G.R. No.

L-37331

March 18, 1933

FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own behalf and in that all
other
stockholders
of
the
Balatoc
Mining
Company,
etc., plaintiffs-appellants,
vs.
BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING COMPANY, H. E. RENZ, JOHN
W. JAUSSERMANN, and A. W. BEAM, defendants-appellees.
Gibbs
and
McDonough
and
Roman
DeWitt,
Perkins
and
Brady
Ross, Lawrence and Selph for appellee Balatoc Mining Company.

Ozaeta

for
for

appellants.
appellees.

STREET, J.:
This action was originally instituted in the Court of First Instance of the City of Manila by F. M. Harden,
acting in his own behalf and that of all other stockholders of the Balatoc Mining Co. who might join in the
action and contribute to the expense of the suit. With the plaintiff Harden two others, J. D. Highsmith
and John C. Hart, subsequently associated themselves. The defendants are the Benguet Consolidated
Mining Co., the Balatoc Mining Co., H. E. Renz, John W. Haussermann, and A. W. Beam. The principal
purpose of the original action was to annul a certificate covering 600,000 shares of the stock of the
Balatoc Mining Co., which have been issued to the Benguet Consolidated Mining Co., and to secure to
the Balatoc Mining Co., the restoration of a large sum of money alleged to have been unlawfully
collected by the Benguet Consolidated Mining Co., with legal interest, after deduction therefrom of the
amount expended by the latter company under a contract between the two companies, bearing date of
March 9, 1927. The complaint was afterwards amended so as to include a prayer for the annulment of
this contract. Shortly prior to the institution of this lawsuit, the Benguet Consolidated Mining Co.,
transferred to H. E. Renz, as trustee, the certificate for 600,000 shares of the Balatoc Mining Co. which
constitute the principal subject matter of the action. This was done apparently to facilitate the splitting
up to the shares in the course of the sale or distribution. To prevent this the plaintiffs, upon filing their
original complaint, procured a preliminary injunction restraining the defendants, their agents and
servants, from selling, assigning or transferring the 600,000 shares of the Balatoc Mining Co., or any
part thereof, and from removing said shares from the Philippine Islands. This explains the connection of
Renz with the case. The other individual defendants are made merely as officials of the Benguet
Consolidated Mining Co. Upon hearing the cause the trial court dismissed the complaint and dissolved
the preliminary injunction, with costs against the plaintiffs. From this judgment the plaintiffs appealed.
The facts which have given rise this lawsuit are simple, as the financial interests involve are immense.
Briefly told these facts are as follows: The Benguet Consolidated Mining Co. was organized in June, 1903,
as a sociedad anonima in conformity with the provisions of Spanish law; while the Balatoc Mining Co.
was organized in December 1925, as a corporation, in conformity with the provisions of the Corporation
Law (Act No. 1459). Both entities were organized for the purpose of engaging in the mining of gold in the
Philippine Islands, and their respective properties are located only a few miles apart in the subprovince
of Benguet. The capital stock of the Balatoc Mining Co. consists of one million shares of the par value of
one peso (P1) each.
When the Balatoc Mining Co. was first organized the properties acquired by it were largely undeveloped;
and the original stockholders were unable to supply the means needed for profitable operation. For this
reason, the board of directors of the corporation ordered a suspension of all work, effective July 31,
1926. In November of the same year a general meeting of the company's stockholders appointed a
committee for the purpose of interesting outside capital in the mine. Under the authority of this
resolution the committee approached A. W. Beam, then president and general manager of the Benguet
Company, to secure the capital necessary to the development of the Balatoc property. As a result of the
negotiations thus begun, a contract, formally authorized by the management of both companies, was
executed on March 9, 1927, the principal features of which were that the Benguet Company was to
proceed with the development and construct a milling plant for the Balatoc mine, of a capacity of 100
tons of ore per day, and with an extraction of at least 85 per cent of the gold content. The Benguet
Company also agreed to erect an appropriate power plant, with the aerial tramlines and such other
surface buildings as might be needed to operate the mine. In return for this it was agreed that the
Benguet Company should receive from the treasurer of the Balatoc Company shares of a par value of
P600,000, in payment for the first P600,000 be thus advanced to it by the Benguet Company.
The performance of this contract was speedily begun, and by May 31, 1929, the Benguet Company had
spent upon the development the sum of P1,417,952.15. In compensation for this work a certificate for
six hundred thousand shares of the stock of the Balatoc Company has been delivered to the Benguet
Company, and the excess value of the work in the amount of P817,952.15 has been returned to the

Benguet Company in cash. Meanwhile dividends of the Balatoc Company have been enriching its
stockholders, and at the time of the filing of the complaint the value of its shares had increased in the
market from a nominal valuation to more than eleven pesos per share. While the Benguet Company was
pouring its million and a half into the Balatoc property, the arrangements made between the two
companies appear to have been viewed by the plaintiff Harden with complacency, he being the owner of
many thousands of the shares of the Balatoc Company. But as soon as the success of the development
had become apparent, he began this litigation in which he has been joined by two others of the eighty
shareholders of the Balatoc Company.
Briefly, the legal point upon which the action is planted is that it is unlawful for the Benguet Company to
hold any interest in a mining corporation and that the contract by which the interest here in question
was acquired must be annulled, with the consequent obliteration of the certificate issued to the Benguet
Company and the corresponding enrichment of the shareholders of the Balatoc Company.
When the Philippine Islands passed to the sovereignty of the United States, in the attention of the
Philippine Commission was early drawn to the fact that there is no entity in Spanish law exactly
corresponding to the notion of the corporation in English and American law; and in the Philippine Bill,
approved July 1, 1902, the Congress of the United States inserted certain provisions, under the head of
Franchises, which were intended to control the lawmaking power in the Philippine Islands in the matter
of granting of franchises, privileges and concessions. These provisions are found in section 74 and 75 of
the Act. The provisions of section 74 have been superseded by section 28 of the Act of Congress of
August 29, 1916, but in section 75 there is a provision referring to mining corporations, which still
remains the law, as amended. This provisions, in its original form, reads as follows: "... it shall be
unlawful for any member of a corporation engaged in agriculture or mining and for any corporation
organized for any purpose except irrigation to be in any wise interested in any other corporation
engaged in agriculture or in mining."
Under the guidance of this and certain other provisions thus enacted by Congress, the Philippine
Commission entered upon the enactment of a general law authorizing the creation of corporations in the
Philippine Islands. This rather elaborate piece of legislation is embodied in what is called our Corporation
Law (Act No. 1459 of the Philippine Commission). The evident purpose of the commission was to
introduce the American corporation into the Philippine Islands as the standard commercial entity and to
hasten the day when the sociedad anonima of the Spanish law would be obsolete. That statute is a sort
of codification of American corporate law.
For the purposes general description only, it may be stated that the sociedad anonima is something very
much like the English joint stock company, with features resembling those of both the partnership is
shown in the fact that sociedad, the generic component of its name in Spanish, is the same word that is
used in that language to designate other forms of partnership, and in its organization it is constructed
along the same general lines as the ordinary partnership. It is therefore not surprising that for purposes
of loose translation the expression sociedad anonima has not infrequently the other hand, the affinity of
this entity to the American corporation has not escaped notice, and the expression sociedad anonima is
now generally translated by the word corporation. But when the word corporation is used in the sense
of sociedad anonima and close discrimination is necessary, it should be associated with the Spanish
expression sociedad anonima either in a parenthesis or connected by the word "or". This latter device
was adopted in sections 75 and 191 of the Corporation Law.
In drafting the Corporation Law the Philippine Commission inserted bodily, in subsection (5) of section 13
of that Act (No. 1459) the words which we have already quoted from section 75 of the Act of Congress of
July 1, 1902 (Philippine Bill); and it is of course obvious that whatever meaning originally attached to this
provision in the Act of Congress, the same significance should be attached to it in section 13 of our
Corporation Law.
As it was the intention of our lawmakers to stimulate the introduction of the American Corporation into
Philippine law in the place of the sociedad anonima, it was necessary to make certain adjustments
resulting from the continued co-existence, for a time, of the two forms of commercial entities.
Accordingly, in section 75 of the Corporation Law, a provision is found making the sociedad
anonima subject to the provisions of the Corporation Law "so far as such provisions may be applicable",
and giving to the sociedades anonimas previously created in the Islands the option to continue business
as such or to reform and organize under the provisions of the Corporation Law. Again, in section 191 of
the Corporation Law, the Code of Commerce is repealed in so far as it relates to sociedades anonimas.
The purpose of the commission in repealing this part of the Code of Commerce was to compel
commercial entities thereafter organized to incorporate under the Corporation Law, unless they should
prefer to adopt some form or other of the partnership. To this provision was added another to the effect
that existing sociedades anonimas, which elected to continue their business as such, instead of

reforming and reorganizing under the Corporation Law, should continue to be governed by the laws that
were in force prior to the passage of this Act "in relation to their organization and method of transacting
business and to the rights of members thereof as between themselves, but their relations to the public
and public officials shall be governed by the provisions of this Act."
As already observed, the provision above quoted from section 75 of the Act Congress of July 1, 1902
(Philippine Bill), generally prohibiting corporations engaged in mining and members of such from being
interested in any other corporation engaged in mining, was amended by section 7 of Act No. 3518 of the
Philippine Legislature, approved by Congress March 1, 1929. The change in the law effected by this
amendment was in the direction of liberalization. Thus, the inhibition contained in the original provision
against members of a corporation engaged in agriculture or mining from being interested in other
corporations engaged in agriculture or in mining was so modified as merely to prohibit any such member
from holding more than fifteen per centum of the outstanding capital stock of another such corporation.
Moreover, the explicit prohibition against the holding by any corporation (except for irrigation) of an
interest in any other corporation engaged in agriculture or in mining was so modified as to limit the
restriction to corporations organized for the purpose of engaging in agriculture or in mining.
As originally drawn, our Corporation Law (Act No. 1459) did not contain any appropriate clause directly
penalizing the act of a corporation, a member of a corporation , in acquiring an interest contrary to
paragraph (5) of section 13 of the Act. The Philippine Legislature undertook to remedy this situation in
section 3 of Act No. 2792 of the Philippine Legislature, approved on February 18, 1919, but this provision
was declared invalid by this court inGovernment of the Philippine Islands vs. El Hogar Filipino (50 Phil.,
399), for lack of an adequate title to the Act. Subsequently the Legislature reenacted substantially the
same penal provision in section 21 of Act No. 3518, under a title sufficiently broad to comprehend the
subject matter. This part of Act No. 3518 became effective upon approval by the Governor-General, on
December 3, 1928, and it was therefore in full force when the contract now in question was made.
This provision was inserted as a new section in the Corporation Law, forming section 1990 (A) of said Act
as it now stands. Omitting the proviso, which seems not to be pertinent to the present controversy, said
provision reads as follows:
SEC. 190 (A). Penalties. The violation of any of the provisions of this Act and its amendments
not otherwise penalized therein, shall be punished by a fine of not more than five thousand pesos
and by imprisonment for not more than five years, in the discretion of the court. If the violation is
committed by a corporation, the same shall, upon such violation being proved, be dissolved
by quo warranto proceedings instituted by the Attorney-General or by any provincial fiscal by
order of said Attorney-General: . . . .
Upon a survey of the facts sketched above it is obvious that there are two fundamental questions
involved in this controversy. The first is whether the plaintiffs can maintain an action based upon the
violation of law supposedly committed by the Benguet Company in this case. The second is whether,
assuming the first question to be answered in the affirmative, the Benguet Company, which was
organized as a sociedad anonima, is a corporation within the meaning of the language used by the
Congress of the United States, and later by the Philippine Legislature, prohibiting a mining corporation
from becoming interested in another mining corporation. It is obvious that, if the first question be
answered in the negative, it will be unnecessary to consider the second question in this lawsuit.
Upon the first point it is at once obvious that the provision referred to was adopted by the lawmakers
with a sole view to the public policy that should control in the granting of mining rights. Furthermore, the
penalties imposed in what is now section 190 (A) of the Corporation Law for the violation of the
prohibition in question are of such nature that they can be enforced only by a criminal prosecution or by
an action of quo warranto. But these proceedings can be maintained only by the Attorney-General in
representation of the Government.
What room then is left for the private action which the plaintiffs seek to assert in this case? The
defendant Benguet Company has committed no civil wrong against the plaintiffs, and if a public wrong
has been committed, the directors of the Balatoc Company, and the plaintiff Harden himself, were the
active inducers of the commission of that wrong. The contract, supposing it to have been unlawful in
fact, has been performed on both sides, by the building of the Balatoc plant by the Benguet Company
and the delivery to the latter of the certificate of 600,000 shares of the Balatoc Company. There is no
possibility of really undoing what has been done. Nobody would suggest the demolition of the mill. The
Balatoc Company is secure in the possession of that improvement, and talk about putting the parties in
status quo ante by restoring the consideration with interest, while the Balatoc Company remains in
possession of what it obtained by the use of that money, does not quite meet the case. Also, to mulct

the Benguet Company in many millions of dollars in favor of individuals who have not the slightest
equitable right to that money in a proposition to which no court can give a ready assent.
The most plausible presentation of the case of the plaintiffs proceeds on the assumption that only one of
the contracting parties has been guilty of a misdemeanor, namely, the Benguet Company, and that the
other party, the Balatoc Company, is wholly innocent to participation in that wrong. The plaintiffs would
then have us apply the second paragraph of article 1305 of the Civil Code which declares that an
innocent party to an illegal contract may recover anything he may have given, while he is not bound to
fulfill any promise he may have made. But, supposing that the first hurdle can be safely vaulted, the
general remedy supplied in article 1305 of the Civil Code cannot be invoked where an adequate special
remedy is supplied in a special law. It has been so held by this court in Go Chioco vs. Martinez (45 Phil.,
256, 280), where we refused to apply that article to a case of nullity arising upon a usurious loan. The
reason given for the decision on this point was that the Usury Act, as amended, contains all the
provisions necessary for the effectuation of its purposes, with the result that the remedy given in article
1305 of the Civil Code is unnecessary. Much more is that idea applicable to the situation now before us,
where the special provisions give ample remedies for the enforcement of the law by action in the name
of the Government, and where no civil wrong has been done to the party here seeking redress.
The view of the case presented above rest upon considerations arising upon our own statutes; and it
would seem to be unnecessary to ransack the American decisions for analogies pertinent to the case.
We may observe, however, that the situation involved is not unlike that which has frequently arisen in
the United States under provisions of the National Bank Act prohibiting banks organized under that law
from holding real property. It has been uniformly held that a trust deed or mortgaged conveying
property of this kind to a bank, by way of security, is valid until the transaction is assailed in a direct
proceeding instituted by the Government against the bank, and the illegality of such tenure supplies no
basis for an action by the former private owner, or his creditor, to annul the conveyance. (National
Bank vs. Matthews, 98 U. S., 621; Kerfoot vs. Farmers & M. Bank, 218 U. S., 281.) Other analogies point
in the same direction. (South & Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29 Mont., 428; Holmes
& Griggs Mfg. Co. vs. Holmes & Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. Co., 77
Hun., 332.)
Most suggestive perhaps of all the cases in Compaia Azucarera de Carolina vs. Registrar (19 Porto Rico,
143), for the reason that this case arose under a provision of the Foraker Act, a law analogous to our
Philippine Bill. It appears that the registrar had refused to register two deeds in favor of the Compaia
Azucarera on the ground that the land thereby conveyed was in excess of the area permitted by law to
the company. The Porto Rican court reversed the ruling of the registrar and ordered the registration of
the deeds, saying:
Thus it may be seen that a corporation limited by the law or by its charter has until the State acts
every power and capacity that any other individual capable of acquiring lands, possesses. The
corporation may exercise every act of ownership over such lands; it may sue in ejectment or
unlawful detainer and it may demand specific performance. It has an absolute title against all the
world except the State after a proper proceeding is begun in a court of law. ... The Attorney
General is the exclusive officer in whom is confided the right to initiate proceedings for escheat
or attack the right of a corporation to hold land.
Having shown that the plaintiffs in this case have no right of action against the Benguet Company for
the infraction of law supposed to have been committed, we forego cny discussion of the further question
whether a sociedad anonima created under Spanish law, such as the Benguet Company, is a corporation
within the meaning of the prohibitory provision already so many times mentioned. That important
question should, in our opinion, be left until it is raised in an action brought by the Government.
The judgment which is the subject of his appeal will therefore be affirmed, and it is so ordered, with
costs against the appellants.
Avancea, C.J., Villamor, Ostrand, Villa-Real, Abad Santos, Hull, Vickers, Imperial and Butte, JJ., concur.
G.R. No. L-18216

October 30, 1962

STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants,

vs.
REGISTER OF DEEDS OF MANILA, respondent-appellee.
Ramon
C.
Fernando
Office of the Solicitor General for respondent-appellee.

for

petitioners-appellants.

BAUTISTA ANGELO, J.:

On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc. executed a certificate of
liquidation of the assets of the corporation reciting, among other things, that by virtue of a resolution of
the stockholders adopted on September 17, 1960, dissolving the corporation, they have distributed
among themselves in proportion to their shareholdings, as liquidating dividends, the assets of said
corporation, including real properties located in Manila.
The certificate of liquidation, when presented to the Register of Deeds of Manila, was denied registration
on seven grounds, of which the following were disputed by the stockholders:
3. The number of parcels not certified to in the acknowledgment;
5. P430.50 Reg. fees need be paid;
6. P940.45 documentary stamps need be attached to the document;
7. The judgment of the Court approving the dissolution and directing the disposition of the assets
of the corporation need be presented (Rules of Court, Rule 104, Sec. 3).
Deciding the consulta elevated by the stockholders, the Commissioner of Land Registration overruled
ground No. 7 and sustained requirements Nos. 3, 5 and 6.
The stockholders interposed the present appeal.
As correctly stated by the Commissioner of Land Registration, the propriety or impropriety of the three
grounds on which the denial of the registration of the certificate of liquidation was predicated hinges on
whether or not that certificate merely involves a distribution of the corporation's assets or should be
considered a transfer or conveyance.
Appellants contend that the certificate of liquidation is not a conveyance or transfer but merely a
distribution of the assets of the corporation which has ceased to exist for having been dissolved. This is
apparent in the minutes for dissolution attached to the document. Not being a conveyance the
certificate need not contain a statement of the number of parcel of land involved in the distribution in
the acknowledgment appearing therein. Hence the amount of documentary stamps to be affixed
thereon should only be P0.30 and not P940.45, as required by the register of deeds. Neither is it correct
to require appellants to pay the amount of P430.50 as registration fee.
The Commissioner of Land Registration, however, entertained a different opinion. He concurred in the
view expressed by the register of deed to the effect that the certificate of liquidation in question, though
it involves a distribution of the corporation's assets, in the last analysis represents a transfer of said
assets from the corporation to the stockholders. Hence, in substance it is a transfer or conveyance.
We agree with the opinion of these two officials. A corporation is a juridical person distinct from the
members composing it. Properties registered in the name of the corporation are owned by it as an entity
separate and distinct from its members. While shares of stock constitute personal property they do not
represent property of the corporation. The corporation has property of its own which consists chiefly of
real estate (Nelson v. Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A
share of stock only typifies an aliquot part of the corporation's property, or the right to share in its
proceeds to that extent when distributed according to law and equity (Hall & Faley v. Alabama Terminal,
173 Ala 398, 56 So., 235), but its holder is not the owner of any part of the capital of the corporation
(Bradley v. Bauder 36 Ohio St., 28). Nor is he entitled to the possession of any definite portion of its
property or assets (Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474). The stockholder is
not a co-owner or tenant in common of the corporate property (Halton v. Hohnston, 166 Ala 317, 51 So
992).
On the basis of the foregoing authorities, it is clear that the act of liquidation made by the stockholders
of the F. Guanzon and Sons, Inc. of the latter's assets is not and cannot be considered a partition of
community property, but rather a transfer or conveyance of the title of its assets to the individual
stockholders. Indeed, since the purpose of the liquidation, as well as the distribution of the assets of the
corporation, is to transfer their title from the corporation to the stockholders in proportion to their
shareholdings, and this is in effect the purpose which they seek to obtain from the Register of Deeds
of Manila, that transfer cannot be effected without the corresponding deed of conveyance from the

corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation
as one in the nature of a transfer or conveyance.
WHEREFORE, we affirm the resolution appealed from, with costs against appellants.
Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and Makalintal, JJ., concur.
Barrera, J., took no part.
G.R. No. L-15121

August 31, 1962

GREGORIO PALACIO, in his own behalf and in behalf of his minor child,
MARIO PALACIO, plaintiffs-appellants,
vs.
FELY TRANSPORTATION COMPANY, defendant-appellee.
Antonio
A.
Saba
Mercado, Ver and Reyes for defendant-appellee.

for

plaintiffs-appellants.

REGALA, J.:
This is an appeal by the plaintiffs from the decision of the Court of First Instance of Manila which
dismissed their complaint.
Originally taken to the Court of Appeals, this appeal was certified to this Court on the ground that it
raises purely questions of law.
The parties in this case adopt the following findings of fact of the lower court:
In their complaint filed with this Court on May 15, 1954, plaintiffs allege, among other things,
"that about December, 1952, the defendant company hired Alfredo Carillo as driver of AC-787
(687) (a registration for 1952) owned and operated by the said defendant company; that on
December 24, 1952, at about 11:30 a.m., while the driver Alfonso (Alfredo) Carillo was driving
AC-687 at Halcon Street, Quezon City, wilfully, unlawfully and feloniously and in a negligent,
reckless and imprudent manner, run over a child Mario Palacio of the herein plaintiff Gregorio
Palacio; that on account of the aforesaid injuries, Mario Palacio suffered a simple fracture of the
right tenor (sic), complete third, thereby hospitalizing him at the Philippine Orthopedic Hospital
from December 24, 1952, up to January 8, 1953, and continued to be treated for a period of five
months thereafter; that the plaintiff Gregorio Palacio herein is a welder by occupation and owner
of a small welding shop and because of the injuries of his child he has abandoned his shop where
he derives income of P10.00 a day for the support of his big family; that during the period that
the plaintiff's (Gregorio Palacio's) child was in the hospital and who said child was under
treatment for five months in order to meet the needs of his big family, he was forced to sell one
air compressor (heavy duty) and one heavy duty electric drill, for a sacrifice sale of P150.00
which could easily sell at P350.00; that as a consequence of the negligent and reckless act of the
driver Alfredo Carillo of the herein defendant company, the herein plaintiffs were forced to litigate
this case in Court for an agreed amount of P300.00 for attorney's fee; that the herein plaintiffs
have now incurred the amount of P500.00 actual expenses for transportation, representation and
similar expenses for gathering evidence and witnesses; and that because of the nature of the
injuries of plaintiff Mario Palacio and the fear that the child might become a useless invalid, the
herein plaintiff Gregorio Palacio has suffered moral damages which could be conservatively
estimated at P1,200.00.
On May 23, 1956, defendant Fely Transportation Co., filed a Motion to Dismiss on the grounds (1)
that there is no cause of action against the defendant company, and (2) that the cause of action
is barred by prior judgment..
In its Order, dated June 8, 1956, this Court deferred the determination of the grounds alleged in
the Motion to Dismiss until the trial of this case.
On June 20, 1956, defendant filed its answer. By way of affirmative defenses, it alleges (1) that
complaint states no cause of action against defendant, and (2) that the sale and transfer of the
jeep AC-687 by Isabelo Calingasan to the Fely Transportation was made on December 24, 1955,
long after the driver Alfredo Carillo of said jeep had been convicted and had served his sentence
in Criminal Case No. Q-1084 of the Court of First Instance of Quezon City, in which both the civil

and criminal cases were simultaneously tried by agreement of the parties in said case. In the
Counterclaim of the Answer, defendant alleges that in view of the filing of this complaint which is
a clearly unfounded civil action merely to harass the defendant, it was compelled to engage the
services of a lawyer for an agreed amount of P500.00.
During the trial, plaintiffs presented the transcript of the stenographic notes of the trial of the
case of "People of the Philippines vs. Alfredo Carillo, Criminal Case No. Q-1084," in the Court of
First Instance of Rizal, Quezon City (Branch IV), as Exhibit "A".1wph1.t
It appears from Exhibit "A" that Gregorio Palacio, one of the herein plaintiffs, testified that Mario
Palacio, the other plaintiff, is his son; that as a result of the reckless driving of accused Alfredo
Carillo, his child Mario was injured and hospitalized from December 24, 1952, to January 8, 1953;
that during all the time that his child was in the hospital, he watched him during the night and his
wife during the day; that during that period of time he could not work as he slept during the day;
that before his child was injured, he used to earn P10.00 a day on ordinary days and on Sundays
from P20 to P50 a Sunday; that to meet his expenses he had to sell his compressor and electric
drill for P150 only; and that they could have been sold for P300 at the lowest price.
During the trial of the criminal case against the driver of the jeep in the Court of First Instance of
Quezon City (Criminal Case No. Q-1084) an attempt was unsuccessfully made by the prosecution
to prove moral damages allegedly suffered by herein plaintiff Gregorio Palacio. Likewise an
attempt was made in vain by the private prosecutor in that case to prove the agreed attorney's
fees between him and plaintiff Gregorio Palacio and the expenses allegedly incurred by the
herein plaintiffs in connection with that case. During the trial of this case, plaintiff Gregorio
Palacio testified substantially to the same facts.
The Court of First Instance of Quezon City in its decision in Criminal Case No. 1084 (Exhibit "2")
determined and thoroughly discussed the civil liability of the accused in that case. The dispositive
part thereof reads as follows:
IN VIEW OF THE FOREGOING, the Court finds the accused Alfredo Carillo y Damaso guilty beyond
reasonable doubt of the crime charged in the information and he is hereby sentenced to suffer
imprisonment for a period of Two Months & One Day of Arresto Mayor; to indemnify the offended
party, by way of consequential damages, in the sum of P500.00 which the Court deems
reasonable; with subsidiary imprisonment in case of insolvency but not to exceed /3 of the
principal penalty imposed; and to pay the costs.
On the basis of these facts, the lower court held action is barred by the judgment in the criminal case
and, that under Article 103 of the Revised Penal Code, the person subsidiarily liable to pay damages is
Isabel Calingasan, the employer, and not the defendant corporation.
Against that decision the plaintiffs appealed, contending that:
THE LOWER COURT ERRED IN NOT SUSTAINING THAT THE DEFENDANT-APPELLEE IS SUBSIDIARILY
LIABLE FOR DAMAGES AS A RESULT OF CRIMINAL CASE NO. Q-1084 OF THE COURT OF FIRST
INSTANCE OF QUEZON CITY FOR THE REASON THAT THE INCORPORATORS OF THE FELY
TRANSPORTATION COMPANY, THE DEFENDANT-APPELLEE HEREIN, ARE ISABELO CALINGASAN
HIMSELF, HIS SON AND DAUGHTERS;
THE LOWER COURT ERRED IN NOT CONSIDERING THAT THE INTENTION OF ISABELO CALINGASAN
IN INCORPORATING THE FELY TRANSPORTATION COMPANY, THE DEFENDANT-APPELLEE HEREIN,
WAS TO EVADE HIS CIVIL LIABILITY AS A RESULT OF THE CONVICTION OF HIS DRIVER OF VEHICLE
AC-687 THEN OWNED BY HIM:
THE LOWER COURT ERRED IN HOLDING THAT THE CAUSE OF ACTION OF THE PLAINTIFFSAPPELLANTS IS BARRED BY PRIOR JUDGMENT.
With respect to the first and second assignments of errors, plaintiffs contend that the defendant
corporate should be made subsidiarily liable for damages in the criminal case because the sale to it of
the jeep in question, after the conviction of Alfred Carillo in Criminal Case No. Q-1084 of the Court of
First Instance of Quezon City was merely an attempt on the part of Isabelo Calingasan its president and
general manager, to evade his subsidiary civil liability.
The Court agrees with this contention of the plaintiffs. Isabelo Calingasan and defendant Fely
Transportation may be regarded as one and the same person. It is evident that Isabelo Calingasan's

main purpose in forming the corporation was to evade his subsidiary civil liability 1 resulting from the
conviction of his driver, Alfredo Carillo. This conclusion is borne out by the fact that the incorporators of
the Fely Transportation are Isabelo Calingasan, his wife, his son, Dr. Calingasan, and his two daughters.
We believe that this is one case where the defendant corporation should not be heard to say that it has
a personality separate and distinct from its members when to allow it to do so would be to sanction the
use of the fiction of corporate entity as a shield to further an end subversive of justice. (La Campana
Coffee Factory, et al. v. Kaisahan ng mga Manggagawa, etc., et al., G.R. No. L-5677, May 25, 1953)
Furthermore, the failure of the defendant corporation to prove that it has other property than the jeep
(AC-687) strengthens the conviction that its formation was for the purpose above indicated.
And while it is true that Isabelo Calingasan is not a party in this case, yet, is held in the case of Alonso v.
Villamor, 16 Phil. 315, this Court can substitute him in place of the defendant corporation as to the real
party in interest. This is so in order to avoid multiplicity of suits and thereby save the parties
unnecessary expenses and delay. (Sec. 2, Rule 17, Rules of Court; Cuyugan v. Dizon. 79 Phil. 80; Quison
v. Salud, 12 Phil. 109.)
Accordingly, defendants Fely Transportation and Isabelo Calingasan should be held subsidiarily liable for
P500.00 which Alfredo Carillo was ordered to pay in the criminal case and which amount he could not
pay on account of insolvency.
We also sustain plaintiffs' third assignment of error and hold that the present action is not barred by the
judgment of the Court of First Instance of Quezon City in the criminal case. While there seems to be
some confusion on part of the plaintiffs as to the theory on which the is based whether ex-delito or
quasi ex-delito (culpa aquiliana) We are convinced, from the discussion prayer in the brief on appeal,
that they are insisting the subsidiary civil liability of the defendant. As a matter of fact, the record shows
that plaintiffs merely presented the transcript of the stenographic notes (Exhibit "A") taken at the
hearing of the criminal case, which Gregorio Palacio corroborated, in support of their claim for damages.
This rules out the defense of res judicata, because such liability proceeds precisely from the judgment in
the criminal action, where the accused was found guilty and ordered to pay an indemnity in the sum
P500.00.
WHEREFORE, the decision of the lower court is hereby reversed and defendants Fely Transportation and
Isabelo Calingasan are ordered to pay, jointly and severally, the plaintiffs the amount of P500.00 and the
costs.
Bengzon, C.J., Padilla, Bautista
Makalintal, concur.
Reyes, J.B.L., J., took no part.

Angelo,

Labrador,

G.R. No. L-20214

Concepcion,

Barrera,

Paredes,

Dizon

and

March 17, 1923

G. C. ARNOLD, plaintiff-appellant,
vs.
WILLITS & PATTERSON, LTD., defendant-appellee.
Fisher,
DeWitt,
Ross and Lawrence for appellee.

Perkins

and

Brady

for

appellant.

STATEMENT
For a number of years prior to the times alleged in the complaint, the plaintiff was in the employ of the
International Banking Corporation of Manila, and it is conceded that he is a competent and experienced
business man. July 31, 1916, C. D. Willits and I. L. Patterson were partners doing business in San
Francisco, California, under the name of Willits & Patterson. The plaintiff was then in San Francisco, and
as a result of negotiations the plaintiff and the firm entered into a written contract, known in the record
as Exhibit A, by which the plaintiff was employed as the agent of the firm in the Philippine Islands for
certain purposes for the period of five years at a minimum salary of $200 per month and travelling
expenses. The plaintiff returned to Manila and entered on the discharge of his duties under the contract.
As a result of plaintiff's employment and the world war conditions, the business of the firm in the
Philippines very rapidly increased and grew beyond the fondest hopes of either party. A dispute arose
between the plaintiff and the firm as to the construction of Exhibit A as to the amount which plaintiff
should receive for his services. Meanwhile Patterson retired from the firm and Willits became the sole
owner of its assets. For convenience of operation and to serve his own purpose, Willits organized a
corporation under the laws of California with its principal office at San Francisco, in and by which he
subscribed for, and became the exclusive owner of all the capital stock except a few shares for
organization purposes only, and the name of the firm was used as the name of the corporation. A short

time after that Willits came to Manila and organized a corporation here known as Willits & Patterson,
Ltd., in and to which he again subscribed for all of the capital stock except the nominal shares necessary
to qualify the directors. In legal effect, the San Francisco corporation took over and acquired all of the
assets and liabilities of the Manila corporation. At the time that Willits was in Manila and while to all
intents and purposes he was the sole owner of the stock of corporations, there was a conference
between him and the plaintiff over the disputed construction of Exhibit A. As a result of which another
instrument, known in the record as Exhibit B, was prepared in the form of a letter which the plaintiff
addressed to Willits at Manila on November 10, 1919, the purpose of which was to more clearly define
and specify the compensation which the plaintiff was to receive for his services. Willits received and
confirmed this letter by signing the name of Willits & Patterson, By C.d. Willits. At the time both
corporations were legally organized, and there is nothing in the corporate minutes to show that Exhibit B
was ever formally ratified or approved by either corporation. After its organization, the Manila
corporation employed a regular accountant whose duty it was to audit the accounts of the company and
render financial statements both for the use of the local banks and the local and parent corporations at
San Francisco. From time to time and in the ordinary course of business such statements of account
were prepared by the accountant and duly forwarded to the home office, and among other things was a
statement of July 31, 1921, showing that there was due and owing the plaintiff under Exhibit B the sum
of P106,277.50. A short time previous to that date, the San Francisco corporation became involved in
financial trouble, and all of its assets were turned over to a "creditors' committee." When this statement
was received, the "creditors' committee" immediately protested its allowance. An attempt was made
without success to adjust the matter on a friendly basis and without litigation. January 10, 1922, the
plaintiff brought this action to recover from the defendant the sum of P106,277.50 with legal interest
and costs, and written instruments known in the record as Exhibits A and B were attached to, and made
a part of, the complaint.
For answer, the defendant admits the formal parts of the complaint, the execution of Exhibit A and
denies each and every other allegation, except as specifically admitted, and alleges that what is known
as Exhibit B was signed by Willits without the authority of the defendant corporation or the firm of Willits
& Patterson, and that it is not an agreement which was ever entered into with the plaintiff by the
defendant or the firm, and, as a separate defense and counterclaim, it alleges that on the 30th of June,
1920, there was a balance due and owing the plaintiff from the defendant under the contract Exhibit A
of the sum of P8,741.05. That his salary from June 30, 1920, to July 31, 1921, under Exhibit A was $400
per month, or a total of P10,400. That about July 6, 1921, the plaintiff wrongfully took P30,000 from the
assets of the firm, and that he is now indebted to the firm in the sum of P10,858.95, with interest and
costs, from which it prays judgement.
The plaintiff admits that he withdrew the P30,000, but alleges that it was with the consent and authority
of the defendant, and denies all other new matter in the answer.
Upon such issues a trial was had, and the lower court rendered judgment in favor of the defendant as
prayed for in its counterclaim, from which the plaintiff appeals, contending that the trial court erred in
not holding that the contract between the parties is that which is embodied in Exhibits A and B, and that
the defendant assumed all partnership obligations, and in failing to render judgment for the plaintiff, as
prayed for, and in dismissing his complaint, and denying plaintiff's motion for a new trial.

JOHNS, J.:
In their respective briefs opposing counsel agree that the important questions involved are "what was
the contract under which the plaintiff rendered services for five years ending July 31, 1921," and "what
is due the plaintiff under that contract." Plaintiff contends that his services were performed under
Exhibits A and B, and that the defendant assumed all of the obligations of the original partnership under
Exhibit A, and is now seeking to deny its liability under, and repudiate, Exhibit B. The defendant admits
that Exhibit A was the original contract between Arnold and the firm of Willits & Patterson by which he
came to the Philippine Islands, and that it was therein agreed that he was to be employed for a period of
five years as the agent of Willits & Patterson in the Philippine Islands to operate a certain oil mill, and to
do such other business as might be deemed advisable for which he was to receive, first, the travelling
expenses of his wife and self from San Francisco to Manila, second, the minimum salary of $200 per
month, third, a brokerage of 1 per cent upon all purchases and sales of merchandise, except for the
account of the coconut oil mill, fourth, one-half of the profits on any transaction in the name of the firm
or himself not provided for in the agreement. That the agreement also provided that if it be found that
the business was operated at a loss, Arnold should receive a monthly salary of $400 during such period.
That the business was operated at a loss from June 30, 1920, to July 31, 1921, and that for such reason,
he was entitled to nothing more than a salary of $400 per month, or for that period P10,400. Adding this
amount to the P8,741.05, which the defendant admits he owed Arnold on June 30, 1920, makes a total
of P19,141.05, leaving a balance due the defendant as set out in the counterclaim. In other words, that
the plaintiff's compensation was measured by, and limited to, the above specified provisions in the

contract Exhibit A, and that the defendant corporation is not bound by the terms or provisions of Exhibit
B, which is as follows:
WILLITS & PATTERSON, LTD.
MANILA, P. I., Nov. 10, 1919.
CHAS. D. WILLITS, Esq.,
Present.
DEAR MR. WILLITS: My understanding of the intent of my agreement with Willits &
Patterson is as under:
Commissions. Willits & Patterson, San Francisco, pay me a commission of one per cent on
all purchases made for them in the Philippines or sales made to them by Manila and one
per cent on all sales made for them in the Philippines, or purchases made from them by
Manila. If such purchases or sales are on an f. o. b. basis the commission is on the f. o. b.
price; if on a c. i. f. basis the commission is computed on the c. i. f. price
These commissions are credited to me in San Francisco.
I do not participate in any profits on business transacted between Willits & Patterson, San
Francisco, and Willits & Patterson, Ltd., Manila.
Profits. On all business transacted between Willits & Patterson, Ltd. and others than Willits
& Patterson, San Francisco, half the profits are to be credited to my account and half to
the Profit & Loss account of Willits & Patterson, Ltd., Manila.
On all other business, such as the Cooperative Coconut Products Co. account, or any other
business we may undertake as agents or managers, half the profits are to be credited to
my account and half to the Profit & Loss account of Willits & Patterson, Ltd., Manila.
Where Willits & Patterson, San Francisco, or Willits & Patterson, Ltd., Manila, have their
own funds invested in the capital stock or a corporation, I of course do not participate in
the earnings of such stock, any more than Willits & Patterson would participate in the
earnings of stock held by me on my account.
If the foregoing conforms to your understanding of our agreement, please confirm below.
Yours faithfully,
(Sgd.) G. C. ARNOLD
Confirmed:
WILLITS & PATTERSON
By (Sgd.) CHAS. D. WILLITS
There is no dispute about any of the following facts: That at the inception C.D. Willits and I. L. Patterson
constituted the firm of Willits & Patterson doing business in the City of San Francisco; that later
Patterson retired from the firm, and Willits acquired all of his interests and thereafter continued the
business under the name and style of Willits & Patterson; that the original contract Exhibit A was made
between the plaintiff and the old firm at San Francisco on July 31, 1916, to cover a period of five years
from that date; that plaintiff entered upon the discharged of his duties and continued his services in the
Philippine Islands to someone for the period of five years; that on November 10, 1919, and as a result of
conferences between Willits and the plaintiff, Exhibit B was addressed and signed in the manner and
form above stated in the City of Manila. A short time prior to that date Willits organized a corporation in
San Francisco, in the State of California, which took over and acquired all of the assets of the firm's
business in California then being conducted under the name and style of Willits & Patterson; that he
subscribed for all of the capital stock of the corporation, and that in truth and in fact he was the owner
of all of its capital stock. After this was done he caused a new corporation to be organized under the
laws of the Philippine Islands with principal office at Manila, which took over and acquired all the
business and assets of the firm of Willits & Patterson in the Philippine Islands, in and to which, in legal
effect, he subscribed for all of its capital stock, and was the owner of all of its stock. After both
corporations were organized the above letter was drafted and signed. The plaintiff contends that the

signing of Exhibit B in the manner and under the conditions in which it was signed, and through the
subsequent acts and conduct of the parties, was ratified and, in legal effect, became and is now binding
upon the defendant.
It will be noted that Exhibit B was executed in Manila, and that at the time it was signed by Willits, he
was to all intents and purposes the legal owner of all the stock in both corporations. It also appears from
the evidence that the parent corporation at San Francisco took over and acquired all of the assets and
liabilities of the local corporation at Manila. That after it was organized the Manila corporation kept
separate records and account books of its own, and that from time to time financial statements were
made and forwarded to the home office, from which it conclusively appears that plaintiff was basing his
claim for services upon Exhibit A, as it was modified by Exhibit B. That at no time after Exhibit B was
signed was there ever any dispute between plaintiff and Willits as to the compensation for plaintiff's
services. That is to say, as between the plaintiff and Willits, Exhibit B was approved, followed and at all
times in force and effect, after it was signed November 10, 1919. It appears from an analysis of Exhibit B
that it was for the mutual interest of both parties. From a small beginning, the business was then in a
very flourishing conditions and growing fast, and the profits were very large and were running into big
money.
Among other things, Exhibit A provided: "(a) That the net profits from said coconut oil business shall be
divided in equal shares between the said parties hereto; (b) that Arnold should receive a brokerage of 1
per cent from all purchases and sales of merchandise, except for the account of the coconut mills; (c)
that the net profits from all other business should be divided in equal half shares between the parties
hereto."
Under the above provisions, the plaintiff might well contend that he was entitled to one-half of all the
profits and a brokerage of 1 per cent from all purchases and sales, except those for the account of the
coconut oil mills, which under the volume of business then existing would run into a very large sum of
money. It was for such reason and after personal conferences between them, and to settle all disputed
questions, that Exhibit B was prepared and signed.
The record recites that "the defendant admits that from July 31, 1916 to July 31, 1921, the plaintiff
faithfully performed all the duties incumbent upon him under his contract of employment, it being
understood, however, that this admission does not include an admission that the plaintiff placed a
proper interpretation upon his right to remuneration under said contract of employment."
It being admitted that the plaintiff worked "under his contract of employment" for the period of five
years, the question naturally arises, for whom was he working? His contract was made with the original
firm of Willits & Patterson, and that firm was dissolved and it ceased to exist, and all of its assets were
merged in, and taken over by, the parent corporation at San Francisco. In the very nature of things, after
the corporation was formed, the plaintiff could not and did not continue to work for the firm, and, yet, he
continued his employment for the full period of five years. For whom did he work after the partnership
was merged in the corporation and ceased to exist?
It is very apparent that, under the conditions then existing, the signing of Exhibit B was for the mutual
interests of both parties, and that if the contract Exhibit A was to be enforced according to its terms,
that Arnold might well contend for a much larger sum of money for his services. In truth and in fact
Willits and both corporations recognized his employment and accepted the benefits of his services. He
continued his employment and rendered his services after the corporation were organized and Exhibit B
was signed just the same as he did before, and both corporations recognized and accepted his services.
Although the plaintiff was president of the local corporation, the testimony is conclusive that both of
them were what is known as a one man corporation, and Willits, as the owner of all of the stock, was the
force and dominant power which controlled them. After Exhibit B was signed it was recognized by Willits
that the plaintiff's services were to be performed and measured by its term and provisions, and there
never was any dispute between plaintiff and Willits upon that question.
The controversy first arose after the corporation was in financial trouble and the appointment of what is
known in the record as a "creditors' committee." There is no claim or pretense that there was any fraud
or collusion between plaintiff and Willits, and it is very apparent that Exhibit B was to the mutual interest
of both parties. It is elementary law that if Exhibit B is a binding contract between the plaintiff and Willits
and the corporations, it is equally binding upon the creditors' committee. It would not have any higher or
better legal right than the corporation itself, and could not make any defense which it could not make. It
is very significant that the claim or defense which is now interposed by the creditors' committee was
never made or asserted at any previous time by the defendant, and that it never was made by Willits,
and it is very apparent that if he had remained in control of the corporation, it would never have made
the defense which is now made by the creditors' committee. The record is conclusive that at the time he
signed Exhibit B, Willits was, in legal effect, the owner and holder of all the stock in both corporations,
and that he approved it in their interest, and to protect them from the plaintiff having and making a
much larger claim under Exhibit A. As a matter of fact, it appears from the statement of Mr. Larkin, the

accountant, in the record that if plaintiff's cause of action was now founded upon Exhibit A, he would
have a claim for more than P160,000.
Thompson on Corporations, 2d ed., vol. I, section 10, says:
The proposition that a corporation has an existence separate and distinct from its membership
has its limitations. It must be noted that this separate existence is for particular purposes. It must
also be remembered that there can be no corporate existence without persons to compose it;
there can be no association without associates. This separate existence is to a certain extent a
legal fiction. Whenever necessary for the interests of the public or for the protection or
enforcement of the rights of the membership, courts will disregard this legal fiction and operate
upon both the corporation and the persons composing it.
In the same section, the author quotes from a decision in 49 Ohio State, 137 1; 15 L. R. A., 145, in which
the Supreme Court of Ohio says:
"So long as a proper use is made of the fiction that a corporation is an entity apart from its
shareholders, it is harmless, and, because convenient, should not be called in question; but
where it is urged to an end subversive of its policy, or such is the issue, the fiction must be
ignored, and the question determined whether the act in question, though done by shareholders,
that is to say, by the persons uniting in one body, was done simply as individuals, and with
respect to their individual interest as shareholders, or was done ostensibly as such, but, as a
matter of fact, to control the corporation, and affect the transaction of its business, in the same
manner as if the act had been clothed with all the formalities of a corporate act. This must be so,
because, the stockholders having a dual capacity, and capable of acting in either, and a possible
interest to conceal their character when acting in their corporate capacity, the absence of the
formal evidence of the character of the act cannot preclude judicial inquiry on the subject. If it
were otherwise, then in that department of the law fraud would enjoy an immunity awarded to it
in no other."
Where the stock of a corporation is owned by one person whereby the corporation functions only
for the benefit of such individual owner, the corporation and the individual should be deemed to
be the same. (U. S. Gypsum Co. vs. Mackay Wall Plaster Co., 199 Pac., 249.)
Ruling Case Law, vol. 7, section 663, says:
While of course a corporation cannot ratify a contract which is strictly ultra vires, and which it in
the first instance could not have made, it may by ratification render binding on it a contract,
entered into on its behalf by its officers or agents without authority. As a general rule such
ratification need not be manifested by any voted or formal resolution of the corporation or be
authenticated by the corporate seal; no higher degree of evidence is requisite in establishing
ratification on the part of a corporation, than is requisite in showing an antecedent authorization.
xxx

xxx

xxx

SEC. 666. The assent or approval of a corporation to acts done on its account may be inferred in
the same manner that the absent of a natural person may be, and it is well settled that where a
corporation with full knowledge of the unauthorized act of its officer or agents acquiesces in and
consents to such acts, it thereby ratifies them, especially where the acquiescence results in
prejudice to a third person.
xxx

xxx

xxx

SEC. 669. So, when, in the usual course of business of a corporation, an officer has been allowed
in his official capacity to manage its affair, his authority to represent the corporation may be
inferred from the manner in which he has been permitted by the directors to transact its
business.
SEC. 656. In accordance with a well-known rule of the law of agency, notice to corporate officers
or agents within the scope or apparent scope of their authority is attributed to the corporation.
SEC. 667. As a general rule, if a corporation with knowledge of its agents unauthorized act
received and enjoys the benefits thereof, it impliedly ratifies the unauthorized act if it is one
capable of ratification by parol.
In its article on corporations, Corpus Juris, in section 2241 says:

Ratification by a corporation of a transaction not previously authorized is more easily inferred

where the corporation receives and retains property under it, and as a general rule where a
corporation, through its proper officers or board, takes and retains the benefits of the
unauthorized act or contract of an officer or agent, with full knowledge of all the material facts, it
thereby ratifies and becomes bound by such act of contract, together with all the liabilities and
burdens resulting therefrom, and in some jurisdiction this rule is, in effect, declared by statute.
Thus the corporation is liable on the ground of ratification where, with knowledge of the facts, it
accepts the benefit of services rendered under an unauthorized contract of employment . . . .
Applying the law to the facts.
Mr. Larkin, an experienced accountant, was employed by the local corporation, and from time to time
and in the ordinary course of business made and prepared financial statements showing its assets and
liabilities, true copies of which were sent to the home office in San Francisco. It appears upon their face
that plaintiff's compensation was made and founded on Exhibit B, and that such statements were made
and prepared by the accountant on the assumption that Exhibit B was in full force and effect as between
the plaintiff and the defendant. In the course of business in the early part of 1920, plaintiff, as manager
of the defendant, sold 500 tons of oil for future delivery at P740 per ton. Due to break in the market,
plaintiff was able to purchase the oil at P380 per ton or a profit of P180,000.
It appears from Exhibit B under the heading of "Profits" that:
On all the business transacted between Willits & Patterson, Ltd. and others than Willits &
Patterson, San Francisco, half the profit are to be credited to may account and half to the Profit &
Loss account Willits & Patterson, Ltd., Manila.
The purchasers paid P105,000 on the contracts and gave their notes for P75,000, and it was agreed that
all of the oil purchased should be held as security for the full payment of the purchase price. As a result,
the defendant itself received the P105,000 in cash, P75,000 in notes, and still holds the 500 tons of oil
as security for the balance of the purchase price. This transaction was shown in the semi-annual
financial statement for the period ending December 31, 1920. That is to say, the business was
transacted by and through the plaintiff, and the defendant received and accepted all of the profits on
the deal, and the statement which was rendered gave him a credit for P90,737.88, or half the profit as
provided in the contract Exhibit B, with interest.
Although the previous financial statements show upon their face that the account of plaintiff was credit
with several small items on the same basis, it was not until the 23d of March, 1921, that any objection
was ever made by anyone, and objection was made for the first time by the creditors' committee in a
cable of that date.
As we analyze the facts Exhibit B was, in legal effect, ratified and approved and is now binding upon the
defendant corporation, and the plaintiff is entitled to recover for his services on that writing as it
modified the original contract Exhibit A.
It appears from the statement prepared by accountant Larkin founded upon Exhibit B that the plaintiff is
entitled to recover P106,277.50. It is very apparent that his statement was based upon the assumption
that there was a net profit of P180,000 on the 500 tons of oil, of which the plaintiff was entitled to onehalf.
In the absence of any other proof, we have the right to assume that the 500 tons of oil was worth the
amount which the defendant paid for them at the time of the purchase or P380 per ton, and the record
shows that the defendant took and now has the possession of all of the oil secure the payment of the
price at which it was sold. Hence, the profit on the deal to the defendant at the time of the sale would
amount to the difference between what the defendant paid for the oil and the amount which it received
for the oil at the time it sold the oil. It appears that at the time of the sale the defendant only received
P105,000 in cash, and that it took and accepted the promissory notes of Cruz & Tan Chong Say, the
purchasers, for P75,000 more which have been collected and may never be. Hence, it must follow that
the amount evidence by the notes cannot now be deemed or treated as profits on the deal and cannot
be until such times as the notes are paid.
The judgment of the lower court is reversed, and a money judgment will be entered here in favor of the
plaintiff and against the defendant for the sum of P68,527.50, with thereon at the rate of 6 per cent per
annum from the 10th day of January, 1922. In addition thereto, judgment will be rendered against the
defendant in substance and to the effect that the plaintiff is the owner of an undivided one-half interest
in the promissory notes for P75,000 which were executed by Cruz & Tan Chong Say, as a part of the
purchase price of the oil, and that he is entitled to have and receive one-half of all the proceeds from the
notes or either of them, and that also he have judgment against the defendant for costs. So ordered.

Araullo, C. J., Street, Malcolm, Avancea, Ostrand, and Romualdez, JJ., concur.
EN

BANC

[G.R.

No.

WALTER

A.

SMITH

42420.
CO.,

November

INC., Plaintiff-Appellee,

J.W.

v.

J.

20,

W.

FORD, Defendant-Appellant.

Ferrier

Anatolio

1936.]

for Appellant.

G.

Alcoba

for Appellee.

SYLLABUS
1. ALLEGATIONS; JURISDICTION; WAIVER OF RIGHT TO OBJECT TO VENUE. Even granting that the
plaintiff company had no branch in the City of Manila at the time of the filing of the complaint, the
existence thereof not having been proven, the Court of First Instance of Manila did not thereby lack
jurisdiction to take cognizance of said complaint because when said defendants demurrer had been
overruled and he was ordered to answer the complaint, he filed an answer wherein, aside from denying
generally and specifically the allegations contained in each and every paragraph of the complaint in
question, he interposed two special defenses. This is equivalent to a waiver of his right to object to the
jurisdiction of the court a quo over his person and a submission to the jurisdiction of said court (67
Corpus
Juris,
131).
2. ID.; SUFFICIENCY OF EVIDENCE IN SUPPORT OF THE COMPLAINT. It having been proven that all the
lumber the value of which is claimed by the plaintiff company was invoiced in the defendants name or
delivered at his address, the mere answer that he neither knew nor remembered whether or not some of
those who signed the receipts for delivery thereof were his employees cannot overcome the evidence
for the plaintiff.
DECISION
VILLA-REAL, J.:
The defendant J.W. Ford appeals to this court from the judgment of the Court of First Instance of Manila
the
dispositive
part
of
which
reads:jgc:chanrobles.com.ph
"Wherefore, the court orders the herein defendant to pay to the plaintiff Walter A. Smith Co., Inc., the
sum of two thousand four hundred eighty-nine pesos and ninety-two centavos (P2,489.92), with interest
thereon at 1 per cent a month from the dates of the invoices in question, with costs. So ordered."cralaw
virtua1aw
library
In support of his appeal, the appellant assigns the following alleged errors as committed by the court a
quo
in
its
decision
in
question,
to
wit:jgc:chanrobles.com.ph
"1.

In

overruling

defendants

demurrer

and

motion

to

dismiss.

"2. In declaring that defendant had not only failed to deny but had admitted that he had received all the
merchandise
described
in
the
inovices.
"3. In condemning the defendant to pay plaintiff the sum of P2,489.92 with interest thereon at 1 per
cent per annum from the respective dates of the invoices, and to pay the costs.
"4. In not absolving the defendant from the complaint particularly for the reason that plaintiff no longer
has
any
claim
against
said
defendant.
"5.
From

In
the

denying
record

defendants
the

following

motion
facts

for
may

a
be

new

trial."cralaw

inferred:chanrob1es

virtua1aw
virtual

1aw

library
library

By resolution of December 31, 1931, of the board of directors of the corporation, Walter A. Smith Co.,
Inc., with official residence in Iloilo, Iloilo, the president thereof, Walter A. Smith, was authorized to open
and he did open a branch of the corporation in the City of Manila. From December 6, 1927, to May 17,
1930, both dates inclusive, there were delivered on different dates at the defendants address in Iloilo,
Iloilo, various kinds of lumber the total value of which amounted to P2,489.92 (Exhibits A, A-3, B, B-3, C,
C-2, C-4, D, E, E- 2, E-4, F, F-3, G, H, I, J, J-3, K, K-3, K-6 and L-1), the corresponding receipts having been
signed as follows: Exhibit A-1 by Nicolas Dignadice, Exhibit A-4 by Manuel Solatorio, Exhibit B-1 by

Manuel Solatorio, Exhibit B-4 by Geo. G. Martin, Exhibit C-1 by J.W. Ford, Exhibit C-3 by a person the
signature of which is illegible, Exhibit C-5 by Andres Velez, Exhibits D-1, E-1, and E-3 by J.W. Ford
himself, Exhibit F-5 by Cornelio Flores, Exhibit H-1 by J.W. Ford himself, Exhibit I-1 by Thick Ford, Exhibit
I-2 by Frank F. Ford, Exhibits J-1 and EJ-4 by Gabino Pullantis, Exhibit K by Frank Ford, Exhibit K-4 by Juan
Salazar, Exhibit K-7 by Mariano Moquera, Exhibit L-1 by Mrs. Marcela Ford. Some of said receipts, those
signed by the defendant J. W. Ford, bear under the signature thereof the words "on account" (Exhibit E1), "Act. Loan & Asia Lumber Co." (Exhibit E-3), "On Act." (Exhibit F-1), "On Act. Note from Asia Lumber
Co." (Exhibit H-1). The value of said lumber had not yet been paid either totally or partially on the date
of
the
filing
of
the
amended
complaint.
The defendant J.W. Ford denies having received all said lumber. He admits having received only that
appearing in Exhibits A-1 signed by Nicolas Dignadice; A-4 signed by Manuel Solatario; B-1 also signed
by Manuel Solatario; B-4 signed by Geo G. Martin; C-1 signed by J.W. Ford; C-5 signed by Andres Velez;
D-1, E-1 and E-3 signed by J.W. Ford; E-5 signed by Frank Ford; F-1 signed by J.W. Ford; F-2 signed by
Frank Ford; F-4 signed by J.W. Ford; F-5 signed by Cornelio Flores; H- 1 signed by J.W. Ford; I-2 signed by
Frank F. Ford; J-1 signed by Gabino Pullantis; K signed by Frank Ford; K-7 signed by Mariano Moquera; L-1
signed by Marcela de Ford. The lumber consigned in the receipts Exhibits C-3 with an illegible signature;
G and G-1 which are unsigned; J-3 also unsigned; J-4 signed by Gabino Pullantis, and K-3 and K-4 signed
by Juan Salazar, was not received by him inasmuch as he does not know the persons whose signatures
appear in said receipts. Upon being questioned by his attorney regarding the signature of Nicolas
Dignadice in Exhibit A-1, the defendant J.W. Ford stated that he did not remember said name but that it
must be that of one of his employees. With respect to Manuel Solatario whose signature appears in the
receipt Exhibit A-4, Geo. G. Martin whose signature appears in the receipt Exhibit B-4; and Andres Velez
whose signature appears in Exhibit C-5, the defendant J.W. Ford, upon being asked if he had employees
by those names, answered that he did not know or that he did not remember.
In view of the foregoing facts, the first question to be decided is that procedural question raised by the
appellant in his first assignment of alleged error, consisting in that the court a quo erred in overruling
the demurrer filed by him and denying his motion to dismiss on the ground of improper venue.
Even granting that the plaintiff company had no branch in the City of Manila at the time of the filing of
the complaint, the existence thereof not having been conclusively proven, the Court of First Instance of
Manila did not thereby lack jurisdiction to take cognizance of said complaint because when said
defendants demurrer had been overruled and he was ordered to answer the complaint, he filed an
answer wherein, aside from denying generally and specifically the allegations contained in each and
every paragraph of the complaint in question, he interposed two special defenses one of which is that all
the items enumerated in said complaint, with the exception of the last two amounting to P278.40, have
already prescribed; the other being that Walter A. Smith, the biggest stockholder of the plaintiff
corporation was indebted and continued to be indebted to the defendant for a considerable amount of
money the total of which is very much more than that claimed by the plaintiff entity, which amount must
be applied to the payment of Walter A. Smiths debt to said defendant, and he prays for the dismissal of
the complaint. All of this is equivalent to a waiver of his right to object to the jurisdiction of the court a
quo over his person and a submission to the jurisdiction of said court (67 Corpus Juris, 131). The facts of
the case of Cohen and Cohen v. Benguet Commercial Co. (34 Phil., 526), cited by the appellant, are that
the defendant company appeared specially and objected to the jurisdiction of the Court of First Instance
of Manila over the company in question and the subject matter of the action on the ground that the
venue had been improperly laid by the plaintiff as the trial, under the provisions of the Code of Civil
Procedure, must take place in the province where either the plaintiff or the defendant resided or was
found at the time the summons was served. The prayer of the motion was that the above entitled cause
be dismissed. The motion was denied by the court on the ground that the motion, especially the prayer,
constituted a voluntary general appearance in the action, and that such an appearance was a waiver of
the objection to the venue. The motion filed by the defendant company, Benguet Commercial Co., Ltd.,
reads: "Now come the undersigned attorneys appearing specially in behalf of the defendant in the above
entitled case for the sole purpose of objecting to the venue of the action." This court, through Justice
Moreland,
said:jgc:chanrobles.com.ph
"This limited the character of the appearance in that motion unless, by some subsequent act, the
defendant waived the limitation or exceeded it by acts which constitute a general appearance. The mere
fact that the prayer of the motion was for a dismissal of the action is not sufficient to constitute such
waiver, or even a general appearance, having in mind the limitation stated in the body of the motion. A
prayer in a motion, like a prayer in a complaint, is not conclusive as to the character of the motion.
Indeed, under the Code of Civil Procedure dismissal of the action is one of the remedies for an improper
venue. Improper venue is a ground of demurrer and it may be made the basis of a plea in abatement;
and, as the ordinary effect of sustaining a demurrer is to dismiss the complaint, if it is not amended,
and, as the result of a plea in abatement is to terminate the action, it necessarily follows that the
remedy prayed for was one of the remedies to which defendant was entitled if its motion was proper.
"Section 377 provides that the defendant may enter a general appearance in the action without waiving
his rights, even where the venue is improperly laid, provided he, at the same time, files an objection to
the venue. The distinction between a general and special appearance does not seem to have been
preserved, at least in words, by the Code of Civil Procedure, it appearing to have been the purpose of

the legislature, in enacting section 377, to require the courts to look at the intent and purpose of the
appearing party and to deal with him accordingly, leaving out of account all technicalities which would
deprive him of that which he really desired to secure by his appearance. Furthermore, there does not
seem to be any provision in the Code of Civil Procedure with respect to change of venue in cases like the
present, the remedy appearing to be a dismissal of the action on the ground that the jurisdiction, if any,
which the court obtained over the person of the defendant by the service of the summons within the
jurisdiction of the court, is divested by objection in conformity with the provisions of section 377."cralaw
virtua1aw
library
It will be seen that in said case the defendant company only appeared specially to object to the
jurisdiction of the court as to the place where the complaint was filed and its person. It neither filed any
answer, not set up any defense whether general or special with a prayer for relief. In the present case
the defendant answered the complaint by denying generally and specifically all the allegations
contained therein and interposed special defenses praying that the plaintiff companys claim against
him be compensated by what the manager of the company, Walter A. Smith, owed him. In the case of
Marquez Lim Cay v. Del Rosario (55 Phil., 962), this court laid down the following
doctrine:jgc:chanrobles.com.ph
"The filing of a demurrer on the ground that the complaint does not allege facts sufficient to constitute a
cause of action; the filing of a motion praying for the dissolution of an attachment without objecting to
the jurisdiction of the court over the place where the property is situated, by means of a special
appearance; the giving of a bond for the dissolution of said attachment; and the filing of a motion
praying for the assessment of damages caused by the undue and unjust issuance of said attachment,
imply a submission to the jurisdiction of the court and a waiver of the privilege to impugn such
jurisdiction. (Manila Railroad Company v. Attorney-General, 20 Phil., 523.)" (See also Samson v.
Carratala,
50
Phil.,
647.)
As to the second assignment of alleged error, while it is true that not all the receipts for delivery of
lumber were signed by the defendant, upon being asked by his own attorney whether those who signed
the other receipts of delivery were his employees, he answered that he did not know or that he did not
remember. It having been proven that all the lumber the value of which is claimed by the plaintiff
company was invoiced in the name of the defendant or delivered at his address, the mere answer that
he neither knew nor remembered whether or not some of those who signed the receipts for delivery
thereof
were
his
employees
cannot
overcome
the
evidence
for
the
plaintiff.
With respect to the question whether or not the defendant is entitled to the compensation of the amount
claimed by the plaintiff company by the alleged indebtedness to him of the president and manager
thereof, Walter A. Smith, it not appearing that the amounts which the defendant claims Walter A. Smith
owes him were invested or used in connection with the business of said corporation, the corporation
cannot be held responsible for the payment thereof as the mere fact that Walter A. Smith is president
and manager of Walter A. Smith Co., Inc., does not make the latter responsible for any personal
obligation
contracted
by
said
manager.
As to the question raised in the fourth assignment of alleged error that the court a quo erred in not
absolving the defendant from the complaint inasmuch as said plaintiff no longer has any claim against
said defendant, Exhibit LL provides that the Manila Lumber Inc. would take charge of collecting certain
accounts due Walter A. Smith Co., Inc., with official residence in the City of Iloilo, on condition that said
Manila Lumber Inc. should defray all expenses incurred in the collection of the accounts delivered to it
for collection and that 10 per cent of the amount collected, after deducting all the expenses for
collection including costs, sheriffs fees and attorneys fees, would be delivered to said Walter A. Smith
Co., Inc., said Manila Lumber Inc., retaining 90 per cent of the net amount collected. It will be seen that
under said contract Walter A. Smith Co., Inc., has not transferred its rights over its uncollected accounts
to the Manila Lumber Inc., but simply entrusted the collection thereof from its debtors. The fact that the
Manila Lumber Inc. retained 90 per cent of the net amount of the collections, delivering only 10 per cent
thereof to Walter A. Smith, Inc., has nothing to do with Walter A. Smiths personal debt which, as already
stated, cannot be imputed to Walter A. Smith Co., Inc., on the ground that Walter A. Smiths personality
is separate from and independent of the juridical personality of Walter A. Smith Co., Inc.,
notwithstanding the fact that Walter A. Smith is the biggest stockholder of the corporation.
In view of the foregoing considerations, and not finding any error in the appealed judgment, it is
affirmed
in
toto
with
costs
to
the
appellant.
So
ordered.
Avancea, C.J., Abad Santos, Imperial, Diaz and Laurel, JJ., concur.
EN BANC
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
Office of the Solicitor General for respondents.

&

Associates

for

petitioner.

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%
Surcharg
e

Total
Amount
Due

Assessment (First) of November 7,

1950 for deficiency sales Tax for the
period from 3rd Qrtr 1947 to 4th Qrtr P1,031,296 P773,473. P1,804,769
1949 inclusive
.60
45
.05

Additional Assessment for period from

176,160.
1st to 4th Qrtr 1950, inclusive
234,880.13 09

411,040.22

Total amount demanded per letter of P1,266,176 P949,632. P2,215,809

December 16, 1954
.73
54
.27

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 markups 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
of Court 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 re-investigation.
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
Rates of Vehicles
Sales Tax Exclusive
Sales Tax

of Sales Taxes Due

and Computed
of 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

Less Taxes
Yutivo

Paid

P1,809,205.67

P22,038,619.44

by 988,655.
76

P820,549.
Deficiency Tax still due 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.
Bengzon, Labrador, Concepcion, Reyes, J.B.L., Barrera and Paredes, JJ., concur.
G.R. No. L-17618

August 31, 1964

COMMISSIONER
OF
vs.
NORTON and HARRISON COMPANY, respondent.
Office
of
Pio Joven for respondent.

the

Solicitor

INTERNAL

General

REVENUE, petitioner,

for

petitioner.

PAREDES, J.:
This is an appeal interposed by the Commissioner of Internal Revenue against the following judgment of
the Court of Tax Appeals:
IN VIEW OF THE FOREGOING, we find no legal basis to support the assessment in question
against petitioner. If at all, the assessment should have been directed against JACKBILT, the
manufacturer. Accordingly, the decision appealed from is reversed, and the surety bond filed to
guarantee payment of said assessment is ordered cancelled. No pronouncement as to costs.
Norton and Harrison is a corporation organized in 1911, (1) to buy and sell at wholesale and retail, all
kinds of goods, wares, and merchandise; (2) to act as agents of manufacturers in the United States and

foreign countries; and (3) to carry on and conduct a general wholesale and retail mercantile
establishment in the Philippines. Jackbilt is, likewise, a corporation organized on February 16, 1948
primarily for the purpose of making, producing and manufacturing concrete blocks. Under date of July
27, 1948. Norton and Jackbilt entered into an agreement whereby Norton was made the sole and
exclusive distributor of concrete blocks manufactured by Jackbilt. Pursuant to this agreement, whenever
an order for concrete blocks was received by the Norton & Harrison Co. from a customer, the order was
transmitted to Jackbilt which delivered the merchandise direct to the customer. Payment for the goods
is, however, made to Norton, which in turn pays Jackbilt the amount charged the customer less a certain
amount, as its compensation or profit. To exemplify the sales procedures adopted by the Norton and
Jackbilt, the following may be cited. In the case of the sale of 420 pieces of concrete blocks to the
American Builders on April 1, 1952, the purchaser paid to Norton the sum of P189.00 the purchase price.
Out of this amount Norton paid Jackbilt P168.00, the difference obviously being its compensation. As per
records of Jackbilt, the transaction was considered a sale to Norton. It was under this procedure that the
sale of concrete blocks manufactured by Jackbilt was conducted until May 1, 1953, when the agency
agreement was terminated and a management agreement between the parties was entered into. The
management agreement provided that Norton would sell concrete blocks for Jackbilt, for a fixed monthly
fee of P2,000.00, which was later increased to P5,000.00.
During the existence of the distribution or agency agreement, or on June 10, 1949, Norton & Harrison
acquired by purchase all the outstanding shares of stock of Jackbilt. Apparently, due to this transaction,
the Commissioner of Internal Revenue, after conducting an investigation, assessed the respondent
Norton & Harrison for deficiency sales tax and surcharges in the amount of P32,662.90, making as basis
thereof the sales of Norton to the Public. In other words, the Commissioner considered the sale of Norton
to the public as the original sale and not the transaction from Jackbilt. The period covered by the
assessment was from July 1, 1949 to May 31, 1953. As Norton and Harrison did not conform with the
assessment, the matter was brought to the Court of Tax Appeals.
The Commissioner of Internal Revenue contends that since Jackbilt was owned and controlled by Norton
& Harrison, the corporate personality of the former (Jackbilt) should be disregarded for sales tax
purposes, and the sale of Jackbilt blocks by petitioner to the public must be considered as the original
sales from which the sales tax should be computed. The Norton & Harrison Company contended
otherwise that is, the transaction subject to tax is the sale from Jackbilt to Norton.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved
by this Honorable Court, without prejudice to the parties adducing other evidence to prove their case
not covered by this stipulation of facts. 1wph1.t
The majority of the Tax Court, in relieving Norton & Harrison of liability under the assessment, made the
following observations:
The law applicable to the case is Section 186 of the National Internal Revenue Code which
imposes a percentage tax of 7% on every original sale of goods, wares or merchandise, such tax
to be based on the gross selling price of such goods, wares or merchandise. The term "original
sale" has been defined as the first sale by every manufacturer, producer or importer. (Sec. 5,
Com. Act No. 503.) Subsequent sales by persons other than the manufacturer, producer or
importer are not subject to the sales tax.
If JACKBILT actually sold concrete blocks manufactured by it to petitioner under the
distributorship or agency agreement of July 27, 1948, such sales constituted the original sales
which are taxable under Section 186 of the Revenue Code, while the sales made to the public by
petitioner are subsequent sales which are not taxable. But it appears to us that there was no
such sale by JACKBILT to petitioner. Petitioner merely acted as agent for JACKBILT in the marketing
of its products. This is shown by the fact that petitioner merely accepted orders from the public
for the purchase of JACKBILT blocks. The purchase orders were transmitted to JACKBILT which
delivered the blocks to the purchaser directly. There was no instance in which the blocks ordered
by the purchasers were delivered to the petitioner. Petitioner never purchased concrete blocks
from JACKBILT so that it never acquired ownership of such concrete blocks. This being so,
petitioner could not have sold JACKBILT blocks for its own account. It did so merely as agent of
JACKBILT. The distributorship agreement of July 27, 1948, is denominated by the parties
themselves as an "agency for marketing" JACKBILT products. ... .
xxx

xxx

xxx

Therefore, the taxable selling price of JACKBILT blocks under the aforesaid agreement is the price
charged to the public and not the amount billed by JACKBILT to petitioner. The deficiency sales

tax should have been assessed against JACKBILT and not against petitioner which merely acted
as the former's agent.
xxx

xxx

xxx

Presiding Judge Nable of the same Court expressed a partial dissent, stating:
Upon the aforestated circumstances, which disclose Norton's control over and direction of
Jackbilt's affairs, the corporate personality of Jackbilt should be disregarded, and the transactions
between these two corporations relative to the concrete blocks should be ignored in determining
the percentage tax for which Norton is liable. Consequently, the percentage tax should be
computed on the basis of the sales of Jackbilt blocks to the public.
The majority opinion is now before Us on appeal by the Commissioner of Internal Revenue, on four (4)
assigned errors, all of which pose the following propositions: (1) whether the acquisition of all the stocks
of the Jackbilt by the Norton & Harrison Co., merged the two corporations into a single corporation; (2)
whether the basis of the computation of the deficiency sales tax should be the sale of the blocks to the
public and not to Norton.
It has been settled that the ownership of all the stocks of a corporation by another corporation does not
necessarily breed an identity of corporate interest between the two companies and be considered as a
sufficient ground for disregarding the distinct personalities (Liddell & Co., Inc. v. Coll. of Int. Rev. L-9687,
June 30, 1961). However, in the case at bar, we find sufficient grounds to support the theory that the
separate identities of the two companies should be disregarded. Among these circumstances, which we
find not successfully refuted by appellee Norton are: (a) Norton and Harrison owned all the outstanding
stocks of Jackbilt; of the 15,000 authorized shares of Jackbilt on March 31, 1958, 14,993 shares belonged
to Norton and Harrison and one each to seven others; (b) Norton constituted Jackbilt's board of directors
in such a way as to enable it to actually direct and manage the other's affairs by making the same
officers of the board for both companies. For instance, James E. Norton is the President, Treasurer,
Director and Stockholder of Norton. He also occupies the same positions in Jackbilt corporation, the only
change being, in the Jackbilt, he is merely a nominal stockholder. The same is true with Mr. Jordan, F. M.
Domingo, Mr. Mantaring, Gilbert Golden and Gerardo Garcia, while they are merely employees of the
North they are Directors and nominal stockholders of the Jackbilt (c) Norton financed the operations of
the Jackbilt, and this is shown by the fact that the loans obtained from the RFC and Bank of America
were used in the expansion program of Jackbilt, to pay advances for the purchase of equipment,
materials rations and salaries of employees of Jackbilt and other sundry expenses. There was no limit to
the advances given to Jackbilt so much so that as of May 31, 1956, the unpaid advances amounted to
P757,652.45, which were not paid in cash by Jackbilt, but was offset by shares of stock issued to Norton,
the absolute and sole owner of Jackbilt; (d) Norton treats Jackbilt employees as its own. Evidence shows
that Norton paid the salaries of Jackbilt employees and gave the same privileges as Norton employees,
an indication that Jackbilt employees were also Norton's employees. Furthermore service rendered in
any one of the two companies were taken into account for purposes of promotion; (e) Compensation
given to board members of Jackbilt, indicate that Jackbilt is merely a department of Norton. The income
tax return of Norton for 1954 shows that as President and Treasurer of Norton and Jackbilt, he received
from Norton P56,929.95, but received from Jackbilt the measly amount of P150.00, a circumstance
which points out that remuneration of purported officials of Jackbilt are deemed included in the salaries
they received from Norton. The same is true in the case of Eduardo Garcia, an employee of Norton but a
member of the Board of Jackbilt. His Income tax return for 1956 reveals that he received from Norton in
salaries and bonuses P4,220.00, but received from Jackbilt, by way of entertainment, representation,
travelling and transportation allowances P3,000.00. However, in the withholding statement (Exh. 28-A),
it was shown that the total of P4,200.00 and P3,000.00 (P7,220.00) was received by Garcia from Norton,
thus portraying the oneness of the two companies. The Income Tax Returns of Albert Golden and
Dioscoro Ramos both employees of Norton but board members of Jackbilt, also disclose the game
method of payment of compensation and allowances. The offices of Norton and Jackbilt are located in
the same compound. Payments were effected by Norton of accounts for Jackbilt and vice versa.
Payments were also made to Norton of accounts due or payable to Jackbilt and vice versa.
Norton and Harrison, while not denying the presence of the set up stated above, tried to explain that the
control over the affairs of Jackbilt was not made in order to evade payment of taxes; that the loans
obtained by it which were given to Jackbilt, were necessary for the expansion of its business in the
manufacture of concrete blocks, which would ultimately benefit both corporations; that the transactions
and practices just mentioned, are not unusual and extraordinary, but pursued in the regular course of
business and trade; that there could be no confusion in the present set up of the two corporations,
because they have separate Boards, their cash assets are entirely and strictly separate; cashiers and
official receipts and bank accounts are distinct and different; they have separate income tax returns,

separate balance sheets and profit and loss statements. These explanations notwithstanding an over-all
appraisal of the circumstances presented by the facts of the case, yields to the conclusion that the
Jackbilt is merely an adjunct, business conduit or alter ego, of Norton and Harrison and that the fiction of
corporate entities, separate and distinct from each, should be disregarded. This is a case where the
doctrine of piercing the veil of corporate fiction, should be made to apply. In the case of Liddell & Co.
Inc. v. Coll. of Int. Rev., supra, it was held:
There are quite a series of conspicuous circumstances that militates against the separate and
distinct personality of Liddell Motors Inc., from Liddell & Co. We notice that the bulk of the
business of Liddell & Co. was channel Red through Liddell Motors, Inc. On the other hand, Liddell
Motors Inc. pursued no activities except to secure cars, trucks, and spare parts from Liddell & Co.,
Inc. and then sell them to the general public. These sales of vehicles by Liddell & Co, to Liddell
Motors. Inc. for the most part were shown to have taken place on the same day that Liddell
Motors, Inc. sold such vehicles to the public. We may even say that the cars and trucks merely
touched the hands of Liddell Motors, Inc. as a matter of formality.
xxx

xxx

xxx

Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations owned and
controlled by Frank Liddell directly or indirectly is not by itself sufficient to justify the disregard of
the separate corporate identity of one from the other. There is however, in this instant case, a
peculiar sequence of the organization and activities of Liddell Motors, Inc.
As opined in the case of Gregory v. Helvering "the legal right of a tax payer to decrease the
amount of what otherwise would be his taxes, or altogether avoid them, by means which the law
permits, cannot be doubted". But as held in another case, "where a corporation is a dummy, is
unreal or a sham and serves no business purpose and is intended only as a blind, the corporate
form may be ignored for the law cannot countenance a form that is bald and a mischievous
fictions".
... a taxpayer may gain advantage of doing business thru a corporation if he pleases, but the
revenue officers in proper cases, may disregard the separate corporate entity where it serves but
as a shield for tax evasion and treat the person who actually may take benefits of the
transactions as the person accordingly taxable.
... to allow a taxpayer to deny tax liability on the ground that the sales were made through
another and distinct corporation when it is proved that the latter is virtually owned by the former
or that they are practically one and the same is to sanction a circumvention of our tax laws. (and
cases cited therein.)
In the case of Yutivo Sons Hardware Co. v. Court of Tax Appeals, L-13203, Jan. 28, 1961, this Court made
a similar ruling where the circumstances of unity of corporate identities have been shown and which are
identical to those obtaining in the case under consideration. Therein, this Court said:
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 (here concrete blocks) ... .
It may not be amiss to state in this connection, the advantages to Norton in maintaining a semblance of
separate entities. If the income of Norton should be considered separate from the income of Jackbilt,
then each would declare such earning separately for income tax purposes and thus pay lesser income
tax. The combined taxable Norton-Jackbilt income would subject Norton to a higher tax. Based upon the
1954-1955 income tax return of Norton and Jackbilt (Exhs. 7 & 8), and assuming that both of them are
operating on the same fiscal basis and their returns are accurate, we would have the following result:
Jackbilt declared a taxable net income of P161,202.31 in which the income tax due was computed at
P37,137.00 (Exh. 8); whereas Norton declared as taxable, a net income of P120,101.59, on which the
income tax due was computed at P25,628.00. The total of these liabilities is P50,764.84. On the other
hand, if the net taxable earnings of both corporations are combined, during the same taxable year, the
tax due on their total which is P281,303.90 would be P70,764.00. So that, even on the question of
income tax alone, it would be to the advantages of Norton that the corporations should be regarded as
separate entities.
WHEREFORE, the decision appealed from should be as it is hereby reversed and another entered making
the appellee Norton & Harrison liable for the deficiency sales taxes assessed against it by the appellant

Commissioner of Internal Revenue, plus 25% surcharge thereon. Costs against appellee Norton &
Harrison.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes J.B.L., Regala and Makalintal, JJ., concur.
G.R. No. L-20502

February 26, 1965

EMILIO
CANO
ENTERPRISES,
vs.
COURT OF INDUSTRIAL RELATIONS, ET AL., respondents.
D.
T.
Reyes
and
Mariano
B.
Tuason
for
respondent
C. E. Santiago for respondent Honorata Cruz.

Associates
Court

INC., petitioner,

of

for
Industrial

petitioner.
Relations.

BAUTISTA ANGELO, J.:

In a complaint for unfair labor practice filed before the Court of Industrial Relations on June 6, 1956 by a
prosecutor of the latter court, Emilio, Ariston and Rodolfo, all surnamed Cano, were made respondents in
their capacity as president and proprietor, field supervisor and manager, respectively, of Emilio Cano
Enterprises, Inc.
After trial, Presiding Judge Jose S. Bautista rendered decision finding Emilio Cano and Rodolfo Cano guilty
of the unfair labor practice charge, but absolved Ariston for insufficiency of evidence. As a consequence,
the two were ordered, jointly and severally, to reinstate Honorata Cruz, to her former position with
payment of backwages from the time of her dismissal up to her reinstatement, together with all other
rights and privileges thereunto appertaining.
Meanwhile, Emilio Cano died on November 14, 1958, and the attempt to have the case dismissed
against him having failed, the case was appealed to the court en banc, which in due course affirmed the
decision of Judge Bautista. An order of execution was issued on August 23, 1961 the dispositive part of
which reads: (1) to reinstate Honorata Cruz to her former position as ordered in the decision; and (2) to
deposit with the court the amount of P7,222.58 within ten days from receipt of the order, failing which
the court will order either a levy on respondents' properties or the filing of an action for contempt of
court.
The order of execution having been directed against the properties of Emilio Cano Enterprises, Inc.
instead of those of the respondents named in the decision, said corporation filed an ex parte motion to
quash the writ on the ground that the judgment sought to be enforced was not rendered against it which
is a juridical entity separate and distinct from its officials. This motion was denied. And having failed to
have it reconsidered, the corporation interposed the present petition for certiorari.1wph1.t
The issue posed before us is: Can the judgment rendered against Emilio and Rodolfo Cano in their
capacity as officials of the corporation Emilio Cano Enterprises, Inc. be made effective against the
property of the latter which was not a party to the case?
The answer must be in the affirmative. While it is an undisputed rule that a corporation has a personality
separate and distinct from its members or stockholders because of a fiction of the law, here we should
not lose sight of the fact that the Emilio Cano Enterprises, Inc. is a closed family corporation where the
incorporators and directors belong to one single family. Thus, the following are its incorporators: Emilio
Cano, his wife Juliana, his sons Rodolfo and Carlos, and his daughter-in-law Ana D. Cano. Here is an
instance where the corporation and its members can be considered as one. And to hold such entity
liable for the acts of its members is not to ignore the legal fiction but merely to give meaning to the
principle that such fiction cannot be invoked if its purpose is to use it as a shield to further an end
subversive of justice. 1 And so it has been held that while a corporation is a legal entity existing separate
and apart from the persons composing it, that concept cannot be extended to a point beyond its reason
and policy, and when invoked in support of an end subversive of this policy it should be disregarded by
the courts (12 Am. Jur. 160-161).
A factor that should not be overlooked is that Emilio and Rodolfo Cano are here indicted, not in their
private capacity, but as president and manager, respectively, of Emilio Cano Enterprises, Inc. Having
been sued officially their connection with the case must be deemed to be impressed with the
representation of the corporation. In fact, the court's order is for them to reinstate Honorata Cruz to her
former position in the corporation and incidentally pay her the wages she had been deprived of during
her separation. Verily, the order against them is in effect against the corporation. No benefit can be

attained if this case were to be remanded to the court a quomerely in response to a technical
substitution of parties for such would only cause an unwarranted delay that would work to Honorata's
prejudice. This is contrary to the spirit of the law which enjoins a speedy adjudication of labor cases
disregarding as much as possible the technicalities of procedure. We, therefore, find unmeritorious the
relief herein prayed for.
WHEREFORE, petition is dismissed, with costs.
Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala, Makalintal, Bengzon, J.P., and
Zaldivar, JJ., concur.
Footnotes
G.R. No. L-19550

June 19, 1967

HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL BECK, petitioners,
vs.
HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE; JOSE LUKBAN, in his
capacity as Acting Director, National Bureau of Investigation; SPECIAL PROSECUTORS PEDRO
D. CENZON, EFREN I. PLANA and MANUEL VILLAREAL, JR. and ASST. FISCAL MANASES G.
REYES; JUDGE AMADO ROAN, Municipal Court of Manila; JUDGE ROMAN CANSINO, Municipal
Court of Manila; JUDGE HERMOGENES CALUAG, Court of First Instance of Rizal-Quezon City
Branch, and JUDGE DAMIAN JIMENEZ, Municipal Court of Quezon City, respondents.
Paredes, Poblador, Cruz and Nazareno and Meer, Meer and Meer and Juan T. David for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Pacifico P. de Castro, Assistant
Solicitor General Frine C. Zaballero, Solicitor Camilo D. Quiason and Solicitor C. Padua for respondents.
CONCEPCION, C.J.:
Upon application of the officers of the government named on the margin 1 hereinafter referred to as
Respondents-Prosecutors several judges2 hereinafter referred to as Respondents-Judges issued,
on different dates,3 a total of 42 search warrants against petitioners herein 4 and/or the corporations of
which they were officers,5 directed to the any peace officer, to search the persons above-named and/or
the premises of their offices, warehouses and/or residences, and to seize and take possession of the
following personal property to wit:
Books of accounts, financial records, vouchers, correspondence, receipts, ledgers, journals,
portfolios, credit journals, typewriters, and other documents and/or papers showing all business
transactions including disbursements receipts, balance sheets and profit and loss statements and
Bobbins (cigarette wrappers).
as "the subject of the offense; stolen or embezzled and proceeds or fruits of the offense," or "used or
intended to be used as the means of committing the offense," which is described in the applications
adverted to above as "violation of Central Bank Laws, Tariff and Customs Laws, Internal Revenue (Code)
and the Revised Penal Code."
Alleging that the aforementioned search warrants are null and void, as contravening the Constitution
and the Rules of Court because, inter alia: (1) they do not describe with particularity the documents,
books and things to be seized; (2) cash money, not mentioned in the warrants, were actually seized; (3)
the warrants were issued to fish evidence against the aforementioned petitioners in deportation cases
filed against them; (4) the searches and seizures were made in an illegal manner; and (5) the
documents, papers and cash money seized were not delivered to the courts that issued the warrants, to
be disposed of in accordance with law on March 20, 1962, said petitioners filed with the Supreme
Court this original action for certiorari, prohibition, mandamus and injunction, and prayed that, pending
final disposition of the present case, a writ of preliminary injunction be issued restraining RespondentsProsecutors, their agents and /or representatives from using the effects seized as aforementioned or any
copies thereof, in the deportation cases already adverted to, and that, in due course, thereafter,
decision be rendered quashing the contested search warrants and declaring the same null and void, and
commanding the respondents, their agents or representatives to return to petitioners herein, in
accordance with Section 3, Rule 67, of the Rules of Court, the documents, papers, things and cash
moneys seized or confiscated under the search warrants in question.
In their answer, respondents-prosecutors alleged, 6 (1) that the contested search warrants are valid and
have been issued in accordance with law; (2) that the defects of said warrants, if any, were cured by

petitioners' consent; and (3) that, in any event, the effects seized are admissible in evidence against
herein petitioners, regardless of the alleged illegality of the aforementioned searches and seizures.
On March 22, 1962, this Court issued the writ of preliminary injunction prayed for in the petition.
However, by resolution dated June 29, 1962, the writ was partially lifted or dissolved, insofar as the
papers, documents and things seized from the offices of the corporations above mentioned are
concerned; but, the injunction was maintained as regards the papers, documents and things found and
seized in the residences of petitioners herein.7
Thus, the documents, papers, and things seized under the alleged authority of the warrants in question
may be split into two (2) major groups, namely: (a) those found and seized in the offices of the
aforementioned corporations, and (b) those found and seized in the residences of petitioners herein.
As regards the first group, we hold that petitioners herein have no cause of action to assail the legality
of the contested warrants and of the seizures made in pursuance thereof, for the simple reason that said
corporations have their respective personalities, separate and distinct from the personality of herein
petitioners, regardless of the amount of shares of stock or of the interest of each of them in said
corporations, and whatever the offices they hold therein may be. 8 Indeed, it is well settled that the
legality of a seizure can be contested only by the party whose rights have been impaired thereby, 9 and
that the objection to an unlawful search and seizure is purely personal and cannot be availed of by third
parties. 10 Consequently, petitioners herein may not validly object to the use in evidence against them of
the documents, papers and things seized from the offices and premises of the corporations adverted to
above, since the right to object to the admission of said papers in evidence belongs exclusively to the
corporations, to whom the seized effects belong, and may not be invoked by the corporate officers in
proceedings against them in their individual capacity. 11 Indeed, it has been held:
. . . that the Government's action in gaining possession of papers belonging to
the corporation did not relate to nor did it affect the personal defendants. If these papers were
unlawfully seized and thereby the constitutional rights of or any one were invaded, they were the
rights of the corporation and not the rights of the other defendants. Next, it is clear that a
question of the lawfulness of a seizure can be raised only by one whose rights have been
invaded. Certainly, such a seizure, if unlawful, could not affect the constitutional rights of
defendants whose property had not been seized or the privacy of whose homes had not been
disturbed; nor could they claim for themselves the benefits of the Fourth Amendment, when its
violation, if any, was with reference to the rights of another. Remus vs. United States (C.C.A.)291
F. 501, 511. It follows, therefore, that the question of the admissibility of the evidence based on
an alleged unlawful search and seizure does not extend to the personal defendants but
embraces only the corporation whose property was taken. . . . (A Guckenheimer & Bros. Co. vs.
United States, [1925] 3 F. 2d. 786, 789, Emphasis supplied.)
With respect to the documents, papers and things seized in the residences of petitioners herein, the
aforementioned resolution of June 29, 1962, lifted the writ of preliminary injunction previously issued by
this Court,12 thereby, in effect, restraining herein Respondents-Prosecutors from using them in evidence
against petitioners herein.
In connection with said documents, papers and things, two (2) important questions need be settled,
namely: (1) whether the search warrants in question, and the searches and seizures made under the
authority thereof, are valid or not, and (2) if the answer to the preceding question is in the negative,
whether said documents, papers and things may be used in evidence against petitioners
herein.1wph1.t
Petitioners maintain that the aforementioned search warrants are in the nature of general warrants and
that accordingly, the seizures effected upon the authority there of are null and void. In this connection,
the Constitution13 provides:
The right of the people to be secure in their persons, houses, papers, and effects against
unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon
probable cause, to be determined by the judge after examination under oath or affirmation of the
complainant and the witnesses he may produce, and particularly describing the place to be
searched, and the persons or things to be seized.
Two points must be stressed in connection with this constitutional mandate, namely: (1) that no warrant
shall issue but upon probable cause, to be determined by the judge in the manner set forth in said
provision; and (2) that the warrant shall particularly describe the things to be seized.

None of these requirements has been complied with in the contested warrants. Indeed, the same were
issued upon applications stating that the natural and juridical person therein named had committed a
"violation of Central Ban Laws, Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal
Code." In other words, nospecific offense had been alleged in said applications. The averments thereof
with respect to the offense committed were abstract. As a consequence, it was impossible for the judges
who issued the warrants to have found the existence of probable cause, for the same presupposes the
introduction of competent proof that the party against whom it is sought has performed particular acts,
or committed specific omissions, violating a given provision of our criminal laws. As a matter of fact, the
applications involved in this case do not allege any specific acts performed by herein petitioners. It
would be the legal heresy, of the highest order, to convict anybody of a "violation of Central Bank Laws,
Tariff and Customs Laws, Internal Revenue (Code) and Revised Penal Code," as alleged in the
aforementioned applications without reference to any determinate provision of said laws or
To uphold the validity of the warrants in question would be to wipe out completely one of the most
fundamental rights guaranteed in our Constitution, for it would place the sanctity of the domicile and the
privacy of communication and correspondence at the mercy of the whims caprice or passion of peace
officers. This is precisely the evil sought to be remedied by the constitutional provision above quoted
to outlaw the so-called general warrants. It is not difficult to imagine what would happen, in times of
keen political strife, when the party in power feels that the minority is likely to wrest it, even though by
legal means.
Such is the seriousness of the irregularities committed in connection with the disputed search warrants,
that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court 14 by providing
in its counterpart, under the Revised Rules of Court 15 that "a search warrant shall not issue but upon
probable cause in connection with one specific offense." Not satisfied with this qualification, the Court
added thereto a paragraph, directing that "no search warrant shall issue for more than one specific
offense."
The grave violation of the Constitution made in the application for the contested search warrants was
compounded by the description therein made of the effects to be searched for and seized, to wit:
Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers,
portfolios, credit journals, typewriters, and other documents and/or papers showing all business
transactions including disbursement receipts, balance sheets and related profit and loss
statements.
Thus, the warrants authorized the search for and seizure of records pertaining to all business
transactions of petitioners herein, regardless of whether the transactions were legal or illegal. The
warrants sanctioned the seizure of all records of the petitioners and the aforementioned corporations,
whatever their nature, thus openly contravening the explicit command of our Bill of Rights that the
things to be seized be particularly described as well as tending to defeat its major objective: the
elimination of general warrants.
Relying upon Moncado vs. People's Court (80 Phil. 1), Respondents-Prosecutors maintain that, even if the
searches and seizures under consideration were unconstitutional, the documents, papers and things
thus seized are admissible in evidence against petitioners herein. Upon mature deliberation, however,
we are unanimously of the opinion that the position taken in the Moncado case must be abandoned.
Said position was in line with the American common law rule, that the criminal should not be allowed to
go free merely "because the constable has blundered," 16 upon the theory that the constitutional
prohibition against unreasonable searches and seizures is protected by means other than the exclusion
of evidence unlawfully obtained, 17 such as the common-law action for damages against the searching
officer, against the party who procured the issuance of the search warrant and against those assisting in
the execution of an illegal search, their criminal punishment, resistance, without liability to an unlawful
seizure, and such other legal remedies as may be provided by other laws.
However, most common law jurisdictions have already given up this approach and eventually adopted
the exclusionary rule, realizing that this is the only practical means of enforcing the constitutional
injunction against unreasonable searches and seizures. In the language of Judge Learned Hand:
As we understand it, the reason for the exclusion of evidence competent as such, which has been
unlawfully acquired, is that exclusion is the only practical way of enforcing the constitutional
privilege. In earlier times the action of trespass against the offending official may have been
protection enough; but that is true no longer. Only in case the prosecution which itself controls
the seizing officials, knows that it cannot profit by their wrong will that wrong be repressed.18

In fact, over thirty (30) years before, the Federal Supreme Court had already declared:
If letters and private documents can thus be seized and held and used in evidence against a
citizen accused of an offense, the protection of the 4th Amendment, declaring his rights to be
secure against such searches and seizures, is of no value, and, so far as those thus placed are
concerned, might as well be stricken from the Constitution. The efforts of the courts and their
officials to bring the guilty to punishment, praiseworthy as they are, are not to be aided by the
sacrifice of those great principles established by years of endeavor and suffering which have
resulted in their embodiment in the fundamental law of the land.19
This view was, not only reiterated, but, also, broadened in subsequent decisions on the same Federal
Court. 20After reviewing previous decisions thereon, said Court held, in Mapp vs. Ohio (supra.):
. . . Today we once again examine the Wolf's constitutional documentation of the right of privacy
free from unreasonable state intrusion, and after its dozen years on our books, are led by it to
close the only courtroom door remaining open to evidence secured by official lawlessness in
flagrant abuse of that basic right, reserved to all persons as a specific guarantee against that
very same unlawful conduct. We hold that all evidence obtained by searches and seizures in
violation of the Constitution is, by that same authority, inadmissible in a State.
Since the Fourth Amendment's right of privacy has been declared enforceable against the States
through the Due Process Clause of the Fourteenth, it is enforceable against them by the same
sanction of exclusion as it used against the Federal Government. Were it otherwise, then just as
without the Weeks rule the assurance against unreasonable federal searches and seizures would
be "a form of words," valueless and underserving of mention in a perpetual charter of inestimable
human liberties, so too, without that rule the freedom from state invasions of privacy would be
so ephemeral and so neatly severed from its conceptual nexus with the freedom from all brutish
means of coercing evidence as not to permit this Court's high regard as a freedom "implicit in
the concept of ordered liberty." At the time that the Court held in Wolf that the amendment was
applicable to the States through the Due Process Clause, the cases of this Court as we have seen,
had steadfastly held that as to federal officers the Fourth Amendment included the exclusion of
the evidence seized in violation of its provisions. Even Wolf "stoutly adhered" to that proposition.
The right to when conceded operatively enforceable against the States, was not susceptible of
destruction by avulsion of the sanction upon which its protection and enjoyment had always been
deemed dependent under the Boyd, Weeks and Silverthorne Cases. Therefore, in extending the
substantive protections of due process to all constitutionally unreasonable searches state or
federal it was logically and constitutionally necessarily that the exclusion doctrine an
essential part of the right to privacy be also insisted upon as an essential ingredient of the
right newly recognized by the Wolf Case. In short, the admission of the new constitutional Right
by Wolf could not tolerate denial of its most important constitutional privilege, namely, the
exclusion of the evidence which an accused had been forced to give by reason of the unlawful
seizure. To hold otherwise is to grant the right but in reality to withhold its privilege and
enjoyment. Only last year the Court itself recognized that the purpose of the exclusionary rule
to "is to deter to compel respect for the constitutional guaranty in the only effectively
available way by removing the incentive to disregard it" . . . .
The ignoble shortcut to conviction left open to the State tends to destroy the entire system of
constitutional restraints on which the liberties of the people rest. Having once recognized that the
right to privacy embodied in the Fourth Amendment is enforceable against the States, and that
the right to be secure against rude invasions of privacy by state officers is, therefore
constitutional in origin, we can no longer permit that right to remain an empty promise. Because
it is enforceable in the same manner and to like effect as other basic rights secured by its Due
Process Clause, we can no longer permit it to be revocable at the whim of any police officer who,
in the name of law enforcement itself, chooses to suspend its enjoyment. Our decision, founded
on reason and truth, gives to the individual no more than that which the Constitution guarantees
him to the police officer no less than that to which honest law enforcement is entitled, and, to
the courts, that judicial integrity so necessary in the true administration of justice. (emphasis
ours.)
Indeed, the non-exclusionary rule is contrary, not only to the letter, but also, to the spirit of the
constitutional injunction against unreasonable searches and seizures. To be sure, if the applicant for a
search warrant has competent evidence to establish probable cause of the commission of a given crime
by the party against whom the warrant is intended, then there is no reason why the applicant should not
comply with the requirements of the fundamental law. Upon the other hand, if he has no such
competent evidence, then it is not possible for the Judge to find that there is probable cause, and,

hence, no justification for the issuance of the warrant. The only possible explanation (not justification)
for its issuance is the necessity of fishing evidence of the commission of a crime. But, then, this fishing
expedition is indicative of the absence of evidence to establish a probable cause.
Moreover, the theory that the criminal prosecution of those who secure an illegal search warrant and/or
make unreasonable searches or seizures would suffice to protect the constitutional guarantee under
consideration, overlooks the fact that violations thereof are, in general, committed By agents of the
party in power, for, certainly, those belonging to the minority could not possibly abuse a power they do
not have. Regardless of the handicap under which the minority usually but, understandably finds
itself in prosecuting agents of the majority, one must not lose sight of the fact that the psychological
and moral effect of the possibility 21 of securing their conviction, is watered down by the pardoning
power of the party for whose benefit the illegality had been committed.
In their Motion for Reconsideration and Amendment of the Resolution of this Court dated June 29, 1962,
petitioners allege that Rooms Nos. 81 and 91 of Carmen Apartments, House No. 2008, Dewey Boulevard,
House No. 1436, Colorado Street, and Room No. 304 of the Army-Navy Club, should be included among
the premises considered in said Resolution as residences of herein petitioners, Harry S. Stonehill, Robert
P. Brook, John J. Brooks and Karl Beck, respectively, and that, furthermore, the records, papers and other
effects seized in the offices of the corporations above referred to include personal belongings of said
petitioners and other effects under their exclusive possession and control, for the exclusion of which
they have a standing under the latest rulings of the federal courts of federal courts of the United
States. 22
We note, however, that petitioners' theory, regarding their alleged possession of and control over the
aforementioned records, papers and effects, and the alleged "personal" nature thereof, has Been
Advanced, notin their petition or amended petition herein, but in the Motion for Reconsideration and
Amendment of the Resolution of June 29, 1962. In other words, said theory would appear to be
readjustment of that followed in said petitions, to suit the approach intimated in the Resolution sought to
be reconsidered and amended. Then, too, some of the affidavits or copies of alleged affidavits attached
to said motion for reconsideration, or submitted in support thereof, contain either inconsistent
allegations, or allegations inconsistent with the theory now advanced by petitioners herein.
Upon the other hand, we are not satisfied that the allegations of said petitions said motion for
reconsideration, and the contents of the aforementioned affidavits and other papers submitted in
support of said motion, have sufficiently established the facts or conditions contemplated in the cases
relied upon by the petitioners; to warrant application of the views therein expressed, should we agree
thereto. At any rate, we do not deem it necessary to express our opinion thereon, it being best to leave
the matter open for determination in appropriate cases in the future.
We hold, therefore, that the doctrine adopted in the Moncado case must be, as it is hereby, abandoned;
that the warrants for the search of three (3) residences of herein petitioners, as specified in the
Resolution of June 29, 1962, are null and void; that the searches and seizures therein made are illegal;
that the writ of preliminary injunction heretofore issued, in connection with the documents, papers and
other effects thus seized in said residences of herein petitioners is hereby made permanent; that the
writs prayed for are granted, insofar as the documents, papers and other effects so seized in the
aforementioned residences are concerned; that the aforementioned motion for Reconsideration and
Amendment should be, as it is hereby, denied; and that the petition herein is dismissed and the writs
prayed for denied, as regards the documents, papers and other effects seized in the twenty-nine (29)
places, offices and other premises enumerated in the same Resolution, without special pronouncement
as to costs.
It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.
CASTRO, J., concurring and dissenting:
From my analysis of the opinion written by Chief Justice Roberto Concepcion and from the import of the
deliberations of the Court on this case, I gather the following distinct conclusions:
1. All the search warrants served by the National Bureau of Investigation in this case are general
warrants and are therefore proscribed by, and in violation of, paragraph 3 of section 1 of Article III
(Bill of Rights) of the Constitution;

2. All the searches and seizures conducted under the authority of the said search warrants were
consequently illegal;
3. The non-exclusionary rule enunciated in Moncado vs. People, 80 Phil. 1, should be, and is
declared, abandoned;
4. The search warrants served at the three residences of the petitioners are expressly declared
null and void the searches and seizures therein made are expressly declared illegal; and the writ
of preliminary injunction heretofore issued against the use of the documents, papers and effect
seized in the said residences is made permanent; and
5. Reasoning that the petitioners have not in their pleadings satisfactorily demonstrated that
they have legal standing to move for the suppression of the documents, papers and effects
seized in the places other than the three residences adverted to above, the opinion written by
the Chief Justice refrains from expresslydeclaring as null and void the such warrants served at
such other places and as illegal the searches and seizures made therein, and leaves "the matter
open for determination in appropriate cases in the future."
It is precisely the position taken by the Chief Justice summarized in the immediately preceding
paragraph (numbered 5) with which I am not in accord.
I do not share his reluctance or unwillingness to expressly declare, at this time, the nullity of the search
warrants served at places other than the three residences, and the illegibility of the searches and
seizures conducted under the authority thereof. In my view even the exacerbating passions and
prejudices inordinately generated by the environmental political and moral developments of this case
should not deter this Court from forthrightly laying down the law not only for this case but as well for
future cases and future generations. All the search warrants, without exception, in this case are
admittedly general, blanket and roving warrants and are therefore admittedly and indisputably outlawed
by the Constitution; and the searches and seizures made were therefore unlawful. That the petitioners,
let us assume in gratia argumente, have no legal standing to ask for the suppression of the papers,
things and effects seized from places other than their residences, to my mind, cannot in any manner
affect, alter or otherwise modify the intrinsic nullity of the search warrants and the intrinsic illegality of
the searches and seizures made thereunder. Whether or not the petitioners possess legal standing the
said warrants are void and remain void, and the searches and seizures were illegal and remain illegal.
No inference can be drawn from the words of the Constitution that "legal standing" or the lack of it is a
determinant of the nullity or validity of a search warrant or of the lawfulness or illegality of a search or
seizure.
On the question of legal standing, I am of the conviction that, upon the pleadings submitted to this Court
the petitioners have the requisite legal standing to move for the suppression and return of the
documents, papers and effects that were seized from places other than their family residences.
Our constitutional provision on searches and seizures was derived almost verbatim from the Fourth
Amendment to the United States Constitution. In the many years of judicial construction and
interpretation of the said constitutional provision, our courts have invariably regarded as doctrinal the
pronouncement made on the Fourth Amendment by federal courts, especially the Federal Supreme
Court and the Federal Circuit Courts of Appeals.
The U.S. doctrines and pertinent cases on standing to move for the suppression or return of documents,
papers and effects which are the fruits of an unlawful search and seizure, may be summarized as
follows; (a) ownership of documents, papers and effects gives "standing;" (b) ownership and/or control
or possession actual or constructive of premises searched gives "standing"; and (c) the "aggrieved
person" doctrine where the search warrant and the sworn application for search warrant are "primarily"
directed solely and exclusively against the "aggrieved person," gives "standing."
An examination of the search warrants in this case will readily show that, excepting three, all were
directed against the petitioners personally. In some of them, the petitioners were named personally,
followed by the designation, "the President and/or General Manager" of the particular corporation. The
three warrants excepted named three corporate defendants. But the "office/house/warehouse/premises"
mentioned in the said three warrants were also the same "office/house/warehouse/premises" declared to
be owned by or under the control of the petitioners in all the other search warrants directed against the
petitioners and/or "the President and/or General Manager" of the particular corporation. (see pages 5-24
of Petitioners' Reply of April 2, 1962). The searches and seizures were to be made, and were actually
made, in the "office/house/warehouse/premises" owned by or under the control of the petitioners.

Ownership of matters seized gives "standing."

Ownership of the properties seized alone entitles the petitioners to bring a motion to return and
suppress, and gives them standing as persons aggrieved by an unlawful search and seizure regardless
of their location at the time of seizure. Jones vs. United States, 362 U.S. 257, 261 (1960) (narcotics
stored in the apartment of a friend of the defendant); Henzel vs. United States, 296 F. 2d. 650, 652-53
(5th Cir. 1961), (personal and corporate papers of corporation of which the defendant was
president), United States vs. Jeffers, 342 U.S. 48 (1951) (narcotics seized in an apartment not belonging
to the defendant); Pielow vs. United States, 8 F. 2d 492, 493 (9th Cir. 1925) (books seized from the
defendant's sister but belonging to the defendant); Cf. Villano vs. United States, 310 F. 2d 680, 683 (10th
Cir. 1962) (papers seized in desk neither owned by nor in exclusive possession of the defendant).
In a very recent case (decided by the U.S. Supreme Court on December 12, 1966), it was held that under
the constitutional provision against unlawful searches and seizures, a person places himself or his
property within a constitutionally protected area, be it his home or his office, his hotel room or his
automobile:
Where the argument falls is in its misapprehension of the fundamental nature and scope of
Fourth Amendment protection. What the Fourth Amendment protects is the security a man relies
upon when heplaces himself or his property within a constitutionally protected area, be it his
home or his office, his hotel room or his automobile. There he is protected from unwarranted
governmental intrusion. And when he puts some thing in his filing cabinet, in his desk drawer, or
in his pocket, he has the right to know it will be secure from an unreasonable search or an
unreasonable seizure. So it was that the Fourth Amendment could not tolerate the warrantless
search of the hotel room in Jeffers, the purloining of the petitioner's private papers in Gouled, or
the surreptitious electronic surveilance in Silverman. Countless other cases which have come to
this Court over the years have involved a myriad of differing factual contexts in which the
protections of the Fourth Amendment have been appropriately invoked. No doubt, the future will
bring countless others. By nothing we say here do we either foresee or foreclose factual
situations to which the Fourth Amendment may be applicable. (Hoffa vs. U.S., 87 S. Ct. 408
(December 12, 1966). See also U.S. vs. Jeffers, 342 U.S. 48, 72 S. Ct. 93 (November 13, 1951).
(Emphasis supplied).
Control of premises searched gives "standing."
Independent of ownership or other personal interest in the records and documents seized, the
petitioners have standing to move for return and suppression by virtue of their proprietary or leasehold
interest in many of the premises searched. These proprietary and leasehold interests have been
sufficiently set forth in their motion for reconsideration and need not be recounted here, except to
emphasize that the petitioners paid rent, directly or indirectly, for practically all the premises searched
(Room 91, 84 Carmen Apts; Room 304, Army & Navy Club; Premises 2008, Dewey Boulevard; 1436
Colorado Street); maintained personal offices within the corporate offices (IBMC, USTC); had made
improvements or furnished such offices; or had paid for the filing cabinets in which the papers were
stored (Room 204, Army & Navy Club); and individually, or through their respective spouses, owned the
controlling stock of the corporations involved. The petitioners' proprietary interest in most, if not all, of
the premises searched therefore independently gives them standing to move for the return and
suppression of the books, papers and affects seized therefrom.
In Jones vs. United States, supra, the U.S. Supreme Court delineated the nature and extent of the
interest in the searched premises necessary to maintain a motion to suppress. After reviewing what it
considered to be the unduly technical standard of the then prevailing circuit court decisions, the
Supreme Court said (362 U.S. 266):
We do not lightly depart from this course of decisions by the lower courts. We are persuaded,
however, that it is unnecessarily and ill-advised to import into the law surrounding the
constitutional right to be free from unreasonable searches and seizures subtle distinctions,
developed and refined by the common law in evolving the body of private property law which,
more than almost any other branch of law, has been shaped by distinctions whose validity is
largely historical. Even in the area from which they derive, due consideration has led to the
discarding of those distinctions in the homeland of the common law. See Occupiers' Liability Act,
1957, 5 and 6 Eliz. 2, c. 31, carrying out Law Reform Committee, Third Report, Cmd. 9305.
Distinctions such as those between "lessee", "licensee," "invitee," "guest," often only of
gossamer strength, ought not be determinative in fashioning procedures ultimately referable to
constitutional safeguards. See also Chapman vs. United States, 354 U.S. 610, 616-17 (1961).

It has never been held that a person with requisite interest in the premises searched must own the
property seized in order to have standing in a motion to return and suppress. In Alioto vs. United States,
216 F. Supp. 48 (1963), a Bookkeeper for several corporations from whose apartment the corporate
records were seized successfully moved for their return. In United States vs. Antonelli, Fireworks Co., 53
F. Supp. 870, 873 (W D. N. Y. 1943), the corporation's president successfully moved for the return and
suppression is to him of both personal and corporate documents seized from his home during the course
of an illegal search:
The lawful possession by Antonelli of documents and property, "either his own or the
corporation's was entitled to protection against unreasonable search and seizure. Under the
circumstances in the case at bar, the search and seizure were unreasonable and unlawful. The
motion for the return of seized article and the suppression of the evidence so obtained should be
granted. (Emphasis supplied).
Time was when only a person who had property in interest in either the place searched or the articles
seize had the necessary standing to invoke the protection of the exclusionary rule. But in MacDonald vs.
Unite States, 335 U.S. 461 (1948), Justice Robert Jackson joined by Justice Felix Frankfurter, advanced
the view that "even a guest may expect the shelter of the rooftree he is under against criminal
intrusion." This view finally became the official view of the U.S. Supreme Court and was articulated
in United States vs. Jeffers, 432 U.S 48 (1951). Nine years later, in 1960, in Jones vs. Unite States, 362
U.S. 257, 267, the U.S. Supreme Court went a step further. Jones was a mere guest in the apartment
unlawfully searched but the Court nonetheless declared that the exclusionary rule protected him as well.
The concept of "person aggrieved by an unlawful search and seizure" was enlarged to include "anyone
legitimately on premise where the search occurs."
Shortly after the U.S. Supreme Court's Jones decision the U.S. Court of Appeals for the Fifth Circuit held
that the defendant organizer, sole stockholder and president of a corporation had standing in a mail
fraud prosecution against him to demand the return and suppression of corporate property. Henzel vs.
United States, 296 F 2d 650, 652 (5th Cir. 1961), supra. The court conclude that the defendant had
standing on two independent grounds:First he had a sufficient interest in the property seized,
and second he had an adequate interest in the premises searched (just like in the case at bar). A
postal inspector had unlawfully searched the corporation' premises and had seized most of the
corporation's book and records. Looking to Jones, the court observed:
Jones clearly tells us, therefore, what is not required qualify one as a "person aggrieved by an
unlawful search and seizure." It tells us that appellant should not have been precluded from
objecting to the Postal Inspector's search and seizure of the corporation's books and records
merely because the appellant did not show ownership or possession of the books and records or
a substantial possessory interest in the invade premises . . . (Henzel vs. United States, 296 F. 2d
at 651). .
Henzel was soon followed by Villano vs. United States, 310 F. 2d 680, 683, (10th Cir. 1962). In Villano,
police officers seized two notebooks from a desk in the defendant's place of employment; the defendant
did not claim ownership of either; he asserted that several employees (including himself) used the
notebooks. The Court held that the employee had a protected interest and that there also was an
invasion of privacy. Both Henzel andVillano considered also the fact that the search and seizure were
"directed at" the moving defendant. Henzel vs. United States, 296 F. 2d at 682; Villano vs. United States,
310 F. 2d at 683.
In a case in which an attorney closed his law office, placed his files in storage and went to Puerto Rico,
the Court of Appeals for the Eighth Circuit recognized his standing to move to quash as unreasonable
search and seizure under the Fourth Amendment of the U.S. Constitution a grand jury subpoena duces
tecum directed to the custodian of his files. The Government contended that the petitioner had no
standing because the books and papers were physically in the possession of the custodian, and because
the subpoena was directed against the custodian. The court rejected the contention, holding that
Schwimmer legally had such possession, control and unrelinquished personal rights in the books
and papers as not to enable the question of unreasonable search and seizure to be escaped
through the mere procedural device of compelling a third-party naked possessor to produce and
deliver them. Schwimmer vs. United States, 232 F. 2d 855, 861 (8th Cir. 1956).
Aggrieved person doctrine where the search warrant s primarily directed against said person
gives "standing."

The latest United States decision squarely in point is United States vs. Birrell, 242 F. Supp. 191 (1965,
U.S.D.C. S.D.N.Y.). The defendant had stored with an attorney certain files and papers, which attorney,
by the name of Dunn, was not, at the time of the seizing of the records, Birrell's attorney. * Dunn, in turn,
had stored most of the records at his home in the country and on a farm which, according to Dunn's
affidavit, was under his (Dunn's) "control and management." The papers turned out to be private,
personal and business papers together with corporate books and records of certain unnamed
corporations in which Birrell did not even claim ownership. (All of these type records were seized in the
case at bar). Nevertheless, the search in Birrell was held invalid by the court which held that even
though Birrell did not own the premises where the records were stored, he had "standing" to move for
the return of all the papers and properties seized. The court, relying on Jones vs. U.S.,supra; U.S. vs.
Antonelli Fireworks Co., 53 F. Supp. 870, Aff'd 155 F. 2d 631: Henzel vs. U.S., supra; andSchwimmer vs.
U.S., supra, pointed out that
It is overwhelmingly established that the searches here in question were directed solely and
exclusively against Birrell. The only person suggested in the papers as having violated the law
was Birrell. The first search warrant described the records as having been used "in committing a
violation of Title 18, United States Code, Section 1341, by the use of the mails by one Lowell M.
Birrell, . . ." The second search warrant was captioned: "United States of America vs. Lowell M.
Birrell. (p. 198)
Possession (actual or constructive), no less than ownership, gives standing to move to suppress.
Such was the rule even before Jones. (p. 199)
If, as thus indicated Birrell had at least constructive possession of the records stored with Dunn, it
matters not whether he had any interest in the premises searched. See also Jeffers v. United
States, 88 U.S. Appl. D.C. 58, 187 F. 2d 498 (1950), affirmed 432 U.S. 48, 72 S. Ct. 93, 96 L. Ed.
459 (1951).
The ruling in the Birrell case was reaffirmed on motion for reargument; the United States did not appeal
from this decision. The factual situation in Birrell is strikingly similar to the case of the present
petitioners; as in Birrell, many personal and corporate papers were seized from premises not petitioners'
family residences; as in Birrell, the searches were "PRIMARILY DIRECTED SOLETY AND EXCLUSIVELY"
against the petitioners. Still both types of documents were suppressed in Birrell because of the illegal
search. In the case at bar, the petitioners connection with the premises raided is much closer than
in Birrell.
Thus, the petitioners have full standing to move for the quashing of all the warrants regardless whether
these were directed against residences in the narrow sense of the word, as long as the documents were
personal papers of the petitioners or (to the extent that they were corporate papers) were held by them
in a personal capacity or under their personal control.
Prescinding a from the foregoing, this Court, at all events, should order the return to the petitioners
all personaland private papers and effects seized, no matter where these were seized, whether from
their residences or corporate offices or any other place or places. The uncontradicted sworn statements
of the petitioners in their, various pleadings submitted to this Court indisputably show that amongst the
things seized from the corporate offices and other places were personal and private papers and effects
belonging to the petitioners.
If there should be any categorization of the documents, papers and things which where the objects of
the unlawful searches and seizures, I submit that the grouping should be: (a) personal or private papers
of the petitioners were they were unlawfully seized, be it their family residences offices, warehouses
and/or premises owned and/or possessed (actually or constructively) by them as shown in all the search
and in the sworn applications filed in securing the void search warrants and (b) purely corporate papers
belonging to corporations. Under such categorization or grouping, the determination of which unlawfully
seized papers, documents and things arepersonal/private of the petitioners or purely corporate
papers will have to be left to the lower courts which issued the void search warrants in ultimately
effecting the suppression and/or return of the said documents.
And as unequivocally indicated by the authorities above cited, the petitioners likewise have clear legal
standing to move for the suppression of purely corporate papers as "President and/or General Manager"
of the corporations involved as specifically mentioned in the void search warrants.
Finally, I must articulate my persuasion that although the cases cited in my disquisition were criminal
prosecutions, the great clauses of the constitutional proscription on illegal searches and seizures do not
withhold the mantle of their protection from cases not criminal in origin or nature.

Footnotes
G.R. No. L-67626 April 18, 1989
JOSE
REMO,
JR., petitioner,
vs.
THE HON. INTERMEDIATE APPELLATE COURT and E.B. MARCHA TRANSPORT COMPANY, INC.,
represented by APIFANIO B. MARCHA, respondents.
Orbos, Cabusora, Dumlao & Sta. Ana for petitioner.

GANCAYCO, J.:
A corporation is an entity separate and distinct from its stockholders. While not in fact and in reality a
person, the law treats a corporation as though it were a person by process of fiction or by regarding it as
an artificial person distinct and separate from its individual stockholders. 1
However, the corporate fiction or the notion of legal entity may be disregarded when it "is used to
defeat public convenience, justify wrong, protect fraud, or defend crime" in which instances "the law will
regard the corporation as an association of persons, or in case of two corporations, will merge them into
one." The corporate fiction may also be disregarded when it is the "mere alter ego or business conduit of
a person." 2 There are many occasions when this Court pierced the corporate veil because of its use to
protect fraud and to justify wrong. 3 The herein petition for review of a. resolution of the Intermediate
Appellate Court dated February 8, 1984 seeking the reversal thereof and the reinstatement of its earlier
decision dated June 30, 1983 in AC-G.R. No. 68496-R 4 calls for the application of the foregoing
principles.
In the latter part of December, 1977 the board of directors of Akron Customs Brokerage Corporation
(hereinafter referred to as Akron), composed of petitioner Jose Remo, Jr., Ernesto Baares, Feliciano
Coprada, Jemina Coprada, and Dario Punzalan with Lucia Lacaste as Secretary, adopted a resolution
authorizing the purchase of thirteen (13) trucks for use in its business to be paid out of a loan the
corporation may secure from any lending institution. 5
Feliciano Coprada, as President and Chairman of Akron, purchased thirteen trucks from private
respondent on January 25, 1978 for and in consideration of P525,000.00 as evidenced by a deed of
absolute sale. 6 In a side agreement of the same date, the parties agreed on a downpayment in the
amount of P50,000.00 and that the balance of P475,000.00 shall be paid within sixty (60) days from the
date of the execution of the agreement. The parties also agreed that until said balance is fully paid, the
down payment of P50,000.00 shall accrue as rentals of the 13 trucks; and that if Akron fails to pay the
balance within the period of 60 days, then the balance shall constitute as a chattel mortgage lien
covering said cargo trucks and the parties may allow an extension of 30 days and thereafter private
respondent may ask for a revocation of the contract and the reconveyance of all said trucks. 7
The obligation is further secured by a promissory note executed by Coprada in favor of Akron. It is stated
in the promissory note that the balance shall be paid from the proceeds of a loan obtained from the
Development Bank of the Philippines (DBP) within sixty (60) days. 8 After the lapse of 90 days, private
respondent tried to collect from Coprada but the latter promised to pay only upon the release of the DBP
loan. Private respondent sent Coprada a letter of demand dated May 10, 1978. 9 In his reply to the said
letter, Coprada reiterated that he was applying for a loan from the DBP from the proceeds of which
payment of the obligation shall be made. 10
Meanwhile, two of the trucks were sold under a pacto de retro sale to a certain Mr. Bais of the Perpetual
Loans and Savings Bank at Baclaran. The sale was authorized by a board resolution made in a meeting
held on March 15, 1978. 11
Upon inquiry, private respondent found that no loan application was ever filed by Akron with DBP. 12
In the meantime, Akron paid rentals of P500.00 a day pursuant to a subsequent agreement, from April
27, 1978 (the end of the 90-day period to pay the balance) to May 31, 1978. Thereafter, no more rental
payments were made.

On June 17, 1978, Coprada wrote private respondent begging for a grace period of until the end of the
month to pay the balance of the purchase price; that he will update the rentals within the week; and in
case he fails, then he will return the 13 units should private respondent elect to get back the
same. 13 Private respondent, through counsel, wrote Akron on August 1, 1978 demanding the return of
the 13 trucks and the payment of P25,000.00 back rentals covering the period from June 1 to August 1,
1978. 14
Again, Coprada wrote private respondent on August 8, 1978 asking for another grace period of up to
August 31, 1978 to pay the balance, stating as well that he is expecting the approval of his loan
application from a certain financing company, and that ten (10) trucks have been returned to Bagbag,
Novaliches. 15 On December 9, 1978, Coprada informed private respondent anew that he had returned
ten (10) trucks to Bagbag and that a resolution was passed by the board of directors confirming the
deed of assignment to private respondent of P475,000 from the proceeds of a loan obtained by Akron
from the State Investment House, Inc. 16
In due time, private respondent filed a compliant for the recovery of P525,000.00 or the return of the 13
trucks with damages against Akron and its officers and directors, Feliciano Coprada, Dario D. Punzalan,
Jemina Coprada, Lucia Lacaste, Wilfredo Layug, Arcadio de la Cruz, Francisco Clave, Vicente Martinez,
Pacifico Dollario and petitioner with the then Court of First Instance of Rizal. Only petitioner answered
the complaint denying any participation in the transaction and alleging that Akron has a distinct
corporate personality. He was, however, declared in default for his failure to attend the pre-trial.
In the meanwhile, petitioner sold all his shares in Akron to Coprada. It also appears that Akron amended
its articles of incorporation thereby changing its name to Akron Transport International, Inc. which
assumed the liability of Akron to private respondent.
After an ex parte reception of the evidence of the private respondent, a decision was rendered on
October 28, 1980, the dispositive part of which reads as follows:
Finding the evidence sufficient to prove the case of the plaintiff, judgment is hereby rendered in favor of
the plaintiff and against the defendants, ordering them jointly and severally to pay;
a the purchase price of the trucks in the amount of P525,000.00 with ... legal rate (of
interest) from the filing of the complaint until the full amount is paid;
b rentals of Bagbag property at P1,000.00 a month from August 1978 until the
premises is cleared of the said trucks;
c attorneys fees of P10,000.00, and
d costs of suit.
The P50,000.00 given as down payment shall pertain as rentals of the trucks from June 1 to August 1,
1978 which is P25,000.00 (see demand letter of Atty. Aniano Exhibit "T") and the remaining P25,000.00
shall be from August 1, 1978 until the trucks are removed totally from the place." 17
A motion for new trial filed by petitioner was denied so he appealed to the then Intermediate Appellate
Court (IAC) wherein in due course a decision was rendered on June 30, 1 983 setting aside the said
decision as far as petitioner is concemed. However, upon a motion for reconsideration filed by private
respondent dent, the IAC, in a resolution dated February 8,1984, set aside the decision dated June 30,
1983. The appellate court entered another decision affirming the appealed decision of the trial court,
with costs against petitioner.
Hence, this petition for review wherein petitioner raises the following issues:
I. The Intermediate Appellate Court (IAC) erred in disregarding the corporate fiction and in
holding the petitioner personally liable for the obligation of the Corporation which decision
is patently contrary to law and the applicable decision thereon.
II. The Intermediate Appellate Court (IAC) committed grave error of law in its decision by
sanctioning the merger of the personality of the corporation with that of the petitioner
when the latter was held liable for the corporate debts. 18
We reverse.

The environmental facts of this case show that there is no cogent basis to pierce the corporate veil of
Akron and hold petitioner personally liable for its obligation to private respondent. While it is true that in
December, 1977 petitioner was still a member of the board of directors of Akron and that he participated
in the adoption of a resolution authorizing the purchase of 13 trucks for the use in the brokerage
business of Akron to be paid out of a loan to be secured from a lending institution, it does not appear
that said resolution was intended to defraud anyone and more particularly private respondent. It was
Coprada, President and Chairman of Akron, who negotiated with said respondent for the purchase of 13
cargo trucks on January 25, 1978. It was Coprada who signed a promissory note to guarantee the
payment of the unpaid balance of the purchase price out of the proceeds of a loan he supposedly sought
from the DBP. The word "WE' in the said promissory note must refer to the corporation which Coprada
represented in the execution of the note and not its stockholders or directors. Petitioner did not sign the
said promissory note so he cannot be personally bound thereby.
Thus, if there was any fraud or misrepresentation that was foisted on private respondent in that there
was a forthcoming loan from the DBP when it fact there was none, it is Coprada who should account for
the same and not petitioner.
As to the sale through pacto de retro of the two units to a third person by the corporation by virtue of a
board resolution, petitioner asserts that he never signed said resolution. Be that as it may, the sale is
not inherently fraudulent as the 13 units were sold through a deed of absolute sale to Akron so that the
corporation is free to dispose of the same. Of course, it was stipulated that in case of default in payment
to private respondent of the balance of the consideration, a chattel mortgage lien shag be constituted
on the 13 units. Nevertheless, said mortgage is a prior lien as against the pacto de retro sale of the 2
units.
As to the amendment of the articles of incorporation of Akron thereby changing its name to Akron
Transport International, Inc., petitioner alleges that the change of corporate name was in order to
include trucking and container yard operations in its customs brokerage of which private respondent was
duly informed in a letter. 19Indeed, the new corporation confirmed and assumed the obligation of the
old corporation. There is no indication of an attempt on the part of Akron to evade payment of its
obligation to private respondent.
There is the fact that petitioner sold his shares in Akron to Coprada during the pendency of the case.
Since petitioner has no personal obligation to private respondent, it is his inherent right as a stockholder
to dispose of his shares of stock anytime he so desires.
Mention is also made of the alleged "dumping" of 10 units in the premises of private respondent at
Bagbag, Novaliches which to the mind of the Court does not prove fraud and instead appears to be an
attempt on the part of Akron to attend to its obligations as regards the said trucks. Again petitioner has
no part in this.
If the private respondent is the victim of fraud in this transaction, it has not been clearly shown that
petitioner had any part or participation in the perpetration of the same. Fraud must be established by
clear and convincing evidence. If at all, the principal character on whom fault should be attributed is
Feliciano Coprada, the President of Akron, whom private respondent dealt with personally all through
out. Fortunately, private respondent obtained a judgment against him from the trial court and the said
judgment has long been final and executory.
WHEREFORE, the petition is GRANTED. The questioned resolution of the Intermediate Appellate Court
dated February 8,1984 is hereby set aside and its decision dated June 30,1983 setting aside the decision
of the trial court dated October 28, 1980 insofar as petitioner is concemed is hereby reinstated and
affirmed, without costs.
SO ORDERED.
Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.
G.R. No. 131673

September 10, 2004

RUBEN MARTINEZ,* substituted by his heirs, MENA CONSTANTINO MARTINEZ, WILFRIDO C.

MARTINEZ,
EMMA
M.
NAVA,
and
EDNA
M.
SAKHRANI, petitioners,
vs.
COURT OF APPEALS and BPI INTERNATIONAL FINANCE, respondents.
DECISION

CALLEJO, SR., J.:

Before us is a petition for review on certiorari of the Decision 1 of the Court of Appeals, in CA-G.R. CV No.
43985, modifying the Decision2 of the Regional Trial Court of Kalookan City, Branch 122, in Civil Case No.
C-10811.
The antecedents are as follows:
Respondent BPI International Finance 3 is a foreign corporation not doing business in the Philippines, with
office address at the Bank of America Tower, 12 Harcourt Road, Central Hongkong. It was a deposittaking company organized and existing under and by virtue of the laws of Hongkong, and was also
engaged in investment banking operations therein.
Cintas Largas, Ltd. (CLL) was also a foreign corporation, established in Hongkong, with a paid-up capital
of HK$10,000. The registered shareholders of the CLL in Hongkong were the Overseas Nominee, Ltd. and
Shares Nominee, Ltd., which were mainly nominee shareholders. In Hongkong, the nominee shareholder
of CLL was Baker & McKenzie Nominees, Ltd., a leading solicitor firm. However, beneficially, the
company was equally owned by Messrs. Ramon Siy, Ricardo Lopa, Wilfrido C. Martinez, and Miguel J.
Lacson.4 The registered office address of CLL in Hongkong was 22/F, Princes Building, also the office
address of Price Waterhouse & Co., a large accounting firm in Hongkong.
The bulk of the business of the CLL was the importation of molasses from the Philippines, principally
from the Mar Tierra Corporation, and the resale thereof in the international market. 5 However, Mar Tierra
Corporation also sold molasses to its customers. 6 Wilfrido C. Martinez was the president of Mar Tierra
Corporation, while its executive vice-president was Blamar Gonzales. The business operations of both
the CLL and Mar Tierra Corporation were run by Wilfrido Martinez and Gonzales.
About 42% of the capital stock of Mar Tierra Corporation was owned by RJL Martinez Fishing Corporation
(RJL), the leading tuna fishing outfit in the Philippines. Petitioner Ruben Martinez was the president of RJL
and a member of the board of directors thereof. The majority stockholders of RJL were Ruben Martinez
and his brothers, Jose and Luis Martinez. Sixty-eight (68) percent of the total assets of Ruben Martinez
were in the RJL.
In 1979, respondent BPI International Finance (then AIFL) granted CLL a letter of credit in the amount of
US$3,000,000. Wilfrido Martinez signed the letter agreement with the respondent for the CLL. The
respondent and the CLL had made the following arrangements:
Cintas Largas, Ltd. will purchase molasses from the Philippines, mainly from Mar Tierra
Corporation, and then sell the molasses to foreign countries. Both the purchase of the molasses
from the Philippines and the subsequent sale thereof to foreign customers were effected by
means of Letters of Credit. A Letter of Credit would be opened by Cintas Largas, Ltd. in favour of
Mar Tierra Corporation or any other seller in the Philippines. Upon the sale of the molasses to
foreign buyers, a Letter of Credit would then be opened by such buyers, in favour of Cintas
Largas, Ltd. The Letters of Credit were effected through the Letter of Credit Facility of Cintas
Largas, Ltd. in plaintiff. The profits of Cintas Largas, Ltd. from these transactions were then
deposited in either the deposit account of Cintas Largas, Ltd. with plaintiff or the Money Market
Placement Account Nos. 063 and 084, depending upon the instructions of Wilfrido C. Martinez
and Blamar C. Gonzales, principally.7
On January 24, 1979, the CLL opened a money market placement with the respondent bearing MMP No.
063, with an initial placement of US$390,000. 8 The CLL also opened and maintained a foreign currency
account and a deposit account with the respondent. The authorized signatory in both accounts of CLL
was Wilfrido C. Martinez. Some instructions also came from Gonzales, to be confirmed by Wilfrido
Martinez.9 On March 21, 1980, petitioner Ruben Martinez and/or his son Wilfrido C. Martinez and/or
Miguel J. Lacson affixed their signatures on the two signature cards furnished by the respondent which
became MMP No. 063 and MMP No. 084. On the face of the cards, the signatories became joint account
holders of the said money market placements.10
On March 25, 1980, the CLL opened a money market placement account with the respondent bearing
MMP No. 084 with an initial placement of US$68,768.60, transferred from MMP No. 063. 11 At times, funds
in MMP Nos. 063 and 084 were transferred to the CLLs deposit account, and vice versa.
On May 19, 1980, the CLL, through Wilfrido Martinez, and the respondent, through Senen L. Matoto and
Michael Sung, Senior Manager of the Money Management Division of the respondent, executed a letteragreement in which the existing back-to-back credit facility granted to the CLL way back in 1979 was
extended up to July 1980, and increased to US$5,000,000. The credit facility was to be secured as
follows:

SECURITY: (i) Back-to-Back L/C to be secured by an L/C issued, by a bank acceptable to AFHK, in
favor of Cintas Largas.
(ii) AFHK L/C issued prior to receipt of Backing L/C to be secured by a 10% margin by way of a
hold out on cash deposit with AFHK with interest at LIBOR. The Backing L/C, however, shall be
opened not later than 120 days after the issuance of AFHKs L/C.
(iii) JSS of Messrs. Ramon Siy, Wilfrido C. Martinez, Ricardo Lopa and Miguel J. Lacson for both of
the above cases.
DOCUMENTATION: Standard AFHK L/C documentation.12
The facility was designed to finance the purchases of molasses made by the CLL from the Philippines for
re-export.13
In compliance with the letter-agreement, Wilfrido C. Martinez, Miguel J. Lacson, Ricardo Lopa, and Ramon
Siy executed a continuing suretyship agreement in which they bound and obliged themselves, jointly
and severally, with the CLL to pay the latters obligation under the said credit facility. 14
As of September 26, 1980, the balance of the deposit account of the CLL with the respondent was
US$1,025,052.06.15 On the other hand, the balance of the money placement in MMP No. 063, as of
September 25, 1980 was US$312,708.43, 16 while the balance of the money market placement in MMP
No. 084 as of September 8, 1980 stood at US$768,258.24. 17
On October 10, 1980, Blamar Gonzales, acting for Mar Tierra Corporation, sent to the respondent a telex
confirming his telephone conversation with Michael Sung/Bing Matoto requesting the respondent to
transfer US$340,000 to Account No. FCD SA 18402-7, registered in the name of Mar Tierra Corporation,
Philippine Banking Corporation, Union Cement Building, Port Area, Manila, as payee, with the following
specific instructions: (a) there should be no mention of Wilfrido Martinez or Mar Tierra Corporation; (b)
the telex instruction should be signed only by Wilfrido Martinez and sent only through the telex machine
of Mar Tierra Corporation; and, (c) the final confirmation of the transfer should be made by telephone
call.18 Gonzales requested the respondent, in the same telex, to confirm its total available account so
that instructions on the transfer of the funds to FCD SA 18402-7 could be formalized. 19
On October 13, 1980, Sung sent a telex to Gonzales informing the latter of the balances of the MMP Nos.
063 and 084 and in the CLL account deposit, with the corresponding maturity dates thereof, thus:
1. DETAIL OF PLACEMENT IN VARIOUS A/C.
MMP 063
VALUE
DATE

MATURITY
DATE

DATE

AMOUNT

MATURITY
VALUE

25/9/80

28/11/80

12-1/4

USD306,043.4
USD 312,708.43
8

28/11/80

12-1/4

USD751,883.8
USD 768,258.24
8

MMP 084
25/09/80

------------USD1080,966.67
==========
====
CINTAS LARGAS
VALUE
DATE

MATURITY
DATE

DATE

AMOUNT

15/9/80

1 DAY CALL

10-7/8

USD
46,131.26

25/9/80

1 DAY CALL

11-1/4

USD500,000.0
0

MATURITY
VALUE

(RATE ADJ: TO 12-1/4 VALUE 7/10/80)

26/9/80

31/10/80

12-1/4

USD420,831.4
USD 425,843.44
5

2. ACCORDING TO AIDC, O/S OF PESO LOAN IS 10,930,000.00, AND THE HOLDOUT REQUIRED IS
120 PCT
COMPUTATION:

PESO
10,930,000.00
7.89 (EXCHANGE RATE)
1.20
(120
PCT)
----------------1,662,357.00
==========

3. ACCORDINGLY, THE FUND AVAILABLE IS APPROX. USD340,000.00. PLS REVERT. 20

Sung informed Gonzales that the account available was approximately US$340,000, considering the CLL
deposit account and the money market placements.21 On October 14, 1980, the respondent received a
telex from Wilfrido C. Martinez requesting that the transfer of US$340,000 from the deposit account of
the CLL or any deposit available be effected by telegraphic transfer as soon as possible to their account,
payee FCD SA 18402-7, Philippine Banking Corporation, Port Area, Manila. 22 On October 21, 1980,
Wilfrido Martinez wrote the respondent confirming his request for the transfer of US$340,000 to "their"
account, FCD SA 18402-7, with the Philippine Banking Corporation, through Wells Fargo Bank of New
York, Philippine Banking Corporation Account No. FCDU SA No. 003-019205. 23
The respondent complied with the request of the CLL, through Wilfrido Martinez and Gonzales, and
remitted US$340,000 as instructed. 24 However, instead of deducting the amount from the funds in the
CLL foreign currency or deposit accounts and/or MMP Nos. 063 and 084, the respondent merely "posted"
the US$340,000 as an account receivable of the CLL since, at that time, the money market placements
had not yet matured.25 When the money market placements matured, however, the respondent did not
collect the US$340,000 therefrom. Instead, the respondent allowed the CLL and/or Wilfrido C. Martinez
to withdraw, up to July 3, 1981, the bulk of the CLL deposit account and MMP Nos. 084 and 063; 26 hence,
it failed to secure reimbursement for the US$340,000 from the said deposit account and/or money
market placements.
In the meantime, problems ensued in the reconciliation of the transactions involving the funds of the
CLL, including the MMP Nos. 063 and 084 with the respondent, as well as the receivables of Mar Tierra
Corporation. There was also a need to audit the said funds. Sometime in July 1982, conferences were
held between the executive committee of Mar Tierra Corporation and some of its officers, including
Miguel J. Lacson, where the means to reduce the administrative expenses and accountants fees, and
the possibility of placing the CLL on an "inactive status" were discussed. 27 The respondent pressured the
CLL, Wilfrido Martinez, and Gonzales to pay the US$340,000 it remitted to Account No. FCD SA 184027.28 Eventually, Wilfrido C. Martinez and Blamar Gonzales engaged the services of the auditing firm, the
Jacinto, Belano, Castro & Co., to review the flow of the CLLs funds and the receivables of Mar Tierra
Corporation.
On August 16, 1982, the CLL, through its certified public accountant, wrote the respondent requesting
the latter to furnish its accountant with a copy of the financial report prepared by its auditors. 29 An audit
was, thereafter, conducted by the Jacinto, Belano, Castro & Co., certified public accountants of the CLL
and Mar Tierra Corporation. Based on their report, the auditors found that the CLL owed the respondent
US$340,000.30
In the meantime, the respondent demanded from the CLL, Wilfrido Martinez, Lacson, Gonzales, and
petitioner Ruben Martinez, the payment of the US$340,000 remitted by it to FCD SA 18402-7, per
instructions of Gonzales and Wilfrido Martinez. No remittance was made to the respondent. Petitioner
Ruben Martinez denied knowledge of any such remittance, as well as any liability for the amount thereof.
On June 17, 1983, the respondent filed a complaint against the CLL, Wilfrido Martinez, Lacson, Gonzales,
and petitioner Ruben Martinez, with the RTC of Kaloocan City for the collection of the principal amount of
US$340,000, with a plea for a writ of preliminary attachment. Two alternative causes of action against
the defendants were alleged therein, viz:
FIRST ALTERNATIVE CAUSE OF ACTION
2.1 The allegations contained in the foregoing paragraphs are repleaded herein by reference.

2.2 The remittance by plaintiff of the sum of US$340,000.00 as previously explained in the
foregoing paragraphs was made upon the express instructions of defendants GONZALES and
WILFRIDO C. MARTINEZ acting for and in behalf of the defendant CINTAS, defendants GONZALES
and WILFRIDO C. MARTINEZ being the duly authorized representatives of defendant CINTAS to
transact any and all of its business with plaintiff.
2.3 The remittance of US$340,000.00 was made under an agreement for plaintiff to advance the
said amount and for defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS to repay plaintiff
all such monies so advanced to said defendants or to their order.
2.4 In making said remittance, plaintiff acted as the agent of the foregoing defendants in meeting
the latters liability to the recipient/s of the amount so remitted.
2.5 The remittance of US$340,000.00 which remains unsettled to date is a just, binding and
lawful obligation of the defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS.
2.6 Defendant CINTAS is a reinvoicing or paper company with nominee shareholders in
Hongkong. The real and beneficial shareholders of the foregoing defendants are the defendants
LACSON and WILFRIDO C. MARTINEZ.
2.7 Defendant CINTAS is being used by the foregoing defendants as an alter ego or business
conduit for their sole benefit and/or to defeat public convenience.
2.8 Defendant CINTAS, being a mere alter ego or business conduit for the foregoing defendants,
has no corporate personality distinct and separate from that of its beneficial shareholders and,
likewise, has no substantial assets in its own name.
2.9 The remittance of US$340,000.00 as referred to previously, although made upon the
instructions of defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS, was in fact a
remittance made for the benefit of the beneficial shareholders of defendant CINTAS.
2.10 Any and all obligations of defendant CINTAS are the obligations of its beneficial shareholders
since the former is being used by the latter as an alter ego or business conduit for their sole
benefit and/or to defeat public convenience.
SECOND ALTERNATIVE CAUSE OF ACTION
3.1 The allegations contained in the foregoing paragraphs are incorporated herein by reference.
3.2 Defendants RUBEN MARTINEZ, WILFRIDO C. MARTINEZ and LACSON are joint account holders
of Money Market Placement Account Nos. 063 and 084 (hereinafter referred to as MMP 063 and
084 for brevity) opened and maintained by said defendants with the plaintiff.
3.3 Said money market placement accounts, although nominally opened and maintained by said
defendants, were in reality for the account and benefit of all the defendants.
3.4 Defendant CINTAS likewise opened and maintained a deposit account with plaintiff.
3.5 Defendants W.C. Martinez and Gonzales upon giving instructions to plaintiff to remit the
amount of US$340,000.00 as previously discussed also instructed plaintiff to reimburse itself
from available funds in MMP Account Nos. 063 and 084 and the defendant CINTAS deposit
account.
3.6 Due to excusable mistake, plaintiff was unable to obtain reimbursement for the remittance it
made from MMP Account Nos. 063, 084 and from the deposit account of defendant CINTAS.
3.7 As a consequence of said mistake, plaintiff delivered to the foregoing defendants and/or to
third parties upon orders of the defendants substantially all the funds in MMP Account Nos. 063,
084 and the deposit account of defendant CINTAS.
3.8 The amount of US$340,000.00 delivered by plaintiff to the foregoing defendants constituted
an overpayment and/or erroneous payment as defendants had no right to demand the same;
further, said amount having been unduly delivered by mistake, the foregoing defendants were
obliged to return it.
3.9 Since the foregoing defendants had no legal right to the overpayment or erroneous payment
of US$340,000.00 they, therefore, hold said money in trust for the plaintiff.

3.10 Despite numerous demands to the defendants WILFRIDO C. MARTINEZ, RUBEN MARTINEZ,
LACSON and CINTAS for restitution of the funds erroneously paid or overpaid to said defendants,
they have failed and continue to fail to make any restitution.31
The respondent prayed therein that, after due proceedings, judgment be rendered in its favor, viz:
ON THE FIRST ALTERNATIVE CAUSE OF ACTION
4.1 Ordering defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS, jointly and severally,
liable to pay plaintiff the amount of US$340,000.00 with interests thereon from February 20,
1982 until fully paid.
4.2 Declaring that defendant CINTAS is a mere alter ego or business conduit of defendants
LACSON and WILFRIDO C. MARTINEZ; hence, the foregoing defendants are, jointly and severally,
liable to pay plaintiff the amount of US$340,000.00 with interests thereon.
4.3 Ordering the foregoing defendants to be, jointly and severally, liable for the amount
of P100,000.00 as and for attorneys fees; and
4.4 Ordering the foregoing defendants to be, jointly and severally, liable to plaintiff for actual
damages in an amount to be proved at the trial. Or ON THE SECOND ALTERNATIVE CAUSE OF ACTION
5.1 Declaring that plaintiff made an erroneous payment in the amount of US$340,000.00 to
defendants LACSON, WILFRIDO C. MARTINEZ, RUBEN MARTINEZ and CINTAS.
5.2 Declaring the foregoing defendants to be, jointly and severally, liable to reimburse plaintiff
the amount of US$340,000.00 with interest thereon from February 20, 1982 until fully paid.
5.3 Ordering defendants to be, jointly and severally, liable for the amount of P100,000.00 as and
for attorneys fees; and
5.4 Ordering defendants to be, jointly and severally, liable to plaintiff for actual damages in an
amount to be proved at the trial.
5.5 A writ of preliminary attachment be issued against the properties of the defendants
WILFRIDO C. MARTINEZ, RUBEN MARTINEZ, LACSON and CINTAS as a security for the satisfaction
of any judgment that may be recovered.
Plaintiff further prays for such other relief as may be deemed just and equitable in the premises. 32
In his answer to the complaint, petitioner Ruben Martinez interposed the following special and
affirmative defenses:
BY WAY OF SPECIAL AND AFFIRMATIVE DEFENSES, answering defendant respectfully states:

2. Defendant is not the holder, owner, depositor, trustee and has no interest whatsoever in the
account in Philippine Banking Corporation (FCD SA 18402-7) where the plaintiff remitted the
amount sought to be recovered. Hence, he did not benefit directly or indirectly from the said
remittance;
3. Defendant did not participate in any manner whatsoever in the remittance of funds from the
plaintiff to the alleged FCD Account in the Philippine Banking Corporation;
4. Defendant has not received nor benefited from the alleged remittance, "payment,"
"overpayment" or "erroneous payment" allegedly made by plaintiff; hence, insofar as he is
concerned, there is nothing to return to or to "hold in trust" for the plaintiff;
5. Plaintiffs alleged remittance of the amount by mere telex or telephone instruction was highly
irregular and questionable considering that the undertaking was that no remittance or transfer
could be done without the prior signature of the authorized signatories;

6. The alleged telex instructions to the plaintiff was for it to confirm the amounts that are "free
and available" which it did;
7. Plaintiff is guilty of estoppel or laches by making it appear that the funds so remitted are "free
and available" and by not acting within reasonable time to correct the alleged mistake;
8. The alleged remittance, "overpayment" and "erroneous payment" was manipulated by
plaintiffs own employees, officers or representatives without connivance or collusion on the part
of the answering defendant; hence, plaintiff has only itself to blame for the same; likewise, its
recourse is not against answering defendant;
9. Plaintiffs Complaint is defective in that it has failed to state the facts constituting the
"mistake" regarding its failure to obtain reimbursement from MMP 063 and 084;
10. Plaintiff is guilty of gross negligence and it only has itself to blame for its alleged loss;
11. Sometime on or about 1980, defendant was made to sign blank forms concerning opening of
money market placements and perhaps, this is how he became a "joint account holder" of MMP
063 and 084; defendant at that time did not realize the import or significance of his act;
afterwards, defendant did not do any act or omission by which he could be implicated in this
case;
12. Assuming that defendant is a "joint account holder" of said MMP 063 and 084, plaintiff has
failed to plead defendants obligations, if any, by being said "joint account holder;" likewise, the
Complaint fails to attach the corresponding documents showing defendants being a "joint
account holder."33
The CLL was declared in default for its failure to file an answer to the complaint.
After trial, the RTC rendered its decision, the dispositive portion of which reads as follows:
PREMISES CONSIDERED, judgment is hereby rendered as follows:
1. Ordering all the defendants, jointly and severally, to pay plaintiff the amount of
US$340,000.00 or its equivalent in Philippine currency measured at the Central Bank
prevailing rate of exchange in October 1980 and with legal interest thereon computed
from the filing of plaintiffs complaint on June 17, 1983 until fully paid;
2. Declaring that defendant Cintas Largas Ltd. is a mere business conduit and alter ego of
the individual defendants, thereby holding the individual defendants, jointly and severally,
liable to pay plaintiff the aforesaid amount of US$340,000.00 or its equivalent in Philippine
Currency measured at the Central Bank prevailing rate of exchange in October 1980, with
interest thereon as above-stated;
3. Ordering all defendants to, jointly and severally, pay unto plaintiff the amount
of P50,000.00 as and for attorneys fees, plus costs.
All counterclaims and cross-claims are dismissed for lack of merit.
SO ORDERED.34
The trial court ruled that the CLL was a mere paper company with nominee shareholders in Hongkong. It
ruled that the principle of piercing the veil of corporate entity was applicable in this case, and held the
defendants liable, jointly and severally, for the claim of the respondent, on its finding that the
defendants merely used the CLL as their business conduit. The trial court declared that the majority
shareholder of Mar Tierra Corporation was the RJL, controlled by petitioner Ruben Martinez and his
brothers, Jose and Luis Martinez, as majority shareholders thereof. Moreover, petitioner Ruben Martinez
was a joint account holder of MMP Nos. 063 and 084. The trial court, likewise, found that the auditors of
Mar Tierra Corporation and the CLL confirmed that the defendants owed US$340,000. The trial court
concluded that the respondent had established its causes of action against Wilfrido Martinez, Lacson,
Gonzales, and petitioner Ruben Martinez; hence, held all of them liable for the claim of the respondent.
The decision was appealed to the CA. On June 27, 1997, the CA rendered its decision, the dispositive
portion of which reads:
WHEREFORE, the decision of the Court a quo dated December [19], 1991 is
hereby MODIFIED, by exonerating appellant Blamar Gonzales from any liability to appellee and

the complaint against him isDISMISSED. The decision appealed from is AFFIRMED in all other
respect.
SO ORDERED.35
The appellate court exonerated Gonzales of any liability, reasoning that he was not a stockholder of the
CLL nor of Mar Tierra Corporation, but was a mere employee of the latter corporation. 36 Petitioner Ruben
Martinez sought a reconsideration of the decision of the CA, to no avail. 37
Dissatisfied with the decision and resolution of the appellate court, the petitioner, filed the petition at
bar, on the following grounds:
I
RESPONDENT COURT OF APPEALS ERRED IN FINDING THAT HEREIN PETITIONER RUBEN MARTINEZ
IS LIABLE TO RESPONDENT BPI INTERNATIONAL FINANCE FOR REIMBURSEMENT OF THE
US$340,000.00 REMITTED BY SAID RESPONDENT BPI INTERNATIONAL FINANCE TO FCD SA
ACCOUNT NO. 18402-7 AT THE PHILIPPINE BANKING CORPORATION, PORT AREA BRANCH.
II
RESPONDENT COURT OF APPEALS ERRED IN NOT GRANTING THE COUNTER-CLAIM OF PETITIONER
RUBEN MARTINEZ CONSIDERING THE EVIDENCE ON RECORD THAT PROVES THE SAME. 38
The paramount issue posed for resolution is whether or not the petitioner is obliged to reimburse to the
respondent the principal amount of US$340,000.
The petitioner asserts that the trial and appellate courts erred when they held him liable for the
reimbursement of US$340,000 to the respondent. He contends that he is not in actuality a stockholder
of Mar Tierra Corporation, nor a stockholder of the CLL. He was not involved in any way in the operations
of the said corporations. He added that while he may have signed the signature cards of MMP Nos. 063
and 084 in blank, he never had any involvement in the management and disposition of the said
accounts, nor of any deposits in or withdrawals from either or both accounts. He was not aware of any
transactions between the respondent, Wilfrido Martinez, and Gonzales, with reference to the remittance
of the US$340,000 to FCD SA 18402-7; nor did he oblige himself to pay the said amount to the
respondent. According to the petitioner, there is no evidence that he had benefited from any of the
following: (a) the remittance by the respondent of the US$340,000 to Account No. FCD SA 18402-7
owned by Mar Tierra Corporation; (b) the money market placements in MMP Nos. 063 and 084, or, (c)
from any deposits in or withdrawals from the said account and money market placements.
On the other hand, the appellate court found the petitioner and his co-defendants, jointly and severally,
liable to the respondent for the payment of the US$340,000 based on the following findings of the trial
court:
The Court finds that defendant Cintas Largas (Ltd.) with capitalization of $10,000.00 divided into
1,000 shares at HK$10 per share, is a mere paper company with nominee shareholders in
Hongkong, namely: Overseas Nominees Ltd. and Shares Nominees Ltd., with defendants Wilfrido
and Miguel J. Lacson as the sole directors (Exh. A). Since the said shareholders are mere nominee
companies, it would appear that the said defendants Wilfrido and Miguel J. Lacson who are the
sole directors are the real and beneficial shareholders (t.s.n., 9-1-87, p. 5). Further, defendant
Cintas Largas Ltd. has no real office in Hongkong as it is merely being accommodated by Price
Waterhouse, a large accounting office in Hongkong (t.s.n., 9-1-87, pp. 7-8).
Defendant Cintas Largas Ltd., being a mere alter ego or business conduit for the individual
defendants with no corporate personality distinct and separate from that of its beneficial
shareholders and with no substantial assets in its own name, it is safe to conclude that the
remittance of US$340,000.00 was, in fact, a remittance made for the benefit of the individual
defendants. Plaintiff was supposed to deduct the US$340,000.00 remitted to the foreign currency
deposit account from Cintas Largas (Ltd.) funds or from money market placement account Nos.
063 and 084 as well as Cintas Largas Ltd. deposit account (Exh. FF-24).

Defendant Cintas Largas Ltd. was established only for financing (t.s.n., 12-19-88, pp. 25-26) and
the active owners of Cintas are defendants Miguel Lacson and Wilfrido C. Martinez (t.s.n., 12-1988, p. 22). Mar Tierra Corporation of which defendant Wilfrido Martinez is the President and one
of its owners and defendant Blamar Gonzales as the Vice President, sells molasses to defendant
Cintas Largas Ltd. Defendant Miguel J. Lacson is a business partner in purchasing molasses for

Mar Tierra Corporation. Mar Tierra Corporation was selling molasses to Cintas Largas Ltd. which
were purchased by Miguel Lacson and Wilfrido C. Martinez (t.s.n., 12-19-88, pp. 23-24). The
majority owner of Mar Tierra Corporation is RJL Martinez Fishing Corporation which is owned by
brothers Ruben Martinez, Jose Martinez and Luis Martinez (t.s.n., 12-19-88, pp. 24-25; t.s.n., 6-2088, pp. 11-12). The FCD SA-18402-7 account at Philippine Banking Corporation, Port Area Branch,
where the US$340,000.00 was remitted by the plaintiff is the account of Mar Tierra Corporation,
and with the interlapping connection of the defendants to each other, these could be the reason
why the funds of Cintas Largas Ltd. were being co-mingled and controlled by defendants more
particularly defendants Blamar Gonzales and Wilfrido C. Martinez (Exhs. D, E, F, G, H, I, J, L, M, N,
O, P, R, S, and T).
On the basis of the evidence, the Court finds and so holds that the cause of action of the plaintiff
against the defendants has been established.39
We do not agree with the trial court and appellate court.
We note that the question of whether or not a corporation is merely an alter ego is purely one of
fact.40 So is the question of whether or not a corporation is a paper company or a sham or subterfuge or
whether the respondent adduced the requisite quantum of evidence warranting the piercing of the veil
of corporate entity of the CLL. 41The Court is not a trier of facts. Hence, the factual findings of the trial
court, as affirmed by the appellate court, are generally conclusive upon this Court. 42 However, the rule is
subject to the following exceptions: (a) where the conclusion is a finding grounded entirely on
speculation, surmise and conjectures; (b) where the information made is manifestly mistaken; (c) where
there is grave abuse of discretion; (d) where the judgment is based on a misapplication of facts, and the
findings of facts of the trial court and the appellate court are contradicted by the evidence on record;
and (e) when certain material facts and circumstances had been overlooked by the trial court which, if
taken into account, would alter the result of the case.
We have reviewed the records and find that some substantial factual findings of the trial court and the
appellate court and, consequently, their conclusions based on the said findings, are not supported by
the evidence on record.
The general rule is that a corporation is clothed with a personality separate and distinct from the
persons composing it. Such corporation may not be held liable for the obligation of the persons
composing it; and neither can its stockholders be held liable for such obligation. 43 A corporation has a
separate personality distinct from its stockholders and from other corporation to which it may be
connected.44 This separate and distinct personality of a corporation is a fiction created by law for
convenience and to prevent injustice.45
Nevertheless, being a mere fiction of law, peculiar situations or valid grounds can exist to warrant, albeit
sparingly, the disregard of its independent being and the piercing of the corporate veil. 46 Thus, the veil
of separate corporate personality may be lifted when such personality is used to defeat public
convenience, justify wrong, protect fraud or defend crime; or used as a shield to confuse the legitimate
issues; or when the corporation is merely an adjunct, a business conduit or an alter ego of another
corporation 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; 47 or when the
corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or where necessary to
achieve equity or for the protection of the creditors. 48 In such cases where valid grounds exist for
piercing the veil of corporate entity, the corporation will be considered as a mere association of
persons.49 The liability will directly attach to them.50
However, mere ownership by a single stockholder or by another corporation of all or nearly all of the
capital stocks of a corporation is not by itself a sufficient ground to disregard the separate corporate
personality. The substantial identity of the incorporators of two or more corporations does not warrantly
imply that there was fraud so as to justify the piercing of the writ of corporate fiction. 51 To disregard the
said separate juridical personality of a corporation, the wrongdoing must be proven clearly and
convincingly.52
The test in determining the application of the instrumentality or alter ego doctrine 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. 53
In this case, the respondent failed to adduce the quantum of evidence necessary to prove any valid
ground for the piercing of the veil of corporate entity of Mar Tierra Corporation, or of RJL for that matter,
and render the petitioner liable for the respondents claim, jointly and severally, with Wilfrido Martinez
and Lacson. The mere fact that the majority stockholder of Mar Tierra Corporation is the RJL, and that
the petitioner, along with Jose and Luis Martinez, owned about 42% of the capital stock of RJL, do not
constitute sufficient evidence that the latter corporation, and/or the petitioner and his brothers, had
complete domination of Mar Tierra Corporation. It does not automatically follow that the said corporation
was used by the petitioner for the purpose of committing fraud or wrong, or to perpetrate an injustice on
the respondent. There is no evidence on record that the petitioner had any involvement in the purchases
of molasses by Wilfrido Martinez, Gonzales and Lacson, and the subsequent sale thereof to the CLL,
through Mar Tierra Corporation. On the contrary, the evidence on record shows that the CLL purchased
molasses from Mar Tierra Corporation and paid for the same through the credit facility granted by the
respondent to the CLL. The CLL, thereafter, made remittances to Mar Tierra Corporation from its deposit
account and MMP Nos. 063 and 084 with the respondent. The close business relationship of the two
corporations does not warrant a finding that Mar Tierra Corporation was but a conduit of the CLL.
Likewise, the respondent failed to adduce preponderant evidence to prove that the Mar Tierra
Corporation and the RJL were so organized and controlled, its affairs so conducted as to make the latter
corporation merely an instrumentality, agency, conduit or adjunct of the former or of Wilfrido Martinez,
Gonzales, and Lacson for that matter, or that such corporations were organized to defraud their
creditors, including the respondent. The mere fact, therefore, that the businesses of two or more
corporations are interrelated is not a justification for disregarding their separate personalities, absent
sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third
persons of their rights.54
Also, the mere fact that part of the proceeds of the sale of molasses made by Mar Tierra Corporation to
the CLL may have been used by the latter as deposits in its deposit account with the respondent or in
the money market placements in MMP Nos. 063 and 084, or that the funds of Mar Tierra Corporation and
the CLL with the respondent were mingled, and their disposition controlled by Wilfrido Martinez, does not
constitute preponderant evidence that the petitioner, Wilfrido Martinez and Lacson used the Mar Tierra
Corporation and the RJL to defraud the respondent. The respondent treated the CLL and Mar Tierra
Corporation as separate entities and considered them as one and the same entity only when Wilfrido C.
Martinez and/or Blamar Gonzales failed to pay the US$340,000 remitted by the respondent to FCD SA
18402-7. This being the case, there is no factual and legal basis to hold the petitioner liable to the
respondent for the said amount.
Contrary to the ruling of the trial court and the appellate court, the auditors of the CLL and the Mar
Tierra Corporation, in their report, did not find the petitioner liable for the respondents claim in their
report. The auditors, in fact, found the CLL alone liable for the said amount. 55 Even a cursory reading of
the report will show that the name of the petitioner was not mentioned therein.
The respondent failed to adduce evidence that the petitioner had any involvement in the transactions
between the CLL, through Wilfrido Martinez and Gonzales, and the respondent, with reference to the
remittance of the US$340,000 to FCD SA 18402-7. In fact, the said transaction was so confidential that
Gonzales even suggested to the respondent that the name of Wilfrido Martinez or Mar Tierra Corporation
be not made of record, and to authorize only Wilfrido Martinez to sign the telex instruction:
OCT. 10, 1980
TO: AYALA FINANCE
ATTN: MICHAEL SUNG/BING MATOTO
FR: B. GONZALES
RE: TRANSFER OF FUNDS
THIS IS TO CONFRM OUR TELEPHONE CONVERSATION THAT WE WLD LIKE TO SUGGEST THE FF
PROCEDURES FOR FUND TRANSFER.

1. TLX INSTRUCTION THAT FUNDS BE TRANSFERRED TO OUR FCD ACCT BY TELEGRAPHIC

TRANSFER.
2. WE WILL ONLY USE ONE ACCT W/C IS FCD SA 18402-7 OF PHILBANKING CORPORATION,
PORT AREA BRANCH, UNION CEMENT BLDG, BONIFACIO DRIVE, PORT AREA, METRO
MANILA, PHILS.
3. PAYEE SHLD BE FCD SA 18402-7 AND NO MENTION OF W.C. MARTINEZ OR MAR TIERRA
CORP. TLX INSTRUCTION SHLD BE SIGNED BY W.C. MARTINEZ AND WILL BE SENT ONLY
THRU TLX MACHINE OF MAR TIERRA CORP.
4. FINAL CONFIRMATION OF THE TRANSFER BY TELEPHONE CALL.
PLS CONFRM TODAY TOTAL AMT. THAT IS FREE AND AVAILABLE SO WE CAN FORMALIZE
INSTRUCTION OF TRANSFER IF THE ABOVE PROCEDURE IS APPROVED BY YOU. PLS CONFRM ALSO
LIST OF CORRESPONDENT BANK IN HK.
IN CASE OF WELLS FARGO HK, WE WLD LIKE TO SUGGEST THE FF PROCEDURE:
1. WELLS FARGO HK WIL SEND A TLX TO MANILA INSTRUCTING PHIL BANKING CORP TO
CREDIT FCD SA 18402-7.
2. REIMBURSEMENT INSTRUCTION, AT THE SAME TIME WELLS FARGO HK WIL REQUEST
WELLS FARGO NEW YORK TO CREDIT FCDU NO. 003-019205 FOR THE ACCT OF PHIL
BANKING CORP.56
Even the respondent admitted, in its complaint, that the CLL, Gonzales, and Wilfrido Martinez, bound
and obliged themselves to repay the US$340,000, viz:
2.2 The remittance by plaintiff of the sum of US$340,000.00 as previously explained in the
foregoing paragraphs was made upon the express instructions of defendants GONZALES and
WILFRIDO C. MARTINEZ acting for and in behalf of the defendant CINTAS, defendants GONZALES
and WILFRIDO C. MARTINEZ being the duly authorized representatives of defendant CINTAS to
transact any and all of its business with plaintiff.
2.3 The remittance of US$340,000.00 was made under an agreement for plaintiff to advance the
said amount and for defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS to repay plaintiff
all such monies so advanced to said defendants or to their order.
2.4 In making said remittance, plaintiff acted as the agent of the foregoing defendants in meeting
the latters liability to the recipient/s of the amount so remitted.
2.5 The remittance of US$340,000.00 which remains unsettled to date is a just, binding and
lawful obligation of the defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS.
2.6 Defendant CINTAS is a reinvoicing or paper company with nominee shareholders in
Hongkong. The real and beneficial shareholders of the foregoing defendants are the defendants
LACSON, and WILFRIDO C. MARTINEZ.
2.7 Defendant CINTAS is being used by the foregoing defendants as an alter ego or business
conduit for their sole benefit and/or to defeat public convenience.
2.8 Defendant CINTAS, being a mere alter ego or business conduit for the foregoing defendants,
has no corporate personality distinct and separate from that of its beneficial shareholders and
likewise has no substantial assets in its own name.
2.9 The remittance of US$340,000.00 as referred to previously, although made upon the
instructions of defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS, was in fact a
remittance made for the benefit of the beneficial shareholders of defendant CINTAS.57
The admissions made by the respondent in its complaint are judicial admissions which cannot be
contradicted unless there is a showing that it was made through palpable mistake or that no such
admission was made.58
The respondent impleaded the petitioner only in its second alternative cause of action, on its allegation
that the latter was a joint account holder of MMP Nos. 063 and 084, simply because he signed the
signature cards with Wilfrido Martinez and/or Lacson in blank. The trial court found the submission of the

respondent duly established, based on Wilfrido Martinezs answer to the complaint, and held the
petitioner liable for the said amount based on the signature cards in this language:
Defendants Ruben Martinez, Wilfrido C. Martinez and Miguel Lacson are joint account holders of
the money market placement account Nos. 063 and 084 (par. 17 page 4 Answer of defendant
Wilfrido C. Martinez; par. 2, page 5, Amended Answer of defendant Lacson; t.s.n., 4-18-88, p. 7). 59
The appellate court affirmed the ruling of the trial court without making any specific reference to the
aforequoted ruling of the trial court.60
We do not agree. The judicial admissions made by Wilfrido Martinez in his answer to the complaint are
not binding on the petitioner.61 The evidence on record shows that the petitioner affixed his signatures
on the signature cards merely upon the request of his son, Wilfrido Martinez. The signature cards were
printed forms of the respondent with the names of the signatories and the supposed account holders
typewritten thereon and, except for the account number, were similarly worded, viz:
SIGNATURE CARD
Account
Name:

Mr.
Ruben
Martinez Account Number: MMP-063
and/or
Mr. Wilfrido C. Martinez
and/or Mr.
Miguel
J.
Lacson

I.D. Card/Passport No.: _____________________________________________

Residence Address: ________________________________________________
_________________________________________ Tel.: ___________________
Office Address: ____________________________________________________
_________________________________________ Tel.: ___________________
Number
of
signature
_________________________

required

Confirmation/Correspondence
mailed to:

to

to

withdraw

funds:

be ___ Office
___ Residence
___ Others: ________________
__________________________

Other Instructions: _______________________________________________

_________________________________________________________________
_________________________________________________________________
Specimen of signature:
1. Sgd.

(Ruben Martinez)

3. Sgd.

(Wilfrido Martinez)

SIGNATURE

NAME

SIGNATURE

NAME

2. Sgd.

(Ruben Martinez)

4. Sgd.

(Miguel J. Lacson)

SIGNATURE

NAME

SIGNATURE

NAME62

The respondent failed to adduce any evidence, testimonial or documentary, including the relevant
laws63 of Hongkong where the placements were made to hold the petitioner liable for the respondents
claims. Other than the signature cards, the respondent failed to adduce a shred of evidence to prove (a)
the terms and conditions of the money market placements of the CLL in MMP Nos. 063 and 084; and, (b)
the rights and obligations of the petitioner, Wilfrido Martinez and Lacson, over the money market
placements. In light of the evidence on record, the CLL and/or Wilfrido Martinez never surrendered their
ownership over the funds in favor of the petitioner when the latter co-signed the signature cards. The
CLL and/or Wilfrido Martinez retained complete control and dominion over the funds.
By merely affixing his signatures on the signature cards, the petitioner did not necessarily become a
joint and solidary creditor of the respondent over the said placements. Neither did the petitioner bind
himself to pay to the respondent the US$340,000 which was borrowed by the CLL and/or Wilfrido
Martinez, and later remitted to FCD SA 18402-7.
The respondent has no one but itself to blame for its failure to deduct the US$340,000 from the foreign
currency and deposit accounts and money market placements of the CLL. The evidence on record shows
that the respondent was supposed to deduct the said amount from the money market placements of the
CLL in MMP Nos. 063 and 084, but failed to do so. The respondent remitted the amount from its own
funds and, by its negligence, merely posted the amount in the account of the CLL. Worse, the
respondent allowed the CLL and Wilfrido Martinez to withdraw the entirety of the deposits in the said
accounts, without first deducting the US$340,000. By the time the respondent realized its mistakes, the
funds in the said accounts had already been withdrawn solely by the CLL and/or Wilfrido Martinez. This
was the testimony of Michael Sung, the witness for the respondent.
Q: Do you know whether this US$340,000 was really transferred to Foreign Currency Deposit
Account No. 18402-7 of the Philippine Banking Corporation in Manila?
A: Yes.
Q: Pursuant to the procedure for fund transfer as contained in Exhs. B, C, D and E, after having
made such remittance of US$340,000.00, what was plaintiff supposed to do, if any, in order to
get reimbursement for such transfer?
A: Plaintiff was supposed to deduct the US$340,000.00 remitted to the foreign currency deposit
account from the Cintas Largas funds or from Money Market Placement Account Nos. 063 and
084 as well as the Cintas Largas, Ltd. deposit account.
Q: Do you know if plaintiff was able to obtain reimbursement of the US$340,000 remitted to the
Philippine Banking Corporation in Manila?
A: No, because instead of deducting the remittance of US$340,000 from the funds in the money
market placement accounts and/or the Cintas Largas Deposit Account, we posted the
US$340,000 remittance as an account receivable of Cintas Largas, Ltd. since at that time the
money market placement deposits have not yet matured. Subsequently, we failed to charge the
deposit and MMP accounts when they matured and Cintas Largas, Ltd. and/or Wilfrido C. Martinez
had already withdrawn the bulk of the funds contained in Money Market Placement Account No.
063 and the Cintas Largas, Ltd. Deposit Account thus, we were unable to obtain reimbursement
therefrom.64
It cannot even be argued that if the petitioner would not be adjudged liable for the respondents claim,
he would thereby be enriching himself at the expense of the respondent. There is no evidence on record
that the petitioner withdrew a single centavo from or was personally benefited by the funds in MMP Nos.
063 and 084. The testimonial and documentary evidence of the respondent clearly shows that the CLL
and/or Wilfrido Martinez used and disposed of the said funds without the knowledge, involvement, and
consent of the petitioner. Furthermore, the documentary evidence of the respondent shows the
following:
MMP

Statement of Accounts (Deposit)

Value
Date

Funds In

Funds Out

Remarks

28/11/8
0

6,664.95

Interests earned

29/12/8

4,779.66

"

"

063

0
21/01/8
1

4,024.83

21/01/8
1
13/02/8
1

"
119,478.51

2,321.99

"

"

Purchase HK$632,041.33 @5.29 & transferred

to its statement A/C
Interests earned

100,015.00

Transfer to Cintas Largas A/C Receivable.

17/02/8
1

55.07

Interests earned

18/03/8
1

1,317.27

"

"

"

100,000.00

Purchase HK$525,000.00 @5.25 cheque made

payable to Grand Solid Enterprises Co., Ltd.

"

5,713.74

Transfer
(MMP-063)

_____________
US$443,975.8
5
========
====

_____________
US$443,975.8
5
========
====

to

A/C

65

MMP

Statement of Accounts (Deposit)

Value
Date

Funds In

Funds Out

Remarks

28/11/8
0

16,374.36

Interests earned

01/12/8
0

488.16

"

"

04/12/8
0

1,089.06

"

"

US$250,000.0
Transfer to A/C of Cintas Largas
0

"
09/12/8
0

1,290.56

"
18/12/8
0

Interests earned
200,000.00

1,545.42

"

Transfer to Cintas Largas A/R.

Interests earned

200,000.00

T/T to Chase Manhattan NY for

Credit A/C Allied Capital F/O
Frank Chan B/O Grand Solid.

02/03/8
1

4,608.27

"
09/03/8
1

321.91

"
20/03/8
1

Interests earned
20,470.74

213.40

Transfer to A/C of Grand Solid

Interests earned

60,000.00

Receivable

Transfer to A/C of Trinisia Ltd.

Interests earned

084

"

45,286.26

T/T to Nitto Trading & Josho

Ind. Co., Ltd., Japan.

"

2,028.02

Transfer to A/C Receivable

(MMP-084)

"
_____________
US$777,815.0
2
========
====

30.00

Cable Charges

_____________
US$777,815.0
2
========
====

66

CINTAS
Statement of Accounts (Deposit)
Value
Date

Funds In

Funds Out

LARGAS

Remarks

31/10/8
0

5,011.99

Interests earned

17/11/8
0

8,067.70

"

"
09/11/8
0

350,000.00
3,062.23

"
26/11/8
0

21/01/8
1

3,264.34

02/03/8
1

Purchase HK$1,789,200.00 @5.112, Cheque

made payable to Grand Solid.
Interests earned

300,000.00
1,299.80

"

Transfer to A/C of Grand Solid

Interests earned

350,000.00

"

"

Purchase HK$1,535,100.00 @5.117, Cheque

made payable to Grand Solid
Interests earned

81,415.00
2,445.49

Remittance from C. Itoh & Co., NY

Interests earned

"

129,529.26

Transfer to Grand Solids A/C Receivable

02/04/8
1

143,000.00

Transfer from CLs Statement A/C

10/04/8
1

456.81

Interests earned

"

50,000.00

Purchase HK$267,150.00 @5.343,

made payable to Grand Solid.

13/04/8
1

US$ 40.89

Interests earned

21/04/8
1

311.66

"
28/04/8
1
"

"
US$
50,000.00

132.04

Cheque

"

Purchase HK$268,850.00 @5.377,

made payable to Grand Solid.

cheque

Interests earned
40,000.00

Purchase HK$214,480.00 @5.362,

made payable to Grand Solid.

cheque

"

52,692.00

Remittance from Dai Ichi Kangyo Bank NY.

REF. KOMEIMARU

19/05/8
1

178,465.18

Transfer from CLs A/C Receivable

22/05/8
1

46,472.00

Remittance from C. Itoh & Co., NY Re. Pacific

Geory.

26/05/8
1

28.40

Interests earned

04/06/8
1

1,242.80

"

"
11/06/8
1

50,000.00
2,252.36

"

"

Purchase HK$275,750.00 @5.515,

made payable to Grand Solid

Cheque

Interests earned
66,400.00

T/T to Security Pacific Natl Bank LA for A/C of

Twentieth Century Fox Intl Corp.

"

15.00

Cable Charge

"

31.65

Purchase HK$175.00 @5.53 for payment of

Business Registration Fee.

25/06/8
1

1,192.24

Interests earned

"

60,000.00

Purchase HK$331,500.00 @5.525,

made payable to Grand Solid.

"

22,656.88

T/T to Daiwa Bank, Los Angeles for A/C of OAC

Equipment Corp.

"

45,800.00

T/T to Josho Ind. Co. Ltd., Japan

"

15.00

Cable Charge

03/07/8
1

165.47

cheque

Interests earned

"

11,870.00

T/T to Bank of Tokyo, Kobe Branch for A/C of

Furuno Electric Co. Ref.: Mar Tierra Takashiro
Maru, Eatelite Nav. and Radar.

"

15.00

Cable Charge

06/07/8
1

17.60

Interests earned

07/07/8
1

14.83

"

"

"

16,000.00

T/T to Dai Ichi Kangyo Bank, Shimizu Branch

for A/C of Takashiro Maru.

"

15.00

Cable Charge

15/09/8
1

US$ 482.29

"
17/09/8
1

Interests earned
US$ 1,250.00

11.91

"

Reimbursement of expenses paid to Price

Waterhouse & Co.
Interests earned

237.43

Purchase HK$1,421.50 for cheque payment to

Price Waterhouse & Co.

08/01/8
2

70,360.00

Remittance from C. Itoh & Co., NY

19/01/8
2

268.74

Interests earned

"

3,064.81

Transfer to CLs Margin A/C

"

50,000.00

Purchase HK$295,100.00,
payable to Grand Solid.

"

5,952.38

Transfer to A/C of Trinisia Ltd.

cheque

made

_____________ ______________
US$1,756,387 US$1,732,103
TOTAL : .32
.25
-

24,284.07

Outstanding deposits

______________
US$1,756,387
.32
========
======

______________
US$1,756,387
.32
========
======

67

Clearly from the foregoing, the withdrawals from the deposit and foreign currency accounts and MMP
Nos. 063 and 084 of the CLL, after the respondent remitted the US$340,000, were for the account of the
CLL and/or Wilfrido Martinez, and not of the petitioner.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court of Appeals
isREVERSED AND SET ASIDE. The complaint of the respondent against the petitioner in Civil Case No.
C-10811 isDISMISSED. No costs.
SO ORDERED.
PAMPLONA PLANTATION COMPANY, INC. and/or JOSE LUIS BONDOC, petitioners, vs. RODEL
TINGHIL, MARYGLENN SABIHON, ESTANISLAO BOBON, CARLITO TINGHIL, BONIFACIO
TINGHIL, NOLI TINGHIL, EDGAR TINGHIL, ERNESTO ESTOMANTE, SALLY TOROY,
BENIGNO TINGHIL JR., ROSE ANN NAPAO, DIOSDADO TINGHIL, ALBERTO TINGHIL,
ANALIE TINGHIL, and ANTONIO ESTOMANTE, respondents.
DECISION
PANGANIBAN, J.:
To protect the rights of labor, two corporations with identical directors, management, office and
payroll should be treated as one entity only. A suit by the employees against one corporation should be
deemed as a suit against the other. Also, the rights and claims of workers should not be prejudiced by
the acts of the employer that tend to confuse them about its corporate identity. The corporate fiction
must yield to truth and justice.
The Case
Before us is a Petition for Review [1] under Rule 45 of the Rules of Court, seeking to annul the January
31, 2003 Decision[2] and the June 17, 2003 Resolution [3] of the Court of Appeals (CA) in CA-GR SP No.
62813. The assailed Decision disposed as follows:
WHEREFORE, in view of the foregoing, the petition is GRANTED. The assailed decision of public
respondent NLRC dated 19 July 2000 [is] REVERSED and SET ASIDE and a new one
enteredDIRECTING private respondents to reinstate petitioners, except Rufino Bacubac, Felix Torres and
Antonio Canolas, to their former positions without loss of seniority rights plus payment of full
backwages. However, if reinstatement is no longer feasible, a one-month salary for every year of service
shall be paid the petitioners as ordered by the Labor Arbiter in his decision dated 31 August 1998 plus
payment of full backwages computed from date of illegal dismissal to the finality of this decision. [4]
The Decision[5] of the National Labor Relations Commission (NLRC),[6] reversed by the CA, disposed
as follows:
WHEREFORE, premises considered, the decision appealed from is hereby REVERSED, and another one
entered DISMISSING the complaint.[7]
The June 17, 2003 Resolution denied petitioners Motion for Reconsideration.

The Facts
The CA summarized the antecedents as follows:
Sometime in 1993, [Petitioner] Pamplona Plantations Company, Inc. (company for brevity) was organized
for the purpose of taking over the operations of the coconut and sugar plantation of Hacienda Pamplona
located in Pamplona, Negros Oriental. It appears that Hacienda Pamplona was formerly owned by a
certain Mr. Bower who had in his employ several agricultural workers.
When the company took over the operation of Hacienda Pamplona in 1993, it did not absorb all the
workers of Hacienda Pamplona. Some, however, were hired by the company during harvest season as
coconut hookers or sakador, coconut filers, coconut haulers, coconut scoopers or lugiteros, and charcoal
makers.
Sometime in 1995, Pamplona Plantation Leisure Corporation was established for the purpose of
engaging in the business of operating tourist resorts, hotels, and inns, with complementary facilities,
such as restaurants, bars, boutiques, service shops, entertainment, golf courses, tennis courts, and
other land and aquatic sports and leisure facilities.
On 15 December 1996, the Pamplona Plantation Labor Independent Union (PAPLIU) conducted an
organizational meeting wherein several [respondents] who are either union members or officers
participated in said meeting.
Upon learning that some of the [respondents] attended the said meeting, [Petitioner] Jose Luis Bondoc,
manager of the company, did not allow [respondents] to work anymore in the plantation.
Thereafter, on various dates, [respondents] filed their respective complaints with the NLRC, SubRegional Arbitration Branch No. VII, Dumaguete City against [petitioners] for unfair labor practice, illegal
dismissal, underpayment, overtime pay, premium pay for rest day and holidays, service incentive leave
pay, damages, attorneys fees and 13th month pay.
On 09 October 1997, [respondent] Carlito Tinghil amended his complaint to implead Pamplona
Plantation Leisure Corporation x x x.
On 31 August 1998, Labor Arbiter Jose G. Gutierrez rendered a decision finding [respondents], except
Rufino Bacubac, Antonio Caolas and Felix Torres who were complainants in another case, to be entitled
to separation pay.
xxxxxxxxx
[Petitioners] appealed the Labor Arbiters decision to [the] NLRC. In the assailed decision dated 19 July
2000, the NLRCs Fourth Division reversed the Labor Arbiter, ruling that [respondents], except Carlito
Tinghil, failed to implead Pamplona Plantation Leisure Corporation, an indispensable party and that there
exist no employer-employee relation between the parties.
xxxxxxxxx
[Respondents] filed a motion for reconsideration which was denied by [the] NLRC in a Resolution dated
06 December 2000.[8]
Respondents elevated the case to the CA via a Petition for Certiorari under Rule 65 of the Rules of
Court.
Ruling of the Court of Appeals
Guided by the fourfold test for determining the existence of an employer-employee relationship, the
CA held that respondents were employees of petitioner-company. Finding there was a power to hire, the
appellate court considered the admission of petitioners in their Comment that they had hired
respondents as coconut filers, coconut scoopers, charcoal makers, or as pieceworkers. The fact that
respondents were paid by piecework did not mean that they were not employees of the company.
Further, the CA ruled that petitioners necessarily exercised control over the work they performed, since
the latter were working within the premises of the plantation. According to the CA, the mere existence -not necessarily the actual exercise -- of the right to control the manner of doing work sufficed to meet
the fourth element of an employer-employee relation.

The appellate court also held that respondents were regular employees, because the tasks they
performed were necessary and indispensable to the operation of the company. Since there was no
compliance with the twin requirements of a valid and/or authorized cause and of procedural due
process, their dismissal was illegal.
Hence, this Petition.[9]
Issues
In their Memorandum, petitioners submit the following issues for our consideration:
1. Whether or not the finding of the Court of Appeals that herein respondents are employees of
Petitioner Pamplona Plantation Company, Inc. is contrary to the admissions of the respondents
themselves.
2. Whether or not the Court of Appeals has decided in a way not in accord with law and
jurisprudence, and with grave abuse of discretion, in not dismissing the respondents complaint
for failure to implead Pamplona Plantation Leisure Corp., which is an indispensable party to this
case.
3. Whether or not the Court of Appeals has decided in a way not in accord with law and jurisprudence,
and with grave abuse of discretion in ordering reinstatement or payment of separation pay and
backwages to the respondents, considering the lack of employer-employee relationship between
petitioner and respondents.[10]
The main issue raised is whether the case should be dismissed for the non-joinder of the Pamplona
Plantation Leisure Corporation. The other issues will be taken up in the discussion of the main question.
The Courts Ruling
The Petition lacks merit.
Preliminary Issue:
Factual Matters
Section 1 of Rule 45 of the Rules of Court states that only questions of law are entertained in
appeals by certiorari to the Supreme Court. However, jurisprudence has recognized several exceptions
in which factual issues may be resolved by this Court: [11] (1) the legal conclusions made by the lower
tribunal are speculative;[12] (2) its inferences are manifestly mistaken, [13] absurd, or impossible; (3)
the lower court committed grave abuse of discretion; (4) the judgment is based on a misapprehension of facts;
[14]
(5) the findings of fact of the lower tribunals are conflicting; [15] (6) the CA went beyond the issues; (7) the
CAs findings are contrary to the admissions of the parties; [16] (8) the CA manifestly overlooked facts not
disputed which, if considered, would justify a different conclusion; (9) the findings of fact are conclusions
without citation of the specific evidence on which they are based; and (10) when the findings of fact of the CA
are premised on the absence of evidence but such findings are contradicted by the evidence on record.[17]
The very same reason that constrained the appellate court to review the factual findings of the
NLRC impels this Court to take its own look at the facts. Normally, the Supreme Court is not a trier of
facts.[18] However, since the findings of the CA and the NLRC on this point were conflicting, we waded
through the records to find out if there was basis for the formers reversal of the NLRCs Decision. We
shall discuss our factual findings together with our review of the main issue.
Main Issue:
Piercing the Corporate Veil
Petitioners contend that the CA should have dismissed the case for the failure of respondents
(except Carlito Tinghil) to implead the Pamplona Plantation Leisure Corporation, an indispensable party,
for being the true and real employer. Allegedly, respondents admitted in their Affidavits dated February
3, 1998,[19] that they had been employed by the leisure corporation and/or engaged to perform activities
that pertained to its business.

Further, as the NLRC allegedly noted in their individual Complaints, respondents specifically averred
that they had worked in the golf course and performed related jobs in the recreational facilities of the
leisure corporation. Hence, petitioners claim that, as a sugar and coconut plantation company separate
and distinct from the Pamplona Plantation Leisure Corporation, the petitioner-company is not the real
party in interest.
We are not persuaded.
An examination of the facts reveals that, for both the coconut plantation and the golf course, there
is only one management which the laborers deal with regarding their work. [20] A portion of the plantation
(also called Hacienda Pamplona) had actually been converted into a golf course and other recreational
facilities. The weekly payrolls issued by petitioner-company bore the name Pamplona Plantation Co., Inc.
[21]
It is also a fact that respondents all received their pay from the same person, Petitioner Bondoc -- the
managing director of the company. Since the workers were working for a firm known as Pamplona
Plantation Co., Inc., the reason they sued their employer through that name was natural and
understandable.
True, the Petitioner Pamplona Plantation Co., Inc., and the Pamplona Plantation Leisure Corporation
appear to be separate corporate entities. But it is settled that this fiction of law cannot be invoked to
further an end subversive of justice.[22]
The principle requiring the piercing of the corporate veil mandates courts to see through the
protective shroud that distinguishes one corporation from a seemingly separate one. [23]The corporate
mask may be removed and the corporate veil pierced when a corporation is the mere alter ego of
another.[24] Where badges of fraud exist, where public convenience is defeated, where a wrong is sought
to be justified thereby, or where a separate corporate identity is used to evade financial obligations to
employees or to third parties,[25] the notion of separate legal entity should be set aside [26] and the factual
truth upheld. When that happens, the corporate character is not necessarily abrogated. [27] It continues
for other legitimate objectives. However, it may be pierced in any of the instances cited in order to
promote substantial justice.
In the present case, the corporations have basically the same incorporators and directors and are
headed by the same official. Both use only one office and one payroll and are under one management.
In their individual Affidavits, respondents allege that they worked under the supervision and control of
Petitioner Bondoc -- the common managing director of both the petitioner-company and the leisure
corporation. Some of the laborers of the plantation also work in the golf course. [28] Thus, the attempt to
make the two corporations appear as two separate entities, insofar as the workers are concerned,
should be viewed as a devious but obvious means to defeat the ends of the law. Such a ploy should not
be permitted to cloud the truth and perpetrate an injustice.
We note that this defense of separate corporate identity was not raised during the proceedings
before the labor arbiter. The main argument therein raised by petitioners was their alleged lack of
employer-employee relationship with, and power of control over, the means and methods of work of
respondents because of the seasonal nature of the latters work.[29]
Neither was the issue of non-joinder of indispensable parties raised in petitioners appeal before the
NLRC.[30] Nevertheless, in its Decision[31] dated July 19, 2000, the Commission concluded that the
plantation company and the leisure corporation were two separate and distinct corporations, and that
the latter was an indispensable party that should have been impleaded. We quote below pertinent
portions of that Decision:
Respondent posits that it is engaged in operating and maintaining sugar and coconut plantation. The
positions of complainants could only be determined through their individual complaints. Yet all
complainants alleged in their affidavits x x x that they were working at the golf course. Worthy to note
that only Carlito Tinghil amended his complaint to include Pamplona Leisure Corporation, which
respondents maintain is a separate corporation established in 1995. Thus, xxx Pamplona Plantation Co.,
Inc. and Pamplona Leisure Corporation are two separate and distinct corporations. Except for Carlito
Tinghil the complainants have the wrong party respondent. Pamplona Leisure Corporation is an
indispensable party without which there could be no final determination of the case. [32]
Indeed, it was only after this NLRC Decision was issued that the petitioners harped on the separate
personality of the Pamplona Plantation Co., Inc., vis--vis the Pamplona Plantation Leisure Corporation.
As cited above, the NLRC dismissed the Complaints because of the alleged admission of
respondents in their Affidavits that they had been working at the golf course. However, it failed to

appreciate the rest of their averments. Just because they worked at the golf course did not necessarily
mean that they were not employed to do other tasks, especially since the golf course was merely a
portion of the coconut plantation. Even petitioners admitted that respondents had been hired as coconut
filers, coconut scoopers or charcoal makers. [33]Consequently, NLRCs conclusion derived from the
Affidavits of respondents stating that they were employees of the Pamplona Plantation Leisure
Corporation alone was the result of an improper selective appreciation of the entire evidence.
Furthermore, we note that, contrary to the NLRCs findings, some respondents indicated that their
employer was the Pamplona Plantation Leisure Corporation, while others said that it was the Pamplona
Plantation Co., Inc. But in all these Affidavits, both the leisure corporation and petitioner-company were
identified or described as entities engaged in the development and operation of sugar and coconut
plantations, as well as recreational facilities such as a golf course. These allegations reveal that
petitioner successfully confused the workers as to who their true and real employer was. All things
considered, their faulty belief that the plantation company and the leisure corporation were one and the
same can be attributed solely to petitioners. It would certainly be unjust to prejudice the claims of the
workers because of the misleading actions of their employer.
Non-Joinder of Parties
Granting for the sake of argument that the Pamplona Plantation Leisure Corporation is an
indispensable party that should be impleaded, NLRCs outright dismissal of the Complaints was still
erroneous.
The non-joinder of indispensable parties is not a ground for the dismissal of an action. [34] At any
stage of a judicial proceeding and/or at such times as are just, parties may be added on the motion of a
party or on the initiative of the tribunal concerned.[35] If the plaintiff refuses to implead an indispensable
party despite the order of the court, that court may dismiss the complaint for the plaintiffs failure to
comply with the order. The remedy is to implead the non-party claimed to be indispensable. [36] In this
case, the NLRC did not require respondents to implead the Pamplona Plantation Leisure Corporation as
respondent; instead, the Commission summarily dismissed the Complaints.
In any event, there is no need to implead the leisure corporation because, insofar as respondents
are concerned, the leisure corporation and petitioner-company are one and the same entity. Salvador v.
Court of Appeals[37] has held that this Court has full powers, apart from that power and authority which is
inherent, to amend the processes, pleadings, proceedings and decisions by substituting as party-plaintiff
the real party-in-interest.
In Alonso v. Villamor,[38] we had the occasion to state thus:
There is nothing sacred about processes or pleadings, their forms or contents. Their sole purpose is to
facilitate the application of justice to the rival claims of contending parties. They were created, not to
hinder and delay, but to facilitate and promote, the administration of justice. They do not constitute the
thing itself, which courts are always striving to secure to litigants. They are designed as the means best
adapted to obtain that thing. In other words, they are a means to an end. When they lose the character
of the one and become the other, the administration of justice is at fault and courts are correspondingly
remiss in the performance of their obvious duty.
The controlling principle in the interpretation of procedural rules is liberality, so that they may
promote their object and assist the parties in obtaining just, speedy and inexpensive determination of
every action and proceeding.[39] When the rules are applied to labor cases, this liberal interpretation
must be upheld with even greater vigor. [40] Without in any way depriving the employer of its legal rights,
the thrust of statutes and rules governing labor cases has been to benefit workers and avoid subjecting
them to great delays and hardships. This intent holds especially in this case, in which the plaintiffs are
poor laborers.
Employer-Employee Relationship
Petitioners insist that respondents are not their employees, because the former exercised no control
over the latters work hours and method of performing tasks. Thus, petitioners contend that under the
control test, the workers were independent contractors.
We disagree. As shown by the evidence on record, petitioners hired respondents, who performed
tasks assigned by their respective officers-in-charge, who in turn were all under the direct supervision
and control of Petitioner Bondoc. These allegations are contained in the workers Affidavits, which were
never disputed by petitioners. Also uncontroverted are the payrolls bearing the name of the plantation

company and signed by Petitioner Bondoc. Some of these payrolls include the time records of the
employees. These documents prove that petitioner-company exercised control and supervision over
them.
To operate against the employer, the power of control need not have been actually exercised. Proof
of the existence of such power is enough. [41] Certainly, petitioners wielded that power to hire or dismiss,
as well as to check on the progress and the quality of work of the laborers.
Jurisprudence provides other equally important considerations [42] that support the conclusion that
respondents were not independent contractors. First, they cannot be said to have carried on an
independent business or occupation. [43] They are not engaged in the business of filing, scooping and
hauling coconuts and/or operating and maintaining a plantation and a golf course. Second, they do not
have substantial capital or investment in the form of tools, equipment, machinery, work premises, and
other implements needed to perform the job, work or service under their own account or responsibility.
[44]
Third, they have been working exclusively for petitioners for several years. Fourth, there is no dispute
that petitioners are in the business of growing coconut trees for commercial purposes. There is no
question, either, that a portion of the plantation was converted into a golf course and other recreational
facilities. Clearly, respondents performed usual, regular and necessary services for petitioners business.
WHEREFORE, the Petition is DENIED, and the assailed Decision AFFIRMED. Costs against the
petitioners.
SO ORDERED.
G.R. No. 155173. November 23, 2004]
LAFARGE CEMENT PHILIPPINES, INC., (formerly Lafarge Philippines, Inc.), LUZON
CONTINENTAL LAND CORPORATION, CONTINENTAL OPERATING CORPORATION and
PHILIP ROSEBERG, petitioners, vs. CONTINENTAL CEMENT CORPORATION, GREGORY T.
LIM and ANTHONY A. MARIANO, respondents.
DECISION
PANGANIBAN, J.:
May defendants in civil cases implead in their counterclaims persons who were not parties to the
original complaints? This is the main question to be answered in this controversy.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to nullify the May
22, 2002[2] and the September 3, 2002 Orders[3] of the Regional Trial Court (RTC) of Quezon City (Branch
80) in Civil Case No. Q-00-41103. The decretal portion of the first assailed Order reads:
WHEREFORE, in the light of the foregoing as earlier stated, the plaintiffs motion to dismiss claims is
granted. Accordingly, the defendants claims against Mr. Lim and Mr. Mariano captioned as their
counterclaims are dismissed.[4]
The second challenged Order denied petitioners Motion for Reconsideration.
The Facts
Briefly, the origins of the present controversy can be traced to the Letter of Intent (LOI) executed by
both parties on August 11, 1998, whereby Petitioner Lafarge Cement Philippines, Inc. (Lafarge) -- on
behalf of its affiliates and other qualified entities, including Petitioner Luzon Continental Land
Corporation (LCLC) -- agreed to purchase the cement business of Respondent Continental Cement
Corporation (CCC). On October 21, 1998, both parties entered into a Sale and Purchase Agreement
(SPA). At the time of the foregoing transactions, petitioners were well aware that CCC had a case
pending with the Supreme Court. The case was docketed as GR No. 119712, entitled Asset Privatization
Trust (APT) v. Court of Appeals and Continental Cement Corporation.
In anticipation of the liability that the High Tribunal might adjudge against CCC, the parties, under
Clause 2 (c) of the SPA, allegedly agreed to retain from the purchase price a portion of the contract price
in the amount of P117,020,846.84 -- the equivalent of US$2,799,140. This amount was to be deposited

in an interest-bearing account in the First National City Bank of New York (Citibank) for payment to APT,
the petitioner in GR No. 119712.
However, petitioners allegedly refused to apply the sum to the payment to APT, despite the
subsequent finality of the Decision in GR No. 119712 in favor of the latter and the repeated instructions
of Respondent CCC. Fearful that nonpayment to APT would result in the foreclosure, not just of its
properties covered by the SPA with Lafarge but of several other properties as well, CCC filed before the
Regional Trial Court of Quezon City on June 20, 2000, a Complaint with Application for Preliminary
Attachment against petitioners. Docketed as Civil Case No. Q-00-41103, the Complaint prayed, among
others, that petitioners be directed to pay the APT Retained Amount referred to in Clause 2 (c) of the
SPA.
Petitioners moved to dismiss the Complaint on the ground that it violated the prohibition on forumshopping. Respondent CCC had allegedly made the same claim it was raising in Civil Case No. Q-0041103 in another action, which involved the same parties and which was filed earlier before the
International Chamber of Commerce. After the trial court denied the Motion to Dismiss in its November
14, 2000 Order, petitioners elevated the matter before the Court of Appeals in CA-GR SP No. 68688.
In the meantime, to avoid being in default and without prejudice to the outcome of their appeal,
petitioners filed their Answer and Compulsory Counterclaims ad Cautelam before the trial court in Civil
Case No. Q-00-41103. In their Answer, they denied the allegations in the Complaint. They prayed -- by
way of compulsory counterclaims against Respondent CCC, its majority stockholder and president
Gregory T. Lim, and its corporate secretary Anthony A. Mariano -- for the sums of (a) P2,700,000 each as
actual damages, (b) P100,000,000 each as exemplary damages, (c) P100,000,000 each as moral
damages, and (d) P5,000,000 each as attorneys fees plus costs of suit.
Petitioners alleged that CCC, through Lim and Mariano, had filed the baseless Complaint in Civil
Case No. Q-00-41103 and procured the Writ of Attachment in bad faith. Relying on this Courts
pronouncement in Sapugay v. CA,[5] petitioners prayed that both Lim and Mariano be held jointly and
solidarily liable with Respondent CCC.
On behalf of Lim and Mariano who had yet to file any responsive pleading, CCC moved to dismiss
petitioners compulsory counterclaims on grounds that essentially constituted the very issues for
resolution in the instant Petition.
Ruling of the Trial Court
On May 22, 2002, the Regional Trial Court of Quezon City (Branch 80) dismissed petitioners
counterclaims for several reasons, among which were the following: a) the counterclaims against
Respondents Lim and Mariano were not compulsory; b) the ruling in Sapugay was not applicable; and c)
petitioners Answer with Counterclaims violated procedural rules on the proper joinder of causes of
action.[6]
Acting on the Motion for Reconsideration filed by petitioners, the trial court -- in an Amended Order
dated September 3, 2002[7] -- admitted some errors in its May 22, 2002 Order, particularly in its
pronouncement that their counterclaim had been pleaded against Lim and Mariano only. However, the
RTC clarified that it was dismissing the counterclaim insofar as it impleaded Respondents Lim and
Mariano, even if it included CCC.
Hence this Petition.[8]
Issues
In their Memorandum, petitioners raise the following issues for our consideration:
[a] Whether or not the RTC gravely erred in refusing to rule that Respondent CCC has no
personality to move to dismiss petitioners compulsory counterclaims on Respondents
Lim and Marianos behalf.
[b] Whether or not the RTC gravely erred in ruling that (i) petitioners counterclaims against
Respondents Lim and Mariano are not compulsory; (ii) Sapugay v. Court of Appeals is
inapplicable here; and (iii) petitioners violated the rule on joinder of causes of action. [9]
For clarity and coherence, the Court will resolve the foregoing in reverse order.

The Courts Ruling

The Petition is meritorious.
First Issue:
Counterclaims and
Joinder of Causes of Action.
Petitioners Counterclaims
Compulsory
Counterclaims are defined in Section 6 of Rule 6 of the Rules of Civil Procedure as any claim which a
defending party may have against an opposing party. They are generally allowed in order to avoid a
multiplicity of suits and to facilitate the disposition of the whole controversy in a single action, such that
the defendants demand may be adjudged by a counterclaim rather than by an independent suit. The
only limitations to this principle are (1) that the court should have jurisdiction over the subject matter of
the counterclaim, and (2) that it could acquire jurisdiction over third parties whose presence is essential
for its adjudication.[10]
A counterclaim may either be permissive or compulsory. It is permissive if it does not arise out of or
is not necessarily connected with the subject matter of the opposing partys claim. [11] A permissive
counterclaim is essentially an independent claim that may be filed separately in another case.
A counterclaim is compulsory when its object arises out of or is necessarily connected with the
transaction or occurrence constituting the subject matter of the opposing partys claim and does not
require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction. [12]
Unlike permissive counterclaims, compulsory counterclaims should be set up in the same action;
otherwise, they would be barred forever. NAMARCO v. Federation of United Namarco Distributors [13] laid
down the following criteria to determine whether a counterclaim is compulsory or permissive: 1) Are
issues of fact and law raised by the claim and by the counterclaim largely the same? 2) Would res
judicata bar a subsequent suit on defendants claim, absent the compulsory counterclaim rule? 3) Will
substantially the same evidence support or refute plaintiffs claim as well as defendants counterclaim? 4)
Is there any logical relation between the claim and the counterclaim? A positive answer to all four
questions would indicate that the counterclaim is compulsory.
Adopted in Quintanilla v. CA[14] and reiterated in Alday v. FGU Insurance Corporation,[15] the
compelling test of compulsoriness characterizes a counterclaim as compulsory if there should exist a
logical relationship between the main claim and the counterclaim. There exists such a relationship when
conducting separate trials of the respective claims of the parties would entail substantial duplication of
time and effort by the parties and the court; when the multiple claims involve the same factual and legal
issues; or when the claims are offshoots of the same basic controversy between the parties.
We shall now examine the nature of petitioners counterclaims against respondents with the use of
the foregoing parameters.
Petitioners base their counterclaim on the following allegations:
Gregory T. Lim and Anthony A. Mariano were the persons responsible for making the bad faith decisions
for, and causing plaintiff to file this baseless suit and to procure an unwarranted writ of attachment,
notwithstanding their knowledge that plaintiff has no right to bring it or to secure the writ. In taking such
bad faith actions, Gregory T. Lim was motivated by his personal interests as one of the owners of
plaintiff while Anthony A. Mariano was motivated by his sense of personal loyalty to Gregory T. Lim, for
which reason he disregarded the fact that plaintiff is without any valid cause.
Consequently, both Gregory T. Lim and Anthony A. Mariano are the plaintiffs co-joint tortfeasors in the
commission of the acts complained of in this answer and in the compulsory counterclaims pleaded
below. As such they should be held jointly and solidarily liable as plaintiffs co-defendants to those
compulsory counterclaims pursuant to the Supreme Courts decision in Sapugay v. Mobil.
xxxxxxxxx

The plaintiffs, Gregory T. Lim and Anthony A. Marianos bad faith filing of this baseless case has
compelled the defendants to engage the services of counsel for a fee and to incur costs of litigation, in
amounts to be proved at trial, but in no case less than P5 million for each of them and for which plaintiff
Gregory T. Lim and Anthony A. Mariano should be held jointly and solidarily liable.
The plaintiffs, Gregory T. Lims and Anthony A. Marianos actions have damaged the reputations of the
defendants and they should be held jointly and solidarily liable to them for moral damages of P100
million each.
In order to serve as an example for the public good and to deter similar baseless, bad faith litigation, the
plaintiff, Gregory T. Lim and Anthony A. Mariano should be held jointly and solidarily liable to the
defendants for exemplary damages of P100 million each. [16]
The above allegations show that petitioners counterclaims for damages were the result of
respondents (Lim and Mariano) act of filing the Complaint and securing the Writ of Attachment in bad
faith. Tiu Po v. Bautista[17] involved the issue of whether the counterclaim that sought moral, actual and
exemplary damages and attorneys fees against respondents on account of their malicious and
unfounded complaint was compulsory. In that case, we held as follows:
Petitioners counterclaim for damages fulfills the necessary requisites of a compulsory counterclaim.
They are damages claimed to have been suffered by petitioners as a consequence of the action filed
against them. They have to be pleaded in the same action; otherwise, petitioners would be precluded by
the judgment from invoking the same in an independent action. The pronouncement in Papa vs. Banaag
(17 SCRA 1081) (1966) is in point:
Compensatory, moral and exemplary damages, allegedly suffered by the creditor in consequence of the
debtors action, are also compulsory counterclaim barred by the dismissal of the debtors action. They
cannot be claimed in a subsequent action by the creditor against the debtor.
Aside from the fact that petitioners counterclaim for damages cannot be the subject of an independent
action, it is the same evidence that sustains petitioners counterclaim that will refute private respondents
own claim for damages. This is an additional factor that characterizes petitioners counterclaim as
compulsory.[18]
Moreover, using the compelling test of compulsoriness, we find that, clearly, the recovery of
petitioners counterclaims is contingent upon the case filed by respondents; thus, conducting separate
trials thereon will result in a substantial duplication of the time and effort of the court and the parties.
Since the counterclaim for damages is compulsory, it must be set up in the same action; otherwise,
it would be barred forever. If it is filed concurrently with the main action but in a different proceeding, it
would be abated on the ground of litis pendentia; if filed subsequently, it would meet the same fate on
the ground of res judicata.[19]
Sapugay v. Court of Appeals
Applicable to the Case at Bar
Sapugay v. Court of Appeals finds application in the present case. In Sapugay, Respondent Mobil
Philippines filed before the trial court of Pasig an action for replevin against Spouses Marino and Lina Joel
Sapugay. The Complaint arose from the supposed failure of the couple to keep their end of their
Dealership Agreement. In their Answer with Counterclaim, petitioners alleged that after incurring
expenses in anticipation of the Dealership Agreement, they requested the plaintiff to allow them to get
gas, but that it had refused. It claimed that they still had to post a surety bond which, initially fixed
at P200,000, was later raised to P700,000.
The spouses exerted all efforts to secure a bond, but the bonding companies required a copy of the
Dealership Agreement, which respondent continued to withhold from them. Later, petitioners discovered
that respondent and its manager, Ricardo P. Cardenas, had intended all along to award the dealership to
Island Air Product Corporation.
In their Answer, petitioners impleaded in the counterclaim Mobil Philippines and its manager -Ricardo P. Cardenas -- as defendants. They prayed that judgment be rendered, holding both jointly and
severally liable for pre-operation expenses, rental, storage, guarding fees, and unrealized profit
including damages. After both Mobil and Cardenas failed to respond to their Answer to the Counterclaim,

petitioners filed a Motion to Declare Plaintiff and its Manager Ricardo P. Cardenas in Default on
Defendants Counterclaim.
Among the issues raised in Sapugay was whether Cardenas, who was not a party to the original
action, might nevertheless be impleaded in the counterclaim. We disposed of this issue as follows:
A counterclaim is defined as any claim for money or other relief which a defending party may have
against an opposing party. However, the general rule that a defendant cannot by a counterclaim bring
into the action any claim against persons other than the plaintiff admits of an exception under Section
14, Rule 6 which provides that when the presence of parties other than those to the original action is
required for the granting of complete relief in the determination of a counterclaim or cross-claim, the
court shall order them to be brought in as defendants, if jurisdiction over them can be obtained. The
inclusion, therefore, of Cardenas in petitioners counterclaim is sanctioned by the rules. [20]
The prerogative of bringing in new parties to the action at any stage before judgment is intended to
accord complete relief to all of them in a single action and to avert a duplicity and even a multiplicity of
suits thereby.
In insisting on the inapplicability of Sapugay, respondents argue that new parties cannot be
included in a counterclaim, except when no complete relief can be had. They add that [i]n the present
case, Messrs. Lim and Mariano are not necessary for petitioners to obtain complete relief from
Respondent CCC as plaintiff in the lower court. This is because Respondent CCC as a corporation with a
separate [legal personality] has the juridical capacity to indemnify petitioners even without Messrs. Lim
and Mariano.[21]
We disagree. The inclusion of a corporate officer or stockholder -- Cardenas in Sapugay or Lim and
Mariano in the instant case -- is not premised on the assumption that the plaintiff corporation does not
have the financial ability to answer for damages, such that it has to share its liability with individual
defendants. Rather, such inclusion is based on the allegations of fraud and bad faith on the part of the
corporate officer or stockholder. These allegations may warrant the piercing of the veil of corporate
fiction, so that the said individual may not seek refuge therein, but may be held individually and
personally liable for his or her actions.
In Tramat Mercantile v. Court of Appeals,[22] the Court held that generally, it should only be the
corporation that could properly be held liable. However, circumstances may warrant the inclusion of the
personal liability of a corporate director, trustee, or officer, if the said individual is found guilty of bad
faith or gross negligence in directing corporate affairs.
Remo Jr. v. IAC[23] has stressed that while a corporation is an entity separate and distinct from its
stockholders, the corporate fiction may be disregarded if used to defeat public convenience, justify a
wrong, protect fraud, or defend crime. In these instances, the law will regard the corporation as an
association of persons, or in case of two corporations, will merge them into one. Thus, there is no debate
on whether, in alleging bad faith on the part of Lim and Mariano the counterclaims had in effect made
them indispensable parties thereto; based on the alleged facts, both are clearly parties in interest to the
counterclaim.[24]
Respondents further assert that Messrs. Lim and Mariano cannot be held personally liable [because
their assailed acts] are within the powers granted to them by the proper board resolutions; therefore, it
is not a personal decision but rather that of the corporation as represented by its board of directors.
[25]
The foregoing assertion, however, is a matter of defense that should be threshed out during the trial;
whether or not fraud is extant under the circumstances is an issue that must be established by
convincing evidence.[26]
Suability and liability are two distinct matters. While the Court does rule that the counterclaims
against Respondent CCCs president and manager may be properly filed, the determination of whether
both can in fact be held jointly and severally liable with respondent corporation is entirely another issue
that should be ruled upon by the trial court.
However, while a compulsory counterclaim may implead persons not parties to the original
complaint, the general rule -- a defendant in a compulsory counterclaim need not file any responsive
pleading, as it is deemed to have adopted the allegations in the complaint as its answer -- does not
apply. The filing of a responsive pleading is deemed a voluntary submission to the jurisdiction of the
court; a new party impleaded by the plaintiff in a compulsory counterclaim cannot be considered to have
automatically and unknowingly submitted to the jurisdiction of the court. A contrary ruling would result
in mischievous consequences whereby a party may be indiscriminately impleaded as a defendant in a

compulsory counterclaim; and judgment rendered against it without its knowledge, much less
participation in the proceedings, in blatant disregard of rudimentary due process requirements.
The correct procedure in instances such as this is for the trial court, per Section 12 of Rule 6 of the
Rules of Court, to order [such impleaded parties] to be brought in as defendants, if jurisdiction over
them can be obtained, by directing that summons be served on them. In this manner, they can be
properly appraised of and answer the charges against them. Only upon service of summons can the trial
court obtain jurisdiction over them.
In Sapugay, Cardenas was furnished a copy of the Answer with Counterclaim, but he did not file any
responsive pleading to the counterclaim leveled against him. Nevertheless, the Court gave due
consideration to certain factual circumstances, particularly the trial courts treatment of the Complaint as
the Answer of Cardenas to the compulsory counterclaim and of his seeming acquiescence thereto, as
evidenced by his failure to make any objection despite his active participation in the proceedings. It was
held thus:
It is noteworthy that Cardenas did not file a motion to dismiss the counterclaim against him on the
ground of lack of jurisdiction. While it is a settled rule that the issue of jurisdiction may be raised even
for the first time on appeal, this does not obtain in the instant case. Although it was only Mobil which
filed an opposition to the motion to declare in default, the fact that the trial court denied said motion,
both as to Mobil and Cardenas on the ground that Mobils complaint should be considered as the answer
to petitioners compulsory counterclaim, leads us to the inescapable conclusion that the trial court
treated the opposition as having been filed in behalf of both Mobil and Cardenas and that the latter had
adopted as his answer the allegations raised in the complaint of Mobil. Obviously, it was this
ratiocination which led the trial court to deny the motion to declare Mobil and Cardenas in default.
Furthermore, Cardenas was not unaware of said incidents and the proceedings therein as he testified
and was present during trial, not to speak of the fact that as manager of Mobil he would necessarily be
interested in the case and could readily have access to the records and the pleadings filed therein.
By adopting as his answer the allegations in the complaint which seeks affirmative relief, Cardenas is
deemed to have recognized the jurisdiction of the trial court over his person and submitted thereto. He
may not now be heard to repudiate or question that jurisdiction. [27]
Such factual circumstances are unavailing in the instant case. The records do not show that
Respondents Lim and Mariano are either aware of the counterclaims filed against them, or that they
have actively participated in the proceedings involving them. Further, in dismissing the counterclaims
against the individual respondents, the court a quo -- unlike in Sapugay -- cannot be said to have treated
Respondent CCCs Motion to Dismiss as having been filed on their behalf.
Rules on Permissive Joinder of Causes
of Action or Parties Not Applicable
Respondent CCC contends that petitioners counterclaims violated the rule on joinder of causes of
action. It argues that while the original Complaint was a suit for specific performance based on a
contract, the counterclaim for damages was based on the tortuous acts of respondents. [28] In its Motion
to Dismiss, CCC cites Section 5 of Rule 2 and Section 6 of Rule 3 of the Rules of Civil Procedure, which
we quote:
Section 5. Joinder of causes of action. A party may in one pleading assert, in the alternative or
otherwise, as many causes of action as he may have against an opposing party, subject to the following
conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of parties; x x x
Section 6. Permissive joinder of parties. All persons in whom or against whom any right to relief in
respect to or arising out of the same transaction or series of transactions is alleged to exist whether
jointly, severally, or in the alternative, may, except as otherwise provided in these Rules, join as
plaintiffs or be joined as defendants in one complaint, where any question of law or fact common to all
such plaintiffs or to all such defendants may arise in the action; but the court may make such orders as
may be just to prevent any plaintiff or defendant from being embarrassed or put to expense in
connection with any proceedings in which he may have no interest.
The foregoing procedural rules are founded on practicality and convenience. They are meant to
discourage duplicity and multiplicity of suits. This objective is negated by insisting -- as the court a

quo has done -- that the compulsory counterclaim for damages be dismissed, only to have it possibly refiled in a separate proceeding. More important, as we have stated earlier, Respondents Lim and Mariano
are real parties in interest to the compulsory counterclaim; it is imperative that they be joined therein.
Section 7 of Rule 3 provides:
Compulsory joinder of indispensable parties. Parties in interest without whom no final determination can
be had of an action shall be joined either as plaintiffs or defendants.
Moreover, in joining Lim and Mariano in the compulsory counterclaim, petitioners are being
consistent with the solidary nature of the liability alleged therein.
Second Issue:
CCCs Personality to Move to Dismiss
the Compulsory Counterclaims
Characterizing their counterclaim for damages against Respondents CCC, Lim and Mariano as joint
and solidary, petitioners prayed:
WHEREFORE, it is respectfully prayed that after trial judgment be rendered:
1. Dismissing the complaint in its entirety;
2. Ordering the plaintiff, Gregory T. Lim and Anthony A. Mariano jointly and solidarily to pay
defendant actual damages in the sum of at least P2,700,000.00;
3. Ordering the plaintiff, Gregory T. Lim and Anthony A, Mariano jointly and solidarily to
pay the defendants LPI, LCLC, COC and Roseberg:
a. Exemplary damages of P100 million each;
b. Moral damages of P100 million each; and
c. Attorneys fees and costs of suit of at least P5 million each.
Other reliefs just and equitable are likewise prayed for. [29]
Obligations may be classified as either joint or solidary. Joint or jointly or conjoint
means mancum or mancomunada or pro rata obligation; on the other hand, solidary obligations may be
used interchangeably with joint and several or several. Thus, petitioners usage of the term joint and
solidary is confusing and ambiguous.
The ambiguity in petitioners counterclaims notwithstanding, respondents liability, if proven, is solidary.
This characterization finds basis in Article 1207 of the Civil Code, which provides that obligations are
generally considered joint, except when otherwise expressly stated or when the law or the nature of the
obligation requires solidarity. However, obligations arising from tort are, by their nature, always solidary.
We have assiduously maintained this legal principle as early as 1912 in Worcester v. Ocampo,[30] in which
we held:
x x x The difficulty in the contention of the appellants is that they fail to recognize that the basis of the
present action is tort. They fail to recognize the universal doctrine that each joint tort feasor is not only
individually liable for the tort in which he participates, but is also jointly liable with his tort feasors. x x x
It may be stated as a general rule that 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. They are each liable as principals, to the same
extent and in the same manner as if they had performed the wrongful act themselves. x x x
Joint tort feasors are jointly and severally liable for the tort which they commit. The persons injured may
sue all of them or any number less than all. Each is liable for the whole damages caused by all, and all
together are jointly liable for the whole damage. It is no defense for one sued alone, that the others who
participated in the wrongful act are not joined with him as defendants; nor is it any excuse for him that
his participation in the tort was insignificant as compared to that of the others. x x x

Joint tort feasors are not liable pro rata. The damages can not be apportioned among them, except
among themselves. They cannot insist upon an apportionment, for the purpose of each paying an
aliquot part. They are jointly and severally liable for the whole amount. x x x
A payment in full for the damage done, by one of the joint tort feasors, of course satisfies any claim
which might exist against the others. There can be but satisfaction. The release of one of the joint tort
feasors by agreement generally operates to discharge all. x x x
Of course the court during trial may find that some of the alleged tort feasors are liable and that others
are not liable. The courts may release some for lack of evidence while condemning others of the alleged
tort feasors. And this is true even though they are charged jointly and severally.
In a joint obligation, each obligor answers only for a part of the whole liability; in a solidary or joint
and several obligation, the relationship between the active and the passive subjects is so close that
each of them must comply with or demand the fulfillment of the whole obligation. [31] The fact that the
liability sought against the CCC is for specific performance and tort, while that sought against the
individual respondents is based solely on tort does not negate the solidary nature of their liability for
tortuous acts alleged in the counterclaims. Article 1211 of the Civil Code is explicit on this point:
Solidarity may exist although the creditors and the debtors may not be bound in the same manner and
by the same periods and conditions.
The solidary character of respondents alleged liability is precisely why credence cannot be given to
petitioners assertion. According to such assertion, Respondent CCC cannot move to dismiss the
counterclaims on grounds that pertain solely to its individual co-debtors. [32] In cases filed by the creditor,
a solidary debtor may invoke defenses arising from the nature of the obligation, from circumstances
personal to it, or even from those personal to its co-debtors. Article 1222 of the Civil Code provides:
A solidary debtor may, in actions filed by the creditor, avail itself of all defenses which are derived from
the nature of the obligation and of those which are personal to him, or pertain to his own share. With
respect to those which personally belong to the others, he may avail himself thereof only as
regards that part of the debt for which the latter are responsible. (Emphasis supplied).
The act of Respondent CCC as a solidary debtor -- that of filing a motion to dismiss the counterclaim
on grounds that pertain only to its individual co-debtors -- is therefore allowed.
However, a perusal of its Motion to Dismiss the counterclaims shows that Respondent CCC filed it on
behalf of Co-respondents Lim and Mariano; it did not pray that the counterclaim against it be dismissed.
Be that as it may, Respondent CCC cannot be declared in default. Jurisprudence teaches that if the
issues raised in the compulsory counterclaim are so intertwined with the allegations in the complaint,
such issues are deemed automatically joined. [33] Counterclaims that are only for damages and attorneys
fees and that arise from the filing of the complaint shall be considered as special defenses and need not
be answered.[34]
CCCs Motion to Dismiss the
Counterclaim on Behalf of
Respondents Lim and
Mariano Not Allowed
While Respondent CCC can move to dismiss the counterclaims against it by raising grounds that
pertain to individual defendants Lim and Mariano, it cannot file the same Motion on their behalf for the
simple reason that it lacks the requisite authority to do so. A corporation has a legal personality entirely
separate and distinct from that of its officers and cannot act for and on their behalf, without being so
authorized. Thus, unless expressly adopted by Lim and Mariano, the Motion to Dismiss the compulsory
counterclaim filed by Respondent CCC has no force and effect as to them.
In summary, we make the following pronouncements:
1. The counterclaims against Respondents CCC, Gregory T. Lim and Anthony A. Mariano are
compulsory.

2. The counterclaims may properly implead Respondents Gregory T. Lim and Anthony A. Mariano,
even if both were not parties in the original Complaint.
3. Respondent CCC or any of the three solidary debtors (CCC, Lim or Mariano) may include, in a
Motion to Dismiss, defenses available to their co-defendants; nevertheless, the same Motion
cannot be deemed to have been filed on behalf of the said co-defendants.
4. Summons must be served on Respondents Lim and Mariano before the trial court can obtain
jurisdiction over them.
WHEREFORE, the Petition is GRANTED and the assailed Orders REVERSED. The court of origin is
hereby ORDERED to take cognizance of the counterclaims pleaded in petitioners Answer with
Compulsory Counterclaims and to cause the service of summons on Respondents Gregory T. Lim and
Anthony A. Mariano. No costs.
SO ORDERED.
JARDINE DAVIES, INC., G.R. No. 151438
Petitioner,
Present:
PUNO, J., Chairman,
AUSTRIA-MARTINEZ,
versus CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.
JRB REALTY, INC.,
Respondent. Promulgated:
July 15, 2005
x----------------------------------------------x
DECISION
CALLEJO, SR., J.:

Before us is a petition for review of the Decision [1] of the Court of Appeals (CA) in CA-G.R. CV No.
54201 affirming in toto that of the Regional Trial Court (RTC) in Civil Case No. 90-237 for specific
performance; and the Resolution dated January 11, 2002 denying the motion for reconsideration thereof.

The facts are as follows:

In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named Blanco Center, on
its parcel of land located at 119 Alfaro St., Salcedo Village, Makati City. An air conditioning system was
needed for the Blanco Law Firm housed at the second floor of the building. On March 13, 1980, the
respondents Executive Vice-President, Jose R. Blanco, accepted the contract quotation of Mr. A.G.
Morrison, President of Aircon and Refrigeration Industries, Inc. (Aircon), for two (2) sets of Fedders
Adaptomatic 30,000 kcal (Code: 10-TR) air conditioning equipment with a net total selling price
of P99,586.00.[2] Thereafter, two (2) brand new packaged air conditioners of 10 tons capacity each to
deliver 30,000 kcal or 120,000 BTUH [3] were installed by Aircon. When the units with rotary compressors
were installed, they could not deliver the desired cooling temperature. Despite several adjustments and
corrective measures, the respondent conceded that Fedders Air Conditioning USAs technology for rotary
compressors for big capacity conditioners like those installed at the Blanco Center had not yet been
perfected. The parties thereby agreed to replace the units with reciprocating/semi-hermetic compressors
instead. In a Letter dated March 26, 1981,[4] Aircon stated that it would be replacing the units currently
installed with new ones using rotary compressors, at the earliest possible time. Regrettably, however, it
could not specify a date when delivery could be effected.
TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the maintenance of the
units, inclusive of parts and services. In October 1987, the respondent learned, through newspaper ads,
[5]

that Maxim Industrial and Merchandising Corporation (Maxim, for short) was the new and exclusive

licensee of Fedders Air Conditioning USA in the Philippines for the manufacture, distribution, sale,
installation and maintenance of Fedders air conditioners. The respondent requested that Maxim honor
the obligation of Aircon, but the latter refused. Considering that the ten-year period of prescription was
fast approaching, to expire on March 13, 1990, the respondent then instituted, on January 29, 1990, an
action for specific performance with damages against Aircon & Refrigeration Industries, Inc., Fedders Air
Conditioning USA, Inc., Maxim Industrial & Merchandising Corporation and petitioner Jardine Davies, Inc.
[6]

The latter was impleaded as defendant, considering that Aircon was a subsidiary of the petitioner. The

respondent prayed that judgment be rendered, as follows:

1. Ordering the defendants to jointly and severally at their account and expense
deliver, install and place in operation two brand new units of each 10-tons capacity
Fedders unitary packaged air conditioners with Fedders USAs technology perfected
rotary compressors to always deliver 30,000 kcal or 120,000 BTUH to the second floor of
the Blanco Center building at 119 Alfaro St., Salcedo Village, Makati, Metro Manila;
2. Ordering defendants to jointly and severally reimburse plaintiff not only the
sums of P415,118.95 for unsaved electricity from 21 st October 1981 to 7th January 1990
andP99,287.77 for repair costs of the two service units from 7 th March 1987 to
11th January 1990, with legal interest thereon from the filing of this Complaint until fully
reimbursed, but also like unsaved electricity costs and like repair costs therefrom until
Prayer No. 1 above shall have been complied with;
3. Ordering defendants to jointly and severally pay plaintiffs P150,000.00
attorneys fees and other costs of litigation, as well as exemplary damages in an amount
not less than or equal to Prayer 2 above; and
4. Granting plaintiff such other and further relief as shall be just and equitable in
the premises.[7]

Of the four defendants, only the petitioner filed its Answer. The court did not acquire jurisdiction
over Aircon because the latter ceased operations, as its corporate life ended on December 31, 1986.
[8]

Upon motion, defendants Fedders Air Conditioning USA and Maxim were declared in default. [9]
On May 17, 1996, the RTC rendered its Decision, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered ordering defendants Jardine Davies, Inc.,
Fedders Air Conditioning USA, Inc. and Maxim Industrial and Merchandising Corporation,
jointly and severally:
1.

To deliver, install and place into operation the two (2) brand new
units of Fedders unitary packaged airconditioning units each of 10 tons
capacity with rotary compressors to deliver 30,000 kcal or 120,000 BTUH
to the second floor of the Blanco Center building, or to pay plaintiff the
current price for two such units;

2.

To reimburse plaintiff the amount of P556,551.55 as and for the

unsaved electricity bills from October 21, 1981 up to April 30, 1995; and
another amount of P185,951.67 as and for repair costs;

3.

To pay plaintiff P50,000.00 as and for attorneys fees; and

4.

Cost of suit.[10]

The petitioner filed its notice of appeal with the CA, alleging that the trial court erred in holding it
liable because it was not a party to the contract between JRB Realty, Inc. and Aircon, and that it had a
personality separate and distinct from that of Aircon.
On March 23, 2000, the CA affirmed the trial courts ruling in toto; hence, this petition.

The petitioner raises the following assignment of errors:

I.
THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE FOR THE ALLEGED
CONTRACTUAL BREACH OF AIRCON SOLELY BECAUSE THE LATTER WAS FORMERLY
JARDINES SUBSIDIARY.
II.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE ALTER
EGO, THE COURT OF APPEALS ERRED IN NOT DECLARING AIRCONS OBLIGATION TO

DELIVER THE TWO (2) AIRCONDITIONING UNITS TO JRB AS HAVING BEEN SUBSTANTIALLY
COMPLIED WITH IN GOOD FAITH.

III.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE ALTER
EGO, THE COURT OF APPEALS ERRED IN NOT DECLARING JRBS CAUSES OF ACTION AS
HAVING BEEN BARRED BY LACHES.
IV.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS JARDINES MERE ALTER
EGO, THE COURT OF APPEALS ERRED IN FINDING JRB ENTITLED TO RECOVER ALLEGED
UNSAVED ELECTRICITY EXPENSES.
V.
THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE TO PAY ATTORNEYS FEES.
VI.
THE COURT OF APPEALS ERRED IN NOT HOLDING JRB LIABLE TO JARDINE FOR DAMAGES.
[11]

It is the well-settled rule that factual findings of the trial court, as affirmed by the CA, are
accorded high respect, even finality at times. However, considering that the factual findings of the CA
and the RTC were based on speculation and conjectures, unsupported by substantial evidence, the Court
finds that the instant case falls under one of the excepted instances. There is, thus, a need to correct the
error.

The trial court ruled that Aircon was a subsidiary of the petitioner, and concluded, thus:
Plaintiffs documentary evidence shows that at the time it contracted with Aircon
on March 13, 1980 (Exhibit D) and on the date the revised agreement was reached on
March 26, 1981, Aircon was a subsidiary of Jardine. The phrase A subsidiary of Jardine
Davies, Inc. was printed on Aircons letterhead of its March 13, 1980 contract with
plaintiff (Exhibit D-1), as well as the Aircons letterhead of Jardines Director and Senior
Vice-President A.G. Morrison and Aircons President in his March 26, 1981 letter to
plaintiff (Exhibit J-2) confirming the revised agreement. Aircons newspaper ads of April
12 and 26, 1981 and a press release on August 30, 1982 (Exhibits E, F and L) also show
that defendant Jardine publicly represented Aircon to be its subsidiary.
Records from the Securities and Exchange Commission (SEC) also reveal that as
per Jardines December 31, 1986 and 1985 Financial Statements that The company acts
as general manager of its subsidiaries (Exhibit P). Jardines Consolidated Balance Sheet
as of December 31, 1979 filed with the SEC listed Aircon as its subsidiary by owning
94.35% of Aircon (Exhibit P-1). Also, Aircons reportorial General Information Sheet as of
April 1980 and April 1981 filed with the SEC show that Jardine was 94.34% owner of
Aircon (Exhibits Q and R) and that out of seven members of the Board of Directors of
Aircon, four (4) are also of Jardine.
Defendant Jardines witness, Atty. Fe delos Santos-Quiaoit admitted that
defendant Aircon, renamed Aircon & Refrigeration Industries, Inc. is one of the
subsidiaries of Jardine Davies (TSN, September 22, 1995, p. 12). She also testified that
Jardine nominated, elected, and appointed the controlling majority of the Board of
Directors and the highest officers of Aircon (Ibid, pp. 10,13-14).
The foregoing circumstances provide justifiable basis for this Court to disregard
the fiction of corporate entity and treat defendant Aircon as part of the instrumentality
of co-defendant Jardine.[12]

The respondent court arrived at the same conclusion basing its ruling on the following
documents, to wit:
(a)

Contract/Quotation #78-No. 80-1639 dated March 03, 1980 (Exh. D-1);

(b) Newspaper Advertisements (Exhs. E-1 and F-1);

(c) Letter dated March 26, 1981 of A.G. Morrison, President of Aircon, to Atty. J.R.
Blanco (Exh. J);
(d) News items of Bulletin Today dated August 30, 1982 (Exh. L);
(e) Balance Sheet of Jardine Davies, Inc. as of December 31, 1979 listing Aircon
as one of its subsidiaries (Exh. P);
(f) Financial Statement of Aircon as of December 31, 1982 and 1981 (Exh. S);
(g) Financial Statement of Aircon as of December 31, 1981 (Exh. S-1). [13]

Applying the doctrine of piercing the veil of corporate fiction, both the respondent and trial courts
conveniently held the petitioner liable for the alleged omissions of Aircon, considering that the latter was
its instrumentality or corporate alter ego. The petitioner is now before us, reiterating its defense of
separateness, and the fact that it is not a party to the contract.
We find merit in the petition.

It is an elementary and fundamental principle of corporation law that a corporation is an artificial

being invested by law with a personality separate and distinct from its stockholders and from other
corporations to which it may be connected. While a corporation is allowed to exist solely for a lawful
purpose, the law will regard it as an association of persons or in case of two corporations, merge them
into one, when this corporate legal entity is used as a cloak for fraud or illegality. [14] This is the doctrine
of piercing the veil of corporate fiction which applies only when such corporate fiction is used to defeat
public convenience, justify wrong, protect fraud or defend crime. [15] The rationale behind piercing a
corporations identity is to remove the barrier between the corporation from the persons comprising it to
thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for
undertaking certain proscribed activities.[16]

While it is true that Aircon is a subsidiary of the petitioner, it does not necessarily follow that
Aircons corporate legal existence can just be disregarded. In Velarde v. Lopez, Inc.,[17] the Court
categorically held that a subsidiary has an independent and separate juridical personality, distinct from
that of its parent company; hence, any claim or suit against the latter does not bind the former, and vice
versa. In applying the doctrine, the following requisites must be established: (1) control, not merely
majority or complete stock control; (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 acts
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. [18]

The records bear out that Aircon is a subsidiary of the petitioner only because the latter acquired
Aircons majority of capital stock. It, however, does not exercise complete control over Aircon; nowhere
can it be gathered that the petitioner manages the business affairs of Aircon. Indeed, no management
agreement exists between the petitioner and Aircon, and the latter is an entirely different entity from
the petitioner.[19]

Jardine Davies, Inc., incorporated as early as June 28, 1946, [20] is primarily a financial and trading
company. Its Articles of Incorporation states among many others that the purposes for which the said
corporation was formed, are as follows:
(a) To carry on the business of merchants, commission merchants, brokers, factors,
manufacturers, and agents;
(b) Upon complying with the requirements of law applicable thereto, to act as
agents of companies and underwriters doing and engaging in any and all kinds of
insurance business.[21]

On the other hand, Aircon, incorporated on December 27, 1952, [22] is a manufacturing firm. Its
Articles of Incorporation states that its purpose is mainly To carry on the business of manufacturers of commercial and household appliances and
accessories of any form, particularly to manufacture, purchase, sell or deal in air
conditioning and refrigeration products of every class and description as well as
accessories and parts thereof, or other kindred articles; and to erect, or buy, lease,
manage, or otherwise acquire manufactories, warehouses, and depots for
manufacturing, assemblage, repair and storing, buying, selling, and dealing in the
aforesaid appliances, accessories and products. [23]

The existence of interlocking directors, corporate officers and shareholders, which the respondent
court considered, is not enough justification to pierce the veil of corporate fiction, in the absence of
fraud or other public policy considerations. [24] But even when there is dominance over the affairs of the
subsidiary, the doctrine of piercing the veil of corporate fiction applies only when such fiction is used to
defeat public convenience, justify wrong, protect fraud or defend crime. [25] To warrant resort to this
extraordinary remedy, there must be proof that the corporation is being used as a cloak or cover for
fraud or illegality, or to work injustice. [26] Any piercing of the corporate veil has to be done with caution.
[27]

The wrongdoing must be clearly and convincingly established. It cannot just be presumed. [28]

In the instant case, there is no evidence that Aircon was formed or utilized with the intention of
defrauding its creditors or evading its contracts and obligations. There was nothing fraudulent in the
acts of Aircon in this case. Aircon, as a manufacturing firm of air conditioners, complied with its
obligation of providing two air conditioning units for the second floor of the Blanco Center in good faith,
pursuant to its contract with the respondent. Unfortunately, the performance of the air conditioning
units did not satisfy the respondent despite several adjustments and corrective measures. In a
Letter[29] dated October 22, 1980, the respondent even conceded that Fedders Air Conditioning USA has
not yet perhaps perfected its technology of rotary compressors, and agreed to change the compressors
with the semi-hermetic type. Thus, Aircon substituted the units with serviceable ones which delivered
the cooling temperature needed for the law office. After enjoying ten (10) years of its cooling power,
respondent cannot now complain about the performance of these units, nor can it demand a
replacement thereof.

Moreover, it was reversible error to award the respondent the amount of P556,551.55
representing the alleged 30% unsaved electricity costs and P185,951.67 as maintenance cost without
showing any basis for such award. To justify a grant of actual or compensatory damages, it is necessary
to prove with a reasonable degree of certainty, premised upon competent proof and on the best
evidence obtainable by the injured party, the actual amount of loss. [30] The respondent merely based its
cause of action on Aircons alleged representation that Fedders air conditioners with rotary compressors
can save as much as 30% on electricity compared to other brands. Offered in evidence were newspaper
advertisements published on April 12 and 26, 1981. The respondent then recorded its electricity
consumption from October 21, 1981 up to April 3, 1995 and computed 30% thereof, which amounted
to P556,551.55. The Court rules that this amount is highly speculative and merely hypothetical, and for
which the petitioner can not be held accountable.

First. The respondent merely relied on the newspaper advertisements showing the Fedders
window-type air conditioners, which are far different from the big capacity air conditioning units installed
at Blanco Center.

Second. After such print advertisements, the respondent informed Aircon that it was going to
install an electric meter to register its electric consumption so as to determine the electric costs not

saved by the presently installed units with semi-hermetic compressors. Contrary to the allegations of the
respondent that this was in pursuance to their Revised Agreement, no proof was adduced that Aircon
agreed to the respondents proposition. It was a unilateral act on the part of the respondent, which
Aircon did not oblige or commit itself to pay.

Third. Needless to state, the amounts computed are mere estimates representing the
respondents self-serving claim of unsaved electricity cost, which is too speculative and conjectural to
merit consideration. No other proofs, reports or bases of comparison showing that Fedders Air
Conditioning USA could indeed cut down electricity cost by 30% were adduced.

Likewise, there is no basis for the award of P185,951.67 representing maintenance cost. The
respondent merely submitted a schedule [31] prepared by the respondents accountant, listing the alleged
repair costs from March 1987 up to June 1994. Such evidence is self-serving and can not also be given
probative weight, considering that there are no proofs of receipts, vouchers, etc., which would
substantiate the amounts paid for such services. Absent any more convincing proof, the Court finds that
the respondents claims are without basis, and cannot, therefore, be awarded.

We sustain the petitioners separateness from that of Aircon in this case. It bears stressing that
the petitioner was never a party to the contract. Privity of contracts take effect only between parties,
their successors-in-interest, heirs and assigns.[32] The petitioner, which has a separate and distinct legal
personality from that of Aircon, cannot, therefore, be held liable.

IN VIEW OF THE FOREGOING, the petition is GRANTED. The assailed decision of the Court of
Appeals, affirming the decision of the Regional Trial Court isREVERSED and SET ASIDE. The complaint
of the respondent is DISMISSED. Costs against the respondent.
SO ORDERED.
FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO MEDICAL AND EDUCATIONAL
CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM) and ANGELITA F.
AGO, respondents.
DECISION
CARPIO, J.:
The Case
This petition for review[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 CenterBicol 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 AMECBCCM, 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
AMEC-Institute of Mass Communication in their effort to minimize expenses in terms of
salary are absorbing or continues to accept rejects. For example how many teachers in AMEC are
former teachers of Aquinas University but were removed because of immorality? Does it mean that the
present administration of AMEC have the total definite moral foundation from catholic administrator of
Aquinas University. I will prove to you my friends, that AMEC is a dumping ground, garbage, not
merely of moral and physical misfits. Probably they only qualify in terms of intellect. The Dean of
Student Affairs of AMEC is Justita Lola, as the family name implies. She is too old to work, being an old
woman. Is the AMEC administration exploiting the very [e]nterprising or compromising and
undemanding Lola? Could it be that AMEC is just patiently making use of Dean Justita Lola were if she is
very old. As in atmospheric situation zero visibility the plane cannot land, meaning she is very old, low
pay follows. By the way, Dean Justita Lola is also the chairman of the committee on scholarship in AMEC.
She had retired from Bicol University a long time ago but AMEC has patiently made use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground for moral and physically misfit people.
What does this mean? Immoral and physically misfits as teachers.
May I say 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 inaccurate and 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 inBorjal, 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 inMambulao 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.
THE
COLLECTOR
OF
vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.

INTERNAL

REVENUE, petitioner,

This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the
Collector of Internal Revenue, assessing against and demanding from the "Club Filipino, Inc. de Cebu",
the sum of P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty, allegedly due
from it as a keeper of bar and restaurant.
As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a civic
corporation organized under the laws of the Philippines with an original authorized capital stock of
P22,000.00, which was subsequently increased to P200,000.00, among others, to it "proporcionar,
operar, y mantener un campo de golf, tenis, gimnesio (gymnasiums), juego de bolos (bowling alleys),
mesas de billar y pool, y toda clase de juegos no prohibidos por leyes generales y ordenanzas generales;
y desarollar y cultivar deportes de toda clase y denominacion cualquiera para el recreo y entrenamiento
saludable de sus miembros y accionistas" (sec. 2, Escritura de Incorporacion del Club Filipino, Inc. Exh.
A). Neither in the articles or by-laws is there a provision relative to dividends and their distribution,
although it is covenanted that upon its dissolution, the Club's remaining assets, after paying debts, shall
be donated to a charitable Philippine Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a.).
The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the
government), and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders
to its members and their guests. The bar-restaurant was a necessary incident to the operation of the
club and its golf-course. The club is operated mainly with funds derived from membership fees and dues.
Whatever profits it had, were used to defray its overhead expenses and to improve its golf-course. In
1951. as a result of a capital surplus, arising from the re-valuation of its real properties, the value or
price of which increased, the Club declared stock dividends; but no actual cash dividends were
distributed to the stockholders. In 1952, a BIR agent discovered that the Club has never paid percentage
tax on the gross receipts of its bar and restaurant, although it secured B-4, B-9(a) and B-7 licenses. In a
letter dated December 22, 1852, the Collector of Internal Revenue assessed against and demanded from
the Club, the following sums:
As
percentage
tax
during the tax years 1946 to 1951

on

its

gross

receipts

P9,599.07

Surcharge therein

2,399.77

As fixed tax for the years 1946 to 1952

70.00

Compromise penalty

500.00

The Club wrote the Collector, requesting for the cancellation of the assessment. The request having
been denied, the Club filed the instant petition for review.
The dominant issues involved in this case are twofold:

1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed and
percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax Code, under which
the assessment was made, in connection with the operation of its bar and restaurant, during the periods
mentioned above; and
2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.
Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a business on
which the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos for each calendar
year or fraction thereof in which such person shall engage in said business." Section 183 provides in
general that "the percentage taxes on business shall be payable at the end of each calendar quarter in
the amount lawfully due on the business transacted during each quarter; etc." And section 191, same
Tax Code, provides "Percentage tax . . . Keepers of restaurants, refreshment parlors and other eating
places shall pay a tax three per centum, and keepers of bar and cafes where wines or liquors are served
five per centum of their gross receipts . . .". It has been held that the liability for fixed and percentage
taxes, as provided by these sections, does not ipso factoattach by mere reason of the operation of a bar
and restaurant. For the liability to attach, the operator thereof must be engaged in the business as a
barkeeper and restaurateur. The plain and ordinary meaning of business is restricted to activities or
affairs where profit is the purpose or livelihood is the motive, and the term business when used without
qualification, should be construed in its plain and ordinary meaning, restricted to activities for profitor
livelihood (The Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila Elks Club] & Court of Tax
Appeals, G.R. No. L-11176, June 29, 1959, giving full definitions of the word "business"; Coll. of Int. Rev.
v. Sweeney, et al. [International Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959, the facts of which
are similar to the ones at bar; Manila Polo Club v. B. L. Meer, etc., No. L-10854, Jan. 27, 1960).
Having found as a fact that the Club was organized to develop and cultivate sports of all class and
denomination, for the healthful recreation and entertainment of its stockholders and members; that
upon its dissolution, its remaining assets, after paying debts, shall be donated to a charitable Philippine
Institution in Cebu; that it is operated mainly with funds derived from membership fees and dues; that
the Club's bar and restaurant catered only to its members and their guests; that there was in fact no
cash dividend distribution to its stockholders and that whatever was derived on retail from its bar and
restaurant was used to defray its overall overhead expenses and to improve its golf-course (cost-plusexpenses-basis), it stands to reason that the Club is not engaged in the business of an operator of bar
and restaurant (same authorities, cited above).
It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact
does not necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary
adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily incidental to
the primary object of developing and cultivating sports for the healthful recreation and entertainment of
the stockholders and members. That a Club makes some profit, does not make it a profit-making Club.
As has been remarked a club should always strive, whenever possible, to have surplus (Jesus Sacred
Heart College v. Collector of Int. Rev., G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco
Educational Corp., G.R. No. L-9276, Oct. 23, 1956).1wph1.t
It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club is a
stock corporation. This is unmeritorious. The facts that the capital stock of the respondent Club is
divided into shares, does not detract from the finding of the trial court that it is not engaged in the
business of operator of bar and restaurant. What is determinative of whether or not the Club is engaged
in such business is its object or purpose, as stated in its articles and by-laws. It is a familiar rule that the
actual purpose is not controlled by the corporate form or by the commercial aspect of the business
prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of
operation. From the extrinsic evidence adduced, the Tax Court concluded that the Club is not engaged in
the business as a barkeeper and restaurateur.
Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital
stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends or
allotments of the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the case at bar,
nowhere in its articles of incorporation or by-laws could be found an authority for the distribution of its
dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered a stock corporation,
within the contemplation of the corporation law.
A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit,
nonstock organizations, unless the intent to the contrary is manifest and patent" (Collector v. BPOE Elks
Club, et al., supra), which is not the case in the present appeal.
Having arrived at the conclusion that respondent Club is not engaged in the business as an operator of a
bar and restaurant, and therefore, not liable for fixed and percentage taxes, it follows that it is not liable
for any penalty, much less of a compromise penalty.

WHEREFORE, the decision appealed from is affirmed without costs.

[G.R. No. 129459. September 29, 1998]

SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner, vs. COURT OF APPEALS,
MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL DEVELOPMENT CORP.
and JNM REALTY AND DEVELOPMENT CORP., respondents.
DECISION
PANGANIBAN, J.
May a corporate treasurer, by herself and without any authorization from the board of directors,
validly sell a parcel of land owned by the corporation? May the veil of corporate fiction be pierced on the
mere ground that almost all of the shares of stock of the corporation are owned by said treasurer and
her husband?

The Case
These questions are answered in the negative by this Court in resolving the Petition for Review on
Certiorari before us, assailing the March 18, 1997 Decision [1] of the Court of Appeals[2] in CA GR CV No.
46801 which, in turn, modified the July 18, 1994 Decision of the Regional Trial Court of Makati, Metro
Manila, Branch 63[3] in Civil Case No. 89-3511. The RTC dismissed both the Complaint and the
Counterclaim filed by the parties. On the other hand, the Court of Appeals ruled:
WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH MODIFICATION
ordering defendant-appellee Nenita Lee Gruenberg to REFUND or return to plaintiff-appellant
the downpayment of P100,000.00 which she received from plaintiff-appellant. There is no
pronouncement as to costs.[4]
The petition also challenges the June 10, 1997 CA Resolution denying reconsideration. [5]

The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.s amended complaint alleged
that on 14 February 1989, plaintiff-appellant entered into an agreement with defendantappellee Motorich Sales Corporation for the transfer to it of a parcel of land identified as Lot 30,
Block 1 of the Acropolis Greens Subdivision located in the District of Murphy, Quezon City,
Metro Manila, containing an area of Four Hundred Fourteen (414) square meters, covered by
TCT No. (362909) 2876; that as stipulated in the Agreement of 14 February 1989, plaintiffappellant paid the down payment in the sum of One Hundred Thousand (P100,000.00) Pesos,
the balance to be paid on or before March 2, 1989; that on March 1, 1989, Mr. Andres T. Co,
president of plaintiff-appellant corporation, wrote a letter to defendant-appellee Motorich Sales
Corporation requesting for a computation of the balance to be paid; that said letter was
coursed through defendant-appellees broker, Linda Aduca, who wrote the computation of the
balance; that on March 2, 1989, plaintiff-appellant was ready with the amount corresponding to
the balance, covered by Metrobank Cashiers Check No. 004223, payable to defendant-appellee
Motorich Sales Corporation; that plaintiff-appellant and defendant-appellee Motorich Sales
Corporation were supposed to meet in the office of plaintiff-appellant but defendant-appellees
treasurer, Nenita Lee Gruenberg, did not appear; that defendant-appellee Motorich Sales
Corporation despite repeated demands and in utter disregard of its commitments had refused
to execute the Transfer of Rights/Deed of Assignment which is necessary to transfer the
certificate of title; that defendant ACL Development Corp. is impleaded as a necessary party
since Transfer Certificate of Title No. (362909) 2876 is still in the name of said defendant; while
defendant JNM Realty & Development Corp. is likewise impleaded as a necessary party in view
of the fact that it is the transferor of right in favor of defendant-appellee Motorich Sales
Corporation; that on April 6, 1989, defendant ACL Development Corporation and Motorich Sales
Corporation entered into a Deed of Absolute Sale whereby the former transferred to the latter
the subject property; that by reason of said transfer, the Registry of Deeds of Quezon City
issued a new title in the name of Motorich Sales Corporation, represented by defendantappellee Nenita Lee Gruenberg and Reynaldo L. Gruenberg, under Transfer Certificate of Title

No. 3571; that as a result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales
Corporations bad faith in refusing to execute a formal Transfer of Rights/Deed of Assignment,
plaintiff-appellant suffered moral and nominal damages which may be assessed against
defendants-appellees in the sum of Five Hundred Thousand (500,000.00) Pesos; that as a result
of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporations unjustified and
unwarranted failure to execute the required Transfer of Rights/Deed of Assignment or formal
deed of sale in favor of plaintiff-appellant, defendants-appellees should be assessed exemplary
damages in the sum of One Hundred Thousand (P100,000.00) Pesos; that by reason of
defendants-appellees bad faith in refusing to execute a Transfer of Rights/Deed of Assignment
in favor of plaintiff-appellant, the latter lost the opportunity to construct a residential building in
the sum of One Hundred Thousand (P100,000.00) Pesos; and that as a consequence of
defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporations bad faith in
refusing to execute a deed of sale in favor of plaintiff-appellant, it has been constrained to
obtain the services of counsel at an agreed fee of One Hundred Thousand (P100,000.00) Pesos
plus appearance fee for every appearance in court hearings.
In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee Gruenberg
interposed as affirmative defense that the President and Chairman of Motorich did not sign the
agreement adverted to in par. 3 of the amended complaint; that Mrs. Gruenbergs signature on
the agreement (ref: par. 3 of Amended Complaint) is inadequate to bind Motorich. The other
signature, that of Mr. Reynaldo Gruenberg, President and Chairman of Motorich, is required;
that plaintiff knew this from the very beginning as it was presented a copy of the Transfer of
Rights (Annex B of amended complaint) at the time the Agreement (Annex B of amended
complaint) was signed; that plaintiff-appellant itself drafted the Agreement and insisted that
Mrs. Gruenberg accept the P100,000.00 as earnest money; that granting, without admitting,
the enforceability of the agreement, plaintiff-appellant nonetheless failed to pay in legal tender
within the stipulated period (up to March 2, 1989); that it was the understanding between Mrs.
Gruenberg and plaintiff-appellant that the Transfer of Rights/Deed of Assignment will be signed
only upon receipt of cash payment; thus they agreed that if the payment be in check, they will
meet at a bank designated by plaintiff-appellant where they will encash the check and sign the
Transfer of Rights/Deed. However, plaintiff-appellant informed Mrs. Gruenberg of the alleged
availability of the check, by phone, only after banking hours.
On the basis of the evidence, the court a quo rendered the judgment appealed from[,]
dismissing plaintiff-appellants complaint, ruling that:
'The issue to be resolved is: whether plaintiff had the right to compel defendants to
execute a deed of absolute sale in accordance with the agreement of February 14, 1989;
and if so, whether plaintiff is entitled to damages.
As to the first question, there is no evidence to show that defendant Nenita Lee
Gruenberg was indeed authorized by defendant corporation, Motorich Sales, to dispose
of that property covered by T.C.T. No. (362909) 2876. Since the property is clearly
owned by the corporation, Motorich Sales, then its disposition should be governed by
the requirement laid down in Sec. 40, of the Corporation Code of the Philippines, to wit:
Sec. 40, Sale or other disposition of assets. Subject to the provisions of existing
laws on illegal combination and monopolies, a corporation may by a majority
vote of its board of directors xxx sell, lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its property and assets, including
its goodwill xxx when authorized by the vote of the stockholders representing at
least two third (2/3) of the outstanding capital stock x x x.
No such vote was obtained by defendant Nenita Lee Gruenberg for that proposed sale[;]
neither was there evidence to show that the supposed transaction was ratified by the
corporation.Plaintiff should have been on the look out under these circumstances. More
so, plaintiff himself [owns] several corporations (tsn dated August 16, 1993, p. 3) which
makes him knowledgeable on corporation matters.
Regarding the question of damages, the Court likewise, does not find substantial
evidence to hold defendant Nenita Lee Gruenberg liable considering that she did not in
anyway misrepresent herself to be authorized by the corporation to sell the property to
plaintiff (tsn dated September 27, 1991, p. 8).
In the light of the foregoing, the Court hereby renders judgment DISMISSING the
complaint at instance for lack of merit.
Defendants counterclaim is also DISMISSED for lack of basis. (Decision, pp. 7-8; Rollo,
pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:
AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

This Agreement, made and entered into by and between:
MOTORICH SALES CORPORATION, a corporation duly organized and existing under and by virtue of
Philippine Laws, with principal office address at 5510 South Super Hi-way cor. Balderama St., Pio del
Pilar, Makati, Metro Manila, represented herein by its Treasurer, NENITA LEE GRUENBERG, hereinafter
referred to as the TRANSFEROR;
- and -SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation duly organized and existing under and by
virtue of the laws of the Philippines, with principal office address at Sumulong Highway, Barrio
Mambungan, Antipolo, Rizal, represented herein by its President, ANDRES T. CO, hereinafter referred to
as the TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner of a parcel of land identified as Lot 30 Block 1 of the
ACROPOLIS GREENS SUBDIVISION located at the District of Murphy, Quezon City, Metro Manila,
containing an area of FOUR HUNDRED FOURTEEN (414) SQUARE METERS, covered by a TRANSFER OF
RIGHTS between JNM Realty & Dev. Corp. as the Transferor and Motorich Sales Corp. as the Transferee;
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties have agreed as
follows:
1. That the purchase price shall be at FIVE THOUSAND TWO HUNDRED PESOS (P5,200.00)
per square meter; subject to the following terms:
a. Earnest money amounting to ONE HUNDRED THOUSAND PESOS (P100,000.00), will be
paid upon the execution of this agreement and shall form part of the total purchase
price;
b. Balance shall be payable on or before March 2, 1989;
2. That the monthly amortization for the month of February 1989 shall be for the account of
the Transferor; and that the monthly amortization starting March 21, 1989 shall be for
the account of the Transferee;
The transferor warrants that he [sic] is the lawful owner of the above-described property and that there
[are] no existing liens and/or encumbrances of whatsoever nature;
In case of failure by the Transferee to pay the balance on the date specified on 1. (b), the earnest money
shall be forfeited in favor of the Transferor.
That upon full payment of the balance, the TRANSFEROR agrees to execute a TRANSFER OF
RIGHTS/DEED OF ASSIGNMENT in favor of the TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto set their hands this 14th day of February, 1989 at
Greenhills, San Juan, Metro Manila, Philippines.
MOTORICH SALES CORPORATION SAN STRUCTURAL &
TRANSFEROR STEEL FABRICATORS
TRANSFEREE
[SGD.] [SGD.]
By: NENITA LEE GRUENBERG By: ANDRES T. CO
Treasurer President
Signed in the presence of:
[SGD.] [SGD.]
_________________________ _____________________[6]
In its recourse before the Court of Appeals, petitioner insisted:

1. Appellant is entitled to compel the appellees to execute a Deed of Absolute Sale in

accordance with the Agreement of February 14, 1989,
2. Plaintiff is entitled to damages.[7]
As stated earlier, the Court of Appeals debunked petitioners arguments and affirmed the Decision of
the RTC with the modification that Respondent Nenita Lee Gruenberg was ordered to refundP100,000 to
petitioner, the amount remitted as downpayment or earnest money. Hence, this petition before us.[8]

The Issues
Before this Court, petitioner raises the following issues:
I. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in the
instant case
II. Whether or not the appellate court may consider matters which the parties failed to
raise in the lower court
III. Whether or not there is a valid and enforceable contract between the petitioner and the
respondent corporation
IV. Whether or not the Court of Appeals erred in holding that there is a valid
correction/substitution of answer in the transcript of stenographic note[s]
V. Whether or not respondents are liable for damages and attorneys fees[9]
The Court synthesized the foregoing and will thus discuss them seriatim as follows:
1. Was there a valid contract of sale between petitioner and Motorich?
2. May the doctrine of piercing the veil of corporate fiction be applied to Motorich?
3. Is the alleged alteration of Gruenbergs testimony as recorded in the transcript of
stenographic notes material to the disposition of this case?
4. Are respondents liable for damages and attorneys fees?

The Courts Ruling

The petition is devoid of merit.

First Issue: Validity of Agreement

Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14, 1989, it
entered through its president, Andres Co, into the disputed Agreement with Respondent Motorich Sales
Corporation, which was in turn allegedly represented by its treasurer, Nenita Lee Gruenberg. Petitioner
insists that [w]hen Gruenberg and Co affixed their signatures on the contract they both consented to be
bound by the terms thereof. Ergo, petitioner contends that the contract is binding on the two
corporations. We do not agree.
True, Gruenberg and Co signed on February 14, 1989, the Agreement according to which a lot
owned by Motorich Sales Corporation was purportedly sold. Such contract, however, cannot bind
Motorich, because it never authorized or ratified such sale.
A corporation is a juridical person separate and distinct from its stockholders or
members. Accordingly, the property of the corporation is not the property of its stockholders or
members and may not be sold by the stockholders or members without express authorization from the
corporations board of directors.[10] Section 23 of BP 68, otherwise known as the Corporation Code of the
Philippines, provides:
SEC. 23. The Board of Directors or Trustees. -- Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors or
trustees to be elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year and until their
successors are elected and qualified.
Indubitably, a corporation may act only through its board of directors, or, when authorized either by
its bylaws or by its board resolution, through its officers or agents in the normal course of business.The

general principles of agency govern the relation between the corporation and its officers or agents,
subject to the articles of incorporation, bylaws, or relevant provisions of law. [11] Thus, this Court has held
that a corporate officer or agent may represent and bind the corporation in transactions with third
persons to the extent that the authority to do so has been conferred upon him, and this includes powers
which have been intentionally conferred, and also such powers as, in the usual course of the particular
business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by
custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as
the corporation has caused persons dealing with the officer or agent to believe that it has conferred. [12]
Furthermore, the Court has also recognized the rule that persons dealing with an assumed agent,
whether the assumed agency be a general or special one, are bound at their peril, if they would hold the
principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and
in case either is controverted, the burden of proof is upon them to establish it (Harry Keeler v. Rodriguez,
4 Phil. 19).[13] Unless duly authorized, a treasurer, whose powers are limited, cannot bind the corporation
in a sale of its assets.[14]
In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita
Gruenberg, its treasurer, to sell the subject parcel of land. [15] Consequently, petitioner had the burden of
proving that Nenita Gruenberg was in fact authorized to represent and bind Motorich in the
transaction. Petitioner failed to discharge this burden. Its offer of evidence before the trial court
contained no proof of such authority. [16] It has not shown any provision of said respondents articles of
incorporation, bylaws or board resolution to prove that Nenita Gruenberg possessed such power.
That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the responsibility of
ascertaining the extent of her authority to represent the corporation. Petitioner cannot assume that she,
by virtue of her position, was authorized to sell the property of the corporation. Selling is obviously
foreign to a corporate treasurers function, which generally has been described as to receive and keep
the funds of the corporation, and to disburse them in accordance with the authority given him by the
board or the properly authorized officers.[17]
Neither was such real estate sale shown to be a normal business activity of Motorich. The primary
purpose of Motorich is marketing, distribution, export and import in relation to a general merchandising
business.[18] Unmistakably, its treasurer is not cloaked with actual or apparent authority to buy or sell
real property, an activity which falls way beyond the scope of her general authority.
Articles 1874 and 1878 of the Civil Code of the Philippines provides:
ART. 1874. When a sale of a piece of land or any interest therein is through an agent, the
authority of the latter shall be in writing; otherwise, the sale shall be void.
ART. 1878 Special powers of attorney are necessary in the following case:
xxxxxxxxx
(5) To enter any contract by which the ownership of an immovable is transmitted or acquired
either gratuitously or for a valuable consideration;
x x x x x x x x x.
Petitioner further contends that Respondent Motorich has ratified said contract of sale because of its
acceptance of benefits, as evidenced by the receipt issued by Respondent Gruenberg. [19] Petitioner is
clutching at straws.
As a general rule, the acts of corporate officers within the scope of their authority are binding on the
corporation. But when these officers exceed their authority, their actions cannot bind the corporation,
unless it has ratified such acts or is estopped from disclaiming them. [20]
In this case, there is a clear absence of proof that Motorich ever authorized Nenita Gruenberg, or
made it appear to any third person that she had the authority, to sell its land or to receive the earnest
money. Neither was there any proof that Motorich ratified, expressly or impliedly, the contract. Petitioner
rests its argument on the receipt, which, however, does not prove the fact of ratification. The document
is a hand-written one, not a corporate receipt, and it bears only Nenita Gruenbergs signature. Certainly,
this document alone does not prove that her acts were authorized or ratified by Motorich.
Article 1318 of the Civil Code lists the requisites of a valid and perfected contract: (1) consent of the
contracting parties; (2) object certain which is the subject matter of the contract; (3) cause of the
obligation which is established. As found by the trial court[21] and affirmed by the Court of Appeals,
[22]
there is no evidence that Gruenberg was authorized to enter into the contract of sale, or that the said
contract was ratified by Motorich. This factual finding of the two courts is binding on this Court. [23] As the
consent of the seller was not obtained, no contract to bind the obligor was perfected. Therefore, there
can be no valid contract of sale between petitioner and Motorich.
Because Motorich had never given a written authorization to Respondent Gruenberg to sell its parcel
of land, we hold that the February 14, 1989 Agreement entered into by the latter with petitioner is void
under Article 1874 of the Civil Code. Being inexistent and void from the beginning, said contract cannot
be ratified.[24]

Second Issue:
Piercing the Corporate Veil Not Justified

Petitioner also argues that the veil of corporate fiction of Motorich should be pierced, because the
latter is a close corporation. Since Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all or
almost all or 99.866% to be accurate, of the subscribed capital stock [25] of Motorich, petitioner argues
that Gruenberg needed no authorization from the board to enter into the subject contract. [26] It adds
that, being solely owned by the Spouses Gruenberg, the company can be treated as a close corporation
which can be bound by the acts of its principal stockholder who needs no specific authority. The Court is
not persuaded.
First, petitioner itself concedes having raised the issue belatedly, [27] not having done so during the
trial, but only when it filed its sur-rejoinder before the Court of Appeals. [28] Thus, this Court cannot
entertain said issue at this late stage of the proceedings. It is well-settled that points of law, theories
and arguments not brought to the attention of the trial court need not be, and ordinarily will not be,
considered by a reviewing court, as they cannot be raised for the first time on appeal. [29] Allowing
petitioner to change horses in midstream, as it were, is to run roughshod over the basic principles of fair
play, justice and due process.
Second, even if the above-mentioned argument were to be addressed at this time, the Court still
finds no reason to uphold it. True, one of the advantages of a corporate form of business organization is
the limitation of an investors liability to the amount of the investment. [30] This feature flows from the
legal theory that a corporate entity is separate and distinct from its stockholders. However, the
statutorily granted privilege of a corporate veil may be used only for legitimate purposes. [31] On
equitable considerations, the veil can be disregarded when it is utilized as a shield to commit fraud,
illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego
or business conduit of a person or an instrumentality, agency or adjunct of another corporation. [32]
Thus, the Court has consistently ruled that [w]hen the fiction is used as a means of perpetrating a
fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of
statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime,
the veil with which the law covers and isolates the corporation from the members or stockholders who
compose it will be lifted to allow for its consideration merely as an aggregation of individuals. [33]
We stress that the corporate fiction should be set aside when it becomes a shield against liability for
fraud, illegality or inequity committed on third persons. The question of piercing the veil of corporate
fiction is essentially, then, a matter of proof. In the present case, however, the Court finds no reason to
pierce the corporate veil of Respondent Motorich. Petitioner utterly failed to establish that said
corporation was formed, or that it is operated, for the purpose of shielding any alleged fraudulent or
illegal activities of its officers or stockholders; or that the said veil was used to conceal fraud, illegality or
inequity at the expense of third persons, like petitioner.
Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the
Corporation Code defines a close corporation as follows:
SEC. 96. Definition and Applicability of Title. -- A close corporation, within the meaning of this
Code, is one whose articles of incorporation provide that: (1) All of the corporations issued
stock of all classes, exclusive of treasury shares, shall be held of record by not more than a
specified number of persons, not exceeding twenty (20); (2) All of the issued stock of all classes
shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3)
The corporation shall not list in any stock exchange or make any public offering of any of its
stock of any class.Notwithstanding the foregoing, a corporation shall be deemed not a close
corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or
controlled by another corporation which is not a close corporation within the meaning of this
Code. xxx.
The articles of incorporation[34] of Motorich Sales Corporation does not contain any provision stating
that (1) the number of stockholders shall not exceed 20, or (2) a preemption of shares is restricted in
favor of any stockholder or of the corporation, or (3) listing its stocks in any stock exchange or making a
public offering of such stocks is prohibited. From its articles, it is clear that Respondent Motorich is not a
close corporation.[35] Motorich does not become one either, just because Spouses Reynaldo and Nenita
Gruenberg owned 99.866% of its subscribed capital stock. The [m]ere ownership by a single stockholder
or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personalities. [36] So too, a narrow distribution of
ownership does not, by itself, make a close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals [37] wherein the Court ruled that
xxx petitioner corporation is classified as a close corporation and, consequently, a board resolution
authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the
action of its president.[38] But the factual milieu in Dulay is not on all fours with the present
case. InDulay, the sale of real property was contracted by the president of a close corporation with the
knowledge and acquiescence of its board of directors. [39] In the present case, Motorich is not a close

corporation, as previously discussed, and the agreement was entered into by the corporate treasurer
without the knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where an action by a director, who singly
is the controlling stockholder, may be considered as a binding corporate act and a board action as
nothing more than a mere formality.[40] The present case, however, is not one of them.
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own almost 99.866% of
Respondent Motorich.[41] Since Nenita is not the sole controlling stockholder of Motorich, the
aforementioned exception does not apply. Granting arguendo that the corporate veil of Motorich is to be
disregarded, the subject parcel of land would then be treated as conjugal property of Spouses
Gruenberg, because the same was acquired during their marriage. There being no indication that said
spouses, who appear to have been married before the effectivity of the Family Code, have agreed to a
different property regime, their property relations would be governed by conjugal partnership of gains.
[42]
As a consequence, Nenita Gruenberg could not have effected a sale of the subject lot because [t]here
is no co-ownership between the spouses in the properties of the conjugal partnership of gains. Hence,
neither spouse can alienate in favor of another his or her interest in the partnership or in any property
belonging to it; neither spouse can ask for a partition of the properties before the partnership has been
legally dissolved.[43]
Assuming further, for the sake of argument, that the spouses property regime is the absolute
community of property, the sale would still be invalid. Under this regime, alienation of community
property must have the written consent of the other spouse or the authority of the court without which
the disposition or encumbrance is void.[44] Both requirements are manifestly absent in the instant case.

Third Issue: Challenged Portion of TSN Immaterial

Petitioner calls our attention to the following excerpt of the transcript of stenographic notes(TSN):
Q Did you ever represent to Mr. Co that you were authorized by the corporation to sell the property?
A Yes, sir.[45]
Petitioner claims that the answer Yes was crossed out, and, in its place was written a No with an
initial scribbled above it.[46] This, however, is insufficient to prove that Nenita Gruenberg was authorized
to represent Respondent Motorich in the sale of its immovable property. Said excerpt should be
understood in the context of her whole testimony. During her cross-examination, Respondent Gruenberg
testified:
Q So, you signed in your capacity as the treasurer?
[A] Yes, sir.
Q Even then you kn[e]w all along that you [were] not authorized?
A Yes, sir.
Q You stated on direct examination that you did not represent that you were authorized to sell the
property?
A Yes, sir.
Q But you also did not say that you were not authorized to sell the property, you did not tell that to
Mr. Co, is that correct?
A That was not asked of me.
Q Yes, just answer it.
A I just told them that I was the treasurer of the corporation and it [was] also the president who [was]
also authorized to sign on behalf of the corporation.
Q You did not say that you were not authorized nor did you say that you were authorized?
A Mr. Co was very interested to purchase the property and he offered to put up a P100,000.00 earnest
money at that time. That was our first meeting.[47]
Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell its
property. On the other hand, her testimony demonstrates that the president of Petitioner Corporation, in
his great desire to buy the property, threw caution to the wind by offering and paying the earnest money
without first verifying Gruenbergs authority to sell the lot.

Fourth Issue:
Damages and Attorneys Fees

Finally, petitioner prays for damages and attorneys fees, alleging that [i]n an utter display of malice
and bad faith, [r]espondents attempted and succeeded in impressing on the trial court and [the] Court
of Appeals that Gruenberg did not represent herself as authorized by Respondent Motorich despite the
receipt issued by the former specifically indicating that she was signing on behalf of Motorich Sales
Corporation. Respondent Motorich likewise acted in bad faith when it claimed it did not authorize
Respondent Gruenberg and that the contract [was] not binding, [insofar] as it [was] concerned, despite
receipt and enjoyment of the proceeds of Gruenbergs act. [48] Assuming that Respondent Motorich was
not a party to the alleged fraud, petitioner maintains that Respondent Gruenberg should be held liable
because she acted fraudulently and in bad faith [in] representing herself as duly authorized by
[R]espondent [C]orporation.[49]
As already stated, we sustain the findings of both the trial and the appellate courts that the
foregoing allegations lack factual bases. Hence, an award of damages or attorneys fees cannot be
justified. The amount paid as earnest money was not proven to have redounded to the benefit of
Respondent Motorich. Petitioner claims that said amount was deposited to the account of Respondent
Motorich, because it was deposited with the account of Aren Commercial c/o Motorich Sales Corporation.
[50]
Respondent Gruenberg, however, disputes the allegations of petitioner. She testified as follows:
Q You voluntarily accepted the P100,000.00, as a matter of fact, that was encashed, the check was
encashed.
A Yes, sir, the check was paid in my name and I deposit[ed] it . . .
Q In your account?
A Yes, sir. [51]
In any event, Gruenberg offered to return the amount to petitioner xxx since the sale did not push
through.[52]
Moreover, we note that Andres Co is not a neophyte in the world of corporate business. He has been
the president of Petitioner Corporation for more than ten years and has also served as chief executive of
two other corporate entities.[53] Co cannot feign ignorance of the scope of the authority of a corporate
treasurer such as Gruenberg. Neither can he be oblivious to his duty to ascertain the scope of
Gruenbergs authorization to enter into a contract to sell a parcel of land belonging to Motorich.
Indeed, petitioners claim of fraud and bad faith is unsubstantiated and fails to persuade the
Court. Indubitably, petitioner appears to be the victim of its own officers negligence in entering into a
contract with and paying an unauthorized officer of another corporation.
As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be ordered to return
to petitioner the amount she received as earnest money, as no one shall enrich himself at the expense
of another,[54] a principle embodied in Article 2154 of the Civil Code. [55] Although there was no binding
relation between them, petitioner paid Gruenberg on the mistaken belief that she had the authority to
sell the property of Motorich.[56] Article 2155 of the Civil Code provides that [p]ayment by reason of a
mistake in the construction or application of a difficult question of law may come within the scope of the
preceding article.
WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.
SO ORDERED.
G.R. No. L-2598

June 29, 1950

C.
ARNOLD
HALL
and
BRADLEY
P.
HALL, petitioners,
vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA
BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber and
Commercial Co., Inc.,respondents.
Claro
M.
Recto
Ramon Diokno and Jose W. Diokno for respondents.

for

petitioners.

BENGZON, J.:
This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First Instance of
Leyte and to enjoin the respondent judge from further acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the respondents Fred
Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed and acknowledged in Leyte,
the article of incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized to engage in a
general lumber business to carry on as general contractors, operators and managers, etc. Attached to
the article was an affidavit of the treasurer stating that 23,428 shares of stock had been subscribed and
fully paid with certain properties transferred to the corporation described in a list appended thereto.

(2) Immediately after the execution of said articles of incorporation, the corporation proceeded to do
business with the adoption of by-laws and the election of its officers.
(3) On December 2, 1947, the said articles of incorporation were filed in the office of the Securities and
Exchange Commissioner, for the issuance of the corresponding certificate of incorporation.
(4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid governmental
office, the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed
before the Court of First Instance of Leyte the civil case numbered 381, entitled "Fred Brown et al. vs.
Arnold C. Hall et al.", alleging among other things that the Far Eastern Lumber and Commercial Co. was
an unregistered partnership; that they wished to have it dissolved because of bitter dissension among
the members, mismanagement and fraud by the managers and heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to dismiss,
contesting the court's jurisdiction and the sufficiently of the cause of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company; and at
the request of plaintiffs, appointed of the properties thereof, upon the filing of a P20,000 bond.
(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of the
receiver, but the respondent judge refused to accept the offer and to discharge the receiver. Whereupon,
the present special civil action was instituted in this court. It is based upon two main propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company, because
it being ade facto corporation, dissolution thereof may only be ordered in a quo warranto proceeding
instituted in accordance with section 19 of the Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of incorporation but
only a partnership.
Discussion: The second proposition may at once be dismissed. All the parties are informed that the
Securities and Exchange Commission has not, so far, issued the corresponding certificate of
incorporation. All of them know, or sought to know, that the personality of a corporation begins to exist
only from the moment such certificate is issued not before (sec. 11, Corporation Law). The
complaining associates have not represented to the others that they were incorporated any more than
the latter had made similar representations to them. And as nobody was led to believe anything to his
prejudice and damage, the principle of estoppel does not apply. Obviously this is not an instance
requiring the enforcement of contracts with the corporation through the rule of estoppel.
The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern Lumber
and Commercial Co., is a de facto corporation, section 19 of the Corporation Law applies, and therefore
the court had not jurisdiction to take cognizance of said civil case number 381. Section 19 reads as
follows:
. . . The due incorporation of any corporations claiming in good faith to be a corporation under
this Act and its right to exercise corporate powers shall not be inquired into collaterally in any
private suit to which the corporation may be a party, but such inquiry may be had at the suit of
the Insular Government on information of the Attorney-General.
There are least two reasons why this section does not govern the situation. Not having obtained the
certificate of incorporation, the Far Eastern Lumber and Commercial Co. even its stockholders may
not probably claim "in good faith" to be a corporation.
Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a certificate
of incorporation by the Director of the Bureau of Commerce and Industry which calls a
corporation into being. The immunity if collateral attack is granted to corporations "claiming in
good faith to be a corporation under this act." Such a claim is compatible with the existence of
errors and irregularities; but not with a total or substantial disregard of the law. Unless there has
been an evident attempt to comply with the law the claim to be a corporation "under this act"
could not be made "in good faith." (Fisher on the Philippine Law of Stock Corporations, p. 75. See
also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)
Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders of
the alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de
jure corporation may be terminated in a private suit for its dissolution between stockholders, without the
intervention of the state.

There might be room for argument on the right of minority stockholders to sue for dissolution; 1 but that
question does not affect the court's jurisdiction, and is a matter for decision by the judge, subject to
review on appeal. Whkch brings us to one principal reason why this petition may not prosper, namely:
the petitioners have their remedy by appealing the order of dissolution at the proper time.
There is a secondary issue in connection with the appointment of a receiver. But it must be admitted
that receivership is proper in proceedings for dissolution of a company or corporation, and it was no
error to reject the counter-bond, the court having declared the dissolution. As to the amount of the bond
to be demanded of the receiver, much depends upon the discretion of the trial court, which in this
instance we do not believe has been clearly abused.
Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction heretofore
issued will be dissolved.
Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.
SAPPARI K. SAWADJAAN, petitioner, vs. THE HONORABLE COURT OF APPEALS, THE CIVIL
SERVICE
COMMISSION
and
AL-AMANAH
INVESTMENT
BANK
OF
THE
PHILIPPINES, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a petition for certiorari under Rule 65 of the Rules of Court of the Decision [1] of the Court of
Appeals of 30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil Service
Commission (CSC) dated 11 August 1994 and 11 April 1995, respectively, which in turn affirmed
Resolution No. 2309 of the Board of Directors of the Al-Amanah Islamic Investment Bank of the
Philippines (AIIBP) dated 13 December 1993, finding petitioner guilty of Dishonesty in the Performance
of Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and dismissing him from
the service, and its Resolution[2] of 15 December 1999 dismissing petitioners Motion for Reconsideration.
The records show that petitioner Sappari K. Sawadjaan was among the first employees of the
Philippine Amanah Bank (PAB) when it was created by virtue of Presidential Decree No. 264 on 02
August 1973. He rose through the ranks, working his way up from his initial designation as security
guard, to settling clerk, bookkeeper, credit investigator, project analyst, appraiser/ inspector, and
eventually, loans analyst.[3]
In February 1988, while still designated as appraiser/investigator, Sawadjaan was assigned to
inspect the properties offered as collaterals by Compressed Air Machineries and Equipment Corporation
(CAMEC) for a credit line of Five Million Pesos (P5,000,000.00). The properties consisted of two parcels of
land covered by Transfer Certificates of Title (TCTs) No. N-130671 and No. C-52576. On the basis of his
Inspection and Appraisal Report,[4] the PAB granted the loan application. When the loan matured on 17
May 1989, CAMEC requested an extension of 180 days, but was granted only 120 days to repay the
loan.[5]
In the meantime, Sawadjaan was promoted to Loans Analyst I on 01 July 1989. [6]
In January 1990, Congress passed Republic Act 6848 creating the AIIBP and repealing P.D. No. 264
(which created the PAB). All assets, liabilities and capital accounts of the PAB were transferred to the
AIIBP,[7] and the existing personnel of the PAB were to continue to discharge their functions unless
discharged.[8] In the ensuing reorganization, Sawadjaan was among the personnel retained by the AIIBP.
When CAMEC failed to pay despite the given extension, the bank, now referred to as the AIIBP,
discovered that TCT No. N-130671 was spurious, the property described therein non-existent, and that
the property covered by TCT No. C-52576 had a prior existing mortgage in favor of one Divina Pablico.
On 08 June 1993, the Board of Directors of the AIIBP created an Investigating Committee to look into
the CAMEC transaction, which had cost the bank Six Million Pesos (P6,000,000.00) in losses. [9] The
subsequent events, as found and decided upon by the Court of Appeals, [10] are as follows:
On 18 June 1993, petitioner received a memorandum from Islamic Bank [AIIBP] Chairman Roberto F. De
Ocampo charging him with Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to
the Best Interest of the Service and preventively suspending him.
In his memorandum dated 8 September 1993, petitioner informed the Investigating Committee that he
could not submit himself to the jurisdiction of the Committee because of its alleged partiality. For his
failure to appear before the hearing set on 17 September 1993, after the hearing of 13 September 1993
was postponed due to the Manifestation of even date filed by petitioner, the Investigating Committee
declared petitioner in default and the prosecution was allowed to present its evidence ex parte.

On 08 December 1993, the Investigating Committee rendered a decision, the pertinent portions of which
reads as follows:
In view of respondent SAWADJAANS abject failure to perform his duties and assigned tasks as
appraiser/inspector, which resulted to the prejudice and substantial damage to the Bank, respondent
should be held liable therefore. At this juncture, however, the Investigating Committee is of the
considered opinion that he could not be held liable for the administrative offense of dishonesty
considering the fact that no evidence was adduced to show that he profited or benefited from being
remiss in the performance of his duties. The record is bereft of any evidence which would show that he
received any amount in consideration for his non-performance of his official duties.
This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to perform his
official duties resulted to the prejudice and substantial damage to the Islamic Bank for which he should
be held liable for the administrative offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE
SERVICE.
Premises considered, the Investigating Committee recommends that respondent SAPPARI SAWADJAAN
be meted the penalty of SIX (6) MONTHS and ONE (1) DAY SUSPENSION from office in accordance with
the Civil Service Commissions Memorandum Circular No. 30, Series of 1989.
On 13 December 1993, the Board of Directors of the Islamic Bank [AIIBP] adopted Resolution No. 2309
finding petitioner guilty of Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to
the Best Interest of the Service and imposing the penalty of Dismissal from the Service.
On reconsideration, the Board of Directors of the Islamic Bank [AIIBP] adopted the Resolution No. 2332
on 20 February 1994 reducing the penalty imposed on petitioner from dismissal to suspension for a
period of six (6) months and one (1) day.
On 29 March 1994, petitioner filed a notice of appeal to the Merit System Protection Board (MSPB).
On 11 August 1994, the CSC adopted Resolution No. 94-4483 dismissing the appeal for lack of merit and
affirming Resolution No. 2309 dated 13 December 1993 of the Board of Directors of Islamic Bank.
On 11 April 1995, the CSC adopted Resolution No. 95-2574 denying petitioners Motion for
Reconsideration.
On 16 June 1995, the instant petition was filed with the Honorable Supreme Court on the following
assignment of errors:
I. Public respondent Al-Amanah Islamic Investment Bank of the Philippines has committed a grave
abuse of discretion amounting to excess or lack of jurisdiction when it initiated and conducted
administrative investigation without a validly promulgated rules of procedure in the adjudication of
administrative cases at the Islamic Bank.
II. Public respondent Civil Service Commission has committed a grave abuse of discretion
amounting to lack of jurisdiction when it prematurely and falsely assumed jurisdiction of the case not
appealed to it, but to the Merit System Protection Board.
III. Both the Islamic Bank and the Civil Service Commission erred in finding petitioner Sawadjaan of
having deliberately reporting false information and therefore guilty of Dishonesty and Conduct
Prejudicial to the Best Interest of the Service and penalized with dismissal from the service.
On 04 July 1995, the Honorable Supreme Court En Banc referred this petition to this Honorable Court
pursuant to Revised Administrative Circular No. 1-95, which took effect on 01 June 1995.
We do not find merit [in] the petition.
Anent the first assignment of error, a reading of the records would reveal that petitioner raises for the
first time the alleged failure of the Islamic Bank [AIIBP] to promulgate rules of procedure governing the
adjudication and disposition of administrative cases involving its personnel. It is a rule that issues not
properly brought and ventilated below may not be raised for the first time on appeal, save in exceptional
circumstances (Casolita, Sr. v. Court of Appeals, 275 SCRA 257) none of which, however, obtain in this
case. Granting arguendo that the issue is of such exceptional character that the Court may take
cognizance of the same, still, it must fail. Section 26 of Republic Act No. 6848 (1990) provides:
Section 26. Powers of the Board. The Board of Directors shall have the broadest powers to manage the
Islamic Bank, x x x The Board shall adopt policy guidelines necessary to carry out effectively the

provisions of this Charter as well as internal rules and regulations necessary for the conduct of its
Islamic banking business and all matters related to personnel organization, office functions and salary
administration. (Italics ours)
On the other hand, Item No. 2 of Executive Order No. 26 (1992) entitled Prescribing Procedure and
Sanctions to Ensure Speedy Disposition of Administrative Cases directs, all administrative agencies to
adopt and include in their respective Rules of Procedure provisions designed to abbreviate
administrative proceedings.
The above two (2) provisions relied upon by petitioner does not require the Islamic Bank [AIIBP] to
promulgate rules of procedure before administrative discipline may be imposed upon its employees. The
internal rules of procedures ordained to be adopted by the Board refers to that necessary for the
conduct of its Islamic banking business and all matters related to personnel organization, office
functions and salary administration. On the contrary, Section 26 of RA 6848 gives the Board of Directors
of the Islamic Bank the broadest powers to manage the Islamic Bank. This grant of broad powers would
be an idle ceremony if it would be powerless to discipline its employees.
The second assignment of error must likewise fail. The issue is raised for the first time via this petition
for certiorari. Petitioner submitted himself to the jurisdiction of the CSC. Although he could have raised
the alleged lack of jurisdiction in his Motion for Reconsideration of Resolution No. 94-4483 of the CSC, he
did not do so. By filing the Motion for Reconsideration, he is estopped from denying the CSCs jurisdiction
over him, as it is settled rule that a party who asks for an affirmative relief cannot later on impugn the
action of the tribunal as without jurisdiction after an adverse result was meted to him. Although
jurisdiction over the subject matter of a case may be objected to at any stage of the proceedings even
on appeal, this particular rule, however, means that jurisdictional issues in a case can be raised only
during the proceedings in said case and during the appeal of said case (Aragon v. Court of Appeals, 270
SCRA 603). The case at bar is a petition [for] certiorari and not an appeal.
But even on the merits the argument must falter. Item No. 1 of CSC Resolution No. 93-2387 dated 29
June 1993, provides:
Decisions in administrative cases involving officials and employees of the civil service appealable to the
Commission pursuant to Section 47 of Book V of the Code (i.e., Administrative Code of 1987) including
personnel actions such as contested appointments shall now be appealed directly to the Commission
and not to the MSPB.
In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it was categorically held:
. . . The functions of the MSPB relating to the determination of administrative disciplinary cases were, in
other words, re-allocated to the Commission itself.
Be that as it may, (i)t is hornbook doctrine that in order `(t)o ascertain whether a court (in this case,
administrative agency) has jurisdiction or not, the provisions of the law should be inquired into.
Furthermore, `the jurisdiction of the court must appear clearly from the statute law or it will not be held
to exist.(Azarcon v. Sandiganbayan, 268 SCRA 747, 757) From the provision of law abovecited, the Civil
Service Commission clearly has jurisdiction over the Administrative Case against petitioner.
Anent the third assignment of error, we likewise do not find merit in petitioners proposition that he
should not be liable, as in the first place, he was not qualified to perform the functions of
appraiser/investigator because he lacked the necessary training and expertise, and therefore, should not
have been found dishonest by the Board of Directors of Islamic Bank [AIIBP] and the CSC. Petitioner
himself admits that the position of appraiser/inspector is one of the most serious [and] sensitive job in
the banking operations. He should have been aware that accepting such a designation, he is obliged to
perform the task at hand by the exercise of more than ordinary prudence. As appraiser/investigator, he
is expected, among others, to check the authenticity of the documents presented by the borrower by
comparing them with the originals on file with the proper government office. He should have made it
sure that the technical descriptions in the location plan on file with the Bureau of Lands of Marikina, jibe
with that indicated in the TCT of the collateral offered by CAMEC, and that the mortgage in favor of the
Islamic Bank was duly annotated at the back of the copy of the TCT kept by the Register of Deeds of
Marikina. This, petitioner failed to do, for which he must be held liable. That he did not profit from his
false report is of no moment. Neither the fact that it was not deliberate or willful, detracts from the
nature of the act as dishonest. What is apparent is he stated something to be a fact, when he really was
not sure that it was so.
WHEREFORE, above premises considered, the instant Petition is DISMISSED, and the assailed
Resolutions of the Civil Service Commission are hereby AFFIRMED.

On 24 March 1999, Sawadjaans counsel notified the court a quo of his change of address, [11] but
apparently neglected to notify his client of this fact. Thus, on 23 July 1999, Sawadjaan, by himself, filed a
Motion for New Trial[12] in the Court of Appeals based on the following grounds: fraud, accident, mistake
or excusable negligence and newly discovered evidence. He claimed that he had recently discovered
that at the time his employment was terminated, the AIIBP had not yet adopted its corporate by-laws.
He attached a Certification[13] by the Securities and Exchange Commission (SEC) that it was only on 27
May 1992 that the AIIBP submitted its draft by-laws to the SEC, and that its registration was being held
in abeyance pending certain corrections being made thereon. Sawadjaan argued that since the AIIBP
failed to file its by-laws within 60 days from the passage of Rep. Act No. 6848, as required by Sec. 51 of
the said law, the bank and its stockholders had already forfeited its franchise or charter, including its
license to exist and operate as a corporation,[14] and thus no longer have the legal standing and
personality to initiate an administrative case.
Sawadjaans counsel subsequently adopted his motion, but requested that it be treated as a motion
for reconsideration.[15] This motion was denied by the court a quo in its Resolution of 15 December 1999.
[16]

Still disheartened, Sawadjaan filed the present petition for certiorari under Rule 65 of the Rules of
Court challenging the above Decision and Resolution of the Court of Appeals on the ground that the
court a quo erred: i) in ignoring the facts and evidences that the alleged Islamic Bank has no valid bylaws; ii) in ignoring the facts and evidences that the Islamic Bank lost its juridical personality as a
corporation on 16 April 1990; iii) in ignoring the facts and evidences that the alleged Islamic Bank and
its alleged Board of Directors have no jurisdiction to act in the manner they did in the absence of a valid
by-laws; iv) in not correcting the acts of the Civil Service Commission who erroneously rendered the
assailed Resolutions No. 94-4483 and No. 95-2754 as a result of fraud, falsification and/or
misrepresentations committed by Farouk A. Carpizo and his group, including Roberto F. de Ocampo; v) in
affirming an unconscionably harsh and/or excessive penalty; and vi) in failing to consider newly
discovered evidence and reverse its decision accordingly.
Subsequently, petitioner Sawadjaan filed an Ex-parte Urgent Motion for Additional Extension of Time
to File a Reply (to the Comments of Respondent Al-Amanah Investment Bank of the Philippines), [17] Reply
(to Respondents Consolidated Comment,)[18] and Reply (to the Alleged Comments of Respondent AlAmanah Islamic Bank of the Philippines). [19] On 13 October 2000, he informed this Court that he had
terminated his lawyers services, and, by himself, prepared and filed the following: 1) Motion for New
Trial;[20] 2) Motion to Declare Respondents in Default and/or Having Waived their Rights to Interpose
Objection to Petitioners Motion for New Trial;[21] 3) Ex-Parte Urgent Motions to Punish Attorneys Amado D.
Valdez, Elpidio J. Vega, Alda G. Reyes, Dominador R. Isidoro, Jr., and Odilon A. Diaz for Being in Contempt
of Court & to Inhibit them from Appearing in this Case Until they Can Present Valid Evidence of Legal
Authority;[22] 4) Opposition/Reply (to Respondent AIIBPs Alleged Comment); [23] 5) Ex-Parte Urgent Motion
to Punish Atty. Reynaldo A. Pineda for Contempt of Court and the Issuance of a Commitment
Order/Warrant for His Arrest;[24] 6) Reply/Opposition (To the Formal Notice of Withdrawal of Undersigned
Counsel as Legal Counsel for the Respondent Islamic Bank with Opposition to Petitioners Motion to
Punish Undersigned Counsel for Contempt of Court for the Issuance of a Warrant of Arrest); [25] 7)
Memorandum for Petitioner;[26] 8) Opposition to SolGens Motion for Clarification with Motion for Default
and/or Waiver of Respondents to File their Memorandum; [27] 9) Motion for Contempt of Court and
Inhibition/Disqualification with Opposition to OGCCs Motion for Extension of Time to File Memorandum;
[28]
10) Motion for Enforcement (In Defense of the Rule of Law); [29] 11) Motion and Opposition (Motion to
Punish OGCCs Attorneys Amado D. Valdez, Efren B. Gonzales, Alda G. Reyes, Odilon A. Diaz and
Dominador R. Isidoro, Jr., for Contempt of Court and the Issuance of a Warrant for their Arrest; and
Opposition to their Alleged Manifestation and Motion Dated February 5, 2002); [30] 12) Motion for
Reconsideration of Item (a) of Resolution dated 5 February 2002 with Supplemental Motion for Contempt
of Court;[31] 13) Motion for Reconsideration of Portion of Resolution Dated 12 March 2002; [32] 14) Ex-Parte
Urgent Motion for Extension of Time to File Reply Memorandum (To: CSC and AIIBPs Memorandum);
[33]
15) Reply Memorandum (To: CSCs Memorandum) With Ex-Parte Urgent Motion for Additional
Extension of time to File Reply Memorandum (To: AIIBPs Memorandum); [34] and 16) Reply Memorandum
(To: OGCCs Memorandum for Respondent AIIBP).[35]
Petitioners efforts are unavailing, and we deny his petition for its procedural and substantive flaws.
The general rule is that the remedy to obtain reversal or modification of the judgment on the merits
is appeal. This is true even if the error, or one of the errors, ascribed to the court rendering the judgment
is its lack of jurisdiction over the subject matter, or the exercise of power in excess thereof, or grave
abuse of discretion in the findings of fact or of law set out in the decision. [36]
The records show that petitioners counsel received the Resolution of the Court of Appeals denying
his motion for reconsideration on 27 December 1999. The fifteen day reglamentary period to appeal
under Rule 45 of the Rules of Court therefore lapsed on 11 January 2000. On 23 February 2000, over a
month after receipt of the resolution denying his motion for reconsideration, the petitioner filed his
petition for certiorari under Rule 65.
It is settled that a special civil action for certiorari will not lie as a substitute for the lost remedy of
appeal,[37] and though there are instances[38] where the extraordinary remedy ofcertiorari may be

resorted to despite the availability of an appeal, [39] we find no special reasons for making out an
exception in this case.
Even if we were to overlook this fact in the broader interests of justice and treat this as a special
civil action for certiorari under Rule 65,[40] the petition would nevertheless be dismissed for failure of the
petitioner to show grave abuse of discretion. Petitioners recurrent argument, tenuous at its very best, is
premised on the fact that since respondent AIIBP failed to file its by-laws within the designated 60 days
from the effectivity of Rep. Act No. 6848, all proceedings initiated by AIIBP and all actions resulting
therefrom are a patent nullity. Or, in his words, the AIIBP and its officers and Board of Directors,
. . . [H]ave no legal authority nor jurisdiction to manage much less operate the Islamic Bank, file
administrative charges and investigate petitioner in the manner they did and allegedly passed Board
Resolution No. 2309 on December 13, 1993 which is null and void for lack of an (sic) authorized and
valid by-laws. The CIVIL SERVICE COMMISSION was therefore affirming, erroneously, a null and void
Resolution No. 2309 dated December 13, 1993 of the Board of Directors of Al-Amanah Islamic
Investment Bank of the Philippines in CSC Resolution No. 94-4483 dated August 11, 1994. A motion for
reconsideration thereof was denied by the CSC in its Resolution No. 95-2754 dated April 11, 1995. Both
acts/resolutions of the CSC are erroneous, resulting from fraud, falsifications and misrepresentations of
the alleged Chairman and CEO Roberto F. de Ocampo and the alleged Director Farouk A. Carpizo and his
group at the alleged Islamic Bank. [41]
Nowhere in petitioners voluminous pleadings is there a showing that the court a quo committed
grave abuse of discretion amounting to lack or excess of jurisdiction reversible by a petition
for certiorari. Petitioner already raised the question of AIIBPs corporate existence and lack of jurisdiction
in his Motion for New Trial/Motion for Reconsideration of 27 May 1997 and was denied by the Court of
Appeals. Despite the volume of pleadings he has submitted thus far, he has added nothing substantial
to his arguments.
The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts business, has
shareholders, corporate officers, a board of directors, assets, and personnel. It is, in fact, here
represented by the Office of the Government Corporate Counsel, the principal law office of governmentowned corporations, one of which is respondent bank. [42] At the very least, by its failure to submit its bylaws on time, the AIIBP may be considered a de facto corporation[43] whose right to exercise corporate
powers may not be inquired into collaterally in any private suit to which such corporations may be a
party.[44]
Moreover, a corporation which has failed to file its by-laws within the prescribed period does
not ipso facto lose its powers as such. The SEC Rules on Suspension/Revocation of the Certificate of
Registration of Corporations,[45] details the procedures and remedies that may be availed of before an
order of revocation can be issued. There is no showing that such a procedure has been initiated in this
case.
In any case, petitioners argument is irrelevant because this case is not a corporate controversy, but
a labor dispute; and it is an employers basic right to freely select or discharge its employees, if only as a
measure of self-protection against acts inimical to its interest. [46] Regardless of whether AIIBP is a
corporation, a partnership, a sole proprietorship, or a sari-saristore, it is an undisputed fact that AIIBP is
the petitioners employer. AIIBP chose to retain his services during its reorganization, controlled the
means and methods by which his work was to be performed, paid his wages, and, eventually,
terminated his services.[47]
And though he has had ample opportunity to do so, the petitioner has not alleged that he is
anything other than an employee of AIIBP. He has neither claimed, nor shown, that he is a stockholder or
an officer of the corporation. Having accepted employment from AIIBP, and rendered his services to the
said bank, received his salary, and accepted the promotion given him, it is now too late in the day for
petitioner to question its existence and its power to terminate his services. One who assumes an
obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that
there was in fact no corporation.[48]
Even if we were to consider the facts behind petitioner Sawadjaans dismissal from service, we would
be hard pressed to find error in the decision of the AIIBP.
As appraiser/investigator, the petitioner was expected to conduct an ocular inspection of the
properties offered by CAMEC as collaterals and check the copies of the certificates of title against those
on file with the Registry of Deeds. Not only did he fail to conduct these routine checks, but he also
deliberately misrepresented in his appraisal report that after reviewing the documents and conducting a
site inspection, he found the CAMEC loan application to be in order. Despite the number of pleadings he
has filed, he has failed to offer an alternative explanation for his actions.
When he was informed of the charges against him and directed to appear and present his side on
the matter, the petitioner sent instead a memorandum questioning the fairness and impartiality of the
members of the investigating committee and refusing to recognize their jurisdiction over him.
Nevertheless, the investigating committee rescheduled the hearing to give the petitioner another
chance, but he still refused to appear before it.

Thereafter, witnesses were presented, and a decision was rendered finding him guilty of dishonesty
and dismissing him from service. He sought a reconsideration of this decision and the same committee
whose impartiality he questioned reduced their recommended penalty to suspension for six months and
one day. The board of directors, however, opted to dismiss him from service.
On appeal to the CSC, the Commission found that Sawadjaans failure to perform his official duties
greatly prejudiced the AIIBP, for which he should be held accountable. It held that:
. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was remiss in the performance of his duties
as appraiser/inspector. Had respondent performed his duties as appraiser/inspector, he could have
easily noticed that the property located at Balintawak, Caloocan City covered by TCT No. C-52576 and
which is one of the properties offered as collateral by CAMEC is encumbered to Divina Pablico. Had
respondent reflected such fact in his appraisal/inspection report on said property the ISLAMIC BANK
would not have approved CAMECs loan of P500,000.00 in 1987 and CAMECs P5 Million loan in 1988,
respondent knowing fully well the Banks policy of not accepting encumbered properties as collateral.
Respondent SAWADJAANs reprehensible act is further aggravated when he failed to check and verify
from the Registry of Deeds of Marikina the authenticity of the property located at Mayamot, Antipolo,
Rizal covered by TCT No. N-130671 and which is one of the properties offered as collateral by CAMEC for
its P5 Million loan in 1988. If he only visited and verified with the Register of Deeds of Marikina the
authenticity of TCT No. N-130671 he could have easily discovered that TCT No. N-130671 is fake and the
property described therein non-existent.
...
This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to perform his
official duties resulted to the prejudice and substantial damage to the ISLAMIC BANK for which he should
be held liable for the administrative offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE
SERVICE.[49]
From the foregoing, we find that the CSC and the court a quo committed no grave abuse of
discretion when they sustained Sawadjaans dismissal from service. Grave abuse of discretion implies
such capricious and whimsical exercise of judgment as equivalent to lack of jurisdiction, or, in other
words, where the power is exercised in an arbitrary or despotic manner by reason of passion or personal
hostility, and it must be so patent and gross as to amount to an evasion of positive duty or to a virtual
refusal to perform the duty enjoined or to act at all in contemplation of law. [50] The records show that the
respondents did none of these; they acted in accordance with the law.
WHEREFORE, the petition is DISMISSED. The Decision of the Court of Appeals of 30 March 1999
affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil Service Commission, and its Resolution of
15 December 1999 are hereby AFFIRMED. Costs against the petitioner.
SO ORDERED.
G.R. No. L-37640

December 21, 1933

THE GOVERNMENT OF THE

INSULAR, Defendant-Appellant.
Ramirez
and
Attorney-General Jaranilla for appellee.

PHILIPPINE

ISLANDS, Plaintiff-Appellee,

Ortigas

for

vs. EL

AHORRO

appellant.

IMPERIAL, J.:
On September 28, 1931, the Government of the Philippine Islands, through the Attorney-General,
instituted quo warranto proceedings against El Ahorro Insular, a mutual building and loan association,
organized
under
Act
No.
1459
commonly
known
as
the
"Corporation
Law",
as
amended.chanroblesvirtualawlibrary chanrobles virtual law library
The action was based on eight alleged causes of action under which the plaintiff sought the following
remedies: (1) That the defendant be deprived of all its corporate rights, privileges and franchises; (2)
that the defendant corporation be dissolved; and (3) that the plaintiff be granted such other just and
equitable relief. The dispositive part of the judgment rendered therein reads as follows:
For the foregoing reasons, the defendant corporation is hereby ordered to comply with the orders and
instructions of the Bank Commissioner and the Secretary of Finance mentioned in the first, second, third,
fourth and seventh causes of action shall become final. If the defendant fails or refuses to comply with
this order, the defendant corporation shall be dissolved.chanroblesvirtualawlibrary chanrobles virtual
law library

It seems to the court that it would work a great hardship on the defendant and be impracticable to
require it to carry into effect the orders mentioned in the first and fourth causes of action from the
beginning of its operations. Said orders will therefore be given effect from the first of January,
1932.chanroblesvirtualawlibrary chanrobles virtual law library
The defendant will pay the costs. It is so ordered.
The defendant excepted to the decision in toto. However, in its brief it assigns as alleged error only that
part thereof relative to the first, third and seventh causes of action. Inasmuch as the present decision
hinges only on the four alleged errors relied upon, it relieves us of the task of discussing the questions
involved in the other causes of action alleged in the complaint. The assignments of error in question, as
translated, read as follows:
I. The trial court erred in prohibiting to defendant from paying a certain compensation to its
incorporators:
( a)
Because
the
said
incorporators
( b) Because the compensation was just and valid.

were

not

parties

to

the

suit.

II. The trial court erred in ordering the defendant to demand the payment of certain loans obtained on
"fundadores" shares:
( a)
Because
the
plaintiff
failed
to
prove
the
facts
as
alleged
therein.
( b) Because a suit involving the same transaction is pending before this Honorable Court.
( c) Because the whole transaction was perfectly valid and legal.
III. The trial court erred in holding it illegal for the defendant to maintain a certain proportion between its
share by means of closing the issuance of certain shares.chanroblesvirtualawlibrary chanrobles virtual
law library
IV. The trial court erred in denying the defendant's motion for a new trial.
The facts relative to the first assignment of error are as follows: On February 23, 1930, at the general
meeting of the stockholders of the defendant corporation, the resolution Exhibit J granting a
compensation of P140,000 to six incorporators was adopted. For one reason or another, or perhaps
because they already doubted the legality thereof, the beneficiaries renounced said compensation. At
another general meeting of the stockholders held on February 22, 1931, the resolution Exhibit L was
unanimously approved, whereby the board of directors was ordered to set aside annually a sum
equivalent to between 2 per cent and 8 per cent of the net profits of the corporation, which sum must
not exceed P140,000, for the purpose of compensating equally six incorporators. The incorporators
likewise renounced such compensation. Notwithstanding said renunciations, at least the last resolution
subsists. However, neither the board of directors nor the stockholders would repeal it in spite of the
instructions given by the Bank Commissioner to the effect that they were illegal on the ground that they
are in conflict with the spirit and purpose of mutual building and loan associations and with the express
provisions of the Corporation Law.chanroblesvirtualawlibrary chanrobles virtual law library
The defendant contends that the compensation voted by the stockholders to be given to the
incorporators is valid and is within the scope of its corporate powers. In the cases ofBarretto vs. La
Previsora Filipina (57 Phil., 649), and Viuda de Barretto vs. La PrevisoraFilipina (p. 212, post), in which
the decisions rendered have been published recently, it was held that compensations and remunerations
of similar character are null and void and illegal on the ground that they do not constitute a contract
between the beneficiaries and the corporation, and that they are violative of the mutuality and
cooperation which are the characteristic purposes that distinguish mutual building and loan associations
from other ordinary corporations.chanroblesvirtualawlibrary chanrobles virtual law library
However, the defendant insists that the trial court erred in that respect: ( a) Because judgment was
rendered against the incorporators-beneficiaries without giving them a chance to be heard, and ( b)
because in the case of Government of the Philippine Islandsvs. El Hogar Filipino (50 Phil., 399), another
clause granting 5 per cent of the net profits of the corporation in favor of the founder thereof was held
to be valid.chanroblesvirtualawlibrary chanrobles virtual law library
In fact and in conformity with the provisions of the procedural law, no judgment has been rendered in
the present case against the incorporators in whose favor the compensation was granted. It should be
observed that the action instituted by the Government is in the nature of quo warranto proceedings for
the sole purpose of testing the validity of certain resolutions adopted by the defendant. It is for this
reason that the incorporators were not included as parties defendant. Neither was there any necessity of
doing so. Whether the incorporators acquired any enforceable right under such resolutions or not, is a

question to be decided between them and the defendant, to the exclusion of the herein
plaintiff.chanroblesvirtualawlibrary chanrobles virtual law library
The case of El Hogar Filipino invoked by the defendant, was also taken into consideration when similar
questions raised in the Barretto cases were decided. It was then held that there was no similarity in the
facts involved therein on the ground that in the El Hogar case there had been a contract ratified by it
through its board of directors and because some of the considerations of the said contract had been: the
important services which the founder thereof was to render; the loan of P6,000 which he granted
without interest; his payment of the organization expenses out of his own pocket and his promise to the
effect that the capital of the corporation would not be less than P400,000. None of these considerations
are found in the case of the incorporators. As we understand, the only consideration of the proposed
compensation is the alleged services rendered by them prior and up to the time of the incorporation of
the defendant.chanroblesvirtualawlibrary chanrobles virtual law library
The second assignment of error has its own origin in a clause in the by-laws, which reads as follows:
Paid-up shares denominated "fundadores" shares shall have a par value of two hundred pesos (P200)
each, fully paid, and shall be issued from the date the association is incorporated until such time as the
Board of Directors deems such issuance closed, provided that shares of this series shall not exceed two
thousand five hundred (2,500) in number. Until January 1, 1933, these shares bear interest at the rate of
10 per cent per annum payable on the 31st of December of every calendar year. However, from the
aforesaid date forward, they shall bear interest at the rate of 12 per cent annum payable at the
expiration of every semester. Holders of this kind of shares shall have no other participation in the
profits of the corporation than the right to collect the afore-stated fixed dividend . . . .
Several organizers and directors of the defendant corporation, their relatives and business associates
subscribed for the "fundadores" shares paying only 20 per cent or less of the par value thereof and
issuing promissory notes for the unpaid balance, secured by the pledge of the same shares so issued.
The Bank Commissioner objected to this method of operation and ordered that said shares be cancelled
or full payment thereof be demanded of the subscribers. The defendant appealed to the Secretary of
Finance who granted it a period of ten days within which to demand the payment in cash of all the
promissory notes secured by the "fundadores" shares, adding that in case said promissory notes are not
paid for within the required period, the validity of the shares already issued shall not thenceforth be
questioned, provided however that no loan on said "fundadores" shares would from that time on be
granted unless made within six months from the date they are fully paid for and the Bank Commissioner
is satisfied that it is a bona fide transaction and permits it. He ruled, further, that in case the promissory
notes in question were not paid within ten days, the corresponding "fundadores" shares would be
considered null and void and must be cancelled.chanroblesvirtualawlibrary chanrobles virtual law library
Instead of complying with the above-mentioned resolutions, the defendant instituted civil case No.
37703 of the Court of First Instance of Manila which resulted in a decision sustaining the Bank
Commissioner and the Secretary of Finance and holding their disputed resolutions valid. Said case was
appealed and registered in this court as G.R. No. 35982. 1The said appeal, however, was dismissed upon
petition of the herein defendant, the plaintiff-appellant, as evidenced by the resolution of this court
dated August 11,1932.chanroblesvirtualawlibrary chanrobles virtual law library
As hereinbefore stated, the court sustaining the Bank Commissioner and the Secretary of Finance held
that the transaction in question was illegal and the instructions given by the aforesaid administrative
authorities should have been complied with. However, the defendant claims in its second assignment of
error that the judgment of the trial court is untenable and erroneous: ( a) Because the plaintiff has not
proven the facts as alleged by it; ( b) because a suit involving the transaction in question is pending
before
this
court;
and
( c)
because
the
whole
transaction
is
valid
and
legal.chanroblesvirtualawlibrary chanrobles virtual law library
With respect to the first point, we are of the opinion that the facts stated therein are beyond question.
The defendant itself admits them implicitly in the course of its arguments. The existence of such kind of
shares cannot be denied.chanroblesvirtualawlibrary chanrobles virtual law library
As to the pending suit, it may be noted that the case instituted by the defendant against Unson and
Martin, G. R. No. 35982, supra, has already been decided, having resulted in the dismissal of the appeal
taken therein. If the alleged pendency of the said case was a bar to the discussion of the point in
controversy in this case, undoubtedly the defendant wished to convey the idea that the final judgment
that would be rendered therein should be respected by the parties. If such is the theory, as it
undoubtedly is, it is unnecessary to pass upon this point of the present appeal, on the ground that it had
already been decided conclusively in the judgment rendered by the trial court in the aforesaid case,
which judgment became final upon the dismissal of the appeal taken therefrom. For this reason the
Attorney-General abstained from discussing the second assignment of error in detail in his brief. We
deem it likewise our duty to abstain from passing upon this same point which had already been decided

finally
and
in
which
the
parties
abided
therein.chanroblesvirtualawlibrary chanrobles virtual law library

by

the

judgment

rendered

In our opinion, the third assignment of error involves purely academic and imaginary questions. We have
read the decision of the trial court carefully but we have not found anything therein to the effect that it
has held illegal the maintenance by the defendant of a certain proportion between its shares by means
of closing the issuance of other shares. What the trial court really said in connection with paragraph ( c)
of the second cause of action was that the tables contained in the defendant's prospectus, whereby it
assured that the accumulative shares would mature after a certain number of years and would earn as
general average a dividend of 18 per cent, were illegal and misleading to the public on the ground that
the defendant and its board of directors could not make any such promises nor give similar assurances
to anybody inasmuch as the results thereof were dependent upon circumstances over which it had
absolutely no control. It is a far cry from this pronouncement to the proposition submitted by the
defendant in its third assignment of error. The Attorney-General has called attention to this same fact in
his brief. We conclude that the question raised by the defendant in its aforesaid assignment of error is
purely
imaginary
and
anticipatory.
Therefore,
it
merits
no
discussion
nor
solution.chanroblesvirtualawlibrary chanrobles virtual law library
Being a mere corollary of the former ones, the last assignment of error does not deserve any further
consideration.chanroblesvirtualawlibrary chanrobles virtual law library
Wherefore, being convinced that the judgment appealed from is in accordance with the law in so far as it
refers to the questions hereinbefore discussed and decided, it is hereby affirmed, with the costs against
the defendant-appellant. So ordered.chanroblesvirtualawlibrary chanrobles virtual law library
Street, Malcolm, Butte, and Diaz, JJ., concur. chanrobles virtual law library
G.R. No. L-43350 December 23, 1937
CAGAYAN
FISHING
DEVELOPMENT
vs.
TEODORO SANDIKO, defendant-appellee.
Arsenio
P.
Dizon
Sumulong, Lavides and Sumulong for appellee.

CO.,

INC., plaintiff-appellant,

for

appellant.

LAUREL, J.:
This is an appeal from a judgment of the Court of First Instance of Manila absolving the defendant from
the plaintiff's complaint.
Manuel Tabora is the registered owner of four parcels of land situated in the barrio of Linao, town of
Aparri, Province of Cagayan, as evidenced by transfer certificate of title No. 217 of the land records of
Cagayan, a copy of which is in evidence as Exhibit 1. To guarantee the payment of a loan in the sum of
P8,000, Manuel Tabora, on August 14, 1929, executed in favor of the Philippine National Bank a first
mortgage on the four parcels of land above-mentioned. A second mortgage in favor of the same bank
was in April of 1930 executed by Tabora over the same lands to guarantee the payment of another loan
amounting to P7,000. A third mortgage on the same lands was executed on April 16, 1930 in favor of
Severina Buzon to whom Tabora was indebted in the sum of P2,9000. These mortgages were registered
and annotations thereof appear at the back of transfer certificate of title No. 217.
On May 31, 1930, Tabora executed a public document entitled "Escritura de Transpaso de Propiedad
Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by him was sold to the plaintiff
company, said to under process of incorporation, in consideration of one peso (P1) subject to the
mortgages in favor of the Philippine National Bank and Severina Buzon and, to the condition that the
certificate of title to said lands shall not be transferred to the name of the plaintiff company until the
latter has fully and completely paid Tabora's indebtedness to the Philippine National Bank.
The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry on
October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board of directors of said company
adopted a resolution (Exhibit G) authorizing its president, Jose Ventura, to sell the four parcels of lands in
question to Teodoro Sandiko for P42,000. Exhibits B, C and D were thereafter made and executed.
Exhibit B is a deed of sale executed before a notary public by the terms of which the plaintiff sold ceded
and transferred to the defendant all its right, titles, and interest in and to the four parcels of land
described in transfer certificate in turn obligated himself to shoulder the three mortgages hereinbefore
referred to. Exhibit C is a promisory note for P25,300. drawn by the defendant in favor of the plaintiff,
payable after one year from the date thereof. Exhibit D is a deed of mortgage executed before a notary

public in accordance with which the four parcels of land were given a security for the payment of the
promissory note, Exhibit C. All these three instrument were dated February 15, 1932.
The defendant having failed to pay the sum stated in the promissory note, plaintiff, on January 25, 1934,
brought this action in the Court of First Instance of Manila praying that judgment be rendered against
the defendant for the sum of P25,300, with interest at legal rate from the date of the filing of the
complaint, and the costs of the suits. After trial, the court below, on December 18, 1934, rendered
judgment absolving the defendant, with costs against the plaintiff. Plaintiff presented a motion for new
trial on January 14, 1935, which motion was denied by the trial court on January 19 of the same year.
After due exception and notice, plaintiff has appealed to this court and makes an assignment of various
errors.
In dismissing the complaint against the defendant, the court below, reached the conclusion that Exhibit
B is invalid because of vice in consent and repugnancy to law. While we do not agree with this
conclusion, we have however voted to affirm the judgment appealed from the reasons which we shall
presently state.
The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was affected
on May 31, 1930 (Exhibit A) and the actual incorporation of said company was affected later on October
22, 1930 (Exhibit 2). In other words, the transfer was made almost five months before the incorporation
of the company. Unquestionably, a duly organized corporation has the power to purchase and hold such
real property as the purposes for which such corporation was formed may permit and for this purpose
may enter into such contracts as may be necessary (sec. 13, pars. 5 and 9, and sec. 14, Act No. 1459).
But before a corporation may be said to be lawfully organized, many things have to be done. Among
other things, the law requires the filing of articles of incorporation (secs. 6 et seq., Act. No. 1459).
Although there is a presumption that all the requirements of law have been complied with (sec. 334, par.
31 Code of Civil Procedure), in the case before us it can not be denied that the plaintiff was not yet
incorporated when it entered into a contract of sale, Exhibit A. The contract itself referred to the plaintiff
as "una sociedad en vias de incorporacion." It was not even a de facto corporation at the time. Not being
in legal existence then, it did not possess juridical capacity to enter into the contract.
Corporations are creatures of the law, and can only come into existence in the manner prescribed
by law. As has already been stated, general law authorizing the formation of corporations are
general offers to any persons who may bring themselves within their provisions; and if conditions
precedent are prescribed in the statute, or certain acts are required to be done, they are terms of
the offer, and must be complied with substantially before legal corporate existence can be
acquired. (14 C. J., sec. 111, p. 118.)
That a corporation should have a full and complete organization and existence as an entity
before it can enter into any kind of a contract or transact any business, would seem to be self
evident. . . . A corporation, until organized, has no being, franchises or faculties. Nor do those
engaged in bringing it into being have any power to bind it by contract, unless so authorized by
the charter there is not a corporation nor does it possess franchise or faculties for it or others to
exercise, until it acquires a complete existence. (Gent vs. Manufacturers and Merchant's Mutual
Insurance Company, 107 Ill., 652, 658.)
Boiled down to its naked reality, the contract here (Exhibit A) was entered into not between Manuel
Tabora and a non-existent corporation but between the Manuel Tabora as owner of the four parcels of
lands on the one hand and the same Manuel Tabora, his wife and others, as mere promoters of a
corporations on the other hand. For reasons that are self-evident, these promoters could not have acted
as agent for a projected corporation since that which no legal existence could have no agent. A
corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa
mere. This is not saying that under no circumstances may the acts of promoters of a corporation be
ratified by the corporation if and when subsequently organized. There are, of course, exceptions
(Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, secs. 207 et seq.), but under the peculiar facts
and circumstances of the present case we decline to extend the doctrine of ratification which would
result in the commission of injustice or fraud to the candid and unwary.(Massachusetts rule, Abbott vs.
Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193; citing English cases;
Koppel vs. Massachusetts Brick Co., 192 Mass., 223; 78 N. E., 128; Holyoke Envelope Co., vs. U. S.
Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should be observed that Manuel Tabora was the registered
owner of the four parcels of land, which he succeeded in mortgaging to the Philippine National Bank so
that he might have the necessary funds with which to convert and develop them into fishery. He
appeared to have met with financial reverses. He formed a corporation composed of himself, his wife,
and a few others. From the articles of incorporation, Exhibit 2, it appears that out of the P48,700,
amount of capital stock subscribed, P45,000 was subscribed by Manuel Tabora himself and P500 by his
wife, Rufina Q. de Tabora; and out of the P43,300, amount paid on subscription, P42,100 is made to
appear as paid by Tabora and P200 by his wife. Both Tabora and His wife were directors and the latter
was treasurer as well. In fact, to this day, the lands remain inscribed in Tabora's name. The defendant
always regarded Tabora as the owner of the lands. He dealt with Tabora directly. Jose Ventura, president

of the plaintiff corporation, intervened only to sign the contract, Exhibit B, in behalf of the plaintiff. Even
the Philippine National Bank, mortgagee of the four parcels of land, always treated Tabora as the owner
of the same. (SeeExhibits E and F.) Two civil suits (Nos. 1931 and 38641) were brought against Tabora in
the Court of First Instance of Manila and in both cases a writ of attachment against the four parcels of
land was issued. The Philippine National Bank threatened to foreclose its mortgages. Tabora approached
the defendant Sandiko and succeeded in the making him sign Exhibits B, C, and D and in making him,
among other things, assume the payment of Tabora's indebtedness to the Philippine National Bank. The
promisory note, Exhibit C, was made payable to the plaintiff company so that it may not attached by
Tabora's creditors, two of whom had obtained writs of attachment against the four parcels of land.
If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it follows
that it did not possess any resultant right to dispose of them by sale to the defendant, Teodoro Sandiko.
Some of the members of this court are also of the opinion that the transfer from Manuel Tabora to the
Cagayan Fishing Development Company, Inc., which transfer is evidenced by Exhibit A, was subject to a
condition precedent (condicion suspensiva), namely, the payment of the mortgage debt of said Tabora
to the Philippine National Bank, and that this condition not having been complied with by the Cagayan
Fishing Development Company, Inc., the transfer was ineffective. (Art. 1114, Civil Code; Wise & Co. vs.
Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having arrived at the conclusion that the
transfer by Manuel Tabora to the Cagayan Fishing Development Company, Inc. was null because at the
time it was affected the corporation was non-existent, we deem it unnecessary to discuss this
point.lawphil.net
The decision of the lower court is accordingly affirmed, with costs against the appellant. So Ordered.
Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
G.R. No. L-28113

March 28, 1969

THE
MUNICIPALITY
OF
MALABANG,
LANAO
DEL
SUR,
and
AMER
MACAORAO
BALINDONG, petitioners,
vs.
PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI HASAN MACARAMPAD,
FREDERICK V. DUJERTE MONDACO ONTAL, MARONSONG ANDOY, MACALABA INDAR
LAO. respondents.
L.
Amores
and
Jose W. Diokno for respondents.

R.

Gonzales

for

petitioners.

CASTRO, J.:
The petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur, while the
respondent Pangandapun Bonito is the mayor, and the rest of the respondents are the councilors, of the
municipality of Balabagan of the same province. Balabagan was formerly a part of the municipality of
Malabang, having been created on March 15, 1960, by Executive Order 386 of the then President Carlos
P. Garcia, out of barrios and sitios 1 of the latter municipality.
The petitioners brought this action for prohibition to nullify Executive Order 386 and to restrain the
respondent municipal officials from performing the functions of their respective office relying on the
ruling of this Court inPelaez v. Auditor General 2 and Municipality of San Joaquin v. Siva. 3
In Pelaez this Court, through Mr. Justice (now Chief Justice) Concepcion, ruled: (1) that section 23 of
Republic Act 2370 [Barrio Charter Act, approved January 1, 1960], by vesting the power to
create barrios in the provincial board, is a "statutory denial of the presidential authority to create a
new barrio [and] implies a negation of thebigger power to create municipalities," and (2) that section 68
of the Administrative Code, insofar as it gives the President the power to create municipalities, is
unconstitutional (a) because it constitutes an undue delegation of legislative power and (b) because it
offends against section 10 (1) of article VII of the Constitution, which limits the President's power over
local governments to mere supervision. As this Court summed up its discussion: "In short, even if it did
not entail an undue delegation of legislative powers, as it certainly does, said section 68, as part of the
Revised Administrative Code, approved on March 10, 1917, must be deemed repealed by the
subsequent adoption of the Constitution, in 1935, which is utterly incompatible and inconsistent with
said statutory enactment."
On the other hand, the respondents, while admitting the facts alleged in the petition, nevertheless
argue that the rule announced in Pelaez can have no application in this case because unlike the
municipalities involved inPelaez, the municipality of Balabagan is at least a de facto corporation, having
been organized under color of a statute before this was declared unconstitutional, its officers having

been either elected or appointed, and the municipality itself having discharged its corporate functions
for the past five years preceding the institution of this action. It is contended that as a de
facto corporation, its existence cannot be collaterally attacked, although it may be inquired into directly
in an action for quo warranto at the instance of the State and not of an individual like the petitioner
Balindong.
It is indeed true that, generally, an inquiry into the legal existence of a municipality is reserved to the
State in a proceeding for quo warranto or other direct proceeding, and that only in a few exceptions may
a private person exercise this function of government. 4 But the rule disallowing collateral attacks applies
only where the municipal corporation is at least a de facto corporations. 5 For where it is neither a
corporation de jure nor de facto, but a nullity, the rule is that its existence may be, questioned
collaterally or directly in any action or proceeding by any one whose rights or interests ate affected
thereby, including the citizens of the territory incorporated unless they are estopped by their conduct
from doing so. 6
And so the threshold question is whether the municipality of Balabagan is a de facto corporation. As
earlier stated, the claim that it is rests on the fact that it was organized before the promulgation of this
Court's decision inPelaez. 7
Accordingly, we address ourselves to the question whether a statute can lend color of validity to an
attempted organization of a municipality despite the fact that such statute is subsequently declared
unconstitutional.lawphi1.et
This has been a litigiously prolific question, sharply dividing courts in the United States. Thus, some
hold that ade facto corporation cannot exist where the statute or charter creating it is unconstitutional
because there can be no de facto corporation where there can be no de jure one, 8 while others hold
otherwise on the theory that a statute is binding until it is condemned as unconstitutional. 9
An early article in the Yale Law Journal offers the following analysis:
It appears that the true basis for denying to the corporation a de facto status lay in the absence
of any legislative act to give vitality to its creation. An examination of the cases holding, some of
them unreservedly, that a de facto office or municipal corporation can exist under color of an
unconstitutional statute will reveal that in no instance did the invalid act give life to the
corporation, but that either in other valid acts or in the constitution itself the office or the
corporation was potentially created....
The principle that color of title under an unconstitutional statute can exist only where there is
some other valid law under which the organization may be effected, or at least an authority in
potentia by the state constitution, has its counterpart in the negative propositions that there can
be no color of authority in an unconstitutional statute that plainly so appears on its face or that
attempts to authorize the ousting of a de jure or de facto municipal corporation upon the same
territory; in the one case the fact would imply the imputation of bad faith, in the other the new
organization must be regarded as a mere usurper....
As a result of this analysis of the cases the following principles may be deduced which seem to
reconcile the apparently conflicting decisions:
I. The color of authority requisite to the organization of a de facto municipal corporation
may be:
1. A valid law enacted by the legislature.
2. An unconstitutional law, valid on its face, which has either (a) been upheld for a
time by the courts or (b) not yet been declared void; provided that a warrant for its
creation can be found in some other valid law or in the recognition of its potential
existence by the general laws or constitution of the state.
II. There can be no de facto municipal corporation unless either directly or potentially,
such a de jurecorporation is authorized by some legislative fiat.
III. There can be no color of authority in an unconstitutional statute alone, the invalidity of
which is apparent on its face.
IV. There can be no de facto corporation created to take the place of an existing de
jure corporation, as such organization would clearly be a usurper. 10

In the cases where a de facto municipal corporation was recognized as such despite the fact that the
statute creating it was later invalidated, the decisions could fairly be made to rest on the consideration
that there was some other valid law giving corporate vitality to the organization. Hence, in the case at
bar, the mere fact that Balabagan was organized at a time when the statute had not been invalidated
cannot conceivably make it a de facto corporation, as, independently of the Administrative Code
provision in question, there is no other valid statute to give color of authority to its creation. Indeed,
in Municipality of San Joaquin v. Siva, 11 this Court granted a similar petition for prohibition and nullified
an executive order creating the municipality of Lawigan in Iloilo on the basis of the Pelaez ruling, despite
the fact that the municipality was created in 1961, before section 68 of the Administrative Code, under
which the President had acted, was invalidated. 'Of course the issue of de facto municipal corporation
did not arise in that case.
In Norton v. Shelby Count, 12 Mr. Justice Field said: "An unconstitutional act is not a law; it confers no
rights; it imposes no duties; it affords no protection; it creates no office; it is, in legal contemplation, as
inoperative as though it had never been passed." Accordingly, he held that bonds issued by a board of
commissioners created under an invalid statute were unenforceable.
Executive Order 386 "created no office." This is not to say, however, that the acts done by the
municipality of Balabagan in the exercise of its corporate powers are a nullity because the executive
order "is, in legal contemplation, as inoperative as though it had never been passed." For the existence
of Executive, Order 386 is "an operative fact which cannot justly be ignored." As Chief Justice Hughes
explained in Chicot County Drainage District v. Baxter State Bank: 13
The courts below have proceeded on the theory that the Act of Congress, having been found to
be unconstitutional, was not a law; that it was inoperative, conferring no rights and imposing no
duties, and hence affording no basis for the challenged decree. Norton v. Shelby County, 118 U.S.
425, 442; Chicago, I. & L. Ry. Co. v. Hackett, 228 U.S. 559, 566. It is quite clear, however, that
such broad statements as to the effect of a determination of unconstitutionality must be taken
with qualifications. The actual existence of a statute, prior to such a determination, is an
operative fact and may have consequences which cannot justly be ignored. The past cannot
always be erased by a new judicial declaration. The effect of the subsequent ruling as to
invalidity may have to be considered in various aspects with respect to particular relations,
individual and corporate, and particular conduct, private and official. Questions of rights claimed
to have become vested, of status of prior determinations deemed to have finality and acted upon
accordingly, of public policy in the light of the nature both of the statute and of its previous
application, demand examination. These questions are among the most difficult of those which
have engaged the attention of courts, state and federal, and it is manifest from numerous
decisions that an all-inclusive statement of a principle of absolute retroactive invalidity cannot be
justified.
There is then no basis for the respondents' apprehension that the invalidation of the executive order
creating Balabagan would have the effect of unsettling many an act done in reliance upon the validity of
the creation of that municipality. 14
ACCORDINGLY, the petition is granted, Executive Order 386 is declared void, and the respondents are
hereby permanently restrained from performing the duties and functions of their respective offices. No
pronouncement as to costs.
Reyes,
J.B.L.,
Dizon,
Makalintal,
Teehankee and Barredo, JJ., took no part.
G.R. No. L-19118

Zaldivar,

Sanchez

and

Capistrano,

JJ.,

concur.

June 16, 1965

MARIANO
A.
vs.
UNIVERSITY PUBLISHING CO., INC., defendant-appellee.
Uy
and
Artiaga
and
Antonio
M.
Aruego, Mamaril and Associates for defendant-appellee.

ALBERT, plaintiff-appellant,

Molina

for

plaintiff-appellant.

R E S O L U T I O N*
BENGZON, J.P., J.:
Defendant-appellee University Publishing Co., Inc. has two prayers before us: First, that said defendantappellee be granted leave to present original papers not included in the records of this case because
they were never presented in the trial of the case; and second, that the decision promulgated by this
Court on January 30, 1965 be reconsidered.

For a proper appraisal of all the facts and circumstances of this case it becomes necessary and
convenient to trace the origin of the same.
Plaintiff Albert, almost sixteen (16) years ago, sued University Publishing Co., Inc. for breach of contract.
On April 18, 1958, in L-9300, this court awarded the sum of P15,000.00 as damages. On October 24,
1960, in L-15275, to clarify whether the P7,000.00 paid on account should be deducted therefrom, this
Court decided that the amount should be paid in full because said partial payment was already taken
into consideration when it fixed P15,000.00 as damages.
From the inception until the time when the decision in L-15275 was to be executed, corporate existence
on the part of University Publishing Co., Inc. seems to have been taken for granted, for it was not put in
issue in either of the cases abovementioned. However, when the Court of First Instance of Manila issued
on July 22, 1961 an order of execution against University Publishing Co., Inc., plaintiff, speaking also for
the Sheriff of Manila, reported to the Court by petition of August 10, 1961 that there is no such entity as
University Publishing Co., Inc., thereupon praying that, Jose M. Aruego being the real defendant, the writ
of execution be issued against him. Attached to said petition was a certification from the Securities and
Exchange Commission dated July 31, 1961 attesting: "The records of this Commission do not show the
registration of UNIVERSITY PUBLISHING CO., INC., either as a corporation or partnership." The issue of its
corporate existence was then clearly and squarely presented before the court.
University Publishing Co., Inc., instead of informing the lower court that it had in its possession copies of
its certificate of registration its by-laws, and all other pertinent papers material to the point in dispute
corporate existence chose to remain silent thereon. It merely countered the aforesaid petition by
filing through counsel (Jose M. Aruego's own law firm) a manifestation stating that Jose M. Aruego is not
a party to this case and, therefore, plaintiff's petition should be denied. After the court a quo denied the
request that a writ of execution be issued against Jose M. Aruego, plaintiff brought this present appeal
on the issue of the corporate existence of University Publishing Co., Inc., as determinative of the
responsibility of Jose M. Aruego, the person or official who had always moved and acted for and in behalf
of University Publishing Co., Inc.
It may be worth noting again that Jose M. Aruego started the negotiation which culminated in the
contract between the parties, signing said contract as president of University Publishing Co., Inc.
Likewise he was the one who made partial payments up to the amount of P7,000.00 for, and in behalf of
University Publishing Co., Inc. He also appeared not only as a witness but as lawyer, signing some
pleadings or motions in defense of University Publishing Co., Inc., although in other instances it is one of
his associates or members of his law firm who did so. Known is the fact that even a duly existing
corporation can only move and act through natural persons. In this case it was Jose M. Aruego who
moved and acted as or for University, Publishing Co., Inc.
It is elemental that the courts can only decide the merits of a given suit according to the records that are
in the case. It is true that in the two previous cases decided by this Court, the first, awarding damages
(L-9300), the second, clarifying the amount of P15,000.00 awarded as such (L-15275), the corporate
existence of University Publishing Co., Inc. as a legal entity was merely taken for granted.
However, when the said issue was squarely presented before the court, and University Publishing Co.,
Inc. chose to keep the courts in the dark by withholding pertinent documents and papers in its
possession and control, perforce this Court had to decide the points raised according to the records of
the case and whatever related matters necessarily included therein. Hence, as a consequence of the
certification of the Securities and Exchange Commission that its records "do not show the registration of
University Publishing Co., Inc., either as a corporation or partnership," this Court concluded that by
virtue of its non-registration, it can not be considered a corporation. We further said that it has therefore
no personality separate from Jose M. Aruego and that Aruego was in reality the one who answered and
litigated through his own law firm counsel. Stated otherwise, we found that Aruego was in fact, if not in
name, the defendant. 1 Indeed, the judge of the court of first instance wrote in his decision thus:
"Defendant Aruego (all along the judge who pens this decision considered that the defendant here is the
president of the University Publishing Co., Inc. since it was he who really made the contract with Justice
Albert) 2" And this portion of the decision made by the court a quo was never questioned by the
defendant.
The above statement made by the court a quo in its decision compelled this Court to carefully examine
the facts surrounding the dispute starting from the time of the negotiation of the business proposition,
followed by the signing of the contract; considered the benefits received; took into account the partial
payments made, the litigation conducted, the decisions rendered and the appeals undertaken. After thus
considering the facts and circumstances, keeping in mind that even with regard to corporations shown
as duly registered and existing, we have in many a case pierced the veil of corporate fiction to
administer the ends of justice, 3 we held Aruego personally responsible for his acts on behalf of
University Publishing Co., Inc.

Defendant would reply that in all those cases where the Court pierced the veil of corporate fiction the
officials held liable were made party defendants. As stated, defendant-appellee could not even pretend
to possess corporate fiction in view to its non-registration per the evidence so that from the start
Aruego was the real defendant. Since the purpose of formally impleading a party is to assure him a day
in court, once the protective mantle of due process of law has in fact been accorded a litigant, whatever
the imperfection in form, the real litigant may be held liable as a party. Jose M. Aruego definitely had his
day in court, and due process of law was enjoyed by him as a matter of fact as revealed by the records
of the case. 4
The dispositive portion of the decision the reconsideration of which is being sought is the following:
"Premises considered, the order appealed from is hereby set aside and the case remanded ordering the
lower court to hold supplementary proceedings for the purpose of carrying the judgment into effect
against University Publishing Co., Inc. and/or Jose M. Aruego."
According to several cases a litigant is not allowed to speculate on the decision the court may render in
the case.5 The University Publishing Co., Inc. speculated on a favorable decision based on the issue that
Jose M. Aruego, not being a formal party defendant in this case, a writ of execution against him was not
in order. It, therefore, preferred to suppress vital documents under its possession and control rather than
to rebut the certification issued by the Securities and Exchange Commission that according to its records
University Publishing Co., Inc. was not registered. If the lower court's order is sustained, collection of
damages becomes problematical. If a new suit is filed against Aruego, prescription might be considered
as effective defense, aside from the prospect of another ten years of pending litigation. Such are the
possible reasons for adopting the position of speculation of our decision. Our ruling appeared to be
unfavorable to such speculation. It was only after the receipt of the adverse decision promulgated by
this Court that University Publishing Co., Inc., disclosed its registration papers. For purposes of this case
only and according to its particular facts and circumstances, we rule that in view of the late disclosure of
said papers by the University Publishing Co., Inc., the same can no longer considered at this stage of the
proceedings.
Specifically said original papers are:
1. Original Certificate of Registration of the University Publishing Co., Inc., signed by then Director
of Commerce, Cornelio Balmaceda, showing that said company was duly registered as a
corporation with the Mercantile Registry of the then Bureau of Commerce (predecessor of the
Securities and Exchange Commission) as early as August 7, 1936;
2. Original copy of the Articles of Incorporation of the University Publishing Co., Inc consisting of
five (5) pages, showing that said corporation was incorporated as early as August 1, 1936,
Manila, Philippines, with an authorized capital stock of TEN THOUSAND PESOS (P10,000), TWO
THOUSAND PESOS (P2,000.00) of which was fully subscribed and FIVE HUNDRED PESOS
(P500.00), fully paid up; that it had a corporate existence of fifty (50) years and the original
incorporators of the same are: Jose M. Aruego, Jose A. Adeva, Delfin T. Bruno Enrique Rimando
and Federico Mangahas;
3. The original copy of the By-Laws of the University Publishing Co., Inc. consisting of eleven (11)
pages, showing that it exercised its franchise as early as September 4, 1936;
4. A certificate of Reconstitution of Records issued by the Securities and Exchange Commission
recognized the corporate existence of the University Publishing, Co., Inc. as early as August 7,
1936.
Defendant-appellee could have presented the foregoing papers before the lower court to counter the
evidence of non-registration, but defendant-appellee did not do so. It could have reconstituted its
records at that stage of the proceedings, instead of only on April 1, 1965, after decision herein was
promulgated.
It follows, therefore, that defendant-appellee may not now be allowed to submit the abovementioned
papers to form part of the record. Sec. 7 of Rule 48, Rules of Court (in relation to Sec. 1. Rule 42),
invoked by movant, states:
SEC. 7. Original papers may be required. Whenever it is necessary or proper in the opinion of the
court that original papers of any kind should be inspected in the court on appeal, it may make
such order for the transmission, safekeeping, and return of such original papers as may seem
proper, and the court may receive and consider such original papers in connection with the
record.
The provision obviously refers to papers the originals of which are of record in the lower court, which the
appellate court may require to be transmitted for inspection. The original papers in question not having

been presented before the lower court as part of its record, the same cannot be transmitted on appeal
under the aforesaid section. In contrast, the certification as to University Publishing Co., Inc.'s nonregistration forms part of the record in the lower court.
For original papers not part of the lower court's record, the applicable rule is Sec. 1 of Rule 59 on New
Trial. Under said Rule, the papers in question cannot be admitted, because they are not "newly
discovered evidence ," for with due diligence movant could have presented them in the lower court,
since they were in its possession and control.
As far as this case is concerned, therefore, University Publishing Co., Inc. must be deemed as
unregistered, since by defendant-appellee's choice the record shows it to be so. Defendant-appellee
apparently sought to delay the execution by remaining unregistered per the certification of the
Securities and Exchange Commission. It was only when execution was to be carried out, anyway, against
it and/or its president and almost 19 years after the approval of the law authorizing reconstitution
that it reconstituted its records to show its registration, thereby once more attempting to delay the
payment of plaintiff's claim, long since adjudged meritorious. Deciding, therefore, as we must, this
particular case on its record as submitted by the parties, defendant-appellee's proffered evidence of its
corporate existence cannot at this stage be considered to alter the decision reached herein. This is not
to preclude in future cases the consideration of properly submitted evidence as to defendant-appellee's
corporate existence.
WHEREFORE, the motion for reconsideration and for leave to file original papers not in the record, is
hereby denied. It is so ordered.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala, Makalintal and
Zaldivar,
JJ.,
concur.
Barrera, J., took no part.

[G.R. No. 125221. June 19, 1997]

REYNALDO M. LOZANO, petitioner, vs. HON. ELIEZER R. DE LOS SANTOS, Presiding Judge,
RTC, Br. 58, Angeles City; and ANTONIO ANDA,respondents.
DECISION
PUNO, J.:
This petition for certiorari seeks to annul and set aside the decision of the Regional Trial Court,
Branch 58, Angeles City which ordered the Municipal Circuit Trial Court, Mabalacat and Magalang,
Pampanga to dismiss Civil Case No. 1214 for lack of jurisdiction.
The facts are undisputed. On December 19, 1995, petitioner Reynaldo M. Lozano filed Civil Case No.
1214 for damages against respondent Antonio Anda before the Municipal Circuit Trial Court (MCTC),
Mabalacat and Magalang, Pampanga. Petitioner alleged that he was the president of the Kapatirang
Mabalacat-Angeles Jeepney Drivers' Association, Inc. (KAMAJDA) while respondent Anda was the
president of the Samahang Angeles-Mabalacat Jeepney Operators' and Drivers' Association, Inc.
(SAMAJODA); in August 1995, upon the request of the Sangguniang Bayan of Mabalacat, Pampanga,
petitioner and private respondent agreed to consolidate their respective associations and form the
Unified Mabalacat-Angeles Jeepney Operators' and Drivers' Association, Inc. (UMAJODA); petitioner and
private respondent also agreed to elect one set of officers who shall be given the sole authority to
collect the daily dues from the members of the consolidated association; elections were held on October
29, 1995 and both petitioner and private respondent ran for president; petitioner won; private
respondent protested and, alleging fraud, refused to recognize the results of the election; private
respondent also refused to abide by their agreement and continued collecting the dues from the
members of his association despite several demands to desist. Petitioner was thus constrained to file the
complaint to restrain private respondent from collecting the dues and to order him to pay damages in
the amount of P25,000.00 and attorney's fees of P500.00.[1]
Private respondent moved to dismiss the complaint for lack of jurisdiction, claiming that jurisdiction
was lodged with the Securities and Exchange Commission (SEC). The MCTC denied the motion on
February 9, 1996.[2] It denied reconsideration on March 8, 1996.[3]
Private respondent filed a petition for certiorari before the Regional Trial Court, Branch 58, Angeles
City.[4] The trial court found the dispute to be intracorporate, hence, subject to the jurisdiction of the
SEC, and ordered the MCTC to dismiss Civil Case No. 1214 accordingly. [5] It denied reconsideration on
May 31, 1996.[6]

Hence this petition. Petitioner claims that:

"THE RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS
OF JURISDICTION AND SERIOUS ERROR OF LAW IN CONCLUDING THAT THE SECURITIES AND EXCHANGE
COMMISSION HAS JURISDICTION OVER A CASE OF DAMAGES BETWEEN HEADS/PRESIDENTS OF TWO (2)
ASSOCIATIONS WHO INTENDED TO CONSOLIDATE/MERGE THEIR ASSOCIATIONS BUT NOT YET [SIC]
APPROVED AND REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION." [7]
The jurisdiction of the Securities and Exchange Commission (SEC) is set forth in Section 5 of
Presidential Decree No. 902-A. Section 5 reads as follows:
"Section 5. x x x [T]he Securities and Exchange Commission [has] original and exclusive jurisdiction to
hear and decide cases involving:
(a) Devices or schemes employed by or any acts of the board of directors, business associates, its
officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest
of the public and/or of the stockholders, partners, members of associations or organizations registered
with the Commission.
(b) Controversies arising out of intracorporate or partnership relations, between and among
stockholders, members or associates; between any or all of them and the corporation, partnership or
association of which they are stockholders, members, or associates, respectively; and between such
corporation, partnership or association and the state insofar as it concerns their individual franchise or
right to exist as such entity.
(c) Controversies in the election or appointment of directors, trustees, officers or managers of such
corporations, partnerships or associations.
(d) Petitions of corporations, partnerships or associations to be declared in the state of suspension of
payments in cases where the corporation, partnership or association possesses sufficient property to
cover all its debts but foresees the impossibility of meeting them when they respect very fall due or in
cases where the corporation, partnership or association has no sufficient assets to cover its liabilities,
but is under the management of a Rehabilitation Receiver or Management Committee created pursuant
to this Decree."
The grant of jurisdiction to the SEC must be viewed in the light of its nature and function under the law.
[8]
This jurisdiction is determined by a concurrence of two elements: (1) the status or relationship of the
parties; and (2) the nature of the question that is the subject of their controversy. [9]
The first element requires that the controversy must arise out of intracorporate or partnership
relations between and among stockholders, members, or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members or associates,
respectively; and between such corporation, partnership or association and the State in so far as it
concerns their individual franchises.[10] The second element requires that the dispute among the parties
be intrinsically connected with the regulation of the corporation, partnership or association or deal with
the internal affairs of the corporation, partnership or association. [11] After all, the principal function of the
SEC is the supervision and control of corporations, partnerships and associations with the end in view
that investments in these entities may be encouraged and protected, and their activities pursued for the
promotion of economic development.[12]
There is no intracorporate nor partnership relation between petitioner and private respondent. The
controversy between them arose out of their plan to consolidate their respective jeepney drivers' and
operators' associations into a single common association. This unified association was, however, still a
proposal. It had not been approved by the SEC, neither had its officers and members submitted their
articles of consolidation in accordance with Sections 78 and 79 of the Corporation Code. Consolidation
becomes effective not upon mere agreement of the members but only upon issuance of the certificate
of consolidation by the SEC.[13] When the SEC, upon processing and examining the articles of
consolidation, is satisfied that the consolidation of the corporations is not inconsistent with the
provisions of the Corporation Code and existing laws, it issues a certificate of consolidation which makes
the reorganization official.[14] The new consolidated corporation comes into existence and the constituent
corporations dissolve and cease to exist.[15]
The KAMAJDA and SAMAJODA to which petitioner and private respondent belong are duly registered
with the SEC, but these associations are two separate entities. The dispute between petitioner and
private respondent is not within the KAMAJDA nor the SAMAJODA. It is between members of separate
and distinct associations. Petitioner and private respondent have no intracorporate relation much less do
they have an intracorporate dispute. The SEC therefore has no jurisdiction over the complaint.
The doctrine of corporation by estoppel [16] advanced by private respondent cannot override
jurisdictional requirements. Jurisdiction is fixed by law and is not subject to the agreement of the parties.

[17]

It cannot be acquired through or waived, enlarged or diminished by, any act or omission of the
parties, neither can it be conferred by the acquiescence of the court. [18]
Corporation by estoppel is founded on principles of equity and is designed to prevent injustice and
unfairness.[19] It applies when persons assume to form a corporation and exercise corporate functions
and enter into business relations with third persons. Where there is no third person involved and the
conflict arises only among those assuming the form of a corporation, who therefore know that it has not
been registered, there is no corporation by estoppel.[20]
IN VIEW WHEREOF, the petition is granted and the decision dated April 18, 1996 and the order
dated May 31, 1996 of the Regional Trial Court, Branch 58, Angeles City are set aside.The Municipal
Circuit Trial Court of Mabalacat and Magalang, Pampanga is ordered to proceed with dispatch in
resolving Civil Case No. 1214. No costs.
SO ORDERED.
Regalado, (Chairman), Romero, Mendoza, and Torres, Jr., JJ., concur.
G.R. No. 22106

September 11, 1924

ASIA
BANKING
vs.
STANDARD PRODUCTS, CO., INC., defendant-appellant.
Charles
C.
De
Gibbs & McDonough and Roman Ozaeta for appellee.

CORPORATION, plaintiff-appellee,

Selms

for

appellant.

OSTRAND, J.:
This action is brought to recover the sum of P24,736.47, the balance due on the following promissory
note:
P37,757.22

MANILA, P. I.,

Nov. 28, 1921.

MANILA, P. I., Nov. 28, 1921.

On demand, after date we promise to pay to the Asia Banking Corporation, or order, the sum of
thirty-seven thousand seven hundred fifty-seven and 22/100 pesos at their office in Manila, for
value received, together with interest at the rate of ten per cent per annum.
No. ________ Due __________

THE

STANDARD PRODUCTS CO., INC.

By
(Sgd.) GEORGE H. SEAVER

By

President

The court below rendered judgment in favor of the plaintiff for the sum demanded in the complaint, with
interest on the sum of P24,147.34 from November 1, 1923, at the rate of 10 per cent per annum, and
the costs. From this judgment the defendant appeals to this court.
At the trial of the case the plaintiff failed to prove affirmatively the corporate existence of the parties
and the appellant insists that under these circumstances the court erred in finding that the parties were
corporations with juridical personality and assigns same as reversible error.
There is no merit whatever in the appellant's contention. The general rule is that in the absence of fraud
a person who has contracted or otherwise dealt with an association in such a way as to recognize and in
effect admit its legal existence as a corporate body is thereby estopped to deny its corporate existence

in any action leading out of or involving such contract or dealing, unless its existence is attacked for
cause which have arisen since making the contract or other dealing relied on as an estoppel and this
applies to foreign as well as to domestic corporations. (14 C. J., 227; Chinese Chamber of
Commerce vs. Pua Te Ching, 14 Phil., 222.)
The defendant having recognized the corporate existence of the plaintiff by making a promissory note in
its favor and making partial payments on the same is therefore estopped to deny said plaintiff's
corporate existence. It is, of course, also estopped from denying its own corporate existence. Under
these circumstances it was unnecessary for the plaintiff to present other evidence of the corporate
existence of either of the parties. It may be noted that there is no evidence showing circumstances
taking the case out of the rules stated.
The judgment appealed from is affirmed, with the costs against the appellant. So ordered.