff that the former was foreclosing
extrajudicially the chattels mortgaged by the latter and that the auction sale thereof would be held on
November 21, 1961, between 9:00 and 12:00 a.m., in Mambulao, Camarines Norte, where the mortgaged
chattels were situated.
On November 8, 1961, Deputy Provincial Sheriff Anacleto Heraldo took possession of the chattels
mortgaged by the plaintiff and made an inventory thereof in the presence of a PC Sergeant and a
policeman of the municipality of Jose Panganiban. On November 9, 1961, the said Deputy Sheriff issued
the corresponding notice of public auction sale of the mortgaged chattels to be held on November 21,
1961, at 10:00 a.m., at the plaintiff's compound situated in the municipality of Jose Panganiban, Province
of Camarines Norte.
On November 19, 1961, the plaintiff sent separate letters, posted as registered air mail matter, one to the
Naga Branch of the PNB and another to the Provincial Sheriff of Camarines Norte, protesting against the
foreclosure of the real estate and chattel mortgages on the grounds that they could not be effected unless
a Court's order was issued against it (plaintiff) for said purpose and that the foreclosure proceedings,
according to the terms of the mortgage contracts, should be made in Manila. In said letter to the Naga
Branch of the PNB, it was intimated that if the public auction sale would be suspended and the plaintiff
would be given an extension of ninety (90) days, its obligation would be settled satisfactorily because an
important negotiation was then going on for the sale of its "whole interest" for an amount more than
sufficient to liquidate said obligation.
The letter of the plaintiff to the Naga Branch of the PNB was construed by the latter as a request for
extension of the foreclosure sale of the mortgaged chattels and so it advised the Sheriff of Camarines
Norte to defer it to December 21, 1961, at the same time and place. A copy of said advice was sent to the
plaintiff for its information and guidance.
The foreclosure sale of the parcel of land, together with the buildings and improvements thereon, covered
by Transfer Certificate of Title No. 381, was, however, held on November 21, 1961, and the said property
was sold to the PNB for the sum of P56,908.00, subject to the right of the plaintiff to redeem the same

within a period of one year. On the same date, Deputy Provincial Sheriff Heraldo executed a certificate of
sale in favor of the PNB and a copy thereof was sent to the plaintiff.
In a letter dated December 14, 1961 (but apparently posted several days later), the plaintiff sent a bank
draft for P738.59 to the Naga Branch of the PNB, allegedly in full settlement of the balance of the
obligation of the plaintiff after the application thereto of the sum of P56,908.00 representing the proceeds
of the foreclosure sale of parcel of land described in Transfer Certificate of Title No. 381. In the said letter,
the plaintiff reiterated its request that the foreclosure sale of the mortgaged chattels be discontinued on
the grounds that the mortgaged indebtedness had been fully paid and that it could not be legally effected
at a place other than the City of Manila.
In a letter dated December 16, 1961, the plaintiff advised the Provincial Sheriff of Camarines Norte that it
had fully paid its obligation to the PNB, and enclosed therewith a copy of its letter to the latter dated
December 14, 1961.
On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to the plaintiff acknowledging
the remittance of P738.59 with the advice, however, that as of that date the balance of the account of the
plaintiff was P9,161.76, to which should be added the expenses of guarding the mortgaged chattels at the
rate of P4.00 a day beginning December 19, 1961. It was further explained in said letter that the sum of
P57,646.59, which was stated in the request for the foreclosure of the real estate mortgage, did not
include the 10% attorney's fees and expenses of the sale. Accordingly, the plaintiff was advised that the
foreclosure sale scheduled on the 21st of said month would be stopped if a remittance of P9,161.76, plus
interest thereon and guarding fees, would be made.
On December 21, 1961, the foreclosure sale of the mortgaged chattels was held at 10:00 a.m. and they
were awarded to the PNB for the sum of P4,200 and the corresponding bill of sale was issued in its favor
by Deputy Provincial Sheriff Heraldo.
In a letter dated December 26, 1961, the Manager of the Naga Branch of the PNB advised the plaintiff
giving it priority to repurchase the chattels acquired by the former at public auction. This offer was
reiterated in a letter dated January 3, 1962, of the Attorney of the Naga Branch of the PNB to the plaintiff,
with the suggestion that it exercise its right of redemption and that it apply for the condonation of the
attorney's fees. The plaintiff did not follow the advice but on the contrary it made known of its intention to
file appropriate action or actions for the protection of its interests.
On May 24, 1962, several employees of the PNB arrived in the compound of the plaintiff in Jose
Panganiban, Camarines Norte, and they informed Luis Salgado, Chief Security Guard of the premises, that
the properties therein had been auctioned and bought by the PNB, which in turn sold them to Mariano
Bundok. Upon being advised that the purchaser would take delivery of the things he bought, Salgado was
at first reluctant to allow any piece of property to be taken out of the compound of the plaintiff. The
employees of the PNB explained that should Salgado refuse, he would be exposing himself to a litigation
wherein he could be held liable to pay big sum of money by way of damages. Apprehensive of the risk
that he would take, Salgado immediately sent a wire to the President of the plaintiff in Manila, asking
advice as to what he should do. In the meantime, Mariano Bundok was able to take out from the plaintiff's
compound two truckloads of equipment.
In the afternoon of the same day, Salgado received a telegram from plaintiff's President directing him not
to deliver the "chattels" without court order, with the information that the company was then filing an
action for damages against the PNB. On the following day, May 25, 1962, two trucks and men of Mariano
Bundok arrived but Salgado did not permit them to take out any equipment from inside the compound of
the plaintiff. Thru the intervention, however, of the local police and PC soldiers, the trucks of Mariano
Bundok were able finally to haul the properties originally mortgaged by the plaintiff to the PNB, which
were bought by it at the foreclosure sale and subsequently sold to Mariano Bundok.
Upon the foregoing facts, the trial court rendered the decision appealed from which, as stated in the first
paragraph of this opinion, sentenced the Mambulao Lumber Company to pay to the defendant PNB the sum of
P3,582.52 with interest thereon at the rate of 6% per annum from December 22, 1961 (day following the date of
the questioned foreclosure of plaintiff's chattels) until fully paid, and the costs. Mambulao Lumber Company
interposed the instant appeal.
We shall discuss the various points raised in appellant's brief in seriatim.

The first question Mambulao Lumber Company poses is that which relates to the amount of its indebtedness to
the PNB arising out of the principal loans and the accrued interest thereon. It is contended that its obligation
under the terms of the two promissory notes it had executed in favor of the PNB amounts only to P56,485.87 as
of November 21, 1961, when the sale of real property was effected, and not P58,213.51 as found by the trial
court.
There is merit to this claim. Examining the terms of the promissory note executed by the appellant in favor of the
PNB, we find that the agreed interest on the loan of P43,000.00 P27,500.00 released on August 2, 1956 as per
promissory note of even date (Exhibit C-3), and P15,500.00 released on October 19, 1956, as per promissory note
of the same date (Exhibit C-4) was six per cent (6%) per annum from the respective date of said notes "until
paid". In the statement of account of the appellant as of September 22, 1961, submitted by the PNB, it appears
that in arriving at the total indebtedness of P57,646.59 as of that date, the PNB had compounded the principal of
the loan and the accrued 6% interest thereon each time the yearly amortizations became due, and on the basis
of these compounded amounts charged additional delinquency interest on them up to September 22, 1961; and
to this erroneously computed total of P57,646.59, the trial court added 6% interest per annum from September
23, 1961 to November 21 of the same year. In effect, the PNB has claimed, and the trial court has adjudicated to
it, interest on accrued interests from the time the various amortizations of the loan became due until the real
estate mortgage executed to secure the loan was extra-judicially foreclosed on November 21, 1961. This is an
error. Section 5 of Act No. 2655 expressly provides that in computing the interest on any obligation, promissory
note or other instrument or contract, compound interest shall not be reckoned, except by agreement, or in
default thereof, whenever the debt is judicially claimed. This is also the clear mandate of Article 2212 of the new
Civil Code which provides that interest due shall earn legal interest only from the time it is judicially demanded,
and of Article 1959 of the same code which ordains that interest due and unpaid shall not earn interest. Of
course, the parties may, by stipulation, capitalize the interest due and unpaid, which as added principal shall
earn new interest; but such stipulation is nowhere to be found in the terms of the promissory notes involved in
this case. Clearly therefore, the trial court fell into error when it awarded interest on accrued interests, without
any agreement to that effect and before they had been judicially demanded.
Appellant next assails the award of attorney's fees and the expenses of the foreclosure sale in favor of the PNB.
With respect to the amount of P298.54 allowed as expenses of the extra-judicial sale of the real property,
appellant maintains that the same has no basis, factual or legal, and should not have been awarded. It likewise
decries the award of attorney's fees which, according to the appellant, should not be deducted from the proceeds
of the sale of the real property, not only because there is no express agreement in the real estate mortgage
contract to pay attorney's fees in case the same is extra-judicially foreclosed, but also for the reason that the PNB
neither spent nor incurred any obligation to pay attorney's fees in connection with the said extra-judicial
foreclosure under consideration.
There is reason for the appellant to assail the award of P298.54 as expenses of the sale. In this respect, the trial
court said:
The parcel of land, together with the buildings and improvements existing thereon covered by Transfer
Certificate of Title No. 381, was sold for P56,908. There was, however, no evidence how much was the
expenses of the foreclosure sale although from the pertinent provisions of the Rules of Court, the Sheriff's
fees would be P1 for advertising the sale (par. k, Sec. 7, Rule 130 of the Old Rules) and P297.54 as his
commission for the sale (par. n, Sec. 7, Rule 130 of the Old Rules) or a total of P298.54.
There is really no evidence of record to support the conclusion that the PNB is entitled to the amount awarded as
expenses of the extra-judicial foreclosure sale. The court below committed error in applying the provisions of the
Rules of Court for purposes of arriving at the amount awarded. It is to be borne in mind that the fees enumerated
under paragraphs k and n, Section 7, of Rule 130 (now Rule 141) are demandable, only by a sheriff serving
processes of the court in connection with judicial foreclosure of mortgages under Rule 68 of the new Rules, and
not in cases of extra-judicial foreclosure of mortgages under Act 3135. The law applicable is Section 4 of Act 3135
which provides that the officer conducting the sale is entitled to collect a fee of P5.00 for each day of actual work
performed in addition to his expenses in connection with the foreclosure sale. Admittedly, the PNB failed to prove
during the trial of the case, that it actually spent any amount in connection with the said foreclosure sale. Neither
may expenses for publication of the notice be legally allowed in the absence of evidence on record to support
it. 1 It is true, as pointed out by the appellee bank, that courts should take judicial notice of the fees provided for
by law which need not be proved; but in the absence of evidence to show at least the number of working days
the sheriff concerned actually spent in connection with the extra-judicial foreclosure sale, the most that he may
be entitled to, would be the amount of P10.00 as a reasonable allowance for two day's work one for the
preparation of the necessary notices of sale, and the other for conducting the auction sale and issuance of the
corresponding certificate of sale in favor of the buyer. Obviously, therefore, the award of P298.54 as expenses of
the sale should be set aside.

But the claim of the appellant that the real estate mortgage does not provide for attorney's fees in case the same
is extra-judicially foreclosed, cannot be favorably considered, as would readily be revealed by an examination of
the pertinent provision of the mortgage contract. The parties to the mortgage appear to have stipulated under
paragraph (c) thereof, inter alia:
. . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby appoints the Mortgagee his
attorney-in-fact to sell the property mortgaged under Act 3135, as amended, to sign all documents and to
perform all acts requisite and necessary to accomplish said purpose and to appoint its substitute as such
attorney-in-fact with the same powers as above specified. In case of judicial foreclosure, the Mortgagor
hereby consents to the appointment of the Mortgagee or any of its employees as receiver, without any
bond, to take charge of the mortgaged property at once, and to hold possession of the same and the
rents, benefits and profits derived from the mortgaged property before the sale, less the costs and
expenses of the receivership; the Mortgagor hereby agrees further that in all cases, attorney's fees
hereby fixed at Ten Per cent (10%) of the total indebtedness then unpaid which in no case shall be less
than P100.00 exclusive of all fees allowed by law, and the expenses of collection shall be the obligation of
the Mortgagor and shall with priority, be paid to the Mortgagee out of any sums realized as rents and
profits derived from the mortgaged property or from the proceeds realized from the sale of the said
property and this mortgage shall likewise stand as security therefor. . . .
We find the above stipulation to pay attorney's fees clear enough to cover both cases of foreclosure sale
mentioned thereunder, i.e., judicially or extra-judicially. While the phrase "in all cases" appears to be part of the
second sentence, a reading of the whole context of the stipulation would readily show that it logically refers to
extra-judicial foreclosure found in the first sentence and to judicial foreclosure mentioned in the next sentence.
And the ambiguity in the stipulation suggested and pointed out by the appellant by reason of the faulty sentence
construction should not be made to defeat the otherwise clear intention of the parties in the agreement.
It is suggested by the appellant, however, that even if the above stipulation to pay attorney's fees were
applicable to the extra-judicial foreclosure sale of its real properties, still, the award of P5,821.35 for attorney's
fees has no legal justification, considering the circumstance that the PNB did not actually spend anything by way
of attorney's fees in connection with the sale. In support of this proposition, appellant cites authorities to the
effect: (1) that when the mortgagee has neither paid nor incurred any obligation to pay an attorney in connection
with the foreclosure sale, the claim for such fees should be denied; 2 and (2) that attorney's fees will not be
allowed when the attorney conducting the foreclosure proceedings is an officer of the corporation (mortgagee)
who receives a salary for all the legal services performed by him for the corporation. 3 These authorities are
indeed enlightening; but they should not be applied in this case. The very same authority first cited suggests that
said principle is not absolute, for there is authority to the contrary. As to the fact that the foreclosure proceeding's
were handled by an attorney of the legal staff of the PNB, we are reluctant to exonerate herein appellant from the
payment of the stipulated attorney's fees on this ground alone, considering the express agreement between the
parties in the mortgage contract under which appellant became liable to pay the same. At any rate, we find merit
in the contention of the appellant that the award of P5,821.35 in favor of the PNB as attorney's fees is
unconscionable and unreasonable, considering that all that the branch attorney of the said bank did in
connection with the foreclosure sale of the real property was to file a petition with the provincial sheriff of
Camarines Norte requesting the latter to sell the same in accordance with the provisions of Act 3135.
The principle that courts should reduce stipulated attorney's fees whenever it is found under the circumstances
of the case that the same is unreasonable, is now deeply rooted in this jurisdiction to entertain any serious
objection to it. Thus, this Court has explained:
But the principle that it may be lawfully stipulated that the legal expenses involved in the collection of a
debt shall be defrayed by the debtor does not imply that such stipulations must be enforced in
accordance with the terms, no matter how injurious or oppressive they may be. The lawful purpose to be
accomplished by such a stipulation is to permit the creditor to receive the amount due him under his
contract without a deduction of the expenses caused by the delinquency of the debtor. It should not be
permitted for him to convert such a stipulation into a source of speculative profit at the expense of the
debtor.
Contracts for attorney's services in this jurisdiction stands upon an entirely different footing from
contracts for the payment of compensation for any other services. By express provision of section 29 of
the Code of Civil Procedure, an attorney is not entitled in the absence of express contract to recover more
than a reasonable compensation for his services; and even when an express contract is made the court
can ignore it and limit the recovery to reasonable compensation if the amount of the stipulated fee is
found by the court to be unreasonable. This is a very different rule from that announced in section 1091 of
the Civil Code with reference to the obligation of contracts in general, where it is said that such obligation
has the force of law between the contracting parties. Had the plaintiff herein made an express contract to

pay his attorney an uncontingent fee of P2,115.25 for the services to be rendered in reducing the note
here in suit to judgment, it would not have been enforced against him had he seen fit to oppose it, as
such a fee is obviously far greater than is necessary to remunerate the attorney for the work involved and
is therefore unreasonable. In order to enable the court to ignore an express contract for an attorney's
fees, it is not necessary to show, as in other contracts, that it is contrary to morality or public policy (Art.
1255, Civil Code). It is enough that it is unreasonable or unconscionable. 4
Since then this Court has invariably fixed counsel fees on a quantum meruit basis whenever the fees stipulated
appear excessive, unconscionable, or unreasonable, because a lawyer is primarily a court officer charged with
the duty of assisting the court in administering impartial justice between the parties, and hence, the fees should
be subject to judicial control. Nor should it be ignored that sound public policy demands that courts disregard
stipulations for counsel fees, whenever they appear to be a source of speculative profit at the expense of the
debtor or mortgagor. 5 And it is not material that the present action is between the debtor and the creditor, and
not between attorney and client. As court have power to fix the fee as between attorney and client, it must
necessarily have the right to say whether a stipulation like this, inserted in a mortgage contract, is valid. 6
In determining the compensation of an attorney, the following circumstances should be considered: the amount
and character of the services rendered; the responsibility imposed; the amount of money or the value of the
property affected by the controversy, or involved in the employment; the skill and experience called for in the
performance of the service; the professional standing of the attorney; the results secured; and whether or not the
fee is contingent or absolute, it being a recognized rule that an attorney may properly charge a much larger fee
when it is to be contingent than when it is not. 7 From the stipulation in the mortgage contract earlier quoted, it
appears that the agreed fee is 10% of the total indebtedness, irrespective of the manner the foreclosure of the
mortgage is to be effected. The agreement is perhaps fair enough in case the foreclosure proceedings is
prosecuted judicially but, surely, it is unreasonable when, as in this case, the mortgage was foreclosed extrajudicially, and all that the attorney did was to file a petition for foreclosure with the sheriff concerned. It is to be
assumed though, that the said branch attorney of the PNB made a study of the case before deciding to file the
petition for foreclosure; but even with this in mind, we believe the amount of P5,821.35 is far too excessive a fee
for such services. Considering the above circumstances mentioned, it is our considered opinion that the amount
of P1,000.00 would be more than sufficient to compensate the work aforementioned.
The next issue raised deals with the claim that the proceeds of the sale of the real properties alone together with
the amount it remitted to the PNB later was more than sufficient to liquidate its total obligation to herein appellee
bank. Again, we find merit in this claim. From the foregoing discussion of the first two errors assigned, and for
purposes of determining the total obligation of herein appellant to the PNB as of November 21, 1961 when the
real estate mortgage was foreclosed, we have the following illustration in support of this conclusion:1wph1.t
A. I.

Principal Loan
(a) Promissory note dated August 2, 1956

P27,500.00

(1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961
(b) Promissory note dated October 19, 1956

P15,500.00

(1) Interest at 6% per annum from Oct.19, 1956 to Nov. 21, 1961
II.

Sheriff's fees [for two (2) day's work]

III.

Attorney's fee

8,751.78

4,734.08
10.00
1,000.00

Total obligation as of Nov. 21, 1961

P57,495.86

B. I.

Proceeds of the foreclosure sale of the real estate mortgage on Nov. 21, 1961

II.

Additional amount remitted to the PNB on Dec. 18, 1961

P56,908.00
738.59

Total amount of Payment made to PNB as of Dec. 18, 1961

P57,646.59

Deduct: Total obligation to the PNB

P57,495.86

Excess Payment to the PNB

P 150.73
========

From the foregoing illustration or computation, it is clear that there was no further necessity to foreclose the
mortgage of herein appellant's chattels on December 21, 1961; and on this ground alone, we may declare the
sale of appellant's chattels on the said date, illegal and void. But we take into consideration the fact that the PNB
must have been led to believe that the stipulated 10% of the unpaid loan for attorney's fees in the real estate
mortgage was legally maintainable, and in accordance with such belief, herein appellee bank insisted that the
proceeds of the sale of appellant's real property was deficient to liquidate the latter's total indebtedness. Be that
as it may, however, we still find the subsequent sale of herein appellant's chattels illegal and objectionable on
other grounds.
That appellant vigorously objected to the foreclosure of its chattel mortgage after the foreclosure of its real estate
mortgage on November 21, 1961, can not be doubted, as shown not only by its letter to the PNB on November
19, 1961, but also in its letter to the provincial sheriff of Camarines Norte on the same date. These letters were
followed by another letter to the appellee bank on December 14, 1961, wherein herein appellant, in no uncertain
terms, reiterated its objection to the scheduled sale of its chattels on December 21, 1961 at Jose Panganiban,
Camarines Norte for the reasons therein stated that: (1) it had settled in full its total obligation to the PNB by the
sale of the real estate and its subsequent remittance of the amount of P738.59; and (2) that the contemplated
sale at Jose Panganiban would violate their agreement embodied under paragraph (i) in the Chattel Mortgage
which provides as follows:
(i) In case of both judicial and extra-judicial foreclosure under Act 1508, as amended, the parties hereto
agree that the corresponding complaint for foreclosure or the petition for sale should be filed with the
courts or the sheriff of the City of Manila, as the case may be; and that the Mortgagor shall pay attorney's
fees hereby fixed at ten per cent (10%) of the total indebtedness then unpaid but in no case shall it be
less than P100.00, exclusive of all costs and fees allowed by law and of other expenses incurred in
connection with the said foreclosure. [Emphasis supplied]
Notwithstanding the abovequoted agreement in the chattel mortgage contract, and in utter disregard of the
objection of herein appellant to the sale of its chattels at Jose Panganiban, Camarines Norte and not in the City of
Manila as agreed upon, the PNB proceeded with the foreclosure sale of said chattels. The trial court, however,
justified said action of the PNB in the decision appealed from in the following rationale:
While it is true that it was stipulated in the chattel mortgage contract that a petition for the extra-judicial
foreclosure thereof should be filed with the Sheriff of the City of Manila, nevertheless, the effect thereof
was merely to provide another place where the mortgage chattel could be sold in addition to those
specified in the Chattel Mortgage Law. Indeed, a stipulation in a contract cannot abrogate much less
impliedly repeal a specific provision of the statute. Considering that Section 14 of Act No. 1508 vests in
the mortgagee the choice where the foreclosure sale should be held, hence, in the case under
consideration, the PNB had three places from which to select, namely: (1) the place of residence of the
mortgagor; (2) the place of the mortgaged chattels were situated; and (3) the place stipulated in the
contract. The PNB selected the second and, accordingly, the foreclosure sale held in Jose Panganiban,
Camarines Norte, was legal and valid.
To the foregoing conclusion, We disagree. While the law grants power and authority to the mortgagee to sell the
mortgaged property at a public place in the municipality where the mortgagor resides or where the property is
situated, 8 this Court has held that the sale of a mortgaged chattel may be made in a place other than that where
it is found, provided that the owner thereof consents thereto; or that there is an agreement to this effect between
the mortgagor and the mortgagee. 9 But when, as in this case, the parties agreed to have the sale of the
mortgaged chattels in the City of Manila, which, any way, is the residence of the mortgagor, it cannot be rightly
said that mortgagee still retained the power and authority to select from among the places provided for in the
law and the place designated in their agreement over the objection of the mortgagor. In providing that the
mortgaged chattel may be sold at the place of residence of the mortgagor or the place where it is situated, at the
option of the mortgagee, the law clearly contemplated benefits not only to the mortgagor but to the mortgagee
as well. Their right arising thereunder, however, are personal to them; they do not affect either public policy or
the rights of third persons. They may validly be waived. So, when herein mortgagor and mortgagee agreed in the
mortgage contract that in cases of both judicial and extra-judicial foreclosure under Act 1508, as amended, the
corresponding complaint for foreclosure or the petition for sale should be filed with the courts or the Sheriff of
Manila, as the case may be, they waived their corresponding rights under the law. The correlative obligation
arising from that agreement have the force of law between them and should be complied with in good faith. 10

By said agreement the parties waived the legal venue, and such waiver is valid and legally effective,
because it, was merely a personal privilege they waived, which is not contrary, to public policy or to the
prejudice of third persons. It is a general principle that a person may renounce any right which the law
gives unless such renunciation is expressly prohibited or the right conferred is of such nature that its
renunciation would be against public policy. 11
On the other hand, if a place of sale is specified in the mortgage and statutory requirements in regard
thereto are complied with, a sale is properly conducted in that place. Indeed, in the absence of a statute
to the contrary, a sale conducted at a place other than that stipulated for in the mortgage is invalid,
unless the mortgagor consents to such sale. 12
Moreover, Section 14 of Act 1508, as amended, provides that the officer making the sale should make a return of
his doings which shall particularly describe the articles sold and the amount received from each article. From this,
it is clear that the law requires that sale be made article by article, otherwise, it would be impossible for him to
state the amount received for each item. This requirement was totally disregarded by the Deputy Sheriff of
Camarines Norte when he sold the chattels in question in bulk, notwithstanding the fact that the said chattels
consisted of no less than twenty different items as shown in the bill of sale. 13 This makes the sale of the chattels
manifestly objectionable. And in the absence of any evidence to show that the mortgagor had agreed or
consented to such sale in gross, the same should be set aside.
It is said that the mortgagee is guilty of conversion when he sells under the mortgage but not in accordance with
its terms, or where the proceedings as to the sale of foreclosure do not comply with the statute. 14 This rule
applies squarely to the facts of this case where, as earlier shown, herein appellee bank insisted, and the appellee
deputy sheriff of Camarines Norte proceeded with the sale of the mortgaged chattels at Jose Panganiban,
Camarines Norte, in utter disregard of the valid objection of the mortgagor thereto for the reason that it is not the
place of sale agreed upon in the mortgage contract; and the said deputy sheriff sold all the chattels (among
which were a skagit with caterpillar engine, three GMC 6 x 6 trucks, a Herring Hall Safe, and Sawmill equipment
consisting of a 150 HP Murphy Engine, plainer, large circular saws etc.) as a single lot in violation of the
requirement of the law to sell the same article by article. The PNB has resold the chattels to another buyer with
whom it appears to have actively cooperated in subsequently taking possession of and removing the chattels
from appellant compound by force, as shown by the circumstance that they had to take along PC soldiers and
municipal policemen of Jose Panganiban who placed the chief security officer of the premises in jail to deprive
herein appellant of its possession thereof. To exonerate itself of any liability for the breach of peace thus
committed, the PNB would want us to believe that it was the subsequent buyer alone, who is not a party to this
case, that was responsible for the forcible taking of the property; but assuming this to be so, still the PNB cannot
escape liability for the conversion of the mortgaged chattels by parting with its interest in the property. Neither
would its claim that it afterwards gave a chance to herein appellant to repurchase or redeem the chattels,
improve its position, for the mortgagor is not under obligation to take affirmative steps to repossess the chattels
that were converted by the mortgagee. 15 As a consequence of the said wrongful acts of the PNB and the Deputy
Sheriff of Camarines Norte, therefore, We have to declare that herein appellant is entitled to collect from them,
jointly and severally, the full value of the chattels in question at the time they were illegally sold by them. To this
effect was the holding of this Court in a similar situation. 16
The effect of this irregularity was, in our opinion to make the plaintiff liable to the defendant for the full
value of the truck at the time the plaintiff thus carried it off to be sold; and of course, the burden is on the
defendant to prove the damage to which he was thus subjected. . . .
This brings us to the problem of determining the value of the mortgaged chattels at the time of their sale in 1961.
The trial court did not make any finding on the value of the chattels in the decision appealed from and denied
altogether the right of the appellant to recover the same. We find enough evidence of record, however, which
may be used as a guide to ascertain their value. The record shows that at the time herein appellant applied for its
loan with the PNB in 1956, for which the chattels in question were mortgaged as part of the security therefore,
herein appellant submitted a list of the chattels together with its application for the loan with a stated value of
P107,115.85. An official of the PNB made an inspection of the chattels in the same year giving it an appraised
value of P42,850.00 and a market value of P85,700.00. 17 The same chattels with some additional equipment
acquired by herein appellant with part of the proceeds of the loan were reappraised in a re-inspection conducted
by the same official in 1958, in the report of which he gave all the chattels an appraised value of P26,850.00 and
a market value of P48,200.00. 18 Another re-inspection report in 1959 gave the appraised value as P19,400.00
and the market value at P25,600.00. 19 The said official of the PNB who made the foregoing reports of inspection
and re-inspections testified in court that in giving the values appearing in the reports, he used a conservative
method of appraisal which, of course, is to be expected of an official of the appellee bank. And it appears that the
values were considerably reduced in all the re-inspection reports for the reason that when he went to herein
appellant's premises at the time, he found the chattels no longer in use with some of the heavier equipments
dismantled with parts thereof kept in the bodega; and finding it difficult to ascertain the value of the dismantled

chattels in such condition, he did not give them anymore any value in his reports. Noteworthy is the fact,
however, that in the last re-inspection report he made of the chattels in 1961, just a few months before the
foreclosure sale, the same inspector of the PNB reported that the heavy equipment of herein appellant were
"lying idle and rusty" but were "with a shed free from rains" 20 showing that although they were no longer in use
at the time, they were kept in a proper place and not exposed to the elements. The President of the appellant
company, on the other hand, testified that its caterpillar (tractor) alone is worth P35,000.00 in the market, and
that the value of its two trucks acquired by it with part of the proceeds of the loan and included as additional
items in the mortgaged chattels were worth no less than P14,000.00. He likewise appraised the worth of its
Murphy engine at P16,000.00 which, according to him, when taken together with the heavy equipments he
mentioned, the sawmill itself and all other equipment forming part of the chattels under consideration, and
bearing in mind the current cost of equipments these days which he alleged to have increased by about five (5)
times, could safely be estimated at P120,000.00. This testimony, except for the appraised and market values
appearing in the inspection and re-inspection reports of the PNB official earlier mentioned, stand uncontroverted
in the record; but We are not inclined to accept such testimony at its par value, knowing that the equipments of
herein appellant had been idle and unused since it stopped operating its sawmill in 1958 up to the time of the
sale of the chattels in 1961. We have no doubt that the value of chattels was depreciated after all those years of
inoperation, although from the evidence aforementioned, We may also safely conclude that the amount of
P4,200.00 for which the chattels were sold in the foreclosure sale in question was grossly unfair to the mortgagor.
Considering, however, the facts that the appraised value of P42,850.00 and the market value of P85,700.00
originally given by the PNB official were admittedly conservative; that two 6 x 6 trucks subsequently bought by
the appellant company had thereafter been added to the chattels; and that the real value thereof, although
depreciated after several years of inoperation, was in a way maintained because the depreciation is off-set by the
marked increase in the cost of heavy equipment in the market, it is our opinion that the market value of the
chattels at the time of the sale should be fixed at the original appraised value of P42,850.00.
Herein appellant's claim for moral damages, however, seems to have no legal or factual basis. Obviously, an
artificial person like herein appellant corporation cannot experience physical sufferings, mental anguish, fright,
serious anxiety, wounded feelings, moral shock or social humiliation which are basis of moral damages. 21 A
corporation may have a good reputation which, if besmirched, may also be a ground for the award of moral
damages. The same cannot be considered under the facts of this case, however, not only because it is admitted
that herein appellant had already ceased in its business operation at the time of the foreclosure sale of the
chattels, but also for the reason that whatever adverse effects of the foreclosure sale of the chattels could have
upon its reputation or business standing would undoubtedly be the same whether the sale was conducted at Jose
Panganiban, Camarines Norte, or in Manila which is the place agreed upon by the parties in the mortgage
contract.
But for the wrongful acts of herein appellee bank and the deputy sheriff of Camarines Norte in proceeding with
the sale in utter disregard of the agreement to have the chattels sold in Manila as provided for in the mortgage
contract, to which their attentions were timely called by herein appellant, and in disposing of the chattels in gross
for the miserable amount of P4,200.00, herein appellant should be awarded exemplary damages in the sum of
P10,000.00. The circumstances of the case also warrant the award of P3,000.00 as attorney's fees for herein
appellant.
WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed from should be, as hereby, it is set
aside. The Philippine National Bank and the Deputy Sheriff of the province of Camarines Norte are ordered to pay,
jointly and severally, to Mambulao Lumber Company the total amount of P56,000.73, broken as follows: P150.73
overpaid by the latter to the PNB, P42,850.00 the value of the chattels at the time of the sale with interest at the
rate of 6% per annum from December 21, 1961, until fully paid, P10,000.00 in exemplary damages, and
P3,000.00 as attorney's fees. Costs against both appellees.

[G.R. No. 108734. May 29, 1996]


CONCEPT BUILDERS, INC., petitioner, vs. THE NATIONAL LABOR RELATIONS COMMISSION, (First
Division); and Norberto Marabe, Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio
Giducos, Pedro Aboigar, Norberto Comendador, Rogello Salut, Emilio Garcia, Jr., Mariano Rio,
Paulina Basea, Aifredo Albera, Paquito Salut, Domingo Guarino, Romeo Galve, Dominador
Sabina, Felipe Radiana, Gavino Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan,
and Ruben Robalos, respondents.
DECISION

HERMOSISIMA, JR., J.:


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. Where badges of fraud exist; where public convenience is
defeated; where a wrong is sought to be justified thereby, the corporate fiction or the notion of legal entity should
come to naught. The law in these instances will regard the corporation as a mere association of persons and, in
case of two corporations, merge them into one.
Thus, where a sister corporation is used as a shield to evade a corporations subsidiary liability for damages,
the corporation may not be heard to say that it has a personality separate and distinct from the other
corporation. The piercing of the corporate veil comes into play.
This special civil action ostensibly raises the question of whether the National Labor Relations Commission
committed grave abuse of discretion when it issued a break-open order to the sheriff to be enforced against
personal property found in the premises of petitioners sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road,
Valenzuela, Metro Manila, is engaged in the construction business. Private respondents were employed by said
company as laborers, carpenters and riggers.
On November, 1981, private respondents were served individual written notices of termination of
employment by petitioner, effective on November 30, 1981. It was stated in the individual notices that their
contracts of employment had expired and the project in which they were hired had been completed.
Public respondent found it to be, the fact, however, that at the time of the termination of private respondents
employment, the project in which they were hired had not yet been finished and completed. Petitioner had to
engage the services of sub-contractors whose workers performed the functions of private respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-payment
of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner.
On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner to reinstate private
respondents and to pay them back wages equivalent to one year or three hundred working days.
On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motion for
reconsideration filed by petitioner on the ground that the said decision had already become final and executory.2
On October 16, 1986, the NLRC Research and Information Department made the finding that private
respondents backwages amounted to P199,800.00.3
On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the
Decision, dated December 19, 1984. The writ was partially satisfied through garnishment of sums from
petitioners debtor, the Metropolitan Waterworks and Sewerage Authority, in the amount of P81,385.34. Said
amount was turned over to the cashier of the NLRC.
On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff to collect
from herein petitioner the sum of P117,414.76, representing the balance of the judgment award, and to reinstate
private respondents to their former positions.
On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution on
petitioner through the security guard on duty but the service was refused on the ground that petitioner no longer
occupied the premises.
On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second alias writ of
execution.

The said writ had not been enforced by the special sheriff because, as stated in his progress report,
dated November 2, 1989:
1. All the employees inside petitioners premises at 355 Maysan Road, Valenzuela, Metro Manila, claimed that they
were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;
2. Levy was made upon personal properties he found in the premises;
3. Security guards with high-powered guns prevented him from removing the properties he had levied upon.4
The said special sheriff recommended that a break-open order be issued to enable him to enter petitioners
premises so that he could proceed with the public auction sale of the aforesaid personal properties on November
7, 1989.
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter alleging
that the properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of which he is
the Vice-President.
On November 23, 1989, private respondents filed a Motion for Issuance of a Break-Open Order, alleging that
HPPI and petitioner corporation were owned by the same incorporator! stockholders. They also alleged that
petitioner temporarily suspended its business operations in order to evade its legal obligations to them and that
private respondents were willing to post an indemnity bond to answer for any damages which petitioner and HPPI
may suffer because of the issuance of the break-open order.
In support of their claim against HPPI, private respondents presented duly certified copies of the General
Informations Sheet, dated May 15, 1987, submitted by petitioner to the Securities and Exchange Commission
(SEC) and the General Information Sheet, dated May 15, 1987, submitted by HPPI to the Securities and Exchange
Commission.
The General Information Sheet submitted by the petitioner1 revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
HPPI P6,999,500.00
Antonio W. Lim 2,900,000.00
Dennis S. Cuyegkeng 300.00
Elisa C. Lim 100,000.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman
Dennis S. Cuyegkeng Member
Elisa C. Lim Member

Teodulo R. Dino Member


Virgilio O. Casino Member
3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa 0. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road
Valenzuela, Metro Manila.5
On the other hand, the General Information Sheet of HPPI revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
Antonio W. Lim P400,000.00
Elisa C. Lim 57,700.00
AWL Trading 455,000.00
Dennis S. Cuyegkeng 40,100.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman
Elisa C. Lim Member
Dennis S. Cuyegkeng Member
Virgilio O. Casino Member
Teodulo R. Dino Member
3. Corporate Officers
Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President


Elisa O. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila.6
On February 1, 1990, HPPI filed an Opposition to private respondents motion for issuance of a break-open
order, contending that HPPI is a corporation which is separate and distinct from petitioner. HPPI also alleged that
the two corporations are engaged in two different kinds of businesses, i.e., HPPI is a manufacturing firm while
petitioner was then engaged in construction.
On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents motion for breakopen order.
Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the order of the Labor
Arbiter, issued a break-open order and directed private respondents to file a bond. Thereafter, it directed the
sheriff to proceed with the auction sale of the properties already levied upon. It dismissed the third-party claim
for lack of merit.
Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution,
dated December 3, 1992.
Hence, the resort to the present petition.
Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the execution of its
decision despite a third-party claim on the levied property. Petitioner further contends, that the doctrine of
piercing the corporate veil should not have been applied, in this case, in the absence of any showing that it
created HPPI in order to evade its liability to private respondents. It also contends that HPPI is engaged in the
manufacture and sale of steel, concrete and iron pipes, a business which is distinct and separate from petitioners
construction business. Hence, it is of no consequence that petitioner and HPPI shared the same premises, the
same President and the same set of officers and subscribers.7
We find petitioners contention to be unmeritorious.
It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its
stockholders and from other corporations to which it may be connected. 8 But, this separate and distinct
personality of a corporation is merely a fiction created by law for convenience and to promote justice. 9 So, when
the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or
defend crime, or is used as a device to defeat the labor laws, 10 this separate personality of the corporation may
be disregarded or the veil of corporate fiction pierced. 11 This is true likewise when the corporation is merely an
adjunct, a business conduit or an alter ego of another corporation.12
The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and
circumstances of each case. No hard and fast rule can be accurately laid down, but certainly, there are some
probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, to wit:
1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.

4. Methods of conducting the business.13


The SEC en banc explained the instrumentality rule which the courts have applied in disregarding the
separate juridical personality of corporations as follows:
Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may be
disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such
domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind,
will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control must be
shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of
duty must proximately cause the injury or unjust loss for which the complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of
policy and business practice in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
The absence of any one of these elements prevents piercing the corporate veil. in applying the instrumentality or
alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the
individual defendants relationship to that operation. 14
Thus, the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a sham
or a subterfuge is purely one of fact.15
In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on April 29,
1986, it filed an Information Sheet with the Securities and Exchange Commission on May 15, 1987, stating that
its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party
claimant, submitted on the same day, a similar information sheet stating that its office address is at 355 Maysan
Road, Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O. Casino as the corporate secretary of both corporations.
It would also not be amiss to note that both corporations had thesame president, the same board of directors,
the same corporate officers, and substantially the same subscribers.
From the foregoing, it appears that, among other things, the respondent (herein petitioner) and the third-party
claimant shared the same address and/or premises. Under this circumstances, (sic) it cannot be said that the
property levied upon by the sheriff were not of respondents.16
Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of
backwages and to bar their reinstatement to their former positions. HPPI is obviously a business conduit of
petitioner corporation and its emergence was skillfully orchestrated to avoid the financial liability that already
attached to petitioner corporation.
The facts in this case are analogous to Claparols v. Court of Industrial Relations 17 where we had the occasion
to rule:

Respondent courts findings that indeed the Claparols Steel and Nail Plant, which ceased operation of June 30,
1957, was SUCCEEDED by the Claparols Steel Corporation effective the next day, July 1, 1957, up to December 7,
1962, when the latter finally ceased to operate, were not disputed by petitioner. it is very clear that the latter
corporation was a continuation and successor of the first entity x x x. Both predecessors and successor were
owned and controlled by petitioner Eduardo Claparols and there was no break in the succession and continuity of
the same business. This avoiding-the-liability scheme is very patent, considering that 90% of the subscribed
shares of stock of the Claparols Steel Corporation (the second corporation) was owned by respondent x x x
Claparols himself, and all the assets of the dissolved Claparols Steel and Nail Plant were turned over to the
emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in
the present case could, and should, be pierced as it was deliberately and maliciously designed to evade its
financial obligation to its employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of the
execution, private respondents had no other recourse but to apply for a break-open order after the third-party
claim of HPPI was dismissed for lack of merit by the NLRC. This is in consonance with Section 3, Rule VII of the
NLRC Manual of Execution of Judgment which provides that:
Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his representative entry to
the place where the property subject of execution is located or kept, the judgment creditor may apply to the
Commission or Labor Arbiter concerned for a break-open order.
Furthermore, our perusal of the records shows that the twin requirements of due notice and hearing were
complied with. Petitioner and the third-party claimant were given the opportunity to submit evidence in support
of their claim.
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open order issued
by the Labor Arbiter.
Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial agencies supported
by substantial evidence are binding on this Court and are entitled to great respect, in the absence of showing of
grave abuse of a discretion.18
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23,
1992 and December 3, 1992, are AFFIRMED.
SO ORDERED.
[G.R. No. 103576. August 22, 1996]
ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners, vs. HON. COURT OF
APPEALS, PRODUCERS BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN
CITY, respondents.
DECISION
VITUG, J.:
Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its
coverage to obligations yet to be contracted or incurred?This question is the core issue in the instant petition for
review on certiorari.
Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic
Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of private

respondent Producers Bank of the Philippines. The mortgage stood by way of security for petitioner's corporate
loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage agreement was to this effect "(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full obligation or
obligations above-stated according to the terms thereof, then this mortgage shall be null and void. x x x.
"In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former note,
as an extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts,
letters of credit, acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this
mortgage shall also stand as security for the payment of the said promissory note or notes and/or
accommodations without the necessity of executing a new contract and this mortgage shall have the same force
and effect as if the said promissory note or notes and/or accommodations were existing on the date thereof. This
mortgage shall also stand as security for said obligations and any and all other obligations of the MORTGAGOR to
the MORTGAGEE of whatever kind and nature, whether such obligations have been contracted before, during or
after the constitution of this mortgage."[1]
In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained
from respondent bank additional financial accommodations totalling P2,700,000.00. [2] These borrowings were on
due date also fully paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million
pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial constraints, the
loan was not settled at maturity.[3] Respondent bank thereupon applied for an extrajudicial foreclosure of the
chattel mortgage, hereinbefore cited, with the Sheriff of Caloocan City, prompting petitioner corporation to
forthwith file an action for injunction, with damages and a prayer for a writ of preliminary injunction, before the
Regional Trial Court of Caloocan City (Civil Case No. C-12081). Ultimately, the court dismissed the complaint and
ordered the foreclosure of the chattel mortgage. It held petitioner corporation bound by the stipulations,
aforequoted, of the chattel mortgage.
Petitioner corporation appealed to the Court of Appeals [4] which, on 14 August 1991, affirmed, "in all
respects," the decision of the court a quo. The motion for reconsideration was denied on 24 January 1992.
The instant petition interposed by petitioner corporation was initially denied on 04 March 1992 by this Court
for having been insufficient in form and substance.Private respondent filed a motion to dismiss the petition while
petitioner corporation filed a compliance and an opposition to private respondent's motion to dismiss. The Court
denied petitioner's first motion for reconsideration but granted a second motion for reconsideration, thereby
reinstating the petition and requiring private respondent to comment thereon.[5]
Except in criminal cases where the penalty of reclusion perpetua or death is imposed[6] which the Court so
reviews as a matter of course, an appeal from judgments of lower courts is not a matter of right but of sound
judicial discretion. The circulars of the Court prescribing technical and other procedural requirements are meant
to weed out unmeritorious petitions that can unnecessarily clog the docket and needlessly consume the time of
the Court. These technical and procedural rules, however, are intended to help secure, not suppress, substantial
justice. A deviation from the rigid enforcement of the rules may thus be allowed to attain the prime objective for,
after all, the dispensation of justice is the core reason for the existence of courts. In this instance, once again, the
Court is constrained to relax the rules in order to give way to and uphold the paramount and overriding interest
of justice.
Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a
suretyship, the faithful performance of the obligation by the principal debtor is secured by
the personal commitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a
mortgage or an antichresis, that fulfillment is secured by an encumbrance of property - in pledge, the placing of
movable property in the possession of the creditor; in chattel mortgage, by the execution of the corresponding
deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a public instrument
encumbering the real property covered thereby; and in antichresis, by a written instrument granting to the
creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the

payment of interest, if owing, and thereafter to the principal of his credit - upon the essential condition that if the
principal obligation becomes due and the debtor defaults, then the property encumbered can be alienated for the
payment of the obligation,[7] but that should the obligation be duly paid, then the contract is automatically
extinguished proceeding from the accessory character [8] of the agreement. As the law so puts it, once the
obligation is complied with, then the contract of security becomes, ipso facto, null and void.[9]
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so
long as these future debts are accurately described, [10]a chattel mortgage, however, can only cover obligations
existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include
debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself,
however, does not come into existence or arise until after a chattel mortgage agreement covering the newly
contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract
conformably with the form prescribed by the Chattel Mortgage Law. [11] Refusal on the part of the borrower to
execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of
the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure
can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to
be foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the
Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is
not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid
between the parties (not against third persons acting in good faith [12]), the fact, however, that the statute has
provided that the parties to the contract must execute an oath that "x x x (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and
for no other purpose, and that the same is a just and valid obligation, and one not entered into for the purpose of
fraud."[13]
makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely
contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage
contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of the
Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or
terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al.,[14] the Court said "x x x A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from
the date the same are made and not from the date of the mortgage."[15]
The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased
to exist coincidentally with the full payment of the P3,000,000.00 loan, [16] there no longer was any chattel
mortgage that could cover the new loans that were concluded thereafter.
We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial court
for a specific finding on the amount of damages it has sustained "as a result of the unlawful action taken by
respondent bank against it."[17] This prayer is not reflected in its complaint which has merely asked for the
amount of P3,000,000.00 by way of moral damages.[18] In LBC Express, Inc. vs. Court of Appeals,[19] we have said:
"Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being
an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses;
therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only
by one having a nervous system and it flows from real ills, sorrows, and griefs of life - all of which cannot be
suffered by respondent bank as an artificial person."[20]
While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been so named
as a party in representation of petitioner corporation.

Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It instead
turned out to be, however, a source of disappointment for this Court to read in petitioner's reply to private
respondent's comment on the petition his so-called "One Final Word;" viz:
"In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals should
be required to justify its decision which completely disregarded the basic laws on obligations and contracts, as
well as the clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this Honorable Court;
that in the event that its explanation is wholly unacceptable, this Honorable Court should impose appropriate
sanctions on the erring justices. This is one positive step in ridding our courts of law of incompetent and
dishonest magistrates especially members of a superior court of appellate jurisdiction."[21] (Italics supplied.)
The statement is not called for. The Court invites counsel's attention to the admonition in Guerrero vs. Villamor;
[22]
thus:
"(L)awyers x x x should bear in mind their basic duty `to observe and maintain the respect due to the courts of
justice and judicial officers and x x x (to) insist on similar conduct by others.' This respectful attitude towards the
court is to be observed, `not for the sake of the temporary incumbent of the judicial office, but for the
maintenance of its supreme importance.' And it is `through a scrupulous preference for respectful language that
a lawyer best demonstrates his observance of the respect due to the courts and judicial officers x x x.'" [23]
The virtues of humility and of respect and concern for others must still live on even in an age of materialism.
WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without
prejudice to the appropriate legal recourse by private respondent as may still be warranted as an unsecured
creditor. No costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the courts.
SO ORDERED.

[G.R. No. 149454. May 28, 2004]

BANK

OF THE PHILIPPINE ISLANDS, petitioner,


LEONARDO T. YABUT, respondents.

vs. CASA

MONTESSORI

INTERNATIONALE

and

[G.R. No. 149507. May 28, 2004]

CASA MONTESSORI INTERNATIONALE, petitioner, vs. BANK OF THE PHILIPPINE ISLANDS, respondent.
DECISION
PANGANIBAN, J.:
By the nature of its functions, a bank is required to take meticulous care of the deposits of its clients, who
have the right to expect high standards of integrity andperformance from it. Among its obligations in furtherance
thereof is knowing the signatures of its clients. Depositors are not estopped from questioning wrongful
withdrawals, even if they have failed to question those errors in the statements sent by the bank to them for
verification.

The Case
Before us are two Petitions for Review[1] under Rule 45 of the Rules of Court, assailing the March 23,
2001 Decision[2] and the August 17, 2001 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No. 63561. The
decretal portion of the assailed Decision reads as follows:
WHEREFORE, upon the premises, the decision appealed from is AFFIRMED with the modification that defendant
bank [Bank of the Philippine Islands (BPI)] is held liable only for one-half of the value of the forged checks in the
amount of P547,115.00 after deductions subject to REIMBURSEMENT from third party defendant Yabut who is
likewiseORDERED to pay the other half to plaintiff corporation [Casa Montessori Internationale (CASA)].[4]
The assailed Resolution denied all the parties Motions for Reconsideration.

The Facts
The facts of the case are narrated by the CA as follows:
On November 8, 1982, plaintiff CASA Montessori International[5] opened Current Account No. 0291-008101 with defendant BPI[,] with CASAs President Ms. Ma. Carina C. Lebron as one of its authorized signatories.
In 1991, after conducting an investigation, plaintiff discovered that nine (9) of its checks had been
encashed by a certain Sonny D. Santos since 1990 in the total amount ofP782,000.00, on the following
dates and amounts:
Check No. Date Amount
1.

839700 April 24, 1990 P 43,400.00

2.

839459 Nov. 2, 1990 110,500.00

3.

839609 Oct. 17, 1990 47,723.00

4.

839549 April 7, 1990 90,700.00

5.

839569 Sept. 23, 1990 52,277.00

6.

729149 Mar. 22, 1990 148,000.00

7.

729129 Mar. 16, 1990 51,015.00

8.

839684 Dec. 1, 1990 140,000.00

9.

729034 Mar. 2, 1990 98,985.00


Total -- P 782,600.00[6]

It turned out that Sonny D. Santos with account at BPIs Greenbelt Branch [was] a fictitious name
used by third party defendant Leonardo T. Yabut who worked as external auditor of CASA. Third
party defendant voluntarily admitted that he forged the signature of Ms. Lebron and encashed the
checks.
The PNP Crime Laboratory conducted an examination of the nine (9) checks and concluded that the
handwritings thereon compared to the standard signature of Ms. Lebron were not written by the latter.
On March 4, 1991, plaintiff filed the herein Complaint for Collection with Damages against
defendant bank praying that the latter be ordered to reinstate the amount of P782,500.00[7] in the
current and savings accounts of the plaintiff with interest at 6% per annum.
On February 16, 1999, the RTC rendered the appealed decision in favor of the plaintiff.[8]

Ruling of the Court of Appeals


Modifying the Decision of the Regional Trial Court (RTC), the CA apportioned the loss between BPI and
CASA. The appellate court took into account CASAs contributory negligence that resulted in the undetected
forgery. It then ordered Leonardo T. Yabut to reimburse BPI half the total amount claimed; and CASA, the other
half. It also disallowed attorneys fees and moral and exemplary damages.
Hence, these Petitions.[9]

Issues
In GR No. 149454, Petitioner BPI submits the following issues for our consideration:
I. The Honorable Court of Appeals erred in deciding this case NOT in accord with the applicable decisions of
this Honorable Court to the effect that forgery cannot be presumed; that it must be proved by clear,
positive and convincing evidence; and that the burden of proof lies on the party alleging the forgery.
II. The Honorable Court of Appeals erred in deciding this case not in accord with applicable laws, in particular
the Negotiable Instruments Law (NIL) which precludes CASA, on account of its own negligence, from asserting its
forgery claim against BPI, specially taking into account the absence of any negligence on the part of BPI.[10]
In GR No. 149507, Petitioner CASA submits the following issues:
1. The Honorable Court of Appeals erred when it ruled that there is no showing that [BPI], although negligent,
acted in bad faith x x x thus denying the prayer for the award of attorneys fees, moral damages and exemplary
damages to [CASA]. The Honorable Court also erred when it did not order [BPI] to pay interest on the amounts
due to [CASA].
2. The Honorable Court of Appeals erred when it declared that [CASA] was likewise negligent in the case at bar,
thus warranting its conclusion that the loss in the amount ofP547,115.00 be apportioned between [CASA] and
[BPI] x x x.[11]
These issues can be narrowed down to three. First, was there forgery under the Negotiable Instruments Law
(NIL)? Second, were any of the parties negligent and therefore precluded from setting up forgery as a
defense? Third, should moral and exemplary damages, attorneys fees, and interest be awarded?

The Courts Ruling


The Petition in GR No. 149454 has no merit, while that in GR No. 149507 is partly meritorious.

First Issue:
Forged Signature Wholly Inoperative
Section 23 of the NIL provides:
Section 23. Forged signature; effect of. -- When a signature is forged or made without the authority of the person
whose signature it purports to be, it is wholly inoperative, and no right x x x to enforce payment thereof against
any party thereto, can be acquired through or under such signature, unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority.[12]
Under this provision, a forged signature is a real [13] or absolute defense,[14] and a person whose
signature on a negotiable instrument is forged is deemed to have never become a party thereto and
to have never consented to the contract that allegedly gave rise to it. [15]

The counterfeiting of any writing, consisting in the signing of anothers name with intent to defraud, is
forgery.[16]
In the present case, we hold that there was forgery of the drawers signature on the check.
First, both the CA[17] and the RTC[18] found that Respondent Yabut himself had voluntarily admitted, through
an Affidavit, that he had forged the drawers signature and encashed the checks.[19] He never refuted these
findings.[20] That he had been coerced into admission was not corroborated by any evidence on record.[21]
Second, the appellate and the trial courts also ruled that the PNP Crime Laboratory, after its examination of
the said checks,[22] had concluded that the handwritings thereon -- compared to the standard signature of the
drawer -- were not hers.[23] This conclusion was the same as that in the Report[24] that the PNP Crime Laboratory
had earlier issued to BPI -- the drawee bank -- upon the latters request.
Indeed, we respect and affirm the RTCs factual findings, especially when affirmed by the CA, since these are
supported by substantial evidence on record.[25]

Voluntary Admission Not


Violative of Constitutional Rights
The voluntary admission of Yabut did not violate his constitutional rights (1) on custodial investigation, and
(2) against self-incrimination.
In the first place, he was not under custodial investigation. [26] His Affidavit was executed in private and before
private individuals.[27] The mantle of protection under Section 12 of Article III of the 1987 Constitution [28] covers
only the period from the time a person is taken into custody for investigation of his possible participation in the
commission of a crime or from the time he is singled out as a suspect in the commission of a crime although not
yet in custody.[29]
Therefore, to fall within the ambit of Section 12, quoted above, there must be an arrest or a deprivation of
freedom, with questions propounded on him by the police authorities for the purpose of eliciting admissions,
confessions, or any information.[30] The said constitutional provision does not apply to spontaneous statements
made in a voluntary manner[31] whereby an individual orally admits to authorship of a crime. [32] What the
Constitution proscribes is the compulsory or coercive disclosure of incriminating facts.[33]
Moreover, the right against self-incrimination [34] under Section 17 of Article III[35] of the Constitution, which is
ordinarily available only in criminal prosecutions, extends to all other government proceedings -- including civil
actions, legislative investigations,[36] and administrative proceedings that possess a criminal or penal aspect [37] -but not to private investigations done by private individuals. Even in such government proceedings, this right
may be waived,[38] provided the waiver is certain; unequivocal; and intelligently, understandingly and willingly
made.[39]
If in these government proceedings waiver is allowed, all the more is it so in private investigations. It is of no
moment that no criminal case has yet been filed against Yabut. The filing thereof is entirely up to the appropriate
authorities or to the private individuals upon whom damage has been caused. As we shall also explain later, it is
not mandatory for CASA -- the plaintiff below -- to implead Yabut in the civil case before the lower court.
Under these two constitutional provisions, [t]he Bill of Rights [40] does not concern itself with the relation
between a private individual and another individual. It governs the relationship between the individual and the
State.[41] Moreover, the Bill of Rights is a charter of liberties for the individual and a limitation upon the power of
the [S]tate.[42] These rights[43] are guaranteed to preclude the slightest coercion by the State that may lead the
accused to admit something false, not prevent him from freely and voluntarily telling the truth.[44]
Yabut is not an accused here. Besides, his mere invocation of the aforesaid rights does not automatically
entitle him to the constitutional protection.[45] When he freely and voluntarily executed[46] his Affidavit, the State
was not even involved. Such Affidavit may therefore be admitted without violating his constitutional rights while
under custodial investigation and against self-incrimination.

Clear, Positive and Convincing


Examination and Evidence
The examination by the PNP, though inconclusive, was nevertheless clear, positive and convincing.

Forgery cannot be presumed.[47] It must be established by clear, positive and convincing evidence. [48] Under
the best evidence rule as applied to documentary evidence like the checks in question, no secondary or
substitutionary evidence may inceptively be introduced, as the original writing itself must be produced in court.
[49]
But when, without bad faith on the part of the offeror, the original checks have already been destroyed or
cannot be produced in court, secondary evidence may be produced. [50] Without bad faith on its part, CASA proved
the loss or destruction of the original checks through the Affidavit of the one person who knew of that fact [51] -Yabut. He clearly admitted to discarding the paid checks to cover up his misdeed. [52] In such a situation,
secondary evidence like microfilm copies may be introduced in court.
The drawers signatures on the microfilm copies were compared with the standard signature. PNP Document
Examiner II Josefina de la Cruz testified on cross-examination that two different persons had written them.
[53]
Although no conclusive report could be issued in the absence of the original checks, [54] she affirmed that her
findings were 90 percent conclusive. [55] According to her, even if the microfilm copies were the only basis of
comparison, the differences were evident.[56] Besides, the RTC explained that although the Report was
inconclusive, no conclusive report could have been given by the PNP, anyway, in the absence of the original
checks.[57]This explanation is valid; otherwise, no such report can ever be relied upon in court.
Even with respect to documentary evidence, the best evidence rule applies only when the contents of a
document -- such as the drawers signature on a check -- is the subject of inquiry. [58] As to whether the document
has been actually executed, this rule does not apply; and testimonial as well as any other secondary evidence is
admissible.[59] Carina Lebron herself, the drawers authorized signatory, testified many times that she had never
signed those checks. Her testimonial evidence is admissible; the checks have not been actually executed. The
genuineness of her handwriting is proved, not only through the courts comparison of the questioned handwritings
and admittedly genuine specimens thereof,[60] but above all by her.
The failure of CASA to produce the original checks neither gives rise to the presumption of suppression of
evidence[61] nor creates an unfavorable inference against it. [62] Such failure merely authorizes the introduction of
secondary evidence[63] in the form of microfilm copies. Of no consequence is the fact that CASA did not present
the signature card containing the signatures with which those on the checks were compared. [64] Specimens of
standard signatures are not limited to such a card. Considering that it was not produced in evidence, other
documents that bear the drawers authentic signature may be resorted to. [65] Besides, that card was in the
possession of BPI -- the adverse party.
We have held that without the original document containing the allegedly forged signature, one cannot make
a definitive comparison that would establish forgery; [66] and that a comparison based on a mere reproduction of
the document under controversy cannot produce reliable results.[67] We have also said, however, that a judge
cannot merely rely on a handwriting experts testimony, [68] but should also exercise independent judgment in
evaluating the authenticity of a signature under scrutiny.[69] In the present case, both the RTC and the CA
conducted independent examinations of the evidence presented and arrived at reasonable and similar
conclusions. Not only did they admit secondary evidence; they also appositely considered testimonial and other
documentary evidence in the form of the Affidavit.
The best evidence rule admits of exceptions and, as we have discussed earlier, the first of these has been
met.[70] The result of examining a questioned handwriting, even with the aid of experts and scientific instruments,
may be inconclusive;[71] but it is a non sequitur to say that such result is not clear, positive and convincing. The
preponderance of evidence required in this case has been satisfied.[72]

Second Issue:
Negligence Attributable to BPI Alone
Having established the forgery of the drawers signature, BPI -- the drawee -- erred in making payments by virtue
thereof. The forged signatures are wholly inoperative, and CASA -- the drawer whose authorized signatures do not
appear on the negotiable instruments -- cannot be held liable thereon. Neither is the latter precluded from setting
up forgery as a real defense.

Clear Negligence
in Allowing Payment
Under a Forged Signature
We have repeatedly emphasized that, since the banking business is impressed with public interest, of
paramount importance thereto is the trust and confidence of the public in general. Consequently, the highest
degree of diligence[73] is expected,[74] and high standards of integrity and performance are even

required, of it.[75] By the nature of its functions, a bank is under obligation to treat the accounts of its depositors
with meticulous care,[76] always having in mind the fiduciary nature of their relationship.[77]
BPI contends that it has a signature verification procedure, in which checks are honored only when the
signatures therein are verified to be the same with or similar to the specimen signatures on the signature
cards. Nonetheless, it still failed to detect the eight instances of forgery. Its negligence consisted in
the omission of that degree of diligence required [78] of a bank. It cannot now feign ignorance, for
very early on we have already ruled that a bank is bound to know the signatures of its customers;
and if it pays a forged check, it must be considered as making the payment out of its own funds, and cannot
ordinarily charge the amount so paid to the account of the depositor whose name was forged. [79] In fact, BPI was
the same bank involved when we issued this ruling seventy years ago.

Neither Waiver nor Estoppel


Results from Failure to
Report Error in Bank Statement
The monthly statements issued by BPI to its clients contain a notice worded as follows: If no error is
reported in ten (10) days, account will be correct. [80] Such notice cannot be considered a waiver, even
if CASA failed to report the error. Neither is it estopped from questioning the mistake after the lapse of the tenday period.
This notice is a simple confirmation[81] or circularization -- in accounting parlance -- that requests clientdepositors to affirm the accuracy of items recorded by the banks. [82] Its purpose is to obtain from the depositors a
direct corroboration of the correctness of their account balances with their respective banks. [83] Internal or
external auditors of a bank use it as a basic audit procedure [84] -- the results of which its client-depositors are
neither interested in nor privy to -- to test the details of transactions and balances in the banks records.
[85]
Evidential matter obtained from independent sources outside a bank only serves to provide greater assurance
of reliability[86] than that obtained solely within it for purposes of an audit of its own financial statements, not
those of its client-depositors.
Furthermore, there is always the audit risk that errors would not be detected [87] for various reasons. One,
materiality is a consideration in audit planning; [88] andtwo, the information obtained from such a substantive test
is merely presumptive and cannot be the basis of a valid waiver. [89] BPI has no right to impose a condition
unilaterally and thereafter consider failure to meet such condition a waiver. Neither may CASA
renounce a right[90] it has never possessed.[91]
Every right has subjects -- active and passive. While the active subject is entitled to demand its enforcement,
the passive one is duty-bound to suffer such enforcement.[92]
On the one hand, BPI could not have been an active subject, because it could not have demanded from CASA
a response to its notice. Besides, the notice was a measly request worded as follows: Please examine x x x and
report x x x.[93] CASA, on the other hand, could not have been a passive subject, either, because it had no
obligation to respond. It could -- as it did -- choose not to respond.
Estoppel precludes individuals from denying or asserting, by their own deed or representation, anything
contrary to that established as the truth, in legal contemplation. [94] Our rules on evidence even make a juris et de
jure presumption[95] that whenever one has, by ones own act or omission, intentionally and deliberately led
another to believe a particular thing to be true and to act upon that belief, one cannot -- in any litigation arising
from such act or omission -- be permitted to falsify that supposed truth.[96]
In the instant case, CASA never made any deed or representation that misled BPI. The formers omission, if
any, may only be deemed an innocent mistake oblivious to the procedures and consequences of periodic
audits. Since its conduct was due to such ignorance founded upon an innocent mistake, estoppel will not arise.
[97]
A person who has no knowledge of or consent to a transaction may not be estopped by it. [98] Estoppel cannot
be sustained by mere argument or doubtful inference x x x. [99] CASA is not barred from questioning BPIs error
even after the lapse of the period given in the notice.

Loss Borne by
Proximate Source
of Negligence
For allowing payment[100] on the checks to a wrongful and fictitious payee, BPI -- the drawee bank -- becomes
liable to its depositor-drawer. Since the encashing bank is one of its branches,[101] BPI can easily go after it and

hold it liable for reimbursement.[102] It may not debit the drawers account[103] and is not entitled to indemnification
from the drawer.[104] In both law and equity, when one of two innocent persons must suffer by the wrongful act of
a third person, the loss must be borne by the one whose negligence was the proximate cause of the loss or who
put it into the power of the third person to perpetrate the wrong.[105]
Proximate cause is determined by the facts of the case.[106] It is that cause which, in natural and continuous
sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would
not have occurred.[107]
Pursuant to its prime duty to ascertain well the genuineness of the signatures of its client-depositors on
checks being encashed, BPI is expected to use reasonable business prudence. [108] In the performance of that
obligation, it is bound by its internal banking rules and regulations that form part of the contract it enters into
with its depositors.[109]
Unfortunately, it failed in that regard. First, Yabut was able to open a bank account in one of its branches
without privity;[110] that is, without the proper verification of his corresponding identification papers. Second, BPI
was unable to discover early on not only this irregularity, but also the marked differences in the signatures on the
checks and those on the signature card. Third, despite the examination procedures it conducted, the Central
Verification Unit[111] of the bank even passed off these evidently different signatures as genuine. Without
exercising the required prudence on its part, BPI accepted and encashed the eight checks presented to it. As a
result, it proximately contributed to the fraud and should be held primarily liable [112] for the negligence of its
officers or agents when acting within the course and scope of their employment.[113] It must bear the loss.

CASA Not Negligent


in Its Financial Affairs
In this jurisdiction, the negligence of the party invoking forgery is recognized as an exception [114] to the
general rule that a forged signature is wholly inoperative. [115]Contrary to BPIs claim, however, we do not find
CASA negligent in handling its financial affairs. CASA, we stress, is not precluded from setting up forgery as a real
defense.

Role of Independent Auditor


The major purpose of an independent audit is to investigate and determine objectively if the financial
statements submitted for audit by a corporation have been prepared in accordance with the appropriate financial
reporting practices[116] of private entities. The relationship that arises therefrom is both legal and moral. [117] It
begins with the execution of the engagement letter [118] that embodies the terms and conditions of the audit and
ends with the fulfilled expectation of the auditors ethical[119] and competent performance in all aspects of the
audit.[120]
The financial statements are representations of the client; but it is the auditor who has the responsibility for
the accuracy in the recording of data that underlies their preparation, their form of presentation, and the
opinion[121] expressed therein.[122] The auditor does not assume the role of employee or of management in the
clients conduct of operations[123] and is never under the control or supervision[124] of the client.
Yabut was an independent auditor [125] hired by CASA. He handled its monthly bank reconciliations and had
access to all relevant documents and checkbooks. [126]In him was reposed the clients [127] trust and
confidence[128] that he would perform precisely those functions and apply the appropriate procedures in
accordance with generally accepted auditing standards.[129] Yet he did not meet these expectations. Nothing could
be more horrible to a client than to discover later on that the person tasked to detect fraud was the same one
who perpetrated it.

Cash Balances
Open to Manipulation
It is a non sequitur to say that the person who receives the monthly bank statements, together with the
cancelled checks and other debit/credit memoranda, shall examine the contents and give notice of any
discrepancies within a reasonable time. Awareness is not equipollent with discernment.

Besides, in the internal accounting control system prudently installed by CASA, [130] it was Yabut who should
examine those documents in order to prepare the bank reconciliations.[131] He owned his working papers,[132] and
his output consisted of his opinion as well as the clients financial statements and accompanying notes
thereto. CASA had every right to rely solely upon his output -- based on the terms of the audit engagement -- and
could thus be unwittingly duped into believing that everything was in order. Besides, [g]ood faith is always
presumed and it is the burden of the party claiming otherwise to adduce clear and convincing evidence to the
contrary.[133]
Moreover, there was a time gap between the period covered by the bank statement and the date of its
actual receipt. Lebron personally received the December 1990 bank statement only in January 1991 [134] -- when
she was also informed of the forgery for the first time, after which she immediately requested a stop payment
order. She cannot be faulted for the late detection of the forged December check. After all, the bank account with
BPI was not personal but corporate, and she could not be expected to monitor closely all its finances. A preschool
teacher charged with molding the minds of the youth cannot be burdened with the intricacies or complexities of
corporate existence.
There is also a cutoff period such that checks issued during a given month, but not presented for payment
within that period, will not be reflected therein. [135] An experienced auditor with intent to defraud can easily
conceal any devious scheme from a client unwary of the accounting processes involved by manipulating the cash
balances on record -- especially when bank transactions are numerous, large and frequent. CASA could only be
blamed, if at all, for its unintelligent choice in the selection and appointment of an auditor -- a fault that is not
tantamount to negligence.
Negligence is not presumed, but proven by whoever alleges it. [136] Its mere existence is not sufficient without
proof that it, and no other cause,[137] has given rise to damages.[138] In addition, this fault is common to, if not
prevalent among, small and medium-sized business entities, thus leading the Professional Regulation
Commission (PRC), through the Board of Accountancy (BOA), to require today not only accreditation for the
practice of public accountancy, [139] but also the registration of firms in the practice thereof. In fact, among the
attachments now required upon registration are the code of good governance[140] and a sworn statement on
adequate and effective training.[141]
The missing checks were certainly reported by the bookkeeper[142] to the accountant[143] -- her immediate
supervisor -- and by the latter to the auditor. However, both the accountant and the auditor, for reasons known
only to them, assured the bookkeeper that there were no irregularities.
The bookkeeper[144] who had exclusive custody of the checkbooks [145] did not have to go directly to CASAs
president or to BPI. Although she rightfully reported the matter, neither an investigation was conducted nor a
resolution of it was arrived at, precisely because the person at the top of the helm was the culprit. The vouchers,
invoices and check stubs in support of all check disbursements could be concealed or fabricated -- even in
collusion -- and management would still have no way to verify its cash accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful act through no fault of CASA. If auditors may be held
liable for breach of contract and negligence,[146] with all the more reason may they be charged with the
perpetration of fraud upon an unsuspecting client. CASA had the discretion to pursue BPI alone under the NIL, by
reason of expediency or munificence or both. Money paid under a mistake may rightfully be recovered, [147] and
under such terms as the injured party may choose.

Third Issue:
Award of Monetary Claims

Moral Damages Denied


We deny CASAs claim for moral damages.
In the absence of a wrongful act or omission, [148] or of fraud or bad faith,[149] moral damages cannot be
awarded.[150] The adverse result of an action does not per se make the action wrongful, or the party liable for
it. One may err, but error alone is not a ground for granting such damages. [151] While no proof of pecuniary loss is
necessary therefor -- with the amount to be awarded left to the courts discretion [152] -- the claimant must
nonetheless satisfactorily prove the existence of its factual basis [153] and causal relation[154] to the claimants act or
omission.[155]
Regrettably, in this case CASA was unable to identify the particular instance -- enumerated in the Civil Code
-- upon which its claim for moral damages is predicated. [156] Neither bad faith nor negligence so gross that it
amounts to malice[157] can be imputed to BPI. Bad faith, under the law, does not simply connote bad judgment or

negligence;[158] it imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a breach
of a known duty through some motive or interest or ill will that partakes of the nature of fraud.[159]
As a general rule, a corporation -- being an artificial person without feelings, emotions and
senses, and having existence only in legal contemplation -- is not entitled to moral damages,
[160]
because it cannot experience physical suffering and mental anguish. [161] However, for breach of
the fiduciary duty required of a bank, a corporate client may claim such damages when its good
reputation is besmirched by such breach, and social humiliation results therefrom. [162] CASA was
unable to prove that BPI had debased the good reputation of, [163] and consequently caused
incalculable embarrassment to, the former. CASAs mere allegation or supposition thereof, without
any sufficient evidence on record,[164] is not enough.

Exemplary Damages Also Denied


We also deny CASAs claim for exemplary damages.
Imposed by way of correction [165] for the public good,[166] exemplary damages cannot be recovered as a
matter of right.[167] As we have said earlier, there is no bad faith on the part of BPI for paying the checks of CASA
upon forged signatures. Therefore, the former cannot be said to have acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.[168] The latter, having no right to moral damages, cannot demand exemplary
damages.[169]

Attorneys Fees Granted


Although it is a sound policy not to set a premium on the right to litigate, [170] we find that CASA is entitled to
reasonable attorneys fees based on factual, legal, and equitable justification.[171]
When the act or omission of the defendant has compelled the plaintiff to incur expenses to protect the
latters interest,[172] or where the court deems it just and equitable, [173] attorneys fees may be recovered. In the
present case, BPI persistently denied the claim of CASA under the NIL to recredit the latters account for the value
of the forged checks. This denial constrained CASA to incur expenses and exert effort for more than ten years in
order to protect its corporate interest in its bank account. Besides, we have already cautioned BPI on a similar act
of negligence it had committed seventy years ago, but it has remained unrelenting. Therefore, the Court deems it
just and equitable to grant ten percent (10%)[174] of the total value adjudged to CASA as attorneys fees.

Interest Allowed
For the failure of BPI to pay CASA upon demand and for compelling the latter to resort to the courts to obtain
payment, legal interest may be adjudicated at the discretion of the Court, the same to run from the filing [175] of
the Complaint.[176] Since a court judgment is not a loan or a forbearance of recovery, the legal interest shall be at
six percent (6%) per annum.[177] If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall be the payment of x x
x legal interest, which is six percent per annum.[178] The actual base for its computation shall be on the amount
finally adjudged,[179] compounded[180] annually to make up for the cost of money[181] already lost to CASA.
Moreover, the failure of the CA to award interest does not prevent us from granting it upon damages
awarded for breach of contract.[182] Because BPI evidently breached its contract of deposit with CASA, we award
interest in addition to the total amount adjudged. Under Section 196 of the NIL, any case not provided for shall be
governed by the provisions of existing legislation or, in default thereof, by the rules of the law merchant.
[183]
Damages are not provided for in the NIL. Thus, we resort to the Code of Commerce and the Civil Code. Under
Article 2 of the Code of Commerce, acts of commerce shall be governed by its provisions and, in their absence,
by the usages of commerce generally observed in each place; and in the absence of both rules, by those of the
civil law.[184] This law being silent, we look at Article 18 of the Civil Code, which states: In matters which are
governed by the Code of Commerce and special laws, their deficiency shall be supplied by its provisions. A
perusal of these three statutes unmistakably shows that the award of interest under our civil law is justified.
WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that in GR No. 149507 PARTLY
GRANTED. The assailed Decision of the Court of Appeals is AFFIRMED with modification: BPI is held liable
for P547,115, the total value of the forged checks less the amount already recovered by CASA from Leonardo T.
Yabut, plus interest at the legal rate of six percent (6%) per annum -- compounded annually, from the filing of the

complaint until paid in full; and attorneys fees of ten percent (10%) thereof, subject to reimbursement from
Respondent Yabut for the entire amount, excepting attorneys fees. Let a copy of this Decision be furnished the
Board of Accountancy of the Professional Regulation Commission for such action as it may deem appropriate
against Respondent Yabut. No costs.
SO ORDERED.

[G.R. No. 141994. January 17, 2005]

FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO MEDICAL AND EDUCATIONAL CENTERBICOL CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM) and ANGELITA F. AGO, respondents.
DECISION
CARPIO, J.:
The Case
This petition for review[1] assails the 4 January 1999 Decision [2] and 26 January 2000 Resolution of the Court
of Appeals in CA-G.R. CV No. 40151. The Court of Appeals affirmed with modification the 14 December 1992
Decision[3] 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, attorneys fees and costs of suit.
The Antecedents
Expos is a radio documentary [4] program hosted by Carmelo Mel Rima (Rima) and Hermogenes
Jun Alegre (Alegre).[5] Expos is aired every morning over DZRC-AM which is owned by Filipinas
Broadcasting Network, Inc. (FBNI). Expos 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 AMECs College of Medicine, filed a complaint
for damages[7] 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 AMECs 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 youll 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, isnt 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 latters 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 AMECInstitute 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 Im 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. Dont 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 thats 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. xxx[9]
(Emphasis supplied)
The complaint further alleged that AMEC is a reputable learning institution. With the supposed
exposs, 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 Answer [10] 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 Dismiss [11] on FBNIs 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 Decision [12] 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 Rimas only participation was when he agreed
with Alegres expos. The trial court found Rimas 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 P300,000.00 moral damages, plus P30,000.00
reimbursement of attorneys 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 courts judgment with modification. The
appellate court made Rima solidarily liable with FBNI and Alegre. The appellate court denied Agos claim for
damages and attorneys 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 courts 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 Alegres 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 AMECs 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 Agos claim for damages and attorneys 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, attorneys fees and costs of suit.
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 ATTORNEYS FEES IS PROPER; and
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR PAYMENT OF MORAL DAMAGES,
ATTORNEYS FEES AND COSTS OF SUIT.
The Courts 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 AMECs cause of action is based on Articles 30 and 33 of the Civil Code. Article 30 [18] authorizes a separate
civil action to recover civil liability arising from a criminal offense. On the other hand, Article 33 [19] 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 19[20] of the Civil Code to justify its claim for damages. AMEC cites
Articles 2176[21] and 2180[22] of the Civil Code to hold FBNI solidarily liable with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel[23] is a public and malicious imputation of a crime, or of a vice or defect, real or 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 Alegres remarks such as greed for money on the
part of AMECs 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 AMECs side and gave Ago the opportunity to defend AMEC and its administrators. FBNI
concludes that since there is no malice, there is no libel.
FBNIs 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 inaccurateand misleading information.[26] Hearing the students alleged complaints a month before the
expos,[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 Alegres reckless disregard of whether their report was true or not.
Contrary to FBNIs 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 republishers 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.
FBNIs 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 AMECs 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 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 Code [35] 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 19[37] 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 21[38] 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 Courts 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, AMECs claim for moral damages falls under item 7 of Article 2219 [43] 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 P300,000 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 P300,000
to P150,000.

III.
Whether the award of attorneys fees is proper
FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the award of attorneys
fees. FBNI adds that the instant case does not fall under the enumeration in Article 2208[48] of the Civil Code.
The award of attorneys fees is not proper because AMEC failed to justify satisfactorily its claim for attorneys
fees. AMEC did not adduce evidence to warrant the award of attorneys fees. Moreover, both the trial and
appellate courts failed to explicitly state in their respective decisions the rationale for the award of attorneys
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 counsels fees are not to be awarded every time a party wins a suit.The power of the court to award
attorneys 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 attorneys fees.[51] (Emphasis supplied)
While it mentioned about the award of attorneys 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, attorneys fees
and costs of suit
FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages and attorneys
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 Alegres 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. Rimas
accreditation lapsed due to his non-payment of the KBP annual fees while Alegres 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.
FBNIs 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.
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 FBNIs radio program Expos 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. FBNIs 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 industrys 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
FBNIs regimented process of application. Furthermore, FBNI admits that Rima and Alegre had deficiencies in their
KBP accreditation,[56] which is one of FBNIs requirements before it hires a broadcaster. Significantly, membership
in the KBP, while voluntary, indicates the broadcasters strong commitment to observe the broadcast industrys
rules and regulations. Clearly, these circumstances show FBNIs 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 P300,000 to P150,000 and the award of attorneys fees is deleted. Costs against
petitioner.
SO ORDERED.

WILSON P. GAMBOA,

G.R. No. 176579

Petitioner,

Present:

- versus CORONA, C.J.,


FINANCE SECRETARY MARGARITO B.
TEVES, FINANCE UNDERSECRETARY
JOHN P. SEVILLA, AND COMMISSIONER
RICARDO ABCEDE OF THE

CARPIO,

PRESIDENTIAL COMMISSION ON GOOD


GOVERNMENT (PCGG) IN THEIR
CAPACITIES AS CHAIR AND MEMBERS,
RESPECTIVELY, OF THE PRIVATIZATION
COUNCIL,
CHAIRMAN ANTHONI SALIM OF FIRST
PACIFIC CO., LTD. IN HIS CAPACITY AS
DIRECTOR OF METRO PACIFIC ASSET
HOLDINGS INC., CHAIRMAN MANUEL V.
PANGILINAN OF PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY (PLDT)
IN HIS CAPACITY AS MANAGING
DIRECTOR OF FIRST PACIFIC CO., LTD.,
PRESIDENT NAPOLEON L. NAZARENO
OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY, CHAIR FE BARIN
OF THE SECURITIES EXCHANGE
COMMISSION, and PRESIDENT FRANCIS
LIM OF THE PHILIPPINE STOCK
EXCHANGE,
Respondents.

VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA, and
SERENO, JJ.

PABLITO V. SANIDAD and

Promulgated:

ARNO V. SANIDAD,
Petitioners-in-Intervention.

June 28, 2011

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CARPIO, J.:

The Case

This is an original petition for prohibition, injunction, declaratory relief and declaration of nullity of the sale of
shares of stock of Philippine Telecommunications Investment Corporation (PTIC) by the government of the
Republic of the Philippines to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company
Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine Long Distance Telephone
Company (PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which granted PLDT a franchise and the
right to engage in telecommunications business. In 1969, General Telephone and Electronics Corporation (GTE),
an American company and a major PLDT stockholder, sold 26 percent of the outstanding common shares of PLDT
to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by several persons, including Roland Gapud and Jose
Campos, Jr. Subsequently, PHI became the owner of 111,415 shares of stock of PTIC by virtue of three Deeds of
Assignment executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 shares
of stock of PTIC held by PHI were sequestered by the Presidential Commission on Good Government (PCGG). The
111,415 PTIC shares, which represent about 46.125 percent of the outstanding capital stock of PTIC, were later
declared by this Court to be owned by the Republic of the Philippines.2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the remaining 54
percent of the outstanding capital stock of PTIC. On 20 November 2006, the Inter-Agency Privatization Council
(IPC) of the Philippine Government announced that it would sell the 111,415 PTIC shares, or 46.125 percent of the
outstanding capital stock of PTIC, through a public bidding to be conducted on 4 December 2006. Subsequently,
the public bidding was reset to 8 December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax)
and Pan-Asia Presidio Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC stockholder and buy the
111,415 PTIC shares by matching the bid price of Parallax. However, First Pacific failed to do so by the 1 February
2007 deadline set by IPC and instead, yielded its right to PTIC itself which was then given by IPC until 2 March
2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its subsidiary, MPAH, entered into a
Conditional Sale and Purchase Agreement of the 111,415 PTIC shares, or 46.125 percent of the outstanding
capital stock of PTIC, with the Philippine Government for the price of P25,217,556,000 or US$510,580,189. The
sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of PTIC shares is
actually an indirect sale of 12 million shares or about 6.3 percent of the outstanding common shares of
PLDT. With the sale, First Pacifics common shareholdings in PLDT increased from 30.7 percent to 37
percent, thereby increasing the common shareholdings of foreigners in PLDT to about 81.47
percent. This violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of
the capital of a public utility to not more than 40 percent.3

On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary John P. Sevilla, and
PCGG Commissioner Ricardo Abcede allege the following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the business of investment holdings. PTIC
held 26,034,263 PLDT common shares, or 13.847 percent of the total PLDT outstanding common shares. PHI, on
the other hand, was incorporated in 1977, and became the owner of 111,415 PTIC shares or 46.125 percent of
the outstanding capital stock of PTIC by virtue of three Deeds of Assignment executed by Ramon Cojuangco and
Luis Tirso Rivilla. In 1986, the 111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently
declared by this Court as part of the ill-gotten wealth of former President Ferdinand Marcos. The sequestered PTIC
shares were reconveyed to the Republic of the Philippines in accordance with this Courts decision4 which became
final and executoryon 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares, which represent 6.4 percent of the
outstanding common shares of stock of PLDT, and designated the Inter-Agency Privatization Council (IPC),
composed of the Department of Finance and the PCGG, as the disposing entity. An invitation to bid was published
in seven different newspapers from 13 to 24 November 2006. On 20 November 2006, a pre-bid conference was
held, and the original deadline for bidding scheduled on 4 December 2006 was reset to 8 December 2006. The
extension was published in nine different newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest bidder with a bid
of P25,217,556,000. The government notified First Pacific, the majority owner of PTIC shares, of the bidding
results and gave First Pacific until 1 February 2007 to exercise its right of first refusal in accordance with PTICs
Articles of Incorporation. First Pacific announced its intention to match Parallaxs bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good Government conducted a public
hearing on the particulars of the then impending sale of the 111,415 PTIC shares.
Respondents Teves and Sevilla were among those who attended the public hearing. The HR Committee Report
No. 2270 concluded that: (a) the auction of the governments 111,415 PTIC shares bore due diligence,

transparency and conformity with existing legal procedures; and (b) First Pacifics intended acquisition of the
governments 111,415 PTIC shares resulting in First Pacifics 100% ownership of PTIC will not violate
the 40 percent constitutional limit on foreign ownership of a public utility since PTIC holds only
13.847 percent of the total outstanding common shares of PLDT.5 On 28 February 2007, First Pacific
completed the acquisition of the 111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public bidding for the sale of
111,415 PTIC shares or 46 percent of the outstanding capital stock of PTIC (the remaining 54 percent of PTIC
shares was already owned by First Pacific and its affiliates); (b) Parallax offered the highest bid amounting
to P25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its shareholders granted in PTICs
Articles of Incorporation, MPAH, a First Pacific affiliate, exercised its right of first refusal by matching the highest
bid offered for PTIC shares on 13 February 2007; and (d) on 28 February 2007, the sale was consummated when
MPAH paid IPC P25,217,556,000 and the government delivered the certificates for the 111,415 PTIC shares.
Respondent Pangilinan denies the other allegations of facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory relief, and
declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among others, that the sale of the
111,415 PTIC shares would result in an increase in First Pacifics common shareholdings in PLDT from 30.7 percent
to 37 percent, and this, combined with Japanese NTT DoCoMos common shareholdings in PLDT, would result to a
total foreign common shareholdings in PLDT of 51.56 percent which is over the 40 percent constitutional
limit.6 Petitioner asserts:

If and when the sale is completed, First Pacifics equity in PLDT will go up from 30.7 percent to 37.0
percent of its common or voting- stockholdings, x x x. Hence, the consummation of the sale will put the
two largest foreign investors in PLDT First Pacific and Japans NTT DoCoMo, which is the worlds largest
wireless telecommunications firm, owning 51.56 percent of PLDT common equity. x x x With the
completion of the sale, data culled from the official website of the New York Stock Exchange
(www.nyse.com) showed that those foreign entities, which own at least five percent of common equity,
will collectively own 81.47 percent of PLDTs common equity. x x x
x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x which
PLDT submitted to the New York Stock Exchange for the period 2003-2005, revealed that
First Pacific and several other foreign entities breached the constitutional limit of 40
percent ownership as early as 2003. x x x7

Petitioner raises the following issues: (1) whether the consummation of the then impending sale of 111,415 PTIC
shares to First Pacific violates the constitutional limit on foreign ownership of a public utility; (2) whether public
respondents committed grave abuse of discretion in allowing the sale of the 111,415 PTIC shares to First Pacific;
and (3) whether the sale of common shares to foreigners in excess of 40 percent of the entire subscribed
common capital stock violates the constitutional limit on foreign ownership of a public utility.8

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to Intervene and Admit
Attached Petition-in-Intervention. In the Resolution of 28 August 2007, the Court granted the motion and noted
the Petition-in-Intervention.

Petitioners-in-intervention join petitioner Wilson Gamboa x x x in seeking, among others, to enjoin and/or nullify
the sale by respondents of the 111,415 PTIC shares to First Pacific or assignee. Petitioners-in-intervention claim
that, as PLDT subscribers, they have a stake in the outcome of the controversy x x x where the Philippine
Government is completing the sale of government owned assets in [PLDT], unquestionably a public utility, in
violation of the nationality restrictions of the Philippine Constitution.

The Issue

This Court is not a trier of facts. Factual questions such as those raised by petitioner,9 which indisputably demand
a thorough examination of the evidence of the parties, are generally beyond this Courts jurisdiction. Adhering to
this well-settled principle, the Court shall confine the resolution of the instant controversy solely on thethreshold
and purely legal issue of whether the term capital in Section 11, Article XII of the Constitution refers to the
total common shares only or to the total outstanding capital stock (combined total of common and non-voting
preferred shares) of PLDT, a public utility.

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies petitioner seeks, only the petition
for prohibition is within the original jurisdiction of this court, which however is not exclusive but is concurrent with
the Regional Trial Court and the Court of Appeals. The actions for declaratory relief,10 injunction, and annulment of
sale are not embraced within the original jurisdiction of the Supreme Court. On this ground alone, the petition
could have been dismissed outright.

While direct resort to this Court may be justified in a petition for prohibition,11 the Court shall nevertheless refrain
from discussing the grounds in support of the petition for prohibition since on 28 February 2007, the questioned
sale was consummated when MPAH paid IPC P25,217,556,000 and the government delivered the certificates for
the 111,415 PTIC shares.

However, since the threshold and purely legal issue on the definition of the term capital in Section 11, Article XII
of the Constitution has far-reaching implications to the national economy, the Court treats the petition for
declaratory relief as one for mandamus.12

In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for declaratory relief as one for
mandamus considering the grave injustice that would result in the interpretation of a banking law. In that case,
which involved the crime of rape committed by a foreign tourist against a Filipino minor and the execution of the
final judgment in the civil case for damages on the tourists dollar deposit with a local bank, the Court declared
Section 113 of Central Bank Circular No. 960, exempting foreign currency deposits from attachment, garnishment
or any other order or process of any court, inapplicable due to the peculiar circumstances of the case. The Court
held that injustice would result especially to a citizen aggrieved by a foreign guest like accused x x x that would
negate Article 10 of the Civil Code which provides that in case of doubt in the interpretation or application of

laws, it is presumed that the lawmaking body intended right and justice to prevail. The Court therefore required
respondents Central Bank of the Philippines, the local bank, and the accused to comply with the writ of execution
issued in the civil case for damages and to release the dollar deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly brushed aside the procedural
infirmity of the petition for declaratory relief and treated the same as one for mandamus. In Alliance, the issue
was whether the government unlawfully excluded petitioners, who were government employees, from the
enjoyment of rights to which they were entitled under the law. Specifically, the question was: Are the branches,
agencies, subdivisions, and instrumentalities of the Government, including government owned or controlled
corporations included among the four employers under Presidential Decree No. 851 which are required to pay
their employees x x x a thirteenth (13th) month pay x x x ? The Constitutional principle involved therein affected
all government employees, clearly justifying a relaxation of the technical rules of procedure, and certainly
requiring the interpretation of the assailed presidential decree.

In short, it is well-settled that this Court may treat a petition for declaratory relief as one for mandamus if the
issue involved has far-reaching implications. As this Court held in Salvacion:

The Court has no original and exclusive jurisdiction over a petition for declaratory relief. However,
exceptions to this rule have been recognized. Thus, where the petition has far-reaching
implications and raises questions that should be resolved, it may be treated as one for
mandamus.15 (Emphasis supplied)

In the present case, petitioner seeks primarily the interpretation of the term capital in Section 11, Article XII of
the Constitution. He prays that this Court declare that the term capital refers to common shares only, and that
such shares constitute the sole basis in determining foreign equity in a public utility. Petitioner further asks this
Court to declare any ruling inconsistent with such interpretation unconstitutional.

The interpretation of the term capital in Section 11, Article XII of the Constitution has far-reaching implications to
the national economy. In fact, a resolution of this issue will determine whether Filipinos are masters, or second
class citizens, in their own country. What is at stake here is whether Filipinos or foreigners will haveeffective
control of the national economy. Indeed, if ever there is a legal issue that has far-reaching implications to the
entire nation, and to future generations of Filipinos, it is the threshhold legal issue presented in this case.

The Court first encountered the issue on the definition of the term capital in Section 11, Article XII of the
Constitution in the case of Fernandez v. Cojuangco, docketed as G.R. No. 157360.16 That case involved the same
public utility (PLDT) and substantially the same private respondents. Despite the importance and novelty of the
constitutional issue raised therein and despite the fact that the petition involved a purely legal question, the
Court declined to resolve the case on the merits, and instead denied the same for disregarding the hierarchy of
courts.17 There, petitioner Fernandez assailed on a pure question of law the Regional Trial Courts Decision of 21
February 2003 via a petition for review under Rule 45. The Courts Resolution, denying the petition, became final
on 21 December 2004.
The instant petition therefore presents the Court with another opportunity to finally settle this purely legal
issue which is of transcendental importance to the national economy and a fundamental requirement to a
faithful adherence to our Constitution. The Court must forthwith seize such opportunity, not only for the benefit of
the litigants, but more significantly for the benefit of the entire Filipino people, to ensure, in the words of the
Constitution, a self-reliant and independent national economyeffectively controlled by Filipinos.18 Besides, in
the light of vague and confusing positions taken by government agencies on this purely legal issue, present and

future foreign investors in this country deserve, as a matter of basic fairness, a categorical ruling from this Court
on the extent of their participation in the capital of public utilities and other nationalized businesses.

Despite its far-reaching implications to the national economy, this purely legal issue has remained unresolved for
over 75 years since the 1935 Constitution. There is no reason for this Court to evade this ever recurring
fundamental issue and delay again defining the term capital, which appears not only in Section 11, Article XII of
the Constitution, but also in Section 2, Article XII on co-production and joint venture agreements for the
development of our natural resources,19 in Section 7, Article XII on ownership of private lands,20 in Section 10,
Article XII on the reservation of certain investments to Filipino citizens,21 in Section 4(2), Article XIV on the
ownership of educational institutions,22 and in Section 11(2), Article XVI on the ownership of advertising
companies.23

Petitioner has locus standi

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to question the subject sale,
which he claims to violate the nationality requirement prescribed in Section 11, Article XII of the Constitution. If
the sale indeed violates the Constitution, then there is a possibility that PLDTs franchise could be revoked, a dire
consequence directly affecting petitioners interest as a stockholder.

More importantly, there is no question that the instant petition raises matters of transcendental importance to
the public. The fundamental and threshold legal issue in this case, involving the national economy and the
economic welfare of the Filipino people, far outweighs any perceived impediment in the legal personality of the
petitioner to bring this action.

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters of transcendental
importance to the public, thus:

In Taada v. Tuvera, the Court asserted that when the issue concerns a public right and the object of
mandamus is to obtain the enforcement of a public duty, the people are regarded as the real parties
in interest; and because it is sufficient that petitioner is a citizen and as such is interested in the
execution of the laws, he need not show that he has any legal or special interest in the result of the
action. In the aforesaid case, the petitioners sought to enforce their right to be informed on matters of public
concern, a right then recognized in Section 6, Article IV of the 1973 Constitution, in connection with the rule that
laws in order to be valid and enforceable must be published in the Official Gazette or otherwise effectively
promulgated. In ruling for the petitioners legal standing, the Court declared that the right they sought to be
enforced is a public right recognized by no less than the fundamental law of the land.
Legaspi v. Civil Service Commission, while reiterating Taada, further declared that when a mandamus
proceeding involves the assertion of a public right, the requirement of personal interest is satisfied
by the mere fact that petitioner is a citizen and, therefore, part of the general public which
possesses the right.
Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been involved under the
questioned contract for the development, management and operation of the Manila International Container
Terminal, public interest [was] definitely involved considering the important role [of the subject
contract] . . . in the economic development of the country and the magnitude of the financial

consideration involved. We concluded that, as a consequence, the disclosure provision in the Constitution
would constitute sufficient authority for upholding the petitioners standing. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of transcendental public importance, the
petitioner has the requisite locus standi.

Definition of the Term Capital in


Section 11, Article XII of the 1987 Constitution

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution mandates the Filipinization of
public utilities, to wit:

Section 11. 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; nor shall such franchise, certificate, or authorization be exclusive in
character or for a longer period than fifty years. Neither shall any such franchise or right be granted
except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress
when the common good so requires. The State shall encourage equity participation in public utilities by
the general public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive and managing
officers of such corporation or association must be citizens of the Philippines. (Emphasis supplied)

The above provision substantially reiterates Section 5, Article XIV of the 1973 Constitution, thus:

Section 5. 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 the
capital of which is owned by such citizens, nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be
granted except under the condition that it shall be subject to amendment, alteration, or repeal by the
National Assembly when the public interest so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign investors in the governing body of any
public utility enterprise shall be limited to their proportionate share in the capital thereof. (Emphasis
supplied)

The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV of the 1935 Constitution, viz:

Section 8. 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 other
entities organized under the laws of the Philippines sixty per centum of the capital of which is
owned by citizens of the Philippines, nor shall such franchise, certificate, or authorization be
exclusive in character or for a longer period than fifty years. No franchise or right shall be granted to any
individual, firm, or corporation, except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the public interest so requires. (Emphasis supplied)

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission, reminds us that
the Filipinization provision in the 1987 Constitution is one of the products of the spirit of nationalism which
gripped the 1935 Constitutional Convention.25 The 1987 Constitution provides for the Filipinization of public
utilities by requiring that any form of authorization for the operation of public utilities should be granted only 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. The provision is [an express] recognition of
the sensitive and vital position of public utilities both in the national economy and for national
security.26 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.27 This specific provision explicitly reserves to
Filipino citizens control of public utilities, pursuant to an overriding economic goal of the 1987 Constitution: to
conserve and develop our patrimony28 and ensure a self-reliant and independent national
economy effectively controlled by Filipinos.29

Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum nationality
requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a corporation to be granted
authority to operate a public utility, at least 60 percent of its capital must be owned by Filipino citizens.

The crux of the controversy is the definition of the term capital. Does the term capital in Section 11, Article XII of
the Constitution refer to common shares or to the total outstanding capital stock (combined total of common and
non-voting preferred shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers only to common
shares because such shares are entitled to vote and it is through voting that control over a corporation is
exercised. Petitioner posits that the term capital in Section 11, Article XII of the Constitution refers to the
ownership of common capital stock subscribed and outstanding, which class of shares alone, under the corporate
set-up of PLDT, can vote and elect members of the board of directors. It is undisputed that PLDTs non-voting
preferred shares are held mostly by Filipino citizens.30 This arose from Presidential Decree No. 217,31 issued on 16
June 1973 by then President Ferdinand Marcos, requiring every applicant of a PLDT telephone line to subscribe to
non-voting preferred shares to pay for the investment cost of installing the telephone line.32

Petitioners-in-intervention basically reiterate petitioners arguments and adopt petitioners definition of the term
capital.33 Petitioners-in-intervention allege that the approximate foreign ownership of common capital stock of
PLDT x x x already amounts to at least 63.54% of the total outstanding common stock, which means that
foreigners exercise significant control over PLDT, patently violating the 40 percent foreign equity limitation in
public utilities prescribed by the Constitution.

Respondents, on the other hand, do not offer any definition of the term capital in Section 11, Article XII of the
Constitution. More importantly, private respondentsNazareno and Pangilinan of PLDT do not dispute that more
than 40 percent of the common shares of PLDT are held by foreigners.

In particular, respondent Nazarenos Memorandum, consisting of 73 pages, harps mainly on the procedural
infirmities of the petition and the supposed violation of the due process rights of the affected foreign common
shareholders. Respondent Nazareno does not deny petitioners allegation of foreigners dominating the common
shareholdings of PLDT. Nazareno stressed mainly that the petition seeks to divest foreign common
shareholders purportedly exceeding 40% of the total common shareholdings in PLDT of their
ownership over their shares. Thus, the foreign natural and juridical PLDT shareholders must be impleaded in
this suit so that they can be heard.34 Essentially, Nazareno invokes denial of due process on behalf of the foreign
common shareholders.

While Nazareno does not introduce any definition of the term capital, he states that among the factual
assertions that need to be established to counter petitioners allegations is the uniform
interpretation by government agencies (such as the SEC), institutions and corporations (such as the
Philippine National Oil Company-Energy Development Corporation or PNOC-EDC) of including both
preferred shares and common shares in controlling interest in view of testing compliance with the
40% constitutional limitation on foreign ownership in public utilities. 35

Similarly, respondent Manuel V. Pangilinan does not define the term capital in Section 11, Article XII of the
Constitution. Neither does he refute petitioners claim of foreigners holding more than 40 percent of PLDTs
common shares. Instead, respondent Pangilinan focuses on the procedural flaws of the petition and the alleged
violation of the due process rights of foreigners. Respondent Pangilinan emphasizes in his Memorandum (1) the
absence of this Courts jurisdiction over the petition; (2) petitioners lack of standing; (3) mootness of the petition;
(4) non-availability of declaratory relief; and (5) the denial of due process rights. Moreover,
respondentPangilinan alleges that the issue should be whether owners of shares in PLDT as well as owners of
shares in companies holding shares in PLDT may be required to relinquish their shares in PLDT and in those
companies without any law requiring them to surrender their shares and also without notice and trial.

Respondent Pangilinan further asserts that Section 11, [Article XII of the Constitution] imposes no
nationality requirement on the shareholders of the utility company as a condition for keeping their
shares in the utility company. According to him, Section 11 does not authorize taking one persons property
(the shareholders stock in the utility company) on the basis of another partys alleged failure to satisfy a
requirement that is a condition only for that other partys retention of another piece of property (the utility
company being at least 60% Filipino-owned to keep its franchise).36

The OSG, representing public respondents Secretary Margarito Teves, Undersecretary John P. Sevilla,
Commissioner Ricardo Abcede, and Chairman Fe Barin, is likewise silent on the definition of the term capital. In its
Memorandum37 dated 24 September 2007, the OSG also limits its discussion on the supposed procedural defects
of the petition, i.e. lack of standing, lack of jurisdiction, non-inclusion of interested parties, and lack of basis for
injunction. The OSG does not present any definition or interpretation of the term capital in Section 11, Article XII
of the Constitution. The OSG contends that the petition actually partakes of a collateral attack on PLDTs franchise
as a public utility, which in effect requires a full-blown trial where all the parties in interest are given their day in
court.38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the Philippine Stock
Exchange (PSE), does not also define the term capital and seeks the dismissal of the petition on the following
grounds: (1) failure to state a cause of action against Lim; (2) the PSE allegedly implemented its rules and

required all listed companies, including PLDT, to make proper and timely disclosures; and (3) the reliefs prayed
for in the petition would adversely impact the stock market.

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a stockholder of record
of PLDT, contended that the term capital in the 1987 Constitution refers to shares entitled to vote or the common
shares. Fernandez explained thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution refers to
ownership of shares of stock entitled to vote, i.e., common shares, considering that it is through voting
that control is being exercised. x x x

Obviously, the intent of the framers of the Constitution in imposing limitations and restrictions on fully
nationalized and partially nationalized activities is for Filipino nationals to be always in control of the
corporation undertaking said activities. Otherwise, if the Trial Courts ruling upholding respondents
arguments were to be given credence, it would be possible for the ownership structure of a public utility
corporation to be divided into one percent (1%) common stocks and ninety-nine percent (99%) preferred
stocks. Following the Trial Courts ruling adopting respondents arguments, the common shares can be
owned entirely by foreigners thus creating an absurd situation wherein foreigners, who are supposed to
be minority shareholders, control the public utility corporation.

xxxx

Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial
ownership and the controlling interest.

xxxx

Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by the
Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares. Furthermore,
ownership of record of shares will not suffice but it must be shown that the legal and beneficial ownership
rests in the hands of Filipino citizens. Consequently, in the case of petitioner PLDT, since it is already
admitted that the voting interests of foreigners which would gain entry to petitioner PLDT by the
acquisition of SMART shares through the Questioned Transactions is equivalent to 82.99%, and the
nominee arrangements between the foreign principals and the Filipino owners is likewise admitted, there
is, therefore, a violation of Section 11, Article XII of the Constitution.
Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial Court to
support the proposition that the meaning of the word capital as used in Section 11, Article XII of the
Constitution allegedly refers to the sum total of the shares subscribed and paid-in by the shareholder and
it allegedly is immaterial how the stock is classified, whether as common or preferred, cannot stand in the
face of a clear legislative policy as stated in the FIA which took effect in 1991 or way after said opinions
were rendered, and as clarified by the above-quoted Amendments. In this regard, suffice it to state that
as between the law and an opinion rendered by an administrative agency, the law indubitably prevails.
Moreover, said Opinions are merely advisory and cannot prevail over the clear intent of the framers of the
Constitution.

In the same vein, the SECs construction of Section 11, Article XII of the Constitution is at best merely
advisory for it is the courts that finally determine what a law means.39

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V. Pangilinan, Carlos A. Arellano, Helen Y.
Dee, Magdangal B. Elma, Mariles Cacho-Romulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno,
Albert F. Del Rosario, and Orlando B. Vea, argued that the term capital in Section 11, Article XII of the Constitution
includes preferred shares since the Constitution does not distinguish among classes of stock, thus:

16. The Constitution applies its foreign ownership limitation on the corporations capital, without distinction as
to classes of shares. x x x

In this connection, the Corporation Code which was already in force at the time the present (1987)
Constitution was drafted defined outstanding capital stock as follows:

Section 137. Outstanding capital stock defined. The term outstanding capital stock, as used in this Code,
means the total shares of stock issued under binding subscription agreements to subscribers or
stockholders, whether or not fully or partially paid, except treasury shares.

Section 137 of the Corporation Code also does not distinguish between common and preferred shares, nor
exclude either class of shares, in determining the outstanding capital stock (the capital) of a corporation.
Consequently, petitioners suggestion to reckon PLDTs foreign equity only on the basis of PLDTs
outstanding common shares is without legal basis. The language of the Constitution should be understood
in the sense it has in common use.
xxxx

17. But even assuming that resort to the proceedings of the Constitutional Commission is necessary, there is
nothing in the Record of the Constitutional Commission (Vol. III) which petitioner misleadingly cited in the
Petition x x x which supports petitioners view that only common shares should form the basis for
computing a public utilitys foreign equity.
xxxx

18. In addition, the SEC the government agency primarily responsible for implementing the Corporation
Code, and which also has the responsibility of ensuring compliance with the Constitutions foreign equity
restrictions as regards nationalized activities x x x has categorically ruled that both common and
preferred shares are properly considered in determining outstanding capital stock and the nationality
composition thereof.40

We agree with petitioner and petitioners-in-intervention. The term capital in Section 11, Article XII of the
Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present
case only to common shares,41 and not to the total outstanding capital stock comprising both common and nonvoting preferred shares.
The Corporation Code of the Philippines42 classifies shares as common or preferred, thus:

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or
series of shares, or both, any of which classes or series of shares may have such rights, privileges or
restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived
of voting rights except those classified and issued as preferred or redeemable shares, unless
otherwise provided in this Code: Provided, further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of the shares or series of shares may have a par
value or have no par value as may be provided for in the articles of incorporation: Provided,
however, That banks, trust companies, insurance companies, public utilities, and building and loan
associations shall not be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the distribution of the
assets of the corporation in case of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are not violative of the provisions of
this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The Board
of Directors, where authorized in the articles of incorporation, may fix the terms and conditions of
preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective
upon the filing of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the
holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided;
That shares without par value may not be issued for a consideration less than the value of five (P5.00)
pesos per share: Provided, further, That the entire consideration received by the corporation for its no-par
value shares shall be treated as capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring compliance with
constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each
share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the
holders of such shares shall nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with this Code;
and
8. Dissolution of the corporation.

Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular
corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.

Indisputably, one of the rights of a stockholder is the right to participate in the control or management of the
corporation.43 This is exercised through his vote in the election of directors because it is the board of directors
that controls or manages the corporation.44 In the absence of provisions in the articles of incorporation denying
voting rights to preferred shares, preferred shares have the same voting rights as common shares. However,
preferred shareholders are often excluded from any control, that is, deprived of the right to vote in the election of
directors and on other matters, on the theory that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders.45 In fact, under the Corporation Code only preferred
or redeemable shares can be deprived of the right to vote.46Common shares cannot be deprived of the right to
vote in any corporate meeting, and any provision in the articles of incorporation restricting the right of common
shareholders to vote is invalid.47

Considering that common shares have voting rights which translate to control, as opposed to preferred shares
which usually have no voting rights, the term capital in Section 11, Article XII of the Constitution refers only to
common shares. However, if the preferred shares also have the right to vote in the election of directors, then the
term capital shall include such preferred shares because the right to participate in the control or management of
the corporation is exercised through the right to vote in the election of directors. In short, the term capital in
Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the election
of directors.

This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino
citizens the control and management of public utilities. As revealed in the deliberations of the Constitutional
Commission, capital refers to the voting stock or controlling interest of a corporation, to wit:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity;
namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15.

MR. VILLEGAS. That is right.

MR. NOLLEDO. In teaching law, we are always faced with this question: Where do we base the equity
requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up
capital stock of a corporation? Will the Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center
who provided us a draft. The phrase that is contained here which we adopted from the UP draft
is 60 percent of voting stock.

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent,
unpaid capital stock shall be entitled to vote.

MR. VILLEGAS. That is right.

MR. NOLLEDO. Thank you.

With respect to an investment by one corporation in another corporation, say, a corporation with 60-40
percent equity invests in another corporation which is permitted by the Corporation Code, does the
Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.48

xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase voting stock or
controlling interest.

MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: corporations or
associations at least sixty percent of whose CAPITAL is owned by such citizens.

MR. VILLEGAS. Yes.

MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be owned
by citizens.

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us
say 40 percent of the capital is owned by them, but it is the voting capital, whereas, the
Filipinos own the nonvoting shares. So we can have a situation where the corporation is

controlled by foreigners despite being the minority because they have the voting capital.
That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word stock as stated in the 1973 and 1935
Constitutions is that according to Commissioner Rodrigo, there are associations that do not
have stocks. That is why we say CAPITAL.

MR. AZCUNA. We should not eliminate the phrase controlling interest.

MR. BENGZON. In the case of stock corporations, it is assumed. 49 (Emphasis supplied)

Thus, 60 percent of the capital assumes, or should result in, controlling interest in the corporation. Reinforcing
this interpretation of the term capital, as referring to controlling interest or shares entitled to vote, is the
definition of a Philippine national in the Foreign Investments Act of 1991,50 to wit:

SEC. 3. Definitions. - As used in this Act:

a. The term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or
association wholly owned by citizens of the Philippines; or a corporation organized under the laws of
the Philippines of which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines; or a
corporation organized abroad and registered as doing business in the Philippines under the Corporation
Code of which one hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly
owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits,
where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the
benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own
stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%)
of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held
by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of
each of both corporations must be citizens of the Philippines, in order that the corporation, shall be
considered a Philippine national. (Emphasis supplied)

In explaining the definition of a Philippine national, the Implementing Rules and Regulations of the Foreign
Investments Act of 1991 provide:

b. Philippine national shall mean a citizen of the Philippines or a domestic partnership or association
wholly owned by the citizens of the Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent [60%] of the capital stock outstanding and entitled
to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty
percent [60%] of the fund will accrue to the benefit of the Philippine nationals; Provided, that where a
corporation its non-Filipino stockholders own stocks in a Securities and Exchange Commission [SEC]
registered enterprise, at least sixty percent [60%] of the capital stock outstanding and entitled to vote of

both corporations must be owned and held by citizens of the Philippines and at least sixty percent [60%]
of the members of the Board of Directors of each of both corporation must be citizens of the Philippines,
in order that the corporation shall be considered a Philippine national. The control test shall be applied for
this purpose.

Compliance with the required Filipino ownership of a corporation shall be determined on the
basis of outstanding capital stock whether fully paid or not, but only such stocks which are
generally entitled to vote are considered.

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.

Individuals or juridical entities not meeting the aforementioned qualifications are considered
as non-Philippine nationals. (Emphasis supplied)

Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required in the Constitution. Full
beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights,
is required. The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the constitutional mandate. Otherwise, the corporation is
considered as non-Philippine national[s].

Under Section 10, Article XII of the Constitution, Congress may reserve to citizens of the Philippines or to
corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher
percentage as Congress may prescribe, certain areas of investments. Thus, in numerous laws Congress has
reserved certain areas of investments to Filipino citizens or to corporations at least sixty percent of the capital of
which is owned by Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or
R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and
Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5)
Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or
R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term capitalin Section 11, Article XII
of the Constitution is also used in the same context in numerous laws reserving certain areas of investments
to Filipino citizens.

To construe broadly the term capital as the total outstanding capital stock, including both common and nonvoting preferred shares, grossly contravenes the intent and letter of the Constitution that the State shall develop
a self-reliant and independent national economy effectively controlled by Filipinos. A broad definition

unjustifiably disregards who owns the all-important voting stock, which necessarily equates to control of the
public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term capital. Let us assume that a
corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares owned by
Filipinos, with both classes of share having a par value of one peso (P1.00) per share. Under the broad definition
of the term capital, such corporation would be considered compliant with the 40 percent constitutional limit on
foreign equity of public utilities since the overwhelming majority, or more than 99.999 percent, of the total
outstanding capital stock is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting rights in the election of
directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001 percent,
exercise control over the public utility. On the other hand, the Filipinos, holding more than 99.999 percent of the
equity, cannot vote in the election of directors and hence, have no control over the public utility. This starkly
circumvents the intent of the framers of the Constitution, as well as the clear language of the Constitution, to
place the control of public utilities in the hands of Filipinos. It also renders illusory the State policy of an
independent national economy effectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact exists in the present
case.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors. PLDTs
Articles of Incorporation expressly state that the holders of Serial Preferred Stock shall not be entitled to
vote at any meeting of the stockholders for the election of directors or for any other purpose or
otherwise participate in any action taken by the corporation or its stockholders, or to receive notice of any
meeting of stockholders.51

On the other hand, holders of common shares are granted the exclusive right to vote in the election of directors.
PLDTs Articles of Incorporation52 state that each holder of Common Capital Stock shall have one vote in respect of
each share of such stock held by him on all matters voted upon by the stockholders, and the holders of
Common Capital Stock shall have the exclusive right to vote for the election of directors and for all
other purposes.53

In short, only holders of common shares can vote in the election of directors, meaning only common shareholders
exercise control over PLDT. Conversely, holders of preferred shares, who have no voting rights in the election of
directors, do not have any control over PLDT. In fact, under PLDTs Articles of Incorporation, holders of common
shares have voting rights for all purposes, while holders of preferred shares have no voting right for any purpose
whatsoever.

It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common shares of
PLDT. In fact, based on PLDTs 2010 General Information Sheet (GIS),54 which is a document required to be
submitted annually to the Securities and Exchange Commission,55 foreigners hold 120,046,690 common shares of
PLDT whereas Filipinos hold only 66,750,622 common shares.56 In other words, foreigners hold 64.27% of the
total number of PLDTs common shares, while Filipinos hold only 35.73%. Since holding a majority of the common
shares equates to control, it is clear that foreigners exercise control over PLDT. Such amount of control
unmistakably exceeds the allowable 40 percent limit on foreign ownership of public utilities expressly mandated
in Section 11, Article XII of the Constitution.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows that per share the
SIP58 preferred shares earn a pittance in dividends compared to the common shares. PLDT declared dividends for
the common shares at P70.00 per share, while the declared dividends for the preferred shares amounted to a
measly P1.00 per share.59 So the preferred shares not only cannot vote in the election of directors, they also have
very little and obviously negligible dividend earning capacity compared to common shares.

As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the par value of PLDT common shares is P5.00 per share,
whereas the par value of preferred shares isP10.00 per share. In other words, preferred shares have twice the par
value of common shares but cannot elect directors and have only 1/70 of the dividends of common shares.
Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners own only a minuscule 0.56% of
the preferred shares.61 Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT while
common shares constitute only 22.15%.62 This undeniably shows that beneficial interest in PLDT is not with the
non-voting preferred shares but with the common shares, blatantly violating the constitutional requirement of 60
percent Filipino control and Filipino beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of
Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of the voting rights, is constitutionally required for the States grant of
authority to operate a public utility. The undisputed fact that the PLDT preferred shares, 99.44% owned by
Filipinos, are non-voting and earn only 1/70 of the dividends that PLDT common shares earn, grossly violates the
constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership of a public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the
dividends, of PLDT. This directly contravenes the express command in Section 11, Article XII of the Constitution
that [n]o franchise, certificate, or any other form of authorization for the operation of a public utility shall be
granted except to x x x corporations x x x organized under the laws of the Philippines, at least sixty per
centum of whose capital is owned by such citizens x x x.

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares exercises
the sole right to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos own only
35.73% of PLDTs common shares, constituting a minority of the voting stock, and thus do not exercise control
over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only
1/70 of the dividends that common shares earn;63 (5) preferred shares have twice the par value of common
shares; and (6) preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares
only 22.15%. This kind of ownership and control of a public utility is a mockery of the Constitution.

Incidentally, the fact that PLDT common shares with a par value of P5.00 have a current stock market value
of P2,328.00 per share,64 while PLDT preferred shares with a par value of P10.00 per share have a current stock
market value ranging from only P10.92 to P11.06 per share,65 is a glaring confirmation by the market that control
and beneficial ownership of PLDT rest with the common shares, not with the preferred shares.

Indisputably, construing the term capital in Section 11, Article XII of the Constitution to include both voting and
non-voting shares will result in the abject surrender of our telecommunications industry to foreigners, amounting
to a clear abdication of the States constitutional duty to limit control of public utilities to Filipino citizens. Such an
interpretation certainly runs counter to the constitutional provision reserving certain areas of investment to
Filipino citizens, such as the exploitation of natural resources as well as the ownership of land, educational
institutions and advertising businesses. The Court should never open to foreign control what the Constitution has
expressly reserved to Filipinos for that would be a betrayal of the Constitution and of the national interest. The
Court must perform its solemn duty to defend and uphold the intent and letter of the Constitution to ensure, in
the words of the Constitution, a self-reliant and independent national economy effectively controlled by Filipinos.

Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly reserving to
Filipinos specific areas of investment, such as the development of natural resources and ownership of land,
educational institutions and advertising business, is self-executing. There is no need for legislation to
implement these self-executing provisions of the Constitution. The rationale why these constitutional provisions
are self-executing was explained in Manila Prince Hotel v. GSIS,66 thus:
x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a constitutional
mandate, the presumption now is that all provisions of the constitution are self-executing. If the
constitutional provisions are treated as requiring legislation instead of self-executing, the legislature
would have the power to ignore and practically nullify the mandate of the fundamental law. This can be
cataclysmic. That is why the prevailing view is, as it has always been, that

. . . in case of doubt, the Constitution should be considered self-executing rather than non-self-executing. .
. . Unless the contrary is clearly intended, the provisions of the Constitution should be
considered self-executing, as a contrary rule would give the legislature discretion to
determine when, or whether, they shall be effective. These provisions would be subordinated to the
will of the lawmaking body, which could make them entirely meaningless by simply refusing to pass the
needed implementing statute. (Emphasis supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice Reynato S. Puno, later Chief Justice,
agreed that constitutional provisions are presumed to be self-executing. Justice Puno stated:

Courts as a rule consider the provisions of the Constitution as self-executing, rather than as requiring
future legislation for their enforcement. The reason is not difficult to discern. For if they are not treated
as self-executing, the mandate of the fundamental law ratified by the sovereign people can
be easily ignored and nullified by Congress. Suffused with wisdom of the ages is the
unyielding rule that legislative actions may give breath to constitutional rights but
congressional inaction should not suffocate them.

Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests, searches and
seizures, the rights of a person under custodial investigation, the rights of an accused, and the privilege
against self-incrimination. It is recognized that legislation is unnecessary to enable courts to effectuate
constitutional provisions guaranteeing the fundamental rights of life, liberty and the protection of
property. The same treatment is accorded to constitutional provisions forbidding the taking or damaging
of property for public use without just compensation. (Emphasis supplied)

Thus, in numerous cases,67 this Court, even in the absence of implementing legislation, applied directly the
provisions of the 1935, 1973 and 1987 Constitutions limiting land ownership to Filipinos. In Soriano
v. Ong Hoo,68 this Court ruled:

x x x As the Constitution is silent as to the effects or consequences of a sale by a citizen of his land to an
alien, and as both the citizen and the alien have violated the law, none of them should have a recourse
against the other, and it should only be the State that should be allowed to intervene and determine what
is to be done with the property subject of the violation. We have said that what the State should do or
could do in such matters is a matter of public policy, entirely beyond the scope of judicial
authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No. L-5996, June 27, 1956.) While the
legislature has not definitely decided what policy should be followed in cases of violations
against the constitutional prohibition, courts of justice cannot go beyond by declaring the
disposition to be null and void as violative of the Constitution. x x x(Emphasis supplied)

To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the 1935
Constitution, or over the last 75 years, not one of the constitutional provisions expressly reserving specific areas
of investments to corporations, at least 60 percent of the capital of which is owned by Filipinos, was enforceable.
In short, the framers of the 1935, 1973 and 1987 Constitutions miserably failed to effectively reserve to Filipinos
specific areas of investment, like the operation by corporations of public utilities, the exploitation by corporations
of mineral resources, the ownership by corporations of real estate, and the ownership of educational institutions.
All the legislatures that convened since 1935 also miserably failed to enact legislations to implement these vital
constitutional provisions that determine who will effectively control the national economy, Filipinos or foreigners.
This Court cannot allow such an absurd interpretation of the Constitution.

This Court has held that the SEC has both regulatory and adjudicative functions.69 Under its regulatory functions,
the SEC can be compelled by mandamus to perform its statutory duty when it unlawfully neglects to perform the
same. Under its adjudicative or quasi-judicial functions, the SEC can be also be compelled by mandamus to hear
and decide a possible violation of any law it administers or enforces when it is mandated by law to investigate
such violation.

Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to reject or disapprove the
Articles of Incorporation of any corporation where the required percentage of ownership of the capital
stock to be owned by citizens of the Philippines has not been complied with as required by existing
laws or the Constitution. Thus, the SEC is the government agency tasked with the statutory duty to enforce
the nationality requirement prescribed in Section 11, Article XII of the Constitution on the ownership of public
utilities. This Court, in a petition for declaratory relief that is treated as a petition for mandamus as in the present
case, can direct the SEC to perform its statutory duty under the law, a duty that the SEC has apparently
unlawfully neglected to do based on the 2010 GIS that respondent PLDT submitted to the SEC.
Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the power and function
to suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law. The SEC is
mandated under Section 5(d) of the same Code with the power and function to investigate x x x the activities
of persons to ensure compliance with the laws and regulations that SEC administers or enforces. The GIS that
all corporations are required to submit to SEC annually should put the SEC on guard against violations of the
nationality requirement prescribed in the Constitution and existing laws. This Court can compel the SEC, in a
petition for declaratory relief that is treated as a petition for mandamus as in the present case, to hear and
decide a possible violation of Section 11, Article XII of the Constitution in view of the ownership structure of PLDTs
voting shares, as admitted by respondents and as stated in PLDTs 2010 GIS that PLDT submitted to SEC.

WHEREFORE, we PARTLY GRANT the petition and rule that the term capital in Section 11, Article XII of the
1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the
present case only to common shares, and not to the total outstanding capital stock (common and non-voting
preferred shares). Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply
this definition of the term capital in determining the extent of allowable foreign ownership in respondent
Philippine Long Distance Telephone Company, and if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the law.

SO ORDERED.

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