Corpo Cases I PDF

Table of Contents
1. Monfort Hermanos Agricultural Development Corp vs 152542; 155472

Monfort III
2. PNB vs AEEC 142936
3. Tayag vs Benguet Consolidated Inc. L-23145
4. PSE vs CA 125469
5. Feliciano vs COA 147402
6. DBP vs NLRC 86293
7. Edward Keller vs COB Group Marketing L-68097
8. LBP vs CA 127181
9. General Credit Corp vs Alsons Development and 154975
Investment
10. Lipat vs Pacific Banking Corp 142435
11. Sta. Monica Industrial Development Corp vs DAR 164846
Regional Director of Region III
12. Martinez vs CA 131673
13. Secosa vs Heirs of Erwin Suarez Francisco 160039
14. Gala vs Ellice Agro-Industrial Corp 156819
15. R&E Transport Inc vs Latag 155214
16. Enriquez Security Services vs Cabotaje 147993
17. ASJ Corp vs Evangelista 158089
18. Mendoza vs Banco Real Development Bank 140923
19. Lafarge Cement Phils vs Continental Cement 155173
20. General Credit Corp vs Alsons development and 154975
inverstment corp
21. Sicam vs Jorge 159617
22. Jardine Davies Inc. vs JRB Realty INc 151438
23. De Leon vs NLRC 112661
24. PCGG vs Sandiganbayan 119609-10; 119623-25
25. JG Summit Holdings Inc vs CA 124293
26. People vs Quasha L-6055
27. PCI bank vs CA 121413; 121479;
128604
28. Ching vs Secretary of Justice 164317
29. MERALCO vs TEAM Electronics Corp 131723
30. ABECEDO Optical vs CA 100152
31. Sawadjaan vs CA 141735
32. Loxano vs De Los Santos 125221
33. International Express Travel vs CA 119002
34. Polytechnic University vs CA 143513
35. Baluyot vs Holganza 136374
36. Castillo vs Balinghasay 150976
37. Commissioner of Interna; Revenue vs CA 108576
38. Republic Planters Bank vs Agana 51765
39. Castillo vs Balinghasay 150976
40. Lanuza vs CA 131394
41. Ang mga Kaanib ng Iglesia ng Dios vs Iglesia ng Dios 137592
kay Kristo Hesus
42. Gala vs Ellice Agro-Industrial Corp 156819
43. Hyatt Elevators vs Goldstar Elevators Phils 161026
44. NHA vs CA 148830
45. Nautica canning Corp vs Yumul 164588
46. Lanuza vs CA 131394
47. China Banking Corp vs CA 117604
48. Sawadjaan vs CA 141735
49. Salafranca vs Philamlife(Pamplona) Vilage Homeowners 121791
Associantion
Corporation Law/alfred0 Page 1 of 1509

suigeneris
50. PMI Colleges vs NLRC 121466
51. Filipinas Port Services vs GO 161886
52. Boyer-Roxas vs CA 100866
53. AF Realty Development Inc vs Dieselman Freight 111448
Services Co
54. San Juan Structual vs CA 129459
55. Phil Associate of Stock Transfer and Registry of Agencies 137321
Inc Vs CA
56. Islamic Directorate of Phils vs CA 129459
57. Lee vs CA 93695
58. Permium Marble Resources vs CA 96551
59. Raniel vs Jochico 153413
60. Tan vs Sycip 153468
61. Expertravel Tours vs CA 152392
62. Central Cooperative exchange vs Enciso L-35603
63. Pampalona Plantation Company vs Acosta 153193
64. Kwok vs Phil Carpet Mfg Corp 149252
65. Secosa vs Heirs of Erwin Suarez Francisco 160039
66. Rovels Enterprises vs Ocampo 136821
67. Ilusorio vs Ilusorio 171659
68. CSC vs Javier 173264
69. Atrium Management Corp Vs CA 109491
70. BPI vs Casa Montessoru Internationale 149454
71. Filipinas Port Services inc vs Go 161886
72. Gokongwei vs SEC L-45911
73. Cebu Country Club vs Eluzagague 160273
74. Malayang Samahan ng Manggagawa sa M. 113907
Greenfields vs Ramos
75. NPC vs CA 113103
76. SEC vs Cuenca 138544
77. AC Ranson Labor Union vs NLRC L-69494
78. Carag vs NLRC 147590
79. Yao Ka Sin Trading vs CA 53820
80. DBP vs CA 126200
81. BPI Leasing Corp vs CA 127624
82. Omictin vs CA 148004
83. CBC vs CA 117604
84. Woodchild Holdings vs Roxas Electric 140667
85. Atrium Management Corp vs CA 109491
86. Yasuma vs Heirs of Cecilio S De Villa 150350
87. NPC vs AlonzoLegasto 148318
88. Lipat vs PBC 142435
89. Peoples Aircargo vs CA 117847
90. Lapulapu Foundation vs CA 126006
91. Francisco vs GSIS L-18287
92. Kwok Phils vs Phil Carpet Mfg Corp 149252
93. Nyco Sakes Corp vs BA finance Corp 71694
94. BPI family savings bank vs FMIC 132390
95. Rovels Enterprises Inc vs Ocampo 136821
96. Alhanbra Cigar vs SEC L-23606
97. Caltex Phils vs PNOC Dipping and Transport Corp 150711
98. Ong Yong vs Tiu 144476
99. Asia’s Emering Dragon Corp vs DOTC 169914; 174166
100. Price and Sulu Development Co., vs Martin L-37281
101. Tan vs Sycip 153468
102. Cojuanco Jr vs Roxas 91925
103. Gochan vs Young 131889
104. Lee vs CA 93695

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105. Everett vs ABC 25241
106. JG Summt Holdingsvs CA 124293
107. Fleischer vs Botica Nolasco L-23241
108. Cyanamid Phil vs CA 108067
109. CIR vs Lincold Phil Lie Insurance Co 119176
110. NATUS vs Sec of Labor L-39889
111. Veraguth vs Isable Sugar Co L-37064
112. Gokongwei vs SEC L-45911
113. Gonzales vs PNB L-33320
114. RN Symaco Trading Corp vs Santos 142474
115. Chua vs CA 150793
116. Hornilla vs Salunat AC 5804
117. Gochan vs Young 131889
118. Lim vs Lim-Yu 138343
119. Evangelista vs Santos L-1721
120. President of PDIC vs Reyes 154973
121. Comissioner of Internal revenue vs CA 108576
Corp Law Cases
Monfort hermanos Agricultural development corporation vs Monfort

III
G.R. No. 152542 July 8, 2004
MONFORT HERMANOS AGRICULTURAL DEVELOPMENT

CORPORATION, as represented by MA. ANTONIA M. SALVATIERRA,
petitioner,
vs.
ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON,
ILDEFONSO B. MONFORT, ALFREDO B. MONFORT, CARLOS M.
RODRIGUEZ, EMILY FRANCISCA R. DOLIQUEZ, ENCARNACION CECILIA
R. PAYLADO, JOSE MARTIN M. RODRIGUEZ and COURT OF APPEALS,
respondents.
G.R. No. 155472 July 8, 2004
ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON,

ILDEFONSO B. MONFORT, ALFREDO B. MONFORT, CARLOS M.
RODRIGUEZ, EMILY FRANCISCA R. DOLIQUEZ, ENCARNACION CECILIA
R. PAYLADO, JOSE MARTIN M. RODRIGUEZ, petitioners,
vs.
HON. COURT OF APPEALS, MONFORT HERMANOS AGRICULTURAL
DEVELOPMENT CORPORATION, as represented by MA. ANTONIA M.
SALVATIERRA, and RAMON H. MONFORT, respondents.
DECISION

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YNARES-SANTIAGO, J.:
Before the Court are consolidated petitions for review of the

decisions of the Court of Appeals in the complaints for forcible entry
and replevin filed by Monfort Hermanos Agricultural Development
Corporation (Corporation) and Ramon H. Monfort against the
children, nephews, and nieces of its original incorporators
(collectively known as "the group of Antonio Monfort III").
The petition in G.R. No. 152542, assails the October 5, 2001 Decision 1
of the Special Tenth Division of the Court of Appeals in CA-G.R. SP
No. 53652, which ruled that Ma. Antonia M. Salvatierra has no legal
capacity to represent the Corporation in the forcible entry case
docketed as Civil Case No. 534-C, before the Municipal Trial Court of
Cadiz City. On the other hand, the petition in G.R. No. 155472, seeks
to set aside the June 7, 2002 Decision2 rendered by the Special
Former Thirteenth Division of the Court of Appeals in CA-G.R. SP No.
49251, where it refused to address, on jurisdictional considerations,
the issue of Ma. Antonia M. Salvatierra's capacity to file a complaint
for replevin on behalf of the Corporation in Civil Case No. 506-C
before the Regional Trial Court of Cadiz City, Branch 60.
Monfort Hermanos Agricultural Development Corporation, a

domestic private corporation, is the registered owner of a farm,
fishpond and sugar cane plantation known as Haciendas San
Antonio II, Marapara, Pinanoag and Tinampa-an, all situated in
Cadiz City.3 It also owns one unit of motor vehicle and two units of
tractors.4 The same allowed Ramon H. Monfort, its Executive Vice
President, to breed and maintain fighting cocks in his personal
capacity at Hacienda San Antonio.5
In 1997, the group of Antonio Monfort III, through force and

intimidation, allegedly took possession of the 4 Haciendas, the
produce thereon and the motor vehicle and tractors, as well as the
fighting cocks of Ramon H. Monfort.
In G.R. No. 155472:
On April 10, 1997, the Corporation, represented by its President, Ma.

Antonia M. Salvatierra, and Ramon H. Monfort, in his personal
capacity, filed against the group of Antonio Monfort III, a complaint 6
for delivery of motor vehicle, tractors and 378 fighting cocks, with
prayer for injunction and damages, docketed as Civil Case No. 506-
C, before the Regional Trial Court of Negros Occidental, Branch 60.
The group of Antonio Monfort III filed a motion to dismiss contending,

inter alia, that Ma. Antonia M. Salvatierra has no capacity to sue on
behalf of the Corporation because the March 31, 1997 Board

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Resolution7 authorizing Ma. Antonia M. Salvatierra and/or Ramon H.
Monfort to represent the Corporation is void as the purported
Members of the Board who passed the same were not validly
elected officers of the Corporation.
On May 4, 1998, the trial court denied the motion to dismiss.8 The
group of Antonio Monfort III filed a petition for certiorari with the
Court of Appeals but the same was dismissed on June 7, 2002.9 The
Special Former Thirteenth Division of the appellate court did not
resolve the validity of the March 31, 1997 Board Resolution and the
election of the officers who signed it, ratiocinating that the
determination of said question is within the competence of the trial
court.
The motion for reconsideration filed by the group of Antonio Monfort

III was denied.10 Hence, they instituted a petition for review with this
Court, docketed as G.R. No. 155472.
In G.R. No. 152542:
On April 21, 1997, Ma. Antonia M. Salvatierra filed on behalf of the

Corporation a complaint for forcible entry, preliminary mandatory
injunction with temporary restraining order and damages against the
group of Antonio Monfort III, before the Municipal Trial Court (MTC)
of Cadiz City.11 It contended that the latter through force and
intimidation, unlawfully took possession of the 4 Haciendas and
deprived the Corporation of the produce thereon.
In their answer,12 the group of Antonio Monfort III alleged that they
are possessing and controlling the Haciendas and harvesting the
produce therein on behalf of the corporation and not for
themselves. They likewise raised the affirmative defense of lack of
legal capacity of Ma. Antonia M. Salvatierra to sue on behalf of the
Corporation.
On February 18, 1998, the MTC of Cadiz City rendered a decision

dismissing the complaint.13 On appeal, the Regional Trial Court of
Negros Occidental, Branch 60, reversed the Decision of the MTCC
and remanded the case for further proceedings.14
Aggrieved, the group of Antonio Monfort III filed a petition for review
with the Court of Appeals. On October 5, 2001, the Special Tenth
Division set aside the judgment of the RTC and dismissed the
complaint for forcible entry for lack of capacity of Ma. Antonia M.
Salvatierra to represent the Corporation.15 The motion for
reconsideration filed by the latter was denied by the appellate
court.16

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Unfazed, the Corporation filed a petition for review with this Court,
docketed as G.R. No. 152542 which was consolidated with G.R. No.
155472 per Resolution dated January 21, 2004.17
The focal issue in these consolidated petitions is whether or not Ma.

Antonia M. Salvatierra has the legal capacity to sue on behalf of the
Corporation.
The group of Antonio Monfort III claims that the March 31, 1997
Board Resolution authorizing Ma. Antonia M. Salvatierra and/or
Ramon H. Monfort to represent the Corporation is void because the
purported Members of the Board who passed the same were not
validly elected officers of the Corporation.
A corporation has no power except those expressly conferred on it

by the Corporation Code and those that are implied or incidental to
its existence. In turn, a corporation exercises said powers through its
board of directors and/or its duly authorized officers and agents.
Thus, it has been observed that the power of a corporation to sue
and be sued in any court is lodged with the board of directors that
exercises its corporate powers. In turn, physical acts of the
corporation, like the signing of documents, can be performed only
by natural persons duly authorized for the purpose by corporate by-
laws or by a specific act of the board of directors.18
Corollary thereto, corporations are required under Section 26 of the

Corporation Code to submit to the SEC within thirty (30) days after
the election the names, nationalities and residences of the elected
directors, trustees and officers of the Corporation. In order to keep
stockholders and the public transacting business with domestic
corporations properly informed of their organizational operational
status, the SEC issued the following rules:
xxx xxx xxx
2. A General Information Sheet shall be filed with this

Commission within thirty (30) days following the date of the
annual stockholders' meeting. No extension of said period shall
be allowed, except for very justifiable reasons stated in writing
by the President, Secretary, Treasurer or other officers, upon
which the Commission may grant an extension for not more
than ten (10) days.
2.A. Should a director, trustee or officer die, resign or in

any manner, cease to hold office, the corporation shall
report such fact to the Commission with fifteen (15) days
after such death, resignation or cessation of office.

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3. If for any justifiable reason, the annual meeting has to be
postponed, the company should notify the Commission in
writing of such postponement.
The General Information Sheet shall state, among others, the

names of the elected directors and officers, together with their
corresponding position title… (Emphasis supplied)
In the instant case, the six signatories to the March 31, 1997 Board
Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon H.
Monfort to represent the Corporation, were: Ma. Antonia M.
Salvatierra, President; Ramon H. Monfort, Executive Vice President;
Directors Paul M. Monfort, Yvete M. Benedicto and Jaqueline M.
Yusay; and Ester S. Monfort, Secretary.19 However, the names of the
last four (4) signatories to the said Board Resolution do not appear in
the 1996 General Information Sheet submitted by the Corporation
with the SEC. Under said General Information Sheet the composition
of the Board is as follows:
1. Ma. Antonia M. Salvatierra (Chairman);
2. Ramon H. Monfort (Member);
3. Antonio H. Monfort, Jr., (Member);
4. Joaquin H. Monfort (Member);
5. Francisco H. Monfort (Member) and
6. Jesus Antonio H. Monfort (Member).20
There is thus a doubt as to whether Paul M. Monfort, Yvete M.

Benedicto, Jaqueline M. Yusay and Ester S. Monfort, were indeed
duly elected Members of the Board legally constituted to bring suit in
behalf of the Corporation.21
In Premium Marble Resources, Inc. v. Court of Appeals,22 the Court

was confronted with the similar issue of capacity to sue of the
officers of the corporation who filed a complaint for damages. In the
said case, we sustained the dismissal of the complaint because it
was not established that the Members of the Board who authorized
the filing of the complaint were the lawfully elected officers of the
corporation. Thus –
The only issue in this case is whether or not the filing of the case
for damages against private respondent was authorized by a
duly constituted Board of Directors of the petitioner
corporation.
Petitioner, through the first set of officers, viz., Mario Zavalla,

Oscar Gan, Lionel Pengson, Jose Ma. Silva, Aderito Yujuico and

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Rodolfo Millare, presented the Minutes of the meeting of its
Board of Directors held on April 1, 1982, as proof that the filing
of the case against private respondent was authorized by the
Board. On the other hand, the second set of officers, viz.,
Saturnino G. Belen, Jr., Alberto C. Nograles and Jose L.R. Reyes,
presented a Resolution dated July 30, 1986, to show that
Premium did not authorize the filing in its behalf of any suit
against the private respondent International Corporate Bank.
Later on, petitioner submitted its Articles of Incorporation dated

November 6, 1979 with the following as Directors: Mario C.
Zavalla, Pedro C. Celso, Oscar B. Gan, Lionel Pengson, and
Jose Ma. Silva.
However, it appears from the general information sheet and

the Certification issued by the SEC on August 19, 1986 that as of
March 4, 1981, the officers and members of the board of
directors of the Premium Marble Resources, Inc. were:
Alberto C. Nograles — President/Director
Fernando D. Hilario — Vice President/Director
Augusto I. Galace — Treasurer
Jose L.R. Reyes — Secretary/Director
Pido E. Aguilar — Director
Saturnino G. Belen, Jr. — Chairman of the Board.
While the Minutes of the Meeting of the Board on April 1, 1982

states that the newly elected officers for the year 1982 were
Oscar Gan, Mario Zavalla, Aderito Yujuico and Rodolfo Millare,
petitioner failed to show proof that this election was reported to
the SEC. In fact, the last entry in their General Information Sheet
with the SEC, as of 1986 appears to be the set of officers
elected in March 1981.
We agree with the finding of public respondent Court of

Appeals, that "in the absence of any board resolution from its
board of directors the [sic] authority to act for and in behalf of
the corporation, the present action must necessarily fail. The
power of the corporation to sue and be sued in any court is
lodged with the board of directors that exercises its corporate
powers. Thus, the issue of authority and the invalidity of plaintiff-
appellant's subscription which is still pending, is a matter that is
also addressed, considering the premises, to the sound
judgment of the Securities & Exchange Commission."

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By the express mandate of the Corporation Code (Section 26),
all corporations duly organized pursuant thereto are required to
submit within the period therein stated (30 days) to the
Securities and Exchange Commission the names, nationalities
and residences of the directors, trustees and officers elected.
Sec. 26 of the Corporation Code provides, thus:
"Sec. 26. Report of election of directors, trustees and

officers. — Within thirty (30) days after the election of the
directors, trustees and officers of the corporation, the
secretary, or any other officer of the corporation, shall
submit to the Securities and Exchange Commission, the
names, nationalities and residences of the directors,
trustees and officers elected. xxx"
Evidently, the objective sought to be achieved by Section 26 is

to give the public information, under sanction of oath of
responsible officers, of the nature of business, financial
condition and operational status of the company together with
information on its key officers or managers so that those
dealing with it and those who intend to do business with it may
know or have the means of knowing facts concerning the
corporation's financial resources and business responsibility.
The claim, therefore, of petitioners as represented by Atty.

Dumadag, that Zaballa, et al., are the incumbent officers of
Premium has not been fully substantiated. In the absence of an
authority from the board of directors, no person, not even the
officers of the corporation, can validly bind the corporation.
In the case at bar, the fact that four of the six Members of the Board
listed in the 1996 General Information Sheet 23 are already dead24 at
the time the March 31, 1997 Board Resolution was issued, does not
automatically make the four signatories (i.e., Paul M. Monfort, Yvete
M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort) to the said
Board Resolution (whose name do not appear in the 1996 General
Information Sheet) as among the incumbent Members of the Board.
This is because it was not established that they were duly elected to
replace the said deceased Board Members.
To correct the alleged error in the General Information Sheet, the

retained accountant of the Corporation informed the SEC in its
November 11, 1998 letter that the non-inclusion of the lawfully
elected directors in the 1996 General Information Sheet was
attributable to its oversight and not the fault of the Corporation.25
This belated attempt, however, did not erase the doubt as to
whether an election was indeed held. As previously stated, a
corporation is mandated to inform the SEC of the names and the

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change in the composition of its officers and board of directors
within 30 days after election if one was held, or 15 days after the
death, resignation or cessation of office of any of its director, trustee
or officer if any of them died, resigned or in any manner, ceased to
hold office. This, the Corporation failed to do. The alleged election of
the directors and officers who signed the March 31, 1997 Board
Resolution was held on October 16, 1996, but the SEC was informed
thereof more than two years later, or on November 11, 1998. The 4
Directors appearing in the 1996 General Information Sheet died
between the years 1984 – 1987,26 but the records do not show if such
demise was reported to the SEC.
What further militates against the purported election of those who

signed the March 31, 1997 Board Resolution was the belated
submission of the alleged Minutes of the October 16, 1996 meeting
where the questioned officers were elected. The issue of legal
capacity of Ma. Antonia M. Salvatierra was raised before the lower
court by the group of Antonio Monfort III as early as 1997, but the
Minutes of said October 16, 1996 meeting was presented by the
Corporation only in its September 29, 1999 Comment before the
Court of Appeals.27 Moreover, the Corporation failed to prove that
the same October 16, 1996 Minutes was submitted to the SEC. In
fact, the 1997 General Information Sheet28 submitted by the
Corporation does not reflect the names of the 4 Directors claimed to
be elected on October 16, 1996.
Considering the foregoing, we find that Ma. Antonia M. Salvatierra

failed to prove that four of those who authorized her to represent the
Corporation were the lawfully elected Members of the Board of the
Corporation. As such, they cannot confer valid authority for her to
sue on behalf of the corporation.
The Court notes that the complaint in Civil Case No. 506-C, for
replevin before the Regional Trial Court of Negros Occidental,
Branch 60, has 2 causes of action, i.e., unlawful detention of the
Corporation's motor vehicle and tractors, and the unlawful detention
of the of 387 fighting cocks of Ramon H. Monfort. Since Ramon
sought redress of the latter cause of action in his personal capacity,
the dismissal of the complaint for lack of capacity to sue on behalf
of the corporation should be limited only to the corporation's cause
of action for delivery of motor vehicle and tractors. In view, however,
of the demise of Ramon on June 25, 1999,29 substitution by his heirs is
proper.
WHEREFORE, in view of all the foregoing, the petition in G.R. No.

152542 is DENIED. The October 5, 2001 Decision of the Special Tenth
Division of the Court of Appeals in CA-G.R. SP No. 53652, which set
aside the August 14, 1998 Decision of the Regional Trial Court of
Negros Occidental, Branch 60 in Civil Case No. 822, is AFFIRMED.
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In G.R. No. 155472, the petition is GRANTED and the June 7, 2002
Decision rendered by the Special Former Thirteenth Division of the
Court of Appeals in CA-G.R. SP No. 49251, dismissing the petition filed
by the group of Antonio Monfort III, is REVERSED and SET ASIDE.
The complaint for forcible entry docketed as Civil Case No. 822
before the Municipal Trial Court of Cadiz City is DISMISSED. In Civil
Case No. 506-C with the Regional Trial Court of Negros Occidental,
Branch 60, the action for delivery of personal property filed by
Monfort Hermanos Agricultural Development Corporation is likewise
DISMISSED. With respect to the action filed by Ramon H. Monfort for
the delivery of 387 fighting cocks, the Regional Trial Court of Negros
Occidental, Branch 60, is ordered to effect the corresponding
substitution of parties.
No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban, Carpio, and Azcuna, JJ.,

concur.
Monfort Hermanos Agricultural Development Corp. vs Monfort III

(GR No 152542, July 8, 2004, Santiago)
Facts:
Monfort Corp represented by its president, Antonia Salvatierra filed a
complaint against the respondents for the delivery of motor vehicles,
tractors and fighting cocks. The respondents filed a motion to dismiss
on the ground that Antonia does not have the authority to represent
the corporation in this particular case. Antonia contended that they
have submitted board resolutions signed by its directors. However,
this board resolution is being contested because four of the directors
who signed the resolution have not been duly elected by the
company.
Issue:
Whether or not Antonia has the authority to represent the
corporation in this case.
Held:
The SC said Antonia does not have the authority to represent the
corporation in this particular case. The board resolution in question
was held invalid because the general information sheet of the

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corporation readily indicated that four out of the six signatories in the
board resolution do not appear in the general information sheet. This
only showed there is now a doubt whether the four directors
appearing in the resolution were duly elected as directors of the
corporation.
PNB vs Andrada Electric & Engineering Co. 2002
G.R. No. 142936 April 17, 2002
PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT

CORPORATION, petitioners,
vs.
ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.
PANGANIBAN, J.:
Basic is the rule that a corporation has a legal personality distinct

and separate from the persons and entities owning it. The corporate
veil may be lifted only if it has been used to shield fraud, defend
crime, justify a wrong, defeat public convenience, insulate bad faith
or perpetuate injustice. Thus, the mere fact that the Philippine
National Bank (PNB) acquired ownership or management of some
assets of the Pampanga Sugar Mill (PASUMIL), which had earlier
been foreclosed and purchased at the resulting public auction by
the Development Bank of the Philippines (DBP), will not make PNB
liable for the PASUMIL’s contractual debts to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17, 2000 Decision1
of the Court of Appeals (CA) in CA-GR CV No. 57610. The decretal
portion of the challenged Decision reads as follows:
"WHEREFORE, the judgment appealed from is hereby

AFFIRMED."2
The Facts
The factual antecedents of the case are summarized by the Court of

Appeals as follows:
"In its complaint, the plaintiff [herein respondent] alleged that it

is a partnership duly organized, existing, and operating under
the laws of the Philippines, with office and principal place of
business at Nos. 794-812 Del Monte [A]venue, Quezon City,
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while the defendant [herein petitioner] Philippine National Bank
(herein referred to as PNB), is a semi-government corporation
duly organized, existing and operating under the laws of the
Philippines, with office and principal place of business at
Escolta Street, Sta. Cruz, Manila; whereas, the other defendant,
the National Sugar Development Corporation (NASUDECO in
brief), is also a semi-government corporation and the sugar arm
of the PNB, with office and principal place of business at the
2nd Floor, Sampaguita Building, Cubao, Quezon City; and the
defendant Pampanga Sugar Mills (PASUMIL in short), is a
corporation organized, existing and operating under the 1975
laws of the Philippines, and had its business office before 1975
at Del Carmen, Floridablanca, Pampanga; that the plaintiff is
engaged in the business of general construction for the repairs
and/or construction of different kinds of machineries and
buildings; that on August 26, 1975, the defendant PNB acquired
the assets of the defendant PASUMIL that were earlier
foreclosed by the Development Bank of the Philippines (DBP)
under LOI No. 311; that the defendant PNB organized the
defendant NASUDECO in September, 1975, to take ownership
and possession of the assets and ultimately to nationalize and
consolidate its interest in other PNB controlled sugar mills; that
prior to October 29, 1971, the defendant PASUMIL engaged the
services of plaintiff for electrical rewinding and repair, most of
which were partially paid by the defendant PASUMIL, leaving
several unpaid accounts with the plaintiff; that finally, on
October 29, 1971, the plaintiff and the defendant PASUMIL
entered into a contract for the plaintiff to perform the following,
to wit –
‘(a) Construction of one (1) power house building;
‘(b) Construction of three (3) reinforced concrete

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

foundation for the 5,000 KW and 1,250 KW turbo generator
sets;
‘(d) Complete overhauling and reconditioning tests sum

for three (3) 350 KW diesel engine generating set[s];
‘(e) Installation of turbine and diesel generating sets

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

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‘(f) Relocating of 2,400 V transmission line, demolition of all
existing concrete foundation and drainage canals,
excavation, and earth fillings – all for the total amount of
P543,500.00 as evidenced by a contract, [a] xerox copy
of which is hereto attached as Annex ‘A’ and made an
integral part of this complaint;’
that aside from the work contract mentioned-above, the

defendant PASUMIL required the plaintiff to perform extra work,
and provide electrical equipment and spare parts, such as:
‘(a) Supply of electrical devices;
‘(b) Extra mechanical works;
‘(c) Extra fabrication works;
‘(d) Supply of materials and consumable items;
‘(e) Electrical shop repair;
‘(f) Supply of parts and related works for turbine

generator;
‘(g) Supply of electrical equipment for machinery;
‘(h) Supply of diesel engine parts and other related works

including fabrication of parts.’
that out of the total obligation of P777,263.80, the defendant

PASUMIL had paid only P250,000.00, leaving an unpaid
balance, as of June 27, 1973, amounting to P527,263.80, as
shown in the Certification of the chief accountant of the PNB, a
machine copy of which is appended as Annex ‘C’ of the
complaint; that out of said unpaid balance of P527,263.80, the
defendant PASUMIL made a partial payment to the plaintiff of
P14,000.00, in broken amounts, covering the period from
January 5, 1974 up to May 23, 1974, leaving an unpaid balance
of P513,263.80; that the defendant PASUMIL and the defendant
PNB, and now the defendant NASUDECO, failed and refused to
pay the plaintiff their just, valid and demandable obligation;
that the President of the NASUDECO is also the Vice-President
of the PNB, and this official holds office at the 10th Floor of the
PNB, Escolta, Manila, and plaintiff besought this official to pay
the outstanding obligation of the defendant PASUMIL,
inasmuch as the defendant PNB and NASUDECO now owned
and possessed the assets of the defendant PASUMIL, and these
defendants all benefited from the works, and the electrical, as
well as the engineering and repairs, performed by the plaintiff;
that because of the failure and refusal of the defendants to

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pay their just, valid, and demandable obligations, plaintiff
suffered actual damages in the total amount of P513,263.80;
and that in order to recover these sums, the plaintiff was
compelled to engage the professional services of counsel, to
whom the plaintiff agreed to pay a sum equivalent to 25% of
the amount of the obligation due by way of attorney’s fees.
Accordingly, the plaintiff prayed that judgment be rendered
against the defendants PNB, NASUDECO, and PASUMIL, jointly
and severally to wit:
‘(1) Sentencing the defendants to pay the plaintiffs the

sum of P513,263.80, with annual interest of 14% from the
time the obligation falls due and demandable;
‘(2) Condemning the defendants to pay attorney’s fees

amounting to 25% of the amount claim;
‘(3) Ordering the defendants to pay the costs of the suit.’
"The defendants PNB and NASUDECO filed a joint motion to

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

Order of November 27, 1980; in the same order, that court
directed the defendants to file their answer to the complaint
within 15 days.
"In their answer, the defendant NASUDECO reiterated the

grounds of its motion to dismiss, to wit:
‘That the complaint does not state a sufficient cause of

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

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

grounds of its motion to dismiss, namely: (1) the complaint
states no cause of action against the defendant PNB; (2) that
PNB is not a party to the contract alleged in par. 6 of the
complaint and that the alleged services rendered by the
plaintiff to the defendant PASUMIL upon which plaintiff’s suit is
erected, was rendered long before PNB took possession of the
assets of the defendant PASUMIL under LOI No. 189-A; (3) that
the PNB take-over of the assets of the defendant PASUMIL
under LOI 189-A was solely for the purpose of reconditioning
the sugar central so that PASUMIL may resume its operations in
time for the 1974-75 milling season, and that nothing in the said
LOI No. 189-A, as well as in LOI No. 311, authorized or directed
PNB to assume the corporate obligation/s of PASUMIL, let alone
that for which the present action is brought; (4) that PNB’s
management and operation under LOI No. 311 did not refer to
any asset of PASUMIL which the PNB had to acquire and
thereafter [manage], but only to those which were foreclosed
by the DBP and were in turn redeemed by the PNB from the
DBP; (5) that conformably to LOI No. 311, on August 15, 1975,
the PNB and the Development Bank of the Philippines (DBP)
entered into a ‘Redemption Agreement’ whereby DBP sold,
transferred and conveyed in favor of the PNB, by way of
redemption, all its (DBP) rights and interest in and over the
foreclosed real and/or personal properties of PASUMIL, as
shown in Annex ‘C’ which is made an integral part of the
answer; (6) that again, conformably with LOI No. 311, PNB
pursuant to a Deed of Assignment dated October 21, 1975,
conveyed, transferred, and assigned for valuable
consideration, in favor of NASUDECO, a distinct and
independent corporation, all its (PNB) rights and interest in and
under the above ‘Redemption Agreement.’ This is shown in

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Annex ‘D’ which is also made an integral part of the answer; [7]
that as a consequence of the said Deed of Assignment, PNB on
October 21, 1975 ceased to managed and operate the
above-mentioned assets of PASUMIL, which function was now
actually transferred to NASUDECO. In other words, so asserted
PNB, the complaint as to PNB, had become moot and
academic because of the execution of the said Deed of
Assignment; [8] that moreover, LOI No. 311 did not authorize or
direct PNB to assume the corporate obligations of PASUMIL,
including the alleged obligation upon which this present suit
was brought; and [9] that, at most, what was granted to PNB in
this respect was the authority to ‘make a study of and submit
recommendation on the problems concerning the claims of
PASUMIL creditors,’ under sub-par. 5 LOI No. 311.
"In its counterclaim, the PNB averred that it was unnecessarily

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

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

decretal portion of which reads:
‘WHEREFORE, judgment is hereby rendered in favor of

plaintiff and against the defendant Corporation,
Philippine National Bank (PNB) NATIONAL SUGAR
DEVELOPMENT CORPORATION (NASUDECO) and
PAMPANGA SUGAR MILLS (PASUMIL), ordering the latter to
pay jointly and severally the former the following:
‘1. The sum of P513,623.80 plus interest thereon at the

rate of 14% per annum as claimed from September
25, 1980 until fully paid;
‘2. The sum of P102,724.76 as attorney’s fees; and,
‘3. Costs.
‘SO ORDERED.

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‘Manila, Philippines, September 4, 1986.
'(SGD) ERNESTO S. TENGCO

‘Judge’"3
Ruling of the Court of Appeals
Affirming the trial court, the CA held that it was offensive to the basic
tenets of justice and equity for a corporation to take over and
operate the business of another corporation, while disavowing or
repudiating any responsibility, obligation or liability arising therefrom.4
Hence, this Petition.5
Issues
In their Memorandum, petitioners raise the following errors for the

Court’s consideration:
"I
The Court of Appeals gravely erred in law in holding the herein

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

the case at bench the ruling enunciated in Edward J. Nell Co.
v. Pacific Farms, 15 SCRA 415." 6
Succinctly put, the aforesaid errors boil down to the principal issue of
whether PNB is liable for the unpaid debts of PASUMIL to respondent.
This Court’s Ruling
The Petition is meritorious.
Main Issue:
Liability for Corporate Debts
As a general rule, questions of fact may not be raised in a petition for

review under Rule 45 of the Rules of Court.7 To this rule, however,
there are some exceptions enumerated in Fuentes v. Court of
Appeals.8 After a careful scrutiny of the records and the pleadings
submitted by the parties, we find that the lower courts
misappreciated the evidence presented.9 Overlooked by the CA
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were certain relevant facts that would justify a conclusion different
from that reached in the assailed Decision.10
Petitioners posit that they should not be held liable for the corporate
debts of PASUMIL, because their takeover of the latter’s foreclosed
assets did not make them assignees. On the other hand, respondent
asserts that petitioners and PASUMIL should be treated as one entity
and, as such, jointly and severally held liable for PASUMIL’s unpaid
obligation.1âwphi1.nêt
As a rule, a corporation that purchases the assets of another will not

be liable for the debts of the selling corporation, provided the former
acted in good faith and paid adequate consideration for such
assets, except when any of the following circumstances is present:
(1) where the purchaser expressly or impliedly agrees to assume the
debts, (2) where the transaction amounts to a consolidation or
merger of the corporations, (3) where the purchasing corporation is
merely a continuation of the selling corporation, and (4) where the
transaction is fraudulently entered into in order to escape liability for
those debts.11
Piercing the Corporate
Veil Not Warranted
A corporation is an artificial being created by operation of law. It

possesses the right of succession and such powers, attributes, and
properties expressly authorized by law or incident to its existence.12 It
has a personality separate and distinct from the persons composing
it, as well as from any other legal entity to which it may be related.13
This is basic.
Equally well-settled is the principle that the corporate mask may be

removed or the corporate veil pierced when the corporation is just
an alter ego of a person or of another corporation.14 For reasons of
public policy and in the interest of justice, the corporate veil will
justifiably be impaled15 only when it becomes a shield for fraud,
illegality or inequity committed against third persons.16
Hence, any application of the doctrine of piercing the corporate veil

should be done with caution.17 A court should be mindful of the
milieu where it is to be applied.18 It must be certain that the
corporate fiction was misused to such an extent that injustice, fraud,
or crime was committed against another, in disregard of its rights.19
The wrongdoing must be clearly and convincingly established; it
cannot be presumed.20 Otherwise, an injustice that was never
unintended may result from an erroneous application.21
This Court has pierced the corporate veil to ward off a judgment
credit,22 to avoid inclusion of corporate assets as part of the estate of

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the decedent,23 to escape liability arising from a debt,24 or to
perpetuate fraud and/or confuse legitimate issues25 either to
promote or to shield unfair objectives26 or to cover up an otherwise
blatant violation of the prohibition against forum-shopping.27 Only in
these and similar instances may the veil be pierced and
disregarded.28
The question of whether a corporation is a mere alter ego is one of

fact.29 Piercing the veil of corporate fiction may be allowed only if
the following elements concur: (1) control -- not mere stock control,
but complete domination -- not only of finances, but of policy and
business practice in respect to the transaction attacked, must have
been such that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own; (2) such control
must have been used by the defendant to commit a fraud or a
wrong to perpetuate the violation of a statutory or other positive
legal duty, or a dishonest and an unjust act in contravention of
plaintiff’s legal right; and (3) the said control and breach of duty
must have proximately caused the injury or unjust loss complained
of.30
We believe that the absence of the foregoing elements in the

present case precludes the piercing of the corporate veil. First, other
than the fact that petitioners acquired the assets of PASUMIL, there is
no showing that their control over it warrants the disregard of
corporate personalities.31 Second, there is no evidence that their
juridical personality was used to commit a fraud or to do a wrong; or
that the separate corporate entity was farcically used as a mere
alter ego, business conduit or instrumentality of another entity or
person.32 Third, respondent was not defrauded or injured when
petitioners acquired the assets of PASUMIL.33
Being the party that asked for the piercing of the corporate veil,
respondent had the burden of presenting clear and convincing
evidence to justify the setting aside of the separate corporate
personality rule.34 However, it utterly failed to discharge this burden;35
it failed to establish by competent evidence that petitioner’s
separate corporate veil had been used to conceal fraud, illegality or
inequity.36
While we agree with respondent’s claim that the assets of the

National Sugar Development Corporation (NASUDECO) can be
easily traced to PASUMIL,37 we are not convinced that the transfer of
the latter’s assets to petitioners was fraudulently entered into in order
to escape liability for its debt to respondent.38
A careful review of the records reveals that DBP foreclosed the

mortgage executed by PASUMIL and acquired the assets as the
highest bidder at the public auction conducted.39 The bank was

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justified in foreclosing the mortgage, because the PASUMIL account
had incurred arrearages of more than 20 percent of the total
outstanding obligation.40 Thus, DBP had not only a right, but also a
duty under the law to foreclose the subject properties.41
Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB

acquired PASUMIL’s assets that DBP had foreclosed and purchased
in the normal course. Petitioner bank was likewise tasked to manage
temporarily the operation of such assets either by itself or through a
subsidiary corporation.44
PNB, as the second mortgagee, redeemed from DBP the foreclosed

PASUMIL assets pursuant to Section 6 of Act No. 3135.45 These assets
were later conveyed to PNB for a consideration, the terms of which
were embodied in the Redemption Agreement.46 PNB, as successor-
in-interest, stepped into the shoes of DBP as PASUMIL’s creditor.47 By
way of a Deed of Assignment,48 PNB then transferred to NASUDECO
all its rights under the Redemption Agreement.
In Development Bank of the Philippines v. Court of Appeals,49 we

had the occasion to resolve a similar issue. We ruled that PNB, DBP
and their transferees were not liable for Marinduque Mining’s unpaid
obligations to Remington Industrial Sales Corporation (Remington)
after the two banks had foreclosed the assets of Marinduque Mining.
We likewise held that Remington failed to discharge its burden of
proving bad faith on the part of Marinduque Mining to justify the
piercing of the corporate veil.
In the instant case, the CA erred in affirming the trial court’s lifting of
the corporate mask.50 The CA did not point to any fact evidencing
bad faith on the part of PNB and its transferee.51 The corporate
fiction was not used to defeat public convenience, justify a wrong,
protect fraud or defend crime.52 None of the foregoing exceptions
was shown to exist in the present case.53 On the contrary, the lifting
of the corporate veil would result in manifest injustice. This we cannot
allow.
No Merger or Consolidation
Respondent further claims that petitioners should be held liable for

the unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and
311, which expressly authorized PASUMIL and PNB to merge or
consolidate. On the other hand, petitioners contend that their
takeover of the operations of PASUMIL did not involve any corporate
merger or consolidation, because the latter had never lost its
separate identity as a corporation.
A consolidation is the union of two or more existing entities to form a

new entity called the consolidated corporation. A merger, on the
other hand, is a union whereby one or more existing corporations are
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absorbed by another corporation that survives and continues the
combined business.54
The merger, however, does not become effective upon the mere
agreement of the constituent corporations.55 Since a merger or
consolidation involves fundamental changes in the corporation, as
well as in the rights of stockholders and creditors, there must be an
express provision of law authorizing them.56 For a valid merger or
consolidation, the approval by the Securities and Exchange
Commission (SEC) of the articles of merger or consolidation is
required.57 These articles must likewise be duly approved by a
majority of the respective stockholders of the constituent
corporations.58
In the case at bar, we hold that there is no merger or consolidation

with respect to PASUMIL and PNB. The procedure prescribed under
Title IX of the Corporation Code59 was not followed.
In fact, PASUMIL’s corporate existence, as correctly found by the CA,

had not been legally extinguished or terminated.60 Further, prior to
PNB’s acquisition of the foreclosed assets, PASUMIL had previously
made partial payments to respondent for the former’s obligation in
the amount of P777,263.80. As of June 27, 1973, PASUMIL had paid
P250,000 to respondent and, from January 5, 1974 to May 23, 1974,
another P14,000.
Neither did petitioner expressly or impliedly agree to assume the

debt of PASUMIL to respondent.61 LOI No. 11 explicitly provides that
PNB shall study and submit recommendations on the claims of
PASUMIL’s creditors.62 Clearly, the corporate separateness between
PASUMIL and PNB remains, despite respondent’s insistence to the
contrary.63
WHEREFORE, the Petition is hereby GRANTED and the assailed

Decision SET ASIDE. No pronouncement as to costs.
SO ORDERED.
Vitug, Sandoval-Gutierrez, and Carpio, JJ., concur.

Melo, J., Abroad, on official leave.
PNB vs. Andrada Electric & Engineering Co.Case Digest
Philippine National Bank vs. Andrada Electric & Engineering Co.
[GR 142936, 17 April 2002]
Facts: On 26 August 1975, the Philippine national Bank (PNB)

acquired the assets of the Pampanga Sugar Mills (PASUMIL) that

suigeneris
were earlier foreclosed by the Development Bank of the Philippines
(DBP) under LOI 311. The PNB organized the ational Sugar
Development Corporation (NASUDECO) in September 1975, to take
ownership and possession of the assets and ultimately to nationalize
and consolidate its interest in other PNB controlled sugar mills. Prior to
29 October 1971, PASUMIL engaged the services of the Andrada
Electric & Engineering Company (AEEC) for electrical rewinding and
repair, most of which were partially paid by PASUMIL, leaving several
unpaid accounts with AEEC. On 29 October 1971, AEEC and
PASUMIL entered into a contract for AEEC to perform the (a)
Construction of a power house building; 3 reinforced concrete
foundation for 3 units 350 KW diesel engine generating sets, 3
reinforced concrete foundation for the 5,000 KW and 1,250 KW turbo
generator sets, among others. Aside from the work contract,
PASUMIL required AEEC to perform extra work, and provide electrical
equipment and spare parts. Out of the total obligation of
P777,263.80, PASUMIL had paid only P250,000.00, leaving an unpaid
balance, as of 27 June 1973, amounting to P527,263.80. Out of said
unpaid balance of P527,263.80, PASUMIL made a partial payment to
AEEC of P14,000.00, in broken amounts, covering the period from 5
January 1974 up to 23 May 1974, leaving an unpaid balance of
P513,263.80. PASUMIL and PNB, and now NASUDECO, allegedly
failed and refused to pay AEEC their just, valid and demandable
obligation (The President of the NASUDECO is also the Vice-President
of the PNB. AEEC besought said official to pay the outstanding
obligation of PASUMIL, inasmuch as PNB and NASUDECO now
owned and possessed the assets of PASUMIL, and these defendants
all benefited from the works, and the electrical, as well as the
engineering and repairs, performed by AEEC).
Because of the failure and refusal of PNB, PASUMIL and/or

NASUDECO to pay their obligations, AEEC allegedly suffered actual
damages in the total amount of P513,263.80; and that in order to
recover these sums, AEEC was compelled to engage the
professional services of counsel, to whom AEEC agreed to pay a sum
equivalent to 25% of the amount of the obligation due by way of
attorney's fees. PNB and NASUDECO filed a joint motion to dismiss on
the ground that the complaint failed to state sufficient allegations to
establish a cause of action against PNB and NASUDECO, inasmuch
as there is lack or want of privity of contract between the them and
AEEC. Said motion was denied by the trial court in its 27 November
order, and ordered PNB nad NASUDECO to file their answers within
15 days. After due proceedings, the Trial Court rendered judgment in
favor of AEEC and against PNB, NASUDECO and PASUMIL; the latter
being ordered to pay jointly and severally the former (1) the sum of
P513,623.80 plus interest thereon at the rate of 14% per annum as

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claimed from 25 September 1980 until fully paid; (2) the sum of
P102,724.76 as attorney's fees; and, (3) Costs. PNB and NASUDECO
appealed. The Court of Appeals affirmed the decision of the trial
court in its decision of 17 April 2000 (CA-GR CV 57610. PNB and
NASUDECO filed the petition for review.
Issue: Whether PNB and NASUDECO may be held liable for PASUMIL’s
liability to AEEC.
Held: Basic is the rule that a corporation has a legal personality

distinct and separate from the persons and entities owning it. The
corporate veil may be lifted only if it has been used to shield fraud,
defend crime, justify a wrong, defeat public convenience, insulate
bad faith or perpetuate injustice. Thus, the mere fact that the
Philippine National Bank (PNB) acquired ownership or management
of some assets of the Pampanga Sugar Mill (PASUMIL), which had
earlier been foreclosed and purchased at the resulting public
auction by the Development Bank of the Philippines (DBP), will not
make PNB liable for the PASUMIL's contractual debts to Andrada
Electric & Engineering Company (AEEC). Piercing the veil of
corporate fiction may be allowed only if the following elements
concur: (1) control — not mere stock control, but complete
domination — not only of finances, but of policy and business
practice in respect to the transaction attacked, must have been
such that the corporate entity as to this transaction had at the time
no separate mind, will or existence of its own; (2) such control must
have been used by the defendant to commit a fraud or a wrong to
perpetuate the violation of a statutory or other positive legal duty, or
a dishonest and an unjust act in contravention of plaintiff's legal
right; and (3) the said control and breach of duty must have
proximately caused the injury or unjust loss complained of. The
absence of the foregoing elements in the present case precludes
the piercing of the corporate veil. First, other than the fact that PNB
and NASUDECO acquired the assets of PASUMIL, there is no showing
that their control over it warrants the disregard of corporate
personalities. Second, there is no evidence that their juridical
personality was used to commit a fraud or to do a wrong; or that the
separate corporate entity was farcically used as a mere alter ego,
business conduit or instrumentality of another entity or person. Third,
AEEC was not defrauded or injured when PNB and NASUDECO
acquired the assets of PASUMIL. Hence, although the assets of
NASUDECO can be easily traced to PASUMIL, the transfer of the
latter's assets to PNB and NASUDECO was not fraudulently entered
into in order to escape liability for its debt to AEEC. Neither was there
any merger or consolidation with respect to PASUMIL and PNB. The
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procedure prescribed under Title IX of the Corporation Code 59 was
not followed. In fact, PASUMIL's corporate existence had not been
legally extinguished or terminated. Further, prior to PNB's acquisition
of the foreclosed assets, PASUMIL had previously made partial
payments to AEEC for the former's obligation in the amount of
P777,263.80. As of 27 June 1973, PASUMIL had paid P250,000 to AEEC
and, from 5 January 1974 to 23 May 1974, another P14,000. Neither
did PNB expressly or impliedly agree to assume the debt of PASUMIL
to AEEC. LOI 11 explicitly provides that PNB shall study and submit
recommendations on the claims of PASUMIL's creditors. Clearly, the
corporate separateness between PASUMIL and PNB remains, despite
AEEC's insistence to the contrary.
G.R. No. L-23145 November 29, 1968
TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D.

TAYAG, ancillary administrator-appellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.
Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.

Ross, Salcedo, Del Rosario, Bito and Misa for oppositor-appellant.
FERNANDO, J.:
Confronted by an obstinate and adamant refusal of the domiciliary

administrator, the County Trust Company of New York, United States
of America, of the estate of the deceased Idonah Slade Perkins,
who died in New York City on March 27, 1960, to surrender to the
ancillary administrator in the Philippines the stock certificates owned
by her in a Philippine corporation, Benguet Consolidated, Inc., to
satisfy the legitimate claims of local creditors, the lower court, then
presided by the Honorable Arsenio Santos, now retired, issued on
May 18, 1964, an order of this tenor: "After considering the motion of
the ancillary administrator, dated February 11, 1964, as well as the
opposition filed by the Benguet Consolidated, Inc., the Court hereby
(1) considers as lost for all purposes in connection with the
administration and liquidation of the Philippine estate of Idonah
Slade Perkins the stock certificates covering the 33,002 shares of
stock standing in her name in the books of the Benguet
Consolidated, Inc., (2) orders said certificates cancelled, and (3)
directs said corporation to issue new certificates in lieu thereof, the
same to be delivered by said corporation to either the incumbent
ancillary administrator or to the Probate Division of this Court." 1
From such an order, an appeal was taken to this Court not by the
domiciliary administrator, the County Trust Company of New York,
but by the Philippine corporation, the Benguet Consolidated, Inc.
The appeal cannot possibly prosper. The challenged order

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represents a response and expresses a policy, to paraphrase
Frankfurter, arising out of a specific problem, addressed to the
attainment of specific ends by the use of specific remedies, with full
and ample support from legal doctrines of weight and significance.
The facts will explain why. As set forth in the brief of appellant
Benguet Consolidated, Inc., Idonah Slade Perkins, who died on
March 27, 1960 in New York City, left among others, two stock
certificates covering 33,002 shares of appellant, the certificates
being in the possession of the County Trust Company of New York,
which as noted, is the domiciliary administrator of the estate of the
deceased.2 Then came this portion of the appellant's brief: "On
August 12, 1960, Prospero Sanidad instituted ancillary administration
proceedings in the Court of First Instance of Manila; Lazaro A.
Marquez was appointed ancillary administrator, and on January 22,
1963, he was substituted by the appellee Renato D. Tayag. A dispute
arose between the domiciary administrator in New York and the
ancillary administrator in the Philippines as to which of them was
entitled to the possession of the stock certificates in question. On
January 27, 1964, the Court of First Instance of Manila ordered the
domiciliary administrator, County Trust Company, to "produce and
deposit" them with the ancillary administrator or with the Clerk of
Court. The domiciliary administrator did not comply with the order,
and on February 11, 1964, the ancillary administrator petitioned the
court to "issue an order declaring the certificate or certificates of
stocks covering the 33,002 shares issued in the name of Idonah Slade
Perkins by Benguet Consolidated, Inc., be declared [or] considered
as lost."3
It is to be noted further that appellant Benguet Consolidated, Inc.

admits that "it is immaterial" as far as it is concerned as to "who is
entitled to the possession of the stock certificates in question;
appellant opposed the petition of the ancillary administrator
because the said stock certificates are in existence, they are today
in the possession of the domiciliary administrator, the County Trust
Company, in New York, U.S.A...."4
It is its view, therefore, that under the circumstances, the stock

certificates cannot be declared or considered as lost. Moreover, it
would allege that there was a failure to observe certain
requirements of its by-laws before new stock certificates could be
issued. Hence, its appeal.
As was made clear at the outset of this opinion, the appeal lacks
merit. The challenged order constitutes an emphatic affirmation of
judicial authority sought to be emasculated by the wilful conduct of
the domiciliary administrator in refusing to accord obedience to a
court decree. How, then, can this order be stigmatized as illegal?

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As is true of many problems confronting the judiciary, such a
response was called for by the realities of the situation. What cannot
be ignored is that conduct bordering on wilful defiance, if it had not
actually reached it, cannot without undue loss of judicial prestige,
be condoned or tolerated. For the law is not so lacking in flexibility
and resourcefulness as to preclude such a solution, the more so as
deeper reflection would make clear its being buttressed by
indisputable principles and supported by the strongest policy
considerations.
It can truly be said then that the result arrived at upheld and
vindicated the honor of the judiciary no less than that of the country.
Through this challenged order, there is thus dispelled the atmosphere
of contingent frustration brought about by the persistence of the
domiciliary administrator to hold on to the stock certificates after it
had, as admitted, voluntarily submitted itself to the jurisdiction of the
lower court by entering its appearance through counsel on June 27,
1963, and filing a petition for relief from a previous order of March 15,
1963.
Thus did the lower court, in the order now on appeal, impart vitality
and effectiveness to what was decreed. For without it, what it had
been decided would be set at naught and nullified. Unless such a
blatant disregard by the domiciliary administrator, with residence
abroad, of what was previously ordained by a court order could be
thus remedied, it would have entailed, insofar as this matter was
concerned, not a partial but a well-nigh complete paralysis of
judicial authority.
1. Appellant Benguet Consolidated, Inc. did not dispute the power

of the appellee ancillary administrator to gain control and possession
of all assets of the decedent within the jurisdiction of the Philippines.
Nor could it. Such a power is inherent in his duty to settle her estate
and satisfy the claims of local creditors.5 As Justice Tuason speaking
for this Court made clear, it is a "general rule universally recognized"
that administration, whether principal or ancillary, certainly "extends
to the assets of a decedent found within the state or country where
it was granted," the corollary being "that an administrator appointed
in one state or country has no power over property in another state
or country."6
It is to be noted that the scope of the power of the ancillary

administrator was, in an earlier case, set forth by Justice Malcolm.
Thus: "It is often necessary to have more than one administration of
an estate. When a person dies intestate owning property in the
country of his domicile as well as in a foreign country, administration
is had in both countries. That which is granted in the jurisdiction of
decedent's last domicile is termed the principal administration, while
any other administration is termed the ancillary administration. The
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reason for the latter is because a grant of administration does not ex
proprio vigore have any effect beyond the limits of the country in
which it is granted. Hence, an administrator appointed in a foreign
state has no authority in the [Philippines]. The ancillary administration
is proper, whenever a person dies, leaving in a country other than
that of his last domicile, property to be administered in the nature of
assets of the deceased liable for his individual debts or to be
distributed among his heirs."7
It would follow then that the authority of the probate court to require
that ancillary administrator's right to "the stock certificates covering
the 33,002 shares ... standing in her name in the books of [appellant]
Benguet Consolidated, Inc...." be respected is equally beyond
question. For appellant is a Philippine corporation owing full
allegiance and subject to the unrestricted jurisdiction of local courts.
Its shares of stock cannot therefore be considered in any wise as
immune from lawful court orders.
Our holding in Wells Fargo Bank and Union v. Collector of Internal

Revenue8 finds application. "In the instant case, the actual situs of
the shares of stock is in the Philippines, the corporation being
domiciled [here]." To the force of the above undeniable proposition,
not even appellant is insensible. It does not dispute it. Nor could it
successfully do so even if it were so minded.
2. In the face of such incontrovertible doctrines that argue in a

rather conclusive fashion for the legality of the challenged order,
how does appellant, Benguet Consolidated, Inc. propose to carry
the extremely heavy burden of persuasion of precisely
demonstrating the contrary? It would assign as the basic error
allegedly committed by the lower court its "considering as lost the
stock certificates covering 33,002 shares of Benguet belonging to the
deceased Idonah Slade Perkins, ..."9 More specifically, appellant
would stress that the "lower court could not "consider as lost" the
stock certificates in question when, as a matter of fact, his Honor the
trial Judge knew, and does know, and it is admitted by the appellee,
that the said stock certificates are in existence and are today in the
possession of the domiciliary administrator in New York." 10
There may be an element of fiction in the above view of the lower

court. That certainly does not suffice to call for the reversal of the
appealed order. Since there is a refusal, persistently adhered to by
the domiciliary administrator in New York, to deliver the shares of
stocks of appellant corporation owned by the decedent to the
ancillary administrator in the Philippines, there was nothing
unreasonable or arbitrary in considering them as lost and requiring
the appellant to issue new certificates in lieu thereof. Thereby, the
task incumbent under the law on the ancillary administrator could
be discharged and his responsibility fulfilled.
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Any other view would result in the compliance to a valid judicial
order being made to depend on the uncontrolled discretion of the
party or entity, in this case domiciled abroad, which thus far has
shown the utmost persistence in refusing to yield obedience.
Certainly, appellant would not be heard to contend in all seriousness
that a judicial decree could be treated as a mere scrap of paper,
the court issuing it being powerless to remedy its flagrant disregard.
It may be admitted of course that such alleged loss as found by the

lower court did not correspond exactly with the facts. To be more
blunt, the quality of truth may be lacking in such a conclusion arrived
at. It is to be remembered however, again to borrow from
Frankfurter, "that fictions which the law may rely upon in the pursuit
of legitimate ends have played an important part in its
development."11
Speaking of the common law in its earlier period, Cardozo could

state fictions "were devices to advance the ends of justice, [even if]
clumsy and at times offensive."12 Some of them have persisted even
to the present, that eminent jurist, noting "the quasi contract, the
adopted child, the constructive trust, all of flourishing vitality, to attest
the empire of "as if" today."13 He likewise noted "a class of fictions of
another order, the fiction which is a working tool of thought, but
which at times hides itself from view till reflection and analysis have
brought it to the light."14
What cannot be disputed, therefore, is the at times indispensable

role that fictions as such played in the law. There should be then on
the part of the appellant a further refinement in the catholicity of its
condemnation of such judicial technique. If ever an occasion did
call for the employment of a legal fiction to put an end to the
anomalous situation of a valid judicial order being disregarded with
apparent impunity, this is it. What is thus most obvious is that this
particular alleged error does not carry persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to bolster the

above contention by its invoking one of the provisions of its by-laws
which would set forth the procedure to be followed in case of a lost,
stolen or destroyed stock certificate; it would stress that in the event
of a contest or the pendency of an action regarding ownership of
such certificate or certificates of stock allegedly lost, stolen or
destroyed, the issuance of a new certificate or certificates would
await the "final decision by [a] court regarding the ownership
[thereof]."15
Such reliance is misplaced. In the first place, there is no such

occasion to apply such by-law. It is admitted that the foreign
domiciliary administrator did not appeal from the order now in
question. Moreover, there is likewise the express admission of

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appellant that as far as it is concerned, "it is immaterial ... who is
entitled to the possession of the stock certificates ..." Even if such
were not the case, it would be a legal absurdity to impart to such a
provision conclusiveness and finality. Assuming that a contrariety
exists between the above by-law and the command of a court
decree, the latter is to be followed.
It is understandable, as Cardozo pointed out, that the Constitution

overrides a statute, to which, however, the judiciary must yield
deference, when appropriately invoked and deemed applicable. It
would be most highly unorthodox, however, if a corporate by-law
would be accorded such a high estate in the jural order that a court
must not only take note of it but yield to its alleged controlling force.
The fear of appellant of a contingent liability with which it could be

saddled unless the appealed order be set aside for its inconsistency
with one of its by-laws does not impress us. Its obedience to a lawful
court order certainly constitutes a valid defense, assuming that such
apprehension of a possible court action against it could possibly
materialize. Thus far, nothing in the circumstances as they have
developed gives substance to such a fear. Gossamer possibilities of
a future prejudice to appellant do not suffice to nullify the lawful
exercise of judicial authority.
4. What is more the view adopted by appellant Benguet

Consolidated, Inc. is fraught with implications at war with the basic
postulates of corporate theory.
We start with the undeniable premise that, "a corporation is an

artificial being created by operation of law...."16 It owes its life to the
state, its birth being purely dependent on its will. As Berle so aptly
stated: "Classically, a corporation was conceived as an artificial
person, owing its existence through creation by a sovereign
power."17 As a matter of fact, the statutory language employed
owes much to Chief Justice Marshall, who in the Dartmouth College
decision defined a corporation precisely as "an artificial being,
invisible, intangible, and existing only in contemplation of law." 18
The well-known authority Fletcher could summarize the matter thus:

"A corporation is not in fact and in reality a person, but the law treats
it 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.... It owes its existence to law. It is an artificial person
created by law for certain specific purposes, the extent of whose
existence, powers and liberties is fixed by its charter."19 Dean Pound's
terse summary, a juristic person, resulting from an association of
human beings granted legal personality by the state, puts the matter
neatly.20

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There is thus a rejection of Gierke's genossenchaft theory, the basic
theme of which to quote from Friedmann, "is the reality of the group
as a social and legal entity, independent of state recognition and
concession."21 A corporation as known to Philippine jurisprudence is a
creature without any existence until it has received the imprimatur of
the state according to law. It is logically inconceivable therefore that
it will have rights and privileges of a higher priority than that of its
creator. More than that, it cannot legitimately refuse to yield
obedience to acts of its state organs, certainly not excluding the
judiciary, whenever called upon to do so.
As a matter of fact, a corporation once it comes into being,

following American law still of persuasive authority in our jurisdiction,
comes more often within the ken of the judiciary than the other two
coordinate branches. It institutes the appropriate court action to
enforce its right. Correlatively, it is not immune from judicial control in
those instances, where a duty under the law as ascertained in an
appropriate legal proceeding is cast upon it.
To assert that it can choose which court order to follow and which to
disregard is to confer upon it not autonomy which may be
conceded but license which cannot be tolerated. It is to argue that
it may, when so minded, overrule the state, the source of its very
existence; it is to contend that what any of its governmental organs
may lawfully require could be ignored at will. So extravagant a claim
cannot possibly merit approval.
5. One last point. In Viloria v. Administrator of Veterans Affairs,22 it was

shown that in a guardianship proceedings then pending in a lower
court, the United States Veterans Administration filed a motion for
the refund of a certain sum of money paid to the minor under
guardianship, alleging that the lower court had previously granted its
petition to consider the deceased father as not entitled to guerilla
benefits according to a determination arrived at by its main office in
the United States. The motion was denied. In seeking a
reconsideration of such order, the Administrator relied on an
American federal statute making his decisions "final and conclusive
on all questions of law or fact" precluding any other American
official to examine the matter anew, "except a judge or judges of
the United States court."23 Reconsideration was denied, and the
Administrator appealed.
In an opinion by Justice J.B.L. Reyes, we sustained the lower court.

Thus: "We are of the opinion that the appeal should be rejected. The
provisions of the U.S. Code, invoked by the appellant, make the
decisions of the U.S. Veterans' Administrator final and conclusive
when made on claims property submitted to him for resolution; but
they are not applicable to the present case, where the Administrator
is not acting as a judge but as a litigant. There is a great difference
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between actions against the Administrator (which must be filed
strictly in accordance with the conditions that are imposed by the
Veterans' Act, including the exclusive review by United States
courts), and those actions where the Veterans' Administrator seeks a
remedy from our courts and submits to their jurisdiction by filing
actions therein. Our attention has not been called to any law or
treaty that would make the findings of the Veterans' Administrator, in
actions where he is a party, conclusive on our courts. That, in effect,
would deprive our tribunals of judicial discretion and render them
mere subordinate instrumentalities of the Veterans' Administrator."
It is bad enough as the Viloria decision made patent for our judiciary
to accept as final and conclusive, determinations made by foreign
governmental agencies. It is infinitely worse if through the absence
of any coercive power by our courts over juridical persons within our
jurisdiction, the force and effectivity of their orders could be made to
depend on the whim or caprice of alien entities. It is difficult to
imagine of a situation more offensive to the dignity of the bench or
the honor of the country.
Yet that would be the effect, even if unintended, of the proposition

to which appellant Benguet Consolidated seems to be firmly
committed as shown by its failure to accept the validity of the order
complained of; it seeks its reversal. Certainly we must at all pains see
to it that it does not succeed. The deplorable consequences
attendant on appellant prevailing attest to the necessity of negative
response from us. That is what appellant will get.
That is all then that this case presents. It is obvious why the appeal
cannot succeed. It is always easy to conjure extreme and even
oppressive possibilities. That is not decisive. It does not settle the issue.
What carries weight and conviction is the result arrived at, the just
solution obtained, grounded in the soundest of legal doctrines and
distinguished by its correspondence with what a sense of realism
requires. For through the appealed order, the imperative
requirement of justice according to law is satisfied and national
dignity and honor maintained.
WHEREFORE, the appealed order of the Honorable Arsenio Santos,

the Judge of the Court of First Instance, dated May 18, 1964, is
affirmed. With costs against oppositor-appelant Benguet
Consolidated, Inc.
Makalintal, Zaldivar and Capistrano, JJ., concur.

Concepcion, C.J., Reyes, J.B.L., Dizon, Sanchez and Castro, JJ.,
concur in the result.
G.R. No. L-23145 November 29, 1968

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Lessons Applicable: Theory of Concession (Corporate Law)
FACTS:
 March 27, 1960: Idonah Slade Perkins died in New York City
 August 12, 1960: Prospero Sanidad instituted ancillary

administration proceedings appointing ancillary
administrator Lazaro A. Marquez later on substituted by Renato
D. Tayag
 On January 27, 1964: CFI ordered domiciliary

administrator County Trust Company of New York to surrender
to the ancillary administrator in the Philippines 33,002 shares
of stock certificates owned by her in a Philippine corporation,
Benguet Consolidated, Inc., to satisfy the legitimate claims of
local creditors
 When County Trust Company of New York refused the court

ordered Benguet Consolidated, Inc. to declare the stocks lost
and required it to issue new certificates in lieu thereof
 Appeal was taken by Benguet Consolidated, Inc. alleging the

failure to comply with its by-laws setting forth the procedure to
be followed in case of a lost, stolen or destroyed so it cannot
issue new stock certs.
ISSUE: W/N Benguet Consolidated, Inc. can ignore a court order

because of its by-laws
HELD: NO. CFI Affirmed
 Fear of contigent liability - obedience to a lawful order = valid

defense
 Benguet Consolidated, Inc. is a Philippine corporation owing full

allegiance and subject to the unrestricted jurisdiction of local
courts
 Assuming that a contrariety exists between the above by-law

and the command of a court decree, the latter is to be
followed.
 corporation is an artificial being created by operation of

law...."It owes its life to the state, its birth being purely
dependent on its will. Cannot ignore the source of its very
existence
Tayag vs. Benguet Consolidated, Inc.

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G.R. No. L-23145, Nov. 29, 1968
 PRIVATE INTERNATIONAL LAW: Situs of Shares of Stock: domicile

of the corporation
 SUCCESSION: Ancillary Administration: The ancillary

administration is proper, whenever a person dies, leaving in a
country other than that of his last domicile, property to be
administered in the nature of assets of the deceased liable for
his individual debts or to be distributed among his heirs.
 SUCCESSION: Probate: Probate court has authority to issue the

order enforcing the ancillary administrator’s right to the stock
certificates when the actual situs of the shares of stocks is in the
Philippines.
FACTS:
Idonah Slade Perkins, an American citizen who died in New York

City, left among others, two stock certificates issued by Benguet
Consolidated, a corporation domiciled in the Philippines. As ancillary
administrator of Perkins’ estate in the Philippines, Tayag now wants to
take possession of these stock certificates but County Trust Company
of New York, the domiciliary administrator, refused to part with them.
Thus, the probate court of the Philippines was forced to issue an
order declaring the stock certificates as lost and ordering Benguet
Consolidated to issue new stock certificates representing Perkins’
shares. Benguet Consolidated appealed the order, arguing that the
stock certificates are not lost as they are in existence and currently in
the possession of County Trust Company of New York.
ISSUE: Whether or not the order of the lower court is proper
HELD:
The appeal lacks merit.
Tayag, as ancillary administrator, has the power to gain control and

possession of all assets of the decedent within the jurisdiction of the
Philippines
It is to be noted that the scope of the power of the ancillary

administrator was, in an earlier case, set forth by Justice Malcolm.

suigeneris
Thus: "It is often necessary to have more than one administration of
an estate. When a person dies intestate owning property in the
country of his domicile as well as in a foreign country, administration
is had in both countries. That which is granted in the jurisdiction of
decedent's last domicile is termed the principal administration, while
any other administration is termed the ancillary administration. The
reason for the latter is because a grant of administration does not ex
proprio vigore have any effect beyond the limits of the country in
which it is granted. Hence, an administrator appointed in a foreign
state has no authority in the [Philippines]. The ancillary administration
is proper, whenever a person dies, leaving in a country other than
that of his last domicile, property to be administered in the nature of
assets of the deceased liable for his individual debts or to be
distributed among his heirs."
Probate court has authority to issue the order enforcing the ancillary
administrator’s right to the stock certificates when the actual situs of
the shares of stocks is in the Philippines.
It would follow then that the authority of the probate court to require
that ancillary administrator's right to "the stock certificates covering
the 33,002 shares ... standing in her name in the books of [appellant]
Benguet Consolidated, Inc...." be respected is equally beyond
question. For appellant is a Philippine corporation owing full
allegiance and subject to the unrestricted jurisdiction of local courts.
Its shares of stock cannot therefore be considered in any wise as
immune from lawful court orders.
Our holding in Wells Fargo Bank and Union v. Collector of Internal

Revenue finds application. "In the instant case, the actual situs of the
shares of stock is in the Philippines, the corporation being domiciled
[here]." To the force of the above undeniable proposition, not even
appellant is insensible. It does not dispute it. Nor could it successfully
do so even if it were so minded.
PSE vs. CA (281 SCRA 232 [1997])
G.R. No. 125469 October 27, 1997
PHILIPPINE STOCK EXCHANGE, INC., petitioner,

vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE
COMMISSION and PUERTO AZUL LAND, INC., respondents.

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TORRES, JR., J.:
The Securities and Exchange Commission is the government agency,

under the direct general supervision of the Office of the President, 1
with the immense task of enforcing the Revised Securities Act, and all
other duties assigned to it by pertinent laws. Among its inumerable
functions, and one of the most important, is the supervision of all
corporations, partnerships or associations, who are grantees of
primary franchise and/or a license or permit issued by the
government to operate in the Philippines. 2 Just how far this
regulatory authority extends, particularly, with regard to the
Petitioner Philippine Stock Exchange, Inc. is the issue in the case at
bar.
In this Petition for Review on Certiorari, petitioner assails the resolution

of the respondent Court of Appeals, dated June 27, 1996, which
affirmed the decision of the Securities and Exchange Commission
ordering the petitioner Philippine Stock Exchange, Inc. to allow the
private respondent Puerto Azul Land, Inc. to be listed in its stock
market, thus paving the way for the public offering of PALI's shares.
The facts of the case are undisputed, and are hereby restated in
sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation,
had sought to offer its shares to the public in order to raise funds
allegedly to develop its properties and pay its loans with several
banking institutions. In January, 1995, PALI was issued a Permit to Sell
its shares to the public by the Securities and Exchange Commission
(SEC). To facilitate the trading of its shares among investors, PALI
sought to course the trading of its shares through the Philippine Stock
Exchange, Inc. (PSE), for which purpose it filed with the said stock
exchange an application to list its shares, with supporting documents
attached.
On February 8, 1996, the Listing Committee of the PSE, upon a

perusal of PALI's application, recommended to the PSE's Board of
Governors the approval of PALI's listing application.
On February 14, 1996, before it could act upon PALI's application,

the Board of Governors of the PSE received a letter from the heirs of
Ferdinand E. Marcos, claiming that the late President Marcos was
the legal and beneficial owner of certain properties forming part of
the Puerto Azul Beach Hotel and Resort Complex which PALI claims
to be among its assets and that the Ternate Development
Corporation, which is among the stockholders of PALI, likewise
appears to have been held and continue to be held in trust by one
Rebecco Panlilio for then President Marcos and now, effectively for

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his estate, and requested PALI's application to be deferred. PALI was
requested to comment upon the said letter.
PALI's answer stated that the properties forming part of the Puerto
Azul Beach Hotel and Resort Complex were not claimed by PALI as
its assets. On the contrary, the resort is actually owned by Fantasia
Filipina Resort, Inc. and the Puerto Azul Country Club, entities distinct
from PALI. Furthermore, the Ternate Development Corporation owns
only 1.20% of PALI. The Marcoses responded that their claim is not
confined to the facilities forming part of the Puerto Azul Hotel and
Resort Complex, thereby implying that they are also asserting legal
and beneficial ownership of other properties titled under the name
of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol

Gunigundo of the Presidential Commission on Good Government
(PCGG) requesting for comments on the letters of the PALI and the
Marcoses. On March 4, 1996, the PSE was informed that the
Marcoses received a Temporary Restraining Order on the same
date, enjoining the Marcoses from, among others, "further impeding,
obstructing, delaying or interfering in any manner by or any means
with the consideration, processing and approval by the PSE of the
initial public offering of PALI." The TRO was issued by Judge Martin S.
Villarama, Executive Judge of the RTC of Pasig City in Civil Case No.
65561, pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of

Governors of the PSE reached its decision to reject PALI's application,
citing the existence of serious claims, issues and circumstances
surrounding PALI's ownership over its assets that adversely affect the
suitability of listing PALI's shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the
then Acting Chairman, Perfecto R. Yasay, Jr., bringing to the SEC's
attention the action taken by the PSE in the application of PALI for
the listing of its shares with the PSE, and requesting that the SEC, in
the exercise of its supervisory and regulatory powers over stock
exchanges under Section 6(j) of P.D. No. 902-A, review the PSE's
action on PALI's listing application and institute such measures as are
just and proper under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE,
attaching thereto the letter of PALI and directing the PSE to file its
comments thereto within five days from its receipt and for its
authorized representative to appear for an "inquiry" on the matter.
On April 22, 1996, the PSE submitted a letter to the SEC containing its
comments to the April 11, 1996 letter of PALI.

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On April 24, 1996, the SEC rendered its Order, reversing the PSE's
decision. The dispositive portion of the said order reads:
WHEREFORE, premises considered, and invoking the

Commissioner's authority and jurisdiction under Section 3
of the Revised Securities Act, in conjunction with Section 3,
6(j) and 6(m) of Presidential Decree No. 902-A, the
decision of the Board of Governors of the Philippine Stock
Exchange denying the listing of shares of Puerto Azul
Land, Inc., is hereby set aside, and the PSE is hereby
ordered to immediately cause the listing of the PALI shares
in the Exchange, without prejudice to its authority to
require PALI to disclose such other material information it
deems necessary for the protection of the investigating
public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29,
1996, which was, however denied by the Commission in its May 9,
1996 Order which states:
WHEREFORE, premises considered, the Commission finds

no compelling reason to reconsider its order dated April
24, 1996, and in the light of recent developments on the
adverse claim against the PALI properties, PSE should
require PALI to submit full disclosure of material facts and
information to protect the investing public. In this regard,
PALI is hereby ordered to amend its registration
statements filed with the Commission to incorporate the
full disclosure of these material facts and information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals on
May 17, 1996 a Petition for Review (with Application for Writ of
Preliminary Injunction and Temporary Restraining Order), assailing the
above mentioned orders of the SEC, submitting the following as
errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE

ABUSE OF DISCRETION IN ISSUING THE ASSAILED
ORDERS WITHOUT POWER, JURISDICTION, OR
AUTHORITY; SEC HAS NO POWER TO ORDER THE
LISTING AND SALE OF SHARES OF PALI WHOSE
ASSETS ARE SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING
APPLICATIONS;

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II. SEC COMMITTED SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN FINDING THAT PSE
ACTED IN AN ARBITRARY AND ABUSIVE MANNER
IN DISAPPROVING PALI'S LISTING APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL

AND VOID FOR ALLOWING FURTHER
DISPOSITION OF PROPERTIES IN CUSTODIA LEGIS
AND WHICH FORM PART OF NAVAL/MILITARY
RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT

PROPERLY PROMULGATED AND ITS
IMPLEMENTATION AND APPLICATION IN THIS
CASE VIOLATES THE DUE PROCESS CLAUSE OF
THE CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review
and subsequently, a Comment and Motion to Dismiss. On June 10,
1996, PSE fled its Reply to Comment and Opposition to Motion to
Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution

dismissing the PSE's Petition for Review. Hence, this Petition by the
PSE.
The appellate court had ruled that the SEC had both jurisdiction and
authority to look into the decision of the petitioner PSE, pursuant to
Section 3 3 of the Revised Securities Act in relation to Section 6(j) and
6(m) 4 of P.D. No. 902-A, and Section 38(b) 5 of the Revised Securities
Act, and for the purpose of ensuring fair administration of the
exchange. Both as a corporation and as a stock exchange, the
petitioner is subject to public respondent's jurisdiction, regulation and
control. Accepting the argument that the public respondent has the
authority merely to supervise or regulate, would amount to serious
consequences, considering that the petitioner is a stock exchange
whose business is impressed with public interest. Abuse is not remote
if the public respondent is left without any system of control. If the
securities act vested the public respondent with jurisdiction and
control over all corporations; the power to authorize the
establishment of stock exchanges; the right to supervise and
regulate the same; and the power to alter and supplement rules of
the exchange in the listing or delisting of securities, then the law
certainly granted to the public respondent the plenary authority
over the petitioner; and the power of review necessarily comes
within its authority.
All in all, the court held that PALI complied with all the requirements
for public listing, affirming the SEC's ruling to the effect that:

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. . . the Philippine Stock Exchange has acted in an
arbitrary and abusive manner in disapproving the
application of PALI for listing of its shares in the face of the
following considerations:
1. PALI has clearly and admittedly complied with the

Listing Rules and full disclosure requirements of the
Exchange;
2. In applying its clear and reasonable standards on the

suitability for listing of shares, PSE has failed to justify why it
acted differently on the application of PALI, as compared
to the IPOs of other companies similarly situated that were
allowed listing in the Exchange;
3. It appears that the claims and issues on the title to PALI's

properties were even less serious than the claims against
the assets of the other companies in that, the assertions of
the Marcoses that they are owners of the disputed
properties were not substantiated enough to overcome
the strength of a title to properties issued under the Torrens
System as evidence of ownership thereof;
4. No action has been filed in any court of competent

jurisdiction seeking to nullify PALI's ownership over the
disputed properties, neither has the government instituted
recovery proceedings against these properties. Yet the
import of PSE's decision in denying PALI's application is
that it would be PALI, not the Marcoses, that must go to
court to prove the legality of its ownership on these
properties before its shares can be listed.
In addition, the argument that the PALI properties belong to the

Military/Naval Reservation does not inspire belief. The point is, the
PALI properties are now titled. A property losses its public character
the moment it is covered by a title. As a matter of fact, the titles
have long been settled by a final judgment; and the final decree
having been registered, they can no longer be re-opened
considering that the one year period has already passed. Lastly, the
determination of what standard to apply in allowing PALI's
application for listing, whether the discretion method or the system of
public disclosure adhered to by the SEC, should be addressed to the
Securities Commission, it being the government agency that
exercises both supervisory and regulatory authority over all
corporations.
On August 15, 19961 the PSE, after it was granted an extension, filed
the instant Petition for Review on Certiorari, taking exception to the
rulings of the SEC and the Court of Appeals. Respondent PALI filed its

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Comment to the petition on October 17, 1996. On the same date,
the PCGG filed a Motion for Leave to file a Petition for Intervention.
This was followed up by the PCGG's Petition for Intervention on
October 21, 1996. A supplemental Comment was filed by PALI on
October 25, 1997. The Office of the Solicitor General, representing
the SEC and the Court of Appeals, likewise filed its Comment on
December 26, 1996. In answer to the PCGG's motion for leave to file
petition for intervention, PALI filed its Comment thereto on January
17, 1997, whereas the PSE filed its own Comment on January 20,
1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the
comments of respondent PALI (October 17, 1996) and the Solicitor
General (December 26, 1996). On May 16, 1997, PALI filed its
Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC
had authority to order the PSE to list the shares of PALI in the stock
exchange. Under presidential decree No. 902-A, the powers of the
SEC over stock exchanges are more limited as compared to its
authority over ordinary corporations. In connection with this, the
powers of the SEC over stock exchanges under the Revised
Securities Act are specifically enumerated, and these do not include
the power to reverse the decisions of the stock exchange. Authorities
are in abundance even in the United States, from which the
country's security policies are patterned, to the effect of giving the
Securities Commission less control over stock exchanges, which in
turn are given more lee-way in making the decision whether or not
to allow corporations to offer their stock to the public through the
stock exchange. This is in accord with the "business judgment rule"
whereby the SEC and the courts are barred from intruding into
business judgments of corporations, when the same are made in
good faith. the said rule precludes the reversal of the decision of the
PSE to deny PALI's listing application, absent a showing of bad faith
on the part of the PSE. Under the listing rules of the PSE, to which PALI
had previously agreed to comply, the PSE retains the discretion to
accept or reject applications for listing. Thus, even if an issuer has
complied with the PSE listing rules and requirements, PSE retains the
discretion to accept or reject the issuer's listing application if the PSE
determines that the listing shall not serve the interests of the investing
public.
Moreover, PSE argues that the SEC has no jurisdiction over

sequestered corporations, nor with corporations whose properties
are under sequestration. A reading of Republic of the Philippines vs.
Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the
properties of PALI, which were derived from the Ternate
Development Corporation (TDC) and the Monte del Sol

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Development Corporation (MSDC). are under sequestration by the
PCGG, and subject of forfeiture proceedings in the Sandiganbayan.
This ruling of the Court is the "law of the case" between the Republic
and TDC and MSDC. It categorically declares that the assets of
these corporations were sequestered by the PCGG on March 10,
1986 and April 4, 1988.
It is, likewise, intimated that the Court of Appeals' sanction that PALI's
ownership over its properties can no longer be questioned, since
certificates of title have been issued to PALI and more than one year
has since lapsed, is erroneous and ignores well settled jurisprudence
on land titles. That a certificate of title issued under the Torrens
System is a conclusive evidence of ownership is not an absolute rule
and admits certain exceptions. It is fundamental that forest lands or
military reservations are non-alienable. Thus, when a title covers a
forest reserve or a government reservation, such title is void.
PSE, likewise, assails the SEC's and the Court of Appeals reliance on
the alleged policy of "full disclosure" to uphold the listing of PALI's
shares with the PSE, in the absence of a clear mandate for the
effectivity of such policy. As it is, the case records reveal the truth
that PALI did not comply with the listing rules and disclosure
requirements. In fact, PALI's documents supporting its application
contained misrepresentations and misleading statements, and
concealed material information. The matter of sequestration of PALI's
properties and the fact that the same form part of
military/naval/forest reservations were not reflected in PALI's
application.
It is undeniable that the petitioner PSE is not an ordinary corporation,

in that although it is clothed with the markings of a corporate entity,
it functions as the primary channel through which the vessels of
capital trade ply. The PSE's relevance to the continued operation
and filtration of the securities transactions in the country gives it a
distinct color of importance such that government intervention in its
affairs becomes justified, if not necessarily. Indeed, as the only
operational stock exchange in the country today, the PSE enjoys a
monopoly of securities transactions, and as such, it yields an
immense influence upon the country's economy.
Due to this special nature of stock exchanges, the country's

lawmakers has seen it wise to give special treatment to the
administration and regulation of stock exchanges. 6
These provisions, read together with the general grant of jurisdiction,

and right of supervision and control over all corporations under Sec.
3 of P.D. 902-A, give the SEC the special mandate to be vigilant in
the supervision of the affairs of stock exchanges so that the interests
of the investing public may be fully safeguard.

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Section 3 of Presidential Decree 902-A, standing alone, is enough
authority to uphold the SEC's challenged control authority over the
petitioner PSE even as it provides that "the Commission shall have
absolute jurisdiction, supervision, and control over all corporations,
partnerships or associations, who are the grantees of primary
franchises and/or a license or permit issued by the government to
operate in the Philippines. . ." The SEC's regulatory authority over
private corporations encompasses a wide margin of areas, touching
nearly all of a corporation's concerns. This authority springs from the
fact that a corporation owes its existence to the concession of its
corporate franchise from the state.
The SEC's power to look into the subject ruling of the PSE, therefore,
may be implied from or be considered as necessary or incidental to
the carrying out of the SEC's express power to insure fair dealing in
securities traded upon a stock exchange or to ensure the fair
administration of such exchange. 7 It is, likewise, observed that the
principal function of the SEC is the supervision and control over
corporations, partnerships and associations with the end in view that
investment in these entities may be encouraged and protected, and
their activities for the promotion of economic development. 8
Thus, it was in the alleged exercise of this authority that the SEC
reversed the decision of the PSE to deny the application for listing in
the stock exchange of the private respondent PALI. The SEC's action
was affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to whether
or not securities, including shares of stock of a corporation, may be
traded or not in the stock exchange. This is in line with the SEC's
mission to ensure proper compliance with the laws, such as the
Revised Securities Act and to regulate the sale and disposition of
securities in the country. 9 As the appellate court explains:
Paramount policy also supports the authority of the public

respondent to review petitioner's denial of the listing.
Being a stock exchange, the petitioner performs a
function that is vital to the national economy, as the
business is affected with public interest. As a matter of
fact, it has often been said that the economy moves on
the basis of the rise and fall of stocks being traded. By its
economic power, the petitioner certainly can dictate
which and how many users are allowed to sell securities
thru the facilities of a stock exchange, if allowed to
interpret its own rules liberally as it may please. Petitioner
can either allow or deny the entry to the market of
securities. To repeat, the monopoly, unless accompanied
by control, becomes subject to abuse; hence,

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considering public interest, then it should be subject to
government regulation.
The role of the SEC in our national economy cannot be minimized.

The legislature, through the Revised Securities Act, Presidential
Decree No. 902-A, and other pertinent laws, has entrusted to it the
serious responsibility of enforcing all laws affecting corporations and
other forms of associations not otherwise vested in some other
government office. 10
This is not to say, however, that the PSE's management prerogatives

are under the absolute control of the SEC. The PSE is, alter all, a
corporation authorized by its corporate franchise to engage in its
proposed and duly approved business. One of the PSE's main
concerns, as such, is still the generation of profit for its stockholders.
Moreover, the PSE has all the rights pertaining to corporations,
including the right to sue and be sued, to hold property in its own
name, to enter (or not to enter) into contracts with third persons, and
to perform all other legal acts within its allocated express or implied
powers.
A corporation is but an association of individuals, allowed to transact

under an assumed corporate name, and with a distinct legal
personality. In organizing itself as a collective body, it waives no
constitutional immunities and perquisites appropriate to such a
body. 11 As to its corporate and management decisions, therefore,
the state will generally not interfere with the same. Questions of
policy and of management are left to the honest decision of the
officers and directors of a corporation, and the courts are without
authority to substitute their judgment for the judgment of the board
of directors. The board is the business manager of the corporation,
and so long as it acts in good faith, its orders are not reviewable by
the courts. 12
Thus, notwithstanding the regulatory power of the SEC over the PSE,
and the resultant authority to reverse the PSE's decision in matters of
application for listing in the market, the SEC may exercise such
power only if the PSE's judgment is attended by bad faith. In Board of
Liquidators vs. Kalaw, 13 it was held that bad faith does not simply
connote bad judgment or negligence. It imports a dishonest
purpose or some moral obliquity and conscious doing of wrong. It
means a breach of a known duty through some motive or interest of
ill will, partaking of the nature of fraud.
In reaching its decision to deny the application for listing of PALI, the
PSE considered important facts, which, in the general scheme, brings
to serious question the qualification of PALI to sell its shares to the
public through the stock exchange. During the time for receiving
objections to the application, the PSE heard from the representative

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of the late President Ferdinand E. Marcos and his family who claim
the properties of the private respondent to be part of the Marcos
estate. In time, the PCGG confirmed this claim. In fact, an order of
sequestration has been issued covering the properties of PALI, and
suit for reconveyance to the state has been filed in the
Sandiganbayan Court. How the properties were effectively
transferred, despite the sequestration order, from the TDC and MSDC
to Rebecco Panlilio, and to the private respondent PALI, in only a
short span of time, are not yet explained to the Court, but it is clear
that such circumstances give rise to serious doubt as to the integrity
of PALI as a stock issuer. The petitioner was in the right when it
refused application of PALI, for a contrary ruling was not to the best
interest of the general public. The purpose of the Revised Securities
Act, after all, is to give adequate and effective protection to the
investing public against fraudulent representations, or false promises,
and the imposition of worthless ventures. 14
It is to be observed that the U.S. Securities Act emphasized its

avowed protection to acts detrimental to legitimate business, thus:
The Securities Act, often referred to as the "truth in

securities" Act, was designed not only to provide investors
with adequate information upon which to base their
decisions to buy and sell securities, but also to protect
legitimate business seeking to obtain capital through
honest presentation against competition from crooked
promoters and to prevent fraud in the sale of securities.
(Tenth Annual Report, U.S. Securities & Exchange
Commission, p. 14).
As has been pointed out, the effects of such an act are

chiefly (1) prevention of excesses and fraudulent
transactions, merely by requirement of that their details be
revealed; (2) placing the market during the early stages of
the offering of a security a body of information, which
operating indirectly through investment services and
expert investors, will tend to produce a more accurate
appraisal of a security, . . . Thus, the Commission may
refuse to permit a registration statement to become
effective if it appears on its face to be incomplete or
inaccurate in any material respect, and empower the
Commission to issue a stop order suspending the
effectiveness of any registration statement which is found
to include any untrue statement of a material fact or to
omit to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading. (Idem).

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Also, as the primary market for securities, the PSE has established its
name and goodwill, and it has the right to protect such goodwill by
maintaining a reasonable standard of propriety in the entities who
choose to transact through its facilities. It was reasonable for the PSE,
therefore, to exercise its judgment in the manner it deems
appropriate for its business identity, as long as no rights are trampled
upon, and public welfare is safeguarded.
In this connection, it is proper to observe that the concept of

government absolutism is a thing of the past, and should remain so.
The observation that the title of PALI over its properties is absolute
and can no longer be assailed is of no moment. At this juncture,
there is the claim that the properties were owned by TDC and MSDC
and were transferred in violation of sequestration orders, to Rebecco
Panlilio and later on to PALI, besides the claim of the Marcoses that
such properties belong to the Marcos estate, and were held only in
trust by Rebecco Panlilio. It is also alleged by the petitioner that
these properties belong to naval and forest reserves, and therefore
beyond private dominion. If any of these claims is established to be
true, the certificates of title over the subject properties now held by
PALI map be disregarded, as it is an established rule that a
registration of a certificate of title does not confer ownership over
the properties described therein to the person named as owner. The
inscription in the registry, to be effective, must be made in good
faith. The defense of indefeasibility of a Torrens Title does not extend
to a transferee who takes the certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE acted

correctly in refusing the application of PALI, the true ownership of the
properties of PALI need not be determined as an absolute fact.
What is material is that the uncertainty of the properties' ownership
and alienability exists, and this puts to question the qualification of
PALI's public offering. In sum, the Court finds that the SEC had acted
arbitrarily in arrogating unto itself the discretion of approving the
application for listing in the PSE of the private respondent PALI, since
this is a matter addressed to the sound discretion of the PSE, a
corporation entity, whose business judgments are respected in the
absence of bad faith.
The question as to what policy is, or should be relied upon in

approving the registration and sale of securities in the SEC is not for
the Court to determine, but is left to the sound discretion of the
Securities and Exchange Commission. In mandating the SEC to
administer the Revised Securities Act, and in performing its other
functions under pertinent laws, the Revised Securities Act, under
Section 3 thereof, gives the SEC the power to promulgate such rules
and regulations as it may consider appropriate in the public interest
for the enforcement of the said laws. The second paragraph of
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Section 4 of the said law, on the other hand, provides that no
security, unless exempt by law, shall be issued, endorsed, sold,
transferred or in any other manner conveyed to the public, unless
registered in accordance with the rules and regulations that shall be
promulgated in the public interest and for the protection of investors
by the Commission. Presidential Decree No. 902-A, on the other
hand, provides that the SEC, as regulatory agency, has supervision
and control over all corporations and over the securities market as a
whole, and as such, is given ample authority in determining
appropriate policies. Pursuant to this regulatory authority, the SEC
has manifested that it has adopted the policy of "full material
disclosure" where all companies, listed or applying for listing, are
required to divulge truthfully and accurately, all material information
about themselves and the securities they sell, for the protection of
the investing public, and under pain of administrative, criminal and
civil sanctions. In connection with this, a fact is deemed material if it
tends to induce or otherwise effect the sale or purchase of its
securities. 15 While the employment of this policy is recognized and
sanctioned by the laws, nonetheless, the Revised Securities Act sets
substantial and procedural standards which a proposed issuer of
securities must satisfy. 16 Pertinently, Section 9 of the Revised
Securities Act sets forth the possible Grounds for the Rejection of the
registration of a security:
— The Commission may reject a registration statement

and refuse to issue a permit to sell the securities included
in such registration statement if it finds that —
(1) The registration statement is on its face incomplete or

inaccurate in any material respect or includes any untrue
statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make
the statements therein not misleading; or
(2) The issuer or registrant —
(i) is not solvent or not in sound financial

condition;
(ii) has violated or has not complied with the

provisions of this Act, or the rules promulgated
pursuant thereto, or any order of the
Commission;
(iii) has failed to comply with any of the

applicable requirements and conditions that
the Commission may, in the public interest and
for the protection of investors, impose before
the security can be registered;

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(iv) has been engaged or is engaged or is
about to engage in fraudulent transaction;
(v) is in any way dishonest or is not of good

repute; or
(vi) does not conduct its business in

accordance with law or is engaged in a
business that is illegal or contrary to
government rules and regulations.
(3) The enterprise or the business of the issuer is not shown

to be sound or to be based on sound business principles;
(4) An officer, member of the board of directors, or

principal stockholder of the issuer is disqualified to be such
officer, director or principal stockholder; or
(5) The issuer or registrant has not shown to the satisfaction

of the Commission that the sale of its security would not
work to the prejudice of the public interest or as a fraud
upon the purchasers or investors. (Emphasis Ours)
A reading of the foregoing grounds reveals the intention of the

lawmakers to make the registration and issuance of securities
dependent, to a certain extent, on the merits of the securities
themselves, and of the issuer, to be determined by the Securities and
Exchange Commission. This measure was meant to protect the
interests of the investing public against fraudulent and worthless
securities, and the SEC is mandated by law to safeguard these
interests, following the policies and rules therefore provided. The
absolute reliance on the full disclosure method in the registration of
securities is, therefore, untenable. As it is, the Court finds that the
private respondent PALI, on at least two points (nos. 1 and 5) has
failed to support the propriety of the issue of its shares with unfailing
clarity, thereby lending support to the conclusion that the PSE acted
correctly in refusing the listing of PALI in its stock exchange. This does
not discount the effectivity of whatever method the SEC, in the
exercise of its vested authority, chooses in setting the standard for
public offerings of corporations wishing to do so. However, the SEC
must recognize and implement the mandate of the law, particularly
the Revised Securities Act, the provisions of which cannot be
amended or supplanted by mere administrative issuance.
In resume, the Court finds that the PSE has acted with justified
circumspection, discounting, therefore, any imputation of
arbitrariness and whimsical animation on its part. Its action in refusing
to allow the listing of PALI in the stock exchange is justified by the law
and by the circumstances attendant to this case.

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ACCORDINGLY, in view of the foregoing considerations, the Court
hereby GRANTS the Petition for Review on Certiorari. The Decisions of
the Court of Appeals and the Securities and Exchange Commission
dated July 27, 1996 and April 24, 1996 respectively, are hereby
REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED,
affirming the decision of the Philippine Stock Exchange to deny the
application for listing of the private respondent Puerto Azul Land, Inc.
SO ORDERED.
Regalado and Puno, JJ., concur.
Mendoza, J., concurs in the result.
Footnotes
1 Section 1, Presidential Decree No. 902-A.
2 Section 3, Ibid.
3 Sec. 3. Administrative Agency. — This Act shall be

administered by the (Securities and Exchange)
Commission which shall continue to have the
organization, powers, and functions provided by
Presidential Decree Numbered 902-A, 1653, 1758, and
1799 and Executive Order No. 708. The Commission shall,
except as otherwise expressly provided, have the power
to promulgate such rules and regulations as it may
consider appropriate in the public interest for the
enforcement of the provisions hereof.
4 Sec. 6. In order to effectively exercise such jurisdiction,

the (Securities and Exchange) Commission shall possess
the following powers:
xxx xxx xxx
(j) To authorize the establishment and operation of stock

exchanges, commodity exchanges and such other similar
organizations and to supervise and regulale the same;
including the authority to determine their number, size
and location, in the light of national or regional
requirements for such activities with the view to promote,
conserve or rationalize investment;
xxx xxx xxx
(m) To exercise such other powers as may be provided by

law as well as those which may be implied from, or which
are necessary or incidental to the carrying out of, the

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express powers granted to the Commission or to achieve
the objectives and purposes of this Decree.
5 Sec. 38. Powers with respect to exchanges and

securities. — (a) . . .
(b) The Commission is further authorized, if after making

appropriate request in writing to a securities exchange
that such exchange effect on its own behalf specified
changes in the rules and practices and, after appropriate
notice and opportunity for hearing, it determines that
such exchange has not made the changes so requested,
and that such changes are necessary or appropriate for
the protection of investors or to insure fair dealing in
securities traded upon such exchange, by rules or
regulations or by order, to alter or supplement the rules of
such exchange (insofar as necessary or appropriate to
effect such changes) in respect of such matters as
(1) Safeguards in respect of the financial responsibility of

members and adequate provision against the evasion of
financial responsibility through the use of corporate forms
or special partnerships;
(2) The limitation or prohibition of the registration or trading

in any security within a specified period after the issuance
or primary distribution thereof;
(3) The listing or striking from listing of any security;
(4) Hours of trading;
(5) The manner, method, and place of soliciting business;
(6) Fictitious accounts;
(7) The time and method of making settlements,

payments, and deliveries, and of closing accounts;
(8) he reporting of transactions on the exchange upon

tickets maintained by or with the consent of the
exchange, including the method of reporting short sales,
stopped sales, sales of securities of issuers in default,
bankruptcy or receivership, and sales involving other
special circumstances;
(9) The fixing of reasonable rates of commission, interests,

listing, and other charges;
(10) Minimum units of trading;

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(11) Odd-lot purchases and sales; and
(12) Minimum deposits on margin accounts.
6 See Sec. 6(j), PD. 902-A; Sec. 8, Revised Securities Act.
7 Section 6(m), Presidential Decree No. 902-A.
8 Abad vs. CFI of Pangasinan, Branch VIII, et. al., G.R. Nos.
58507-08, February 26, 1992, 206 SCRA 567.
9 Securities and Exchange Commission vs Court of

Appeals, G.R. Nos. 106425 & 106431-32, July 21,1995, 246
SCRA 738.
10 Pineda vs. Lantin, No. L-15350, November 30, 1962, 6

SCRA 757.
11 Bache & Co. (Phil.), Inc. vs. Hon. Judge Ruiz, et al., No.
L-32409, February 27, 1971, 37 SCRA 823.
12 Sales vs. Securities and Exchange Commission, G.R. No.

54330, January 13, 1989, 169 SCRA 109.
13 No. L-18805, August 14, 1967, 20 SCRA 987.
14 Makati Stock Exchange, Inc. vs. Securities and

Exchange Commission, No. L-23004, June 30, 1965, 14
SCRA 620.
15 See SEC Rules Requiring Disclosure of Material Facts by

Corporations Whose Securities are Listed in Any Stock
Exchange or Registered/Licensed under the Revised
Securities Act. (Approved by the SEC Chairman on
February 8, 1973, and published in the Bulletin Today on
February 19, 1973).
16 See Sections 4, 8, 9, 10, and 11, Revised Securities Act.
Puerto Azul Land, Inc. (PALI) is a corporation engaged in the real

estate business. PALI was granted permission by the Securities and
Exchange Commission (SEC) to sell its shares to the public in order for
PALI to develop its properties.
PALI then asked the Philippine Stock Exchange (PSE) to list PALI’s
stocks/shares to facilitate exchange. The PSE Board of Governors
denied PALI’s application on the ground that there were multiple
claims on the assets of PALI. Apparently, the Marcoses, Rebecco
Panlilio (trustee of the Marcoses), and some other corporations were
claiming assets if not ownership over PALI.

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PALI then wrote a letter to the SEC asking the latter to review PSE’s
decision. The SEC reversed PSE’s decisions and ordered the latter to
cause the listing of PALI shares in the Exchange.
ISSUE: Whether or not it is within the power of the SEC to reverse

actions done by the PSE.
HELD: Yes. The SEC has both jurisdiction and authority to look into the
decision of PSE pursuant to the Revised Securities Act and for the
purpose of ensuring fair administration of the exchange. PSE, as a
corporation itself and as a stock exchange is subject to SEC’s
jurisdiction, regulation, and control. In order to insure fair dealing of
securities and a fair administration of exchanges in the PSE, the SEC
has the authority to look into the rulings issued by the PSE. The SEC is
the entity with the primary say as to whether or not securities,
including shares of stock of a corporation, may be traded or not in
the stock exchange.
HOWEVER, in the case at bar, the Supreme Court emphasized that

the SEC may only reverse decisions issued by the PSE if such are
tainted with bad faith. In this case, there was no showing that PSE
acted with bad faith when it denied the application of PALI. Based
on the multiple adverse claims against the assets of PALI, PSE
deemed that granting PALI’s application will only be contrary to the
best interest of the general public. It was reasonable for the PSE to
exercise its judgment in the manner it deems appropriate for its
business identity, as long as no rights are trampled upon, and public
welfare is safeguarded.
Feliciano vs. Commission on Audit (419 SCRA 363 [2004])
G.R. No. 147402 January 14, 2004
ENGR. RANULFO C. FELICIANO, in his capacity as General Manager

of the Leyte Metropolitan Water District (LMWD), Tacloban City,
petitioner,
vs.
COMMISSION ON AUDIT, Chairman CELSO D. GANGAN,
Commissioners RAUL C. FLORES and EMMANUEL M. DALMAN, and
Regional Director of COA Region VIII, respondents.
DECISION

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CARPIO, J.:
The Case
This is a petition for certiorari1 to annul the Commission on Audit’s

("COA") Resolution dated 3 January 2000 and the Decision dated 30
January 2001 denying the Motion for Reconsideration. The COA
denied petitioner Ranulfo C. Feliciano’s request for COA to cease all
audit services, and to stop charging auditing fees, to Leyte
Metropolitan Water District ("LMWD"). The COA also denied
petitioner’s request for COA to refund all auditing fees previously
paid by LMWD.
Antecedent Facts
A Special Audit Team from COA Regional Office No. VIII audited the
accounts of LMWD. Subsequently, LMWD received a letter from COA
dated 19 July 1999 requesting payment of auditing fees. As General
Manager of LMWD, petitioner sent a reply dated 12 October 1999
informing COA’s Regional Director that the water district could not
pay the auditing fees. Petitioner cited as basis for his action Sections
6 and 20 of Presidential Decree 198 ("PD 198")2, as well as Section 18
of Republic Act No. 6758 ("RA 6758"). The Regional Director referred
petitioner’s reply to the COA Chairman on 18 October 1999.
On 19 October 1999, petitioner wrote COA through the Regional

Director asking for refund of all auditing fees LMWD previously paid
to COA.
On 16 March 2000, petitioner received COA Chairman Celso D.

Gangan’s Resolution dated 3 January 2000 denying his requests.
Petitioner filed a motion for reconsideration on 31 March 2000, which
COA denied on 30 January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to

the petition were resolutions of the Visayas Association of Water
Districts (VAWD) and the Philippine Association of Water Districts
(PAWD) supporting the petition.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled COA’s audit
jurisdiction over local water districts in Davao City Water District v.
Civil Service Commission and Commission on Audit,3 as follows:
The above-quoted provision [referring to Section 3(b) PD 198]

definitely sets to naught petitioner’s contention that they are
private corporations. It is clear therefrom that the power to
appoint the members who will comprise the members of the
Board of Directors belong to the local executives of the local

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subdivision unit where such districts are located. In contrast, the
members of the Board of Directors or the trustees of a private
corporation are elected from among members or stockholders
thereof. It would not be amiss at this point to emphasize that a
private corporation is created for the private purpose, benefit,
aim and end of its members or stockholders. Necessarily, said
members or stockholders should be given a free hand to
choose who will compose the governing body of their
corporation. But this is not the case here and this clearly
indicates that petitioners are not private corporations.
The COA also denied petitioner’s request for COA to stop charging
auditing fees as well as petitioner’s request for COA to refund all
auditing fees already paid.
The Issues
Petitioner contends that COA committed grave abuse of discretion

amounting to lack or excess of jurisdiction by auditing LMWD and
requiring it to pay auditing fees. Petitioner raises the following issues
for resolution:
1. Whether a Local Water District ("LWD") created under PD 198,

as amended, is a government-owned or controlled corporation
subject to the audit jurisdiction of COA;
2. Whether Section 20 of PD 198, as amended, prohibits COA’s

certified public accountants from auditing local water districts;
and
3. Whether Section 18 of RA 6758 prohibits the COA from

charging government-owned and controlled corporations
auditing fees.
The Ruling of the Court
The petition lacks merit.
The Constitution and existing laws4 mandate COA to audit all

government agencies, including government-owned and controlled
corporations ("GOCCs") with original charters. An LWD is a GOCC
with an original charter. Section 2(1), Article IX-D of the Constitution
provides for COA’s audit jurisdiction, as follows:
SECTION 2. (1) The Commission on Audit shall have the power,

authority and duty to examine, audit, and settle all accounts
pertaining to the revenue and receipts of, and expenditures or
uses of funds and property, owned or held in trust by, or
pertaining to, the Government, or any of its subdivisions,
agencies, or instrumentalities, including government-owned

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and controlled corporations with original charters, and on a
post-audit basis: (a) constitutional bodies, commissions and
offices that have been granted fiscal autonomy under this
Constitution; (b) autonomous state colleges and universities; (c)
other government-owned or controlled corporations and their
subsidiaries; and (d) such non-governmental entities receiving
subsidy or equity, directly or indirectly, from or through the
government, which are required by law or the granting
institution to submit to such audit as a condition of subsidy or
equity. However, where the internal control system of the
audited agencies is inadequate, the Commission may adopt
such measures, including temporary or special pre-audit, as are
necessary and appropriate to correct the deficiencies. It shall
keep the general accounts of the Government and, for such
period as may be provided by law, preserve the vouchers and
other supporting papers pertaining thereto. (Emphasis supplied)
The COA’s audit jurisdiction extends not only to government

"agencies or instrumentalities," but also to "government-owned and
controlled corporations with original charters" as well as "other
government-owned or controlled corporations" without original
charters.
Whether LWDs are Private or Government-Owned

and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-

examination of a doctrine backed by a long line of cases
culminating in Davao City Water District v. Civil Service Commission5
and just recently reiterated in De Jesus v. Commission on Audit.6
Petitioner maintains that LWDs are not government-owned and
controlled corporations with original charters. Petitioner even argues
that LWDs are private corporations. Petitioner asks the Court to
consider certain interpretations of the applicable laws, which would
give a "new perspective to the issue of the true character of water
districts."7
Petitioner theorizes that what PD 198 created was the Local Waters
Utilities Administration ("LWUA") and not the LWDs. Petitioner claims
that LWDs are created "pursuant to" and not created directly by PD
198. Thus, petitioner concludes that PD 198 is not an "original charter"
that would place LWDs within the audit jurisdiction of COA as
defined in Section 2(1), Article IX-D of the Constitution. Petitioner
elaborates that PD 198 does not create LWDs since it does not
expressly direct the creation of such entities, but only provides for
their formation on an optional or voluntary basis.8 Petitioner adds
that the operative act that creates an LWD is the approval of the
Sanggunian Resolution as specified in PD 198.

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Petitioner’s contention deserves scant consideration.
We begin by explaining the general framework under the

fundamental law. The Constitution recognizes two classes of
corporations. The first refers to private corporations created under a
general law. The second refers to government-owned or controlled
corporations created by special charters. Section 16, Article XII of the
Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide for
the formation, organization, or regulation of private corporations.
Government-owned or controlled corporations may be created or
established by special charters in the interest of the common good
and subject to the test of economic viability.
The Constitution emphatically prohibits the creation of private

corporations except by a general law applicable to all citizens.9 The
purpose of this constitutional provision is to ban private corporations
created by special charters, which historically gave certain
individuals, families or groups special privileges denied to other
citizens.10
In short, Congress cannot enact a law creating a private

corporation with a special charter. Such legislation would be
unconstitutional. Private corporations may exist only under a general
law. If the corporation is private, it must necessarily exist under a
general law. Stated differently, only corporations created under a
general law can qualify as private corporations. Under existing laws,
that general law is the Corporation Code,11 except that the
Cooperative Code governs the incorporation of cooperatives.12
The Constitution authorizes Congress to create government-owned

or controlled corporations through special charters. Since private
corporations cannot have special charters, it follows that Congress
can create corporations with special charters only if such
corporations are government-owned or controlled.
Obviously, LWDs are not private corporations because they are not
created under the Corporation Code. LWDs are not registered with
the Securities and Exchange Commission. Section 14 of the
Corporation Code states that "[A]ll corporations organized under this
code shall file with the Securities and Exchange Commission articles
of incorporation x x x." LWDs have no articles of incorporation, no
incorporators and no stockholders or members. There are no
stockholders or members to elect the board directors of LWDs as in
the case of all corporations registered with the Securities and
Exchange Commission. The local mayor or the provincial governor
appoints the directors of LWDs for a fixed term of office. This Court

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has ruled that LWDs are not created under the Corporation Code,
thus:
From the foregoing pronouncement, it is clear that what has

been excluded from the coverage of the CSC are those
corporations created pursuant to the Corporation Code.
Significantly, petitioners are not created under the said code,
but on the contrary, they were created pursuant to a special
law and are governed primarily by its provision.13 (Emphasis
supplied)
LWDs exist by virtue of PD 198, which constitutes their special charter.

Since under the Constitution only government-owned or controlled
corporations may have special charters, LWDs can validly exist only if
they are government-owned or controlled. To claim that LWDs are
private corporations with a special charter is to admit that their
existence is constitutionally infirm.
Unlike private corporations, which derive their legal existence and

power from the Corporation Code, LWDs derive their legal existence
and power from PD 198. Sections 6 and 25 of PD 19814 provide:
Section 6. Formation of District. — This Act is the source of

authorization and power to form and maintain a district. For
purposes of this Act, a district shall be considered as a quasi-
public corporation performing public service and supplying
public wants. As such, a district shall exercise the powers, rights
and privileges given to private corporations under existing laws,
in addition to the powers granted in, and subject to such
restrictions imposed, under this Act.
(a) The name of the local water district, which shall include the
name of the city, municipality, or province, or region thereof,
served by said system, followed by the words "Water District".
(b) A description of the boundary of the district. In the case of a

city or municipality, such boundary may include all lands within
the city or municipality. A district may include one or more
municipalities, cities or provinces, or portions thereof.
(c) A statement completely transferring any and all waterworks

and/or sewerage facilities managed, operated by or under the
control of such city, municipality or province to such district
upon the filing of resolution forming the district.
(d) A statement identifying the purpose for which the district is

formed, which shall include those purposes outlined in Section 5
above.

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(e) The names of the initial directors of the district with the date
of expiration of term of office for each.
(f) A statement that the district may only be dissolved on the

grounds and under the conditions set forth in Section 44 of this
Title.
(g) A statement acknowledging the powers, rights and

obligations as set forth in Section 36 of this Title.
Nothing in the resolution of formation shall state or infer that the

local legislative body has the power to dissolve, alter or affect
the district beyond that specifically provided for in this Act.
If two or more cities, municipalities or provinces, or any

combination thereof, desire to form a single district, a similar
resolution shall be adopted in each city, municipality and
province.
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Sec. 25. Authorization. — The district may exercise all the

powers which are expressly granted by this Title or which are
necessarily implied from or incidental to the powers and
purposes herein stated. For the purpose of carrying out the
objectives of this Act, a district is hereby granted the power of
eminent domain, the exercise thereof shall, however, be
subject to review by the Administration. (Emphasis supplied)
Clearly, LWDs exist as corporations only by virtue of PD 198, which

expressly confers on LWDs corporate powers. Section 6 of PD 198
provides that LWDs "shall exercise the powers, rights and privileges
given to private corporations under existing laws." Without PD 198,
LWDs would have no corporate powers. Thus, PD 198 constitutes the
special enabling charter of LWDs. The ineluctable conclusion is that
LWDs are government-owned and controlled corporations with a
special charter.
The phrase "government-owned and controlled corporations with

original charters" means GOCCs created under special laws and not
under the general incorporation law. There is no difference between
the term "original charters" and "special charters." The Court clarified
this in National Service Corporation v. NLRC15 by citing the
deliberations in the Constitutional Commission, as follows:
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.
Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending my original

proposed amendment to now read as follows: "including
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government-owned or controlled corporations WITH ORIGINAL
CHARTERS." The purpose of this amendment is to indicate that
government corporations such as the GSIS and SSS, which have
original charters, fall within the ambit of the civil service.
However, corporations which are subsidiaries of these
chartered agencies such as the Philippine Airlines, Manila Hotel
and Hyatt are excluded from the coverage of the civil service.
THE PRESIDING OFFICER (Mr. Trenas). What does the Committee

say?
MR. FOZ. Just one question, Mr. Presiding Officer. By the term
"original charters," what exactly do we mean?
MR. ROMULO. We mean that they were created by law, by an

act of Congress, or by special law.
MR. FOZ. And not under the general corporation law.
MR. ROMULO. That is correct. Mr. Presiding Officer.
MR. FOZ. With that understanding and clarification, the

Committee accepts the amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the

general corporation law are out.
MR. ROMULO. That is correct. (Emphasis supplied)
Again, in Davao City Water District v. Civil Service Commission,16 the

Court reiterated the meaning of the phrase "government-owned
and controlled corporations with original charters" in this wise:
By "government-owned or controlled corporation with original

charter," We mean government owned or controlled
corporation created by a special law and not under the
Corporation Code of the Philippines. Thus, in the case of
Lumanta v. NLRC (G.R. No. 82819, February 8, 1989, 170 SCRA
79, 82), We held:
"The Court, in National Service Corporation (NASECO) v.

National Labor Relations Commission, G.R. No. 69870,
promulgated on 29 November 1988, quoting extensively
from the deliberations of the 1986 Constitutional
Commission in respect of the intent and meaning of the
new phrase ‘with original charter,’ in effect held that
government-owned and controlled corporations with
original charter refer to corporations chartered by special
law as distinguished from corporations organized under
our general incorporation statute — the Corporation
Code. In NASECO, the company involved had been
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organized under the general incorporation statute and
was a subsidiary of the National Investment Development
Corporation (NIDC) which in turn was a subsidiary of the
Philippine National Bank, a bank chartered by a special
statute. Thus, government-owned or controlled
corporations like NASECO are effectively, excluded from
the scope of the Civil Service." (Emphasis supplied)
Petitioner’s contention that the Sangguniang Bayan resolution

creates the LWDs assumes that the Sangguniang Bayan has the
power to create corporations. This is a patently baseless assumption.
The Local Government Code17 does not vest in the Sangguniang
Bayan the power to create corporations.18 What the Local
Government Code empowers the Sangguniang Bayan to do is to
provide for the establishment of a waterworks system "subject to
existing laws." Thus, Section 447(5)(vii) of the Local Government
Code provides:
SECTION 447. Powers, Duties, Functions and Compensation. —

(a) The sangguniang bayan, as the legislative body of the
municipality, shall enact ordinances, approve resolutions and
appropriate funds for the general welfare of the municipality
and its inhabitants pursuant to Section 16 of this Code and in
the proper exercise of the corporate powers of the municipality
as provided for under Section 22 of this Code, and shall:
xxx
(vii) Subject to existing laws, provide for the establishment,

operation, maintenance, and repair of an efficient
waterworks system to supply water for the inhabitants;
regulate the construction, maintenance, repair and use of
hydrants, pumps, cisterns and reservoirs; protect the purity
and quantity of the water supply of the municipality and,
for this purpose, extend the coverage of appropriate
ordinances over all territory within the drainage area of
said water supply and within one hundred (100) meters of
the reservoir, conduit, canal, aqueduct, pumping station,
or watershed used in connection with the water service;
and regulate the consumption, use or wastage of water;
x x x. (Emphasis supplied)
The Sangguniang Bayan may establish a waterworks system only in

accordance with the provisions of PD 198. The Sangguniang Bayan
has no power to create a corporate entity that will operate its
waterworks system. However, the Sangguniang Bayan may avail of
existing enabling laws, like PD 198, to form and incorporate a water
district. Besides, even assuming for the sake of argument that the

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Sangguniang Bayan has the power to create corporations, the LWDs
would remain government-owned or controlled corporations subject
to COA’s audit jurisdiction. The resolution of the Sangguniang Bayan
would constitute an LWD’s special charter, making the LWD a
government-owned and controlled corporation with an original
charter. In any event, the Court has already ruled in Baguio Water
District v. Trajano19 that the Sangguniang Bayan resolution is not the
special charter of LWDs, thus:
While it is true that a resolution of a local sanggunian is still

necessary for the final creation of a district, this Court is of the
opinion that said resolution cannot be considered as its charter,
the same being intended only to implement the provisions of
said decree.
Petitioner further contends that a law must create directly and

explicitly a GOCC in order that it may have an original charter. In
short, petitioner argues that one special law cannot serve as
enabling law for several GOCCs but only for one GOCC. Section 16,
Article XII of the Constitution mandates that "Congress shall not,
except by general law,"20 provide for the creation of private
corporations. Thus, the Constitution prohibits one special law to
create one private corporation, requiring instead a "general law" to
create private corporations. In contrast, the same Section 16 states
that "Government-owned or controlled corporations may be
created or established by special charters." Thus, the Constitution
permits Congress to create a GOCC with a special charter. There is,
however, no prohibition on Congress to create several GOCCs of
the same class under one special enabling charter.
The rationale behind the prohibition on private corporations having

special charters does not apply to GOCCs. There is no danger of
creating special privileges to certain individuals, families or groups if
there is one special law creating each GOCC. Certainly, such
danger will not exist whether one special law creates one GOCC, or
one special enabling law creates several GOCCs. Thus, Congress
may create GOCCs either by special charters specific to each
GOCC, or by one special enabling charter applicable to a class of
GOCCs, like PD 198 which applies only to LWDs.
Petitioner also contends that LWDs are private corporations because

Section 6 of PD 19821 declares that LWDs "shall be considered quasi-
public" in nature. Petitioner’s rationale is that only private
corporations may be deemed "quasi-public" and not public
corporations. Put differently, petitioner rationalizes that a public
corporation cannot be deemed "quasi-public" because such
corporation is already public. Petitioner concludes that the term
"quasi-public" can only apply to private corporations. Petitioner’s
argument is inconsequential.
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Petitioner forgets that the constitutional criterion on the exercise of
COA’s audit jurisdiction depends on the government’s ownership or
control of a corporation. The nature of the corporation, whether it is
private, quasi-public, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over "government-

owned and controlled corporations with original charters," as well as
"government-owned or controlled corporations" without original
charters. GOCCs with original charters are subject to COA pre-audit,
while GOCCs without original charters are subject to COA post-
audit. GOCCs without original charters refer to corporations created
under the Corporation Code but are owned or controlled by the
government. The nature or purpose of the corporation is not material
in determining COA’s audit jurisdiction. Neither is the manner of
creation of a corporation, whether under a general or special law.
The determining factor of COA’s audit jurisdiction is government

ownership or control of the corporation. In Philippine Veterans Bank
Employees Union-NUBE v. Philippine Veterans Bank,22 the Court even
ruled that the criterion of ownership and control is more important
than the issue of original charter, thus:
This point is important because the Constitution provides in its

Article IX-B, Section 2(1) that "the Civil Service embraces all
branches, subdivisions, instrumentalities, and agencies of the
Government, including government-owned or controlled
corporations with original charters." As the Bank is not owned or
controlled by the Government although it does have an original
charter in the form of R.A. No. 3518,23 it clearly does not fall
under the Civil Service and should be regarded as an ordinary
commercial corporation. Section 28 of the said law so provides.
The consequence is that the relations of the Bank with its
employees should be governed by the labor laws, under which
in fact they have already been paid some of their claims.
(Emphasis supplied)
Certainly, the government owns and controls LWDs. The government

organizes LWDs in accordance with a specific law, PD 198. There is
no private party involved as co-owner in the creation of an LWD. Just
prior to the creation of LWDs, the national or local government owns
and controls all their assets. The government controls LWDs because
under PD 198 the municipal or city mayor, or the provincial governor,
appoints all the board directors of an LWD for a fixed term of six
years.24 The board directors of LWDs are not co-owners of the LWDs.
LWDs have no private stockholders or members. The board directors
and other personnel of LWDs are government employees subject to
civil service laws25 and anti-graft laws.26

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While Section 8 of PD 198 states that "[N]o public official shall serve
as director" of an LWD, it only means that the appointees to the
board of directors of LWDs shall come from the private sector. Once
such private sector representatives assume office as directors, they
become public officials governed by the civil service law and anti-
graft laws. Otherwise, Section 8 of PD 198 would contravene Section
2(1), Article IX-B of the Constitution declaring that the civil service
includes "government-owned or controlled corporations with original
charters."
If LWDs are neither GOCCs with original charters nor GOCCs without
original charters, then they would fall under the term "agencies or
instrumentalities" of the government and thus still subject to COA’s
audit jurisdiction. However, the stark and undeniable fact is that the
government owns LWDs. Section 4527 of PD 198 recognizes
government ownership of LWDs when Section 45 states that the
board of directors may dissolve an LWD only on the condition that
"another public entity has acquired the assets of the district and has
assumed all obligations and liabilities attached thereto." The
implication is clear that an LWD is a public and not a private entity.
Petitioner does not allege that some entity other than the
government owns or controls LWDs. Instead, petitioner advances the
theory that the "Water District’s owner is the District itself." 28 Assuming
for the sake of argument that an LWD is "self-owned,"29 as petitioner
describes an LWD, the government in any event controls all LWDs.
First, government officials appoint all LWD directors to a fixed term of
office. Second, any per diem of LWD directors in excess of P50 is
subject to the approval of the Local Water Utilities Administration,
and directors can receive no other compensation for their services
to the LWD.30 Third, the Local Water Utilities Administration can
require LWDs to merge or consolidate their facilities or operations.31
This element of government control subjects LWDs to COA’s audit
jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs became

private entities through the transfer of ownership of water facilities
from local government units to their respective water districts as
mandated by PD 198. Petitioner is grasping at straws. Privatization
involves the transfer of government assets to a private entity.
Petitioner concedes that the owner of the assets transferred under
Section 6 (c) of PD 198 is no other than the LWD itself.32 The transfer of
assets mandated by PD 198 is a transfer of the water systems facilities
"managed, operated by or under the control of such city,
municipality or province to such (water) district."33 In short, the
transfer is from one government entity to another government entity.
PD 198 is bereft of any indication that the transfer is to privatize the
operation and control of water systems.

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Finally, petitioner claims that even on the assumption that the
government owns and controls LWDs, Section 20 of PD 198 prevents
COA from auditing LWDs. 34 Section 20 of PD 198 provides:
Sec. 20. System of Business Administration. — The Board shall, as

soon as practicable, prescribe and define by resolution a
system of business administration and accounting for the
district, which shall be patterned upon and conform to the
standards established by the Administration. Auditing shall be
performed by a certified public accountant not in the
government service. The Administration may, however,
conduct annual audits of the fiscal operations of the district to
be performed by an auditor retained by the Administration.
Expenses incurred in connection therewith shall be borne
equally by the water district concerned and the
Administration.35 (Emphasis supplied)
Petitioner argues that PD 198 expressly prohibits COA auditors, or any

government auditor for that matter, from auditing LWDs. Petitioner
asserts that this is the import of the second sentence of Section 20 of
PD 198 when it states that "[A]uditing shall be performed by a
certified public accountant not in the government service." 36
PD 198 cannot prevail over the Constitution. No amount of clever

legislation can exclude GOCCs like LWDs from COA’s audit
jurisdiction. Section 3, Article IX-C of the Constitution outlaws any
scheme or devise to escape COA’s audit jurisdiction, thus:
Sec. 3. No law shall be passed exempting any entity of the

Government or its subsidiary in any guise whatever, or any
investment of public funds, from the jurisdiction of the
Commission on Audit. (Emphasis supplied)
The framers of the Constitution added Section 3, Article IX-D of the

Constitution precisely to annul provisions of Presidential Decrees, like
that of Section 20 of PD 198, that exempt GOCCs from COA audit.
The following exchange in the deliberations of the Constitutional
Commission elucidates this intent of the framers:
MR. OPLE: I propose to add a new section on line 9, page 2 of

the amended committee report which reads: NO LAW SHALL
BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS
SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF
PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION
ON AUDIT.
May I explain my reasons on record.
We know that a number of entities of the government took

advantage of the absence of a legislature in the past to obtain

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presidential decrees exempting themselves from the
jurisdiction of the Commission on Audit, one notable example
of which is the Philippine National Oil Company which is really
an empty shell. It is a holding corporation by itself, and strictly
on its own account. Its funds were not very impressive in
quantity but underneath that shell there were billions of pesos in
a multiplicity of companies. The PNOC — the empty shell —
under a presidential decree was covered by the jurisdiction of
the Commission on Audit, but the billions of pesos invested in
different corporations underneath it were exempted from the
coverage of the Commission on Audit.
Another example is the United Coconut Planters Bank. The

Commission on Audit has determined that the coconut levy is a
form of taxation; and that, therefore, these funds attributed to
the shares of 1,400,000 coconut farmers are, in effect, public
funds. And that was, I think, the basis of the PCGG in
undertaking that last major sequestration of up to 94 percent of
all the shares in the United Coconut Planters Bank. The charter
of the UCPB, through a presidential decree, exempted it from
the jurisdiction of the Commission on Audit, it being a private
organization.
So these are the fetuses of future abuse that we are slaying

right here with this additional section.
May I repeat the amendment, Madam President: NO LAW

SHALL BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT
OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY
INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE
COMMISSION ON AUDIT.
THE PRESIDENT: May we know the position of the Committee on

the proposed amendment of Commissioner Ople?
MR. JAMIR: If the honorable Commissioner will change the

number of the section to 4, we will accept the amendment.
MR. OPLE: Gladly, Madam President. Thank you.
MR. DE CASTRO: Madam President, point of inquiry on the new

amendment.
THE PRESIDENT: Commissioner de Castro is recognized.
MR. DE CASTRO: Thank you. May I just ask a few questions of

Commissioner Ople.
Is that not included in Section 2 (1) where it states: "(c)

government-owned or controlled corporations and their

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subsidiaries"? So that if these government-owned and
controlled corporations and their subsidiaries are subjected to
the audit of the COA, any law exempting certain government
corporations or subsidiaries will be already unconstitutional.
So I believe, Madam President, that the proposed amendment

is unnecessary.
MR. MONSOD: Madam President, since this has been

accepted, we would like to reply to the point raised by
Commissioner de Castro.
THE PRESIDENT: Commissioner Monsod will please proceed.
MR. MONSOD: I think the Commissioner is trying to avoid the

situation that happened in the past, because the same
provision was in the 1973 Constitution and yet somehow a law
or a decree was passed where certain institutions were
exempted from audit. We are just reaffirming, emphasizing, the
role of the Commission on Audit so that this problem will never
arise in the future.37
There is an irreconcilable conflict between the second sentence of

Section 20 of PD 198 prohibiting COA auditors from auditing LWDs
and Sections 2(1) and 3, Article IX-D of the Constitution vesting in
COA the power to audit all GOCCs. We rule that the second
sentence of Section 20 of PD 198 is unconstitutional since it violates
Sections 2(1) and 3, Article IX-D of the Constitution.
On the Legality of COA’s

Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for audit
services violate the prohibition in Section 18 of RA 6758,38 which
states:
Sec. 18. Additional Compensation of Commission on Audit

Personnel and of other Agencies. – In order to preserve the
independence and integrity of the Commission on Audit
(COA), its officials and employees are prohibited from receiving
salaries, honoraria, bonuses, allowances or other emoluments
from any government entity, local government unit,
government-owned or controlled corporations, and
government financial institutions, except those compensation
paid directly by COA out of its appropriations and contributions.
Government entities, including government-owned or

controlled corporations including financial institutions and local
government units are hereby prohibited from assessing or billing
other government entities, including government-owned or

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controlled corporations including financial institutions or local
government units for services rendered by its officials and
employees as part of their regular functions for purposes of
paying additional compensation to said officials and
employees. (Emphasis supplied)
Claiming that Section 18 is "absolute and leaves no doubt," 39

petitioner asks COA to discontinue its practice of charging auditing
fees to LWDs since such practice allegedly violates the law.
Petitioner’s claim has no basis.
Section 18 of RA 6758 prohibits COA personnel from receiving any

kind of compensation from any government entity except
"compensation paid directly by COA out of its appropriations and
contributions." Thus, RA 6758 itself recognizes an exception to the
statutory ban on COA personnel receiving compensation from
GOCCs. In Tejada v. Domingo,40 the Court declared:
There can be no question that Section 18 of Republic Act No.

6758 is designed to strengthen further the policy x x x to
preserve the independence and integrity of the COA, by
explicitly PROHIBITING: (1) COA officials and employees from
receiving salaries, honoraria, bonuses, allowances or other
emoluments from any government entity, local government
unit, GOCCs and government financial institutions, except such
compensation paid directly by the COA out of its
appropriations and contributions, and (2) government entities,
including GOCCs, government financial institutions and local
government units from assessing or billing other government
entities, GOCCs, government financial institutions or local
government units for services rendered by the latter’s officials
and employees as part of their regular functions for purposes of
paying additional compensation to said officials and
employees.
xxx
The first aspect of the strategy is directed to the COA itself,

while the second aspect is addressed directly against the
GOCCs and government financial institutions. Under the first,
COA personnel assigned to auditing units of GOCCs or
government financial institutions can receive only such salaries,
allowances or fringe benefits paid directly by the COA out of its
appropriations and contributions. The contributions referred to
are the cost of audit services earlier mentioned which cannot
include the extra emoluments or benefits now claimed by
petitioners. The COA is further barred from assessing or billing
GOCCs and government financial institutions for services

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rendered by its personnel as part of their regular audit functions
for purposes of paying additional compensation to such
personnel. x x x. (Emphasis supplied)
In Tejada, the Court explained the meaning of the word

"contributions" in Section 18 of RA 6758, which allows COA to charge
GOCCs the cost of its audit services:
x x x the contributions from the GOCCs are limited to the cost

of audit services which are based on the actual cost of the
audit function in the corporation concerned plus a reasonable
rate to cover overhead expenses. The actual audit cost shall
include personnel services, maintenance and other operating
expenses, depreciation on capital and equipment and out-of-
pocket expenses. In respect to the allowances and fringe
benefits granted by the GOCCs to the COA personnel
assigned to the former’s auditing units, the same shall be
directly defrayed by COA from its own appropriations x x x. 41
COA may charge GOCCs "actual audit cost" but GOCCs must pay
the same directly to COA and not to COA auditors. Petitioner has
not alleged that COA charges LWDs auditing fees in excess of
COA’s "actual audit cost." Neither has petitioner alleged that the
auditing fees are paid by LWDs directly to individual COA auditors.
Thus, petitioner’s contention must fail.
WHEREFORE, the Resolution of the Commission on Audit dated 3

January 2000 and the Decision dated 30 January 2001 denying
petitioner’s Motion for Reconsideration are AFFIRMED. The second
sentence of Section 20 of Presidential Decree No. 198 is declared
VOID for being inconsistent with Sections 2 (1) and 3, Article IX-D of
the Constitution. No costs.
SO ORDERED.
Davide, Jr., C.J., Puno, Vitug, Panganiban, Quisumbing, Ynares-

Santiago, Sandoval-Gutierrez, Austria-Martinez, Corona, Carpio-
Morales, Callejo, Sr., and Azcuna, and Tinga, JJ., concur.
Footnotes
1 Under Rule 64 of the 1997 Revised Rules of Court.
2 As amended by Presidential Decrees Nos. 768 and 1479.
3 G.R. No. 95237-38, 13 September 1991, 201 SCRA 593.
4 Section 26, Government Auditing Code of the Philippines.

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5 Supra note 3.
6 G.R. No. 149154, 10 June 2003.
7 Rollo, p. 7.
8 Ibid., p. 29.
9See National Development Company v. Philippine Veterans
Bank, G.R. Nos. 84132-33, 10 December 1990, 192 SCRA 257.
10BERNAS, THE 1987 CONSTITUTION OF THE REPUBLIC OF THE
PHILIPPINES: A COMMENTARY 1181 (2003).
11 Batas Pambansa Blg. 68.
Republic Act. No. 6938. See also Republic Act No. 6939 or the
12
Cooperative Development Authority Law.

13 Supra note 3.
14 As amended by PD 1479.
15 G.R. No. L-69870, 29 November 1988, 168 SCRA 122.
16 Supra note 3.
17 Republic Act No. 7160.
See Section 447 of the Local Government Code on the

18
powers of the Sangguniang Bayan.

19 212 Phil. 674 (1984).
20 Emphasis supplied.
21 As amended by PD 1479.
22 G.R. No. 67125, 24 August 1990, 189 SCRA 14.
23 Under Section 3 of Republic Act No. 7169 which took effect
on 2 January 1992, the "operations and changes in the capital
structure of the Veterans Bank, as well as other amendments to
its articles of incorporation and by-laws as prescribed under
Republic Act No. 3518, shall be in accordance with the
Corporation Code, the General Banking Act, and other related
laws."
24 Section 3 (b) of PD 198 provides:
"(b) Appointing Authority. – The person empowered to

appoint the members of the Board of Directors of a local
water district depending upon the geographic coverage

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and population make-up of the particular district. In the
event that more than seventy-five percent of the total
active water service connections of local water districts
are within the boundary of any city or municipality, the
appointing authority shall be the mayor of the city or
municipality, as the case may be; otherwise, the
appointing authority shall be the governor of the province
within which the district is located: Provided, That if the
existing waterworks system in the city or municipality
established as a water district under this Decree is
operated and managed by the province, initial
appointment shall be extended by the governor of the
province. Subsequent appointments shall be as specified
as herein.
If portions of more than one province are included within

the boundary of the district, and the appointing authority
is to be the governor, then the power to appoint shall
rotate between the governors involved with the initial
appointments made by the governor in whose province
the greatest number of service connections exists."
G. R. No. 147402, January 14, 2004
A Special Audit Team from COA Regional Office No. VIII audited the
accounts of Leyte Metropolitan Water District (LMWD). For its
auditing services, COA requested payment but was denied by
Petitioner Feliciano as General Manager of LMWD, citing PD198 and
Section 18 of RA 6758. He further requested that COA cease all audit
services, stop charging auditing fees and refund all auditing fees
previously paid by LMWD.
On March 16, 2000, petitioner received the Resolution of COA

Chairman Celso Gangan, holding that local water districts are not
private corporations, and are therefore under its audit jurisdiction, as
pronounced by the Supreme Court in the case of Davao City Water
District vs. CSC and COA.
Issues:
1. Whether or not a local water district created under PD198, as
amended, is a government-owned or controlled corporation subject
to the audit jurisdiction of COA;
2. Whether or not Section 20 of PD 198, as amended, prohibits COA’s

certified public accountants from auditing local water districts; and
3. Whether or not Section 18 of RA 6758 prohibits COA from charging

government-owned and controlled corporations auditing fees.
Ruling:

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The petition lacks merit.
A local water district is considered a GOCC with an original charter.

It exists as a corporation only by virtue of PD198, which expressly
confers on LWDs corporate powers. Without PD198, LWDs would
have no corporate powers. PD 198 constitutes the special enabling
charter of LWDs. Thus, LWDs are government-owned and controlled
corporations with a special charter, and not private corporations
created under the Corporation Code.
LWDs, therefore, are subject to the audit jurisdiction of COA, as

provided under Section 2(1), Article IX-D of the Constitution, which
mandates the latter to audit all government agencies or
instrumentalities, including government-owned and controlled
corporations (GOCCs) with original charters, as well as other
government-owned or controlled corporations without original
charters.
As regards the second issue, the petitioner argues that PD 198

expressly prohibits COA auditors, or any government auditor for that
matter, from auditing LWDs, as stated in Section 18 of the
aforementioned law, which provides in part that “auditing shall be
performed by a certified public accountant not in the government
service.”
The Supreme Court however ruled that PD 198 cannot prevail over
the Constitution, as it provides in Section 3, Article IX-C that “no law
shall be passed exempting any entity of the government or its
subsidiary in any guise whatever, or any investment of public funds,
from the jurisdiction of the Commission on Audit. And since there is
an irreconcilable conflict between Section 20 of PD 198, prohibiting
COA auditors from auditing LWDs, and Sections 2(1) and 3, Article IX-
D of the Constitution, vesting in COA the power to audit all GOCCs,
it is ruled that the second sentence of Section 20 of PD 198 is
unconstitutional since it violates the aforementioned section of the
Constitution.
The third issue is likewise bereft of merit. COA is not prohibited from
charging GOCCs auditing fees. As opposed to petitioner’s
contention, COA may charge GOCCs actual audit cost, but the
same must be paid directly to COA and not to COA auditors. What
Section 18 of RA 6758 prohibits is the receiving of COA personnel of
any kind of compensation from any government entity except
“compensation paid directly by COA out of its appropriations and
contributions.” Petitioner has not alleged that COA charges LWDs
auditing fees in excess of COA’s actual audit cost. Neither has he
alleged that the auditing fees are paid by LWDs directly to individual
COA auditors.

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Facts: COA assessed Leyte Metropolitan Water District (LMWD)
auditing fees. Petitioner Feliciano, as General Manager of LMWD,
contended that the water district could not pay the said fees on the
basis of Sections 6 and 20 of P.D. No. 198 as well as Section 18 of R.A.
No. 6758. He primarily claimed that LMWD is a private corporation
not covered by COA's jurisdiction. Petitioner also asked for refund of
all auditing fees LMWD previously paid to COA. COA Chairman
denied petitioner’s requests. Petitioner filed a motion for
reconsideration which COA denied. Hence, this petition.
Issue: Whether a Local Water District (“LWD”) created under PD 198,

as amended, is a government-owned or controlled corporation
subject to the audit jurisdiction of COA or a private corporation
which is outside of COA’s audit jurisdiction.
Held: Petition lacks merit. The Constitution under Sec. 2(1), Article IX-
D and existing laws mandate COA to audit all government
agencies, including government-owned and controlled corporations
with original charters. An LWD is a GOCC with an original charter.
The Constitution recognizes two classes of corporations. The first

refers to private corporations created under a general law. The
second refers to government-owned or controlled corporations
created by special charters. Under existing laws, that general law is
the Corporation Code.
Obviously, LWD’s are not private corporations because they are not
created under the Corporation Code. LWD’s are not registered with
the Securities and Exchange Commission. Section 14 of the
Corporation Code states that “all corporations organized under this
code shall file with the SEC articles of incorporation x x x.” LWDs have
no articles of incorporation, no incorporators and no stockholders or
members. There are no stockholders or members to elect the board
directors of LWDs as in the case of all corporations registered with
the SEC. The local mayor or the provincial governor appoints the
directors of LWDs for a fixed term of office. The board directors of
LWDs are not co-owners of the LWDs. The board directors and other
personnel of LWDs are government employees subject to civil service
laws and anti-graft laws. Clearly, an LWD is a public and not a
private entity, hence, subject to COA’s audit jurisdiction.
DBP vs. NLRC (186 SCRA 841 [1990])
G.R. No. 86932 June 27, 1990

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DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION and DOROTHY S.
ANCHETA, MA. MAGDALENA Y. ARMARILLE, CONSTANTE A. ANCHETA,
CONSTANTE B. BANAYOS, EVELYN BARRIENTOS, JOSE BENAVIDEZ,
LEONARDO BUENAAGUA, BENJAMIN BAROT, ERNESTO S. CANTILLER,
EDUARDO CANDA, ARMANDO CANDA, AIDA DE LUNA, PACIFICO M.
DE JESUS, ALFREDO ESTRERA, AURELIO A. FARINAS, FRANCISCO
GREGORIO, DOMELINA GONZALES, JUANA JALANDONI, MANUEL
MALUBAY, FELICIANO OCAMPO, MABEL PADO, GEMINIANO PLETA,
ERNESTO S. SALAMAT, JULIAN TRAQUENA, JUSFIEL SILVERIO, JAMES
CRISTALES, FRANCISCO BAMBIO, JOSE T. MARCELO, JR., SUSAN M.
OLIVAR, ERNESTO JULIO, CONSTANTE ANCHETA, JR., ENRIQUE NABUA
and JAVIER P. MATARO, respondents.
The Legal Counsel for petitioner.
CA. Ancheta & C.B. Banayos for private respondents.
REGALADO, J.:
The present petition for certiorari seeks the reversal of the decision of
the National Labor Relations Commission (NLRC) in, NLRC-NCR Case
No. 00-07-02500-87, dated January 16, 1986, 1 which dismissed the
appeal of the Development Bank of the Philippines (DBP) from the
decision of the labor arbiter ordering it to pay the unpaid wages,
13th month pay, incentive pay and separation pay of herein private
respondents.
Philippine Smelters Corporation (PSC), a corporation registered under

Philippine law, obtained a loan in 1983 from the Development Bank
of the Philippines, a government-owned financial institution created
and operated in accordance with Executive Order No. 81, to finance
its iron smelting and steel manufacturing business. To secure said
loan, PSC mortgaged to DBP real properties with all the buildings and
improvements thereon and chattels, with its President, Jose T.
Marcelo, Jr., as co-obligor.
By virtue of the said loan agreement, DBP became the majority

stockholder of PSC, with stockholdings in the amount of
P31,000,000.00 of the total P60,226,000.00 subscribed and paid up
capital stock. Subsequently, it took over the management of PSC.
When PSC failed to pay its obligation with DBP, which amounted to
P75,752,445.83 as of March 31, 1986, DBP foreclosed and acquired
the mortgaged real estate and chattels of PSC in the auction sales
held on February 25, 1987 and March 4, 1987.

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On February 10, 1987, forty (40) petitioners filed a Petition for
Involuntary Insolvency in the Regional Trial Court, Branch 61 at
Makati, Metropolitan Manila, docketed therein as Special
Proceeding No. M-1359, 2 against PSC and DBP, impleading as co-
respondents therein Olecram Mining Corporation, Jose Panganiban
Ice Plant and Cold Storage, Inc. and PISO Bank, with said petitioners
representing themselves as unpaid employees of said private
respondents, except PISO Bank.
On February 13, 1987, herein private respondents filed a complaint

with the Department of Labor against PSC for nonpayment of salaries,
13th month pay, incentive leave pay and separation pay. On
February 20, 1987, the complaint was amended to include DBP as
party respondent. The case was thereafter indorsed to the Arbitration
Branch of the National Labor Relations Commission (NLRC). DBP filed
its position paper on September 7, 1987, invoking the absence of
employer-employee relationship between private respondents and
DBP and submitting that when DBP foreclosed the assets of PSC, it did
so as a foreclosing creditor.
On January 30, 1988, the labor arbiter rendered a decision, the

dispositive portion of which directed that "DBP as foreclosing creditor
is hereby ordered to pay all the unpaid wages and benefits of the
workers which remain unpaid due to PSC's foreclosure." 3
On appeal by DBP, the NLRC sustained the ruling of the labor arbiter,
holding DBP liable for unpaid wages of private respondents "not as a
majority stockholder of respondent PSC, but as the foreclosing
creditor who possesses the assets of said PSC by virtue of the auction
sale it held in 1987." In addition, the NLRC held that the labor arbiter is
correct in assuming jurisdiction because "the worker's preference to
the amount secured by DBP by virtue of said foreclosure sales of PSC
properties arose out of or are connected or interwoven with the labor
dispute brought forth by appellees against PSC and DBP. 4 Hence,
the present petition by DBP.
DBP contends that the labor arbiter and the NLRC committed a grave
abuse of discretion (1) in assuming jurisdiction over DBP; (2) in
applying the provisions of Article 110 of the Labor Code, as
amended; and (3) in not enforcing and applying Section 14 of
Executive Order No. 81.
We find merit in the petition.
It is to be noted that in their comment, private respondents tried to

prove the existence of employer-employee relationship based on
the fact that DBP is the majority stockholder of PSC and that the
majority of the members of the board of directors of PSC are from
DBP. 5 We do not believe that these circumstances are sufficient

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indicia of the existence of an employer-employee relationship as
would confer jurisdiction over the case on the labor arbiter,
especially in the light of the express declaration of said labor arbiter
and the NLRC that DBP is being held liable as a foreclosing creditor.
At any rate, this jurisdictional defect was cured when DBP appealed
the labor arbiter's decision to the NLRC and thereby submitted to its
jurisdiction.
The pivotal issue for resolution is whether DBP, as foreclosing creditor,

could be held liable for the unpaid wages, 13th month pay, incentive
leave pay and separation pay of the employees of PSC.
We rule in the negative.
During the dates material to the foregoing proceedings, Article 110

of the Labor Code read:
Art. 110. Worker preference in case of bankruptcy. — In

the event of bankruptcy or liquidation of an employer's
business, his workers shall enjoy first preference as regards
wages due them for services rendered during the period
prior to the bankruptcy or liquidation, any provision of law
to the contrary notwithstanding. Unpaid wages shall be
paid in full before other creditors may establish any claim
to a share in the assets of the employer.
In conjunction therewith, Section 10, Rule VIII, Book III of the

Implementing Rules and Regulations of the Labor Code provided:
Sec. 10. Payment of wages in mm of bankruptcy.-Unpaid

wages earned by the employees before the declaration
of bankruptcy or judicial liquidation of the employer's
business shall be given first preference and shall be paid
in full before other creditors may establish any claim to a
share in the assets of the employer.
Interpreting the above provisions, this Court, in Development Bank of

the Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et al., 6
explicated as follows:
It is quite clear from the provisions that a declaration of

bankruptcy or a judicial liquidation must be present
before the worker's preference may be enforced. ... .
xxx xxx xxx
Moreover, the reason behind the necessity for a judicial

proceeding or a proceeding in rem before the
concurrence and preference of credits may be applied

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was explained by this Court in the case of Philippine
Savings Bank v. Lantin (124 SCRA 476 [1983]). We said:
The proceedings in the court below do not

partake of the nature of the insolvency
proceedings or settlement of a decedent's
estate. The action filed by Ramos was only to
collect the unpaid cost of the construction of
the duplex apartment. It is far from being a
general liquidation of the estate of the Tabligan
spouses.
Insolvency proceedings and settlement of a

decedent's estate are both proceedings in rem
which are binding against the whole world. All
persons having interest in the subject matter
involved, whether they were notified or not, are
equally bound. Consequently, a liquidation of
similar import or 'other equivalent general
liquidation must also necessarily be a
proceeding in rem so that all interested persons
whether known to the parties or not may be
bound by such proceeding.
In the case at bar, although the lower court

found that 'there were no known creditors other
than the plaintiff and the defendant herein,' this
can not be conclusive. It will not bar other
creditors in the event they show up and present
their claim against the petitioner bank,
claiming that they also have preferred liens
against the property involved. Consequently,
Transfer Certificate of Title No. 101864 issued in
favor of the bank which is supposed to be
indefeasible would remain constantly unstable
and questionable. Such could not have been
the intention of Article 2243 of the Civil Code
although it considers claims and credits under
Article 2242 as statutory fines. Neither does the
De Barreto case ...
The claims of all creditors whether preferred or non-

preferred, the Identification of the preferred ones and the
totality of the employer's asset should be brought into the
picture. There can then be an authoritative, fair, and
binding adjudication instead of the piece meal settlement
which would result from the questioned decision in this
case.

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Republic Act No. 6715, which took effect on March 21, 1989,
amended Article 110 of the Labor Code to read as follows:
Art. 110. Worker preference in case of bankruptcy. — In

the event of bankruptcy or liquidation of an employer's
business, his workers shall enjoy first preference as regards
their unpaid wages and other monetary claims, any
provision of law to the contrary notwithstanding. Such
unpaid wages and monetary claims shall be paid in full
before the claims of the Government and other creditors
may be paid.
As a consequence, Section 1 0, Rule VIII, Book III of the

Implementing Rules and Regulations of the Labor Code was likewise
amended, to wit:
Sec. 10. Payment of wages and other monetary claims in

case of bankruptcy. — In case of bankruptcy or
liquidation of the employer's business, the unpaid wages
and other monetary claims of the employees shall be
given first preference and shall be paid in full before the
claims of government and other creditors may be paid.
Despite said amendments, however, the same interpretation of

Article 110 as applied in the aforesaid case of Development Bank of
the Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et al., supra, was
adopted by this Court in the recent case of Development Bank of the
Philippines vs. National Labor Relations Commission, et. al., 7 For
facility of reference, especially the rationalization for the conclusions
reached therein, we reproduce the salient portions of the decision in
this later case.
Notably, the terms "declaration" of bankruptcy or

"judicial" liquidation have been eliminated. Does this
means then that liquidation proceedings have been done
away with?
We opine m the negative, upon the following

considerations:
1. Because of its impact on the entire system of credit,

Article 110 of the Labor Code cannot be viewed in
isolation but must be read in relation to the Civil Code
scheme on classification and preference of credits.
Article 110 of the Labor Code, in determining

the reach of its terms, cannot be viewed in
isolation. Rather, Article 110 must be read in
relation to the provisions of the Civil Code
concerning the classification, concurrence and

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preference of credits which provisions find
particular application in insolvency
proceedings where the claims of all creditors,
preferred or non-preferred, may be
adjudicated in a binding manner ... (Republic
vs. Peralta (G.R. No. L-56568, May 20, 1987, 150
SCRA 37).
2. In the same way that the Civil Code provisions on

classification of credits and the Insolvency Law have been
brought into harmony, so also must the kindred provisions
of the Labor Law be made to harmonize with those laws.
3. In the event of insolvency, a principal objective should

be to effect an equitable distribution of the insolvent's
property among his creditors. To accomplish this there
must first be some proceeding where notice to all of the
insolvent's creditors may be given and where the claims
of preferred creditors may be bindingly adjudicated (De
Barretto vs. Villanueva, No. L-14938, December 29, 1962, 6
SCRA 928). The rationale therefor has been expressed in
the recent case of DBP vs. Secretary of Labor (G.R. No.
79351, 28 November 1989), which we quote:
A preference of credit bestows upon the

preferred creditor an advantage of having his
credit satisfied first ahead of other claims which
may be established against the debtor.
Logically, it becomes material only when the
properties and assets of the debtors are
insufficient to pay his debts in full; for if the
debtor is amply able to pay his various
creditors, in full, how can the necessity exist to
determine which of his creditors shall be paid
first or whether they shall be paid out of the
proceeds of the sale of the debtor's specific
property? Indubitably, the preferential right of
credit attains significance only after the
properties of the debtor have been inventoried
and liquidated, and the claims held by his
various creditors have been established
(Kuenzle & Streiff [Ltd.] vs. Villanueva, 41 Phil.
611 [1916]; Barretto vs. Villanueva, G.R. No.
14038, 29 December 1962, 6 SCRA 928;
Philippine Savings Bank vs. Lantin, G.R. 33929, 2
September 1983,124 SCRA 476).
4. A distinction should be made between a preference of

credit and a lien. A preference applies only to claims
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which do not attach to specific properties. A hen creates
a charge on a particular property. The right of first
preference as regards unpaid wages recognize by Article
110 does not constitute a hen on the property of the
insolvent debtor in favor of workers. It is but a preference
of credit in their favor, a preference in application. It is a
met-hod adopted to determine and specify the order in
which credits should be paid in the final distribution of the
proceeds of the insolvent's assets- It is a right to a first
preference in the discharge of the funds of the judgment
debtor. in the words of Republic vs. Peralta, supra:
Article 110 of the Labor Code does not purport

to create a lien in favor of workers or
employees for unpaid wages either upon all of
the properties or upon any particular property
owned by their employer. Claims for unpaid
wages do not therefore fall at all within the
category of specially preferred claims
established under Articles 2241 and 2242 of the
Civil Code, except to the extent that such
claims for unpaid wages are already covered
by Article 2241, number 6: 'claims for laborers'
wages, on the goods manufactured or the work
done; or by Article 2242, number 3: 'claims of
laborers and other workers engaged in the
construction, reconstruction or repair of
buildings, canals and other works, upon said
buildings, canals or other works.' To the extent
that claims for unpaid wages fall outside the
scope of Article 2241, number 6 and Article
2242, number 3, they would come within the
ambit of the category of ordinary preferred
credits under Article 2244.'
5. The DBP anchors its claim on a mortgage credit. A

mortgage directly and immediately subjects the property
upon which it is imposed, whoever the possessor may be,
to the fulfillment of the obligation for whose security it was
constituted (Article 2176, Civil Code). It creates a real right
which is enforceable against the whole world. It is a lien
on an Identified immovable property, which a preference
is not. A recorded mortgage credit is a special preferred
credit under Article 2242 (5) of the Civil Code on
classification of credits. The preference given by Article
110, when not falling within Article 2241 (6) and Article
2242 (3) of the Civil Code and not attached to any
specific property, is an ordinary preferred credit although

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its impact is to move it from second priority to first priority
in the order of preference established by Article 2244 of
the Civil Code (Republic vs. Peralta, supra).
In fact, under the Insolvency Law (Section 29) a creditor

holding a mortgage or hen of any kind as security is not
permitted to vote in the election of the assignee in
insolvency proceedings unless the value of his security is
first fixed or he surrenders all such property to the receiver
of the insolvent's estate.
6. Even if Article 110 and its Implementing Rule, as

amended, should be interpreted to mean 'absolute
preference,' the same should be given only prospective
effect in line with the cardinal rule that laws shall have no
retroactive effect, unless the contrary is provided (Article
4, Civil Code). Thereby, any infringement on the
constitutional guarantee on non-impairment of obligation
of contracts (Section 10, Article III, 1987 Constitution) is
also avoided. In point of fact, DBP's mortgage credit
antedated by several years the amendatory law, RA No.
6715. To give Article 110 retroactive effect would be to
wipe out the mortgage in DBPs favor and expose it to a
risk which it sought to protect itself against by requiring a
collateral in the form of real property.
In fine, the right to preference given to workers under

Article 110 of the Labor Code cannot exist in any effective
way prior to the time of its presentation in distribution
proceedings. It will find application when, in proceedings
such as insolvency, such unpaid wages shall be paid in
full before the 'claims of the Government and other
creditors' may be paid. But, for an orderly settlement of a
debtor's assets, all creditors must be convened, their
claims ascertained and inventoried, and thereafter the
preference determined in the course of judicial
proceedings which have for their object the subjection of
the property of the debtor to the payment of his debts or
other lawful obligations. Thereby, an orderly determination
of preference of creditors' claims is assured (Philippine
Savings Bank vs. Lantin, No. L-33929, September 2, 1983,
124 SCRA 476); the adjudication made will be binding on
all parties-in-interest, since those proceedings are
proceedings in rem; and the legal scheme of
classification, concurrence and preference of credits in
the Civil Code, the Insolvency Law, and the Labor Code is
preserved in harmony.

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On the foregoing considerations and it appearing that an involuntary
insolvency proceeding has been instituted against PSC, private
respondents should properly assert their respective claims in said
proceeding. .
WHEREFORE, the petition is GRANTED. The decision of public

respondent is hereby ANNULLED and SET ASIDE.
SO ORDERED.
Melencio-Herrera (Chairperson) and Paras, JJ., concur.
Separate Opinions
SARMIENTO, J., dissenting:
As I held in DBP v. NLRC 1 and more recently, in Bolinao v. Padolina, 2

that on account of the amendment introduced by Republic Act No.
6715, workers now enjoy "absolute preference" in the payment of
labor claims, above and beyond taxes due from the Government,
and credits belonging to private persons. As I said therein, Republic
Act No. 6715 was enacted, precisely, to work more favorable terms
to labor-because prior to the amendment, labor enjoyed no
preference. I am afraid that the majority has misread the clear intent
of the legislature.
PADILLA, J., dissenting:
I dissent for the same reasons stated in my dissenting opinion in DBP

vs. NLRC, et al., G.R. Nos. 82763-64,19 March 1990.
Separate Opinions
SARMIENTO, J., dissenting:
As I held in DBP v. NLRC 1 and more recently, in Bolinao v. Padolina, 2

that on account of the amendment introduced by Republic Act No.
6715, workers now enjoy "absolute preference" in the payment of
labor claims, above and beyond taxes due from the Government,
and credits belonging to private persons. As I said therein, Republic
Act No. 6715 was enacted, precisely, to work more favorable terms
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to labor-because prior to the amendment, labor enjoyed no
preference. I am afraid that the majority has misread the clear intent
of the legislature.
I dissent for the same reasons stated in my dissenting opinion in DBP

vs. NLRC, et al., G.R. Nos. 82763-64,19 March 1990.
Edward A. Keller vs. COB Group Marketing (141 SCRA 86 [1986])
G.R. No. L-68097 January 16, 1986
EDWARD A. KELLER & CO., LTD., petitioner-appellant,

vs.
COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE
CASTRO, JOHNNY DE LA FUENTE, SERGIO C. ORDOÑEZ, TRINIDAD C.
ORDOÑEZ, MAGNO C. ORDOÑEZ, ADORACION C. ORDOÑEZ, TOMAS
C. LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES P. ADAO, ASUNCION
MANAHAN and INTERMEDIATE APPELLATE COURT, respondents-
appellees.
Sycip, Salazar, Feliciano & Hernandez Law Office for petitioner.
Vicente G. Gregorio for private respondents.
Roberto P. Vega for respondent Asuncion Manahan.
AQUINO, C.J.:
This case is about the liability of a marketing distributor under its sales
agreements with the owner of the products. The petitioner presented
its evidence before Judges Castro Bartolome and Benipayo.
Respondents presented their evidence before Judge Tamayo who
decided the case.
A review of the record shows that Judge Tamayo acted under a

misapprehension of facts and his findings are contradicted by the
evidence. The Appellate Court adopted the findings of Judge
Tamayo. This is a case where this Court is not bound by the factual
findings of the Appellate Court. (See Director of Lands vs. Zartiga, L-
46068-69, September 30, 1982, 117 SCRA 346, 355).
Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc.
as exclusive distributor of its household products, Brite and Nuvan in
Panay and Negros, as shown in the sales agreement dated March

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14, 1970 (32-33 RA). Under that agreement Keller sold on credit its
products to COB Group Marketing.
As security for COB Group Marketing's credit purchases up to the

amount of P35,000, one Asuncion Manahan mortgaged her land to
Keller. Manahan assumed solidarily with COB Group Marketing the
faithful performance of all the terms and conditions of the sales
agreement (Exh. D).
In July, 1970 the parties executed a second sales agreement

whereby COB Group Marketing's territory was extended to Northern
and Southern Luzon. As security for the credit purchases up to
P25,000 of COB Group Marketing for that area, Tomas C. Lorenzo, Jr.
and his father Tomas, Sr. (now deceased) executed a mortgage on
their land in Nueva Ecija. Like Manahan, the Lorenzos were solidarily
liable with COB Group Marketing for its obligations under the sales
agreement (Exh. E).
The credit purchases of COB Group Marketing, which started on

October 15, 1969, limited up to January 22, 1971. On May 8, the
board of directors of COB Group Marketing were apprised by Jose E.
Bax the firm's president and general manager, that the firm owed
Keller about P179,000. Bax was authorized to negotiate with Keller for
the settlement of his firm's liability (Exh. 1, minutes of the meeting).
On the same day, May 8, Bax and R. Oefeli of Keller signed the
conditions for the settlement of COB Group Marketing's liability,
Exhibit J, reproduced as follows:
This formalizes our conditions for the settlement of C.O.B.'s

account with Edward Keller Ltd.
1. Increase of mortgaged collaterals to the full market

value (estimated by Edak at P90,000.00).
2. Turn-over of receivables (estimated outstandings

P70,000.00 to P80,000.00).
3. Turn-over of 4 (four) trucks for outright sale to Edak, to

be credited against C.0.B.'s account.
4. Remaining 8 (eight) trucks to be assigned to Edak,

C.O.B will continue operation with these 8 trucks. They win
be returned to COB after settlement of full account.
5. C.O.B has to put up securities totalling P200,000.00.

P100,000.00 has to be liquidated within one year. The
remaining P100,000.00 has to be settled within the second
year.

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6. Edak wig agree to allow C.O.B. to buy goods to the
value of the difference between P200,000.00 and their
outstandings, provided C.O.B. is in a position to put up
securities amounting to P200,000.00.
Discussion held on May 8, 1971.
Twelve days later, or on May 20, COB Group Marketing, through Bax
executed two second chattel mortgages over its 12 trucks (already
mortgaged to Northern Motors, Inc.) as security for its obligation to
Keller amounting to P179,185.16 as of April 30, 1971 (Exh. PP and QQ).
However, the second mortgages did not become effective because
the first mortgagee, Northern Motors, did not give its consent. But the
second mortgages served the purpose of being admissions of the
liability COB Group Marketing to Keller.
The stockholders of COB Group Marketing, Moises P. Adao and

Tomas C. Lorenzo, Jr., in a letter dated July 24, 1971 to Keller's
counsel, proposed to pay Keller P5,000 on November 30, 1971 and
thereafter every thirtieth day of the month for three years until COB
Group Marketing's mortgage obligation had been fully satisfied. They
also proposed to substitute the Manahan mortgage with a
mortgage on Adao's lot at 72 7th Avenue, Cubao, Quezon City (Exh.
L).
These pieces of documentary evidence are sufficient to prove the

liability of COB Group Marketing and to justify the foreclosure of the
two mortgages executed by Manahan and Lorenzo (Exh. D and E).
Section 22, Rule 130 of the Rules of Court provides that the act,
declaration or omission of a party as to a relevant fact may be given
in evidence against him "as admissions of a party".
The admissions of Bax are supported by the documentary evidence.

It is noteworthy that all the invoices, with delivery receipts, were
presented in evidence by Keller, Exhibits KK-1 to KK-277-a and N to N-
149-a, together with a tabulation thereof, Exhibit KK, covering the
period from October 15, 1969 to January 22, 1971. Victor A. Mayo,
Keller's finance manager, submitted a statement of account
showing that COB Group Marketing owed Keller P184,509.60 as of
July 31, 1971 (Exh. JJ). That amount is reflected in the customer's
ledger, Exhibit M.
On the other hand, Bax although not an accountant, presented his

own reconciliation statements wherein he showed that COB Group
Marketing overpaid Keller P100,596.72 (Exh. 7 and 8). He claimed
overpayment although in his answer he did not allege at all that
there was an overpayment to Keller.

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The statement of the Appellate Court that COB Group Marketing
alleged in its answer that it overpaid Keller P100,596.72 is manifestly
erroneous first, because COB Group Marketing did not file any
answer, having been declared in default, and second, because Bax
and the other stockholders, who filed an answer, did not allege any
overpayment. As already stated, even before they filed their answer,
Bax admitted that COB Group Marketing owed Keller around
P179,000 (Exh. 1).
Keller sued on September 16, 1971 COB Group Marketing, its

stockholders and the mortgagors, Manahan and Lorenzo.
COB Group Marketing, Trinidad C. Ordonez and Johnny de la Fuente

were declared in default (290 Record on Appeal).
After trial, the lower court (1) dismissed the complaint; (2) ordered
Keller to pay COB Group Marketing the sum of P100,596.72 with 6%
interest a year from August 1, 1971 until the amount is fully paid: (3)
ordered Keller to pay P100,000 as moral damages to be allocated
among the stockholders of COB Group Marketing in proportion to
their unpaid capital subscriptions; (4) ordered the petitioner to pay
Manahan P20,000 as moral damages; (5) ordered the petitioner to
pay P20,000 as attomey's fees to be divided among the lawyers of
all the answering defendants and to pay the costs of the suit; (6)
declared void the mortgages executed by Manahan and Lorenzo
and the cancellation of the annotation of said mortgages on the
Torrens titles thereof, and (7) dismissed Manahan's cross-claim for
lack of merit.
The petitioner appealed. The Appellate Court affirmed said

judgment except the award of P20,000 as moral damages which it
eliminated. The petitioner appealed to this Court.
Bax and the other respondents quoted the six assignments of error
made by the petitioner in the Appellate Court, not the four
assignments of error in its brief herein. Manahan did not file any
appellee's brief.
We find that the lower courts erred in nullifying the admissions of

liability made in 1971 by Bax as president and general manager of
COB Group Marketing and in giving credence to the alleged
overpayment computed by Bax .
The lower courts not only allowed Bax to nullify his admissions as to
the liability of COB Group Marketing but they also erroneously
rendered judgment in its favor in the amount of its supposed
overpayment in the sum of P100,596.72 (Exh. 8-A), in spite of the fact
that COB Group Marketing was declared in default and did not file
any counterclaim for the supposed overpayment.

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The lower courts harped on Keller's alleged failure to thresh out with
representatives of COB Group Marketing their "diverse statements of
credits and payments". This contention has no factual basis. In Exhibit
J, quoted above, it is stated by Bax and Keller's Oefeli that
"discussion (was) held on May 8, 1971."
That means that there was a conference on the COB Group

Marketing's liability. Bax in that discussion did not present his
reconciliation statements to show overpayment. His Exhibits 7 and 8
were an afterthought. He presented them long after the case was
filed. The petitioner regards them as "fabricated" (p. 28, Appellant's
Brief).
Bax admitted that Keller sent his company monthly statements of

accounts (20-21 tsn, September 2, 1976) but he could not produce
any formal protest against the supposed inaccuracy of the said
statements (22). He lamely explained that he would have to dig up
his company's records for the formal protest (23-24). He did not make
any written demand for reconciliation of accounts (27-28).
As to the liability of the stockholders, it is settled that a stockholder is

personally liable for the financial obligations of a corporation to the
extent of his unpaid subscription (Vda. de Salvatierra vs. Garlitos 103
Phil. 757, 763; 18 CJs 1311-2).
While the evidence shows that the amount due from COB Group
Marketing is P184,509.60 as of July 31, 1971 or P186,354.70 as of
August 31, 1971 (Exh. JJ), the amount prayed for in Keller's complaint
is P182,994.60 as of July 31, 1971 (18-19 Record on Appeal). This latter
amount should be the one awarded to Keller because a judgment
entered against a party in default cannot exceed the amount
prayed for (Sec. 5, Rule 18, Rules of Court).
WHEREFORE, the decisions of the trial court and the Appellate Court
are reversed and set aside.
COB Group marketing, Inc. is ordered to pay Edward A. Keller & Co.,
Ltd. the sum of P182,994.60 with 12% interest per annum from August
1, 1971 up to the date of payment plus P20,000 as attorney's fees.
Asuncion Manahan and Tomas C. Lorenzo, Jr. are ordered to pay

solidarity with COB Group Marketing the sums of P35,000 and
P25,000, respectively.
The following respondents are solidarity liable with COB Group

Marketing up to the amounts of their unpaid subscription to be
applied to the company's liability herein: Jose E. Bax P36,000;
Francisco C. de Castro, P36,000; Johnny de la Fuente, P12,000; Sergio
C. Ordonez, P12,000; Trinidad C. Ordonez, P3,000; Magno C.

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Ordonez, P3,000; Adoracion C. Ordonez P3,000; Tomas C. Lorenzo,
Jr., P3,000 and Luz M. Aguilar-Adao, P6,000.
If after ninety (90) days from notice of the finality of the judgment in
this case the judgment against COB Group Marketing has not been
satisfied fully, then the mortgages executed by Manahan and
Lorenzo should be foreclosed and the proceeds of the sales applied
to the obligation of COB Group Marketing. Said mortgage
obligations should bear six percent legal interest per annum after the
expiration of the said 90-day period. Costs against the private
respondents.
SO ORDERED.
Concepcion, Jr. (Chairman), Escolin, Cuevas and Alampay, JJ.,

concur.
Abad Santos, J., took no part.
Edward Keller & Co vs COB Group Marketing Inc., (G.R. No. L-68097)
Facts:
 Edward Keller & Co., Ltd. Appointed COB Group Marketing,

Inc. as exclusive distributor of its household products. Under the
agreement, Keller sold on credit its products to COB Group
Marketing
 Asuncion Manahan mortgaged her land to Keller as security for

COB’s credit purchases
 July 1970 – the parties executed a second sales agreement

where Tomas C Lorenzo Jr and Sr executed a mortgage on
their land as security for COB Group Marketing
 8 May– Bax, COB’s president and general manager, stated in a

BoD meeting that they owed Keller about P179,000. He was
authorized to negotiate with Keller for the settlement of the
firm’s liability. On the same day, Bax and Oefeli of Keller signed
the conditions for the settlement of COB’s liability
 Victor A. Mayo, Keller’s finance manager, submitted a

statement of account showing that COB Group Marketing
owed Keller P184,509.60 as of July 31, 1971; whereas
 Bax although not an accountant, presented his own

reconciliation statements wherein he showed that COB Group
Marketing overpaid Keller P100,596.72. He claimed
overpayment although in his answer he did not allege at all
that there was an overpayment to Keller.

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 16 September 1971 – Keller sued COB Group Marketing, its
stockholders and the mortgagors, Manahan and Lorenzo. COB
was declared in default.
 The lower court released a decision in favor of COB Group

Marketing and Keller filed an appeal.
Issue:
 Whether or not the lower court’s decision was erroneous
 Who owes who?
Ruling:
 We find that the lower courts erred in nullifying the admissions

of liability made in 1971 by Bax as president and general
manager of COB Group Marketing and in giving credence to
the alleged overpayment computed by Bax .
 The lower courts not only allowed Bax to nullify his admissions as
to the liability of COB Group Marketing but they also
erroneously rendered judgment in its favor in the amount of its
supposed overpayment in the sum of P100, 596.72, in spite of
the fact that COB Group Marketing was declared in default
and did not file any counterclaim for the supposed
overpayment.
 The decisions of the trial court and the Appellate Court are
reversed and set aside.
 COB Group marketing, Inc. is ordered to pay Edward A. Keller &

Co., Ltd. the sum of P182,994.60 with 12% interest per annum
from August 1, 1971 up to the date of payment plus P20,000 as
attorney’s fees.
 Asuncion Manahan and Tomas C. Lorenzo, Jr. are ordered to

pay solidarity with COB Group Marketing the sums of P35,000
and P25,000, respectively.
 The following respondents are solidarity liable with COB Group

Marketing up to the amounts of their unpaid subscription to be
applied to the company’s liability herein: Jose E. Bax P36,000;
Francisco C. de Castro, P36,000; Johnny de la Fuente, P12,000;
Sergio C. Ordonez, P12,000; Trinidad C. Ordonez, P3,000;
Magno C. Ordonez, P3,000; Adoracion C. Ordonez P3,000;
Tomas C. Lorenzo, Jr., P3,000 and Luz M. Aguilar-Adao, P6,000.
 If after ninety (90) days from notice of the finality of the

judgment in this case the judgment against COB Group
Marketing has not been satisfied fully, then the mortgages

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executed by Manahan and Lorenzo should be foreclosed and
the proceeds of the sales applied to the obligation of COB
Group Marketing. Said mortgage obligations should bear six
percent legal interest per annum after the expiration of the said
90-day period. Costs against the private respondents.
Land Bank of the Phils. vs. CA (364 SCRA 375 [2001])
G.R. No. 127181 September 4, 2001
LAND BANK OF THE PHILIPPINES, petitioner,

vs.
THE COURT OF APPEALS, ECO MANAGEMENT CORPORATION and
EMMANUEL C. OÑATE, respondents.
QUISUMBING, J.:
This petition for review on certiorari seeks to reverse and set aside the
decision1 promulgated on June 17, 1996 in CA-GR No. CV-43239 of
public respondent and its resolution2 dated November 29, 1996
denying petitioner’s motion for reconsideration.3
The facts of this case as found by the Court of Appeals and which
we find supported by the records are as follows:
On various dates in September, October, and November, 1980,

appellant Land Bank of the Philippines (LBP) extended a series
of credit accommodations to appellee ECO, using the trust
funds of the Philippine Virginia Tobacco Administration (PVTA)
in the aggregate amount of P26,109,000.00. The proceeds of
the credit accommodations were received on behalf of ECO
by appellee Oñate.
On the respective maturity dates of the loans, ECO failed to

pay the same. Oral and written demands were made, but ECO
was unable to pay. ECO claims that the company was in
financial difficulty for it was unable to collect its investments
with companies which were affected by the financial crisis
brought about by the Dewey Dee scandal.
xxx
On October 20, 1981, ECO proposed and submitted to LBP a

"Plan of Payment" whereby the former would set up a financing
company which would absorb the loan obligations. It was
proposed that LBP would participate in the scheme through
the conversion of P9,000,000.00 which was part of the total
loan, into equity.

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On March 4, 1982, LBP informed ECO of the action taken by the
former’s Trust Committee concerning the "Plan of Payment"
which reads in part, as follows:
xxx
Please be informed that the Bank’s Trust Committee has

deliberated on the plan of payment during its meetings
on November 6, 1981 and February 23, 1982. The
Committee arrived at a decision that you may proceed
with your Plan of Payment provided Land Bank shall not
participate in the undertaking in any manner whatsoever.
In view thereof, may we advise you to make necessary

revision in the proposed Plan of Payment and submit the
same to us as soon as possible. (Records, p. 428)
On May 5, 1982, ECO submitted to LBP a "Revised Plan of

Payment" deleting the latter’s participation in the proposed
financing company. The Trust Committee deliberated on the
"Revised Plan of Payment" and resolved to reject it. LBP then
sent a letter to the PVTA for the latter’s comments. The letter
stated that if LBP did not hear from PVTA within five (5) days
from the latter’s receipt of the letter, such silence would be
construed to be an approval of LBP’s intention to file suit
against ECO and its corporate officers. PVTA did not respond to
the letter.
On June 28, 1982, Landbank filed a complaint for Collection of

Sum of Money against ECO and Emmanuel C. Oñate before
the Regional Trial Court of Manila, Branch 50.
After trial on the merits, a judgment was rendered in favor of

LBP; however, appellee Oñate was absolved from personal
liability for insufficiency of evidence.
Dissatisfied, both parties filed their respective Motions for

Reconsideration. LBP claimed that there was an error in
computation in the amounts to be paid. LBP also questioned
the dismissal of the case with regard to Oñate.
On the other hand, ECO questioned its being held liable for the
amount of the loan. Upon order of the court, both parties
submitted Supplemental Motions for Reconsideration and their
respective Oppositions to each other’s Motions.
On February 3, 1993, the trial court rendered an Amended

Decision, the dispositive portion of which reads as follows:

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ACCORDINGLY, the Decision, dated December 3, 1990, is
hereby modified to read as follows:
WHEREFORE, judgment is rendered ordering defendant

Eco Management Corporation to pay plaintiff Land Bank
of the Philippines:
A. The sum of P26,109,000.00 representing the total

amount of the ten (10) loan accommodations plus 16%
interest per annum computed from the dates of their
respective maturities until fully paid, broken down as
follows:
1. the principal amount of P4,000,000.00 with interest

at 16% computed from September 18, 1981;

at 16% computed from September 21, 1981;

rate at 16% computed from September 28, 1981;

at 15% computed from October 5, 1981;

rate at of 16% computed from October 8, 1981;

rate at of 16% from October 23, 1981;
7. the principal amount of P814,000.00 with interest

rate at of 16% computed from November 1, 1981;


10. the principal amount of P5,000,000.00 with

interest rate at 16% computed from November 9,
1981;
B. The sum of P260,000.00 as attorney’s fees; and
C. The costs of the suit.
The case as against defendant Emmanuel Oñate is

dismissed for insufficiency of evidence.
SO ORDERED. (Records, p. 608)4

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The Court of Appeals affirmed in toto the amended decision of
the trial court.5
On June 9, 1996, petitioner filed a motion for reconsideration, which

was denied in a resolution dated November 29, 1996. Hence, this
present petition, assigning the following errors allegedly committed
by the Court of Appeals:
THE COURT OF APPEALS GRAVELY ERRED IN NOT RULING THAT

BASED ON THE FACTS AS ESTABLISHED BY EVIDENCE, THERE EXISTS
A SUBSTANTIAL AND JUSTIFIABLE GROUND UPON WHICH THE
LEGAL NOTION OF THE CORPORATE FICTION OF RESPONDENT
ECO MANAGEMENT CORPORATION MAY BE PIERCED.
THE COURT OF APPEALS GRAVELY ERRED IN NOT A[T]TACHING

LIABILITY TO RESPONDENT EMMANUEL C. OÑATE JOINTLY AND
SEVERALLY WITH RESPONDENT ECO MANAGEMENT
CORPORATION FOR THE PRINCIPAL SUM OF P26 M PLUS INTEREST
THEREON.
THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE

RULING OF THE LOWER COURT THE SAME NOT BEING SUPPORTED
BY THE EVIDENCE AND APPLICABLE LAWS AND JURISPRUDENCE.6
The primary issues for resolution here are (1) whether or not the
corporate veil of ECO Management Corporation should be pierced;
and (2) whether or not Emmanuel C. Oñate should be held jointly
and severally liable with ECO Management Corporation for the
loans incurred from Land Bank.
Petitioner contends that the personalities of Emmanuel Oñate and of

ECO Management Corporation should be treated as one, for the
particular purpose of holding respondent Oñate liable for the loans
incurred by corporate respondent ECO from Land Bank. According
to petitioner, the said corporation was formed ostensibly to allow
Oñate to acquire loans from Land Bank which he used for his
personal advantage.
Petitioner submits the following arguments to support its stand: (1)

Respondent Oñate owns the majority of the interest holdings in
respondent corporation, specifically during the crucial time when
appellees applied for and obtained the loan from LANDBANK,
sometime in September to November, 1980. (2) The acronym ECO
stands for the initials of Emmanuel C. Oñate, which is the logical,

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sensible and concrete explanation for the name ECO, in the
absence of evidence to the contrary. (3) Respondent Oñate has
always referred to himself as the debtor, not merely as an officer or a
representative of respondent corporation. (4) Respondent Oñate
personally paid P1 Million taken from trust accounts in his name. (5)
Respondent Oñate made a personal offering to pay his personal
obligation. (6) Respondent Oñate controlled respondent corporation
by simultaneously holding two (2) corporate positions, viz., as
Chairman and as treasurer, beginning from the time of respondent
corporation’s incorporation and continuously thereafter without
benefit of election. (7) Respondent corporation had not held any
meeting of the stockholders or of the Board of Directors, as shown by
the fact that no proceeding of such corporate activities was filed
with or borne by the record of the Securities and Exchange
Commission (SEC). The only corporate records respondent
corporation filed with the SEC were the following: Articles of
Incorporation, Treasurer’s Affidavit, Undertaking to Change
Corporate Name, Statement of Assets and Liabilities.7
Private respondents, in turn, contend that Oñate’s only participation

in the transaction between petitioner and respondent ECO was his
execution of the loan agreements and promissory notes as
Chairman of the corporation’s Board of Directors. There was nothing
in the loan agreement nor in the promissory notes which would
indicate that Oñate was binding himself jointly and severally with
ECO. Respondents likewise deny that ECO stands for Emmanuel C.
Oñate. Respondents also note that Oñate is no longer a majority
stockholder of ECO and that the payment by a third person of the
debt of another is allowed under the Civil Code. They also alleged
that there was no fraud and/or bad faith in the transactions
between them and Land Bank. Hence, private respondents
conclude, there is no legal ground to pierce the veil of respondent
corporation’s personality.8
At the outset, we find the matters raised by petitioner in his

argumentation are mainly questions of fact which are not proper in
a petition of this nature.9 Petitioner is basically questioning the
evaluation made by the Court of Appeals of the evidence
submitted at the trial. The Court of Appeals had found that
petitioner’s evidence was not sufficient to justify the piercing of
ECO’s corporate personality.10 Petitioner contended otherwise. It is
basic that where what is being questioned is the sufficiency of
evidence, it is a question of fact.11 Nevertheless, even if we regard
these matters as tendering an issue of law, we still find no reason to
reverse the findings of the Court of Appeals.
A corporation, upon coming into existence, is invested by law with a

personality separate and distinct from those persons composing it as

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well as from any other legal entity to which it may be related.12 By
this attribute, a stockholder may not, generally, be made to answer
for acts or liabilities of the said corporation, and vice versa.13 This
separate and distinct personality is, however, merely a fiction
created by law for convenience and to promote the ends of
justice.14 For this reason, it may not be used or invoked for ends
subversive to the policy and purpose behind its creation15 or which
could not have been intended by law to which it owes its being.16
This is particularly true when the fiction is used to defeat public
convenience, justify wrong, protect fraud, defend crime,17 confuse
legitimate legal or judicial issues,18 perpetrate deception or
otherwise circumvent the law.19 This is likewise true where the
corporate entity is being used as an alter ego, adjunct, or business
conduit for the sole benefit of the stockholders or of another
corporate entity.20 In all these cases, the notion of corporate entity
will be pierced or disregarded with reference to the particular
transaction involved.21
The burden is on petitioner to prove that the corporation and its

stockholders are, in fact, using the personality of the corporation as a
means to perpetrate fraud and/or escape a liability and
responsibility demanded by law. In order to disregard the separate
juridical personality of a corporation, the wrongdoing must be
clearly and convincingly established.22 In the absence of any malice
or bad faith, a stockholder or an officer of a corporation cannot be
made personally liable for corporate liabilities.23
The mere fact that Oñate owned the majority of the shares of ECO is
not a ground to conclude that Oñate and ECO is one and the
same. Mere ownership by a single stockholder of all or nearly all of
the capital stock of a corporation is not by itself sufficient reason for
disregarding the fiction of separate corporate personalities.24 Neither
is the fact that the name "ECO" represents the first three letters of
Oñate’s name sufficient reason to pierce the veil. Even if it did, it
does not mean that the said corporation is merely a dummy of
Oñate. A corporation may assume any name provided it is lawful.
There is nothing illegal in a corporation acquiring the name or as in
this case, the initials of one of its shareholders.
That respondent corporation in this case was being used as a mere

alter ego of Oñate to obtain the loans had not been shown. Bad
faith or fraud on the part of ECO and Oñate was not also shown. As
the Court of Appeals observed, if shareholders of ECO meant to
defraud petitioner, then they could have just easily absconded
instead of going out of their way to propose "Plans of Payment." 25
Likewise, Oñate volunteered to pay a portion of the corporation’s
debt.26 This offer demonstrated good faith on his part to ease the
debt of the corporation of which he was a part. It is understandable

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that a shareholder would want to help his corporation and in the
process, assure that his stakes in the said corporation are secured. In
this case, it was established that the P1 Million did not come solely
from Oñate. It was taken from a trust account which was owned by
Oñate and other investors.27 It was likewise proved that the P1 Million
was a loan granted by Oñate and his co-depositors to alleviate the
plight of ECO.28 This circumstance should not be construed as an
admission that he was really the debtor and not ECO.
In sum, we agree with the Court of Appeals’ conclusion that the

evidence presented by the petitioner does not suffice to hold
respondent Oñate personally liable for the debt of co-respondent
ECO. No reversible error could be attributed to respondent court’s
decision and resolution which petitioner assails.
WHEREFORE, the petition is DENIED for lack of merit. The decision and
resolution of the Court of Appeals in CA-G.R. CV No. 43239 are
AFFIRMED. Costs against petitioner.
SO ORDERED.
Bellosillo, Mendoza, Buena, and De Leon, Jr., JJ., concur.
In 1980, ECO Management Corporation (ECO) obtained loans

amounting to about P26 million from Land Bank. ECO defaulted in its
payment but in 1981, ECO submitted a Payment Plan with the hope
of restructuring its loan. The plan was rejected and Land Bank sued
ECO. It impleaded Emmanuel C. Oñate, the majority stockholder of
ECO who is serving as the Chairman and treasurer of ECO.
The trial court ruled in favor of Land Bank but Oñate was absolved
from liabilities. The Court of Appeals affirmed the decision of the trial
court.
Land Bank appealed as it wanted Oñate to be personally liable on

the following grounds (among others): a) ECO stands for Emmanuel
C. Oñate, b) Oñate is the majority stockholder, c) ECO was formed
ostensibly to allow Oñate to acquire loans from Land Bank which he
used for his personal advantage, d) Oñate holds two positions in the
corporation, and e) ECO never held any board meeting which just
shows only Oñate was in control of the corporation.
ISSUE: Whether or not Oñate should be held personally.
HELD: No. Land Bank was not able to produce sufficient evidence to
prove its claim. A corporation, upon coming into existence, is
invested by law with a personality separate and distinct from those
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persons composing it as well as from any other legal entity to which it
may be related. The corporate fiction is only disregarded when the
fiction is used to defeat public convenience, justify wrong, protect
fraud, defend crime, confuse legitimate legal or judicial issues,
perpetrate deception or otherwise circumvent the law. This is likewise
true where the corporate entity is being used as an alter ego,
adjunct, or business conduit for the sole benefit of the stockholders
or of another corporate entity. None of the foregoing was proved by
Land Bank.
The mere fact that Oñate owned the majority of the shares of ECO is
not a ground to conclude that Oñate and ECO is one and the
same. Mere ownership by a single stockholder of all or nearly all of
the capital stock of a corporation is not by itself sufficient reason for
disregarding the fiction of separate corporate personalities.
Anent the issue of the corporate name, the fact that Oñate’s initials
coincide with the corporate name ECO is not sufficient to disregard
the corporate fiction. Even if ECO does stand for “Emmanuel C.
Oñate”, it does not mean that the said corporation is merely a
dummy of Oñate. A corporation may assume any name provided it
is lawful. There is nothing illegal in a corporation acquiring the name
or as in this case, the initials of one of its shareholders.
General Credit Corp. vs. Alsons Dev. & Investment (513 SCRA 225
[2007])
G.R. No. 154975 January 29, 2007
GENERAL CREDIT CORPORATION (now PENTA CAPITAL FINANCE

CORPORATION), Petitioner,
vs.
ALSONS DEVELOPMENT and INVESTMENT CORPORATION and CCC
EQUITY CORPORATION, Respondents.
DECISION
GARCIA, J.:
In this petition for review on certiorari under Rule 45 of the Rules of

Court, petitioner General Credit Corporation, now known as Penta
Capital Finance Corporation, seeks to annul and set aside the
Decision1 and Resolution2 dated April 11, 2002 and August 20, 2002,
respectively, of the Court of Appeals (CA) in CA-G.R. CV No. 31801,
affirming the November 8, 1990 decision of the Regional Trial Court
(RTC) of Makati City in its Civil Case No. 12707, an action for a sum of

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money thereat instituted by the herein respondent Alsons
Development and Investment Corporation against the petitioner
and respondent CCC Equity Corporation.
The facts:
Shortly after its incorporation in 1957 as a finance and investment

company, petitioner General Credit Corporation (GCC, for short),
then known as Commercial Credit Corporation (CCC), established
CCC franchise companies in different urban centers of the country.3
In furtherance of its business, GCC had, as early as 1974, applied for
and was able to secure license from the then Central Bank (CB) of
the Philippines and the Securities and Exchange Commission (SEC) to
engage also in quasi-banking activities.4 On the other hand,
respondent CCC Equity Corporation (EQUITY, for brevity) was
organized in November 1994 by GCC for the purpose of, among
other things, taking over the operations and management of the
various franchise companies. At a time material hereto, respondent
Alsons Development and Investment Corporation (ALSONS,
hereinafter) and Conrado, Nicasio, Editha and Ladislawa, all
surnamed Alcantara, and Alfredo de Borja (hereinafter the
Alcantara family, for convenience), each owned, just like GCC,
shares in the aforesaid GCC franchise companies, e.g., CCC Davao
and CCC Cebu.
In December 1980, ALSONS and the Alcantara family, for a

consideration of Two Million (P2,000,000.00) Pesos, sold their
shareholdings – a total of 101,953 shares, more or less – in the CCC
franchise companies to EQUITY.[5] On January 2, 1981, EQUITY issued
ALSONS et al., a "bearer" promissory note for P2,000,000.00 with a
one-year maturity date, at 18% interest per annum, with provisions for
damages and litigation costs in case of default.6
Some four years later, the Alcantara family assigned its rights and
interests over the bearer note to ALSONS which thenceforth became
the holder thereof.7 But even before the execution of the assignment
deal aforestated, letters of demand for interest payment were
already sent to EQUITY, through its President, Wilfredo Labayen, who
pleaded inability to pay the stipulated interest, EQUITY no longer
then having assets or property to settle its obligation nor being
extended financial support by GCC.
What happened next, as narrated in the assailed Decision of the CA,

may be summarized, as follows:
1. On January 14, 1986, before the RTC of Makati, ALSONS,

having failed to collect on the bearer note aforementioned,
filed a complaint for a sum of money8 against EQUITY and
GCC. The case, docketed as Civil Case No. 12707, was

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eventually raffled to Branch 58 of the court. As stated in par. 4
of the complaint, GCC is being impleaded as party-defendant
for any judgment ALSONS might secure against EQUITY and,
under the doctrine of piercing the veil of corporate fiction,
against GCC, EQUITY having been organized as a tool and
mere conduit of GCC.
2. Answering with a cross-claim against GCC, EQUITY stated by

way of special and affirmative defenses that it (EQUITY):
a) was purposely organized by GCC for the latter to avoid

CB Rules and Regulations on DOSRI (Directors, Officers,
Stockholders and Related Interest) limitations, and that it
acted merely as intermediary or bridge for loan
transactions and other dealings of GCC to its franchises
and the investing public; and
b) is solely dependent upon GCC for its funding

requirements, to settle, among others, equity purchases
made by investors on the franchises; hence, GCC is solely
and directly liable to ALSONS, the former having failed to
provide …EQUITY the necessary funds to meet its
obligations to ALSONS.
3. GCC filed its ANSWER to Cross-claim, stressing that it is a

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

testifying as adverse witnesses, were CB and GCC officers. Among
other things, ALSONS’ evidence, which included the EQUITY-issued
"bearer" promissory note marked as Exhibit "K" and over sixty (60)
other marked and subsequently admitted documents,9 were to the
effect that five (5) incorporators, each contributing P100,000.00 as
the initial paid up capital of the company, organized EQUITY to
manage, as it did manage, various GCC franchises through
management contracts. Before EQUITY’s incorporation, however,
GCC was already into the financing business as it was in fact
managing and operating various CCC franchises. Presented in
evidence, too, was the September 29, 1982 letter-reply of one G.
Villanueva, then GCC President, to EQUITY President Wilfredo
Labayen, bearing on the sale of EQUITY shares to third parties, part of
the proceeds of which the Alcantaras wanted applied to liquidate
the promissory note in question. In said letter, Mr. Villanueva

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explained that the GCC Board denied the Alcantaras’ request to be
paid out of such proceeds, but nonetheless authorized EQUITY to
pay them interest out of EQUITY’s operation income, in preference
over what was due GCC.10
Albeit EQUITY presented its president, it opted to adopt the testimony

of some of ALSONS’ witnesses, inclusive of the documentary exhibits
testified to by each of them, as its evidence.
For its part, GCC called only Wilfredo Labayen to testify. It stuck to its
underlying defense of separateness and presented documentary
evidence detailing the organizational structures of both GCC and
EQUITY. And in a bid to negate the notion that it was conducting its
business illegally, GCC presented CB and SEC-issued licenses
authoring it to engage in financing and quasi-banking activities. It
also adduced evidence to prove that it was never a party to any of
the actionable documents ALSONS and its predecessors-in-interest
had in their possession and that the November 27, 1985 deed of
assignment of rights over the promissory note was unenforceable.
Eventually, the trial court, on its finding that EQUITY was but an
instrumentality or adjunct of GCC and considering the legal
consequences and implications of such relationship, came out with
its decision on November 8, 1990, rendering judgment for ALSONS, to
wit:
WHEREFORE, the foregoing premises considered, judgment is hereby

rendered in favor of plaintiff [ALSONS] and against the defendants
[EQUITY and GCC] who are hereby ordered, jointly and severally, to
pay plaintiff:
1. the principal sum of Two Million Pesos (P2,000,000.00)

together with the interest due thereon at the rate of eighteen
percent (18%) annually computed from Jan. 2, 1981 until the
obligation is fully paid;
2. liquidated damages due thereon equivalent to three

percent (3%) monthly computed from January 2, 1982 until the
obligation is fully paid;
3. attorney’s fees in an amount equivalent to twenty four

percent (24%) of the total obligation due; and
4. the costs of suit.
IT IS SO ORDERED. (Words in brackets added.)
Therefrom, GCC went on appeal to the CA where its appellate

recourse was docketed as CA-G.R. CV No. 31801, ascribing to the
trial court the commission of the following errors:

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1. In holding that there is a "Parent-Subsidiary" corporate
relationship between EQUITY and GCC;
2. In not holding that EQUITY and GCC are distinct and

separate corporate entities;
3. In applying the doctrine of "Piercing the Veil of Corporate

Fiction" in the case at bar; and
4. In not holding ALSONS in estoppel to question the corporate

personality of EQUITY.
On April 11, 2002, the appellate court rendered the herein assailed
Decision,11 affirming that of the trial court, thus:
WHEREFORE, premises considered, the Decision of the Regional Trial

Court, Branch 58, Makati in Civil Case No. 12707 is hereby AFFIRMED.
SO ORDERED.
In time, GCC moved for reconsideration followed by a motion for

oral argument, but both motions were denied by the CA in its
equally assailed Resolution of August 20, 2002.12
Hence, GCC’s present recourse anchored on the following

arguments, issues and/or submissions:
1. The motion for oral argument with motion for reconsideration

and its supplement were perfunctorily denied by the CA
without justifiable basis;
2. There is absolutely no basis for piercing the veil of corporate

fiction;
3. Respondent Alsons is not a real party-in-interest as the

promissory note payable to bearer subject of the collection suit
is but a simulated document and/or refers to another party.
Moreover, the subject promissory note is not admissible in
evidence because it has not been duly authenticated and it is
an altered document;
4. The fact of full payment stated in the ten (10) deeds of sale
of the shares of stock is conclusive on the sellers, and by the
patrol evidence rule, the alleged fact of its non-payment
cannot be introduced in evidenced; and
5. The counter-claim filed by GCC against Alsons should be

granted in the interest of justice.
The petition and the arguments and/or issues holding it together are
without merit. The desired reversal of the assailed decision and
resolution of the appellate court is accordingly DENIED.
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Instead of raising distinctly formulated questions of law, as is
expected of one seeking a review under Rule 45 of the Rules of
Court of a final CA judgment,13 petitioner GCC starts off by voicing
disappointment over the "perfunctory" denial by the CA of its twin
motions for reconsideration and oral argument. Petitioner, to be sure,
cannot plausibly expect a reversal action premised on the cursory
way its motions were denied, if such indeed were the case. Such
manner of denial, while perhaps far from ideal, is not even a
recognized ground for appeal by certiorari, unless a denial of due
process ensues, which is not the case here. And lest it be overlooked,
the CA prefaced its assailed denial resolution with the clause:
"[F]inding no reversible error committed to warrant the modification
and/or reversal of the April 11, 2002 Decision," suggesting that the
appellate court gave the petitioner’s motion for reconsideration the
attention it deserved. At the very least, the petitioner was duly
apprised of the reasons why reconsideration could not be favorably
considered. An extended resolution was not really necessary to
dispose of the motion for reconsideration in question.
Petitioner’s lament about being deprived of procedural due process

owing to the denial of its motion for oral argument is simply specious.
Under the CA Internal Rules, the appellate court may tap any of the
three (3) alternatives therein provided to aid the court in resolving
appealed cases before it. It may rely on available records alone,
require the submission of memoranda or set the case for oral
argument. The option the Internal Rules thus gives the CA necessarily
suggests that the appellate court may, at its sound discretion,
dispense with a tedious oral argument exercise. Rule VI, Section 6 of
the 2002 Internal Rules of the CA, provides:
SEC. 6 Judicial Action on Certain Petitions.- (a) In petitions for review,

after the receipt of the respondent’s comment on the petition, …
the Court [of Appeals] may dismiss the petition if it finds the same to
be patently without merit …, otherwise, it shall give due course to it.
xxx xxx xxx
If the petition is given due course, the Court may consider the case
submitted for decision or require the parties to submit their
memorandum or set the case for oral argument. xxx. After the oral
argument or upon submission of the memoranda … the case shall
be deemed submitted for decision.
In the case at bench, records reveal that the appellate court, in line
with the prescription of its own rules, required the parties to just
submit, as they did, their respective memoranda to properly
ventilate their separate causes. Under this scenario, the petitioner
cannot be validly heard, having been deprived of due process.

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

raised for the first time on appeal. Lack of jurisdiction over when the
issues raised present a matter of public policy16 comes immediately
to mind. None of the well-recognized exceptions obtain in this case,
however.
Lest it be overlooked vis-à-vis the same last three arguments thus

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

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

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Court to analyze and weigh all over again the evidence or premises
supportive of the factual holdings of lower courts.19
As nothing in the record indicates any of the exceptions adverted to

above, the factual conclusion of the CA that the P2 Million
promissory note in question was authentic and was issued at the first
instance to respondent ALSONS and the Alcantara family for the
amount stated on its face, must be affirmed. It should be stressed in
this regard that even the issuing entity, i.e., respondent EQUITY, never
challenged the genuineness and due execution of the note.
This brings us to the remaining but core issue tendered in this case
and aptly raised by the petitioner, to wit: whether there is absolutely
no basis for piercing GCC’s veil of corporate identity.
A corporation is an artificial being vested by law with a personality

distinct and separate from those of the persons composing it 20 as
well as from that of any other entity to which it may be related.21 The
first consequence of the doctrine of legal entity of the separate
personality of the corporation is that a corporation may not be
made to answer for acts and liabilities of its stockholders or those of
legal entities to which it may be connected or vice versa.22
The notion of separate personality, however, may be disregarded

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

pierced hinges on obtaining facts, appropriately pleaded or proved.
However, any piercing of the corporate veil has to be done with
caution, albeit the Court will not hesitate to disregard the corporate
veil when it is misused or when necessary in the interest of justice.24
After all, the concept of corporate entity was not meant to promote
unfair objectives.
Authorities are agreed on at least three (3) basic areas where

piercing the veil, with which the law covers and isolates the
corporation from any other legal entity to which it may be related, is
allowed.25 These are: 1) defeat of public convenience,26 as when the
corporate fiction is used as vehicle for the evasion of an existing
obligation;27 2) fraud cases or when the corporate entity is used to

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justify a wrong, protect fraud, or defend a crime;28 or 3) alter ego
cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of
another corporation.29
The CA found valid grounds to pierce the corporate veil of petitioner

GCC, there being justifiable basis for such action. When the
appellate court spoke of a justifying factor, the reference was to
what the trial court said in its decision, namely: the existence of
"certain circumstances [which], taken together, gave rise to the
ineluctable conclusion that … [respondent] EQUITY is but an
instrumentality or adjunct of [petitioner] GCC."
The Court agrees with the disposition of the appellate court on the
application of the piercing doctrine to the transaction subject of this
case. Per the Court’s count, the trial court enumerated no less than
20 documented circumstances and transactions, which, taken as a
package, indeed strongly supported the conclusion that respondent
EQUITY was but an adjunct, an instrumentality or business conduit of
petitioner GCC. This relation, in turn, provides a justifying ground to
pierce petitioner’s corporate existence as to ALSONS’ claim in
question. Foremost of what the trial court referred to as "certain
circumstances" are the commonality of directors, officers and
stockholders and even sharing of office between petitioner GCC
and respondent EQUITY; certain financing and management
arrangements between the two, allowing the petitioner to handle
the funds of the latter; the virtual domination if not control wielded
by the petitioner over the finances, business policies and practices of
respondent EQUITY; and the establishment of respondent EQUITY by
the petitioner to circumvent CB rules. For a perspective, the following
are some relevant excerpts from the trial court’s decision setting forth
in some detail the tipping circumstances adverted to therein:
It must be noted that as characterized by their business relationship,

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

had …GCC financed … EQUITY and that the latter was heavily
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indebted to the former but EQUITY was, in fact, a wholly owned
subsidiary of …GCC. Thus, as affirmed by EQUITY’s President, … the
funds invested by EQUITY in the CCC franchise companies actually
came from CCC Phils. or GCC (Exhibit "Y-5")…. that, as disclosed by
the Auditor’s report for 1982, past due receivables alone of GCC
exceeded P101,000,000.00 mostly to GCC affiliates especially CCC
EQUITY. …; that [CB’s] Report of Examination dated July 14, 1977
shows that … EQUITY which has a paid-up capital of only P500,000.00
was the biggest borrower of GCC with a total loan of P6.70 Million ….
xxx xxx xxx
It has likewise been amply substantiated by [respondent ALSONS’]

evidence that not only did … GCC cause the incorporation of …
EQUITY, but, the latter had grossly inadequate capital for the pursuit
of its line of business to the extent that its business affairs were
considered as GCC’s own business endeavors. xxx.
xxx xxx xxx
ALSONS has likewise shown …that the bonuses of the officers and
directors of … EQUITY was based on its total financial performance
together with all its affiliates… both firms were sharing one and the
same office when both were still operational … and that the
directors and executives of … EQUITY never acted independently …
but took their orders from … GCC….
The evidence has also indubitably established that … EQUITY was

organized by … GCC for the purpose of circumventing [CB] rules
and regulations and the Anti-Usury Law. Thus, as disclosed by the
Advance Report … on the result of Central Bank’s Operations
Examination conducted on … GCC as of March 31, 1977 (EXHIBITS
"FFF" etc.), the latter violated [CB] rules and regulations by : (a) using
as a conduit its non-quasi bank affiliates …. (b) issuing without
recourse facilities to enable GCC to extend credit to affiliates like …
EQUITY which go beyond the single borrower’s limit without the need
of showing outstanding balance in the book of accounts. (Emphasis
over words in brackets added.)
It bears to stress at this point that the facts and the inferences drawn
therefrom, upon which the two (2) courts below applied the piercing
doctrine, stand, for the most part, undisputed. Among these is, to
reiterate, the matter of EQUITY having been incorporated to serve,
as it did serve, as an instrumentality or adjunct of GCC. With the view
we take of this case, GCC did not adduce any evidence, let alone
rebut the testimonies and documents presented by ALSONS, to
establish the prevailing circumstances adverted to that provided the
justifying occasion to pierce the veil of corporate fiction between
GCC and EQUITY. We quote the trial court:

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Verily, indeed, as the relationships binding herein [respondent EQUITY
and petitioner GCC] have been that of "parent-subsidiary
corporations" the foregoing principles and doctrines find suitable
applicability in the case at bar; and, it having been satisfactorily and
indubitably shown that the said relationships had been used to
perform certain functions not characterized with legitimacy, this
Court … feels amply justified to "pierce the veil of corporate entity"
and disregard the separate existence of the percent (sic) and
subsidiary the latter having been so controlled by the parent that its
separate identity is hardly discernible thus becoming a mere
instrumentality or alter ego of the former. Consequently, as the
parent corporation, [petitioner] GCC maybe (sic) held responsible
for the acts and contracts of its subsidiary – [respondent] EQUITY -
most especially if the latter (who had anyhow acknowledged its
liability to ALSONS) maybe (sic) without sufficient property with which
to settle its obligations. For, after all, GCC was the entity which
initiated and benefited immensely from the fraudulent scheme
perpetrated in violation of the law. (Words in parenthesis in the
original; emphasis and bracketed words added).
Given the foregoing considerations, it behooves the petitioner, as a

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

Decision and Resolution of the Court of Appeals are accordingly
AFFIRMED.
Costs against the petitioner.
SO ORDERED.
CANCIO C. GARCIA
Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice
Chairperson
ANGELINA SANDOVAL-GUTIERREZ RENATO C. CORONA

Associate Justice Asscociate Justice
ADOLFO S. AZCUNA
Associate Justice

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CERTIFICATION
Pursuant to Article VIII, Section 13 of the Constitution, it is hereby

certified that the conclusions in the above decision had been
reached in consultation before the case was assigned to the writer
of the opinion of the Court’s Division.
REYNATO S. PUNO
Chief Justice
GENERAL CREDIT CORPORATION (now PENTA CAPITAL FINANCE

CORPORATION), vs. ALSONS DEVELOPMENT and INVESTMENT
CORPORATION and CCC EQUITY CORPORATION
G.R. No. 154975 January 29, 2007
Facts:
Petitioner General Credit Corporation (GCC), then known as

Commercial Credit Corporation (CCC), established CCC franchise
companies in different urban centers of the country. In furtherance
of its business, GCC was able to secure license from Central Bank
(CB) and SEC to engage also in quasi-banking activities. On the
other hand, respondent CCC Equity Corporation (EQUITY) was
organized in by GCC for the purpose of, among other things, taking
over the operations and management of the various franchise
companies. At a time material hereto, respondent Alsons
Development and Investment Corporation (ALSONS) and the
Alcantara family, each owned, just like GCC, shares in the aforesaid
GCC franchise companies, e.g., CCC Davao and CCC Cebu.
ALSONS and the Alcantara family, for a consideration of P2M, sold

their shareholdings (101,953 shares), in the CCC franchise companies
to EQUITY. EQUITY issued ALSONS et al., a "bearer" promissory note
for P2M with a one-year maturity date.
4 years later, the Alcantara family assigned its rights and interests
over the bearer note to ALSONS which became the holder thereof.

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But even before the execution of the assignment deal aforestated,
letters of demand for interest payment were already sent to EQUITY.
EQUITY no longer then having assets or property to settle its
obligation nor being extended financial support by GCC, pleaded
inability to pay.
ALSONS, having failed to collect on the bearer note

aforementioned, filed a complaint for a sum of money 8 against
EQUITY and GCC. GCC is being impleaded as party-defendant for
any judgment ALSONS might secure against EQUITY and, under the
doctrine of piercing the veil of corporate fiction, against GCC,
EQUITY having been organized as a tool and mere conduit of GCC.
According to EQUITY (cross-claim against GCC): it acted merely as

intermediary or bridge for loan transactions and other dealings of
GCC to its franchises and the investing public; and is solely
dependent upon GCC for its funding requirements. Hence, GCC is
solely and directly liable to ALSONS, the former having failed to
provide …EQUITY the necessary funds to meet its obligations to
ALSONS.
GCC filed its ANSWER to Cross-claim, stressing that it is a distinct and

separate entity from EQUITY.
RTC, finding that EQUITY was but an instrumentality or adjunct of

GCC and considering the legal consequences and implications of
such relationship, rendered judgment for Alson. CA affirmed.
Issue: WON the doctrine of "Piercing the Veil of Corporate Fiction"

should be applied in the case at bar.
Held:
YES. The notion of separate personality, however, may be

disregarded under the doctrine – "piercing the veil of corporate
fiction" – as in fact the court will often look at the corporation as a
mere collection of individuals or an aggregation of persons
undertaking business as a group, disregarding the separate juridical
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personality of the corporation unifying the group. Another
formulation of this doctrine is that when two (2) business enterprises
are owned, conducted and controlled by the same parties, both
law and equity will, when necessary to protect the rights of third
parties, disregard the legal fiction that two corporations are distinct
entities and treat them as identical or one and the same.
Authorities are agreed on at least three (3) basic areas where

piercing the veil, with which the law covers and isolates the
corporation from any other legal entity to which it may be related, is
allowed. These are: 1) defeat of public convenience, as when the
corporate fiction is used as vehicle for the evasion of an existing
obligation; 2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or 3) alter ego
cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of
another corporation.
The Court agrees with the disposition of the CA on the application of

the piercing doctrine to the transaction subject of this case. Per the
Court’s count, the trial court enumerated no less than 20
documented circumstances and transactions, which, taken as a
package, indeed strongly supported the conclusion that respondent
EQUITY was but an adjunct, an instrumentality or business conduit of
petitioner GCC. This relation, in turn, provides a justifying ground to
pierce petitioner’s corporate existence as to ALSONS’ claim in
question. Foremost of what the trial court referred to as "certain
circumstances" are the commonality of directors, officers and
stockholders and even sharing of office between petitioner GCC
and respondent EQUITY; certain financing and management
arrangements between the two, allowing the petitioner to handle
the funds of the latter; the virtual domination if not control wielded
by the petitioner over the finances, business policies and practices of
respondent EQUITY; and the establishment of respondent EQUITY by
the petitioner to circumvent CB rules.
Verily, indeed, as the relationships binding herein [respondent EQUITY

and petitioner GCC] have been that of "parent-subsidiary
corporations" the foregoing principles and doctrines find suitable
applicability in the case at bar; and, it having been satisfactorily and
indubitably shown that the said relationships had been used to

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perform certain functions not characterized with legitimacy, this
Court … feels amply justified to "pierce the veil of corporate entity"
and disregard the separate existence of the parent and subsidiary
the latter having been so controlled by the parent that its separate
identity is hardly discernible thus becoming a mere instrumentality or
alter ego of the former.
Lipat vs. Pacific Banking Corp. (402 SCRA 339 [2003])
G.R. No. 142435 April 30, 2003
ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners,

vs.
PACIFIC BANKING CORPORATION, REGISTER OF DEEDS, RTC EX-
OFFICIO SHERIFF OF QUEZON CITY and the Heirs of EUGENIO D.
TRINIDAD, respondents.
QUISUMBING, J.:
This petition for review on certiorari seeks the reversal of the Decision1
dated October 21, 1999 of the Court of Appeals in CA-G.R. CV No.
41536 which dismissed herein petitioners' appeal from the Decision2
dated February 10, 1993 of the Regional Trial Court (RTC) of Quezon
City, Branch 84, in Civil Case No. Q-89-4152. The trial court had
dismissed petitioners' complaint for annulment of real estate
mortgage and the extra-judicial foreclosure thereof. Likewise
brought for our review is the Resolution3 dated February 23, 2000 of
the Court of Appeals which denied petitioners' motion for
reconsideration.
The facts, as culled from records, are as follows:
Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat,

owned "Bela's Export Trading" (BET), a single proprietorship with
principal office at No. 814 Aurora Boulevard, Cubao, Quezon City.
BET was engaged in the manufacture of garments for domestic and
foreign consumption. The Lipats also owned the "Mystical Fashions" in
the United States, which sells goods imported from the Philippines
through BET. Mrs. Lipat designated her daughter, Teresita B. Lipat, to
manage BET in the Philippines while she was managing "Mystical
Fashions" in the United States.
In order to facilitate the convenient operation of BET, Estelita Lipat

executed on December 14, 1978, a special power of attorney
appointing Teresita Lipat as her attorney-in-fact to obtain loans and
other credit accommodations from respondent Pacific Banking
Corporation (Pacific Bank). She likewise authorized Teresita to
execute mortgage contracts on properties owned or co-owned by

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her as security for the obligations to be extended by Pacific Bank
including any extension or renewal thereof.
Sometime in April 1979, Teresita, by virtue of the special power of

attorney, was able to secure for and in behalf of her mother, Mrs.
Lipat and BET, a loan from Pacific Bank amounting to P583,854.00 to
buy fabrics to be manufactured by BET and exported to "Mystical
Fashions" in the United States. As security therefor, the Lipat spouses,
as represented by Teresita, executed a Real Estate Mortgage over
their property located at No. 814 Aurora Blvd., Cubao, Quezon City.
Said property was likewise made to secure "other additional or new
loans, discounting lines, overdrafts and credit accommodations, of
whatever amount, which the Mortgagor and/or Debtor may
subsequently obtain from the Mortgagee as well as any renewal or
extension by the Mortgagor and/or Debtor of the whole or part of
said original, additional or new loans, discounting lines, overdrafts
and other credit accommodations, including interest and expenses
or other obligations of the Mortgagor and/or Debtor owing to the
Mortgagee, whether directly, or indirectly, principal or secondary, as
appears in the accounts, books and records of the Mortgagee." 4
On September 5, 1979, BET was incorporated into a family

corporation named Bela's Export Corporation (BEC) in order to
facilitate the management of the business. BEC was engaged in the
business of manufacturing and exportation of all kinds of garments of
whatever kind and description5 and utilized the same machineries
and equipment previously used by BET. Its incorporators and
directors included the Lipat spouses who owned a combined 300
shares out of the 420 shares subscribed, Teresita Lipat who owned 20
shares, and other close relatives and friends of the Lipats.6 Estelita
Lipat was named president of BEC, while Teresita became the vice-
president and general manager.
Eventually, the loan was later restructured in the name of BEC and
subsequent loans were obtained by BEC with the corresponding
promissory notes duly executed by Teresita on behalf of the
corporation. A letter of credit was also opened by Pacific Bank in
favor of A. O. Knitting Manufacturing Co., Inc., upon the request of
BEC after BEC executed the corresponding trust receipt therefor.
Export bills were also executed in favor of Pacific Bank for additional
finances. These transactions were all secured by the real estate
mortgage over the Lipats' property.
The promissory notes, export bills, and trust receipt eventually

became due and demandable. Unfortunately, BEC defaulted in its
payments. After receipt of Pacific Bank's demand letters, Estelita
Lipat went to the office of the bank's liquidator and asked for
additional time to enable her to personally settle BEC's obligations.

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The bank acceded to her request but Estelita failed to fulfill her
promise.
Consequently, the real estate mortgage was foreclosed and after

compliance with the requirements of the law the mortgaged
property was sold at public auction. On January 31, 1989, a
certificate of sale was issued to respondent Eugenio D. Trinidad as
the highest bidder.
On November 28, 1989, the spouses Lipat filed before the Quezon
City RTC a complaint for annulment of the real estate mortgage,
extrajudicial foreclosure and the certificate of sale issued over the
property against Pacific Bank and Eugenio D. Trinidad. The
complaint, which was docketed as Civil Case No. Q-89-4152,
alleged, among others, that the promissory notes, trust receipt, and
export bills were all ultra vires acts of Teresita as they were executed
without the requisite board resolution of the Board of Directors of
BEC. The Lipats also averred that assuming said acts were valid and
binding on BEC, the same were the corporation's sole obligation, it
having a personality distinct and separate from spouses Lipat. It was
likewise pointed out that Teresita's authority to secure a loan from
Pacific Bank was specifically limited to Mrs. Lipat's sole use and
benefit and that the real estate mortgage was executed to secure
the Lipats' and BET's P583,854.00 loan only.
In their respective answers, Pacific Bank and Trinidad alleged in

common that petitioners Lipat cannot evade payments of the value
of the promissory notes, trust receipt, and export bills with their
property because they and the BEC are one and the same, the
latter being a family corporation. Respondent Trinidad further
claimed that he was a buyer in good faith and for value and that
petitioners are estopped from denying BEC's existence after holding
themselves out as a corporation.
After trial on the merits, the RTC dismissed the complaint, thus:
WHEREFORE, this Court holds that in view of the facts contained

in the record, the complaint filed in this case must be, as is
hereby, dismissed. Plaintiffs however has five (5) months and
seventeen (17) days reckoned from the finality of this decision
within which to exercise their right of redemption. The writ of
injunction issued is automatically dissolved if no redemption is
effected within that period.
The counterclaims and cross-claim are likewise dismissed for

lack of legal and factual basis.
No costs.
IT IS SO ORDERED.7

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The trial court ruled that there was convincing and conclusive
evidence proving that BEC was a family corporation of the Lipats. As
such, it was a mere extension of petitioners' personality and business
and a mere alter ego or business conduit of the Lipats established for
their own benefit. Hence, to allow petitioners to invoke the theory of
separate corporate personality would sanction its use as a shield to
further an end subversive of justice.8 Thus, the trial court pierced the
veil of corporate fiction and held that Bela's Export Corporation and
petitioners (Lipats) are one and the same. Pacific Bank had
transacted business with both BET and BEC on the supposition that
both are one and the same. Hence, the Lipats were estopped from
disclaiming any obligations on the theory of separate personality of
corporations, which is contrary to principles of reason and good
faith.
The Lipats timely appealed the RTC decision to the Court of Appeals
in CA-G.R. CV No. 41536. Said appeal, however, was dismissed by
the appellate court for lack of merit. The Court of Appeals found
that there was ample evidence on record to support the application
of the doctrine of piercing the veil of corporate fiction. In affirming
the findings of the RTC, the appellate court noted that Mrs. Lipat had
full control over the activities of the corporation and used the same
to further her business interests.9 In fact, she had benefited from the
loans obtained by the corporation to finance her business. It also
found unnecessary a board resolution authorizing Teresita Lipat to
secure loans from Pacific Bank on behalf of BEC because the
corporation's by-laws allowed such conduct even without a board
resolution. Finally, the Court of Appeals ruled that the mortgage
property was not only liable for the original loan of P583,854.00 but
likewise for the value of the promissory notes, trust receipt, and
export bills as the mortgage contract equally applies to additional or
new loans, discounting lines, overdrafts, and credit
accommodations which petitioners subsequently obtained from
Pacific Bank.
The Lipats then moved for reconsideration, but this was denied by
the appellate court in its Resolution of February 23, 2000.10
Hence, this petition, with petitioners submitting that the court a quo
erred —
1) . . . IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF

CORPORATE FICTION APPLIES IN THIS CASE.
2) . . . IN HOLDING THAT PETITIONERS' PROPERTY CAN BE HELD

LIABLE UNDER THE REAL ESTATE MORTGAGE NOT ONLY FOR THE
AMOUNT OF P583,854.00 BUT ALSO FOR THE FULL VALUE OF
PROMISSORY NOTES, TRUST RECEIPTS AND EXPORT BILLS OF
BELA'S EXPORT CORPORATION.

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3) . . . IN HOLDING THAT "THE IMPOSITION OF 15% ATTORNEY'S
FEES IN THE EXTRA-JUDICIAL FORECLOSURE IS BEYOND THIS
COURT'S JURISDICTION FOR IT IS BEING RAISED FOR THE FIRST
TIME IN THIS APPEAL."
4) . . . IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE

DISPUTED PROMISSORY NOTES, THE DOLLAR
ACCOMMODATIONS AND TRUST RECEIPTS DESPITE THE EVIDENT
FACT THAT THEY WERE NOT SIGNED BY HIM AND THEREFORE ARE
NOT VALID OR ARE NOT BINDING TO HIM.
5) . . . IN DENYING PETITIONERS' MOTION FOR RECONSIDERATION

AND IN HOLDING THAT SAID MOTION FOR RECONSIDERATION IS
"AN UNAUTHORIZED MOTION, A MERE SCRAP OF PAPER WHICH
CAN NEITHER BIND NOR BE OF ANY CONSEQUENCE TO
APPELLANTS."11
In sum, the following are the relevant issues for our resolution:
1. Whether or not the doctrine of piercing the veil of corporate

fiction is applicable in this case;
2. Whether or not petitioners' property under the real estate

mortgage is liable not only for the amount of P583,854.00 but also for
the value of the promissory notes, trust receipt, and export bills
subsequently incurred by BEC; and
3. Whether or not petitioners are liable to pay the 15% attorney's fees
stipulated in the deed of real estate mortgage.
On the first issue, petitioners contend that both the appellate and
trial courts erred in holding them liable for the obligations incurred by
BEC through the application of the doctrine of piercing the veil of
corporate fiction absent any clear showing of fraud on their part.
Respondents counter that there is clear and convincing evidence to

show fraud on part of petitioners given the findings of the trial court,
as affirmed by the Court of Appeals, that BEC was organized as a
business conduit for the benefit of petitioners.
Petitioners' contentions fail to persuade this Court. A careful reading

of the judgment of the RTC and the resolution of the appellate court
show that in finding petitioners' mortgaged property liable for the
obligations of BEC, both courts below relied upon the alter ego
doctrine or instrumentality rule, rather than fraud in piercFing the veil
of corporate fiction. When the corporation is the mere alter ego or
business conduit of a person, the separate personality of the
corporation may be disregarded.12 This is commonly referred to as
the "instrumentality rule" or the alter ego doctrine, which the courts

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have applied in disregarding the separate juridical personality of
corporations. As held in one case,
Where one corporation is so organized and controlled and its

affairs are conducted so that it is, in fact, a mere instrumentality
or adjunct of the other, the fiction of the corporate entity of the
'instrumentality' may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control
but such domination of finances, policies and practices that
the controlled corporation has, so to speak, no separate mind,
will or existence of its own, and is but a conduit for its principal.
x x x .13
We find that the evidence on record demolishes, rather than

buttresses, petitioners' contention that BET and BEC are separate
business entities. Note that Estelita Lipat admitted that she and her
husband, Alfredo, were the owners of BET14 and were two of the
incorporators and majority stockholders of BEC.15 It is also undisputed
that Estelita Lipat executed a special power of attorney in favor of
her daughter, Teresita, to obtain loans and credit lines from Pacific
Bank on her behalf.16 Incidentally, Teresita was designated as
executive-vice president and general manager of both BET and BEC,
respectively.17 We note further that: (1) Estelita and Alfredo Lipat are
the owners and majority shareholders of BET and BEC, respectively;18
(2) both firms were managed by their daughter, Teresita;19 (3) both
firms were engaged in the garment business, supplying products to
"Mystical Fashion," a U.S. firm established by Estelita Lipat; (4) both
firms held office in the same building owned by the Lipats;20 (5) BEC is
a family corporation with the Lipats as its majority stockholders; (6)
the business operations of the BEC were so merged with those of Mrs.
Lipat such that they were practically indistinguishable; (7) the
corporate funds were held by Estelita Lipat and the corporation itself
had no visible assets; (8) the board of directors of BEC was
composed of the Burgos and Lipat family members;21 (9) Estelita had
full control over the activities of and decided business matters of the
corporation;22 and that (10) Estelita Lipat had benefited from the
loans secured from Pacific Bank to finance her business abroad 23
and from the export bills secured by BEC for the account of "Mystical
Fashion."24 It could not have been coincidental that BET and BEC are
so intertwined with each other in terms of ownership, business
purpose, and management. Apparently, BET and BEC are one and
the same and the latter is a conduit of and merely succeeded the
former. Petitioners' attempt to isolate themselves from and hide
behind the corporate personality of BEC so as to evade their
liabilities to Pacific Bank is precisely what the classical doctrine of
piercing the veil of corporate entity seeks to prevent and remedy. In
our view, BEC is a mere continuation and successor of BET, and
petitioners cannot evade their obligations in the mortgage contract

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secured under the name of BEC on the pretext that it was signed for
the benefit and under the name of BET. We are thus constrained to
rule that the Court of Appeals did not err when it applied the
instrumentality doctrine in piercing the corporate veil of BEC.
On the second issue, petitioners contend that their mortgaged

property should not be made liable for the subsequent credit lines
and loans incurred by BEC because, first, it was not covered by the
mortgage contract of BET which only covered the loan of
P583,854.00 and which allegedly had already been paid; and,
second, it was secured by Teresita Lipat without any authorization or
board resolution of BEC.
We find petitioners' contention untenable. As found by the Court of

Appeals, the mortgaged property is not limited to answer for the
loan of P583,854.00. Thus:
Finally, the extent to which the Lipats' property can be held

liable under the real estate mortgage is not limited to
P583,854.00. It can be held liable for the value of the promissory
notes, trust receipt and export bills as well. For the mortgage
was executed not only for the purpose of securing the Bela's
Export Trading's original loan of P583,854.00, but also for "other
additional or new loans, discounting lines, overdrafts and credit
accommodations, of whatever amount, which the Mortgagor
and/or Debtor may subsequently obtain from the mortgagee
as well as any renewal or extension by the Mortgagor and/or
Debtor of the whole or part of said original, additional or new
loans, discounting lines, overdrafts and other credit
accommodations, including interest and expenses or other
obligations of the Mortgagor and/or Debtor owing to the
Mortgagee, whether directly, or indirectly principal or
secondary, as appears in the accounts, books and records of
the mortgagee.25
As a general rule, findings of fact of the Court of Appeals are final

and conclusive, and cannot be reviewed on appeal by the
Supreme Court, provided they are borne out by the record or based
on substantial evidence.26 As noted earlier, BEC merely succeeded
BET as petitioners' alter ego; hence, petitioners' mortgaged property
must be held liable for the subsequent loans and credit lines of BEC.
Further, petitioners' contention that the original loan had already

been paid, hence, the mortgaged property should not be made
liable to the loans of BEC, is unsupported by any substantial
evidence other than Estelita Lipat's self-serving testimony. Two
disputable presumptions under the rules on evidence weigh against
petitioners, namely: (a) that a person takes ordinary care of his
concerns;27 and (b) that things have happened according to the

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ordinary course of nature and the ordinary habits of life.28 Here, if the
original loan had indeed been paid, then logically, petitioners would
have asked from Pacific Bank for the required documents
evidencing receipt and payment of the loans and, as owners of the
mortgaged property, would have immediately asked for the
cancellation of the mortgage in the ordinary course of things.
However, the records are bereft of any evidence contradicting or
overcoming said disputable presumptions.
Petitioners contend further that the mortgaged property should not

bind the loans and credit lines obtained by BEC as they were
secured without any proper authorization or board resolution. They
also blame the bank for its laxity and complacency in not requiring a
board resolution as a requisite for approving the loans.
Such contentions deserve scant consideration.
Firstly, it could not have been possible for BEC to release a board
resolution since per admissions by both petitioner Estelita Lipat and
Alice Burgos, petitioners' rebuttal witness, no business or stockholder's
meetings were conducted nor were there election of officers held
since its incorporation. In fact, not a single board resolution was
passed by the corporate board29 and it was Estelita Lipat and/or
Teresita Lipat who decided business matters.30
Secondly, the principle of estoppel precludes petitioners from

denying the validity of the transactions entered into by Teresita Lipat
with Pacific Bank, who in good faith, relied on the authority of the
former as manager to act on behalf of petitioner Estelita Lipat and
both BET and BEC. While the power and responsibility to decide
whether the corporation should enter into a contract that will bind
the corporation is lodged in its board of directors, subject to the
articles of incorporation, by-laws, or relevant provisions of law, yet,
just as a natural person may authorize another to do certain acts for
and on his behalf, the board of directors may validly delegate some
of its functions and powers to officers, committees, or agents. The
authority of such individuals to bind the corporation is generally
derived from law, corporate by-laws, or authorization from the
board, either expressly or impliedly by habit, custom, or
acquiescence in the general course of business.31 Apparent
authority, is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act
or, in other words, the apparent authority to act in general, with
which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof,
whether within or beyond the scope of his ordinary powers.32

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In this case, Teresita Lipat had dealt with Pacific Bank on the
mortgage contract by virtue of a special power of attorney
executed by Estelita Lipat. Recall that Teresita Lipat acted as the
manager of both BEC and BET and had been deciding business
matters in the absence of Estelita Lipat. Further, the export bills
secured by BEC were for the benefit of "Mystical Fashion" owned by
Estelita Lipat.33 Hence, Pacific Bank cannot be faulted for relying on
the same authority granted to Teresita Lipat by Estelita Lipat by virtue
of a special power of attorney. It is a familiar doctrine that if a
corporation knowingly permits one of its officers or any other agent
to act within the scope of an apparent authority, it holds him out to
the public as possessing the power to do those acts; thus, the
corporation will, as against anyone who has in good faith dealt with
it through such agent, be estopped from denying the agent's
authority.34
We find no necessity to extensively deal with the liability of Alfredo

Lipat for the subsequent credit lines of BEC. Suffice it to state that
Alfredo Lipat never disputed the validity of the real estate mortgage
of the original loan; hence, he cannot now dispute the subsequent
loans obtained using the same mortgage contract since it is, by its
very terms, a continuing mortgage contract.
On the third and final issue, petitioners assail the decision of the
Court of Appeals for not taking cognizance of the issue on attorney's
fees on the ground that it was raised for the first time on appeal. We
find the conclusion of the Court of Appeals to be in accord with
settled jurisprudence. Basic is the rule that matters not raised in the
complaint cannot be raised for the first time on appeal.35 A close
perusal of the complaint yields no allegations disputing the attorney's
fees imposed under the real estate mortgage and petitioners
cannot now allege that they have impliedly disputed the same
when they sought the annulment of the contract.
In sum, we find no reversible error of law committed by the Court of

Appeals in rendering the decision and resolution herein assailed by
petitioners.
WHEREFORE, the petition is DENIED. The Decision dated October 21,

1999 and the Resolution dated February 23, 2000 of the Court of
Appeals in CA-G.R. CV No. 41536 are AFFIRMED. Costs against
petitioners.
SO ORDERED.
Bellosillo, Austria-Martinez and Callejo, Sr., JJ ., concur.
Lipat vs. Pacific Banking Corporation Case Digest
Lipat vs. Pacific Banking Corporation

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[GR 142435, 30 April 2003]
Facts: The spouses Alfredo Lipat and Estelita Burgos Lipat, owned
"Bela's Export Trading" (BET), a single proprietorship with principal
office at No. 814 Aurora Boulevard, Cubao, Quezon City. BET was
engaged in the manufacture of garments for domestic and foreign
consumption. The Lipats also owned the "Mystical Fashions" in the
United States, which sells goods imported from the Philippines
through BET. Mrs. Lipat designated her daughter, Teresita B. Lipat, to
manage BET in the Philippines while she was managing "Mystical
Fashions" in the United States. In order to facilitate the convenient
operation of BET, Estelita Lipat executed on 14 December 1978, a
special power of attorney appointing Teresita Lipat as her attorney-
in-fact to obtain loans and other credit accommodations from
Pacific Banking Corporation (Pacific Bank). She likewise authorized
Teresita to execute mortgage contracts on properties owned or co-
owned by her as security for the obligations to be extended by
Pacific Bank including any extension or renewal thereof.
Sometime in April 1979, Teresita, by virtue of the special power of

attorney, was able to secure for and in behalf of her mother, Mrs.
Lipat and BET, a loan from Pacific Bank amounting to P583,854.00 to
buy fabrics to be manufactured by BET and exported to "Mystical
Fashions" in the United States. As security therefor, the Lipat spouses,
as represented by Teresita, executed a Real Estate Mortgage over
their property located at No. 814 Aurora Blvd., Cubao, Quezon City.
Said property was likewise made to secure other additional or new
loans, etc. On 5 September 1979, BET was incorporated into a family
corporation named Bela's Export Corporation (BEC) in order to
facilitate the management of the business. BEC was engaged in the
business of manufacturing and exportation of all kinds of garments of
whatever kind and description and utilized the same machineries
and equipment previously used by BET. Its incorporators and
directors included the Lipat spouses who owned a combined 300
shares out of the 420 shares subscribed, Teresita Lipat who owned 20
shares, and other close relatives and friends of the Lipats. Estelita
Lipat was named president of BEC, while Teresita became the vice-
president and general manager. Eventually, the loan was later
restructured in the name of BEC and subsequent loans were
obtained by BEC with the corresponding promissory notes duly
executed by Teresita on behalf of the corporation. A letter of credit
was also opened by Pacific Bank in favor of A. O. Knitting
Manufacturing Co., Inc., upon the request of BEC after BEC
executed the corresponding trust receipt therefor. Export bills were
also executed in favor of Pacific Bank for additional finances. These
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transactions were all secured by the real estate mortgage over the
Lipats' property. The promissory notes, export bills, and trust receipt
eventually became due and demandable. Unfortunately, BEC
defaulted in its payments. After receipt of Pacific Bank's demand
letters, Estelita Lipat went to the office of the bank's liquidator and
asked for additional time to enable her to personally settle BEC's
obligations. The bank acceded to her request but Estelita failed to
fulfill her promise. Consequently, the real estate mortgage was
foreclosed and after compliance with the requirements of the law
the mortgaged property was sold at public auction.
On 31 January 1989, a certificate of sale was issued to respondent

Eugenio D. Trinidad as the highest bidder. On 28 November 1989, the
spouses Lipat filed before the Quezon City RTC a complaint for
annulment of the real estate mortgage, extrajudicial foreclosure and
the certificate of sale issued over the property against Pacific Bank
and Eugenio D. Trinidad. The complaint alleged, among others, that
the promissory notes, trust receipt, and export bills were all ultra vires
acts of Teresita as they were executed without the requisite board
resolution of the Board of Directors of BEC. The Lipats also averred
that assuming said acts were valid and binding on BEC, the same
were the corporation's sole obligation, it having a personality distinct
and separate from spouses Lipat. It was likewise pointed out that
Teresita's authority to secure a loan from Pacific Bank was
specifically limited to Mrs. Lipat's sole use and benefit and that the
real estate mortgage was executed to secure the Lipats' and BET's
P583,854.00 loan only. In their respective answers, Pacific Bank and
Trinidad alleged in common that petitioners Lipat cannot evade
payments of the value of the promissory notes, trust receipt, and
export bills with their property because they and the BEC are one
and the same, the latter being a family corporation. Trinidad further
claimed that he was a buyer in good faith and for value and that
the Lipat spouses are estopped from denying BEC's existence after
holding themselves out as a corporation. After trial on the merits, the
RTC dismissed the complaint. The Lipats timely appealed the RTC
decision to the Court of Appeals in CA-G.R. CV 41536. Said appeal,
however, was dismissed by the appellate court for lack of merit. The
Lipats then moved for reconsideration, but this was denied by the
appellate court in its Resolution of 23 February 2000. The Lipat
spouses filed the petition for review on certiorari.
Issue: Whether BEC and BET are separate business entities, and thus
the Lipt spouses can isolate themselves behind the corporate
personality of BEC.

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Held: When the corporation is the mere alter ego or business conduit
of a person, the separate personality of the corporation may be
disregarded. This is commonly referred to as the "instrumentality rule"
or the alter ego doctrine, which the courts have applied in
disregarding the separate juridical personality of corporations. As
held in one case, where one corporation is so organized and
controlled and its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the corporate
entity of the 'instrumentality' may be disregarded. The control
necessary to invoke the rule is not majority or even complete stock
control but such domination of finances, policies and practices that
the controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal. The
evidence on record shows BET and BEC are not separate business
entities. (1) Estelita and Alfredo Lipat are the owners and majority
shareholders of BET and BEC, respectively; (2) both firms were
managed by their daughter, Teresita; 19 (3) both firms were
engaged in the garment business, supplying products to "Mystical
Fashion," a U.S. firm established by Estelita Lipat; (4) both firms held
office in the same building owned by the Lipats; (5) BEC is a family
corporation with the Lipats as its majority stockholders; (6) the
business operations of the BEC were so merged with those of Mrs.
Lipat such that they were practically indistinguishable; (7) the
corporate funds were held by Estelita Lipat and the corporation itself
had no visible assets; (8) the board of directors of BEC was
composed of the Burgos and Lipat family members; (9) Estelita had
full control over the activities of and decided business matters of the
corporation; and that (10) Estelita Lipat had benefited from the loans
secured from Pacific Bank to finance her business abroad and from
the export bills secured by BEC for the account of "Mystical Fashion."
It could not have been coincidental that BET and BEC are so
intertwined with each other in terms of ownership, business purpose,
and management. Apparently, BET and BEC are one and the same
and the latter is a conduit of and merely succeeded the former. The
spouses' attempt to isolate themselves from and hide behind the
corporate personality of BEC so as to evade their liabilities to Pacific
Bank is precisely what the classical doctrine of piercing the veil of
corporate entity seeks to prevent and remedy. BEC is a mere
continuation and successor of BET, and the Lipat spouses cannot
evade their obligations in the mortgage contract secured under the
name of BEC on the pretext that it was signed for the benefit and
under the name of BET.

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Sta. Monica Industrial & Dev. Corp. vs. DAR Regional Director for
Region III (555 SCRA 97 [2008])
STA. MONICA INDUSTRIAL G.R. No. 164846
AND DEVELOPMENT
CORPORATION,
Petitioner, Present:
YNARES-SANTIAGO, J.,
- versus - Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
THE DEPARTMENT OF REYES, and
AGRARIAN REFORM REGIONAL BRION,* JJ.
DIRECTOR FOR REGION III,
PROVINCIAL AGRARIAN
REFORM OFFICER OF
BULACAN, MUNICIPAL
AGRARIAN REFORM OFFICER
OF CALUMPIT, BULACAN, Promulgated:
and BASILIO DE GUZMAN,
Respondents. June 18, 2008
x--------------------------------------------------x
DECISION

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REYES, R.T., J.:
ANG Malawak na Batas sa Repormang Pangsakahan ay binuo

upang makalaya ang mga magsasaka mula sa tali ng kahirapan at
paghahari ng may-ari ng lupa.
Kapag ang kathang-isip na korporasyon ay ginamit na tabing

sa katulad na pyudal na pang-aalipin, ang matayog na hangarin ng
batas pambukid ay nabibigo at ang mismong suliranin na nais
lunasan nito ay nananatili.
Ang belo ng kathang-isip na korporasyon ay pupunitin kapag

ito ay ginamit sa maling hangarin at di-tapat na layunin.
The Comprehensive Agrarian Reform Law1[1] was designed

precisely to liberate peasant-farmers from the clutches of
landlordism and poverty.
When corporate fiction is used as a mere smokescreen to the

same form of feudal servitude, the lofty aim of the agrarian law is
thwarted and the very problem which the law seeks to solve is
perpetrated.
The veil of corporate fiction will be pierced when used for

improper purposes and unfair objectives.

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Before Us is a petition for review on certiorari of the Decision2[2]
of the Court of Appeals (CA) dismissing the petition of Sta. Monica
Industrial and Development Corporation (Sta. Monica) to annul the
Order3[3] of the Regional Director, Region III, Department of
Agrarian Reform (DAR) placing the landholdings of Asuncion Trinidad
under the Comprehensive Agrarian Reform Program (CARP).4[4]
The Facts
Trinidad is the owner of five parcels of land with a total area of

4.69 hectares in Iba Este, Calumpit, Bulacan. Private respondent
Basilio De Guzman is the agricultural leasehold tenant of Trinidad.
On April 29, 1976, a leasehold contract denominated as

Kasunduan ng Buwisan sa Sakahan was executed between Trinidad
and De Guzman.5[5] As an agricultural leasehold tenant, De
Guzman was issued Certificates of Land Transfer on July 22, 1981.6[6]
Desiring to have an emancipation patent over the land under

his tillage, De Guzman filed a petition for the issuance of patent in his
name with the Office of the Regional Director of the DAR.7[7] The
Legal Services Division of the DAR duly sent notices to Trinidad
requiring her to comment. Instead of complying, Trinidad filed a
motion for bill of particulars.8[8]

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After due proceedings, the Regional Director issued the
Order9[9] granting the petition of De Guzman, with the following
disposition:
WHEREFORE, in light of the foregoing analysis and the

reasons indicated thereon, an ORDER is hereby issued as
follows:
1. PLACING under the coverage of Operation Land

Transfer (OLT) pursuant to PD 27/Executive Order No. 228
the landholdings of Asuncion Trinidad with an area of
10.6800 hectares, more or less, located at Iba Este,
Calumpit, Bulacan, without prejudice to the exercise of
her retention rights if qualified under the law.
2. DIRECTING the MARO of Calumpit, Bulacan and

the PARO of Baliuag, Bulacan to cause the generation
and issuance of Emancipation Patent in favor of the
petitioner and other qualified farmer-beneficiaries over
the said landholding in accordance with the actual area
of tillages.10[10]
Trinidad filed a motion for reconsideration but her motion was

denied.11[11]
A year later, petitioner Sta. Monica filed a petition for certiorari

and prohibition with the CA assailing the order of the Regional
Director. In its petition, Sta. Monica claimed that while it is true that
Asuncion Trinidad was the former registered owner of a parcel of
land with an area of 83,689 square meters, the said landholding was
sold on January 27, 1986.12[12]

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Petitioner was able to acquire 39,547 square meters of the
Trinidad property. After the sale, petitioner sought the registration of
the portion pertaining to it before the Register of Deeds of the
Province of Bulacan. Consequently, a corresponding Transfer
Certificate of Title, with No. 301408 (now TCT No. RT 70512) was issued
in favor of petitioner.13[13]
It was asserted that there was a denial of due process of law

because it was not furnished a notice of coverage under the CARP
law.14[14]
In his comment on the petition, De Guzman argued that the

alleged sale of the landholding is illegal due to the lack of requisite
clearance from the DAR. The said clearance is required under P.D.
No. 27,15[15] the Tenant Emancipation Decree, which prohibits
transfer of covered lands except to tenant-beneficiaries. According
to De Guzman, since no clearance was sought from, and granted
by, the DAR, the sale in favor of petitioner by Trinidad is inexistent
and void. Hence, Trinidad remained the owner of the disputed
property.
CA Disposition
On May 26, 2004, the CA rendered a decision dismissing the

petition of Sta. Monica, disposing as follows:
WHEREFORE, premises considered, the instant

petition is hereby DENIED for lack of merit.
SO ORDERED.16[16]

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The CA held that Sta. Monica is not a real party-in-interest
because it cannot be considered as an owner of the land it bought
from Trinidad, thus:17[17]
It appears from the records of this case that the sale

between Trinidad and the petitioner is enjoined by
Department Memorandum Circular No. 2-A,
implementing the provisions of Presidential Decree (P.D.)
No. 27, which prohibits the transfer of ownership of
landholdings covered by P.D. No. 27 after 21 October
1972 without the requisite clearance from the DAR except
to the tenant-beneficiary. Thus, the title to the subject
landholding remained with the previous owner, Asuncion
Trinidad. This effectively deprives the petitioner of interest
to question the orders of the Regional Director of the DAR
relative to the latters directive placing the subject
landholding under the coverage of Operation Land
Transfer and the subsequent issuance of an Emancipation
Patent in favor of private respondent De Guzman. One
having no right or interest to protect cannot invoke the
jurisdiction of the court as a party plaintiff (in this case
petitioner) in an action. A real party in interest is the party
who stands to be benefited or injured by the judgment in
the suit, or the party entitled to the avails of the suit.18[18]
(Citations omitted)
The CA added that even assuming that Sta. Monica is a real

party-in-interest, it was not denied due process because it had
constructive notice of the proceeding which involved its property:
Even assuming, without admitting, that petitioner is

the real party in interest by reason of the sale of the
subject landholding in its favor, it cannot be said that
petitioner was denied due process because of lack of
notice of the proceedings before the DAR. It is significant
to note that Asuncion Trinidad is the treasurer of petitioner,
based on the corporations General Information Sheet.
While it cannot be said that there was proper notice to

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the corporation, being a corporate officer of the
petitioner, there was at least constructive notice of the
fact that there was a proceeding which involved the
property of the corporation of which it may be deprived
should an adverse decision be rendered by the
DAR.19[19]
The CA also ruled that the assailed orders of the Regional

Director have already attained finality because it was not appealed
to the DAR Secretary.
Furthermore, the assailed orders have long become

final and executory, there being no appeal undertaken to
the Secretary of the Department of Agrarian Reform.
Citing Fortich vs. Corona, et al., the Supreme Court aptly
ruled in this wise:
The orderly administration of justice

requires that the judgments/resolutions of a
court or quasi-judicial body must reach a point
of finality set by law, rules and regulations. The
noble purpose is to write finis to disputes once
and for all. This is a fundamental principle in our
justice system, without which there would be no
end to litigations. Utmost respect and
adherence to this principle must always be
maintained by those who wield the power of
adjudication. Any act which violates such
principle must immediately be struck down.
The rule on finality of decisions, orders or resolutions

of a judicial, quasi-judicial, or administrative body is not a
question of technicality but of substance and merit, the
underlying consideration therefore being the protection of
the substantive rights of the winning party. Just as a losing
party has the right to file an appeal within the prescribed
period, the winning party also has the correlative right to
enjoy the finality of the resolution of his/her case.20[20]

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Sta. Monica sought reconsideration but it was denied. Hence,
the present recourse.21[21]
Issue
Sta. Monica seeks reversal of the CA decision on the lone

ground that THE ASSAILED DECISION AND RESOLUTION OF THE COURT
OF APPEALS ARE CONTRARY TO EXISTING LAWS, RELEVANT
JURISPRUDENCE ON THE MATTER AND THE FACTUAL
CIRCUMSTANCES.22[22]
Our Ruling
The petition is bereft of merit.
Trinidad is still deemed the owner of

the agricultural land sold to Sta.
Monica; no need for separate notice
of coverage under the CARP law.
The crux of the petition lies in the requirement of notice of

coverage under the CARP law. The statute requires a notice of
coverage to be furnished and sent to the landowner.23[23] Notice is
part of the constitutional right to due process of law. It informs the
landowner of the States intention to acquire a private land upon
payment of just compensation and gives him the opportunity to
present evidence that his landholding is not covered or is otherwise
excused from the agrarian law.
There is no dispute that a notice of coverage was duly sent to

Trinidad. Records show that she participated in the DAR

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proceedings. As to her, the constitutional requirement of due
process was met and satisfied.
Petitioner Sta. Monica, however, claims that it is the owner of

the agricultural land awarded to De Guzman. It acquired the land
from Trinidad by sale in 1986 and it was issued a transfer certificate of
title. Sta. Monica claims denial of due process of law because it was
not furnished the required notice of coverage under the CARP law.
Respondent De Guzman, on the other hand, contends that the

sale between Trinidad and Sta. Monica is null and void because it is
a prohibited transaction under Presidential Decree No. 27 (P.D. No.
27), as amended.24[24] De Guzman also claims that Trinidad is a
corporate officer of Sta. Monica. It was her duty to inform Sta.
Monica of the pending proceeding with the DAR.25[25] He
maintains that Sta. Monica was not denied due process because
there was constructive notice. Sta. Monica was sufficiently informed
of the pending DAR proceedings.26[26]
Records disclose that there was indeed a deed of sale

between Trinidad and Sta. Monica over the agricultural land
awarded to De Guzman. Sta. Monica was also issued a new transfer
certificate of title over the land. If We rely solely on the sale, it is a
foregone conclusion that Sta. Monica was denied due process of
law. As the owner on record of the agricultural land, it should have
been given a notice of coverage.
However, there is much to be said of the attendant

circumstances that lead Us to conclude that notice of coverage to
Trinidad is also sufficient notice to Sta. Monica. Moreover, We find
that the sale between Trinidad and Sta. Monica was a mere ruse to
frustrate the implementation of the agrarian law.

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First, the sale to Sta. Monica is prohibited. P.D. No. 27, as
amended, forbids the transfer or alienation of covered agricultural
lands after October 21, 1972 except to the tenant-beneficiary. The
agricultural land awarded to De Guzman is covered by P.D. No. 27.
He was awarded a certificate of land transfer in July 22, 1981. The
sale to Sta. Monica in 1986 is void for being contrary to law.27[27]
Trinidad remained the owner of the agricultural land.
In Heirs of Batongbacal v. Court of Appeals,28[28] involving the

similar issue of sale of a covered agricultural land under P.D. No. 27,
this Court held:
Clearly, therefore, Philbanking committed breach of

obligation as an agricultural lessor. As the records show,
private respondent was not informed about the sale
between Philbanking and petitioner, and neither was he
privy to the transfer of ownership from Juana Luciano to
Philbanking. As an agricultural lessee, the law gives him
the right to be informed about matters affecting the land
he tills, without need for him to inquire about it.
xxxx
In other words, transfer of ownership over tenanted

rice and/or corn lands after October 21, 1972 is allowed
only in favor of the actual tenant-tillers thereon. Hence,
the sale executed by Philbanking on January 11, 1985 in
favor of petitioner was in violation of the aforequoted
provision of P.D. 27 and its implementing guidelines, and
must thus be declared null and void.29[29] (Underscoring
supplied)
Second, buyer Sta. Monica is owned and controlled by Trinidad

and her family. Records show that Trinidad, her husband and two
sons own more than 98%30[30] of the outstanding capital stock of

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Sta. Monica. They are all officers of the corporation.31[31] There are
only two non-related incorporators who own less than one percent
of the outstanding capital stock of Sta. Monica and who are not
officers of the corporation.
To be sure, Trinidad and her family exercise absolute control of

the corporate affairs of Sta. Monica. As owners of 98% of the
outstanding capital stock, they are the beneficial owners of all the
assets of the company, including the agricultural land sold by
Trinidad to Sta. Monica.
Third, Trinidad and her counsel failed to notify the DAR of the
prior sale to Sta. Monica during the administrative proceedings.
Worse, Trinidad feigned ignorance of the sale by filing a motion for
bill of particulars seeking specifics from De Guzman of her alleged
landholdings which are subject of his petition with the DAR.
It is highly unusual and unbelievable for her not to know, or at

least be aware, of the sale to Sta. Monica. She herself signed the
deed of sale as seller. She is also a stockholder and officer of Sta.
Monica. More importantly, she cannot feign ignorance of De
Guzmans claim because he was her agricultural tenant since the
1970s. She knows, or at least ought to know, that the subject matter
of the petition with the DAR was her own landholding, which she sold
to Sta. Monica in direct violation of P.D. No. 27.
The apparent lack of candor is heightened by the fact that

both Trinidad and Sta. Monica are represented by the same counsel,
Atty. Ramon Gutierrez. We cannot stretch Our credulity on how
Trinidad filed a motion for bill of particulars with the DAR seeking
specifics on the sale to Sta. Monica when she herself signed for the
vendor as a party to the transaction.
It is the duty of Atty. Gutierrez to inform the DAR, at the very first
opportunity, of the sale to Sta. Monica. He was utterly remiss of this
duty. Instead of informing the DAR, Trinidad and her counsel
engaged in wild goose chase and stonewalling, feigning ignorance
when they ought to have informed the DAR of the sale to Sta.

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Monica. Atty. Gutierrez is reminded that, as an officer of the court,
he owes it the duty of candor, honesty and fairness.32[32]
Fourth, it was only after an adverse decision against Trinidad

that Sta. Monica suddenly filed a petition for certiorari with the CA
questioning the lack of notice of coverage under the CARP law. It is
highly unlikely that Sta. Monica, an artificial being acting only
through its duly authorized representatives, was not sufficiently
informed or had no constructive knowledge of the DAR
proceedings.
Trinidad and by extension, her family members, were informed

or should be sufficiently aware of the DAR proceedings. They are all
stockholders and corporate officers of Sta. Monica. They knew, they
ought to know, that Sta. Monica would suffer damage should the
DAR award, as it awarded, the agricultural land to De Guzman.
As directors and corporate officers, they owe a duty of care to

the corporation to inform it of the pending proceedings with the
DAR.
Fifth, the ultimate factor that betrays Trinidad and Sta. Monica is
the continued payment of lease rentals by De Guzman. Records
show that De Guzman paid and continued to pay lease rentals to
Trinidad even after she sold the land to Sta. Monica. The
receipt33[33] dated May 30, 2002 discloses that De Guzman paid 40
cavans of palay to Clodinaldo dela Cruz, the authorized
representative of Trinidad, as lease rentals for the agricultural land.
It is incredible that Trinidad would still continue to collect lease

rentals from De Guzman if she had long sold the agricultural land to
Sta. Monica in 1986. The continued payment of lease rentals
indicates that Trinidad never sold the agricultural land to Sta.
Monica. Evidently, the sale was a mere ruse to skirt coverage under
the comprehensive agrarian reform law.

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All these circumstances indicate that Trinidad has remained as
the real owner of the agricultural land sold to Sta. Monica. The sale
to Sta. Monica is not valid because it is prohibited under P.D. No. 27.
More importantly, it must be deemed as a mere ploy to evade the
applicable provisions of the agrarian law.
But it is a fiat that the corporate vehicle cannot be used as a

shield to protect fraud or justify wrong. Thus, the veil of corporate
fiction will be pierced when it is used to defeat public convenience
and subvert public policy.
Considering that Trinidad remained to be the true and legal

owner of the agricultural land, there is no need for another notice of
coverage to be sent or furnished to Sta. Monica. At the very least,
the notice to her is already notice to Sta. Monica because the
corporation acted as a mere conduit of Trinidad. The CA correctly
dismissed the petition of Sta. Monica to annul the orders of the
Regional Director placing the agricultural land of Trinidad under the
agrarian reform law.
Final Note
This case can be viewed as a microcosm of the persistent

agrarian reform problem in Our country. For one, it illustrates the
arduous legal battle that tenant-farmers have to endure in order to
be finally freed from the bondage of the soil. De Guzman battled for
almost eight years to acquire the agricultural land from Trinidad.
Others are not as equally lucky. For another, it shows the subtle but
illegal measures taken by landowners to evade coverage under the
CARP law.
Of course, there are also tales of landowners who unduly suffer

either the abuse of some farmers or the harsh consequences of the
law.
In hindsight, it is quite ironic that We are still faced with the

same agrarian reform problem which We have sought to eradicate
several years ago when the CARP law was first introduced. Feudal
system of land ownership still persists in the countryside and most

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farmers are still tied to their bondage. It is more ironic when the
problem is taken in its historical context, the CARP law being the fifth
land reform law passed since President Quezon.
To Our mind, part of the problem lies with the CARP law itself. As
crafted, the law has its own loopholes. It provides for a long list of
exclusions. Some landowners used these exclusions to go around the
law. There is now a growing trend of land conversion in the
countryside suspiciously to evade coverage under the CARP law. Of
course, the solution to this problem lies with Congress. It is high time
We sounded the call for a more realistic, rational comprehensive
agrarian reform law.
The dubious use of seemingly legal means to sidestep the CARP

law persists. Corporate law is resorted to by way of circling around
the agrarian law. As this case illustrates, agricultural lands are being
transferred, simulated or otherwise, to corporations which are fully or
at least predominantly controlled by former landowners, now called
stockholders. Through this strategy, it is anticipated that the
corporation, by virtue of its corporate fiction, will shield the
landowners from agricultural claims of tenant-farmers.
The use of corporate fiction as a means to evade legal liability

is not new. This scheme or device has long been perceived to be
used in other fields of law, notably taxation to minimize payment of
tax with varying degrees of success and acceptability. But the
continued employment of the scheme in agrarian cases is not only
deplorable; it is alarming. It is time to put a lid on the cap.
WHEREFORE, the petition is DENIED. The appealed Decision of

the Court of Appeals is AFFIRMED.
Sta. Monica Industrial & Dev. Corp. vs. DAR Regional Director for
Region III (555 SCRA 97 [2008])
STA. MONICA INDUSTRIAL AND DEVELOPMENT CORPORATION v. THE

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DEPARTMENT OF AGRARIAN REFORM REGIONAL DIRECTOR FOR
REGION III, et. al.
G.R. No. 164846, 18 June 2008, THIRD DIVISION (Reyes, R.T., J.)
Considering that Trinidad remained to be the true and legal owner

of the agricultural land, there
is no need for another notice of coverage to be sent or furnished to

Sta. Monica. At the very least, the
notice to her is already notice to Sta. Monica because the

corporation acted as a mere conduit of
Trinidad.
Trinidad is the owner of five parcels of land with a total area of 4.69
hectares in Calumpit,
Bulacan. Private respondent Basilio De Guzman is the agricultural

leasehold tenant of Trinidad. A
leasehold contract was executed between Trinidad and De

Guzman. As an agricultural leasehold tenant,
De Guzman was issued Certificates of Land Transfer. Desiring to have

an emancipation patent over the
land under his tillage, De Guzman filed a petition for the issuance of
patent in his name with the Office
of the Regional Director of the DAR. DAR duly sent notices to Trinidad
requiring her to comment.
Instead of complying, Trinidad filed a motion for bill of particulars.

After due proceedings, the Regional
Director issued the Order granting the petition of De Guzman.

Trinidad filed a motion for
reconsideration but her motion was denied.
A year later, petitioner Sta. Monica filed a petition for certiorari and
prohibition with the CA
assailing the order of the Regional Director. Sta. Monica claimed that
a portion of the Trinidad
landholding was sold to it. Sta. Monica asserted that there was a
denial of due process of law because it
was not furnished a notice of coverage under the CARP law. De

Guzman argued that the alleged sale of

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the landholding is illegal due to the lack of requisite clearance from
the DAR. The said clearance is
required under P.D. No. 27, the Tenant Emancipation Decree, which
prohibits transfer of covered lands
except to tenant-beneficiaries.
CA dismissed Sta. Monica’s petition to annul the DAR Order, holding

that Sta. Monica is not a
real party-in-interest because it cannot be considered as an owner

of the land it bought from Trinidad.
CA added that even assuming that Sta. Monica is a real party-in-

interest, it was not denied due process
because it had constructive notice of the proceeding which

involved its property, due to the fact
“Asuncion Trinidad is the treasurer of petitioner, based on the

corporation’s General Information Sheet.
While it cannot be said that there was proper notice to the

corporation, being a corporate officer of the
petitioner, there was at least constructive notice of the fact that

there was a proceeding which involved
the property of the corporation of which it may be deprived should

an adverse decision be rendered by
the DAR”.
ISSUE:
Whether Sta. Monica was denied due process for not receiving a
notice of coverage from DAR
HELD: CA Decision AFFIRMED.
First, the sale to Sta. Monica is prohibited. P.D. No. 27, as amended,
forbids the transfer or
alienation of covered agricultural lands after October 21, 1972

except to the tenant-beneficiary. The
agricultural land awarded to De Guzman is covered by P.D. No. 27.

He was awarded a certificate of land
transfer in July 22, 1981. The sale to Sta. Monica in 1986 is void for
being contrary to law. Trinidad

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transfer in July 22, 1981. The sale to Sta. Monica in 1986 is void for
being contrary to law. Trinidad
remained the owner of the agricultural land.
Second, buyer Sta. Monica is owned and controlled by Trinidad and

her family. Records show
that Trinidad, her husband and two sons own more than 98% of the
outstanding capital stock of Sta.
Monica. They are all officers of the corporation. There are only two
non-related incorporators who own
less than one percent of the outstanding capital stock of Sta.

Monica and who are not officers of the
corporation.
To be sure, Trinidad and her family exercise absolute control of the

corporate affairs of Sta.
Monica. As owners of 98% of the outstanding capital stock, they are

the beneficial owners of all the
assets of the company, including the agricultural land sold by

Trinidad to Sta. Monica.
Third, Trinidad and her counsel failed to notify the DAR of the prior
sale to Sta. Monica during
the administrative proceedings. Worse, Trinidad feigned ignorance

of the sale by filing a motion for bill
of particulars seeking specifics from De Guzman of her alleged

landholdings which are subject of his
petition with the DAR.
It is highly unusual and unbelievable for her not to know, or at least

be aware, of the sale to Sta.
Monica. She herself signed the deed of sale as seller. She is also a
stockholder and officer of Sta.
Monica. More importantly, she cannot feign ignorance of De

Guzman’s claim because he was her
agricultural tenant since the 1970s. She knows, or at least ought to

know, that the subject matter of the
petition with the DAR was her own landholding, which she sold to
Sta. Monica in direct violation of

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P.D. No. 27.
The apparent lack of candor is heightened by the fact that both

Trinidad and Sta. Monica are
represented by the same counsel, Atty. Ramon Gutierrez. We cannot

stretch Our credulity on how
Trinidad filed a motion for bill of particulars with the DAR seeking
specifics on the sale to Sta. Monica
when she herself signed for the vendor as a party to the transaction.
Fourth, it was only after an adverse decision against Trinidad that Sta.
Monica suddenly filed a
petition for certiorari with the CA questioning the lack of notice of

coverage under the CARP law. It is
highly unlikely that Sta. Monica, an artificial being acting only

through its duly authorized
representatives, was not sufficiently informed or had no constructive

knowledge of the DAR
proceedings.
Fifth, the ultimate factor that betrays Trinidad and Sta. Monica is the
continued payment of lease
rentals by De Guzman. Records show that De Guzman paid and

continued to pay lease rentals to
Trinidad even after she sold the land to Sta. Monica. The receipt
dated May 30, 2002 discloses that De
Guzman paid 40 cavans of palay to Clodinaldo dela Cruz, the

authorized representative of Trinidad, as
lease rentals for the agricultural land.
All these circumstances indicate that Trinidad has remained as the

real owner of the agricultural
land sold to Sta. Monica. The sale to Sta. Monica is not valid because
it is prohibited under P.D. No. 27.
More importantly, it must be deemed as a mere ploy to evade the

applicable provisions of the agrarian
law.

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It is a fiat that the corporate vehicle cannot be used as a shield to
protect fraud or justify wrong.
Thus, the veil of corporate fiction will be pierced when it is used to

defeat public convenience and
subvert public policy.
Considering that Trinidad remained to be the true and legal owner

of the agricultural land, there
is no need for another notice of coverage to be sent or furnished to

Sta. Monica. At the very least, the
notice to her is already notice to Sta. Monica because the

corporation acted as a mere conduit of
Trinidad. The CA correctly dismissed the petition of Sta. Monica to

annul the orders of the Regional
Director placing the agricultural land of Trinidad under the agrarian

reform law.
Martinez vs. CA (438 SCRA 139 [2004])
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 Decision1 of the

Court of Appeals, in CA-G.R. CV No. 43985, modifying the Decision 2
of the Regional Trial Court of Kalookan City, Branch 122, in Civil Case
No. C-10811.
The antecedents are as follows:
Respondent BPI International Finance3 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

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deposit-taking 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, Prince’s
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

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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 CLL’s 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 letter-agreement 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
AFHK’s 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

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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 latter’s 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 MATURIT DAT

AMOUNT MATURITY VALUE
DATE Y DATE E
12- USD306,043.4
25/9/80 28/11/80 USD 312,708.43
1/4 8
MMP –
084
25/09/8 12- USD751,883.8

28/11/80 USD 768,258.24
0 1/4 8

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

DATE AMOUNT
DATE DATE VALUE
1 DAY 10-
15/9/80 USD 46,131.26
CALL 7/8
1 DAY 11-
25/9/80 USD500,000.00
CALL 1/4
(RATE ADJ: TO 12-1/4 VALUE 7/10/80)
12- USD
26/9/80 31/10/80 USD420,831.45
1/4 425,843.44
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,

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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 18402-7.28
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 CLL’s 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.

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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 latter’s 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.

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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.

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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
attorney’s 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 attorney’s 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.

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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. Plaintiff’s 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 plaintiff’s 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;

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9. Plaintiff’s 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 defendant’s
obligations, if any, by being said "joint account holder;" likewise,
the Complaint fails to attach the corresponding documents
showing defendant’s 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
plaintiff’s 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
attorney’s fees, plus costs.

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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 is DISMISSED. 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:
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.

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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).

suigeneris
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-
19-88, 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., 6-20-
88, 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

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the CLL.41 The 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
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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 plaintiff’s legal rights; and
3. The aforesaid control and breach of duty must proximately

cause the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the

corporate veil." In applying the "instrumentality" or "alter ego"
doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant’s
relationship to that operation.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 respondent’s
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

suigeneris
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 respondent’s 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

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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
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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 latter’s 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

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established, based on Wilfrido Martinez’s 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 Account Number: MMP-

Martinez and/or 063
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 to withdraw funds:

_________________________

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Confirmation/Correspondence to ___ Office
be mailed to:
___ Residence
___ Others:
________________
_________________________
_
Other Instructions:
_______________________________________________
_____________________________________________________________
____
_____________________________________________________________
____
Specimen of signature:
(Ruben (Wilfrido
1. Sgd. 3. Sgd.
Martinez) Martinez)
SIGNATURE NAME SIGNATURE NAME
(Ruben (Miguel J.
2. Sgd. 4. Sgd.
Martinez) 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
respondent’s 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

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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
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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 respondent’s 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 – 063
Statement of Accounts (Deposit)
Value
Funds In Funds Out Remarks
Date
28/11/80 6,664.95 Interests earned
29/12/80 4,779.66 " "
21/01/81 4,024.83 " "
21/01/81 119,478.51 Purchase

HK$632,041.33
@5.29 &
transferred to its
statement A/C
" 100,015.00 Transfer to Cintas

Largas’ A/C
Receivable.
17/02/81 55.07 Interests earned
18/03/81 1,317.27 " "
" 100,000.00 Purchase

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HK$525,000.00
@5.25 cheque
made payable
to Grand Solid
Enterprises Co.,
Ltd.
" 5,713.74 Transfer to A/C

Receivable
(MMP-063)
_____________ _____________
US$443,975.85 US$443,975.85 65
============ ============
…
MMP – 084
Value
Date
01/12/80 488.16 " "
04/12/80 1,089.06 " "
Transfer to A/C
" US$250,000.00
of Cintas Largas
Transfer to Cintas
" 200,000.00
Largas’ A/R.
T/T to Chase
" 200,000.00
Manhattan NY

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for
Credit A/C Allied

Capital F/O
Frank Chan B/O

Grand Solid.
Transfer to A/C
" 20,470.74
of Grand Solid
Transfer to A/C
" 60,000.00
of Trinisia Ltd.
T/T to Nitto
" 45,286.26
Trading & Josho
Ind. Co., Ltd.,

Japan.
Transfer to A/C
" 2,028.02
Receivable
(MMP-084)
" 30.00 Cable Charges
_____________ _____________
US$777,815.02 US$777,815.02 66
============ ============
…
CINTAS LARGAS

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Value
Date
17/11/80 8,067.70 " "
Transfer to A/C
" 350,000.00
of Grand Solid
" 350,000.00 Purchase

HK$1,789,200.00
@5.112, Cheque
made payable
to Grand Solid.
" 300,000.00 Purchase

HK$1,535,100.00
@5.117, Cheque
made payable
to Grand Solid
Remittance from
" 81,415.00
C. Itoh & Co., NY
Transfer to
" 129,529.26 Grand Solid’s
A/C Receivable
Transfer from
02/04/81 143,000.00 CL’s Statement
A/C

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" 50,000.00 Purchase

HK$267,150.00
@5.343, Cheque
made payable
to Grand Solid.
13/04/81 US$ 40.89 Interests earned
21/04/81 311.66 " "
" US$ 50,000.00 Purchase

HK$268,850.00
@5.377, cheque
made payable
to Grand Solid.

HK$214,480.00
@5.362, cheque
made payable
to Grand Solid.
" 52,692.00 Remittance from

Dai Ichi Kangyo
Bank NY. REF.
KOMEIMARU
Transfer from
19/05/81 178,465.18 CL’s A/C
Receivable
Remittance from
C. Itoh & Co., NY
22/05/81 46,472.00
Re. Pacific
Geory.
04/06/81 1,242.80 " "

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HK$275,750.00
@5.515, Cheque
made payable
to Grand Solid
" 66,400.00 T/T to Security

Pacific Nat’l
Bank LA for A/C
of Twentieth
Century Fox Int’l
Corp.
" 15.00 Cable Charge
" 31.65 Purchase

HK$175.00 @5.53
for payment of
Business
Registration Fee.

HK$331,500.00
@5.525, cheque
made payable
to Grand Solid.
" 22,656.88 T/T to Daiwa

Bank, Los
Angeles for A/C
of OAC
Equipment Corp.
T/T to Josho Ind.

" 45,800.00
Co. Ltd., Japan

suigeneris
" 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.
07/07/81 14.83 " "
" 16,000.00 T/T to Dai Ichi

Kangyo Bank,
Shimizu Branch
for A/C of
Takashiro Maru.
15/09/81 US$ 482.29 Interests earned
" US$ 1,250.00 Reimbursement

of expenses paid
to Price
Waterhouse &
Co.
" 237.43 Purchase

HK$1,421.50 for
cheque
payment to
Price
Waterhouse &
Co.
Remittance from
08/01/82 70,360.00
C. Itoh & Co., NY

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" 3,064.81 Transfer to CL’s

Margin A/C

HK$295,100.00,
cheque made
payable to
Grand Solid.
Transfer to A/C
" 5,952.38
of Trinisia Ltd.
_____________ ______________
TOTAL : US$1,756,387.32 US$1,732,103.25
Outstanding
- 24,284.07
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 is REVERSED AND SET ASIDE. The
complaint of the respondent against the petitioner in Civil Case No.
C-10811 is DISMISSED. No costs.
SO ORDERED.
Puno, Austria-Martinez**, Tinga, and Chico-Nazario***, JJ., concur.
Secosa vs. Heirs of Erwin Suarez Francisco (433 SCRA 273 [2004])
[G.R. No. 160039. June 29, 2004]
RAYMUNDO ODANI SECOSA, EL BUENASENSO SY and DASSAD

WAREHOUSING and PORT SERVICES, INCORPORATED, petitioners, vs.
HEIRS OF ERWIN SUAREZ FRANCISCO, respondents.

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DECISION
This is a petition for review under Rule 45 of the Rules of Court seeking
the reversal of the decision34[1] of the Court of Appeals dated
February 27, 2003 in CA-G.R. CV No. 61868, which affirmed in toto
the June 19, 1998 decision35[2] of Branch 20 of the Regional Trial
Court of Manila in Civil Case No. 96-79554.
The facts are as follows:
On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco, an

eighteen year old third year physical therapy student of the Manila
Central University, was riding a motorcycle along Radial 10 Avenue,
near the Veteran Shipyard Gate in the City of Manila. At the same
time, petitioner, Raymundo Odani Secosa, was driving an Isuzu
cargo truck with plate number PCU-253 on the same road. The truck
was owned by petitioner, Dassad Warehousing and Port Services,
Inc.
Traveling behind the motorcycle driven by Francisco was a sand

and gravel truck, which in turn was being tailed by the Isuzu truck
driven by Secosa. The three vehicles were traversing the southbound
lane at a fairly high speed. When Secosa overtook the sand and
gravel truck, he bumped the motorcycle causing Francisco to fall.
The rear wheels of the Isuzu truck then ran over Francisco, which
resulted in his instantaneous death. Fearing for his life, petitioner
Secosa left his truck and fled the scene of the collision.36[3]
Respondents, the parents of Erwin Francisco, thus filed an action for

damages against Raymond Odani Secosa, Dassad Warehousing
and Port Services, Inc. and Dassads president, El Buenasucenso Sy.
The complaint was docketed as Civil Case No. 96-79554 of the RTC
of Manila, Branch 20.
On June 19, 1998, after a full-blown trial, the court a quo rendered a
decision in favor of herein respondents, the dispositive portion of
which states:
WHEREFORE, premised on the foregoing, judgment is hereby

rendered in favor of the plaintiffs ordering the defendants to pay
plaintiffs jointly and severally:
1. The sum of P55,000.00 as actual and compensatory damages;

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2. The sum of P20,000.00 for the repair of the motorcycle;
3. The sum of P100,000.00 for the loss of earning capacity;
4. The sum of P500,000.00 as moral damages;
5. The sum of P50,000.00 as exemplary damages;
6. The sum of P50,000.00 as attorneys fees plus cost of suit.
SO ORDERED.
Petitioners appealed the decision to the Court of Appeals, which

affirmed the appealed decision in toto.37[4]
Hence the present petition, based on the following arguments:
I.
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE

DECISION OF THE TRIAL COURT THAT PETITIONER DASSAD DID NOT
EXERCISE THE DILIGENCE OF A GOOD FATHER OF A FAMILY IN THE
SELECTION AND SUPERVISION OF ITS EMPLOYEES WHICH IS NOT IN
ACCORDANCE WITH ARTICLE 2180 OF THE NEW CIVIL CODE AND
RELATED JURISPRUDENCE ON THE MATTER.
II.
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE

DECISION OF THE TRIAL COURT IN HOLDING PETITIONER EL
BUENASENSO SY SOLIDARILY LIABLE WITH PETITIONERS DASSAD AND
SECOSA IN VIOLATION OF THE CORPORATION LAW AND RELATED
JURISPRUDENCE ON THE MATTER.
III.
THE JUDGMENT OF THE TRIAL COURT AS AFFIRMED BY THE COURT OF

APPEALS AWARDING P500,000.00 AS MORAL DAMAGES IS
MANIFESTLY ABSURD, MISTAKEN AND UNJUST.38[5]
The petition is partly impressed with merit.
On the issue of whether petitioner Dassad Warehousing and Port

Services, Inc. exercised the diligence of a good father of a family in
the selection and supervision of its employees, we find the assailed
decision to be in full accord with pertinent provisions of law and
established jurisprudence.
Article 2176 of the Civil Code provides:

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Whoever by act or omission causes damage to another, there being
fault or negligence, is obliged to pay for the damage done. Such
fault or negligence, if there is no pre-existing contractual relation
between the parties, is called a quasi-delict and is governed by the
provisions of this Chapter.
On the other hand, Article 2180, in pertinent part, states:
The obligation imposed by article 2176 is demandable not only for

ones own acts or omissions, but also for those of persons for whom
one is responsible x x x.
Employers shall be liable for the damages caused by their

employees and household helpers acting within the scope of their
assigned tasks, even though the former are not engaged in any
business or industry x x x.
The responsibility treated of in this article shall cease when the

persons herein mentioned prove that they observed all the diligence
of a good father of a family to prevent damage.
Based on the foregoing provisions, when an injury is caused by the

negligence of an employee, there instantly arises a presumption that
there was negligence on the part of the employer either in the
selection of his employee or in the supervision over him after such
selection. The presumption, however, may be rebutted by a clear
showing on the part of the employer that it exercised the care and
diligence of a good father of a family in the selection and
supervision of his employee. Hence, to evade solidary liability for
quasi-delict committed by an employee, the employer must adduce
sufficient proof that it exercised such degree of care.39[6]
How does an employer prove that he indeed exercised the

diligence of a good father of a family in the selection and
supervision of his employee? The case of Metro Manila Transit
Corporation v. Court of Appeals40[7] is instructive:
In fine, the party, whether plaintiff or defendant, who asserts the

affirmative of the issue has the burden of presenting at the trial such
amount of evidence required by law to obtain a favorable
judgment41[8] . . . In making proof in its or his case, it is paramount
that the best and most complete evidence is formally entered.42[9]

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Coming now to the case at bar, while there is no rule which requires
that testimonial evidence, to hold sway, must be corroborated by
documentary evidence, inasmuch as the witnesses testimonies dwelt
on mere generalities, we cannot consider the same as sufficiently
persuasive proof that there was observance of due diligence in the
selection and supervision of employees. Petitioners attempt to prove
its deligentissimi patris familias in the selection and supervision of
employees through oral evidence must fail as it was unable to
buttress the same with any other evidence, object or documentary,
which might obviate the apparent biased nature of the
testimony.43[10]
Our view that the evidence for petitioner MMTC falls short of the
required evidentiary quantum as would convincingly and
undoubtedly prove its observance of the diligence of a good father
of a family has its precursor in the underlying rationale pronounced in
the earlier case of Central Taxicab Corp. vs. Ex-Meralco Employees
Transportation Co., et al.,44[11] set amidst an almost identical
factual setting, where we held that:
The failure of the defendant company to produce in court any

record or other documentary proof tending to establish that it had
exercised all the diligence of a good father of a family in the
selection and supervision of its drivers and buses, notwithstanding the
calls therefor by both the trial court and the opposing counsel,
argues strongly against its pretensions.
We are fully aware that there is no hard-and-fast rule on the

quantum of evidence needed to prove due observance of all the
diligence of a good father of a family as would constitute a valid
defense to the legal presumption of negligence on the part of an
employer or master whose employee has by his negligence, caused
damage to another. x x x (R)educing the testimony of Albert to its
proper proportion, we do not have enough trustworthy evidence left
to go by. We are of the considered opinion, therefore, that the
believable evidence on the degree of care and diligence that has
been exercised in the selection and supervision of Roberto Leon y
Salazar, is not legally sufficient to overcome the presumption of
negligence against the defendant company.
The above-quoted ruling was reiterated in a recent case again

involving the Metro Manila Transit Corporation,45[12] thus:

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In the selection of prospective employees, employers are required to
examine them as to their qualifications, experience, and service
records.46[13] On the other hand, with respect to the supervision of
employees, employers should formulate standard operating
procedures, monitor their implementation, and impose disciplinary
measures for breaches thereof. To establish these factors in a trial
involving the issue of vicarious liability, employers must submit
concrete proof, including documentary evidence.
In this case, MMTC sought to prove that it exercised the diligence of

a good father of a family with respect to the selection of employees
by presenting mainly testimonial evidence on its hiring procedure.
According to MMTC, applicants are required to submit professional
driving licenses, certifications of work experience, and clearances
from the National Bureau of Investigation; to undergo tests of their
driving skills, concentration, reflexes, and vision; and, to complete
training programs on traffic rules, vehicle maintenance, and
standard operating procedures during emergency cases.
xxx xxx xxx
Although testimonies were offered that in the case of Pedro Musa all
these precautions were followed, the records of his interview, of the
results of his examinations, and of his service were not presented. . .
[T]here is no record that Musa attended such training programs and
passed the said examinations before he was employed. No proof
was presented that Musa did not have any record of traffic
violations. Nor were records of daily inspections, allegedly
conducted by supervisors, ever presented. . . The failure of MMTC to
present such documentary proof puts in doubt the credibility of its
witnesses.
Jurisprudentially, therefore, the employer must not merely present

testimonial evidence to prove that he observed the diligence of a
good father of a family in the selection and supervision of his
employee, but he must also support such testimonial evidence with
concrete or documentary evidence. The reason for this is to obviate
the biased nature of the employers testimony or that of his
witnesses.47[14]
Applying the foregoing doctrines to the present case, we hold that

petitioner Dassad Warehousing and Port Services, Inc. failed to
conclusively prove that it had exercised the requisite diligence of a
good father of a family in the selection and supervision of its
employees.

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Edilberto Duerme, the lone witness presented by Dassad
Warehousing and Port Services, Inc. to support its position that it had
exercised the diligence of a good father of a family in the selection
and supervision of its employees, testified that he was the one who
recommended petitioner Raymundo Secosa as a driver to Dassad
Warehousing and Port Services, Inc.; that it was his duty to scrutinize
the capabilities of drivers; and that he believed petitioner to be
physically and mentally fit for he had undergone rigid training and
attended the PPA safety seminar.48[15]
Petitioner Dassad Warehousing and Port Services, Inc. failed to

support the testimony of its lone witness with documentary evidence
which would have strengthened its claim of due diligence in the
selection and supervision of its employees. Such an omission is fatal
to its position, on account of which, Dassad can be rightfully held
solidarily liable with its co-petitioner Raymundo Secosa for the
damages suffered by the heirs of Erwin Francisco.
However, we find that petitioner El Buenasenso Sy cannot be held

solidarily liable with his co-petitioners. While it may be true that Sy is
the president of petitioner Dassad Warehousing and Port Services,
Inc., such fact is not by itself sufficient to hold him solidarily liable for
the liabilities adjudged against his co-petitioners.
It is a settled precept in this jurisdiction that a corporation is invested

by law with a personality separate from that of its stockholders or
members.49[16] It has a personality separate and distinct from those
of the persons composing it as well as from that of any other entity to
which it may be related. Mere ownership by a single stockholder or
by another corporation of all or nearly all of the capital stock of a
corporation is not in itself sufficient ground for disregarding the
separate corporate personality.50[17] A corporations authority to
act and its liability for its actions are separate and apart from the
individuals who own it.51[18]
The so-called veil of corporation fiction treats as separate and

distinct the affairs of a corporation and its officers and stockholders.
As a general rule, a corporation will be looked upon as a legal entity,
unless and until sufficient reason to the contrary appears. When the
notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the

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corporation as an association of persons.52[19] Also, the corporate
entity may be disregarded in the interest of justice in such cases as
fraud that may work inequities among members of the corporation
internally, involving no rights of the public or third persons. In both
instances, there must have been fraud and proof of it. For the
separate juridical personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established.53[20] It
cannot be presumed.54[21]
The records of this case are bereft of any evidence tending to show
the presence of any grounds enumerated above that will justify the
piercing of the veil of corporate fiction such as to hold the president
of Dassad Warehousing and Port Services, Inc. solidarily liable with it.
The Isuzu cargo truck which ran over Erwin Francisco was registered
in the name of Dassad Warehousing and Port Services, Inc., and not
in the name of El Buenasenso Sy. Raymundo Secosa is an employee
of Dassad Warehousing and Port Services, Inc. and not of El
Buenasenso Sy. All these things, when taken collectively, point
toward El Buenasenso Sys exclusion from liability for damages arising
from the death of Erwin Francisco.
Having both found Raymundo Secosa and Dassad Warehousing

and Port Services, Inc. liable for negligence for the death of Erwin
Francisco on June 27, 1996, we now consider the question of moral
damages which his parents, herein respondents, are entitled to
recover. Petitioners assail the award of moral damages of
P500,000.00 for being manifestly absurd, mistaken and unjust. We are
not persuaded.
Under Article 2206, the spouse, legitimate and illegitimate

descendants and ascendants of the deceased may demand moral
damages for mental anguish for the death of the deceased. The
reason for the grant of moral damages has been explained in this
wise:
. . . the award of moral damages is aimed at a restoration, within the

limits possible, of the spiritual status quo ante; and therefore, it must
be proportionate to the suffering inflicted. The intensity of the pain
experienced by the relatives of the victim is proportionate to the
intensity of affection for him and bears no relation whatsoever with
the wealth or means of the offender.55[22]

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In the instant case, the spouses Francisco presented evidence of the
searing pain that they felt when the premature loss of their son was
relayed to them. That pain was highly evident in the testimony of the
father who was forever deprived of a son, a son whose untimely
death came at that point when the latter was nearing the
culmination of every parents wish to educate their children. The
death of Francis has indeed left a void in the lives of the
respondents. Antonio Francisco testified on the effect of the death
of his son, Francis, in this manner:
Q: (Atty. Balanag): What did you do when you learned that your
son was killed on June 27, 1996?
A: (ANTONIO FRANCISCO): I boxed the door and pushed the

image of St. Nio telling why this happened to us.
Q: Mr. Witness, how did you feel when you learned of the untimely
death of your son, Erwin Suares (sic)?
A: Masakit po ang mawalan ng anak. Its really hard for me, the
thought that my son is dead.
xxx xxx xxx
Q: How did your family react to the death of Erwin Suarez

Francisco?
A: All of my family and relatives were felt (sic) sorrow because

they knew that my son is (sic) good.
Q: We know that it is impossible to put money terms(s) [on] the life

of [a] human, but since you are now in court and if you were to ask
this court how much would you and your family compensate? (sic)
A: Even if they pay me millions, they cannot remove the anguish

of my son (sic).56[23]
Moral damages are emphatically not intended to enrich a plaintiff

at the expense of the defendant. They are awarded to allow the
former to obtain means, diversion or amusements that will serve to
alleviate the moral suffering he has undergone due to the
defendants culpable action and must, perforce, be proportional to
the suffering inflicted.57[24] We have previously held as proper an
award of P500,000.00 as moral damages to the heirs of a deceased
family member who died in a vehicular accident. In our 2002
decision in Metro Manila Transit Corporation v. Court of Appeals, et

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al.,58[25] we affirmed the award of moral damages of P500,000.00
to the heirs of the victim, a mother, who died from injuries she
sustained when a bus driven by an employee of the petitioner hit
her. In the case at bar, we likewise affirm the portion of the assailed
decision awarding the moral damages.
Since the petitioners did not question the other damages adjudged
against them by the court a quo, we affirm the award of these
damages to the respondents.
WHEREFORE, the petition is DENIED. The assailed decision is AFFIRMED

with the MODIFICATION that petitioner El Buenasenso Sy is ABSOLVED
from any liability adjudged against his co-petitioners in this case.
Costs against petitioners.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Panganiban, Carpio, and Azcuna, JJ.,

concur.
Facts: Francisco, an 18 year old 3rd year physical therapy student

was riding a motorcycle. A sand and gravel truck was traveling
behind the motorcycle, which in turn was being tailed by the Isuzu
truck driven by Secosa. The Isuzu cargo truck was owned by Dassad
Warehousing and Port Services, Inc.. The three vehicles were
traversing the southbound lane at a fairly high speed. When Secosa
overtook the sand and gravel truck, he bumped the motorcycle
causing Francisco to fall. The rear wheels of the Isuzu truck then ran
over Francisco, which resulted in his instantaneous death. Secosa left
his truck and fled the scene of the collision.
The parents of Francisco, respondents herein, filed an action for

damages against Secosa, Dassad Warehousing and Port Services,
Inc. and Dassad’s president, El Buenasucenso Sy.
The court a quo rendered a decision in favor of herein respondents;

thus petitioners appealed the decision to the Court of Appeals,
which unfortunately affirmed the appealed decision in toto. Hence,
the present petition.
Issues:

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(1) Whether or not Dassad Warehousing and Port Services, Inc.
exercised the diligence of a good father of a family in the selection
and supervision of its employees; hence it cannot be held solidary
liable with the negligence of its employee.
(2) Whether or not Dassad’s president, El Buenasucenso Sy, can be

held solidary liable with co-petitioners.
Held:
(1) No. Dassad Warehousing and Port Services, Inc. did not exercise
the required diligence of a good father of a family in the selection
and supervision of its employees. Hence, it cannot be held solidary
liable with the negligence of its employee.
Whoever by act or omission causes damage to another, there being

fault or negligence, is obliged to pay for the damage done. Such
fault or negligence, if there is no pre-existing contractual relation
between the parties, is called a quasi-delict and is governed by the
provisions of this Chapter.
On the other hand, Article 2180, in pertinent part, states:
The obligation imposed by article 2176 is demandable not only for

one’s own acts or omissions, but also for those of persons for whom
one is responsible x x x.
Employers shall be liable for the damages caused by their

employees and household helpers acting within the scope of their
assigned tasks, even though the former are not engaged in any
business or industry x x x.
The responsibility treated of in this article shall cease when the

persons herein mentioned prove that they observed all the diligence
of a good father of a family to prevent damage.
suigeneris
Based on the foregoing provisions, when an injury is caused by the
negligence of an employee, there instantly arises a presumption that
there was negligence on the part of the employer, which however,
may be rebutted by a clear evidence showing on the part of the
employer that it exercised the care and diligence of a good father
of a family in the selection and supervision of his employee.
In the selection of prospective employees, employers are required to

examine them as to their qualifications, experience, and service
records. On the other hand, with respect to the supervision of
employees, employers should formulate standard operating
procedures, monitor their implementation, and impose disciplinary
measures for breaches thereof. To establish these factors in a trial
involving the issue of explicit liability, employers must submit concrete
proof, including documentary evidence. The reason for this is to
obviate the biased nature of the employer’s testimony or that of his
witnesses.
In the case at bar, Dassad Warehousing and Port Services, Inc. failed
to conclusively prove that it had exercised the requisite diligence of
a good father of a family in the selection and supervision of its
employees. Dassad Warehousing and Port Services, Inc. failed to
support the testimony of its lone witness, Edilberto Duerme, with
documentary evidence which would have strengthened its claim of
due diligence in the selection and supervision of its employees. Such
an omission is fatal on account of which, Dassad can be rightfully
held solidarily liable with its co-petitioner Secosa for the damages
suffered by the heirs of Francisco.
(2) No. Sy cannot be held solidarily liable with his co-petitioners.

While it may be true that Sy is the president of Dassad Warehousing
and Port Services, Inc., such fact is not by itself sufficient to hold him
solidarily liable for the liabilities adjudged against his co-petitioners.
A corporation has a personality separate from that of its stockholders

or members. The doctrine of ‘veil of corporation’ treats as separate
and distinct the affairs of a corporation and its officers and
stockholders. As a rule, a corporation will be looked upon as a legal
entity, unless and until sufficient reason to the contrary appears.
When the notion of legal entity is used to defeat public

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convenience, justify wrong, protect fraud, or defend crime, the law
will regard the corporation as an association of persons. Also, the
corporate entity may be disregarded in the interest of justice in such
cases as fraud that may work inequities among members of the
corporation internally, involving no rights of the public or third
persons. In both instances, there must have been fraud and proof of
it.
The records of the case does not point toward the presence of any
grounds enumerated above that will justify the piercing of the veil of
corporate entity such as to hold Sy, the president of Dassad
Warehousing and Port Services, Inc., solidarily liable with it.
Furthermore, the Isuzu cargo truck which ran over Francisco was
registered in the name of Dassad and not in the name of Sy. Secosa
is an employee of Dassad and not of Sy. These facts showed Sy’s
exclusion from liability for damages arising from the death of
Francisco.
Gala vs. Ellice Agro-Industrial Corp. (418 SCRA 431 [2003])
G.R. No. 156819 December 11, 2003
ALICIA E. GALA, GUIA G. DOMINGO and RITA G. BENSON, petitioners,

vs.
ELLICE AGRO-INDUSTRIAL CORPORATION, MARGO MANAGEMENT
AND DEVELOPMENT CORPORATION, RAUL E. GALA, VITALIANO N.
AGUIRRE II, ADNAN V. ALONTO, ELIAS N. CRESENCIO, MOISES S.
MANIEGO, RODOLFO B. REYNO, RENATO S. GONZALES, VICENTE C.
NOLAN, NESTOR N. BATICULON, respondents.
DECISION
This is a petition for review under Rule 45 of the Rules of Court,

seeking the reversal of the decision dated November 8, 2002 1 and
the resolution dated December 27, 20022 of the Court of Appeals in
CA-G.R. SP No. 71979.
On March 28, 1979, the spouses Manuel and Alicia Gala, their
children Guia Domingo, Ofelia Gala, Raul Gala, and Rita Benson,
and their encargados Virgilio Galeon and Julian Jader formed and
organized the Ellice Agro-Industrial Corporation.3 The total

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subscribed capital stock of the corporation was apportioned as
follows:
Name Number of Shares Amount
Manuel R. Gala 11, 700 1,170,000.00
Alicia E. Gala 23,200 2,320,000.00
Guia G. Domingo 16 1,600.00
Ofelia E. Gala 40 4,000.00
Raul E. Gala 40 4,000.00
Rita G. Benson 2 200.00
Virgilio Galeon 1 100.00
Julian Jader 1 100.00
TOTAL 35,000 P3,500,000.004
As payment for their subscriptions, the Gala spouses transferred

several parcels of land located in the provinces of Quezon and
Laguna to Ellice. 5
In 1982, Manuel Gala, Alicia Gala and Ofelia Gala subscribed to an

additional 3,299 shares, 10,652.5 shares and 286.5 shares,
respectively. 6
On June 28, 1982, Manuel Gala and Alicia Gala acquired an

additional 550 shares and 281 shares, respectively. 7
Subsequently, on September 16, 1982, Guia Domingo, Ofelia Gala,

Raul Gala, Virgilio Galeon and Julian Jader incorporated the Margo
Management and Development Corporation (Margo). 8 The total
subscribed capital stock of Margo was apportioned as follows:
Raul E. Gala 6,640 66,400.00
Ofelia E. Gala 6,640 66,400.00
Guia G. Domingo 6,640 66,400.00
TOTAL 20,000 P200,000.009

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On November 10, 1982, Manuel Gala sold 13,314 of his shares in Ellice
to Margo. 10
Alicia Gala transferred 1,000 of her shares in Ellice to a certain Victor

de Villa on March 2, 1983. That same day, de Villa transferred said
shares to Margo. 11 A few months later, on August 28, 1983, Alicia
Gala transferred 854.3 of her shares to Ofelia Gala, 500 to Guia
Domingo and 500 to Raul Gala. 12
Years later, on February 8, 1988, Manuel Gala transferred all of his

remaining holdings in Ellice, amounting to 2,164 shares, to Raul Gala.
13
On July 20, 1988, Alicia Gala transferred 10,000 of her shares to

Margo. 14
Thus, as of the date on which this case was commenced, the

stockholdings in Ellice were allocated as follows:
Margo 24,312.5 2,431,250.00
Alicia Gala 21,480.2 2,148,020.00
Raul Gala 2,704.5 270,450.00
Ofelia Gala 980.8 98,080.00
Gina Domingo 516 51,600.00
Rita Benson 2 200.00
Adnan Alonto 1 100.00
Elias Cresencio 1 100.00
TOTAL 50,000 P5,000,000.00
On June 23, 1990, a special stockholders’ meeting of Margo was

held, where a new board of directors was elected. 15 That same day,
the newly-elected board elected a new set of officers. Raul Gala
was elected as chairman, president and general manager. During
the meeting, the board approved several actions, including the
commencement of proceedings to annul certain dispositions of
Margo’s property made by Alicia Gala. The board also resolved to
change the name of the corporation to MRG Management and
Development Corporation. 16
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Similarly, a special stockholders’ meeting of Ellice was held on
August 24, 1990 to elect a new board of directors. In the ensuing
organizational meeting later that day, a new set of corporate
officers was elected. Likewise, Raul Gala was elected as chairman,
On March 27, 1990, respondents filed against petitioners with the

Securities and Exchange Commission (SEC) a petition for the
appointment of a management committee or receiver, accounting
and restitution by the directors and officers, and the dissolution of
Ellice Agro-Industrial Corporation for alleged mismanagement,
diversion of funds, financial losses and the dissipation of assets,
docketed as SEC Case No. 3747. 17 The petition was amended to
delete the prayer for the appointment of a management
committee or receiver and for the dissolution of Ellice. Additionally,
respondents prayed that they be allowed to inspect the corporate
books and documents of Ellice. 18
In turn, petitioners initiated a complaint against the respondents on

June 26, 1991, docketed as SEC Case No. 4027, praying for, among
others, the nullification of the elections of directors and officers of
both Margo Management and Development Corporation and Ellice
Industrial Corporation; the nullification of all board resolutions issued
by Margo from June 23, 1990 up to the present and all board
resolutions issued by Ellice from August 24, 1990 up to the present;
and the return of all titles to real property in the name of Margo and
Ellice, as well as all corporate papers and records of both Margo
and Ellice which are in the possession and control of the
respondents. 19
The two cases were consolidated in an Order dated November 23,

1993. 20
Meanwhile, during the pendency of the SEC cases, the shares of

stock of Alicia and Ofelia Gala in Ellice were levied and sold at
public auction to satisfy a judgment rendered against them by he
Regional Trial Court of Makati, Branch 66, in Civil Case No. 42560,
entitled "Regines Condominium v. Ofelia (Gala) Panes and Alicia
Gala." 21
On November 3, 1998, the SEC rendered a Joint Decision in SEC

Cases Nos. 3747 and 4027, the dispositive portion of which states:
WHEREFORE, premises considered, judgment is hereby rendered, as

follows:
1. Dismissing the petition in SEC Case No. 3747,
2. Issuing the following orders in SEC Case No. 4027;

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(a) Enjoining herein respondents to perform corporate acts of both
Ellice and Margo, as directors and officers thereof.
(b) Nullifying the election of the new sets of Board of Directors and
Officers of Ellice and Margo from June 23, 1990 to the present, and
that of Ellice from August 24, 1990 to the present.
(c) Ordering the respondent Raul Gala to return all the titles of real
properties in the names of Ellice and Margo which were unlawfully
taken and held by him.
(d) Directing the respondents to return to herein petitioners all

corporate papers, records of both Ellice and Margo which are in
their possession and control.
SO ORDERED. 22
Respondents appealed to the SEC En Banc, which, on July 4, 2002,

rendered its Decision, the decretal portion of which reads:
WHEREFORE, the Decision of the Hearing Officer dated November 3,

1998 is hereby REVERSED and SET ASIDE and a new one hereby
rendered granting the appeal, upholding the Amended Petition in
SEC Case No. 3747, and dismissing the Petition with Prayer for
Issuance of Preliminary Restraining Order and granting the
Compulsory Counterclaim in SEC Case No. 4027.
Accordingly, appellees Alicia Gala and Guia G. Domingo are

ordered as follows:
(1) jointly and solidarily pay ELLICE and/or MARGO the amount of
P700,000.00 representing the consideration for the unauthorized sale
of a parcel of land to Lucky Homes and Development Corporation
(Exhs. "N" and "CCC");
(2) jointly and severally pay ELLICE and MARGO the proceeds of
sales of agricultural products averaging P120,000.00 per month from
February 17, 1988;
(3) jointly and severally indemnify the appellants P90,000.00 as

attorney’s fees;
(4) jointly and solidarily pay the costs of suit;
(5) turn over to the individual appellants the corporate records of

ELLICE and MARGO in their possession; and
(6) desist and refrain from interfering with the management of ELLICE
and MARGO.
SO ORDERED. 23

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Petitioners filed a petition for review with the Court of Appeals which
dismissed the petition for review and affirmed the decision of the SEC
En Banc. 24
Hence, this petition, raising the following issues:
WHETHER OR NOT THE LOWER COURT ERRED IN NOT DECLARING AS

ILLEGAL AND CONTRARY TO PUBLIC POLICY THE PURPOSES AND
MANNER IN WHICH RESPONDENT CORPORATIONS WERE ORGANIZED
– WHICH WERE, E.G. TO (1) "PREVENT THE GALA ESTATE FROM BEING
BROUGHT UNDER THE COVERAGE (SIC)" OF THE COMPREHENSIVE
AGRARIAN REFORM PROGRAM (CARP) AND (2) PURPORTEDLY FOR
"ESTATE PLANNING."
II
WHETHER OR NOT THE LOWER COURT ERRED (1) IN SUSPICIOUSLY

RESOLVING THE CASE WITHIN TWO (2) DAYS FROM RECEIPT OF
RESPONDENTS’ COMMENT; AND (2) IN NOT MAKING A
DETERMINATION OF THE ISSUES OF FACTS AND INSTEAD RITUALLY
CITING THE FACTUAL FINDINGS OF THE COMMISSION A QUO WITHOUT
DISCUSSION AND ANALYSIS;
III
WHETHER OR NOT THE LOWER COURT ERRED IN RULING THAT THE

ORGANIZATION OF RESPONDENT CORPORATIONS WAS NOT ILLEGAL
FOR DEPRIVING PETITIONER RITA G. BENSON OF HER LEGITIME.
IV
WHETHER OR NOT THE LOWER COURT ERRED IN NOT PIERCING THE

VEILS OF CORPORATE FICTION OF RESPONDENTS CORPORATIONS
ELLICE AND MARGO. 25
In essence, petitioners want this Court to disregard the separate

juridical personalities of Ellice and Margo for the purpose of treating
all property purportedly owned by said corporations as property
solely owned by the Gala spouses.
The petitioners’ first contention in support of this theory is that the

purposes for which Ellice and Margo were organized should be
declared as illegal and contrary to public policy. They claim that the
respondents never pursued exemption from land reform coverage in
good faith and instead merely used the corporations as tools to
circumvent land reform laws and to avoid estate taxes. Specifically,
they point out that respondents have not shown that the transfers of
the land in favor of Ellice were executed in compliance with the
requirements of Section 13 of R.A. 3844.26 Furthermore, they alleged
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that respondent corporations were run without any of the
conventional corporate formalities. 27
At the outset, the Court holds that petitioners’ contentions

impugning the legality of the purposes for which Ellice and Margo
were organized, amount to collateral attacks which are prohibited in
this jurisdiction. 28
The best proof of the purpose of a corporation is its articles of

incorporation and by-laws. The articles of incorporation must state
the primary and secondary purposes of the corporation, while the
by-laws outline the administrative organization of the corporation,
which, in turn, is supposed to insure or facilitate the accomplishment
of said purpose. 29
In the case at bar, a perusal of the Articles of Incorporation of Ellice

and Margo shows no sign of the allegedly illegal purposes that
petitioners are complaining of. It is well to note that, if a
corporation’s purpose, as stated in the Articles of Incorporation, is
lawful, then the SEC has no authority to inquire whether the
corporation has purposes other than those stated, and mandamus
will lie to compel it to issue the certificate of incorporation. 30
Assuming there was even a grain of truth to the petitioners’ claims

regarding the legality of what are alleged to be the corporations’
true purposes, we are still precluded from granting them relief. We
cannot address here their concerns regarding circumvention of land
reform laws, for the doctrine of primary jurisdiction precludes a court
from arrogating unto itself the authority to resolve a controversy the
jurisdiction over which is initially lodged with an administrative body
of special competence.31 Since primary jurisdiction over any
violation of Section 13 of Republic Act No. 3844 that may have been
committed is vested in the Department of Agrarian Reform
Adjudication Board (DARAB),32 then it is with said administrative
agency that the petitioners must first plead their case. With regard to
their claim that Ellice and Margo were meant to be used as mere
tools for the avoidance of estate taxes, suffice it say that the legal
right of a taxpayer to reduce the amount of what otherwise could
be his taxes or altogether avoid them, by means which the law
permits, cannot be doubted. 33
The petitioners’ allegation that Ellice and Margo were run without
any of the typical corporate formalities, even if true, would not merit
the grant of any of the relief set forth in their prayer. We cannot
disregard the corporate entities of Ellice and Margo on this ground.
At most, such allegations, if proven to be true, should be addressed
in an administrative case before the SEC. 34

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Thus, even if Ellice and Margo were organized for the purpose of
exempting the properties of the Gala spouses from the coverage of
land reform legislation and avoiding estate taxes, we cannot
disregard their separate juridical personalities.
Next, petitioners make much of the fact that the Court of Appeals
promulgated its assailed Decision a mere two days from the time the
respondents filed their Comment. They alleged that the appellate
court could not have made a deliberate study of the factual
questions in the case, considering the sheer volume of evidence
available. 35 In support of this allegation, they point out that the
Court of Appeals merely adopted the factual findings of the SEC En
Banc verbatim, without deliberation and analysis. 36
In People v. Mercado, 37 we ruled that the speed with which a lower

court disposes of a case cannot thus be attributed to the injudicious
performance of its function. Indeed, magistrates are not supposed to
study a case only after all the pertinent pleadings have been filed. It
is a mark of diligence and devotion to duty that jurists study a case
long before the deadline set for the promulgation of their decision
has arrived. The two-day period between the filing of petitioners’
Comment and the promulgation of the decision was sufficient time
to consider their arguments and to incorporate these in the decision.
As long as the lower court does not sacrifice the orderly
administration of justice in favor of a speedy but reckless disposition
of a case, it cannot be taken to task for rendering its decision with
due dispatch. The Court of Appeals in this intra-corporate
controversy committed no reversible error and, consequently, its
decision should be affirmed. 38 Verily, if such swift disposition of a
case is considered a non-issue in cases where the life or liberty of a
person is at stake, then we see no reason why the same principle
cannot apply when only private rights are involved.
Furthermore, well-settled is the rule that the factual findings of the

Court of Appeals are conclusive on the parties and are not
reviewable by the Supreme Court. They carry even more weight
when the Court of Appeals affirms the factual findings of a lower
fact-finding body.39 Likewise, the findings of fact of administrative
bodies, such as the SEC, will not be interfered with by the courts in
the absence of grave abuse of discretion on the part of said
agencies, or unless the aforementioned findings are not supported
by substantial evidence. 40
However, in the interest of equity, this Court has reviewed the factual
findings of the SEC En Banc, which were affirmed in toto by the Court
of Appeals, and has found no cogent reason to disturb the same.
Indeed, we are convinced that the arguments raised by the
petitioners are nothing but unwarranted conclusions of law.
Specifically, they insist that the Gala spouses never meant to part
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with the ownership of the shares which are in the names of their
children and encargados, and that all transfers of property to these
individuals are supposedly void for being absolutely simulated for
lack of consideration.41 However, as correctly held by the SEC En
Banc, the transfers were only relatively simulated, inasmuch as the
evident intention of the Gala spouses was to donate portions of their
property to their children and encargados. 42
In an attempt to bolster their theory that the organization of the

respondent corporations was illegal, the petitioners aver that the
legitime pertaining to petitioners Rita G. Benson and Guia G.
Domingo from the estate of their father had been subject to
unwarranted reductions as a result thereof. In sum, they claim that
stockholdings in Ellice which the late Manuel Gala had assigned to
them were insufficient to cover their legitimes, since Benson was only
given two shares while Domingo received only sixteen shares out of
a total number of 35,000 issued shares. 43
Moreover, the reliefs sought by petitioners should have been raised

in a proceeding for settlement of estate, rather than in the present
intra-corporate controversy. If they are genuinely interested in
securing that part of their late father’s property which has been
reserved for them in their capacity as compulsory heirs, then they
should simply exercise their actio ad supplendam legitimam, or their
right of completion of legitime.44 Such relief must be sought during
the distribution and partition stage of a case for the settlement of the
estate of Manuel Gala, filed before a court which has taken
jurisdiction over the settlement of said estate. 45
Finally, the petitioners pray that the veil of corporate fiction that
shroud both Ellice and Margo be pierced, consistent with their earlier
allegation that both corporations were formed for purposes contrary
to law and public policy. In sum, they submit that the respondent
corporations are mere business conduits of the deceased Manuel
Gala and thus may be disregarded to prevent injustice, the distortion
or hiding of the truth or the "letting in" of a just defense. 46
However, to warrant resort to the extraordinary remedy of piercing

the veil of corporate fiction, there must be proof that the corporation
is being used as a cloak or cover for fraud or illegality, or to work
injustice, 47 and the petitioners have failed to prove that Ellice and
Margo were being used thus. They have not presented any
evidence to show how the separate juridical entities of Ellice and
Margo were used by the respondents to commit fraudulent, illegal or
unjust acts. Hence, this contention, too, must fail.
On June 5, 2003, the petitioners filed a Reply, where, aside from

reiterating the contentions raised in their Petition, they averred that
there is no proof that either capital gains taxes or documentary

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stamp taxes were paid in the series of transfers of Ellice and Margo
shares. Thus, they invoke Sections 176 and 201 of the National
Internal Revenue Code, which would bar the presentation or
admission into evidence of any document that purports to transfer
any benefit derived from certificates of stock if the requisite
documentary stamps have not been affixed thereto and cancelled.
Curiously, the petitioners never raised this issue before the SEC
Hearing Officer, the SEC En Banc or the Court of Appeals. Thus, we
are precluded from passing upon the same for, as a rule, no
question will be entertained on appeal unless it has been raised in
the court below, for points of law, theories, issues and arguments not
brought to the attention of the lower court need not be, and
ordinarily will not be, considered by a reviewing court, as they
cannot be raised for the first time at that late stage. Basic
considerations of due process impel this rule.48 Furthermore, even if
these allegations were proven to be true, such facts would not
render the underlying transactions void, for these instruments would
not be the sole means, much less the best means, by which the
existence of these transactions could be proved. For this purpose,
the books and records of a corporation, which include the stock and
transfer book, are generally admissible in evidence in favor of or
against the corporation and its members. They can be used to prove
corporate acts, a corporation’s financial status and other matters,
including one’s status as a stockholder. Most importantly, these
books and records are, ordinarily, the best evidence of corporate
acts and proceedings.49 Thus, reference to these should have been
made before the SEC Hearing Officer, for this Court will not entertain
this belated questioning of the evidence now.
It is always sad to see families torn apart by money matters and

property disputes.1âwphi1 The concept of a close corporation
organized for the purpose of running a family business or managing
family property has formed the backbone of Philippine commerce
and industry. Through this device, Filipino families have been able to
turn their humble, hard-earned life savings into going concerns
capable of providing them and their families with a modicum of
material comfort and financial security as a reward for years of hard
work. A family corporation should serve as a rallying point for family
unity and prosperity, not as a flashpoint for familial strife. It is hoped
that people reacquaint themselves with the concepts of mutual aid
and security that are the original driving forces behind the formation
of family corporations and use these tenets in order to facilitate
more civil, if not more amicable, settlements of family corporate
disputes.
WHEREFORE, in view of the foregoing, the petition is DENIED. The

Decision dated November 8, 2002 and the Resolution dated

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December 27, 2002, both of the Court of Appeals, are AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., Panganiban, Carpio, and Azcuna, JJ., concur.
Gala vs Ellice Agro Industrial Corp. Doctrine:
The legal right of a taxpayer to reduce the amount of what

otherwise, could be his taxes or altogether to avoid them, by means
which the law permits, could be doubted
Facts:
The spouses Manuel and Alicia Gala and their children Guia
Domingo, Ofelia Gala, Raul Gala and Rita Benson, and their
encargados (rough translation; representatives) VirgilioGaleon and
Julian Jader, formed and organized Ellice Agro Industrial Corporation
(Ellice). As payment for their subscriptions the Spouses Gala
transferred several parcles of land to Ellice. Subsequently, the
children and the encargados formed and organized another
corporation, Margo Management and Development Corporation
(Margo). The father, Manuel Gala, sold his shares in Ellice to Margo.
Subsequently, Alicia transferred her shares to Margo.
In 1990, a special stockholder’s meeting of Margo was held where a

new board of directors was elected. Raul Gala was elected
as chairman, president, and general manager. During the meeting,

the board approved the commencement of proceeding to annul
the
dispositions of Margos’s property made by Alicia Gala. Similarity, a

special stockholder’s meeting was held in Ellice. A new
board was elected and Raul Gala also became chairman,

president and GM of Ellice, Raul Gala along with the respondents
filed a case against the petitiones in the SEC for accounting and
restitution for alleged mismanagement of funds of Ellice. In turn the
petitioners filed in the SEC a petition for the nullification of the
election of directors of officers of both Margo and Ellice. Essentially,
petitioners sought to disregard the separate juridical personalities of
two corporations, namely, Ellice Agro-Industrial Corporation and
Margo Management and Development Corporation, for the
purpose of treating all property purportedly owned by said
corporations as properly solely owned by the Gala Spouses. Among
their arguments were: (1) said corporations were organized for
purpose of exempting the property the property of the Gala Spouses
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from the coverage of land reform laws, and (2) the two corporations
were meant to be used as mere tools for the avoidance of estate
taxes.
Issue:
Whether the separate juridical personalities of Ellice and Margo

could be disregard on the grounds that they were meant to be tools
to avoid land reform laws and estate taxes.
Held:
NO, a perusal of the Articles of Incorporation of Ellice and Margo

shows no sign of the allegedly illegal purposes that petitioners are
complaining of. And even assuming that the petitioner’s allegations

were true, the legality of the purposes for which the two
corporations were formed should be first threshed out in an

administrative case before the Securities and Exchange Commission.
(Doctrine of Primary Jurisdiction). Moreover, on the contention that
Ellice and Margo were meant to be tools for the avoidance of
estate taxes, the court said th
at “…the legal
right of a taxpayer to reduce the amount of what otherwise could

be his taxes or altogether avoid them, by means which the law
permits,
cannot be doubted. (citing: Liddel& Co., Inc c. CIR)”
Note: Simplified, this case is about a feud between family members

who organized two corporation. Petitioners are Alicia Gala (mother),
Guia Domingo (sister), and Rita Benson (Sister), Respondents are Raul
Gala (brother), Ellice Inc., and Margo Inc. (the family corporations).
Gala v. Ellice
GR. No. 156819, December 11, 2003
Justice Ynares-Santiago
Facts: The spouses Manuel and Alicia Gala, their children Guia
Domingo, Ofelia Gala, Raul Gala, and Rita Benson, and their
encargados Virgilio Galeon and Julian Jader formed and organized
the Ellice Agro-Industrial Corporation. The total subscribed capital
stock of the corporation was apportioned as follows:

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Manuel R. Gala 11, 700 1,170,000.00
Alicia E. Gala 23,200 2,320,000.00
Guia G. Domingo 16 1,600.00
Ofelia E. Gala 40 4,000.00
Raul E. Gala 40 4,000.00
Rita G. Benson 2 200.00
TOTAL 35,000 P3,500,000.00
As payment for their subscriptions, the Gala spouses transferred

several parcels of land located in the provinces of Quezon and
Laguna to Ellice.
In 1982, Manuel Gala, Alicia Gala and Ofelia Gala subscribed

to an additional 3,299 shares, 10,652.5 shares and 286.5 shares,
respectively.
On June 28, 1982, Manuel Gala and Alicia Gala acquired an

additional 550 shares and 281 shares, respectively.
Subsequently, on September 16, 1982, Guia Domingo, Ofelia

Gala, Raul Gala, Virgilio Galeon and Julian Jader incorporated the
Margo Management and Development Corporation (Margo). The
total subscribed capital stock of Margo was apportioned as follows:
Raul E. Gala 6,640 66,400.00
Ofelia E. Gala 6,640 66,400.00
Guia G. Domingo 6,640 66,400.00
TOTAL 20,000 P200,000.00
On November 10, 1982, Manuel Gala sold 13,314 of his shares in

Ellice to Margo.

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Alicia Gala transferred 1,000 of her shares in Ellice to a certain
Victor de Villa on March 2, 1983. That same day, de Villa transferred
said shares to Margo. A few months later, Alicia Gala transferred
854.3 of her shares to Ofelia Gala, 500 to Guia Domingo and 500 to
Raul Gala.
Years later, Manuel Gala transferred all of his remaining

holdings in Ellice, amounting to 2,164 shares, to Raul Gala.
On July 20, 1988, Alicia Gala transferred 10,000 of her shares to

Margo.
Thus, as of the date on which this case was commenced, the

stockholdings in Ellice were allocated as follows:
Margo 24,312.5 2,431,250.00
Alicia Gala 21,480.2 2,148,020.00
Raul Gala 2,704.5 270,450.00
Ofelia Gala 980.8 98,080.00
Gina Domingo 516 51,600.00
Rita Benson 2 200.00
Adnan Alonto 1 100.00
Elias Cresencio 1 100.00
TOTAL 50,000 P5,000,000.00
On June 23, 1990, a special stockholders’ meeting of Margo

was held, where a new board of directors was elected. That same
day, the newly-elected board elected a new set of officers. Raul
Gala was elected as chairman, president and general manager.
During the meeting, the board approved several actions, including
the commencement of proceedings to annul certain dispositions of
Margo’s property made by Alicia Gala. The board also resolved to
change the name of the corporation to MRG Management and
Development Corporation.
Similarly, a special stockholders’ meeting of Ellice was held on

August 24, 1990 to elect a new board of directors. In the ensuing

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organizational meeting later that day, a new set of corporate
officers was elected. Likewise, Raul Gala was elected as chairman,
Ellice filed against Gala with the Securities and Exchange

Commission (SEC) a petition for the appointment of a management
committee or receiver, accounting and restitution by the directors
and officers, and the dissolution of Ellice Agro-Industrial Corporation
for alleged mismanagement, diversion of funds, financial losses and
the dissipation of assets. The petition was amended to delete the
prayer for the appointment of a management committee or
receiver and for the dissolution of Ellice. Additionally, respondents
prayed that they be allowed to inspect the corporate books and
documents of Ellice.
In turn, Gala initiated a complaint against Ellice praying for,

among others, the nullification of the elections of directors and
officers of both Margo Management and Development Corporation
and Ellice Industrial Corporation; the nullification of all board
resolutions issued by Margo from June 23, 1990 up to the present and
all board resolutions issued byEllice from August 24, 1990 up to the
present; and the return of all titles to real property in the name of
Margo and Ellice, as well as all corporate papers and records of
both Margo and Ellicewhich are in the possession and control of the
respondents.
The two cases were consolidated.
Meanwhile, during the pendency of the SEC cases, the shares of

stock of Alicia and Ofelia Gala in Ellice were levied and sold at
public auction to satisfy a judgment rendered against them by he
Regional Trial Court of Makati.
SEC rendered a Joint Decision in SEC Cases dismissing the petition

of Ellice and ruling in favor of Gala.
Respondents appealed to the SEC En Banc, which reversed and

set aside the decision of SEC
Issue: WON the lower court erre in ruling that the organization of
Ellice and Margo was not illegeal for depriving Rita G. Benson, one of
the petitioners, her legitime.
Held: In an attempt to bolster their theory that the organization of

the respondent corporations was illegal, the petitioners aver that the
legitime pertaining to petitioners Rita G. Benson and Guia G.
Domingo from the estate of their father had been subject to
unwarranted reductions as a result thereof. In sum, they claim that

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stockholdings in Ellice which the late Manuel Gala had assigned to
them were insufficient to cover theirlegitimes, since Benson was only
given two shares while Domingo received only sixteen shares out of
a total number of 35,000 issued shares.
The reliefs sought by petitioners should have been raised in a

proceeding for settlement of estate, rather than in the present intra-
corporate controversy. If they are genuinely interested in securing
that part of their late father’s property which has been reserved for
them in their capacity as compulsory heirs, then they should simply
exercise their actio ad supplendam legitimam, or their right of
completion of legitime. Such relief must be sought during the
distribution and partition stage of a case for the settlement of the
estate of Manuel Gala, filed before a court which has taken
jurisdiction over the settlement of said estate
R & E Transport, Inc. vs. Latag (422 SCRA 698 [2004])
G.R. No. 155214 February 13, 2004
R & E TRANSPORT, INC., and HONORIO ENRIQUEZ, petitioners,

vs.
AVELINA P. LATAG, representing her deceased husband,
PEDRO M. LATAG, respondents.
DECISION
PANGANIBAN, J.:
Factual issues may be reviewed by the Court of Appeals (CA) when

the findings of fact of the National Labor Relations Commission
(NLRC) conflict with those of the labor arbiter. By the same token, this
Court may review factual conclusions of the CA when they are
contrary to those of the NLRC or of the labor arbiter.
The Case
Before us is a Petition for Review1 under Rule 45 of the Rules of Court,

seeking to nullify the June 3, 2002 Decision2 and the August 28, 2002
Resolution3 of the Court of Appeals in CA-GR SP No. 67998. The
appellate court disposed as follows:
"WHEREFORE, premises considered, the petition is hereby GRANTED.

The assailed Order of public respondent NLRC is SET ASIDE. The
March 14, 20014 [D]ecision of the Labor Arbiter a quo is REINSTATED." 5
The challenged Resolution denied petitioners’ Motion for

Reconsideration.

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The Factual Antecedents
The antecedents of the case are narrated by the CA as follows:
"Pedro Latag was a regular employee x x x of La Mallorca Taxi since

March 1, 1961. When La Mallorca ceased from business operations,
[Latag] x x x transferred to [petitioner] R & E Transport, Inc. x x x. He
was receiving an average daily salary of five hundred pesos
(P500.00) as a taxi driver.
"[Latag] got sick in January 1995 and was forced to apply for partial
disability with the SSS, which was granted. When he recovered, he
reported for work in September 1998 but was no longer allowed to
continue working on account of his old age.
"Latag thus asked Felix Fabros, the administrative officer of

[petitioners], for his retirement pay pursuant to Republic Act 7641 but
he was ignored. Thus, on December 21, 1998, [Latag] filed a case for
payment of his retirement pay before the NLRC.
"Latag however died on April 30, 1999. Subsequently, his wife,

Avelina Latag, substituted him. On January 10, 2000, the Labor
Arbiter rendered a decision in favor of [Latag], the dispositive portion
of which reads:
‘WHEREFORE, judgment is hereby rendered ordering x x x LA

MALLORCA TAXI, R & E TRANSPORT, INC. and their owner/chief
executive officer HONORIO ENRIQUEZ to jointly and severally pay
MRS. AVELINA P. LATAG the sum of P277,500.00 by way of retirement
pay for her deceased husband, PEDRO M. LATAG.
‘SO ORDERED.’
"On January 21, 2000, [Respondent Avelina Latag,] with her then
counsel[,] was invited to the office of [petitioners’] counsel and was
offered the amount of P38,500.00[,] which she accepted.
[Respondent] was also asked to sign an already prepared quitclaim
and release and a joint motion to dismiss the case.
"After a day or two, [respondent] received a copy of the January 10,

2000 [D]ecision of the Labor Arbiter.
"On January 24, 2000, [petitioners] filed the quitclaim and motion to
dismiss. Thereafter, on May 23, 2000, the Labor Arbiter issued an
order, the relevant portion of which states:
‘WHEREFORE, the decision stands and the Labor Arbitration

Associate of this Office is directed to prepare the Writ of Execution in
due course.
‘SO ORDERED.’

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"On January 21, 2000, [petitioners] interposed an appeal before the
NLRC. On March 14, 2001, the latter handed down a [D]ecision[,] the
decretal portion of which provides:
‘WHEREFORE, in view of the foregoing, respondents’ Appeal is

hereby DISMISSED for failure to post a cash or surety bond, as
mandated by law.
‘SO ORDERED.’
"On April 10, 2001, [petitioners] filed a motion for reconsideration of

the above resolution. On September 28, 2001, the NLRC came out
with the assailed [D]ecision, which gave due course to the motion
for reconsideration."6 (Citations omitted)
Respondent appealed to the CA, contending that under Article 223

of the Labor Code and Section 3, Rule VI of the New Rules of
Procedure of the NLRC, an employer’s appeal of a decision
involving monetary awards may be perfected only upon the posting
of an adequate cash or surety bond.
The CA held that the labor arbiter’s May 23, 2000 Order had referred
to the earlier January 10, 2000 Decision awarding respondent
P277,500 as retirement benefit.
According to the appellate court, because petitioners’ appeal

before the NLRC was not accompanied by an appropriate cash or
surety bond, such appeal was not perfected. The CA thus ruled that
the labor arbiter’s January 10, 2000 Decision and May 23, 2000 Order
had already become final and executory.
Issues
Petitioners submit the following issues for our consideration:
"I
Whether or not the Court should respect the findings of fact [of] the
NLRC as against [those] of the labor arbiter.
"II
Whether or not, in rendering judgment in favor of petitioners, the

NLRC committed grave abuse of discretion.
"III

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Whether or not private respondent violated the rule on forum-
shopping.
"IV
Whether or not the appeal of petitioners from the Order of the labor
arbiter to the NLRC involves [a] monetary award." 8
In short, petitioners raise these issues: (1) whether the CA acted

properly when it overturned the NLRC’s factual findings; (2) whether
the rule on forum shopping was violated; and (3) whether the labor
arbiter’s Order of May 23, 2000 involved a monetary award.
The Court’s Ruling
The Petition is partly meritorious.
First Issue:
Factual Findings of the NLRC
Petitioners maintain that the CA erred in disregarding the factual

findings of the NLRC and in deciding to affirm those of the labor
arbiter. Allegedly, the NLRC findings were based on substantial
evidence, while those of the labor arbiter were groundless.
Petitioners add that the appellate court should have refrained from
tackling issues of fact and, instead, limited itself to those of
jurisdiction or grave abuse of discretion on the part of the NLRC.
The power of the CA to review NLRC decisions via a Rule 65 petition

is now a settled issue. As early as St. Martin Funeral Homes v. NLRC,9
we have definitively ruled that the proper remedy to ask for the
review of a decision of the NLRC is a special civil action for certiorari
under Rule 65 of the Rules of Court,10 and that such petition should
be filed with the CA in strict observance of the doctrine on the
hierarchy of courts.11 Moreover, it has already been explained that
under Section 9 of Batas Pambansa (BP) 129, as amended by
Republic Act 7902,12 the CA -- pursuant to the exercise of its original
jurisdiction over petitions for certiorari -- was specifically given the
power to pass upon the evidence, if and when necessary, to resolve
factual issues.13
Likewise settled is the rule that when supported by substantial

evidence,14 factual findings made by quasi-judicial and
administrative bodies are accorded great respect and even finality
by the courts. These findings are not infallible, though; when there is
a showing that they were arrived at arbitrarily or in disregard of the
evidence on record, they may be examined by the courts.15 Hence,
when factual findings of the NLRC are contrary to those of the labor
arbiter, the evidentiary facts may be reviewed by the appellate

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court.16 Such is the situation in the present case; thus, the doors to a
review are open.17
The very same reason that behooved the CA to review the factual
findings of the NLRC impels this Court to take its own look at the
findings of fact. Normally, the Supreme Court is not a trier of facts.18
However, since the findings of fact in the present case are
conflicting,19 it waded through the records to find out if there was
enough basis for the appellate court’s reversal of the NLRC Decision.
Number of Creditable Years of Service for Retirement Benefits
Petitioners do not dispute the fact that the late Pedro M. Latag is
entitled to retirement benefits. Rather, the bone of contention is the
number of years that he should be credited with in computing those
benefits. On the one hand, we have the findings of the labor
arbiter,20 which the CA affirmed. According to those findings, the 23
years of employment of Pedro with La Mallorca Taxi must be added
to his 14 years with R & E Transport, Inc., for a total of 37 years. On the
other, we also have the findings of the NLRC21 that Pedro must be
credited only with his service to R & E Transport, Inc., because the
evidence shows that the aforementioned companies are two
different entities.
After a careful and painstaking review of the evidence on record,

we support the NLRC’s findings. The labor arbiter’s conclusion -- that
La Mallorca Taxi and R & E Transport, Inc., are one and the same
entity -- is negated by the documentary evidence presented by
petitioners. Their evidence22 sufficiently shows the following facts: 1) R
& E Transport, Inc., was established only in 1978; 2) Honorio Enriquez,
its president, was not a stockholder of La Mallorca Taxi; and 3) none
of the stockholders of the latter company hold stocks in the former.
In the face of such evidence, which the NLRC appreciated in its
Decision, it seems that mere surmises and self-serving assertions of
Respondent Avelina Latag formed the bases for the labor arbiter’s
conclusions as follows:
"While [Pedro M. Latag] claims that he worked as taxi driver since

March 1961 since the days of the La Mallorca Taxi, which was later
renamed R & E Transport, Inc., [petitioners] limit the employment
period to 14 years.
"Resolving this matter, we note [respondent’s] ID (Annex "A", [Latag]

position paper), which appears to bear the signature of Miguel
Enriquez on the front portion and the date February 27, 1961 when [x
x x Latag] started with the company. We also note an SSS document
(Annex ‘C’) which shows that the date of initial coverage of Pedro
Latag, with SSS No. 03-0772155, is February 1961.

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"Viewed against [petitioners’] non-disclaimer [sic] that La Mallorca
preceded R & E Taxi, Inc.[;] x x x that both entities were/are owned
by the Enriquez family, with [petitioner] Honorio [Enriquez] as the
latter’s President[; and] x x x that La Mallorca was a different entity
(page 2, [petitioners’] position paper), we are of the conclusion that
[Latag’s] stint with the Enriquez family dated back since February
1961 and thus, he should be entitled to retirement benefits for 37
years, as of the date of the filing of this case on December 12,
1998."23
Furthermore, basic is the rule that the corporate veil may be pierced
only if it becomes a shield for fraud, illegality or inequity committed
against a third person.24 We have thus cautioned against the
inordinate application of this doctrine. In Philippine National Bank v.
Andrada Electric & Engineering Company,25 we said:
"x x x [A]ny application of the doctrine of piercing the corporate veil

should be done with caution. A court should be mindful of the milieu
where it is to be applied. It must be certain that the corporate fiction
was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. The wrongdoing
must be clearly and convincingly established; it cannot be
presumed. Otherwise, an injustice that was never unintended may
result from an erroneous application.
xxx xxx xxx
"The question of whether a corporation is a mere alter ego is one of

fact. Piercing the veil of corporate fiction may be allowed only if the
following elements concur: (1) control -- not mere stock control, but
complete domination -- not only of finances, but of policy and
business practice in respect to the transaction attacked, must have
been such that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own; (2) such control
must have been used by the defendant to commit a fraud or a
wrong to perpetuate the violation of a statutory or other positive
legal duty, or a dishonest and an unjust act in contravention of
plaintiff’s legal right; and (3) the said control and breach of duty
must have proximately caused the injury or unjust loss complained
of."26
Respondent has not shown by competent evidence that one taxi

company had stock control and complete domination over the
other or vice versa. In fact, no evidence was presented to show the
alleged renaming of "La Mallorca Taxi" to "R & E Transport, Inc." The
seven-year gap between the time the former closed shop and the
date when the latter came into being also casts doubt on any
alleged intention of petitioners to commit a wrong or to violate a
statutory duty. This lacuna in the evidence compels us to reverse the

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Decision of the CA affirming the labor arbiter’s finding of fact that
the basis for computing Pedro’s retirement pay should be 37 years,
instead of only 14 years.
Validity of the Quitclaim and Waiver
As to the Quitclaim and Waiver signed by Respondent Avelina

Latag, the appellate court committed no error when it ruled that the
document was invalid and could not bar her from demanding the
benefits legally due her husband. This is not to say that all quitclaims
are invalid per se. Courts, however, are wary of schemes that
frustrate workers’ rights and benefits, and look with disfavor upon
quitclaims and waivers that bargain these away.
Courts have stepped in to annul questionable transactions,

especially where there is clear proof that a waiver, for instance, was
wangled from an unsuspecting or a gullible person; or where the
agreement or settlement was "unconscionable on its face." 27 A
quitclaim is ineffective in barring recovery of the full measure of a
worker’s rights, and the acceptance of benefits therefrom does not
amount to estoppel.28 Moreover, a quitclaim in which the
consideration is "scandalously low and inequitable" cannot be an
obstacle to the pursuit of a worker’s legitimate claim.29
Undisputably, Pedro M. Latag was credited with 14 years of service

with R & E Transport, Inc. Article 287 of the Labor Code, as amended
by Republic Act No. 7641,30 provides:
"Art. 287. Retirement. - x x x
"x x x x x x x x x
"In the absence of a retirement plan or agreement providing for

retirement benefits of employees in the establishment, an employee
upon reaching the age of sixty (60) years or more, but not beyond
sixty-five (65) years which is hereby declared the compulsory
retirement age, who has served at least five (5) years in said
establishment, may retire and shall be entitled to retirement pay
equivalent to at least one-half (1/2) month salary for every year of
service, a fraction of at least six (6) months being considered as one
whole year.
"Unless the parties provide for broader inclusions, the term one half-
month salary shall mean fifteen (15) days plus one-twelfth (1/12) of
the 13th month pay and the cash equivalent of not more than five
(5) days of service incentive leaves.
x x x x x x x x x" (Italics supplied)

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The rules implementing the New Retirement Law similarly provide the
above-mentioned formula for computing the one-half month
salary.31 Since Pedro was paid according to the "boundary" system,
he is not entitled to the 13th month32 and the service incentive pay;33
hence, his retirement pay should be computed on the sole basis of
his salary.
It is accepted that taxi drivers do not receive fixed wages, but retain
only those sums in excess of the "boundary" or fee they pay to the
owners or operators of their vehicles.34 Thus, the basis for computing
their benefits should be the average daily income. In this case, the
CA found that Pedro was earning an average of five hundred pesos
(P500) per day. We thus compute his retirement pay as follows: P500
x 15 days x 14 years of service equals P105,000. Compared with this
amount, the P38,850 he received, which represented just over one
third of what was legally due him, was unconscionable.
Second Issue:
Was There Forum Shopping?
Also assailed are the twin appeals that two different lawyers filed for
respondent before the CA. Petitioners argue that instead of
accepting her explanation, the appellate court should have
dismissed the appeals outright for violating the rule on forum
shopping.
Forum shopping is the institution of two or more actions or

proceedings grounded on the same cause, on the supposition that
one or the other court would render a favorable disposition.35 Such
act is present when there is an identity of parties, rights or causes of
action, and reliefs sought in two or more pending cases.36 It is usually
resorted to by a party against whom an adverse judgment or order
has been issued in one forum, in an attempt to seek and possibly to
get a favorable opinion in another forum, other than by an appeal
or a special civil action for certiorari.37
We find, as the CA38 did, that respondent has adequately explained

why she had filed two appeals before the appellate court. In the
August 5, 2002 Affidavit39 that she attached as Annex "A" to her
Compliance to Show Cause Order with Comment on petitioners’
Motion for Reconsideration,40 she averred that she had sought the
services of another counsel to file her Petition for certiorari before the
CA. She did so after her original counsel had asked for an extension
of time to file the Petition because of time constraints and a
tremendous workload, only to discover later that the original counsel
had filed a similar Petition.

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We cannot fault respondent for her tenacity. Besides, to disallow her
appeal would not be in keeping with the policy of labor laws41 to
shun highly technical procedural laws in the higher interest of justice.
Third Issue:
Monetary Award
Petitioners’ contention is that the labor arbiter’s January 10, 2000

Decision was supplanted by the Compromise Agreement that had
preceded the former’s official release42 to, and receipt43 by, the
parties. It appears from the records that they had entered into an
Amicable Settlement on January 21, 2000; that based on that
settlement, respondent filed a Motion to Dismiss on January 24, 2000,
before the labor arbiter who officially released on the same day his
Decision dated January 10, 2000; that upon receipt of a copy
thereof, respondent filed a Manifestation and Motion to Set Aside
the Motion to Dismiss; and that the labor arbiter subsequently
calendared the case for conference, held hearings thereon, and
required the parties to exchange positions -- by way of comments,
replies and rejoinders -- after which he handed down his May 23,
2000 Order.
Under the circumstances, the case was in effect reopened by the

proceedings held after respondent had filed her Manifestation and
Motion to Set Aside the Motion to Dismiss. This ruling is in accordance
with the fourth paragraph of Section 2, Rule V of the New Rules of
Procedure of the NLRC,44 which therefore correctly held as follows:
"x x x Thus, the further hearings conducted thereafter, to determine

the validity of complainant’s manifestation and motion are but mute
confirmation that indeed the 10 January 2000 decision in this case
has not as yet attained finality. Finally, the appealed order of 23 May
2000 itself declaring [that] ‘the decision stands and the Labor
Arbitration Associate of this office is directed to prepare the Writ of
Execution in due course,’ obviously, is a conclusion that the decision
in this case has been supplanted and rendered functus officio by the
herein parties’ acts. Thus, when the Labor Arbiter a quo found in his
appealed order that the amount of P38,850.00 is ‘unconscionable
viewed against the amount awarded in the decision,’ the same
became appealable independently of the 10 January 2000
decision, which has not attained finality, in the first place." 45
We cannot concur, however, in petitioners’ other contention that

the May 23, 2000 Order did not involve a monetary award. If the
amicable settlement between the parties had rendered the January
10, 2000 Decision functus oficio, then it follows that the monetary
award stated therein was reinstated -- by reference -- by the
aforementioned Order. The appeal from the latter should perforce

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have followed the procedural requirements under Article 223 of the
Labor Code.
As amended, this provision explicitly provides that an appeal from

the labor arbiter’s decision, award or order must be made within ten
(10) calendar days from receipt of a copy thereof by the party
intending to appeal it; and, if the judgment involves a monetary
award, an appeal by the employer may be perfected only upon the
posting of a cash or surety bond. Such cash or bond must have
been issued by a reputable bonding company duly accredited by
the NLRC in the amount equivalent to the monetary award stated in
the judgment. Sections 1, 3 and 6 of Rule VI of the New Rules of
Procedure of the NLRC implement this Article.
Indeed, this Court has repeatedly ruled that the perfection of an

appeal in the manner and within the period prescribed by law is not
only mandatory but jurisdictional, and the failure to perfect an
appeal has the effect of rendering the judgment final and
executory.46 Nonetheless, procedural lapses may be disregarded
because of fundamental considerations of substantial justice;47 or
because of the special circumstances of the case combined with its
legal merits or the amount and the issue involved.48
The requirement to post a bond to perfect an appeal has also been

relaxed in cases when the amount of the award has not been
included in the decision of the labor arbiter.49 Besides, substantial
justice will be better served in the present case by allowing
petitioners’ appeal to be threshed out on the merits,50 especially
because of serious errors in the factual conclusions of the labor
arbiter as to the award of retirement benefits.
WHEREFORE, this Petition is partly GRANTED. The Decision of the Court

of Appeals is MODIFIED by crediting Pedro M. Latag with 14 years of
service. Consequently, he is entitled to retirement pay, which is
hereby computed at P105,000 less the P38,850 which has already
been received by respondent, plus six (6) percent interest thereon
from December 21, 1998 until its full payment. No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna,

JJ., concur.
Footnotes
1 Rollo, pp. 8-33.

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2Id., pp. 36-44. Penned by Justice Eliezer R. de los Santos, with
the concurrence of acting Presiding Justice Cancio C. Garcia
and Justice Marina L. Buzon.
3 Rollo, p. 46.
4 This date should be January 10, 2000.
5 CA Decision, p. 8; rollo, p. 43.
6 Id., pp. 2-4 & 37-39.
7 The Petition was deemed submitted for decision on May 27,
2003, upon the Court’s receipt of private respondent’s
Memorandum signed by Atty. Ernesto R. Arellano. Petitioners’
Memorandum, which was signed by Atty. Roberto T. Neri, was
received by the Court on May 26, 2003.
8Petitioners’ Memorandum, p. 4; rollo, p. 193. Original in upper
case.
9 356 Phil. 811, September 16, 1998.
10 Id., p. 823.
11 Id., p. 824.
12"An Act Expanding the Jurisdiction of the Court of Appeals,
amending for the purpose Section Nine of Batas Pambansa Blg.
129, as amended, known as the Judiciary Reorganization Act
of 1980." Effective March 18, 1995.
13Tanjuan v. PPSBI, GR No. 155278, September 16, 2003, pp. 13-
14.
14Pabu-aya v. Court of Appeals, 356 SCRA 651, 657, April 18,
2001; Philtranco Service Enterprises, Inc. v. NLRC, 351 Phil. 827,
835, April 1, 1998; Philippine Airlines, Inc. v. NLRC, 344 Phil. 860,
873, September 25, 1997.
15Columbus Philippines Bus Corp. v. NLRC, 417 Phil. 81, 99,
September 7, 2001; Zarate Jr. v. Hon. Olegario, 331 Phil. 278,
288-289, October 7, 1996.
16Gonzales v. NLRC, 355 SCRA 195, 204, March 26, 2001; Aklan
Electric Cooperative Incorporated v. NLRC, 380 Phil. 225, 237,
January 25, 2000; San Jose v. NLRC, 355 Phil. 759, August 17,
1998; Manila Electric Company v. NLRC, 331 Phil. 838, 846,
October 24, 1996.
17 Asuncion v. NLRC, 414 Phil. 329, 336, July 31, 2001.

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18 Dico Jr. v. Court of Appeals, 365 Phil. 184, 193, April 14, 1999.
19 The instances in which factual issues may be resolved by this
Court are as follows: (1) the conclusion is a finding grounded
entirely on speculation, surmise and conjecture; (2) the
inference made is manifestly mistaken; (3) there is grave abuse
of discretion; (4) the judgment is based on a misapprehension
of facts; (5) the findings of fact are conflicting; (6) the Court of
Appeals goes beyond the issues of the case, and its findings
are contrary to the admissions of both appellant and
appellees; (7) the findings of fact of the Court of Appeals are
contrary to those of the trial court; (8) said findings of fact are
conclusions without citation of specific evidence on which they
are based; (9) the facts set forth in the petition as well as in the
petitioner’s main and reply briefs are not disputed by the
respondent; and (10) the findings of fact of the Court of
Appeals are premised on the supposed absence of evidence
and contradicted by the evidence on record. (Sarmiento v.
Court of Appeals, 353 Phil. 834, 846, July 2, 1998)
20Decision of Labor Arbiter Ernesto S. Dinopol dated January
10, 2000, p. 3; rollo, p.53.
21NLRC Decision dated September 28, 2001, pp. 7-8; rollo, pp.
121-122.
22See the Articles of Incorporation of La Mallorca Taxi and R & E
Transport, Inc., which was appended to the Petition for Review
on Certiorari as Annexes "N-1" and "N-2"; rollo, pp. 63-83.
23Labor Arbiter’s Decision dated January 10, 2000, pp. 3-4; rollo,
p. 52-53.
24Philippine National Bank & National Sugar Development
Corporation v. Andrada Electric & Engineering Company, 381
SCRA 244, 254, April 17, 2002; Francisco Motors Corporation v.
CA, 368 Phil. 374, 384, June 25, 1999; San Juan Structural and
Steel Fabricators, Inc. v. CA, 357 Phil. 631, 648-649, September
29, 1998.
25 Supra.
26 Id., pp. 254-255, per Panganiban, J.
27 Periquet v. NLRC, 186 SCRA 724, 731, June 22, 1990, per Cruz,
J.
28 Galicia v. NLRC, 342 Phil. 342, 348, July 28, 1997.
29Principe v. Philippine Singapore Transport Services, Inc., 176
SCRA 514, 521, August 16, 1989, per Gancayco, J.
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30 Effective July 7, 1993.
Section 5, Rule II of the Rules Implementing RA 7641 or the

31
New Retirement Law.

32Section 3 of the Rules and Regulations Implementing
Presidential Decree (PD) 851 reads:
"Section 3. Employers Covered. - The Decree shall apply to

all employers except to:
xxx xxx xxx
(d) Employers of those who are paid on purely

commission, boundary, or task basis, and those who are
paid a fixed amount for performing specific work,
irrespective of the time consumed in the performance
thereof, except where the workers are paid on piece-rate
basis in which case the employer shall be covered by this
issuance insofar as such workers are concerned.
xxx xxx x x x"

33Section 1 of Rule V, Book III of the Omnibus Rules
Implementing the Labor Code provides:
"Section 1. Coverage. - This rule shall apply to all

employees except:
xxx xxx xxx
(d) Field personnel and other employees whose

performance is unsupervised by the employer including
those who are engaged on task or contract basis, purely
commission basis, or those who are paid a fixed amount
for performing work irrespective of the time consumed in
the performance.
xxx xxx x x x"

34 Jardin v. NLRC, 383 Phil. 187, 196, February 23, 2000; Martinez
v. NLRC, 339 Phil. 176, 182, May 29, 1997; National Labor Union
v. Dinglasan, 98 Phil. 649, 652, March 3, 1956.
35Government Service Insurance System v. Bengson
Commercial Buildings, Inc., 375 SCRA 431, 440, January 31,
2002; Gatmaytan v. CA, 335 Phil. 155, 167, February 3, 1997.
36International School, Inc. (Manila) v. CA, 368 Phil. 791, 798,
June 29, 1999.
37 Cabarrus Jr. v. Bernas, 344 Phil. 802, 808, September 24, 1997.

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38 CA Resolution dated August 28, 2002; rollo, p. 46.
39 Id., pp. 128-133 & 267-272.
40 Rollo, pp. 267-275.
41See Article 221 of the Labor Code; and Section 9 of Rule V
and Section 10 of Rule VII of the New Rules of Procedure of the
NLRC.
The January 10, 2000 Decision was officially released to the

42
parties on January 24, 2000.

43Petitioners received a copy of the Decision on January 27,
2000, while respondent received her copy on January 28, 2000.
44The pertinent portion of Sec. 2, Rule V, The New Rules of the
NLRC, provides:
"Section 1. Mandatory Conciliation/Mediation

Conference. - x x x
xxx xxx xxx
"A compromise agreement entered into by the parties not

in the presence of the Labor Arbiter before whom the
case is pending shall be approved by him if, after
confronting the parties, particularly the complainants, he
is satisfied that they understand the terms and conditions
of the settlement and that it was entered into freely and
voluntarily by them and the agreement is not contrary to
law, morals, and public policy.
"A compromise agreement duly entered in accordance

with this Section shall be final and binding upon the
parties and the Order approving it shall have the effect of
a judgment rendered by the Labor Arbiter.
xxx xxx x x x"

45NLRC Decision dated September 28, 2001, pp. 6-7; rollo, pp.
120-121.
46 Philippine Airlines v. NLRC, 331 Phil. 937, 961, October 28, 1996.
47Kathy-O Enterprises v. NLRC, 350 Phil. 380, 391, March 2, 1998;
Aurora Land Projects Corp. v. NLRC, 334 Phil. 44, 59, January 2,
1997.
48 Philippine Airlines, Inc. v. NLRC, supra.

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49Taberrah v. NLRC, 342 Phil. 394, 402-403,July 29, 1997; National
Federation of Labor Unions v. Ladrido III, 196 SCRA 833, 844,
May 8, 1991.
50 Manila Mandarin Employees Union v. NLRC, 332 Phil. 354, 364,
November 19, 1996; Oriental Mindoro Electric Cooperative, Inc.
v. NLRC, 316 Phil. 959, 968, July 31, 1995.
R&E Transport Inc. vs. Latag Case Digest
R&E Transport, Inc. & Honorio Enriquez vs. Avelina Latag
G.R. No. 155214
February 13, 2004
Facts: Pedro Latag was a regular employee of La Mallorca Taxi since

March 1, 1961. When La Mallorca ceased from business operations,
Latag transferred to R & E Transport, Inc. He was receiving an
average daily salary of five hundred pesos (P500.00) as a taxi driver.
Latag got sick in January 1995 and was forced to apply for partial
disability with the SSS, which was granted. When he recovered, he
reported for work in September 1998 but was no longer allowed to
continue working on account of his old age. Latag thus asked Felix
Fabros, the administrative officer of [petitioners], for his retirement
pay pursuant to Republic Act 7641 but he was ignored.
Thus, on December 21, 1998, Latagfiled a case for payment of his

retirement pay before the NLRC. Latag however died on April 30,
1999. Subsequently, his wife, Avelina Latag, substituted him. On
January 10, 2000, the Labor Arbiter rendered a decision in favor of
Latag.
Issue: Whether or not Latag is entitled to retirement benefits

considering she signed a waiver of quitclaim.
Ruling: The respondent is entitled to retirement benefits despite of

the waiver of quitclaims. There is no dispute the fact that the late
Pedro M. Latag is entitled to retirement benefits. Rather, the bone of
contention is the number of years that he should be credited with in

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computing those benefits. The findings of the NLRC that Pedro must
be credited only with his service to R & E Transport, Inc., because the
evidence shows that the aforementioned companies are two
different entities. After a careful and painstaking review of the
evidence on record, the court supports the NLRC's findings.
As to the Quitclaim and Waiver signed by Respondent Latag, the CA

committed no error when it ruled that the document was invalid and
could not bar her from demanding the benefits legally due her
husband. This is not say that all quitclaims are invalid per se. Courts,
however, are wary of schemes that frustrate workers' rights and
benefits, and look with disfavor upon quitclaims and waivers that
bargain these away.
Undisputably, Pedro M. Latag was credited with 14 years of service

with R & E Transport, Inc. Article 287 of the Labor Code, as amended
by Republic Act No. 7641, 30 provides: Retirement. — In the absence
of a retirement plan or agreement providing for retirement benefits
of employees in the establishment, an employee upon reaching the
age of sixty (60) years or more, but not beyond sixty-five (65) years
which is hereby declared the compulsory retirement age, who has
served at least five (5) years in said establishment, may retire and
shall be entitled to retirement pay equivalent to at least one-half
(1/2) month salary for every year of service, a fraction of at least six
(6) months being considered as one whole year. Unless the parties
provide for broader inclusions, the term one half-month salary shall
mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay
and the cash equivalent of not more than five (5) days of service
incentive leaves
The rules implementing the New Retirement Law similarly provide the
above-mentioned formula for computing the one-half month salary.
Since Pedro was paid according to the "boundary" system, he is not
entitled to the 13th month 32 and the service incentive pay; hence,
his retirement pay should be computed on the sole basis of his
salary.
It is accepted that taxi drivers do not receive fixed wages, but retain
only those sums in excess of the "boundary" or fee they pay to the
owners or operators of their vehicles. Thus, the basis for computing
their benefits should be the average daily income. In this case, the
CA found that Pedro was earning an average of five hundred pesos

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(P500) per day. We thus compute his retirement pay as follows: P500
x 15 days x 14 years of service equals P105,000.
G.R. No. 147993 July 21, 2006
ENRIQUEZ SECURITY SERVICES, INC., petitioner,

vs.
VICTOR A. CABOTAJE, respondent.
DECISION
CORONA, J.:
Sometime in January 1979, respondent Victor A. Cabotaje was

employed as a security guard by Enriquez Security and Investigation
Agency (ESIA). On November 13, 1985, petitioner Enriquez Security
Services, Inc. (ESSI) was incorporated. Respondent continued to work
as security guard in petitioner’s agency.
On reaching the age of 60 in July 1997,1 respondent applied for

retirement.
Petitioner acknowledged that respondent was entitled to retirement

benefits but opposed his claim that the computation of such
benefits must be reckoned from January 1979 when he started
working for ESIA. It claimed that the benefits must be computed only
from November 13, 1985 when ESSI was incorporated.
Respondent consequently filed a complaint in the National Labor

Relations Commission (NLRC) seeking the payment of retirement
benefits under Republic Act No. (RA) 7641, otherwise known as the
Retirement Pay Law.2
On January 15, 1999, labor arbiter Eduardo Carpio decided in

respondent’s favor:
Complainant is entitled to retirement pay. This entitlement was

not denied by respondents. xxx The computation of this benefits
shall cover the entire period of his employment from January
1979 up to July 16, 1997 based on his latest monthly salary of
P5,383.15 per the payroll sheet submitted by respondents. While
respondents claim that respondent corporation was merely
registered with the DOTC on November 13, 1985, they did not
deny however that complainant was an employee of the then
Enriquez Security and Investigation Agency, and that
complainant’s services with the said security agency up to the
present respondent corporation was uninterrupted. The
obligation of the new company involves not only to absorb the
workers of the dissolved company, but also to include the
length of service earned by the absorbed employee with their

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former employer as well. To rule otherwise would be manifestly
less than fair, certainly less than just and equitable.
xxx xxx xxx
WHEREFORE, judgment is hereby rendered ordering

respondents to pay complainant the grand total amount of
P228,581.00 representing his retirement benefits and other
money claims.
SO ORDERED.3
On appeal, the NLRC set aside the labor arbiter’s award of one-
month salary for every year of service for being excessive. It ruled
that under RA 7641, respondent Cabotaje was entitled to retirement
pay equivalent only to one-half month salary for every year of
service. Thus:
WHEREFORE, the assailed decision is hereby set aside and a

new one entered ordering respondents to pay complainant
the amount of P76,710.60 representing his retirement benefits.
SO ORDERED.4
On March 15, 2000, the NLRC denied petitioner’s motion for

reconsideration.5
On May 25, 2000, petitioner filed a special civil action for certiorari 6
with the Court of Appeals.
On September 26, 2000, the appellate court affirmed the NLRC

decision.7 It also denied the motion for reconsideration on May 8,
2001.8
Hence, this petition for review on certiorari 9 on the following issues:
1. [w]hether or not the Retirement [Pay] Law has retroactive

effect.
2. [w]hether the whole 5 days service incentive leave or just a

portion thereof equivalent to 1/12 should be included in the ½
month salary for purposes of computing the retirement pay.
3. [w]hether or not the length of service of a retired employee

in a dissolved company (his former employer) should be
included in his length of service with his last employer for
purposes of computing the retirement pay.10
We find no merit in the petition.
First. Petitioner’s contention that RA 7641 cannot be applied

retroactively has long been settled in the Guidelines for Effective

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Implementation of RA 7641 issued on October 24, 1996 by the
Department of Labor and Employment. Paragraph B of the
guidelines provides:
In reckoning the length of service, the period of employment

with the same employer before the effectivity date of the law
on January 7, 1993 should be included.
Thus, in Rufina Patis Factory v. Lucas, Sr.,11 we held:
RA 7641 is undoubtedly a social legislation. The law has been

enacted as a labor protection measure and as a curative
statute that – absent a retirement plan devised by, an
agreement with, or a voluntary grant from, an employer – can
respond, in part at least, to the financial well-being of workers
during their twilight years soon following their life of labor. There
should be little doubt about the fact that the law can apply to
labor contracts still existing at the time the statute has taken
effect, and that its benefits can be reckoned not only from the
date of the law’s enactment but retroactively to the time said
employment contracts have started. (emphasis ours)
Second. Petitioner’s insistence that only 1/12 of the service incentive

leave (SIL) should be included in the computation of the retirement
benefit has no basis. Section 1, RA 7641 provides:
x x x Unless the parties provide for broader inclusions, the term

one-half (1/2) month salary shall mean fifteen (15) days plus
one-twelfth (1/12) of the 13th month pay and the cash
equivalent of not more than five (5) days of service incentive
leave. x x x
Section 5.2, Rule II of the Implementing Rules of Book VI of the Labor

Code further clarifies what comprises the "1/2 month salary" due a
retiring employee:
5.2 Components of One-half (1/2) Month Salary. – For the

purpose of determining the minimum retirement pay due an
employee under this Rule, the term "one-half month salary" shall
include all the following:
(a) Fifteen (15) days salary of the employee based on his latest
salary rate. x x x;
(b) The cash equivalent of not more than five (5) days of
service incentive leave;
(c) One-twelfth of the 13th month pay due an employee;

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(d) All other benefits that the employer and employee may
agree upon that should be included in the computation of the
employee’s retirement pay.
The foregoing rules are clear that the whole 5 days of SIL are
included in the computation of a retiring employees’ pay.
Third. It is a well-entrenched doctrine that the Supreme Court does

not pass upon questions of fact in an appeal by certiorari under Rule
45.12 It is not our function to assess and evaluate the evidence all
over again13 where the findings of the quasi-judicial agency and the
appellate court on the matter coincide.
The consistent rulings of the labor arbiter, the NLRC and the
appellate court should be respected and petitioner’s veil of
corporate fiction should likewise be pierced. These are based on the
following uncontroverted facts: (1) respondent worked with ESIA and
petitioner ESSI; (2) his employment with both security agencies was
continuous and uninterrupted; (3) both agencies were owned by the
Enriquez family and (4) petitioner ESSI maintained its office in the
same place where ESIA previously held office.14
The attempt to make the security agencies appear as two separate

entities, when in reality they were but one, was a devise to defeat
the law and should not be permitted. Although respect for
corporate personality is the general rule, there are exceptions. In
appropriate cases, the veil of corporate fiction may be pierced as
when it is used as a means to perpetrate a social injustice or as a
vehicle to evade obligations. Petitioner was thus correctly ordered to
pay respondent’s retirement under RA 7641, computed from January
1979 up to the time he applied for retirement in July 1997.
WHEREFORE, the petition is hereby DENIED. Theassailed decision and

resolution of the Court of Appeals are AFFIRMED.
Costs against petitioner.
SO ORDERED.
Puno, Chairperson, Sandoval-Gutierrez, Azcuna, Garcia, J.J., concur.
ASJ Corp. vs. Evangelista (545 SCRA 300 [2006])

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ASJ CORPORATION and G.R. No. 158086
ANTONIO SAN JUAN,
Petitioners,
Present:
QUISUMBING, J.,
Chairperson,
CARPIO,
- versus -
CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.
SPS. EFREN & MAURA Promulgated:

EVANGELISTA,
Respondents.
February 14, 2008
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - -x
DECISION
QUISUMBING, J.:
For review on certiorari is the Decision59[1] dated April 30, 2003

of the Court of Appeals in CA-G.R. CV No. 56082, which had affirmed
the Decision60[2] dated July 8, 1996 of the Regional Trial Court (RTC)

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of Malolos, Bulacan, Branch 9 in Civil Case No. 745-M-93. The Court of
Appeals, after applying the doctrine of piercing the veil of corporate
fiction, held petitioners ASJ Corporation (ASJ Corp.) and Antonio San
Juan solidarily liable to respondents Efren and Maura Evangelista for
the unjustified retention of the chicks and egg by-products covered
by Setting Report Nos. 108 to 113.61[3]
The pertinent facts, as found by the RTC and the Court of

Appeals, are as follows:
Respondents, under the name and style of R.M. Sy Chicks, are

engaged in the large-scale business of buying broiler eggs, hatching
them, and selling their hatchlings (chicks) and egg by-products62[4]
in Bulacan and Nueva Ecija. For the incubation and hatching of
these eggs, respondents availed of the hatchery services of ASJ
Corp., a corporation duly registered in the name of San Juan and his
family.
Sometime in 1991, respondents delivered to petitioners various

quantities of eggs at an agreed service fee of 80 centavos per egg,
whether successfully hatched or not. Each delivery was reflected in
a Setting Report indicating the following: the number of eggs
delivered; the date of setting or the date the eggs were delivered
and laid out in the incubators; the date of candling or the date the
eggs, through a lighting system, were inspected and determined if
viable or capable of being hatched into chicks; and the date of
hatching, which is also the date respondents would pick-up the
chicks and by-products. Initially, the service fees were paid upon
release of the eggs and by-products to respondents. But as their
business went along, respondents delays on their payments were
tolerated by San Juan, who just carried over the balance, as there

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may be, into the next delivery, out of keeping goodwill with
respondents.
From January 13 to February 3, 1993, respondents had

delivered to San Juan a total of 101,3[50]63[5] eggs, detailed as
follows:64[6]
Date Set SR Number No. of eggs delivered Date hatched/Pick-

up date
1/13/1993 SR 108 32,566 eggs February

3, 1993
1/20/1993 SR 109 21,485 eggs February

10, 1993
1/22/1993 SR 110 7,213 eggs February

12, 1993
1/28/1993 SR 111 14,495 eggs February

18, 1993
1/30/1993 SR 112 15,346 eggs February

20, 1993
2/3/1993 SR 113 10,24[5]65[7] eggs February 24, 1993
TOTAL 101,350 eggs
On February 3, 1993, respondent Efren went to the hatchery to

pick up the chicks and by-products covered by Setting Report No.
108, but San Juan refused to release the same due to respondents
failure to settle accrued service fees on several setting reports
starting from Setting Report No. 90. Nevertheless, San Juan accepted
from Efren 10,245 eggs covered by Setting Report No. 113 and

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P15,000.0066[8] in cash as partial payment for the accrued service
fees.
On February 10, 1993, Efren returned to the hatchery to pick up

the chicks and by-products covered by Setting Report No. 109, but
San Juan again refused to release the same unless respondents fully
settle their accounts. In the afternoon of the same day, respondent
Maura, with her son Anselmo, tendered P15,000.0067[9] to San Juan,
and tried to claim the chicks and by-products. She explained that
she was unable to pay their balance because she was hospitalized
for an undisclosed ailment. San Juan accepted the P15,000.00, but
insisted on the full settlement of respondents accounts before
releasing the chicks and by-products. Believing firmly that the total
value of the eggs delivered was more than sufficient to cover the
outstanding balance, Maura promised to settle their accounts only
upon proper accounting by San Juan. San Juan disliked the idea
and threatened to impound their vehicle and detain them at the
hatchery compound if they should come back unprepared to fully
settle their accounts with him.
On February 11, 1993, respondents directed their errand boy,

Allan Blanco, to pick up the chicks and by-products covered by
Setting Report No. 110 and also to ascertain if San Juan was still
willing to settle amicably their differences. Unfortunately, San Juan
was firm in his refusal and reiterated his threats on respondents.
Fearing San Juans threats, respondents never went back to the
hatchery.
The parties tried to settle amicably their differences before

police authorities, but to no avail. Thus, respondents filed with the

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RTC an action for damages based on petitioners retention of the
chicks and by-products covered by Setting Report Nos. 108 to 113.
On July 8, 1996, the RTC ruled in favor of respondents and

made the following findings: (1) as of Setting Report No. 107,
respondents owed petitioners P102,336.80;68[10] (2) petitioners
withheld the release of the chicks and by-products covered by
Setting Report Nos. 108-113;69[11] and (3) the retention of the chicks
and by-products was unjustified and accompanied by threats and
intimidations on respondents.70[12] The RTC disregarded the
corporate fiction of ASJ Corp.,71[13] and held it and San Juan
solidarily liable to respondents for P529,644.80 as actual damages,
P100,000.00 as moral damages, P50,000.00 as attorneys fees, plus
interests and costs of suit. The decretal portion of the decision reads:
WHEREFORE, based on the evidence on record and

the laws/jurisprudence applicable thereon, judgment is
hereby rendered ordering the defendants to pay, jointly
and severally, unto the plaintiffs the amounts of
P529,644.80, representing the value of the hatched chicks
and by-products which the plaintiffs on the average
expected to derive under Setting Reports Nos. 108 to 113,
inclusive, with legal interest thereon from the date of this
judgment until the same shall have been fully paid,
P100,000.00 as moral damages and P50,000.00 as
attorneys fees, plus the costs of suit.
SO ORDERED.72[14]
Both parties appealed to the Court of Appeals. Respondents

prayed for an additional award of P76,139.00 as actual damages for

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the cost of other unreturned by-products and P1,727,687.52 as
unrealized profits, while petitioners prayed for the reversal of the trial
courts entire decision.
On April 30, 2003, the Court of Appeals denied both appeals for
lack of merit and affirmed the trial courts decision, with the slight
modification of including an award of exemplary damages of
P10,000.00 in favor of respondents. The Court of Appeals, applying
the doctrine of piercing the veil of corporate fiction, considered ASJ
Corp. and San Juan as one entity, after finding that there was no
bona fide intention to treat the corporation as separate and distinct
from San Juan and his wife Iluminada. The fallo of the Court of
Appeals decision reads:
WHEREFORE, in view of the foregoing, the Decision

appealed from is hereby AFFIRMED, with the slight
modification that exemplary damages in the amount of
P10,000.00 are awarded to plaintiffs.
Costs against defendants.
SO ORDERED.73[15]
Hence, the instant petition, assigning the following errors:
I.
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN

HOLDING, AS DID THE COURT A QUO, THAT PETITIONERS
WITHHELD/OR FAILED TO RELEASE THE CHICKS AND BY-
PRODUCTS COVERED BY SETTING REPORT NOS. 108 AND
109.
II.
THE HONORABLE COURT OF APPEALS ERRED IN ADMITTING

THE HEARSAY TESTIMONY OF MAURA EVANGELISTA
SUPPORTIVE OF ITS FINDINGS THAT PETITIONERS
WITHHELD/OR FAILED TO RELEASE THE CHICKS AND BY-

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PRODUCTS COVERED BY SETTING REPORT NOS. 108 AND
109.
III.
THE HONORABLE COURT OF APPEALS, AS DID THE COURT A

QUO, ERRED IN NOT FINDING THAT RESPONDENTS FAILED
TO RETURN TO THE PLANT TO GET THE CHICKS AND BY-
PRODUCTS COVERED BY SETTING REPORT NOS. 110, 111,
112 AND 113.
IV.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING,

AS DID THE COURT A QUO, THAT THE PIERCING OF THE VEIL
OF CORPORATE ENTITY IS JUSTIFIED, AND CONSEQUENTLY
HOLDING PETITIONERS JOINTLY AND SEVERALLY LIABLE TO
PAY RESPONDENTS THE SUM OF P529,644.[80].
V.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING

THAT PETITIONERS HAVE VIOLATED THE PRINCIPLES
ENUNCIATED IN ART. 19 OF THE NEW CIVIL CODE AND
CONSEQUENTLY IN AWARDING MORAL DAMAGES,
EXEMPLARY DAMAGES AND ATTORNEYS FEES.
VI.
THE HONORABLE COURT OF APPEALS ERRED IN NOT

AWARDING PETITIONERS COUNTERCLAIM.74[16]
Plainly, the issues submitted for resolution are: First, did the Court
of Appeals err when (a) it ruled that petitioners withheld or failed to
release the chicks and by-products covered by Setting Report Nos.
108 and 109; (b) it admitted the testimony of Maura; (c) it did not
find that it was respondents who failed to return to the hatchery to
pick up the chicks and by-products covered by Setting Report Nos.
110 to 113; and (d) it pierced the veil of corporate fiction and held
ASJ Corp. and Antonio San Juan as one entity? Second, was it

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proper to hold petitioners solidarily liable to respondents for the
payment of P529,644.80 and other damages?
In our view, there are two sets of issues that the petitioners have
raised.
The first set is factual. Petitioners seek to establish a set of facts

contrary to the factual findings of the trial and appellate courts.
However, as well established in our jurisprudence, only errors of law
are reviewable by this Court in a petition for review under Rule
45.75[17] The trial court, having had the opportunity to personally
observe and analyze the demeanor of the witnesses while testifying,
is in a better position to pass judgment on their credibility.76[18] More
importantly, factual findings of the trial court, when amply supported
by evidence on record and affirmed by the appellate court, are
binding upon this Court and will not be disturbed on appeal.77[19]
While there are exceptional circumstances78[20] when these
findings may be set aside, none of them is present in this case.
Based on the records, as well as the parties own admissions, the

following facts were uncontroverted: (1) As of Setting Report No. 107,
respondents were indebted to petitioners for P102,336.80 as accrued
service fees for Setting Report Nos. 90 to 107;79[21] (2) Petitioners,
based on San Juans own admission,80[22] did not release the chicks
and by-products covered by Setting Report Nos. 108 and 109 for
failure of respondents to fully settle their previous accounts; and (3)
Due to San Juans threats, respondents never returned to the

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hatchery to pick up those covered by Setting Report Nos. 110 to
113.81[23]
Furthermore, although no hard and fast rule can be accurately

laid down under which the juridical personality of a corporate entity
may be disregarded, the following probative factors of identity justify
the application of the doctrine of piercing the veil of corporate
fiction82[24] in this case: (1) San Juan and his wife own the bulk of
shares of ASJ Corp.; (2) The lot where the hatchery plant is located is
owned by the San Juan spouses; (3) ASJ Corp. had no other
properties or assets, except for the hatchery plant and the lot where
it is located; (4) San Juan is in complete control of the corporation;
(5) There is no bona fide intention to treat ASJ Corp. as a different
entity from San Juan; and (6) The corporate fiction of ASJ Corp. was
used by San Juan to insulate himself from the legitimate claims of
respondents, defeat public convenience, justify wrong, defend
crime, and evade a corporations subsidiary liability for
damages.83[25] These findings, being purely one of fact,84[26]
should be respected. We need not assess and evaluate the
evidence all over again where the findings of both courts on these
matters coincide.
On the second set of issues, petitioners contend that the

retention was justified and did not constitute an abuse of rights since it
was respondents who failed to comply with their obligation.
Respondents, for their part, aver that all the elements on abuse of
rights were present. They further state that despite their offer to
partially satisfy the accrued service fees, and the fact that the value

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of the chicks and by-products was more than sufficient to cover their
unpaid obligations, petitioners still chose to withhold the delivery.
The crux of the controversy, in our considered view, is simple

enough. Was petitioners retention of the chicks and by-products on
account of respondents failure to pay the corresponding service
fees unjustified? While the trial and appellate courts had the same
decisions on the matter, suffice it to say that a modification is proper.
Worth stressing, petitioners act of withholding the chicks and by-
products is entirely different from petitioners unjustifiable acts of
threatening respondents. The retention had legal basis; the threats
had none.
To begin with, petitioners obligation to deliver the chicks and

by-products corresponds to three dates: the date of hatching, the
delivery/pick-up date and the date of respondents payment. On
several setting reports, respondents made delays on their payments,
but petitioners tolerated such delay. When respondents accounts
accumulated because of their successive failure to pay on several
setting reports, petitioners opted to demand the full settlement of
respondents accounts as a condition precedent to the delivery.
However, respondents were unable to fully settle their accounts.
Respondents offer to partially satisfy their accounts is not

enough to extinguish their obligation. Under Article 124885[27] of the
Civil Code, the creditor cannot be compelled to accept partial
payments from the debtor, unless there is an express stipulation to
that effect. More so, respondents cannot substitute or apply as their
payment the value of the chicks and by-products they expect to
derive because it is necessary that all the debts be for the same
kind, generally of a monetary character. Needless to say, there was
no valid application of payment in this case.

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Furthermore, it was respondents who violated the very essence
of reciprocity in contracts, consequently giving rise to petitioners
right of retention. This case is clearly one among the species of non-
performance of a reciprocal obligation. Reciprocal obligations are
those which arise from the same cause, wherein each party is a
debtor and a creditor of the other, such that the performance of
one is conditioned upon the simultaneous fulfillment of the
other.86[28] From the moment one of the parties fulfills his obligation,
delay by the other party begins.87[29]
Since respondents are guilty of delay in the performance of

their obligations, they are liable to pay petitioners actual damages
of P183,416.80, computed as follows: From respondents outstanding
balance of P102,336.80, as of Setting Report No. 107, we add the
corresponding services fees of P81,080.0088[30] for Setting Report
Nos. 108 to 113 which had remain unpaid.
Nonetheless, San Juans subsequent acts of threatening

respondents should not remain among those treated with impunity.
Under Article 1989[31] of the Civil Code, an act constitutes an abuse
of right if the following elements are present: (a) the existence of a
legal right or duty; (b) which is exercised in bad faith; and (c) for the
sole intent of prejudicing or injuring another.90[32] Here, while
petitioners had the right to withhold delivery, the high-handed and
oppressive acts of petitioners, as aptly found by the two courts
below, had no legal leg to stand on. We need not weigh the
corresponding pieces of evidence all over again because factual

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findings of the trial court, when adopted and confirmed by the
appellate court, are binding and conclusive and will not be
disturbed on appeal.91[33]
Since it was established that respondents suffered some

pecuniary loss anchored on petitioners abuse of rights, although the
exact amount of actual damages cannot be ascertained,
temperate damages are recoverable. In arriving at a reasonable
level of temperate damages of P408,852.10, which is equivalent to
the value of the chicks and by-products, which respondents, on the
average, are expected to derive, this Court was guided by the
following factors: (a) award of temperate damages will cover only
Setting Report Nos. 109 to 113 since the threats started only on
February 10 and 11, 1993, which are the pick-up dates for Setting
Report Nos. 109 and 110; the rates of (b) 41% and (c) 17%,
representing the average rates of conversion of broiler eggs into
hatched chicks and egg by-products as tabulated by the trial court
based on available statistical data which was unrebutted by
petitioners; (d) 68,784 eggs,92[34] or the total number of broiler eggs
under Setting Report Nos. 109 to 113; and (e) P14.00 and (f) P1.20, or
the then unit market price of the chicks and by-products,
respectively.
Thus, the temperate damages of P408,852.10 is computed as

follows:
[b X (d X e) + c X (d X f)] = Temperate Damages
41% X (68,784 eggs X P14) = P394,820.16
17% X (68,784 eggs X P1.20) = P 14,031.94
[P394,820.16 + P14,031.94] = P408,852.10

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At bottom, we agree that petitioners conduct flouts the norms
of civil society and justifies the award of moral and exemplary
damages. As enshrined in civil law jurisprudence: Honeste vivere,
non alterum laedere et jus suum cuique tribuere. To live virtuously,
not to injure others and to give everyone his due.93[35] Since
exemplary damages are awarded, attorneys fees are also proper.
Article 2208 of the Civil Code provides that:
In the absence of stipulation, attorneys fees and

expenses of litigation, other than judicial costs, cannot be
recovered, except:
(1) When exemplary damages are awarded;
xxxx
WHEREFORE, the petition is PARTLY GRANTED. The Decision

dated April 30, 2003 of the Court of Appeals in CA-G.R. CV No. 56082
is hereby MODIFIED as follows:
a. Respondents are ORDERED to pay petitioners

P183,416.80 as actual damages, with interest of 6% from
the date of filing of the complaint until fully paid, plus
legal interest of 12% from the finality of this decision until
fully paid.
b. The award of actual damages of P529,644.80 in favor

of respondents is hereby REDUCED to P408,852.10, with
legal interest of 12% from the date of finality of this
judgment until fully paid.
c. The award of moral damages, exemplary damages

and attorneys fees of P100,000.00, P10,000.00,
P50,000.00, respectively, in favor of respondents is
hereby AFFIRMED.

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d. All other claims are hereby DENIED.
No pronouncement as to costs.
SO ORDERED.
Mendoza vs. Banco Real Dev. Bank (470 SCRA 86 [2005])
G.R. No. 140923. September 16, 2005
MANUEL M. MENDOZA and EDGARDO A. YOTOKO, Petitioners,

vs.
BANCO REAL DEVELOPMENT BANK (now LBC Development Bank),
Respondent.
DECISION
SANDOVAL-GUTIERREZ, J.:
Before us is a petition for review on certiorari1, assailing the Decision2

of the Court of Appeals dated September 21, 1998 in CA-G.R. No.
41544, entitled "Banco Real Development Bank, plaintiff, versus,
Technica Video Inc., et. al., Manuel M. Mendoza, et. al., defendants"
and Resolution dated December 3, 1999.
The petition alleges inter alia that on August 7, 1985, the Board of
Directors of Technical Video, Inc. (TVI) passed a Resolution
authorizing its President, Eduardo A. Yotoko, petitioner, or its General
Manager-Secretary-Treasurer, Manuel M. Mendoza, also a petitioner,
to apply for and secure a loan from the Pasay City Banco Real

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Development Bank (now LBC Development Bank), herein
respondent.
On September 11, 1985, respondent bank extended a loan of

P500,000.00 to TVI. In his capacity as General Manager, petitioner
Mendoza executed a promissory note and chattel mortgage over
195 units of Beta video machines and their equipment and
accessories belonging to TVI in favor of respondent bank.
On October 3, 1986, TVI and two other video firms, Fox Video and
Galactica Video, organized a new corporation named FGT Video
Network Inc. (FGT). It was registered with the Securities and
Exchange Commission.3 Petitioner Mendoza was the concurrent
President of FGT and Operating General Manager of TVI. Thus, the
office of TVI had to be transferred to the building of FGT for easier
monitoring of the distribution and marketing aspects of the business.
For TVI’s failure to pay its loan upon maturity, respondent bank, on
January 26, 1987, filed with the Office of the Clerk of Court of the
Regional Trial Court (RTC), Pasay City, a petition for Extra Judicial
Foreclosure and Sale of Chattel Mortgage.
However, the Sheriff’s Report/Return4 dated January 27, 1987 shows

that TVI is no longer doing business at its given address; that its
General Manager, Mr. Manuel M. Mendoza, is presently employed
at FGT Video Network with offices at the Philcemcor Bldg., No. 4
Edsa cor. Connecticut St., Greenhills, San Juan, Metro Manila; that
when asked about the whereabouts of the video machines, in the
presence of the representative of respondent bank and its counsel,
Mr. Mendoza denied any knowledge of their whereabouts; and that
action on respondent’s petition is indefinitely postponed until further
notice from the bank.
Respondent then wrote TVI demanding the surrender of the video

machines. In his letter dated February 19, 1987, petitioner Mendoza
requested the bank to give him "additional time to enable us to pay
our total obligations" and proposed a repayment scheme to start not
later than March 10, 1987.5 Still, no payment was received by the
bank. TVI simply refused and ignored the demand and kept silent as
to the whereabouts of the video machines.
Meanwhile, in a case entitled "Republic of the Philippines, plaintiff vs.

FGT Video Network Inc., Manuel Mendoza, Alfredo C. Ongyangco,
Eric Apolonio, Susan Yang ang Eduardo A. Yotoko, defendants," the
RTC, Branch 167, Pasig City issued a search warrant. The agents of
the National Bureau of Investigation (NBI) confiscated at the offices
of FGT 638 machines and equipment including the 195 Beta
machines mortgaged with respondent bank.

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On May 29, 1987, upon motion of FGT and herein petitioners, the
same court issued another Order directing the NBI to release and
return the said machines to them.
However, Columbia Pictures Inc., Orion Pictures Corp., Paramount

Pictures Corp., Universal City Studios Inc., The Walt Disney Company
and Warner Bros. filed with this Court a petition for certiorari6 assailing
the Order of the lower court.
On June 18, 1987, this Court issued a temporary restraining order

enjoining the RTC from enforcing its assailed order. The machines
and equipment were left in the custody of the NBI until the petition
for certiorari shall have been resolved with finality.
On July 13, 1990, respondent bank filed with the RTC, Branch 110,
Pasig City,7 a complaint for collection of a sum of money8 against
TVI, FGT and petitioners. Only petitioners filed their joint answer to the
complaint.
In their joint answer, petitioners specifically denied the allegations in

the complaint, raising the defense that the loan is purely a corporate
indebtedness of TVI.
On April 29, 1991, the trial court rendered a Decision, holding that:
"As by these considerations, the Court finds that TVI was the mere
alter ego or business conduit of Yotoko and Mendoza, and
additionally considering 1) that Mendoza disclaimed knowledge of
the whereabouts of the TVI mortgaged property at the time
plaintiff’s petition for extrajudicial foreclosure was being effected,
and 2) that Mendoza and Yotoko transferred the mortgaged
property to FGT without first securing plaintiff’s consent despite their
awareness that under the chattel mortgage, such consent was
necessary, the doctrine of corporate entity must be pierced and the
two must be held personally liable for TVI’s obligation to plaintiff for
said doctrine cannot be used to defeat public convenience, justify
wrong, protect fraud or avoid a legal obligation."
The dispositive portion of the trial court’s Decision reads:
"WHEREFORE, judgment is hereby rendered in favor of plaintiff and

against defendants TECHNICA VIDEO, INC., Mendoza and Yotoko,
ordering them,
1) to pay plaintiff the sum of P500,000.00 plus interests, charges and

penalties as agreed upon in the promissory note of September 11,
1985, until the same is fully paid;

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2) to pay plaintiff the sum equivalent to ten (10%) of the total unpaid
obligation as and for attorney’s fees, and
3) to pay the costs.
SO ORDERED."
Upon appeal by herein petitioners, the Court of Appeals rendered its

Decision dated September 21, 1998, affirming in toto the Decision of
the trial court. Petitioners’ motion for reconsideration was denied in
its Resolution dated December 3, 1999.
Hence, the instant petition.
The basic issue for our resolution is whether herein petitioners are
personally liable for TVI’s indebtedness of P500,000.00 with
respondent bank.
Both the trial court and the Appellate Court found that the
petitioners transferred the Beta video machines from TVI to FGT
without the consent of respondent bank. Also, upon inquiry of the
sheriff, petitioner Mendoza declined knowledge of the whereabouts
of the mortgaged video machines. Moreover, the fact that the NBI
seized the video machines from FGT glaringly shows that petitioners
transferred the same from TVI. More importantly, a comparison of the
list of video machines in the Chattel Mortgage Contract and the list
of video machines seized by the NBI from FGT shows that they have
the same serial numbers.
The courts below also found that TVI is petitioners’ mere alter ego or
business conduit. They control the affairs of TVI. Among its
stockholders or directors, they were the only ones who became
incorporators of FGT. They transferred the assets of TVI to FGT.
The general rule is that obligations incurred by a corporation, acting

through its directors, officers or employees, are its sole liabilities.
However, the veil with which the law covers and isolates the
corporation from its directors, officers or employees will be lifted
when the corporation is used by any of them as a cloak or cover for
fraud or illegality or injustice.9 Here, the fraud was committed by
petitioners to the prejudice of respondent bank. It bears emphasis
that as reported by the sheriff, TVI is no longer doing business at its
given address and its whereabouts cannot be established as yet.
Both the trial court and the Court of Appeals thus concluded that
petitioners succeeded to hide the chattels, preventing the sheriff to
foreclose the mortgage. Obviously, they acted in bad faith to
defraud respondent bank.

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In fine, we hold that the Appellate Court, in affirming the Decision of
the trial court, correctly ruled that petitioners, not TVI, are the ones
personally liable to respondent bank for the payment of the loan.
WHEREFORE, the petition is DENIED. Costs against petitioners.
SO ORDERED.
Panganiban, (Chairman), Corona, Carpio-Morales, and Garcia, JJ.,

concur.
Lafarge Cement Phils. vs. Continental Cement (443 SCRA 522

[2004])
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 Review1 under Rule 45 of the Rules of Court,

seeking to nullify the May 22, 20022 and the September 3, 2002
Orders3 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

plaintiff's motion to dismiss claims is granted. Accordingly, the
defendants' claims against Mr. Lim and Mr. Mariano captioned
as their counterclaims are dismissed."4

suigeneris
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 forum-shopping. Respondent CCC had
allegedly made the same claim it was raising in Civil Case No. Q-00-
41103 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
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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 attorney's 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 Court's
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, 20027 -- 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

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petitioners' compulsory counterclaims on Respondents Lim and
Mariano's 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 Court's 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 defendant's 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 party's 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 party's 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 Distributors13
laid down the following criteria to determine whether a
counterclaim is compulsory or permissive: 1) Are issues of fact and
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law raised by the claim and by the counterclaim largely the same?
2) Would res judicata bar a subsequent suit on defendant's claim,
absent the compulsory counterclaim rule? 3) Will substantially the
same evidence support or refute plaintiff's claim as well as
defendant's 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. CA14 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 plaintiff's 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 plaintiff's co-defendants to those
compulsory counterclaims pursuant to the Supreme Court's
decision in Sapugay v. Mobil.
xxx xxx xxx
"The plaintiff's, Gregory T. Lim and Anthony A. Mariano's 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
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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 plaintiff's, Gregory T. Lim's and Anthony A. Mariano's

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. Bautista17 involved the issue of whether the
counterclaim that sought moral, actual and exemplary damages
and attorney's 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 debtor's action,
are also compulsory counterclaim barred by the dismissal of
the debtor's 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 respondent's 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
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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 Defendant's 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
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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. IAC23 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"

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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 CCC's 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
court's treatment of the Complaint as the Answer of Cardenas to the
compulsory counterclaim and of his seeming acquiescence thereto,

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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 Mobil's 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 CCC's 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

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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 re-filed 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:
CCC's 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:

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"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. Attorney's 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

suigeneris
"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

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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 attorney's fees and
that arise from the filing of the complaint shall be considered as
special defenses and need not be answered.34
CCC's 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.

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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.
Sandoval-Gutierrez, Carpio-Morales, and Garcia, JJ., concur.

Corona, J., on leave.
Lafarge vs. Continental
GR No. L-155173
FACTS:
1. Petition for review.
2. 1998, LETTER OF INTENT EXECUTED BY BOTH PARTIES
a. LAFARGE, in behalf of Luzon Continental Land

Corporation (LCLC), agreed to purchase the cement
business of respondent Continental Cement Corporation.
b. Parties entered into a Sale and Purchase Agreement

(SPA).
c. LAFARGE aware of CONTINENTAL pending case with the

Supreme Court (Asset Privatization Trust (APT) v. Court of
Appeals and Continental Cement Corporation)
i. In anticipation of the liability SC might

adjudge against CONTINENTAL, 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 Asset Privatization
Trust V. CA/Continental.

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ii. LAFARGE refused to apply the sum to
the payment to APT, despite decision in APT vs CONTINENTAL, in
favor of CONTINENTAL and the repeated instructions of
CONTINENTAL.
1. 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, CONTINENTAL filed “Complaint with
Application for Preliminary Attachment” against
LAFARGE. Docketed as Civil Case No. Q-00-41103,
a. For LAFARGE to pay the “APT Retained Amount” referred to in

Clause 2 (c) of the SPA.
b. LAFARGE moved to dismiss the Complaint on the ground that it

violated the prohibition on forum-shopping.
i. CONTINE
NTAL had allegedly made the same claim it was raising in Civil Case
No. Q-00-41103 in another action, which involved the same parties
and which was filed earlier before the International Chamber of
Commerce.
ii. Trial
court denied LAFARGE’s Motion to Dismiss
1. LAFARGE elevated the matter to CA.
3. LAFARGE to avoid being in default and without prejudice to

the outcome of their appeal, filed Answer and Compulsory
Counterclaims ad Cautelam before the trial court in Civil Case
No. Q-00-41103 (issued for them to pay APT Retained Amount).
a. Denied the allegations in the Complaint.
b. They prayed -- by way of compulsory counterclaims

against CONTINENTAL, 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 attorney’s fees plus costs of suit.
c. Prayed that both Lim and Mariano be held “jointly and

solidarily” liable with CONTINENTAL.
d. On behalf of Lim and Mariano, CONTINENTAL moved to

dismiss petitioners’ compulsory counterclaims on grounds
that essentially constituted the very issues for resolution in
the instant Petition.

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4. RTC dismissed LAFARGE counterclaims:
a. Counterclaims against Respondents Lim and Mariano

were not compulsory.
b. Ruling in Sapugay was not applicable.
c. LAFARGE’s Answer with Counterclaims violated

procedural rules on the proper joinder of causes of action.
5. LAFARGE Motion for Reconsideration:
a. RTC admitted some errors in Order, particularly in its

pronouncement that their counterclaim had been
pleaded against Lim and Mariano only.
b. However, the RTC clarified that it was dismissing the

counterclaim as it impleaded Respondents Lim and
Mariano, even if it included CONTINENTAL.
ISSUE:
WON RTC gravely erred in refusing to rule that CONTINENTAL has no

personality to move to dismiss petitioners’ compulsory counterclaims
on Respondents Lim and Mariano’s behalf.
WON 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.”
May defendants in civil cases implead in their counterclaims persons

who were not parties to the original complaints?
HELD:
Petition 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.

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1. WON RTC gravely erred in ruling that (i) petitioners’
counterclaims (claim to rebut a previous claim) against
Respondents Lim and Mariano are not compulsory---- YES,
COUNTERCLAIM IS CONSIDERED COMPULSARY:
a. SEC 6 of Rule 6 of the Rules of Civil Procedure: “any claim

which a defending party may have against an opposing
party.”
i. Purpose of this is to avoid a multiplicity

of suits and to facilitate the disposition of the whole controversy in a
single action, such that the defendant’s demand may be
considered by a counterclaim rather than by an independent suit.
ii. LIMITATIONS:
1. Court should have jurisdiction over the subject matter of the

counterclaim
2. It could acquire jurisdiction over third parties whose presence is

essential for its consideration.
b. PERMISSIVE COUNTERCLAIM: an independent claim that

may be filed separately in another case.
i. Does not arise out of or is not necessarily

connected with the subject matter of the opposing party’s claim.
c. COMPULSORY COUNTERCLAIM: does not require for its

adjudication (consideration) the presence of third parties
of whom the court cannot acquire jurisdiction.
i. Arises out of or is necessarily connected

with the transaction or occurrence constituting the subject matter of
the opposing party’s claim
ii. Should be set up in the same action;

otherwise, they would be barred forever.
d. COMPULSORY OR PERMISSIVE?
i. Issues of fact and law raised by the

claim and by the counterclaim largely the same?
ii. Would res judicata (judged matter;

matter considered by the court and may not be pursued further) bar
a subsequent suit on defendant’s claim, absent the compulsory
counterclaim rule?
iii. Will substantially the same evidence

support or refute plaintiff’s claim as well as defendant’s

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counterclaim?
iv. Is there any logical relation between the

claim and the counterclaim?
1. YES TO ALL four questions = COMPULSORY
e. LIM AND MARIANO were the persons responsible for

making the bad faith decisions:
i. Caused 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.
ii. LIM AND MARIANO ARE LAFARGE’S

TORTFEASOR (commits a tort; tort- infringement of right leading to
legal liability)
1. They should be held jointly and solidarily liable as plaintiff’s co-

defendants to those compulsory counterclaims pursuant to the
Supreme Court’s decision in Sapugay v. Mobil.
iii. Allegations show that LAFARGE’s

counterclaims for damages were the result of LIM AND MARIANO’s
act of filing the Complaint and securing the Writ of Attachment in
bad faith.
f. CASE AT HAND: LAFARGE’s counterclaim for damages

fulfills the necessary requisites of a compulsory
counterclaim.
i. Damages as a consequence of the

action filed against them.
ii. Papa vs. Banaag:
1. “Compensatory, moral and exemplary damages, allegedly suffered

by the creditor in consequence of the debtor’s action, are also
compulsory counterclaim barred by the dismissal of the debtor’s
action. They cannot be claimed in a subsequent action by the
creditor against the debtor.”
2. “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 respondent’s own claim for damages. This is an additional
factor that characterizes petitioners’ counterclaim as compulsory.”
3. Since the counterclaim for damages is compulsory, it must be set up

in the same action; otherwise, it would be barred forever.

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4. If it is filed concurrently with the main action but in a different
proceeding, it would be abated on the ground of litis pendentia
5. If filed subsequently, it would meet the same fate on the ground of

res judicata.
2. WON RTC gravely erred in ruling that Sapugay v. Court of

Appeals is inapplicable here—YES. SAPUGAY VS. CA IS
APPLICABLE.
a. In Sapugay vs. MOBIL:
i. MOBIL filed before the trial court of

Pasig an action for replevin against SAPUGAY.
ii. Couple failed to keep Dealership

Agreement.
1. In their Answer with Counterclaim, SAPUGAY 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.
2. 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.
3. Later, SAPUGAY discovered that MOBIL had intended all along to

award the dealership to Island Air Product Corporation.
iii. SAPUGAY impleaded in the

counterclaim Mobil Philippines and its manager -- Ricardo P.
Cardenas -- both jointly and severally liable.
iv. MOBIL and Cardenas failed to respond

to their Answer to the Counterclaim, SAPUGAY filed a “Motion to
Declare Plaintiff and its Manager Ricardo P. Cardenas in Default on
Defendant’s Counterclaim.”
v. ISSUES: WON Cardenas, who was not a

party to the original action, might nevertheless be impleaded in the
counterclaim.
1. COUNTERCLAIM is defined as any claim for money or other relief

which a defending party may have against an opposing party.
2. GENERAL RULE: DEFENDANT CANNOT BRING INTO ACTION ANY

CLAIMS AGAINST PERSONS UNDER THIS EXCEPTION: ‘when the
presence of parties other than those to the original action is required
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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.’
a. 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.
b. CASE AT HAND:
i. CONTINENTAL argue that new parties

cannot be included in a counterclaim, except when no complete
relief can be had: CONTINENTAL as a corporation with a separate
[legal personality] has the juridical capacity to indemnify petitioners
even without Messrs. Lim and Mariano.
1. COURT DISAGREES.
a. Inclusion is due to 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.
ii. CONTINENTAL ASSERTS THAT 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.”
1. 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.
c. SUABILITY AND LIABILITY NOT THE SAME.
i. While the Court does rule that the

counterclaims against CONTINENTAL 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.
d. However, GENERAL RULE IN RESPONDING TO

COMPULSORY CLAIM:
i. Defendant need not file any responsive

pleading, answers, adopting allegations in the complaint, does not
apply.
ii. New party impleaded by the plaintiff in

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a compulsory counterclaim cannot be considered to have
automatically and unknowingly submitted to the jurisdiction of the
court.
iii. Court may consider possibility that new

party is unaware of counterclaims filed against it.
e. RECORDS SHOW THAT LIM AND MARIANO ARE UNAWARE

OF COUNTERCLAIMS FILED AGAINST THEM. THEREFORE,
CONTINENTAL’S MOTION TO DISMISS CANNOT BE TREATED
AS BEING FILED IN THEIR BEHALF.
3. WON RTC gravely erred in ruling that petitioners violated

the rule on joinder of causes of action. –NO. LIM AND
MARIANO ARE REAL PARTIES IN INTEREST TO COMPULSARY
COUNTERCLAIM. IT IS IMPERATIVE THEY BE JOINED.
a. Section 6. Permissive joinder of parties.
i. 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.”
b. This is for practicality and convenience; meant to

discourage duplicity and multiplicity of suits.
c. SEC 7 of Rule 3 provides:
i. “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.”
4. WON RTC gravely erred in refusing to rule that

CONTINENTAL has no personality to move to dismiss
petitioners’ compulsory counterclaims on Respondents Lim
and Mariano’s behalf. –YES.
a. COUNTERCLAIM FOR DAMAGES TO LIM AND MARIANO

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AND CONTINENTAL ARE JOINT AND SOLIDARY.
b. 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.
i. JOINT TORTFEASORS (JOINT

OBLIGATION) 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.
1. The damages can not be apportioned among them, except

among themselves.
2. 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.
3. Each obligor answers only for a part of the whole liability.
ii. SOLIDARY OR JOINT/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.
c. CASE AT HAND: LIABILITY SOUGHT AGAINST CONTINENTAL

IS FOR SPECIFIC PERFORMANCE/TORT; LIM AND
MARIANO’S TORT DOES NOT NEGATE THE SOLIDARY
NATURE FOR THE TORTUOUS ACTS ALLEGED IN
COUNTERCLAIMS.
i. Due to SOLIDARY CHARACTER of

obligation, LIM and MARIANO may avail themselves as regards to
part of the debt for which they are responsible.
ii. THEREFORE, the act of CONTINENTAL in

filing a motion to dismiss the counterclaim on grounds that pertain
only to its individual co-debtors -- is allowed.
iii. HOWEVER, SINCE MOTION TO DISMISS

COUNTERCLAIMS SHOW CONTINENTAL FILING IN BEHALF OF LIM AND
MARIANO, CONTINENTAL CANNOT BE DECLARED IN DEFAULT.
1. If issues raised in the compulsory counterclaim are so intertwined

with the allegations in the complaint, such issues are deemed
automatically joined.

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iv. Counterclaims that are only for
damages and attorney’s fees and that arise from the filing of the
complaint shall be considered as special defenses and need not be
answered.
5. CONTINENTAL’S MOTION TO DISMISS IN BEHALF OF LIM AND

MARIANO NOT ALLOWED.
a. It lacks the requisite authority to do so.
b. 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.
c. 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.
d. Summons must be served on Respondents Lim and

Mariano before the trial court can obtain jurisdiction over
them.
General Credit Corp. vs. Alsons Dev. & Investment Corp. (513
SCRA 225 [2007])
Sicam vs. Jorge, 529 SCRA 443 , G.R. No. 159617, August 08, 2007
ROBERTO C. SICAM and AGENCIA de R.C. SICAM, INC., petitioners,
vs.
LULU V. JORGE and CESAR JORGE, respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Roberto C.

Sicam, Jr. (petitioner Sicam) and Agencia de R.C. Sicam, Inc.
(petitioner corporation) seeking to annul the Decision1 of the Court

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of Appeals dated March 31, 2003, and its Resolution2 dated August
8, 2003, in CA G.R. CV No. 56633.
It appears that on different dates from September to October 1987,

Lulu V. Jorge (respondent Lulu) pawned several pieces of jewelry
with Agencia de R. C. Sicam located at No. 17 Aguirre Ave., BF
Homes Parañaque, Metro Manila, to secure a loan in the total
amount of P59,500.00.
On October 19, 1987, two armed men entered the pawnshop and
took away whatever cash and jewelry were found inside the
pawnshop vault. The incident was entered in the police blotter of
the Southern Police District, Parañaque Police Station as follows:
Investigation shows that at above TDPO, while victims were inside the
office, two (2) male unidentified persons entered into the said office
with guns drawn. Suspects(sic) (1) went straight inside and poked his
gun toward Romeo Sicam and thereby tied him with an electric wire
while suspects (sic) (2) poked his gun toward Divina Mata and
Isabelita Rodriguez and ordered them to lay (sic) face flat on the
floor. Suspects asked forcibly the case and assorted pawned
jewelries items mentioned above.
Suspects after taking the money and jewelries fled on board a

Marson Toyota unidentified plate number.3
Petitioner Sicam sent respondent Lulu a letter dated October 19,

1987 informing her of the loss of her jewelry due to the robbery
incident in the pawnshop. On November 2, 1987, respondent Lulu
then wrote a letter4 to petitioner Sicam expressing disbelief stating
that when the robbery happened, all jewelry pawned were
deposited with Far East Bank near the pawnshop since it had been
the practice that before they could withdraw, advance notice must
be given to the pawnshop so it could withdraw the jewelry from the
bank. Respondent Lulu then requested petitioner Sicam to prepare
the pawned jewelry for withdrawal on November 6, 1987 but
petitioner Sicam failed to return the jewelry.

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On September 28, 1988, respondent Lulu joined by her husband,
Cesar Jorge, filed a complaint against petitioner Sicam with the
Regional Trial Court of Makati seeking indemnification for the loss of
pawned jewelry and payment of actual, moral and exemplary
damages as well as attorney's fees. The case was docketed as Civil
Case No. 88-2035.
Petitioner Sicam filed his Answer contending that he is not the real
party-in-interest as the pawnshop was incorporated on April 20, 1987
and known as Agencia de R.C. Sicam, Inc; that petitioner
corporation had exercised due care and diligence in the
safekeeping of the articles pledged with it and could not be made
liable for an event that is fortuitous.
Respondents subsequently filed an Amended Complaint to include

petitioner corporation.
Thereafter, petitioner Sicam filed a Motion to Dismiss as far as he is

concerned considering that he is not the real party-in-interest.
Respondents opposed the same. The RTC denied the motion in an
Order dated November 8, 1989.5
After trial on the merits, the RTC rendered its Decision6 dated
January 12, 1993, dismissing respondents’ complaint as well as
petitioners’ counterclaim. The RTC held that petitioner Sicam could
not be made personally liable for a claim arising out of a corporate
transaction; that in the Amended Complaint of respondents, they
asserted that "plaintiff pawned assorted jewelries in defendants'
pawnshop"; and that as a consequence of the separate juridical
personality of a corporation, the corporate debt or credit is not the
debt or credit of a stockholder.
The RTC further ruled that petitioner corporation could not be held
liable for the loss of the pawned jewelry since it had not been
rebutted by respondents that the loss of the pledged pieces of
jewelry in the possession of the corporation was occasioned by
armed robbery; that robbery is a fortuitous event which exempts the
victim from liability for the loss, citing the case of Austria v. Court of
Appeals;7 and that the parties’ transaction was that of a pledgor
and pledgee and under Art. 1174 of the Civil Code, the pawnshop

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as a pledgee is not responsible for those events which could not be
foreseen.
Respondents appealed the RTC Decision to the CA. In a Decision

dated March 31, 2003, the CA reversed the RTC, the dispositive
portion of which reads as follows:
WHEREFORE, premises considered, the instant Appeal is GRANTED,

and the Decision dated January 12, 1993,of the Regional Trial Court
of Makati, Branch 62, is hereby REVERSED and SET ASIDE, ordering the
appellees to pay appellants the actual value of the lost jewelry
amounting to P272,000.00, and attorney' fees of P27,200.00.8
In finding petitioner Sicam liable together with petitioner corporation,

the CA applied the doctrine of piercing the veil of corporate entity
reasoning that respondents were misled into thinking that they were
dealing with the pawnshop owned by petitioner Sicam as all the
pawnshop tickets issued to them bear the words "Agencia de R.C.
Sicam"; and that there was no indication on the pawnshop tickets
that it was the petitioner corporation that owned the pawnshop
which explained why respondents had to amend their complaint
impleading petitioner corporation.
The CA further held that the corresponding diligence required of a

pawnshop is that it should take steps to secure and protect the
pledged items and should take steps to insure itself against the loss of
articles which are entrusted to its custody as it derives earnings from
the pawnshop trade which petitioners failed to do; that Austria is not
applicable to this case since the robbery incident happened in 1961
when the criminality had not as yet reached the levels attained in
the present day; that they are at least guilty of contributory
negligence and should be held liable for the loss of jewelries; and
that robberies and hold-ups are foreseeable risks in that those
engaged in the pawnshop business are expected to foresee.
The CA concluded that both petitioners should be jointly and

severally held liable to respondents for the loss of the pawned
jewelry.

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Petitioners’ motion for reconsideration was denied in a Resolution
dated August 8, 2003.
Hence, the instant petition for review with the following assignment
of errors:
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT OPENED ITSELF TO

REVERSAL, WHEN IT ADOPTED UNCRITICALLY (IN FACT IT REPRODUCED
AS ITS OWN WITHOUT IN THE MEANTIME ACKNOWLEDGING IT) WHAT
THE RESPONDENTS ARGUED IN THEIR BRIEF, WHICH ARGUMENT WAS
PALPABLY UNSUSTAINABLE.
THE COURT OF APPEALS ERRED, AND WHEN IT DID, IT OPENED ITSELF

TO REVERSAL BY THIS HONORABLE COURT, WHEN IT AGAIN ADOPTED
UNCRITICALLY (BUT WITHOUT ACKNOWLEDGING IT) THE SUBMISSIONS
OF THE RESPONDENTS IN THEIR BRIEF WITHOUT ADDING ANYTHING
MORE THERETO DESPITE THE FACT THAT THE SAID ARGUMENT OF THE
RESPONDENTS COULD NOT HAVE BEEN SUSTAINED IN VIEW OF
UNREBUTTED EVIDENCE ON RECORD.9
Anent the first assigned error, petitioners point out that the CA’s
finding that petitioner Sicam is personally liable for the loss of the
pawned jewelries is "a virtual and uncritical reproduction of the
arguments set out on pp. 5-6 of the Appellants’ brief."10
Petitioners argue that the reproduced arguments of respondents in

their Appellants’ Brief suffer from infirmities, as follows:
(1) Respondents conclusively asserted in paragraph 2 of their

Amended Complaint that Agencia de R.C. Sicam, Inc. is the present
owner of Agencia de R.C. Sicam Pawnshop, and therefore, the CA
cannot rule against said conclusive assertion of respondents;
(2) The issue resolved against petitioner Sicam was not among those
raised and litigated in the trial court; and

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(3) By reason of the above infirmities, it was error for the CA to have
pierced the corporate veil since a corporation has a personality
distinct and separate from its individual stockholders or members.
Anent the second error, petitioners point out that the CA finding on
their negligence is likewise an unedited reproduction of respondents’
brief which had the following defects:
(1) There were unrebutted evidence on record that petitioners had

observed the diligence required of them, i.e, they wanted to open a
vault with a nearby bank for purposes of safekeeping the pawned
articles but was discouraged by the Central Bank (CB) since CB rules
provide that they can only store the pawned articles in a vault inside
the pawnshop premises and no other place;
(2) Petitioners were adjudged negligent as they did not take

insurance against the loss of the pledged jelweries, but it is judicial
notice that due to high incidence of crimes, insurance companies
refused to cover pawnshops and banks because of high probability
of losses due to robberies;
(3) In Hernandez v. Chairman, Commission on Audit (179 SCRA 39,

45-46), the victim of robbery was exonerated from liability for the sum
of money belonging to others and lost by him to robbers.
Respondents filed their Comment and petitioners filed their Reply

thereto. The parties subsequently submitted their respective
Memoranda.
We find no merit in the petition.
To begin with, although it is true that indeed the CA findings were

exact reproductions of the arguments raised in respondents’
(appellants’) brief filed with the CA, we find the same to be not
fatally infirmed. Upon examination of the Decision, we find that it
expressed clearly and distinctly the facts and the law on which it is
based as required by Section 8, Article VIII of the Constitution. The
discretion to decide a case one way or another is broad enough to
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justify the adoption of the arguments put forth by one of the parties,
as long as these are legally tenable and supported by law and the
facts on records.11
Our jurisdiction under Rule 45 of the Rules of Court is limited to the

review of errors of law committed by the appellate court. Generally,
the findings of fact of the appellate court are deemed conclusive
and we are not duty-bound to analyze and calibrate all over again
the evidence adduced by the parties in the court a quo.12 This rule,
however, is not without exceptions, such as where the factual
findings of the Court of Appeals and the trial court are conflicting or
contradictory13 as is obtaining in the instant case.
However, after a careful examination of the records, we find no

justification to absolve petitioner Sicam from liability.
The CA correctly pierced the veil of the corporate fiction and

adjudged petitioner Sicam liable together with petitioner
corporation. The rule is that the veil of corporate fiction may be
pierced when made as a shield to perpetrate fraud and/or confuse
legitimate issues. 14 The theory of corporate entity was not meant to
promote unfair objectives or otherwise to shield them.15
Notably, the evidence on record shows that at the time respondent

Lulu pawned her jewelry, the pawnshop was owned by petitioner
Sicam himself. As correctly observed by the CA, in all the pawnshop
receipts issued to respondent Lulu in September 1987, all bear the
words "Agencia de R. C. Sicam," notwithstanding that the pawnshop
was allegedly incorporated in April 1987. The receipts issued after
such alleged incorporation were still in the name of "Agencia de R.
C. Sicam," thus inevitably misleading, or at the very least, creating
the wrong impression to respondents and the public as well, that the
pawnshop was owned solely by petitioner Sicam and not by a
corporation.
Even petitioners’ counsel, Atty. Marcial T. Balgos, in his letter16 dated

October 15, 1987 addressed to the Central Bank, expressly referred
to petitioner Sicam as the proprietor of the pawnshop
notwithstanding the alleged incorporation in April 1987.

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We also find no merit in petitioners' argument that since respondents
had alleged in their Amended Complaint that petitioner corporation
is the present owner of the pawnshop, the CA is bound to decide
the case on that basis.
Section 4 Rule 129 of the Rules of Court provides that an admission,

verbal or written, made by a party in the course of the proceedings
in the same case, does not require proof. The admission may be
contradicted only by showing that it was made through palpable
mistake or that no such admission was made.
Thus, the general rule that a judicial admission is conclusive upon the
party making it and does not require proof, admits of two
exceptions, to wit: (1) when it is shown that such admission was
made through palpable mistake, and (2) when it is shown that no
such admission was in fact made. The latter exception allows one to
contradict an admission by denying that he made such an
admission.17
The Committee on the Revision of the Rules of Court explained the

second exception in this wise:
x x x if a party invokes an "admission" by an adverse party, but cites

the admission "out of context," then the one making the "admission"
may show that he made no "such" admission, or that his admission
was taken out of context.
x x x that the party can also show that he made no "such admission",
i.e., not in the sense in which the admission is made to appear.
That is the reason for the modifier "such" because if the rule simply
states that the admission may be contradicted by showing that "no
admission was made," the rule would not really be providing for a
contradiction of the admission but just a denial.18 (Emphasis
supplied).
While it is true that respondents alleged in their Amended Complaint

that petitioner corporation is the present owner of the pawnshop,
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they did so only because petitioner Sicam alleged in his Answer to
the original complaint filed against him that he was not the real
party-in-interest as the pawnshop was incorporated in April 1987.
Moreover, a reading of the Amended Complaint in its entirety shows
that respondents referred to both petitioner Sicam and petitioner
corporation where they (respondents) pawned their assorted pieces
of jewelry and ascribed to both the failure to observe due diligence
commensurate with the business which resulted in the loss of their
pawned jewelry.
Markedly, respondents, in their Opposition to petitioners’ Motion to

Dismiss Amended Complaint, insofar as petitioner Sicam is
concerned, averred as follows:
Roberto C. Sicam was named the defendant in the original

complaint because the pawnshop tickets involved in this case did
not show that the R.C. Sicam Pawnshop was a corporation. In
paragraph 1 of his Answer, he admitted the allegations in paragraph
1 and 2 of the Complaint. He merely added "that defendant is not
now the real party in interest in this case."
It was defendant Sicam's omission to correct the pawnshop tickets

used in the subject transactions in this case which was the cause of
the instant action. He cannot now ask for the dismissal of the
complaint against him simply on the mere allegation that his
pawnshop business is now incorporated. It is a matter of defense, the
merit of which can only be reached after consideration of the
evidence to be presented in due course.19
Unmistakably, the alleged admission made in respondents'

Amended Complaint was taken "out of context" by petitioner Sicam
to suit his own purpose. Ineluctably, the fact that petitioner Sicam
continued to issue pawnshop receipts under his name and not under
the corporation's name militates for the piercing of the corporate
veil.
We likewise find no merit in petitioners' contention that the CA erred

in piercing the veil of corporate fiction of petitioner corporation, as it
was not an issue raised and litigated before the RTC.

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Petitioner Sicam had alleged in his Answer filed with the trial court
that he was not the real party-in-interest because since April 20,
1987, the pawnshop business initiated by him was incorporated and
known as Agencia de R.C. Sicam. In the pre-trial brief filed by
petitioner Sicam, he submitted that as far as he was concerned, the
basic issue was whether he is the real party in interest against whom
the complaint should be directed.20 In fact, he subsequently moved
for the dismissal of the complaint as to him but was not favorably
acted upon by the trial court. Moreover, the issue was squarely
passed upon, although erroneously, by the trial court in its Decision in
this manner:
x x x The defendant Roberto Sicam, Jr likewise denies liability as far as

he is concerned for the reason that he cannot be made personally
liable for a claim arising from a corporate transaction.
This Court sustains the contention of the defendant Roberto C.

Sicam, Jr. The amended complaint itself asserts that "plaintiff
pawned assorted jewelries in defendant's pawnshop." It has been
held that " as a consequence of the separate juridical personality of
a corporation, the corporate debt or credit is not the debt or credit
of the stockholder, nor is the stockholder's debt or credit that of a
corporation.21
Clearly, in view of the alleged incorporation of the pawnshop, the

issue of whether petitioner Sicam is personally liable is inextricably
connected with the determination of the question whether the
doctrine of piercing the corporate veil should or should not apply to
the case.
The next question is whether petitioners are liable for the loss of the
pawned articles in their possession.
Petitioners insist that they are not liable since robbery is a fortuitous
event and they are not negligent at all.
We are not persuaded.

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Art. 1174. Except in cases expressly specified by the law, or when it is

otherwise declared by stipulation, or when the nature of the
obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen or which,
though foreseen, were inevitable.
Fortuitous events by definition are extraordinary events not

foreseeable or avoidable. It is therefore, not enough that the event
should not have been foreseen or anticipated, as is commonly
believed but it must be one impossible to foresee or to avoid. The
mere difficulty to foresee the happening is not impossibility to foresee
the same. 22
To constitute a fortuitous event, the following elements must concur:

(a) the cause of the unforeseen and unexpected occurrence or of
the failure of the debtor to comply with obligations must be
independent of human will; (b) it must be impossible to foresee the
event that constitutes the caso fortuito or, if it can be foreseen, it
must be impossible to avoid; (c) the occurrence must be such as to
render it impossible for the debtor to fulfill obligations in a normal
manner; and, (d) the obligor must be free from any participation in
the aggravation of the injury or loss. 23
The burden of proving that the loss was due to a fortuitous event
rests on him who invokes it.24 And, in order for a fortuitous event to
exempt one from liability, it is necessary that one has committed no
negligence or misconduct that may have occasioned the loss. 25
It has been held that an act of God cannot be invoked to protect a

person who has failed to take steps to forestall the possible adverse
consequences of such a loss. One's negligence may have
concurred with an act of God in producing damage and injury to
another; nonetheless, showing that the immediate or proximate
cause of the damage or injury was a fortuitous event would not
exempt one from liability. When the effect is found to be partly the
result of a person's participation -- whether by active intervention,
neglect or failure to act -- the whole occurrence is humanized and
removed from the rules applicable to acts of God. 26

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Petitioner Sicam had testified that there was a security guard in their
pawnshop at the time of the robbery. He likewise testified that when
he started the pawnshop business in 1983, he thought of opening a
vault with the nearby bank for the purpose of safekeeping the
valuables but was discouraged by the Central Bank since pawned
articles should only be stored in a vault inside the pawnshop. The
very measures which petitioners had allegedly adopted show that to
them the possibility of robbery was not only foreseeable, but actually
foreseen and anticipated. Petitioner Sicam’s testimony, in effect,
contradicts petitioners’ defense of fortuitous event.
Moreover, petitioners failed to show that they were free from any
negligence by which the loss of the pawned jewelry may have been
occasioned.
Robbery per se, just like carnapping, is not a fortuitous event. It does
not foreclose the possibility of negligence on the part of herein
petitioners. In Co v. Court of Appeals,27 the Court held:
It is not a defense for a repair shop of motor vehicles to escape

liability simply because the damage or loss of a thing lawfully placed
in its possession was due to carnapping. Carnapping per se cannot
be considered as a fortuitous event. The fact that a thing was
unlawfully and forcefully taken from another's rightful possession, as
in cases of carnapping, does not automatically give rise to a
fortuitous event. To be considered as such, carnapping entails more
than the mere forceful taking of another's property. It must be
proved and established that the event was an act of God or was
done solely by third parties and that neither the claimant nor the
person alleged to be negligent has any participation. In
accordance with the Rules of Evidence, the burden of proving that
the loss was due to a fortuitous event rests on him who invokes it —
which in this case is the private respondent. However, other than the
police report of the alleged carnapping incident, no other evidence
was presented by private respondent to the effect that the incident
was not due to its fault. A police report of an alleged crime, to which
only private respondent is privy, does not suffice to establish the
carnapping. Neither does it prove that there was no fault on the part
of private respondent notwithstanding the parties' agreement at the
pre-trial that the car was carnapped. Carnapping does not
foreclose the possibility of fault or negligence on the part of private
respondent.28
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Just like in Co, petitioners merely presented the police report of the
Parañaque Police Station on the robbery committed based on the
report of petitioners' employees which is not sufficient to establish
robbery. Such report also does not prove that petitioners were not at
fault.
On the contrary, by the very evidence of petitioners, the CA did not

err in finding that petitioners are guilty of concurrent or contributory
negligence as provided in Article 1170 of the Civil Code, to wit:
Art. 1170. Those who in the performance of their obligations are guilty
of fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.29
Article 2123 of the Civil Code provides that with regard to

pawnshops and other establishments which are engaged in making
loans secured by pledges, the special laws and regulations
concerning them shall be observed, and subsidiarily, the provisions
on pledge, mortgage and antichresis.
The provision on pledge, particularly Article 2099 of the Civil Code,

provides that the creditor shall take care of the thing pledged with
the diligence of a good father of a family. This means that petitioners
must take care of the pawns the way a prudent person would as to
his own property.
In this connection, Article 1173 of the Civil Code further provides:
Art. 1173. The fault or negligence of the obligor consists in the

omission of that diligence which is required by the nature of the
obligation and corresponds with the circumstances of the persons,
of time and of the place. When negligence shows bad faith, the
provisions of Articles 1171 and 2201, paragraph 2 shall apply.

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If the law or contract does not state the diligence which is to be
observed in the performance, that which is expected of a good
father of a family shall be required.
We expounded in Cruz v. Gangan30 that negligence is the omission

to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human
affairs, would do; or the doing of something which a prudent and
reasonable man would not do.31 It is want of care required by the
circumstances.
A review of the records clearly shows that petitioners failed to

exercise reasonable care and caution that an ordinarily prudent
person would have used in the same situation. Petitioners were guilty
of negligence in the operation of their pawnshop business. Petitioner
Sicam testified, thus:
Court:
Q. Do you have security guards in your pawnshop?
A. Yes, your honor.
Q. Then how come that the robbers were able to enter the premises
when according to you there was a security guard?
A. Sir, if these robbers can rob a bank, how much more a pawnshop.
Q. I am asking you how were the robbers able to enter despite the
fact that there was a security guard?
A. At the time of the incident which happened about 1:00 and 2:00
o'clock in the afternoon and it happened on a Saturday and
everything was quiet in the area BF Homes Parañaque they
pretended to pawn an article in the pawnshop, so one of my

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employees allowed him to come in and it was only when it was
announced that it was a hold up.
Q. Did you come to know how the vault was opened?
A. When the pawnshop is official (sic) open your honor the

pawnshop is partly open. The combination is off.
Q. No one open (sic) the vault for the robbers?
A. No one your honor it was open at the time of the robbery.
Q. It is clear now that at the time of the robbery the vault was open
the reason why the robbers were able to get all the items pawned to
you inside the vault.
A. Yes sir.32
revealing that there were no security measures adopted by

petitioners in the operation of the pawnshop. Evidently, no sufficient
precaution and vigilance were adopted by petitioners to protect
the pawnshop from unlawful intrusion. There was no clear showing
that there was any security guard at all. Or if there was one, that he
had sufficient training in securing a pawnshop. Further, there is no
showing that the alleged security guard exercised all that was
necessary to prevent any untoward incident or to ensure that no
suspicious individuals were allowed to enter the premises. In fact, it is
even doubtful that there was a security guard, since it is quite
impossible that he would not have noticed that the robbers were
armed with caliber .45 pistols each, which were allegedly poked at
the employees.33 Significantly, the alleged security guard was not
presented at all to corroborate petitioner Sicam's claim; not one of
petitioners' employees who were present during the robbery incident
testified in court.

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Furthermore, petitioner Sicam's admission that the vault was open at
the time of robbery is clearly a proof of petitioners' failure to observe
the care, precaution and vigilance that the circumstances justly
demanded. Petitioner Sicam testified that once the pawnshop was
open, the combination was already off. Considering petitioner
Sicam's testimony that the robbery took place on a Saturday
afternoon and the area in BF Homes Parañaque at that time was
quiet, there was more reason for petitioners to have exercised
reasonable foresight and diligence in protecting the pawned
jewelries. Instead of taking the precaution to protect them, they let
open the vault, providing no difficulty for the robbers to cart away
the pawned articles.
We, however, do not agree with the CA when it found petitioners

negligent for not taking steps to insure themselves against loss of the
pawned jewelries.
Under Section 17 of Central Bank Circular No. 374, Rules and

Regulations for Pawnshops, which took effect on July 13, 1973, and
which was issued pursuant to Presidential Decree No. 114, Pawnshop
Regulation Act, it is provided that pawns pledged must be insured,
to wit:
Sec. 17. Insurance of Office Building and Pawns- The place of

business of a pawnshop and the pawns pledged to it must be
insured against fire and against burglary as well as for the latter(sic),
by an insurance company accredited by the Insurance
Commissioner.
However, this Section was subsequently amended by CB Circular No.

764 which took effect on October 1, 1980, to wit:
Sec. 17 Insurance of Office Building and Pawns – The office

building/premises and pawns of a pawnshop must be insured
against fire. (emphasis supplied).
where the requirement that insurance against burglary was deleted.

Obviously, the Central Bank considered it not feasible to require
insurance of pawned articles against burglary.

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The robbery in the pawnshop happened in 1987, and considering
the above-quoted amendment, there is no statutory duty imposed
on petitioners to insure the pawned jewelry in which case it was error
for the CA to consider it as a factor in concluding that petitioners
were negligent.
Nevertheless, the preponderance of evidence shows that petitioners

failed to exercise the diligence required of them under the Civil
Code.
The diligence with which the law requires the individual at all times to
govern his conduct varies with the nature of the situation in which he
is placed and the importance of the act which he is to perform.34
Thus, the cases of Austria v. Court of Appeals,35 Hernandez v.
Chairman, Commission on Audit36 and Cruz v. Gangan37 cited by
petitioners in their pleadings, where the victims of robbery were
exonerated from liability, find no application to the present case.
In Austria, Maria Abad received from Guillermo Austria a pendant

with diamonds to be sold on commission basis, but which Abad
failed to subsequently return because of a robbery committed upon
her in 1961. The incident became the subject of a criminal case filed
against several persons. Austria filed an action against Abad and her
husband (Abads) for recovery of the pendant or its value, but the
Abads set up the defense that the robbery extinguished their
obligation. The RTC ruled in favor of Austria, as the Abads failed to
prove robbery; or, if committed, that Maria Abad was guilty of
negligence. The CA, however, reversed the RTC decision holding
that the fact of robbery was duly established and declared the
Abads not responsible for the loss of the jewelry on account of a
fortuitous event. We held that for the Abads to be relieved from the
civil liability of returning the pendant under Art. 1174 of the Civil
Code, it would only be sufficient that the unforeseen event, the
robbery, took place without any concurrent fault on the debtor’s
part, and this can be done by preponderance of evidence; that to
be free from liability for reason of fortuitous event, the debtor must, in
addition to the casus itself, be free of any concurrent or contributory
fault or negligence.38

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We found in Austria that under the circumstances prevailing at the
time the Decision was promulgated in 1971, the City of Manila and its
suburbs had a high incidence of crimes against persons and
property that rendered travel after nightfall a matter to be
sedulously avoided without suitable precaution and protection; that
the conduct of Maria Abad in returning alone to her house in the
evening carrying jewelry of considerable value would have been
negligence per se and would not exempt her from responsibility in
the case of robbery. However we did not hold Abad liable for
negligence since, the robbery happened ten years previously; i.e.,
1961, when criminality had not reached the level of incidence
obtaining in 1971.
In contrast, the robbery in this case took place in 1987 when robbery
was already prevalent and petitioners in fact had already foreseen it
as they wanted to deposit the pawn with a nearby bank for
safekeeping. Moreover, unlike in Austria, where no negligence was
committed, we found petitioners negligent in securing their
pawnshop as earlier discussed.
In Hernandez, Teodoro Hernandez was the OIC and special

disbursing officer of the Ternate Beach Project of the Philippine
Tourism in Cavite. In the morning of July 1, 1983, a Friday, he went to
Manila to encash two checks covering the wages of the employees
and the operating expenses of the project. However for some
reason, the processing of the check was delayed and was
completed at about 3 p.m. Nevertheless, he decided to encash the
check because the project employees would be waiting for their
pay the following day; otherwise, the workers would have to wait
until July 5, the earliest time, when the main office would open. At
that time, he had two choices: (1) return to Ternate, Cavite that
same afternoon and arrive early evening; or (2) take the money with
him to his house in Marilao, Bulacan, spend the night there, and
leave for Ternate the following day. He chose the second option,
thinking it was the safer one. Thus, a little past 3 p.m., he took a
passenger jeep bound for Bulacan. While the jeep was on Epifanio
de los Santos Avenue, the jeep was held up and the money kept by
Hernandez was taken, and the robbers jumped out of the jeep and
ran. Hernandez chased the robbers and caught up with one robber
who was subsequently charged with robbery and pleaded guilty.
The other robber who held the stolen money escaped. The
Commission on Audit found Hernandez negligent because he had
not brought the cash proceeds of the checks to his office in Ternate,
Cavite for safekeeping, which is the normal procedure in the
handling of funds. We held that Hernandez was not negligent in
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deciding to encash the check and bringing it home to Marilao,
Bulacan instead of Ternate, Cavite due to the lateness of the hour
for the following reasons: (1) he was moved by unselfish motive for his
co-employees to collect their wages and salaries the following day,
a Saturday, a non-working, because to encash the check on July 5,
the next working day after July 1, would have caused discomfort to
laborers who were dependent on their wages for sustenance; and
(2) that choosing Marilao as a safer destination, being nearer, and in
view of the comparative hazards in the trips to the two places, said
decision seemed logical at that time. We further held that the fact
that two robbers attacked him in broad daylight in the jeep while it
was on a busy highway and in the presence of other passengers
could not be said to be a result of his imprudence and negligence.
Unlike in Hernandez where the robbery happened in a public utility,

the robbery in this case took place in the pawnshop which is under
the control of petitioners. Petitioners had the means to screen the
persons who were allowed entrance to the premises and to protect
itself from unlawful intrusion. Petitioners had failed to exercise
precautionary measures in ensuring that the robbers were prevented
from entering the pawnshop and for keeping the vault open for the
day, which paved the way for the robbers to easily cart away the
pawned articles.
In Cruz, Dr. Filonila O. Cruz, Camanava District Director of

Technological Education and Skills Development Authority (TESDA),
boarded the Light Rail Transit (LRT) from Sen. Puyat Avenue to
Monumento when her handbag was slashed and the contents were
stolen by an unidentified person. Among those stolen were her
wallet and the government-issued cellular phone. She then reported
the incident to the police authorities; however, the thief was not
located, and the cellphone was not recovered. She also reported
the loss to the Regional Director of TESDA, and she requested that
she be freed from accountability for the cellphone. The Resident
Auditor denied her request on the ground that she lacked the
diligence required in the custody of government property and was
ordered to pay the purchase value in the total amount of P4,238.00.
The COA found no sufficient justification to grant the request for relief
from accountability. We reversed the ruling and found that riding the
LRT cannot per se be denounced as a negligent act more so
because Cruz’s mode of transit was influenced by time and money
considerations; that she boarded the LRT to be able to arrive in
Caloocan in time for her 3 pm meeting; that any prudent and
rational person under similar circumstance can reasonably be
expected to do the same; that possession of a cellphone should not
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hinder one from boarding the LRT coach as Cruz did considering that
whether she rode a jeep or bus, the risk of theft would have also
been present; that because of her relatively low position and pay,
she was not expected to have her own vehicle or to ride a taxicab;
she did not have a government assigned vehicle; that placing the
cellphone in a bag away from covetous eyes and holding on to that
bag as she did is ordinarily sufficient care of a cellphone while
traveling on board the LRT; that the records did not show any
specific act of negligence on her part and negligence can never be
presumed.
Unlike in the Cruz case, the robbery in this case happened in

petitioners' pawnshop and they were negligent in not exercising the
precautions justly demanded of a pawnshop.
WHEREFORE, except for the insurance aspect, the Decision of the

Court of Appeals dated March 31, 2003 and its Resolution dated
August 8, 2003, are AFFIRMED.
SO ORDERED.
Ynares-Santiago, Chairperson, Chico-Nazario, Nachura, JJ., concur.
ROBERTO C. SICAM and AGENCIA de R.C. SICAM, INC. vs. SPOUSES

JORGE
G.R. No. 159617, August 8, 2007
FACTS: On different dates, Lulu Jorge pawned several pieces of

jewelry with Agencia de R. C. Sicam located in Parañaque to secure
a loan.
pawnshop vault.
On the same date, Sicam sent Lulu a letter informing her of the loss
of her jewelry due to the robbery incident in the pawnshop.
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Respondent Lulu then wroteback expressing disbelief, then
requested Sicam to prepare the pawned jewelry for withdrawal on
November 6, but Sicam failed to return the jewelry.
Lulu, joined by her husband Cesar, filed a complaint against Sicam

with the RTC of Makati seeking indemnification for the loss of
pawned jewelry and payment of AD, MD and ED as well as AF.
The RTC rendered its Decision dismissing respondents’ complaint as

well as petitioners’ counterclaim. Respondents appealed the RTC
Decision to the CA which reversed the RTC, ordering the appellees
to pay appellants the actual value of the lost jewelry and AF.
Petitioners MR denied, hence the instant petition for review on
Certiorari.
ISSUE: are the petitioners liable for the loss of the pawned articles in
their possession? (Petitioners insist that they are not liable since
robbery is a fortuitous event and they are not negligent at all.)
HELD: The Decision of the CA is AFFIRMED.
YES

Art. 1174. Except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the
obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen or which,
though foreseen, were inevitable.

the same.
To constitute a fortuitous event, the following elements must concur:
(a) the cause of the unforeseen and unexpected occurrence or of
the failure of the debtor to comply with obligations must be
independent of human will;
(b) it must be impossible to foresee the event that constitutes the
caso fortuito or, if it can be foreseen, it must be impossible to avoid;
(c) the occurrence must be such as to render it impossible for the
debtor to fulfill obligations in a normal manner; and,
(d) the obligor must be free from any participation in the
aggravation of the injury or loss.
The burden of proving that the loss was due to a fortuitous event
rests on him who invokes it. And, in order for a fortuitous event to

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exempt one from liability, it is necessary that one has committed no
negligence or misconduct that may have occasioned the loss.
Sicam had testified that there was a security guard in their
pawnshop at the time of the robbery. He likewise testified that when
he started the pawnshop business in 1983, he thought of opening a
vault with the nearby bank for the purpose of safekeeping the
valuables but was discouraged by the Central Bank since pawned
articles should only be stored in a vault inside the pawnshop. The
very measures which petitioners had allegedly adopted show that to
them the possibility of robbery was not only foreseeable, but actually
foreseen and anticipated. Sicam’s testimony, in effect, contradicts
petitioners’ defense of fortuitous event.
Moreover, petitioners failed to show that they were free from any
negligence by which the loss of the pawned jewelry may have been
occasioned.
petitioners.
Petitioners merely presented the police report of the Parañaque

Police Station on the robbery committed based on the report of
petitioners’ employees which is not sufficient to establish robbery.
Such report also does not prove that petitioners were not at fault. On
the contrary, by the very evidence of petitioners, the CA did not err
in finding that petitioners are guilty of concurrent or contributory
negligence as provided in Article 1170 of the Civil Code, to wit:
Art. 1170. Those who in the performance of their obligations are guilty
of fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.
**
Article 2123 of the Civil Code provides that with regard to
pawnshops and other establishments which are engaged in making
loans secured by pledges, the special laws and regulations
concerning them shall be observed, and subsidiarily, the provisions
on pledge, mortgage and antichresis.
The provision on pledge, particularly Article 2099 of the Civil Code,

provides that the creditor shall take care of the thing pledged with
the diligence of a good father of a family. This means that petitioners
must take care of the pawns the way a prudent person would as to
his own property.
In this connection, Article 1173 of the Civil Code further provides:

Art. 1173. The fault or negligence of the obligor consists in the
omission of that diligence which is required by the nature of the
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obligation and corresponds with the circumstances of the persons,
of time and of the place. When negligence shows bad faith, the
provisions of Articles 1171 and 2201, paragraph 2 shall apply.
If the law or contract does not state the diligence which is to be

observed in the performance, that which is expected of a good
father of a family shall be required.
We expounded in Cruz v. Gangan that negligence is the omission to

do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human
affairs, would do; or the doing of something which a prudent and
reasonable man would not do. It is want of care required by the
circumstances.

of negligence in the operation of their pawnshop business. Sicam’s
testimony revealed that there were no security measures adopted
by petitioners in the operation of the pawnshop. Evidently, no
sufficient precaution and vigilance were adopted by petitioners to
protect the pawnshop from unlawful intrusion. There was no clear
showing that there was any security guard at all. Or if there was one,
that he had sufficient training in securing a pawnshop. Further, there
is no showing that the alleged security guard exercised all that was
necessary to prevent any untoward incident or to ensure that no
suspicious individuals were allowed to enter the premises. In fact, it is
even doubtful that there was a security guard, since it is quite
impossible that he would not have noticed that the robbers were
armed with caliber .45 pistols each, which were allegedly poked at
the employees. Significantly, the alleged security guard was not
presented at all to corroborate petitioner Sicam’s claim; not one of
petitioners’ employees who were present during the robbery
incident testified in court.
Furthermore, petitioner Sicam’s admission that the vault was open at

the time of robbery is clearly a proof of petitioners’ failure to observe
the care, precaution and vigilance that the circumstances justly
demanded.
The robbery in this case happened in petitioners’ pawnshop and

they were negligent in not exercising the precautions justly
demanded of a pawnshop.
NOTES:

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We, however, do not agree with the CA when it found petitioners
negligent for not taking steps to insure themselves against loss of the
pawned jewelries.
Under Section 17 of Central Bank Circular No. 374, Rules and

Regulations for Pawnshops, which took effect on July 13, 1973, and
which was issued pursuant to Presidential Decree No. 114, Pawnshop
Regulation Act, it is provided that pawns pledged must be insured,
to wit:
Sec. 17. Insurance of Office Building and Pawns- The place of

business of a pawnshop and the pawns pledged to it must be
insured against fire and against burglary as well as for the latter(sic),
by an insurance company accredited by the Insurance
Commissioner.
However, this Section was subsequently amended by CB Circular No.
764 which took effect on October 1, 1980, to wit:
Sec. 17 Insurance of Office Building and Pawns – The office

building/premises and pawns of a pawnshop must be insured
against fire. (emphasis supplied).
where the requirement that insurance against burglary was deleted.
Obviously, the Central Bank considered it not feasible to require
insurance of pawned articles against burglary.
The robbery in the pawnshop happened in 1987, and considering

the above-quoted amendment, there is no statutory duty imposed
on petitioners to insure the pawned jewelry in which case it was error
for the CA to consider it as a factor in concluding that petitioners
were negligent.
Nevertheless, the preponderance of evidence shows that petitioners

failed to exercise the diligence required of them under the Civil
Code.
SICAM vs. JORGE

G.R. No. 159617 August 8, 2007
Facts:
Lulu Jorge pawned several pieces of jewelry with Agencia de R. C.

Sicam to secure a loan.
pawnshop vault.
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Sicam sent respondent Lulu a letter informing her of the loss of her
jewelry due to the robbery incident in the pawnshop. Respondent
Lulu expressed disbelief stating that when the robbery happened, all
jewelry pawned were deposited with Far East Bank near the
pawnshop since it had been the practice that before they could
withdraw, advance notice must be given to the pawnshop so it
could withdraw the jewelry from the bank. Respondent Lulu then
requested petitioner Sicam to prepare the pawned jewelry for
withdrawal on but petitioner Sicam failed to return the jewelry.
Respondent Lulu is seeking indemnification for the loss of pawned

jewelry and payment of damages. Petitioner is interposing the
defense of caso fortuito on the robber committed against the
pawnshop.
Issue:
WON Sicam is liable for the loss of the pawned articles in their
possession? YES
Held:

the same.
petitioners.

of negligence in the operation of their pawnshop business. No
sufficient precaution and vigilance were adopted by petitioners to
protect the pawnshop from unlawful intrusion. There was no clear
showing that there was any security guard at all.
Sicam’s admission that the vault was open at the time of robbery is
clearly a proof of petitioners’ failure to observe the care, precaution
and vigilance that the circumstances justly demanded. Petitioner
Sicam testified that once the pawnshop was open, the combination
was already off. Instead of taking the precaution to protect them,
they let open the vault, providing no difficulty for the robbers to cart
away the pawned articles.

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In contrast, the robbery in this case took place in 1987 when robbery
was already prevalent and petitioners in fact had already foreseen it
as they wanted to deposit the pawn with a nearby bank for
safekeeping. Moreover, unlike in Austria, where no negligence was
committed, we found petitioners negligent in securing their
pawnshop as earlier discussed.
Jardine Davies, Inc. vs. JRB Realty, Inc. (463 SCRA 555 [2005])
DECISION
CALLEJO, SR., J.:
Before us is a petition for review of the Decision1 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.
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 respondent’s 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 USA’s 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

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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 USA’s 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 21st
October 1981 to 7th January 1990 and P99,287.77 for repair costs of
the two service units from 7th 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 plaintiff’s

P150,000.00 attorney’s 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:
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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 attorney’s 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 court’s 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 JARDINE’S SUBSIDIARY.
II.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS

JARDINE’S MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT
DECLARING AIRCON’S OBLIGATION TO DELIVER THE TWO (2)
AIRCONDITIONING UNITS TO JRB AS HAVING BEEN SUBSTANTIALLY
COMPLIED WITH IN GOOD FAITH.
III.

JARDINE’S MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT
DECLARING JRB’S CAUSES OF ACTION AS HAVING BEEN BARRED BY
LACHES.
IV.

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JARDINE’S 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

ATTORNEY’S 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:
Plaintiff’s 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 Aircon’s letterhead of its March 13, 1980
contract with plaintiff (Exhibit "D-1"), as well as the Aircon’s
letterhead of Jardine’s Director and Senior Vice-President A.G.
Morrison and Aircon’s President in his March 26, 1981 letter to plaintiff
(Exhibit "J-2") confirming the revised agreement. Aircon’s 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 Jardine’s December 31, 1986 and 1985 Financial
Statements that "The company acts as general manager of its
subsidiaries" (Exhibit "P"). Jardine’s 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, Aircon’s 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.

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Defendant Jardine’s 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.
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
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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 corporation’s 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 Aircon’s 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
plaintiff’s 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 Aircon’s 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
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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 Letter29 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 Aircon’s
alleged representation that Fedders air conditioners with rotary

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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 respondent’s 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 respondent’s 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 schedule31
prepared by the respondent’s 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 respondent’s claims are without basis,
and cannot, therefore, be awarded.
We sustain the petitioner’s 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.

suigeneris
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 is REVERSED and SET ASIDE. The complaint of the
respondent is DISMISSED. Costs against the respondent.
SO ORDERED.
ROMEO J. CALLEJO, SR.

Associate Justice
WE CONCUR:
De Leon vs. NLRC (358 SCRA 274 [2001])
G.R. No. 112661 May 30, 2001
SIMEON DE LEON, EFREN ABAD, JAIME ABAD, JESSIE ABAY-ABAY,

ROLANDO ABIOLA, ALICIO ABISO, CELEDONIO ABSALON, JEREMIAS
ADO, VICENTE ADO, VICENTE AGGABAO, EFRAIN AGUIRRE,
ALEXANDER ALATA, ERNESTO ALCALDE, LORENZO ALCOY, ALMARIO
ALICIO, CESAR AMADOR, JOSE AMANTE, ESTELITO AMBROSIO,
VICENTE ANAPI, ARNEL ANCHETA, ROGELIO ANCHETA, WILFREDO
ANONUEVO, DOMINGO ANTIGRO, MARGARITO ANTIGRO, ROGELIO
ANZANO, ANTONIO APOSTOL, ORLANDO AQUINO, JUAN ARCALAS,
BONIFACIO ARIOLA, EDGAR ARIOLA, BONIFACIO ARMASA,
FERNANDO BACCAY, MARIO BACUD, RUPERTO BACUDAN, NILO
BALAG, ARGEL BALTAZAR, DEMETRIO BARAYOGA, FELIX BARNEDO,
FLORENTINO BARTE, SARRI BASIRUL, MARCELO BATANES, RECTO
BAYONA, VICTORIO BERMUNDO, ISMAEL BERNAL, LERIO BERSABE,
FIDEL BOSE, MARIANO BOTACION, DANILO BRAZIL, REYNALDO
BRUNIO, MARIO BUENAVENTURA, ARSENIO BULATAO, FRANCISCO
BULATAO, CARLOS CAJARA, ROSENDO CAMACHO, RUBEN
CAMACHO, NESTOR CAPILOS, DOMINGO CASTRO, MAXIMIANO DE
CASTO, EDINO CASTUERA, ZALDY CERDON, ANTONIO DERUJANO,
VICTOR CIPRIANO, JUANITO CORPUZ, ALFREDO CRUZ, FERNANDO
DELA CRUZ, MARIO CUSTOPAY, ROSAURO CUSTODIO, FRANKLIN
CUSTODIO, ALFREDO DAPROZA, RENATO DAVAG, NOEL DEMINGOY,
GENE DIESTRO, ESTEBAN DIONSON, RAMON DIZA, JEREMIAS
DOROMAL, MANUEL EDATO, FERNANDO EDORA, CONRADO
ENRIQUEZ, NICOMEDEZ ENRIQUEZ, ROLITO ESPIEL, LAURO ESPANOL,
NONITO ESPLANA, ELPIDIO ESPANOL, DIOLITO ESTOPEREZ, ODILON
EUSTE, HENRY FACTOR, VIRGILIO FAVORITO, ARISTOTLE FERNANDEZ,

suigeneris
RODOFLO FORMALEJO, JUNE FULAY, RUIS FUTOL, JESUS GABA,
RODRIGO GABAT, ROSALIA GABAT, CLEMENTE GASPAR, RODRIGO
GAVIOLA, ELLEN GODELOSON, SALVADOR GUELA, EDUARDO
GUZMAN, BALTAZAR DE GUZMAN, ZOSIMO DE GUZMAN, REYANLDO
HAGUIRING, CARLOS GINDAP, BERNARDINO GIPIT, WILFREDO
HERNANDEZ, IMMANUEL IBRING, PEPITO IMPERIO, MAGTANGGOL
INSORIO, RODELYN JACUNTO, MARIO JARAPAN, MAXIMO JIMENEZ,
ALEJANDRO JUDLOMAN, JUAN LAOAGAN, DANTE LARIOSA, ELINO
LASAGA, JOSEPH LEGASPINA, ZOSIMO LEPALAM, BENJAMIN LIBAN,
EFREN LIGUE, CLETO LINGA, ROMEO LLAGAS, LUCIO LLARENA,
ALFREDO LOPEZ, FELIX LOPEZ, SANTOS LOPEZ, RUBEN LORENZO, NILO
LUGANA, CANCIO MAATUBANG, ANTONIO MACASIO, ROBERTO
MACATUNGGAL, VIRGILIO MACALINAO, RAMON MACOY, JOSE
MAGALONA, ALEJO MANAGUELOD, DOMINGO MANALO, EMILIANO
MANALO, SULPICIO MANTALABA, EDITO MANUEL, ROMULO MANUEL,
FELINO MARANA, CARLITO MARGAJA, ROMARES MARIANO,
CERMELO MARTINEZ, MODESTO MASULIT, ALMA MATUSALEM,
FLAVIANO MEDEL, DOLCIANO MEDINA, DOLOROSA MEDINA,
NORLINDO MEJARITO, PEDRITO MENDOZA, GUARDITO MERANO,
ALBERTO DE MESA, CHARLIE MINANO, JOSE MONTEROSO, ROSENDO
MORALES, CESAR NARDA, DOMINADOR NAGAL, EDEMIO NARISMA,
DINISIO NAVASCA, REGINO NEPICON, JR., JESSIE CRIS NILO, JERWYN
ORARIO, EUGENIO ORBEGOZO, IRENEO ORGANISTA, CATALINO
OJENDRAS, WILLIAM OLIVARES, JUANITO ORIO, WILLIAM ORTIZO,
ROQUE PAL-PALLATOC, ROGELIO PAEL, LORENZO PAMINTUAN,
VIRGILIO PANTALEON, ANTONIO PAPA, EMMANUEL PASCUAL,
FRANCISCO PECUNDO, RUFINO PELICER, LEONARDO PEPITO, PABLITO
PERALTA, EDILBERTO PEREZ, LOLITO PEREZ, PELAGIO PEREZ, JR.,
FERNANDO PINEDA, CARMEN PIO, ALEJANDRO QUIAMCO, VIRGILIO
QUILALANG, JEREMEAS QUINES, ZENAIDA RAQUINE, DOMINGO
RANOLA, SABINO RANULO, EDDIE RAZONABE, ALBERTO REBAULA,
BENIGNO REGIS, PERFECTO REBOYO, VITALIANO REYES, ZOSIMO
REYES, EDWIN ROBERTS, ROBERT ROJO, GODOFREDO ROLIO,
ANATALIA ROSANTO, DOMINADOR ROSANTO, RAMON ROSANTO, SR.,
RODRIGO ROSANTO, JULIO RUBIO, DANTE RUZOL, VENUS RUZOL,
ROMULO SABINO, CIPRIANO SACUILLES, SR., PRIMO SALAZAR,
GASPAR SAMUYA, ANTONIO SANCHEZ, CLAUDIO SANCHEZ,
YOLANDA SAN LUIS, ROBERTO SANTOS, BENITO SEGUDIENTE, EDGAR
SIBAL, GREGORIO SIBAL, VALENTINO SIBAL, SONNY SINGH, ROMEO
SOMERA, EDGAR TABAQUE, BENITO TACATA, MATILDE TACATA,
ANDRESITO TALAM, ANTOLIN TALISIC, PABLO TAMAYO, JULIE TAMIEZA,
ROGELIO TAYO, CELSO TE, ENRIQUE TRIPULCA, ARMANDO TUIBEO,
NICANOR TUMAMAO, EDUARDO TUMBALE, RAMON TURIRIT,
LONGENIO UMACAM, TOLENTINO UNDAUNDO, DIOLITO VALENCIA,
ERNESTO VARGAS, BILLY VASQUEZ, TOMAS VELINA, MARCOS DE VERA,
IRENEO VILELA, NICANDRO VILLAFRANCA, DANNY VILLANUEVA,
LOLITA VITALICO, ALIPIO YGOT, AGOSTO YROMA, FELIX ZAMBALES,

suigeneris
and GUILLERMO ZIPANGAN, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION (NLRC), and FORTUNE
TOBACCO CORPORATION and/or MAGNUM INTEGRATED SERVICES,
INC. (formerly FORTUNE INTEGRATED SERVICES, INC.), respondents.
PUNO, J.:
This case stemmed from a complaint for illegal dismissal, unfair labor
practice and refund of cash bond filed by petitioners against
respondents before the Arbitration Branch of the National Labor
Relations Commission (NLRC). The petition at bar seeks the
annulment of the resolution of the NLRC dated July 5, 1993 reversing
the decision of the Labor Arbiter finding respondents liable for the
charges, and its resolution dated August 10, 1993 denying petitioners'
motion for reconsideration.
The undisputed facts are as follows:
On August 23, 1980, Fortune Tobacco Corporation (FTC) and Fortune

Integrated Services, Inc. (FISI) entered into a contract for security
services where the latter undertook to provide security guards for the
protection and security of the former. The petitioners were among
those engaged as security guards pursuant to the contract.
On February 1, 1991, the incorporators and stockholders of FISI sold

out lock, stock and barrel to a group of new stockholders by
executing for the purpose a "Deed of Sale of Shares of Stock". On the
same date, the Articles of Incorporation of FISI was amended
changing its corporate name to Magnum Integrated Services, Inc.
(MISI). A new by-laws was likewise adopted and approved by the
Securities and Exchange Commission on June 4, 1993.
On October 15, 1991, FTC terminated the contract for security

services which resulted in the displacement of some five hundred
eighty two (582) security guards assigned by FISI/MISI to FTC,
including the petitioners in this case. FTC engaged the services of
two (2) other security agencies, Asian Security Agency and Ligalig
Security Services, whose security guards were posted on October 15,
1991 to replace FISI's security guards.
Sometime in October 1991, the Fortune Tobacco Labor Union, an

affiliate of the National Federation of Labor Unions (NAFLU), and
claiming to be the bargaining agent of the security guards, sent a
Notice of Strike to FISI/MISI. On November 14, 1991, the members of
the union which include petitioners picketed the premises of FTC. The
Regional Trial Court of Pasig, however, issued a writ of injunction to
enjoin the picket.1âwphi1.nêt

suigeneris
On November 29, 1991, Simeon de Leon, together with sixteen (16)
other complainants instituted the instant case before the Arbitration
Branch of the NLRC. The complaint was later amended to allow the
inclusion of other complainants.1âwphi1.nêt
The parties submitted the following issues for resolution:
(1) Whether petitioners were illegally dismissed;
(2) Whether respondents are guilty of unfair labor practice; and
(3) Whether petitioners are entitled to the refund of their cash

bond deposited with respondent FISI.
Petitioners alleged that they were regular employees of FTC which

was also using the corporate names Fortune Integrated Services, Inc.
and Magnum Integrated Services, Inc. They were assigned to work
as security guards at the company's main factory plant, its tobacco
redrying plant and warehouse. They averred that they performed
their duties under the control and supervision of FTC's security
supervisors. Their services, however, were severed in October 1991
without valid cause and without due process. Petitioners claimed
that their dismissal was part of respondents' design to bust their
newly-organized union which sought to enforce their rights under the
Labor Standards law.1
Respondent FTC, on the other hand, maintained that there was no

employer-employee relationship between FTC and petitioners. It said
that at the time of the termination of their services, petitioners were
the employees of MISI which was a separate and distinct
corporation from FTC. Hence, petitioners had no cause of action
against FTC.2
Respondent FISI, meanwhile, denied the charge of illegal dismissal

and unfair labor practice. It argued that petitioners were not
dismissed from service but were merely placed on floating status
pending re-assignment to other posts. It alleged that the temporary
displacement of petitioners was not due to its fault but was the result
of the pretermination by FTC of the contract for security services.3
The Labor Arbiter found respondents liable for the charges. Rejecting
FTC's argument that there was no employer-employee relationship
between FTC and petitioners, he ruled that FISI and FTC should be
considered as a single employer. He observed that the two
corporations have common stockholders and they share the same
business address. In addition, FISI had no client other than FTC and
other corporations belonging to the group of companies owned by
Lucio Tan. The Labor Arbiter thus found respondents guilty of union
busting and illegal dismissal. He observed that not long after the

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stockholders of FISI sold all their stocks to a new set of stockholders,
FTC terminated the contract of security services and engaged the
services of two other security agencies. FTC did not give any reason
for the termination of the contract. The Labor Arbiter gave credence
to petitioners' theory that respondents' precipitate termination of
their employment was intended to bust their union. Consequently,
the Labor Arbiter ordered respondents to pay petitioners their
backwages and separation pay, to refund their cash bond deposit,
and to pay attorney's fees.4
On appeal, the NLRC reversed and set aside the decision of the
Labor Arbiter. First, it held that the Labor Arbiter erred in applying the
"single employer" principle and concluding that there was an
employer-employee relationship between FTC and FISI on one hand,
and petitioners on the other hand. It found that at the time of the
termination of the contract of security services on October 15, 1991,
FISI which, at that time, had been renamed Magnum Integrated
Services, Inc. had a different set of stockholders and officers from
that of FTC. They also had separate offices. The NLRC held that the
principle of "single employer" and the doctrine of piercing the
corporate veil could not apply under the circumstances. It further
ruled that the proximate cause for the displacement of petitioners
was the termination of the contract for security services by FTC on
October 15, 1991. FISI could not be faulted for the severance of
petitioners' assignment at the premises of FTC. Consequently, the
NLRC held that the charge of illegal dismissal had no basis. As
regards the charge of unfair labor practice, the NLRC found that
petitioners who had the burden of proof failed to adduce any
evidence to support their charge of unfair labor practice against
respondents. Hence, it ordered the dismissal of petitioners'
complaint.5
The petitioners filed a motion for reconsideration of the resolution of

the NLRC but the same was denied.6 Hence, this petition.
We gave due course to the petition on May 15, 1995. Thus, the ruling
in St. Martin Funeral Home vs. NLRC7 remanding all petitions for
certiorari from the decision of the NLRC to the Court of Appeals does
not apply to the case at bar.
The petition is impressed with merit.
An examination of the facts of this case reveals that there is sufficient

ground to conclude that respondents were guilty of interfering with
the right of petitioners to self-organization which constitutes unfair
labor practice under Article 248 of the Labor Code.8 Petitioners have
been employed with FISI since the 1980s and have since been
posted at the premises of FTC -- its main factory plant, its tobacco

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redrying plant and warehouse. It appears from the records that FISI,
while having its own corporate identity, was a mere instrumentality of
FTC, tasked to provide protection and security in the company
premises. The records show that the two corporations had identical
stockholders and the same business address. FISI also had no other
clients except FTC and other companies belonging to the Lucio Tan
group of companies. Moreover, the early payslips of petitioners show
that their salaries were initially paid by FTC.9 To enforce their rightful
benefits under the laws on Labor Standards, petitioners formed a
union which was later certified as bargaining agent of all the security
guards. On February 1, 1991, the stockholders of FISI sold all their
participations in the corporation to a new set of stockholders which
renamed the corporation Magnum Integrated Services, Inc. On
October 15, 1991, FTC, without any reason, preterminated its
contract of security services with MISI and contracted two other
agencies to provide security services for its premises. This resulted in
the displacement of petitioners. As MISI had no other clients, it failed
to give new assignments to petitioners. Petitioners have remained
unemployed since then. All these facts indicate a concerted effort
on the part of respondents to remove petitioners from the company
and thus abate the growth of the union and block its actions to
enforce their demands in accordance with the Labor Standards
laws. The Court held in Insular Life Assurance Co., Ltd., Employees
Association-NATU vs. Insular Life Assurance Co., Ltd.:10
"The test of whether an employer has interfered with and

coerced employees within the meaning of section (a) (1) is
whether the employer has engaged in conduct which it may
reasonably be said tends to interfere with the free exercise of
employees' rights under section 3 of the Act, and it is not
necessary that there be direct evidence that any employee
was in fact intimidated or coerced by statements of threats of
the employer if there is a reasonable inference that anti-union
conduct of the employer does have an adverse effect on self-
organization and collective bargaining."11
We are not persuaded by the argument of respondent FTC denying

the presence of an employer-employee relationship. We find that
the Labor Arbiter correctly applied the doctrine of piercing the
corporate veil to hold all respondents liable for unfair labor practice
and illegal termination of petitioners' employment. It is a
fundamental principle in corporation law that a corporation is an
entity separate and distinct from its stockholders and from other
corporations to which it is connected. However, when the concept
of separate 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 case of two
corporations, merge them into one. The separate juridical personality

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of a corporation may also be disregarded when such corporation is
a mere alter ego or business conduit of another person.12 In the case
at bar, it was shown that FISI was a mere adjunct of FTC. FISI, by
virtue of a contract for security services, provided FTC with security
guards to safeguard its premises. However, records show that FISI
and FTC have the same owners and business address, and FISI
provided security services only to FTC and other companies
belonging to the Lucio Tan group of companies. The purported sale
of the shares of the former stockholders to a new set of stockholders
who changed the name of the corporation to Magnum Integrated
Services, Inc. appears to be part of a scheme to terminate the
services of FISI's security guards posted at the premises of FTC and
bust their newly-organized union which was then beginning to
become active in demanding the company's compliance with
Labor Standards laws. Under these circumstances, the Court cannot
allow FTC to use its separate corporate personality to shield itself
from liability for illegal acts committed against its employees.
Thus, we find that the termination of petitioners' services was without

basis and therefore illegal. Under Article 279 of the Labor Code, an
employee who is unjustly dismissed from work is entitled to
reinstatement without loss of seniority rights and other privileges, and
to his full backwages, inclusive of allowances, and to his other
benefits or their monetary equivalent computed from the time his
compensation was witheld from him up to the time of his actual
reinstatement. However, if reinstatement is no longer possible, the
employer has the alternative of paying the employee his separation
pay in lieu of reinstatement.13
IN VIEW WHEREOF, the petition is GRANTED. The assailed resolutions of

the NLRC are SET ASIDE. Respondents are hereby ordered to pay
petitioners their full backwages, and to reinstate them to their former
position without loss of seniority rights and privileges, or to award
them separation pay in case reinstatement is no longer
feasible.1âwphi1.nêt
SO ORDERED.
Davide, Jr., C.J. (Chairman), Pardo and Ynares-Santiago, JJ., concur.
Kapunan J., on leave.
PCGG vs. Sandiganbayan (365 SCRA 538 [2001])

suigeneris
G.R. Nos. 119609-10 September 21, 2001
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, OCEANIC

WIRELESS NETWORK, INC., DAVID M. CASTRO, MAXIMO A. MACEREN,
CAESAR PARLADE, MELQUIADES C. GUTIERREZ, EDUARDO M.
VILLANUEVA, and EDILBERTO S. ALEJANDRO, petitioners,
vs.
HONORABLE SANDIGANBAYAN (Third Division), JOSE L. AFRICA+,
MANUEL H. NIETO, JR., ANDRES L. AFRICA, AEROCOM INVESTORS AND
MANAGERS INC., POLYGON INVESTORS AND MANAGERS, INC., and
BELGOR INVESTMENT CORPORATION, respondents.
----------------------------------------
G.R. Nos. 119623-25 September 21, 2001
OCEANIC WIRELESS NETWORK, INC., MELQUIADES C. GUTIERREZ,

MAXIMO A. MACEREN, and CAESAR O. V. PARLADE, petitioners,
vs.
HONORABLE SANDIGANBAYAN (Third Division), and JOSE L. AFRICA, +
MANUEL H. NIETO, JR., ANDRES L. AFRICA, AEROCOM INVESTORS &
MANAGERS, INC., POLYGON INVESTORS & MANAGERS, INC.,
SILANGAN INVESTORS & MANAGERS INC., and BELGOR INVESTMENT
CORPORATION, respondents.
PARDO, J.:
What is before the Court is a joint petition1 to annul and set aside the
decision2 of the Sandiganbayan dismissing petitioners’ complaint for
injunction with damages against Victor A. Africa, Jose L. Africa, +
Manuel H. Nieto, Jr. and Juan de Ocampo3 and the resolution4
denying petitioners’ motion for reconsideration.
The Facts
On August 28, 1990, the Presidential Commission on Good

Government (PCGG) sent Corporate Secretary Victor A. Africa of
Oceanic Wireless Network, Inc. (OWNI), a letter dated August 3,
1990, directing him to send notices to all stockholders of record of
OWNI for special stockholders’ meeting to be held on September 17,
1990. He was required to issue one qualifying share each to PCGG
Commissioners Maximo A. Maceren and David M. Castro from the
unissued shares and to record the transfer in the stock and transfer
book of OWNI. Failure to comply within five (5) days from receipt
thereof, Assistant Solicitor General Ramon S. Desuasido would be
designated as acting corporate secretary.
On September 17, 1990, during the special stockholders’ meeting of

OWNI, PCGG voted all the Class "A" shares in the election of

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directors and elected to the board of directors Commissioners
Maximo A. Maceren, Cesar O. V. Parlade and Melquiades C.
Gutierrez representing the Class "A" shares and Colin Brooker and
Terry Miller representing Class "B" and "C" shares. The new board of
directors then elected Commissioner Maximo A. Maceren as
Chairman of the Board, Melquiades C. Gutierrez as President,
Assistant Solicitor General Ramon S. Desuasido as Acting Corporate
Secretary and Almario P. Velasco as Acting Treasurer. None of the
registered Class "A" shareholders of OWNI was present in that special
stockholders meeting.
PCGG sequestered the Class "A" shareholding in OWNI amounting to

63,573 shares out of the total 105,955 outstanding capital stock, or
about 60% of the outstanding capital stock, and PCGG voted all the
Class "A" shares by virtue of the following writs of sequestration, to wit:
(a) The order of sequestration, dated April 11, 1986, which

covers shares of Jose L. Africa, + Roberto S. Benedicto, + Andres
L. Africa and Victor A. Africa in OWNI. PCGG Commissioner
Mary Concepcion Bautista signed the sequestration order.
(b) The writs of sequestration, dated June 15, 1988, were issued
by the PCGG against Aerocom, Polygon on August 3, 1988 or
one day after the constitutional deadline as provided in
Section 26, Article XVIII of the 1987 Constitution. Furthermore, no
court case has been filed against Aerocom, Polygon, Belgor
Investment Corp., Silangan Investors & Manages, Inc. and
OWNI.
On October 9, 1990, Corporate Secretary Victor A. Africa wrote the

Securities Exchange Commission questioning the election of PCGG
nominees as directors of the OWNI board on the ground that they
were not stockholders of OWNI.
Upon instruction of the Africa group, Atty. Victor A. Africa sent

notices to all stockholders of OWNI advising them of a special
stockholders’ meeting of OWNI to be held on January 27, 1991, at
the Holiday Inn, Manila, for the purpose of the election of directors
and other matters.
On January 27, 1991, the special stockholders’ meeting of OWNI took

place. Stockholders owning 63,573 Class "A" shares were
represented. Atty. Juan de Ocampo was designated as acting
secretary to record the minutes of the meeting. An election of
directors for Class "A" shares was held. Manuel H. Nieto, Jr., Jose L.
Africa+ and Andres L. Africa were elected as directors for Class "A"
shares for 1991 until their successors are elected and qualified. Class
"B" and "C" shareholders did not attend the meeting. No new
directors for them were elected.
suigeneris
The stockholders directed the new officers to dig deeper to the
reported OWNI-Digitel deal. Atty. Victor A. Africa, as corporate
secretary, was directed to furnish all the banks with said resolution.
The board formed an executive committee and appointed Manuel
H. Nieto, Jr. as chairman, Jose L. Africa+ as member and the
incumbent directors representing Class "B" and "C" shares.
On July 8, 1991, Manuel H. Nieto, Jr., in his capacity as OWNI

president, wrote the National Telecommunications Commission
(NTC), requesting the NTC to hold in abeyance the application, or if
granted, to withdraw and recall OWNI’s permit and frequency
allocations as the same were made by an unauthorized board.
On July 10, 1991, Manuel H. Nieto, Jr. wrote Melquiades C. Gutierrez

informing him of the new set of directors and requested for the
turnover of the management of OWNI, including all corporate
records to the new set of directors. Atty. Victor A. Africa, in
compliance with the directive of the OWNI board, wrote Traders
Royal Bank informing it of the new bank signatories.
On July 30, 1991, Manuel H. Nieto, Jr. and Jose L. Africa+ circularized
a letter to the staff and employees of OWNI informing them of the
new set of board of directors.
On July 29, 1991, PCGG, acting for itself and in behalf of OWNI, filed
with the Sandiganbayan a complaint for injunction with damages
against Victor A. Africa, Jose L. Africa, + Manuel H. Nieto, Jr. and
Juan de Ocampo.5 PCGG sought to enjoin the defendants from
interfering with PCGG’s management of OWNI and/or representing
themselves as directors.
On August 1, 1991, Jose L. Africa, + Manuel H. Nieto, Jr., Andres L.

Africa, Aerocom, Polygon, Belgor, and Silangan, including OWNI
itself, filed with the Sandiganbayan a separate petition for certiorari
and prohibition, with prayer for temporary restraining order (TRO)
and preliminary injunction, against the PCGG.6
By agreement of the parties, the Sandiganbayan jointly heard Civil

Cases Nos. 0126 and 0127.
On April 25, 1994, the Sandiganbayan promulgated a decision, the

dispositive portion of which reads:
"(1) declaring as null and void the PCGG writs of sequestration,

dated June 15, 1988 against Aerocom Investors & Managers
Inc., Polygon Investors & Managers, Inc., Silangan Investors &
Managers, Inc. and Belgor Investments, Inc. for the reason that
the said writs of sequestration were deemed automatically
lifted for failure of the PCGG to commence the necessary

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judicial action against the said corporations within the required
six-month period pursuant to Section 26 of Article XVIII of the
1987 Constitution.
"(2) declaring as null and void the order of sequestration, dated

April 11, 1986, relative to the OWNI shares owned by Jose L.
Africa and Victor A. Africa on the ground that the said order of
sequestration was signed only by PCGG Commissioner Mary
Concepcion Bautista in violation of Section 3 of the Rules &
Regulations of the PCGG requiring the signatures of at least two
Commissioners on such order of sequestration.
"(3) declaring as null and void the acts and conduct of PCGG,
its agents, nominees and representatives in reorganizing and
taking over the Board of Directors and management of OWNI,
including the acts of calling and holding a special
stockholders’ meeting of OWNI on September 17, 1990, the
election therein of OWNI chairman and directors, president,
acting secretary and acting treasurer and the appointment of
PCGG nominees as corporate officers of OWNI;
"(4) ordering all the PCGG nominees and representatives in the

present Board of Directors and management of OWNI
including but not limited to respondents Maximo A. Maceren,
David M. Castro, Cesar Parlade, Melquiades C. Gutierrez,
Eduardo M. Villanueva and Edilberto S. Alejandro as well as
their replacements, if any, to vacate their positions in OWNI;
and considering the interest of justice, respondents in Civil Case
No. 0127 are hereby ordered to REFRAIN and DESIST;
(a) from further implementing /acting on the basis of the

Writs of Sequestration such as operating, administering
and managing the affairs and business of OWNI, or
representing themselves as directors and officers of OWNI;
(b) from disbursing, utilizing, disposing and committing the

funds and assets of OWNI and/or entering into any
transactions for the benefit of Digitel;
(c) from excluding petitioners Jose L. Africa, Manuel H.

Nieto, Jr. and Andres L. Africa as Chairman of the Board,
President and Treasurer, respectively, of OWNI;
(d) from making any expenditures for the use and benefit
of Digitel and pursuing any and all papers/com-
munications filed by OWNI with the National
Telecommunications Commission relative to the
requirements of Digitel to comply with Digitel’s franchise;

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"(5) ordering the respondents in Civil Case No. 0127 their
officers, agents, representatives and other persons acting
under their orders/instructions: (a) to vacate OWNI’s office
premises at the Electra House, Esteban St., Legaspi Village,
Makati; (b) to turn over all the corporate records of OWNI to
petitioner Jose L. Africa, et al.; and (c) render an accounting of
all transactions undertaken by them in the name or in behalf of
OWNI, including disbursement of corporate funds;
"(6) dismissing the complaint as well as the compulsory

counterclaims in Civil Case No. 0126, with costs against the
petitioners therein, PCGG."
On May 6, 1994, petitioners filed with the Sandiganbayan a motion

for reconsideration7 of the decision; however, on March 30, 1995, the
Sandiganbayan denied the motion.8
Hence, this joint petition with prayer for consolidation.9
On August 21, 1995, we granted the consolidation.10
Petitioners contend that:
First: the OWNI board was dormant and inactive necessitating the
PCGG takeover. And in reorganizing the OWNI board on September
17, 1990, PCGG merely performed its duty of preventing further
dissipation of the assets of OWNI in light of a 5.7 million peso payroll
anomaly committed by the former Finance Manager of OWNI;
Second: the Sandiganbayan erred in declaring null and void the

writs of sequestration against respondents Polygon Investors and
Managers, Inc., Aerocom Investors and Managers, Inc., and
Silangan Investors and Managers, Inc., for failure of the PCGG to file
the required cases against these companies, as said ruling runs
counter to the recent decision of the Supreme Court in the PCGG
sequestration cases;
Third: the Sandiganbayan decided on non-issues or issues that were

not involved in the application for injunction, and compounded this
mistake when it granted the main reliefs prayed for in Case No. 0127,
although the hearings were only in connection with prayer for the
issuance of a writ of preliminary injunction.
Fourth: the Sandiganbayan erred in ordering the ouster of non-

PCGG respondents from the positions they were holding in OWNI
without first putting in place the safeguards required by the case of
Cojuangco v. Roxas.11
The Issue

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The main issue raised is whether or not the PCGG’s takeover of OWNI
is legal.
The petition must fail.
Petitioner PCGG explained that prior to September 17, 1990, OWNI

was a dormant and inactive corporation. There was no functioning
board which made possible the Finance Manager’s embezzlement
of company funds. And in the exercise of their powers pursuant to
Executive Order Nos. 1, 2, 14 and 14-A, PCGG sequestered a
majority of shares of stocks of OWNI. PCGG was only consistent with
its mission of preventing dissipation of assets of sequestered
corporations or businesses when it took over control of OWNI.
In Presidential Commission on Good Government v. Cojuanco, Jr.,12

the Court ruled that who should vote the sequestered shares requires
the determination of the ill-gotten character of those shares and
consequently the rightful ownership thereof. The issue was still
pending in the main case in the Sandiganbayan. This is only an
incident of the main case and is limited to the stockholders’ meeting
held on September 17, 1990. This is without prejudice to the final
disposition of the merits of the main suit. The ownership of the shares
is still under litigation. It is not known whether the shares are part of
the ill-gotten wealth of former President Marcos and his "cronies."
In Bataan Shipyard & Engineering Co., Inc. v. PCGG,13 we declared

the scope and extent of the powers that the PCGG may exercise
with regard to the property of businesses sequestered:
"x x x the PCGG cannot exercise acts of dominion over

property sequestered, frozen or provisionally taken over. As
already earlier stressed with no little insistence, the act of
sequestration, freezing or provisional takeover of property does
not import or bring about a divestment of title over said
property; does not make the PCGG the owner thereof. In
relation to the property sequestered, frozen or provisionally
taken over, the PCGG is a conservator, not an owner.
Therefore, it can not perform acts of strict ownership; and this is
specially true in the situations contemplated by the
sequestration rules where, unlike cases of receivership, for
example, no court exercises effective supervision or can upon
due application and hearing, grant authority for the
performance of acts of dominion."
Petitioners contend that the Sandiganbayan should not have

nullified the writs of sequestration because there was no need to file
a separate action against OWNI, Polygon, Aerocom and Silangan
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since they had been included in the list of the ill-gotten wealth of
defendants Jose L. Africa+ and Manuel H. Nieto, Jr. in Civil Case No.
0009. Petitioners cited Republic v. Sandiganbayan (First Division),14 in
which the Court held:
"1) Section 26, Article XVIII of the Constitution does not, by its
terms or any fair interpretation thereof, require that
corporations or business enterprises alleged to be repositories of
"ill-gotten wealth," as the term is used in said provision, be
actually and formally impleaded in the actions for the recovery
thereof, in order to maintain in effect existing sequestrations
thereof;
"2) complaints for the recovery of ill-gotten wealth which

merely identify and/or allege said corporations or enterprises to
be the instruments, repositories or the fruits of ill-gotten wealth,
without more, come within the meaning of the phrase
"corresponding judicial action or proceeding" contemplated
by the constitutional provision referred to; the more so, that
normally, said corporations, as distinguished from their
stockholders or members, are not generally suable for the
latter’s illegal or criminal actuations in the acquisition of the
assets invested by them in the former;
"3) even assuming the impleading of said corporations to be

necessary and proper so that judgment may comprehensively
and effectively be rendered in the actions, amendment of the
complaints to implead them as defendants may, under existing
rules of procedure, be done at any time during the pendency
of the actions thereby initiated, and even during the pendency
of an appeal to the Supreme Court--a procedure that, in any
case, is not inconsistent with or proscribed by the constitutional
time limits to the filing of the corresponding complaints "for"--
i.e., with regard or in relation to, in respect of, or in connection
with, or concerning--orders of sequestration, freezing, or
provisional takeover."
In this case, the PCGG’s complaint15 for "Reconveyance, Reversion,

Accounting, Restitution and Damages" against Jose L. Africa, +
Manuel H. Nieto, Jr., the Marcos Spouses, Ferdinand Marcos, Jr.,
Roberto S. Benedicto, + Juan Ponce Enrile, Potenciano Ilusorio+ was
filed on July 22, 1987. In the complaint, Polygon, Silangan, Aerocom
and OWNI were included in the list of property as part of the
defendants’ ill-gotten wealth.
We find the writ of sequestration issued against OWNI not valid

because the suit in Civil Case No. 0009 against Manuel H. Nieto and
Jose L. Africa+ as shareholders in OWNI is not a suit against OWNI. This

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Court has held that "failure to implead these corporations as
defendants and merely annexing a list of such corporations to the
complaints is a violation of their right to due process for it would in
effect be disregarding their distinct and separate personality without
a hearing."16
Furthermore, PCGG issued the writs of sequestration on August 3,

1988, which was beyond the period set by the Constitution.
Article XVIII, Section 26, of the 1987 Constitution provides:
"Sec. 26. The authority to issue sequestration or freeze orders

under Proclamation No. 3 dated March 25, 1986 in relation to
the recovery of ill-gotten wealth shall remain operative for not
more than eighteen months after the ratification of this
Constitution. However, in the national interest, as certified by
the President, the Congress may extend said period.
"A sequestration or freeze order shall be issued only upon

showing of a prima facie case. The order and the list of the
sequestered or frozen properties shall forthwith be registered
with the proper court. For orders issued before the ratification of
this Constitution, the corresponding judicial action or
proceeding shall be filed within six months from its ratification.
For those issued after such ratification, the judicial action or
proceeding shall be commenced within six months from the
issuance thereof.
"The sequestration or freeze order is deemed automatically

lifted if no judicial action or proceeding is commenced as
herein provided."
The sequestration orders issued against respondents shall be

deemed automatically lifted due to the failure of PCGG to
commence the proper judicial action or to implead the respondents
therein within the period prescribed by Article XVIII, Section 26 of the
1987 Constitution.
The lifting of the writs of sequestration will not necessarily be fatal to

the main case since the lifting of the subject orders does not ipso
facto mean that the sequestered property are not ill-gotten. The
effect of the lifting of the sequestration against OWNI will merely be
the termination of the role of the government as conservator
thereof. In other words, the PCGG may no longer exercise
administrative or housekeeping powers17 and its nominees may no
longer vote the sequestered shares to enable them to sit on the
corporate board of the subject firm.1âwphi1.nêt
The Fallo

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WHEREFORE, the petitions are hereby DENIED. The decision and
resolution of the Sandiganbayan are hereby AFFIRMED.
No costs.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Kapunan, and Ynares-Santiago, JJ.,

concur.
Puno, J., on official leave.
PCGG vs. SANDIGANBAYAN, et al. [G.R. Nos. 119609-10, September

21, 2001]
FACTS OF THE CASE:
On August 28, 1990, PCGG sent Corporate Secretary

Victor A. Africa of Oceanic Wireless Network, Inc. (OWNI), a letter
dated August 3, 1990, directing him to send notices to all
stockholders of record of OWNI for special stockholders'
meeting. On September 17, 1990,during the special
stockholders' meeting of OWNI, PCGG voted all the Class "A"
shares in the election of directors and elected to the board of
directors Commissioners Maceren, Parlade and Gutierrez
representing the Class "A" shares and Brooker and Miller representing
Class "B" and "C" shares. None of the registered Class "A" shareholders
of OWNI was present in that,
specialstockholders meeting. PCGG sequestered th e Class
" A" shareholdi ng about 60% of th eoutstanding capital stock,
and PCGG voted all the Class "A" shares.
On October 9, 1990, Corporate Secretary Africa wrote the SEC

questioning the
electiono f P C G G n o m i n e e s a s d i r e c t o r s o f t h e O W N I b o
ard on the ground that they were not stockholders of
OWNI.

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O n Janu ary 2 7 , 199 1 , t he sp eci al sto ckhol d ers' me
e t i n g o f O W N I t o o k p l a c e . Stockholders owning 63,573
Class "A" shares were represented. An election of directors
for Class "A" shares was held. Nieto, Jr., J. Africa and A. Africa were
elected as directors for
Class" A " s h a r e s f o r 1 9 9 1 u n t i l t h e i r s u c c e s s o r s a r e e l e c t
e d a n d q u a l i f i e d . C l a s s " B " a n d " C " shareholders did not
attend the meeting. No new directors for them were elected.
On July 29, 1991, PCGG, acti ng for i tself and i n behalf

o f O W N I , f i l e d w i t h t h e Sandiganbayan a complaint for
injunction with damages against V. Africa, J. Africa, Nieto, Jr. and
Ocampo. PCGG sought to enjoin the defendants from interfering
with PCGG's management of OWNI and/or representing themselves
as director.
ISSUE:
Whether or not the PCGG's takeover of OWNI is legal.
HELD:
NO. In PCGG v. Cojuanco, Jr ., the Court ruled that who should

vote the sequestered shares requires the determination of the ill-
gotten character of those shares and consequently the rightful
ownership thereof. The issue was still pending in the main case in the
Sandiganbayan. This is only an incident of the main case and is
limited to the stockholders' meeting held on September 17,
1990. This is without prejudice to the final disposition of the merits of
the main suit. The ownership of the shares is still under litigation. It is
not known whether the shares are part of the ill-gotten wealth of
former President Marcos and his "cronies."
We find the writ of sequestration issued against OWNI not valid

because the suit in Civil Case No. 0009 against Nieto, Jr. and J.
Africa as shareholders in OWNI is not a suit against OWNI. This
Court has held that "failure to implead these corporations as

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defendants and merely annexing a list of such corporations to the
a hearing.
Furthermore, PCGG issued the writs of sequestration on August

3, 1988, which was beyond the period set by the Constitution. Article
XVIII, Section 26, of the 1987 Constitution provides.
Sec. 26.The authority to issue sequestration or freeze orders

under Proclamation No. 3dated March 25, 1986 in relation to the
recovery of ill-gotten wealth shall remain operative for not more
than eighteen months after the ratification of this Constitution.
However, in the national interest, as certified by the President, the
Congress may extend said period.
A sequestration or freeze order shall be issued only

upon showing of a prima facie case. The order and the list of the
sequestered or frozen properties shall forthwith be registered with the
proper court. For orders issued before the ratification of this
Constitution, the corresponding judicial action or proceeding shall
be filed within six months from its ratification. For those issued after
such ratification, the judicial action or proceeding shall be
commenced within six months from the issuance thereof.
The sequestration or freeze order is deemed automatically

lifted if no judicial action or proceeding is commenced as herein
provided.
The sequestration orders issued against respondents shall be

deemed automatically lifted due to the failure of PCGG to
commence the proper judicial action or to implead the respondents
therein within the period prescribed by Article XVIII, Section 26 of the
1987 Constitution.
The lifting of the writs of sequestration will not necessarily be

fatal to the main case since the lifting of the subject orders does not
ipso facto mean that the sequestered property are not ill-gotten. The
effect of the lifting of the sequestration against OWNI will merely be

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the termination of the role of the government as conservator
thereof. In other words, the PCGG may no longer exercise
administrative or housekeeping powers and its nominees may no
longer vote the sequestered shares to enable them to sit on the
corporate board of the subject firm.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT VS.
SANDIGANBAYAN
G.R. Nos. 119609-10
FACTS OF THE CASE
The PCGG issued writs of sequestration against OWNI. Then, it sent
Corporate Secretary Africa of Ocean Wireless Network, Inc. (OWNI)
a letter directing him to send notices to all stockholders of record of
OWNI for special stockholders’ meeting. He was required to issue
one qualifying share each to PCGG Commissioners Maceren and
Castro from the unissued shares and to record the transfer in the
stock and transfer book of OWNI. Failure to comply within 5 days
from receipt thereof, Assistant Solicitor General Desuasido would be
designated as acting corporate secretary.During the special
stockholders’ meeting of OWNI, PCGG voted all the Class A shares in
the election of directors and elected to the board of directors
Commissioners Maceren, Parlade and Gutierrez representing the

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Class A shares, and Brooker and Miller representing Class B and C
shares. The new board of directors then elected Maceren as
Chairman of the Board, Gutierrez as President, ASG Desuasido as
Acting Corporate Secretary and Velasco as Acting Treasurer. None
of the registered Class A shareholders of OWNI was present in that
special stockholders meeting.Corporate Secretary Africa wrote the
SEC questioning the election of the PCGG nominees as directors of
the OWNI board on the ground that they were not stockholders of
the OWNI. Then, a special stockholders’ meeting of OWNI took
place, were another election of directors for Class “A” shares were
held. Thus, the PCGG sought to enjoin the new directors from
interfering with PCGG’s management of OWNI and/or representing
themselves as directors. Sandiganbayan nullified the writs of
sequestration, stressing the need to file a separate action against
OWNI.
ISSUE
Whether or not the PCGG’s takeover of OWN is legal.
RULING
PCGG’s takeover of OWNI is not legal. It was previously ruled by the
Court that “the PCGG cannot exercise acts of dominion over
property sequestered, frozen or provisionally taken over.. the act of

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sequestration.. does not import or bring about a divestment of title
over said property; does not make the PCGG the owner thereof.”
Further, the writ of sequestration issued against OWNI is not valid
because the civil suit filed against its stockholders is not a suit against
OWNI. This Court has held that “failure to implead these corporations
as defendants and merely annexing a list of such corporations to the
a hearing.”
J.G. Summit Holdings, Inc. vs. CA (450 SCRA 169 [2005])
G.R. No. 124293 January 31, 2005
J.G. SUMMIT HOLDINGS, INC., petitioner,

vs.
COURT OF APPEALS; COMMITTEE ON PRIVATIZATION, its Chairman and
Members; ASSET PRIVATIZATION TRUST; and PHILYARDS HOLDINGS,
INC., respondents.
RESOLUTION
PUNO, J.:
For resolution before this Court are two motions filed by the
petitioner, J.G. Summit Holdings, Inc. for reconsideration of our
Resolution dated September 24, 2003 and to elevate this case to the
Court En Banc. The petitioner questions the Resolution which
reversed our Decision of November 20, 2000, which in turn reversed
and set aside a Decision of the Court of Appeals promulgated on
July 18, 1995.
I. Facts

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The undisputed facts of the case, as set forth in our Resolution of
September 24, 2003, are as follows:
On January 27, 1997, the National Investment and Development

Corporation (NIDC), a government corporation, entered into a Joint
Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of
Kobe, Japan (KAWASAKI) for the construction, operation and
management of the Subic National Shipyard, Inc. (SNS) which
subsequently became the Philippine Shipyard and Engineering
Corporation (PHILSECO). Under the JVA, the NIDC and KAWASAKI will
contribute P330 million for the capitalization of PHILSECO in the
proportion of 60%-40% respectively. One of its salient features is the
grant to the parties of the right of first refusal should either of them
decide to sell, assign or transfer its interest in the joint venture, viz:
1.4 Neither party shall sell, transfer or assign all or any part of its
interest in SNS [PHILSECO] to any third party without giving the other
under the same terms the right of first refusal. This provision shall not
apply if the transferee is a corporation owned or controlled by the
GOVERNMENT or by a KAWASAKI affiliate.
On November 25, 1986, NIDC transferred all its rights, title and interest
in PHILSECO to the Philippine National Bank (PNB). Such interests
were subsequently transferred to the National Government pursuant
to Administrative Order No. 14. On December 8, 1986, President
Corazon C. Aquino issued Proclamation No. 50 establishing the
Committee on Privatization (COP) and the Asset Privatization Trust
(APT) to take title to, and possession of, conserve, manage and
dispose of non-performing assets of the National Government.
Thereafter, on February 27, 1987, a trust agreement was entered into
between the National Government and the APT wherein the latter
was named the trustee of the National Government's share in
PHILSECO. In 1989, as a result of a quasi-reorganization of PHILSECO
to settle its huge obligations to PNB, the National Government's
shareholdings in PHILSECO increased to 97.41% thereby reducing
KAWASAKI's shareholdings to 2.59%.
In the interest of the national economy and the government, the

COP and the APT deemed it best to sell the National Government's
share in PHILSECO to private entities. After a series of negotiations
between the APT and KAWASAKI, they agreed that the latter's right
of first refusal under the JVA be "exchanged" for the right to top by
five percent (5%) the highest bid for the said shares. They further
agreed that KAWASAKI would be entitled to name a company in
which it was a stockholder, which could exercise the right to top. On
September 7, 1990, KAWASAKI informed APT that Philyards Holdings,
Inc. (PHI)1 would exercise its right to top.

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At the pre-bidding conference held on September 18, 1993,
interested bidders were given copies of the JVA between NIDC and
KAWASAKI, and of the Asset Specific Bidding Rules (ASBR) drafted for
the National Government's 87.6% equity share in PHILSECO. The
provisions of the ASBR were explained to the interested bidders who
were notified that the bidding would be held on December 2, 1993.
A portion of the ASBR reads:
1.0 The subject of this Asset Privatization Trust (APT) sale through
public bidding is the National Government's equity in PHILSECO
consisting of 896,869,942 shares of stock (representing 87.67% of
PHILSECO's outstanding capital stock), which will be sold as a whole
block in accordance with the rules herein enumerated.
xxx xxx xxx
2.0 The highest bid, as well as the buyer, shall be subject to the final
approval of both the APT Board of Trustees and the Committee on
Privatization (COP).
2.1 APT reserves the right in its sole discretion, to reject any or all bids.
3.0 This public bidding shall be on an Indicative Price Bidding basis.

The Indicative price set for the National Government's 87.67% equity
in PHILSECO is PESOS: ONE BILLION THREE HUNDRED MILLION
(P1,300,000,000.00).
xxx xxx xxx
6.0 The highest qualified bid will be submitted to the APT Board of
Trustees at its regular meeting following the bidding, for the purpose
of determining whether or not it should be endorsed by the APT
Board of Trustees to the COP, and the latter approves the same. The
APT shall advise Kawasaki Heavy Industries, Inc. and/or its nominee,
[PHILYARDS] Holdings, Inc., that the highest bid is acceptable to the
National Government. Kawasaki Heavy Industries, Inc. and/or
[PHILYARDS] Holdings, Inc. shall then have a period of thirty (30)
calendar days from the date of receipt of such advice from APT
within which to exercise their "Option to Top the Highest Bid" by
offering a bid equivalent to the highest bid plus five (5%) percent
thereof.
6.1 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS]

Holdings, Inc. exercise their "Option to Top the Highest Bid," they shall
so notify the APT about such exercise of their option and deposit with
APT the amount equivalent to ten percent (10%) of the highest bid
plus five percent (5%) thereof within the thirty (30)-day period
mentioned in paragraph 6.0 above. APT will then serve notice upon
Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc.

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declaring them as the preferred bidder and they shall have a period
of ninety (90) days from the receipt of the APT's notice within which
to pay the balance of their bid price.
6.2 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS]

Holdings, Inc. fail to exercise their "Option to Top the Highest Bid"
within the thirty (30)-day period, APT will declare the highest bidder
as the winning bidder.
xxx xxx xxx
12.0 The bidder shall be solely responsible for examining with

appropriate care these rules, the official bid forms, including any
addenda or amendments thereto issued during the bidding period.
The bidder shall likewise be responsible for informing itself with
respect to any and all conditions concerning the PHILSECO Shares
which may, in any manner, affect the bidder's proposal. Failure on
the part of the bidder to so examine and inform itself shall be its sole
risk and no relief for error or omission will be given by APT or COP. . . .
At the public bidding on the said date, petitioner J.G. Summit

Holdings, Inc.2 submitted a bid of Two Billion and Thirty Million Pesos
(P2,030,000,000.00) with an acknowledgment of
KAWASAKI/[PHILYARDS'] right to top, viz:
4. I/We understand that the Committee on Privatization (COP) has

up to thirty (30) days to act on APT's recommendation based on the
result of this bidding. Should the COP approve the highest bid, APT
shall advise Kawasaki Heavy Industries, Inc. and/or its nominee,
[PHILYARDS] Holdings, Inc. that the highest bid is acceptable to the
National Government. Kawasaki Heavy Industries, Inc. and/or
[PHILYARDS] Holdings, Inc. shall then have a period of thirty (30)
calendar days from the date of receipt of such advice from APT
within which to exercise their "Option to Top the Highest Bid" by
offering a bid equivalent to the highest bid plus five (5%) percent
thereof.
As petitioner was declared the highest bidder, the COP approved

the sale on December 3, 1993 "subject to the right of Kawasaki
Heavy Industries, Inc./[PHILYARDS] Holdings, Inc. to top JGSMI's bid
by 5% as specified in the bidding rules."
On December 29, 1993, petitioner informed APT that it was protesting

the offer of PHI to top its bid on the grounds that: (a) the
KAWASAKI/PHI consortium composed of KAWASAKI, [PHILYARDS],
Mitsui, Keppel, SM Group, ICTSI and Insular Life violated the ASBR
because the last four (4) companies were the losing bidders thereby
circumventing the law and prejudicing the weak winning bidder; (b)
only KAWASAKI could exercise the right to top; (c) giving the same
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option to top to PHI constituted unwarranted benefit to a third party;
(d) no right of first refusal can be exercised in a public bidding or
auction sale; and (e) the JG Summit consortium was not estopped
from questioning the proceedings.
On February 2, 1994, petitioner was notified that PHI had fully paid
the balance of the purchase price of the subject bidding. On
February 7, 1994, the APT notified petitioner that PHI had exercised its
option to top the highest bid and that the COP had approved the
same on January 6, 1994. On February 24, 1994, the APT and PHI
executed a Stock Purchase Agreement. Consequently, petitioner
filed with this Court a Petition for Mandamus under G.R. No. 114057.
On May 11, 1994, said petition was referred to the Court of Appeals.
On July 18, 1995, the Court of Appeals denied the same for lack of
merit. It ruled that the petition for mandamus was not the proper
remedy to question the constitutionality or legality of the right of first
refusal and the right to top that was exercised by KAWASAKI/PHI,
and that the matter must be brought "by the proper party in the
proper forum at the proper time and threshed out in a full blown
trial." The Court of Appeals further ruled that the right of first refusal
and the right to top are prima facie legal and that the petitioner, "by
participating in the public bidding, with full knowledge of the right to
top granted to KAWASAKI/[PHILYARDS] is…estopped from
questioning the validity of the award given to [PHILYARDS] after the
latter exercised the right to top and had paid in full the purchase
price of the subject shares, pursuant to the ASBR." Petitioner filed a
Motion for Reconsideration of said Decision which was denied on
March 15, 1996. Petitioner thus filed a Petition for Certiorari with this
Court alleging grave abuse of discretion on the part of the appellate
court.
On November 20, 2000, this Court rendered x x x [a] Decision ruling

among others that the Court of Appeals erred when it dismissed the
petition on the sole ground of the impropriety of the special civil
action of mandamus because the petition was also one of certiorari.
It further ruled that a shipyard like PHILSECO is a public utility whose
capitalization must be sixty percent (60%) Filipino-owned.
Consequently, the right to top granted to KAWASAKI under the Asset
Specific Bidding Rules (ASBR) drafted for the sale of the 87.67% equity
of the National Government in PHILSECO is illegal — not only
because it violates the rules on competitive bidding — but more so,
because it allows foreign corporations to own more than 40% equity
in the shipyard. It also held that "although the petitioner had the
opportunity to examine the ASBR before it participated in the
bidding, it cannot be estopped from questioning the
unconstitutional, illegal and inequitable provisions thereof." Thus, this
Court voided the transfer of the national government's 87.67% share

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in PHILSECO to Philyard[s] Holdings, Inc., and upheld the right of JG
Summit, as the highest bidder, to take title to the said shares, viz:
WHEREFORE, the instant petition for review on certiorari is GRANTED.

The assailed Decision and Resolution of the Court of Appeals are
REVERSED and SET ASIDE. Petitioner is ordered to pay to APT its bid
price of Two Billion Thirty Million Pesos (P2,030,000,000.00), less its bid
deposit plus interests upon the finality of this Decision. In turn, APT is
ordered to:
(a) accept the said amount of P2,030,000,000.00 less bid

deposit and interests from petitioner;
(b) execute a Stock Purchase Agreement with petitioner;
(c) cause the issuance in favor of petitioner of the certificates

of stocks representing 87.6% of PHILSECO's total capitalization;
(d) return to private respondent PHGI the amount of Two Billion

One Hundred Thirty-One Million Five Hundred Thousand Pesos
(P2,131,500,000.00); and
(e) cause the cancellation of the stock certificates issued to

PHI.
SO ORDERED.
In separate Motions for Reconsideration, respondents submit[ted]

three basic issues for x x x resolution: (1) Whether PHILSECO is a public
utility; (2) Whether under the 1977 JVA, KAWASAKI can exercise its
right of first refusal only up to 40% of the total capitalization of
PHILSECO; and (3) Whether the right to top granted to KAWASAKI
violates the principles of competitive bidding.3 (citations omitted)
In a Resolution dated September 24, 2003, this Court ruled in favor of

the respondents. On the first issue, we held that Philippine Shipyard
and Engineering Corporation (PHILSECO) is not a public utility, as by
nature, a shipyard is not a public utility4 and that no law declares a
shipyard to be a public utility.5 On the second issue, we found
nothing in the 1977 Joint Venture Agreement (JVA) which prevents
Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) from
acquiring more than 40% of PHILSECO’s total capitalization.6 On the
final issue, we held that the right to top granted to KAWASAKI in
exchange for its right of first refusal did not violate the principles of
competitive bidding.7
On October 20, 2003, the petitioner filed a Motion for

Reconsideration8 and a Motion to Elevate This Case to the Court En
Banc.9 Public respondents Committee on Privatization (COP) and

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Asset Privatization Trust (APT), and private respondent Philyards
Holdings, Inc. (PHILYARDS) filed their Comments on J.G. Summit
Holdings, Inc.’s (JG Summit’s) Motion for Reconsideration and Motion
to Elevate This Case to the Court En Banc on January 29, 2004 and
February 3, 2004, respectively.
II. Issues
Based on the foregoing, the relevant issues to resolve to end this

litigation are the following:
1. Whether there are sufficient bases to elevate the case at bar

to the Court en banc.
2. Whether the motion for reconsideration raises any new

matter or cogent reason to warrant a reconsideration of this
Court’s Resolution of September 24, 2003.
Motion to Elevate this Case to the
Court En Banc
The petitioner prays for the elevation of the case to the Court en
banc on the following grounds:
1. The main issue of the propriety of the bidding process

involved in the present case has been confused with the policy
issue of the supposed fate of the shipping industry which has
never been an issue that is determinative of this case.10
2. The present case may be considered under the Supreme

Court Resolution dated February 23, 1984 which included
among en banc cases those involving a novel question of law
and those where a doctrine or principle laid down by the Court
en banc or in division may be modified or reversed.11
3. There was clear executive interference in the judicial

functions of the Court when the Honorable Jose Isidro
Camacho, Secretary of Finance, forwarded to Chief Justice
Davide, a memorandum dated November 5, 2001, attaching a
copy of the Foreign Chambers Report dated October 17, 2001,
which matter was placed in the agenda of the Court and
noted by it in a formal resolution dated November 28, 2001. 12
Opposing J.G. Summit’s motion to elevate the case en banc,

PHILYARDS points out the petitioner’s inconsistency in previously
opposing PHILYARDS’ Motion to Refer the Case to the Court En Banc.
PHILYARDS contends that J.G. Summit should now be estopped from
asking that the case be referred to the Court en banc. PHILYARDS
further contends that the Supreme Court en banc is not an
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appellate court to which decisions or resolutions of its divisions may
be appealed citing Supreme Court Circular No. 2-89 dated February
7, 1989.13 PHILYARDS also alleges that there is no novel question of
law involved in the present case as the assailed Resolution was
based on well-settled jurisprudence. Likewise, PHILYARDS stresses that
the Resolution was merely an outcome of the motions for
reconsideration filed by it and the COP and APT and is "consistent
with the inherent power of courts to ‘amend and control its process
and orders so as to make them conformable to law and justice.’
(Rule 135, sec. 5)"14 Private respondent belittles the petitioner’s
allegations regarding the change in ponente and the alleged
executive interference as shown by former Secretary of Finance Jose
Isidro Camacho’s memorandum dated November 5, 2001 arguing
that these do not justify a referral of the present case to the Court en
banc.
In insisting that its Motion to Elevate This Case to the Court En Banc
should be granted, J.G. Summit further argued that: its Opposition to
the Office of the Solicitor General’s Motion to Refer is different from
its own Motion to Elevate; different grounds are invoked by the two
motions; there was unwarranted "executive interference"; and the
change in ponente is merely noted in asserting that this case should
be decided by the Court en banc.15
We find no merit in petitioner’s contention that the propriety of the

bidding process involved in the present case has been confused
with the policy issue of the fate of the shipping industry which,
petitioner maintains, has never been an issue that is determinative of
this case. The Court’s Resolution of September 24, 2003 reveals a
clear and definitive ruling on the propriety of the bidding process. In
discussing whether the right to top granted to KAWASAKI in
exchange for its right of first refusal violates the principles of
competitive bidding, we made an exhaustive discourse on the rules
and principles of public bidding and whether they were complied
with in the case at bar.16 This Court categorically ruled on the
petitioner’s argument that PHILSECO, as a shipyard, is a public utility
which should maintain a 60%-40% Filipino-foreign equity ratio, as it
was a pivotal issue. In doing so, we recognized the impact of our
ruling on the shipbuilding industry which was beyond avoidance.17
We reject petitioner’s argument that the present case may be

considered under the Supreme Court Resolution dated February 23,
1984 which included among en banc cases those involving a novel
question of law and those where a doctrine or principle laid down
by the court en banc or in division may be modified or reversed. The
case was resolved based on basic principles of the right of first
refusal in commercial law and estoppel in civil law. Contractual
obligations arising from rights of first refusal are not new in this

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jurisdiction and have been recognized in numerous cases.18 Estoppel
is too known a civil law concept to require an elongated discussion.
Fundamental principles on public bidding were likewise used to
resolve the issues raised by the petitioner. To be sure, petitioner leans
on the right to top in a public bidding in arguing that the case at bar
involves a novel issue. We are not swayed. The right to top was
merely a condition or a reservation made in the bidding rules which
was fully disclosed to all bidding parties. In Bureau Veritas,
represented by Theodor H. Hunermann v. Office of the President, et
al., 19 we dealt with this conditionality, viz:
x x x It must be stressed, as held in the case of A.C. Esguerra & Sons v.

Aytona, et al., (L-18751, 28 April 1962, 4 SCRA 1245), that in an
"invitation to bid, there is a condition imposed upon the bidders to
the effect that the bidding shall be subject to the right of the
government to reject any and all bids subject to its discretion. In the
case at bar, the government has made its choice and unless an
unfairness or injustice is shown, the losing bidders have no cause to
complain nor right to dispute that choice. This is a well-settled
doctrine in this jurisdiction and elsewhere."
The discretion to accept or reject a bid and award contracts is

vested in the Government agencies entrusted with that function. The
discretion given to the authorities on this matter is of such wide
latitude that the Courts will not interfere therewith, unless it is
apparent that it is used as a shield to a fraudulent award (Jalandoni
v. NARRA, 108 Phil. 486 [1960]). x x x The exercise of this discretion is a
policy decision that necessitates prior inquiry, investigation,
comparison, evaluation, and deliberation. This task can best be
discharged by the Government agencies concerned, not by the
Courts. The role of the Courts is to ascertain whether a branch or
instrumentality of the Government has transgressed its constitutional
boundaries. But the Courts will not interfere with executive or
legislative discretion exercised within those boundaries. Otherwise, it
strays into the realm of policy decision-making.
It is only upon a clear showing of grave abuse of discretion that the

Courts will set aside the award of a contract made by a government
entity. Grave abuse of discretion implies a capricious, arbitrary and
whimsical exercise of power (Filinvest Credit Corp. v. Intermediate
Appellate Court, No. 65935, 30 September 1988, 166 SCRA 155). The
abuse of discretion must be so patent and gross as to amount to an
evasion of positive duty or to a virtual refusal to perform a duty
enjoined by law, as to act at all in contemplation of law, where the
power is exercised in an arbitrary and despotic manner by reason of
passion or hostility (Litton Mills, Inc. v. Galleon Trader, Inc., et al[.], L-
40867, 26 July 1988, 163 SCRA 489).

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The facts in this case do not indicate any such grave abuse of
discretion on the part of public respondents when they awarded the
CISS contract to Respondent SGS. In the "Invitation to Prequalify and
Bid" (Annex "C," supra), the CISS Committee made an express
reservation of the right of the Government to "reject any or all bids or
any part thereof or waive any defects contained thereon and
accept an offer most advantageous to the Government." It is a well-
settled rule that where such reservation is made in an Invitation to
Bid, the highest or lowest bidder, as the case may be, is not entitled
to an award as a matter of right (C & C Commercial Corp. v. Menor,
L-28360, 27 January 1983, 120 SCRA 112). Even the lowest Bid or any
Bid may be rejected or, in the exercise of sound discretion, the
award may be made to another than the lowest bidder (A.C.
Esguerra & Sons v. Aytona, supra, citing 43 Am. Jur., 788). (emphases
supplied)1awphi1.nét
Like the condition in the Bureau Veritas case, the right to top was a
condition imposed by the government in the bidding rules which
was made known to all parties. It was a condition imposed on all
bidders equally, based on the APT’s exercise of its discretion in
deciding on how best to privatize the government’s shares in
PHILSECO. It was not a whimsical or arbitrary condition plucked from
the ether and inserted in the bidding rules but a condition which the
APT approved as the best way the government could comply with its
contractual obligations to KAWASAKI under the JVA and its
mandate of getting the most advantageous deal for the
government. The right to top had its history in the mutual right of first
refusal in the JVA and was reached by agreement of the
government and KAWASAKI.
Further, there is no "executive interference" in the functions of this

Court by the mere filing of a memorandum by Secretary of Finance
Jose Isidro Camacho. The memorandum was merely "noted" to
acknowledge its filing. It had no further legal significance. Notably
too, the assailed Resolution dated September 24, 2003 was decided
unanimously by the Special First Division in favor of the respondents.
Again, we emphasize that a decision or resolution of a Division is that

of the Supreme Court20 and the Court en banc is not an appellate
court to which decisions or resolutions of a Division may be
appealed.21
For all the foregoing reasons, we find no basis to elevate this case to
the Court en banc.
Motion for Reconsideration
Three principal arguments were raised in the petitioner’s Motion for

Reconsideration. First, that a fair resolution of the case should be
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based on contract law, not on policy considerations; the contracts
do not authorize the right to top to be derived from the right of first
refusal.22 Second, that neither the right of first refusal nor the right to
top can be legally exercised by the consortium which is not the
proper party granted such right under either the JVA or the Asset
Specific Bidding Rules (ASBR).23 Third, that the maintenance of the
60%-40% relationship between the National Investment and
Development Corporation (NIDC) and KAWASAKI arises from
contract and from the Constitution because PHILSECO is a
landholding corporation and need not be a public utility to be
bound by the 60%-40% constitutional limitation.24
On the other hand, private respondent PHILYARDS asserts that J.G.

Summit has not been able to show compelling reasons to warrant a
reconsideration of the Decision of the Court.25 PHILYARDS denies that
the Decision is based mainly on policy considerations and points out
that it is premised on principles governing obligations and contracts
and corporate law such as the rule requiring respect for contractual
stipulations, upholding rights of first refusal, and recognizing the
assignable nature of contracts rights.26 Also, the ruling that shipyards
are not public utilities relies on established case law and
fundamental rules of statutory construction. PHILYARDS stresses that
KAWASAKI’s right of first refusal or even the right to top is not limited
to the 40% equity of the latter.27 On the landholding issue raised by
J.G. Summit, PHILYARDS emphasizes that this is a non-issue and even
involves a question of fact. Even assuming that this Court can take
cognizance of such question of fact even without the benefit of a
trial, PHILYARDS opines that landholding by PHILSECO at the time of
the bidding is irrelevant because what is essential is that ultimately a
qualified entity would eventually hold PHILSECO’s real estate
properties.28 Further, given the assignable nature of the right of first
refusal, any applicable nationality restrictions, including landholding
limitations, would not affect the right of first refusal itself, but only the
manner of its exercise.29 Also, PHILYARDS argues that if this Court
takes cognizance of J.G. Summit’s allegations of fact regarding
PHILSECO’s landholding, it must also recognize PHILYARDS’ assertions
that PHILSECO’s landholdings were sold to another corporation.30 As
regards the right of first refusal, private respondent explains that
KAWASAKI’s reduced shareholdings (from 40% to 2.59%) did not
translate to a deprivation or loss of its contractually granted right of
first refusal.31 Also, the bidding was valid because PHILYARDS
exercised the right to top and it was of no moment that losing
bidders later joined PHILYARDS in raising the purchase price.32
In cadence with the private respondent PHILYARDS, public

respondents COP and APT contend:

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1. The conversion of the right of first refusal into a right to top by
5% does not violate any provision in the JVA between NIDC
and KAWASAKI.
2. PHILSECO is not a public utility and therefore not governed

by the constitutional restriction on foreign ownership.
3. The petitioner is legally estopped from assailing the validity of

the proceedings of the public bidding as it voluntarily
submitted itself to the terms of the ASBR which included the
provision on the right to top.
4. The right to top was exercised by PHILYARDS as the nominee

of KAWASAKI and the fact that PHILYARDS formed a consortium
to raise the required amount to exercise the right to top the
highest bid by 5% does not violate the JVA or the ASBR.
5. The 60%-40% Filipino-foreign constitutional requirement for the

acquisition of lands does not apply to PHILSECO because as
admitted by petitioner itself, PHILSECO no longer owns real
property.
6. Petitioner’s motion to elevate the case to the Court en banc

is baseless and would only delay the termination of this case.33
In a Consolidated Comment dated March 8, 2004, J.G. Summit

countered the arguments of the public and private respondents in
this wise:
1. The award by the APT of 87.67% shares of PHILSECO to

PHILYARDS with losing bidders through the exercise of a right to
top, which is contrary to law and the constitution is null and
void for being violative of substantive due process and the
abuse of right provision in the Civil Code.
a. The bidders[’] right to top was actually exercised by

losing bidders.
b. The right to top or the right of first refusal cannot co-

exist with a genuine competitive bidding.
c. The benefits derived from the right to top were

unwarranted.
2. The landholding issue has been a legitimate issue since the

start of this case but is shamelessly ignored by the respondents.
a. The landholding issue is not a non-issue.
b. The landholding issue does not pose questions of fact.

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c. That PHILSECO owned land at the time that the right of
first refusal was agreed upon and at the time of the
bidding are most relevant.
d. Whether a shipyard is a public utility is not the core issue

in this case.
3. Fraud and bad faith attend the alleged conversion of an

inexistent right of first refusal to the right to top.
a. The history behind the birth of the right to top shows

fraud and bad faith.
b. The right of first refusal was, indeed, "effectively useless."
4. Petitioner is not legally estopped to challenge the right to top

in this case.
a. Estoppel is unavailing as it would stamp validity to an

act that is prohibited by law or against public policy.
b. Deception was patent; the right to top was an

attractive nuisance.
c. The 10% bid deposit was placed in escrow.
J.G. Summit’s insistence that the right to top cannot be sourced from
the right of first refusal is not new and we have already ruled on the
issue in our Resolution of September 24, 2003. We upheld the mutual
right of first refusal in the JVA.34 We also ruled that nothing in the JVA
prevents KAWASAKI from acquiring more than 40% of PHILSECO’s
total capitalization.35 Likewise, nothing in the JVA or ASBR bars the
conversion of the right of first refusal to the right to top. In sum,
nothing new and of significance in the petitioner’s pleading warrants
a reconsideration of our ruling.
Likewise, we already disposed of the argument that neither the right

of first refusal nor the right to top can legally be exercised by the
consortium which is not the proper party granted such right under
either the JVA or the ASBR. Thus, we held:
The fact that the losing bidder, Keppel Consortium (composed of

Keppel, SM Group, Insular Life Assurance, Mitsui and ICTSI), has joined
PHILYARDS in the latter's effort to raise P2.131 billion necessary in
exercising the right to top is not contrary to law, public policy or
public morals. There is nothing in the ASBR that bars the losing
bidders from joining either the winning bidder (should the right to top
is not exercised) or KAWASAKI/PHI (should it exercise its right to top as
it did), to raise the purchase price. The petitioner did not allege, nor
was it shown by competent evidence, that the participation of the
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losing bidders in the public bidding was done with fraudulent intent.
Absent any proof of fraud, the formation by [PHILYARDS] of a
consortium is legitimate in a free enterprise system. The appellate
court is thus correct in holding the petitioner estopped from
questioning the validity of the transfer of the National Government's
shares in PHILSECO to respondent.36
Further, we see no inherent illegality on PHILYARDS’ act in seeking

funding from parties who were losing bidders. This is a purely
commercial decision over which the State should not interfere
absent any legal infirmity. It is emphasized that the case at bar
involves the disposition of shares in a corporation which the
government sought to privatize. As such, the persons with whom
PHILYARDS desired to enter into business with in order to raise funds
to purchase the shares are basically its business. This is in contrast to a
case involving a contract for the operation of or construction of a
government infrastructure where the identity of the buyer/bidder or
financier constitutes an important consideration. In such cases, the
government would have to take utmost precaution to protect public
interest by ensuring that the parties with which it is contracting have
the ability to satisfactorily construct or operate the infrastructure.
On the landholding issue, J.G. Summit submits that since PHILSECO is

a landholding company, KAWASAKI could exercise its right of first
refusal only up to 40% of the shares of PHILSECO due to the
constitutional prohibition on landholding by corporations with more
than 40% foreign-owned equity. It further argues that since
KAWASAKI already held at least 40% equity in PHILSECO, the right of
first refusal was inutile and as such, could not subsequently be
converted into the right to top. 37 Petitioner also asserts that, at
present, PHILSECO continues to violate the constitutional provision on
landholdings as its shares are more than 40% foreign-owned.38
PHILYARDS admits that it may have previously held land but had
already divested such landholdings.39 It contends, however, that
even if PHILSECO owned land, this would not affect the right of first
refusal but only the exercise thereof. If the land is retained, the right
of first refusal, being a property right, could be assigned to a
qualified party. In the alternative, the land could be divested before
the exercise of the right of first refusal. In the case at bar,
respondents assert that since the right of first refusal was validly
converted into a right to top, which was exercised not by KAWASAKI,
but by PHILYARDS which is a Filipino corporation (i.e., 60% of its shares
are owned by Filipinos), then there is no violation of the
Constitution.40 At first, it would seem that questions of fact beyond
cognizance by this Court were involved in the issue. However, the
records show that PHILYARDS admits it had owned land up until the
time of the bidding.41 Hence, the only issue is whether KAWASAKI
had a valid right of first refusal over PHILSECO shares under the JVA

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considering that PHILSECO owned land until the time of the bidding
and KAWASAKI already held 40% of PHILSECO’s equity.
We uphold the validity of the mutual rights of first refusal under the
JVA between KAWASAKI and NIDC. First of all, the right of first refusal
is a property right of PHILSECO shareholders, KAWASAKI and NIDC,
under the terms of their JVA. This right allows them to purchase the
shares of their co-shareholder before they are offered to a third
party. The agreement of co-shareholders to mutually grant this right
to each other, by itself, does not constitute a violation of the
provisions of the Constitution limiting land ownership to Filipinos and
Filipino corporations. As PHILYARDS correctly puts it, if PHILSECO still
owns land, the right of first refusal can be validly assigned to a
qualified Filipino entity in order to maintain the 60%-40% ratio. This
transfer, by itself, does not amount to a violation of the Anti-Dummy
Laws, absent proof of any fraudulent intent. The transfer could be
made either to a nominee or such other party which the holder of
the right of first refusal feels it can comfortably do business with.
Alternatively, PHILSECO may divest of its landholdings, in which case
KAWASAKI, in exercising its right of first refusal, can exceed 40% of
PHILSECO’s equity. In fact, it can even be said that if the foreign
shareholdings of a landholding corporation exceeds 40%, it is not the
foreign stockholders’ ownership of the shares which is adversely
affected but the capacity of the corporation to own land – that is, the
corporation becomes disqualified to own land. This finds support
under the basic corporate law principle that the corporation and its
stockholders are separate juridical entities. In this vein, the right of first
refusal over shares pertains to the shareholders whereas the
capacity to own land pertains to the corporation. Hence, the fact
that PHILSECO owns land cannot deprive stockholders of their right
of first refusal. No law disqualifies a person from purchasing shares in
a landholding corporation even if the latter will exceed the allowed
foreign equity, what the law disqualifies is the corporation from
owning land. This is the clear import of the following provisions in the
Constitution:
Section 2. All lands of the public domain, waters, minerals, coal,

petroleum, and other mineral oils, all forces of potential energy,
fisheries, forests or timber, wildlife, flora and fauna, and other natural
resources are owned by the State. With the exception of agricultural
lands, all other natural resources shall not be alienated. The
exploration, development, and utilization of natural resources shall
be under the full control and supervision of the State. The State may
directly undertake such activities, or it may enter into co-production,
joint venture, or production-sharing agreements with Filipino citizens,
or corporations or associations at least sixty per centum of whose
capital is owned by such citizens. Such agreements may be for a
period not exceeding twenty-five years, renewable for not more

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than twenty-five years, and under such terms and conditions as may
be provided by law. In cases of water rights for irrigation, water
supply, fisheries, or industrial uses other than the development of
water power, beneficial use may be the measure and limit of the
grant.
xxx xxx xxx
Section 7. Save in cases of hereditary succession, no private lands

shall be transferred or conveyed except to individuals, corporations,
or associations qualified to acquire or hold lands of the public
domain.42 (emphases supplied)
The petitioner further argues that "an option to buy land is void in
itself (Philippine Banking Corporation v. Lui She, 21 SCRA 52 [1967]).
The right of first refusal granted to KAWASAKI, a Japanese
corporation, is similarly void. Hence, the right to top, sourced from
the right of first refusal, is also void."43 Contrary to the contention of
petitioner, the case of Lui She did not that say "an option to buy land
is void in itself," for we ruled as follows:
x x x To be sure, a lease to an alien for a reasonable period is valid.

So is an option giving an alien the right to buy real property on
condition that he is granted Philippine citizenship. As this Court said
in Krivenko vs. Register of Deeds:
[A]liens are not completely excluded by the Constitution from the

use of lands for residential purposes. Since their residence in the
Philippines is temporary, they may be granted temporary rights such
as a lease contract which is not forbidden by the Constitution.
Should they desire to remain here forever and share our fortunes and
misfortunes, Filipino citizenship is not impossible to acquire.
But if an alien is given not only a lease of, but also an option to buy,
a piece of land, by virtue of which the Filipino owner cannot sell or
otherwise dispose of his property, this to last for 50 years, then it
becomes clear that the arrangement is a virtual transfer of ownership
whereby the owner divests himself in stages not only of the right to
enjoy the land (jus possidendi, jus utendi, jus fruendi and jus
abutendi) but also of the right to dispose of it (jus disponendi) —
rights the sum total of which make up ownership. It is just as if today
the possession is transferred, tomorrow, the use, the next day, the
disposition, and so on, until ultimately all the rights of which
ownership is made up are consolidated in an alien. And yet this is just
exactly what the parties in this case did within this pace of one year,
with the result that Justina Santos'[s] ownership of her property was
reduced to a hollow concept. If this can be done, then the
Constitutional ban against alien landholding in the Philippines, as

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announced in Krivenko vs. Register of Deeds, is indeed in grave
peril.44 (emphases supplied; Citations omitted)
In Lui She, the option to buy was invalidated because it amounted

to a virtual transfer of ownership as the owner could not sell or
dispose of his properties. The contract in Lui She prohibited the owner
of the land from selling, donating, mortgaging, or encumbering the
property during the 50-year period of the option to buy. This is not so
in the case at bar where the mutual right of first refusal in favor of
NIDC and KAWASAKI does not amount to a virtual transfer of land to
a non-Filipino. In fact, the case at bar involves a right of first refusal
over shares of stock while the Lui She case involves an option to buy
the land itself. As discussed earlier, there is a distinction between the
shareholder’s ownership of shares and the corporation’s ownership
of land arising from the separate juridical personalities of the
corporation and its shareholders.
We note that in its Motion for Reconsideration, J.G. Summit alleges

that PHILSECO continues to violate the Constitution as its foreign
equity is above 40% and yet owns long-term leasehold rights which
are real rights.45 It cites Article 415 of the Civil Code which includes in
the definition of immovable property, "contracts for public works,
and servitudes and other real rights over immovable property."46 Any
existing landholding, however, is denied by PHILYARDS citing its
recent financial statements.47 First, these are questions of fact, the
veracity of which would require introduction of evidence. The Court
needs to validate these factual allegations based on competent
and reliable evidence. As such, the Court cannot resolve the
questions they pose. Second, J.G. Summit misreads the provisions of
the Constitution cited in its own pleadings, to wit:
29.2 Petitioner has consistently pointed out in the past that private
respondent is not a 60%-40% corporation, and this violates the
Constitution x x x The violation continues to this day because under
the law, it continues to own real property…
xxx xxx xxx
32. To review the constitutional provisions involved, Section 14, Article

XIV of the 1973 Constitution (the JVA was signed in 1977), provided:
"Save in cases of hereditary succession, no private lands shall be

transferred or conveyed except to individuals, corporations, or
associations qualified to acquire or hold lands of the public domain."
32.1 This provision is the same as Section 7, Article XII of the 1987
Constitution.

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32.2 Under the Public Land Act, corporations qualified to acquire or
hold lands of the public domain are corporations at least 60% of
which is owned by Filipino citizens (Sec. 22, Commonwealth Act 141,
as amended). (emphases supplied)
As correctly observed by the public respondents, the prohibition in

the Constitution applies only to ownership of land.48 It does not
extend to immovable or real property as defined under Article 415 of
the Civil Code. Otherwise, we would have a strange situation where
the ownership of immovable property such as trees, plants and
growing fruit attached to the land49 would be limited to Filipinos and
Filipino corporations only.
III.
WHEREFORE, in view of the foregoing, the petitioner’s Motion for

Reconsideration is DENIED WITH FINALITY and the decision appealed
from is AFFIRMED. The Motion to Elevate This Case to the Court En
Banc is likewise DENIED for lack of merit.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Corona, and Tinga,

JJ., concur.
People vs. Quasha (93 Phil. 333 [1953])
G.R. No. L-6055 June 12, 1953
THE PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
WILLIAM H. QUASHA, defendant-appellant.
Jose P. Laurel for appellant and William H. Quasha in his own behalf.
Office of the Solicitor General Juan R. Liwag and Assistant Solicitor
General Francisco Carreon for appellee.
REYES, J.:
William H. Quasha, a member of the Philippine bar, was charged in

the Court of First Instance of Manila with the crime of falsification of a
public and commercial document in that, having been entrusted

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with the preparation and registration of the article of incorporation
of the Pacific Airways Corporation, a domestic corporation
organized for the purpose of engaging in business as a common
carrier, he caused it to appear in said article of incorporation that
one Arsenio Baylon, a Filipino citizen, had subscribed to and was the
owner of 60.005 per cent of the subscribed capital stock of the
corporation when in reality, as the accused well knew, such was not
the case, the truth being that the owner of the portion of the capital
stock subscribed to by Baylon and the money paid thereon were
American citizen whose name did not appear in the article of
incorporation, and that the purpose for making this false statement
was to circumvent the constitutional mandate that no corporation
shall be authorize to operate as a public utility in the Philippines
unless 60 per cent of its capital stock is owned by Filipinos.
Found guilty after trial and sentenced to a term of imprisonment and

a fine, the accused has appealed to this Court.
The essential facts are not in dispute. On November 4,1946, the

Pacific Airways Corporation registered its articles of incorporation
with the Securities and Exchanged Commission. The article were
prepared and the registration was effected by the accused, who
was in fact the organizer of the corporation. The article stated that
the primary purpose of the corporation was to carry on the business
of a common carrier by air, land or water; that its capital stock was
P1,000,000, represented by 9,000 preferred and 100,000 common
shares, each preferred share being of the par value of p100 and
entitled to 1/3 vote and each common share, of the par value of P1
and entitled to one vote; that the amount capital stock actually
subscribed was P200,000, and the names of the subscribers were
Arsenio Baylon, Eruin E. Shannahan, Albert W. Onstott, James
O'Bannon, Denzel J. Cavin, and William H. Quasha, the first being a
Filipino and the other five all Americans; that Baylon's subscription
was for 1,145 preferred shares, of the total value of P114,500, and for
6,500 common shares, of the total par value of P6,500, while the
aggregate subscriptions of the American subscribers were for 200
preferred shares, of the total par value of P20,000, and 59,000
common shares, of the total par value of P59,000; and that Baylon
and the American subscribers had already paid 25 per cent of their
respective subscriptions. Ostensibly the owner of, or subscriber to,
60.005 per cent of the subscribed capital stock of the corporation,
Baylon nevertheless did not have the controlling vote because of
the difference in voting power between the preferred shares and
the common shares. Still, with the capital structure as it was, the
article of incorporation were accepted for registration and a
certificate of incorporation was issued by the Securities and
Exchange Commission.

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There is no question that Baylon actually subscribed to 60.005 per
cent of the subscribed capital stock of the corporation. But it is
admitted that the money paid on his subscription did not belong to
him but to the Americans subscribers to the corporate stock. In
explanation, the accused testified, without contradiction, that in the
process of organization Baylon was made a trustee for the American
incorporators, and that the reason for making Baylon such trustee
was as follows:
Q. According to this article of incorporation Arsenio Baylon

subscribed to 1,135 preferred shares with a total value of
P1,135. Do you know how that came to be?
A. Yes.
The people who were desirous of forming the corporation, whose

names are listed on page 7 of this certified copy came to my house,
Messrs. Shannahan, Onstott, O'Bannon, Caven, Perry and
Anastasakas one evening. There was considerable difficulty to get
them all together at one time because they were pilots. They had
difficulty in deciding what their respective share holdings would be.
Onstott had invested a certain amount of money in airplane surplus
property and they had obtained a considerable amount of money
on those planes and as I recall they were desirous of getting a
corporation formed right away. And they wanted to have their
respective shares holdings resolved at a latter date. They stated that
they could get together that they feel that they had no time to settle
their respective share holdings. We discussed the matter and finally it
was decided that the best way to handle the things was not to put
the shares in the name of anyone of the interested parties and to
have someone act as trustee for their respective shares holdings. So
we looked around for a trustee. And he said "There are a lot of
people whom I trust." He said, "Is there someone around whom we
could get right away?" I said, "There is Arsenio. He was my boy during
the liberation and he cared for me when i was sick and i said i
consider him my friend." I said. They all knew Arsenio. He is a very kind
man and that was what was done. That is how it came about.
Defendant is accused under article 172 paragraph 1, in connection

with article 171, paragraph 4, of the Revised Penal Code, which
read:
ART. 171. Falsification by public officer, employee, or notary or

ecclesiastic minister. — The penalty of prision mayor and a fine
not to exceed 5,000 pesos shall be imposed upon any public
officer, employee, or notary who, taking advantage of his
official position, shall falsify a document by committing any of
the following acts:

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xxx xxx xxx
4. Making untruthful statements in a narration of facts.
ART. 172. Falsification by private individuals and use of falsified

documents. — The penalty of prision correccional in its medium
and maximum period and a fine of not more than 5,000 pesos
shall be imposed upon:
xxx xxx xxx
1. Any private individual who shall commit any of the

falsifications enumerated in the next preceding article in any
public or official document or letter of exchange or any other
kind of commercial document.
Commenting on the above provision, Justice Albert, in his well-

known work on the Revised Penal Code ( new edition, pp. 407-408),
observes, on the authority of U.S. vs. Reyes, (1 Phil., 341), that the
perversion of truth in the narration of facts must be made with the
wrongful intent of injuring a third person; and on the authority of U.S.
vs. Lopez (15 Phil., 515), the same author further maintains that even
if such wrongful intent is proven, still the untruthful statement will not
constitute the crime of falsification if there is no legal obligation on
the part of the narrator to disclose the truth. Wrongful intent to injure
a third person and obligation on the part of the narrator to disclose
the truth are thus essential to a conviction for a crime of falsification
under the above article of the Revised Penal Code.
Now, as we see it, the falsification imputed in the accused in the

present case consists in not disclosing in the articles of incorporation
that Baylon was a mere trustee ( or dummy as the prosecution
chooses to call him) of his American co-incorporators, thus giving the
impression that Baylon was the owner of the shares subscribed to by
him which, as above stated, amount to 60.005 per cent of the sub-
scribed capital stock. This, in the opinion of the trial court, is a
malicious perversion of the truth made with the wrongful intent
circumventing section 8, Article XIV of the Constitution, which
provides that " no franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted
except to citizens of the Philippines or to corporation or other entities
organized under the law of the Philippines, sixty per centum of the
capital of which is owned by citizens of the Philippines . . . ." Plausible
though it may appear at first glance, this opinion loses validity once it
is noted that it is predicated on the erroneous assumption that the
constitutional provision just quoted was meant to prohibit the mere
formation of a public utility corporation without 60 per cent of its
capital being owned by the Filipinos, a mistaken belief which has
induced the lower court to that the accused was under obligation
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to disclose the whole truth about the nationality of the subscribed
capital stock of the corporation by revealing that Baylon was a mere
trustee or dummy of his American co-incorporators, and that in not
making such disclosure defendant's intention was to circumvent the
Constitution to the detriment of the public interests. Contrary to the
lower court's assumption, the Constitution does not prohibit the mere
formation of a public utility corporation without the required
formation of Filipino capital. What it does prohibit is the granting of a
franchise or other form of authorization for the operation of a public
utility to a corporation already in existence but without the requisite
proportion of Filipino capital. This is obvious from the context, for the
constitutional provision in question qualifies the terms " franchise",
"certificate", or "any other form of authorization" with the phrase "for
the operation of a public utility," thereby making it clear that the
franchise meant is not the "primary franchise" that invest a body of
men with corporate existence but the "secondary franchise" or the
privilege to operate as a public utility after the corporation has
already come into being.
If the Constitution does not prohibit the mere formation of a public

utility corporation with the alien capital, then how can the accused
be charged with having wrongfully intended to circumvent that
fundamental law by not revealing in the articles of incorporation
that Baylon was a mere trustee of his American co-incorporation
and that for that reason the subscribed capital stock of the
corporation was wholly American? For the mere formation of the
corporation such revelation was not essential, and the Corporation
Law does not require it. Defendant was, therefore, under no
obligation to make it. In the absence of such obligation and of the
allege wrongful intent, defendant cannot be legally convicted of
the crime with which he is charged.
It is urged, however, that the formation of the corporation with 60

per cent of its subscribed capital stock appearing in the name of
Baylon was an indispensable preparatory step to the subversion of
the constitutional prohibition and the laws implementing the policy
expressed therein. This view is not correct. For a corporation to be
entitled to operate a public utility it is not necessary that it be
organized with 60 per cent of its capital owned by Filipinos from the
start. A corporation formed with capital that is entirely alien may
subsequently change the nationality of its capital through transfer of
shares to Filipino citizens. conversely, a corporation originally formed
with Filipino capital may subsequently change the national status of
said capital through transfer of shares to foreigners. What need is
there then for a corporation that intends to operate a public utility to
have, at the time of its formation, 60 per cent of its capital owned by
Filipinos alone? That condition may anytime be attained thru the
necessary transfer of stocks. The moment for determining whether a

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corporation is entitled to operate as a public utility is when it applies
for a franchise, certificate, or any other form of authorization for that
purpose. And that can be done after the corporation has already
come into being and not while it is still being formed. And at that
moment, the corporation must show that it has complied not only
with the requirement of the Constitution as to the nationality of its
capital, but also with the requirements of the Civil Aviation Law if it is
a common carrier by air, the Revised Administrative Code if it is a
common carrier by water, and the Public Service Law if it is a
common carrier by land or other kind of public service.
Equally untenable is the suggestion that defendant should at least

be held guilty of an "impossible crime" under article 59 of the Revised
Penal Code. It not being possible to suppose that defendant had
intended to commit a crime for the simple reason that the alleged
constitutional prohibition which he is charged for having tried to
circumvent does not exist, conviction under that article is out of the
question.
The foregoing consideration can not but lead to the conclusion that
the defendant can not be held guilty of the crime charged. The
majority of the court, however, are also of the opinion that, even
supposing that the act imputed to the defendant constituted
falsification at the time it was perpetrated, still with the approval of
the Party Amendment to the Constitution in March, 1947, which
placed Americans on the same footing as Filipino citizens with
respect to the right to operate public utilities in the Philippines, thus
doing away with the prohibition in section 8, Article XIV of the
Constitution in so far as American citizens are concerned, the said
act has ceased to be an offense within the meaning of the law, so
that defendant can no longer be held criminally liable therefor.
In view of the foregoing, the judgment appealed from is reversed

and the defendant William H. Quasha acquitted, with costs de
oficio.
Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Jugo, Bautista Angelo,

and Labrador, JJ., concur.
G.R. No. L-6055 June 12, 1953
Lessons Applicable: Public Utilities (Corporate Law)
FACTS:
suigeneris
 William H. Quasha
o a member of the Philippine bar, committed a crime of

falsification of a public and commercial document for
causing it to appear that Arsenio Baylon, a Filipino citizen,
had subscribed to and was the owner of 60.005 % of the
subscribed capital stock of Pacific Airways Corp.
(Pacific) when in reality the money paid belongs to an
American citizen whose name did not appear in the
article of incorporation,
 to circumvent the constitutional mandate that no

corp. shall be authorize to operate as a public utility
in the Philippines unless 60% of its capital stock is
owned by Filipinos.
o Found guilty after trial and sentenced to a term of

imprisonment and a fine
 Quasha appealed to this Court
 Primary purpose: to carry on the business of a common carrier

by air, land or water
 Baylon did not have the controlling vote because of the

difference in voting power between the preferred shares and
the common shares
 ART. 171. Falsification by public officer, employee, or notary or

ecclesiastic minister. — The penalty of prision mayor and a fine
the following acts:
4. Making untruthful statements in a narration of facts.
 ART. 172. Falsification by private individuals and use of falsified

documents. — The penalty of prision correccional in its medium
and maximum period and a fine of not more than 5,000 pesos
shall be imposed upon:

falsifications enumerated in the next preceding
article in any public or official document or letter of

exchange or any other kind of commercial
document.

suigeneris
ISSUE: W/N Quasha should be criminally liable
HELD: NO. Acquitted.
 falsification consists in not disclosing in the articles of

incorporation that Baylon was a mere trustee ( or dummy as
the prosecution chooses to call him) of his American co-
incorporators, thus giving the impression that Baylon was the
owner of the shares subscribed to by him
 For the mere formation of the corporation such revelation was

not essential, and the Corporation Law does not require it
 The moment for determining whether a corporation is entitled

to operate as a public utility is when it applies for a franchise,
certificate, or any other form of authorization for that purpose.
o that can be done after the corporation has already come

into being and not while it is still being formed
 so far as American citizens are concerned, the said act has

ceased to be an offense within the meaning of the law, so that
defendant can no longer be held criminally liable therefor.
PCI Bank vs. CA (350 SCRA 446 [2001])
G.R. No. 121413 January 29, 2001
PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR

BANK OF ASIA AND AMERICA), petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A.,
respondents.
G.R. No. 121479 January 29, 2001
FORD PHILIPPINES, INC., petitioner-plaintiff,

vs.
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, respondents.

suigeneris
G.R. No. 128604 January 29, 2001
FORD PHILIPPINES, INC., petitioner,

vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and
COURT OF APPEALS, respondents.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated

checks.
The original actions a quo were instituted by Ford Philippines to

recover from the drawee bank, CITIBANK, N.A. (Citibank) and
collecting bank, Philippine Commercial International Bank (PCIBank)
[formerly Insular Bank of Asia and America], the value of several
checks payable to the Commissioner of Internal Revenue, which
were embezzled allegedly by an organized syndicate.1âwphi1.nêt
G.R. Nos. 121413 and 121479 are twin petitions for review of the
March 27, 1995 Decision1 of the Court of Appeals in CA-G.R. CV No.
25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Insular
Bank of Asia and America (now Philipppine Commercial
International Bank), and the August 8, 1995 Resolution,2 ordering the
collecting bank, Philippine Commercial International Bank, to pay
the amount of Citibank Check No. SN-04867.
In G.R. No. 128604, petitioner Ford Philippines assails the October 15,
1996 Decision3 of the Court of Appeals and its March 5, 1997
Resolution4 in CA-G.R. No. 28430 entitled "Ford Philippines, Inc. vs.
Citibank, N.A. and Philippine Commercial International Bank,"
affirming in toto the judgment of the trial court holding the
defendant drawee bank, Citibank, N.A., solely liable to pay the
amount of P12,163,298.10 as damages for the misapplied proceeds
of the plaintiff's Citibanl Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the

Court of Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and issued its
Citibank Check No. SN-04867 in the amount of P4,746,114.41, in
favor of the Commissioner of Internal Revenue as payment of
plaintiff;s percentage or manufacturer's sales taxes for the third
quarter of 1977.
The aforesaid check was deposited with the degendant IBAA

(now PCIBank) and was subsequently cleared at the Central

suigeneris
Bank. Upon presentment with the defendant Citibank, the
proceeds of the check was paid to IBAA as collecting or
depository bank.
The proceeds of the same Citibank check of the plaintiff was

never paid to or received by the payee thereof, the
Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or

Commissioner of Internal Revenue, the plaintiff was compelled
to make a second payment to the Bureau of Internal Revenue
of its percentage/manufacturers' sales taxes for the third
quarter of 1977 and that said second payment of plaintiff in the
amount of P4,746,114.41 was duly received by the Bureau of
Internal Revenue.
It is further admitted by defendant Citibank that during the time

of the transactions in question, plaintiff had been maintaining a
checking account with defendant Citibank; that Citibank
Check No. SN-04867 which was drawn and issued by the
plaintiff in favor of the Commissioner of Internal Revenue was a
crossed check in that, on its face were two parallel lines and
written in between said lines was the phrase "Payee's Account
Only"; and that defendant Citibank paid the full face value of
the check in the amount of P4,746,114.41 to the defendant
IBAA.
It has been duly established that for the payment of plaintiff's

percentage tax for the last quarter of 1977, the Bureau of
Internal Revenue issued Revenue Tax Receipt No. 18747002,
dated October 20, 1977, designating therein in Muntinlupa,
Metro Manila, as the authorized agent bank of Metrobanl,
Alabang branch to receive the tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-04867,

together with the Revenue Tax Receipt No. 18747002, was
deposited with defendant IBAA, through its Ermita Branch. The
latter accepted the check and sent it to the Central Clearing
House for clearing on the samd day, with the indorsement at
the back "all prior indorsements and/or lack of indorsements
guaranteed." Thereafter, defendant IBAA presented the check
for payment to defendant Citibank on same date, December
19, 1977, and the latter paid the face value of the check in the
amount of P4,746,114.41. Consequently, the amount of
P4,746,114.41 was debited in plaintiff's account with the
defendant Citibank and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check

No. SN-04867 in the amount of P4,746,114.41 was not paid to
suigeneris
the Commissioner of Internal Revenue. Hence, in separate
letters dated October 26, 1979, addressed to the defendants,
the plaintiff notified the latter that in case it will be re-assessed
by the BIR for the payment of the taxes covered by the said
checks, then plaintiff shall hold the defendants liable for
reimbursement of the face value of the same. Both defendants
denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner

of Internal Revenue addressed to the plaintiff - supposed to be
Exhibit "D", the latter was officially informed, among others, that
its check in the amount of P4, 746,114.41 was not paid to the
government or its authorized agent and instead encashed by
unauthorized persons, hence, plaintiff has to pay the said
amount within fifteen days from receipt of the letter. Upon
advice of the plaintiff's lawyers, plaintiff on March 11, 1982, paid
to the Bureau of Internal Revenue, the amount of P4,746,114.41,
representing payment of plaintiff's percentage tax for the third
quarter of 1977.
As a consequence of defendant's refusal to reimburse plaintiff

of the payment it had made for the second time to the BIR of
its percentage taxes, plaintiff filed on January 20, 1983 its
original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the

Philippine Commercial International Bank (PCI Bank) with the
latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of

plaintiff's Citibank Check No. SN-04867 in the amount of
P4,746,114.41 "was in due course"; it merely relied on the
clearing stamp of the depository/collecting bank, the
defendant IBAA that "all prior indorsements and/or lack of
indorsements guaranteed"; and the proximate cause of
plaintiff's injury is the gross negligence of defendant IBAA in
indorsing the plaintiff's Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of

plaintiff's Citibank Check No. SN-048867 was paid to defendant
IBAA as collecting bank, plaintiff was maintaining a checking
account with defendant Citibank."5
Although it was not among the stipulated facts, an investigation by

the National Bureau of Investigation (NBI) revealed that Citibank
Check No. SN-04867 was recalled by Godofredo Rivera, the General
Ledger Accountant of Ford. He purportedly needed to hold back
the check because there was an error in the computation of the tax
due to the Bureau of Internal Revenue (BIR). With Rivera's instruction,
suigeneris
PCIBank replaced the check with two of its own Manager's Checks
(MCs). Alleged members of a syndicate later deposited the two MCs
with the Pacific Banking Corporation.
Ford, with leave of court, filed a third-party complaint before the trial
court impleading Pacific Banking Corporation (PBC) and Godofredo
Rivera, as third party defendants. But the court dismissed the
complaint against PBC for lack of cause of action. The course
likewise dismissed the third-party complaint against Godofredo
Rivera because he could not be served with summons as the NBI
declared him as a "fugitive from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as follows:
"1. Ordering the defendants Citibank and IBAA (now PCI

Bank), jointly and severally, to pay the plaintiff the amount
of P4,746,114.41 representing the face value of plaintiff's
Citibank Check No. SN-04867, with interest thereon at the
legal rate starting January 20, 1983, the date when the
original complaint was filed until the amount is fully paid,
plus costs;
"2. On defendant Citibank's cross-claim: ordering the

cross-defendant IBAA (now PCI Bank) to reimburse
defendant Citibank for whatever amount the latter has
paid or may pay to the plaintiff in accordance with next
preceding paragraph;
"3. The counterclaims asserted by the defendants against

the plaintiff, as well as that asserted by the cross-
defendant against the cross-claimant are dismissed, for
lack of merits; and
"4. With costs against the defendants.
SO ORDERED."6
Not satisfied with the said decision, both defendants, Citibank and
PCIBank, elevated their respective petitions for review on certiorari to
the Courts of Appeals. On March 27, 1995, the appellate court issued
its judgment as follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS the

appealed decision with modifications.
The court hereby renderes judgment:

suigeneris
1. Dismissing the complaint in Civil Case No. 49287 insofar
as defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the

plaintiff the amount of P4,746,114.41 representing the face
value of plaintiff's Citibank Check No. SN-04867, with
interest thereon at the legal rate starting January 20, 1983,
the date when the original complaint was filed until the
amount is fully paid;
3. Dismissing the counterclaims asserted by the

defendants against the plaintiff as well as that asserted by
the cross-defendant against the cross-claimant, for lack of
merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."7
PCI Bank moved to reconsider the above-quoted decision of the

Court of Appeals, while Ford filed a "Motion for Partial
Reconsideration." Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for
review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and
resolution of the Twelfth Division of the Court of Appeals contending
that it merely acted on the instruction of Ford and such casue of
action had already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the
petitioner acted on the check drawn by respondent Ford on
the said respondent's instructions, it nevertheless found the
petitioner liable to the said respondent for the full amount of
the said check.
II. Did the respondent court err when it did not find prescription
in favor of the petitioner.8
In a counter move, Ford filed its petition docketed as G.R. No.

121479, questioning the same decision and resolution of the Court of
Appeals, and praying for the reinstatement in toto of the decision of
the trial court which found both PCIBank and Citibank jointly and
severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions

for consideration:
suigeneris
I. Respondent Citibank is liable to petitioner Ford considering
that:
1. As drawee bank, respondent Citibank owes to

petitioner Ford, as the drawer of the subject check and a
depositor of respondent Citibank, an absolute and
contractual duty to pay the proceeds of the subject
check only to the payee thereof, the Commissioner of
Internal Revenue.
2. Respondent Citibank failed to observe its duty as

banker with respect to the subject check, which was
crossed and payable to "Payee's Account Only."
3. Respondent Citibank raises an issue for the first time on

appeal; thus the same should not be considered by the
Honorable Court.
4. As correctly held by the trial court, there is no evidence

of gross negligence on the part of petitioner Ford.9
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to deliver

the proceeds of the subject check to a person other than
the payee named therein, the Commissioner of the
Bureau of Internal Revenue; thus, PCIBank's only obligation
is to deliver the proceeds to the Commissioner of the
Bureau of Internal Revenue.10
2. PCIBank which affixed its indorsement on the subject

check ("All prior indorsement and/or lack of indorsement
guaranteed"), is liable as collecting bank.11
3. PCIBank is barred from raising issues of fact in the instant

proceedings.12
4. Petitioner Ford's cause of action had not prescribed.13
II. G.R. No. 128604
The same sysndicate apparently embezzled the proceeds of checks

intended, this time, to settle Ford's percentage taxes appertaining to
the second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the
amount of P5,851,706.37 representing the percentage tax due for
the second quarter of 1978 payable to the Commissioner of Internal

suigeneris
Revenue. A BIR Revenue Tax Receipt No. 28645385 was issued for the
said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in
the amount of P6,311,591.73, representing the payment of
percentage tax for the first quarter of 1979 and payable to the
Commissioner of Internal Revenue. Again a BIR Revenue Tax Receipt
No. A-1697160 was issued for the said purpose.
Both checks were "crossed checks" and contain two diagonal lines
on its upper corner between, which were written the words "payable
to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated
February 28, 1980, the BIR, Region 4-B, demanded for the said tax
payments the corresponding periods above-mentioned.
As far as the BIR is concernced, the said two BIR Revenue Tax
Receipts were considered "fake and spurious". This anomaly was
confirmed by the NBI upon the initiative of the BIR. The findings
forced Ford to pay the BIR a new, while an action was filed against
Citibank and PCIBank for the recovery of the amount of Citibank
Check Numbers SN-10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case,
made its findings on the modus operandi of the syndicate, as follows:
"A certain Mr. Godofredo Rivera was employed by the plaintiff

FORD as its General Ledger Accountant. As such, he prepared
the plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-
10597] for payment to the BIR. Instead, however, fo delivering
the same of the payee, he passed on the check to a co-
conspirator named Remberto Castro who was a pro-manager
of the San Andres Branch of PCIB.* In connivance with one
Winston Dulay, Castro himself subsequently opened a
Checking Account in the name of a fictitious person
denominated as 'Reynaldo reyes' in the Meralco Branch of
PCIBank where Dulay works as Assistant Manager.
After an initial deposit of P100.00 to validate the account,

Castro deposited a worthless Bank of America Check in exactly
the same amount as the first FORD check (Exh. "A",
P5,851,706.37) while this worthless check was coursed through
PCIB's main office enroute to the Central Bank for clearing,
replaced this worthless check with FORD's Exhibit 'A' and
accordingly tampered the accompanying documents to
cover the replacement. As a result, Exhibit 'A' was cleared by
defendant CITIBANK, and the fictitious deposit account of
'Reynaldo Reyes' was credited at the PCIB Meralco Branch with
suigeneris
the total amount of the FORD check Exhibit 'A'. The same
method was again utilized by the syndicate in profiting from
Exh. 'B' [Citibank Check No. SN-16508] which was subsequently
pilfered by Alexis Marindo, Rivera's Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew various

checks distributing the sahres of the other participating
conspirators namely (1) CRISANTO BERNABE, the mastermind
who formulated the method for the embezzlement; (2)
RODOLFO R. DE LEON a customs broker who negotiated the
initial contact between Bernabe, FORD's Godofredo Rivera
and PCIB's Remberto Castro; (3) JUAN VASTILLO who assisted
de Leon in the initial arrangements; (4) GODOFREDO RIVERA,
FORD's accountant who passed on the first check (Exhibit "A")
to Castro; (5) REMERTO CASTRO, PCIB's pro-manager at San
Andres who performed the switching of checks in the clearing
process and opened the fictitious Reynaldo Reyes account at
the PCIB Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant
Manager at its Meralco Branch, who assisted Castro in
switching the checks in the clearing process and facilitated the
opening of the fictitious Reynaldo Reyes' bank account; (7)
ALEXIS MARINDO, Rivera's Assistant at FORD, who gave the
second check (Exh. "B") to Castro; (8) ELEUTERIO JIMENEZ, BIR
Collection Agent who provided the fake and spurious revenue
tax receipts to make it appear that the BIR had received
FORD's tax payments.
Several other persons and entities were utilized by the

syndicate as conduits in the disbursements of the proceeds of
the two checks, but like the aforementioned participants in the
conspiracy, have not been impleaded in the present case. The
manner by which the said funds were distributed among them
are traceable from the record of checks drawn against the
original "Reynaldo Reyes" account and indubitably identify the
parties who illegally benefited therefrom and readily indicate in
what amounts they did so."14
On December 9, 1988, Regional Trial Court of Makati, Branch 57,

held drawee-bank, Citibank, liable for the value of the two checks
while adsolving PCIBank from any liability, disposing as follows:
"WHEREFORE, judgment is hereby rendered sentencing

defendant CITIBANK to reimburse plaintiff FORD the total
amount of P12,163,298.10 prayed for in its complaint, with 6%
interest thereon from date of first written demand until full
payment, plus P300,000.00 attorney's fees and expenses
litigation, and to pay the defendant, PCIB (on its counterclaim

suigeneris
to crossclaim) the sum of P300,000.00 as attorney's fees and
costs of litigation, and pay the costs.
SO ORDERED."15
Both Ford and Citibank appealed to the Court of Appeals which

affirmed, in toto, the decision of the trial court. Hence, this petition.
Petitioner Ford prays that judgment be rendered setting aside the

portion of the Court of Appeals decision and its resolution dated
March 5, 1997, with respect to the dismissal of the complaint against
PCIBank and holding Citibank solely responsible for the proceeds of
Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73 and
P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the

complaint against defendant PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to

exercise the diligence required to be exercised by it as a
banking insitution.
II. Defendant PCIBank clearly failed to observe the diligence

required in the selection and supervision of its officers and
employees.
III. Defendant PCIBank was, due to its negligence, clearly liable

for the loss or damage resulting to the plaintiff Ford as a
consequence of the substitution of the check consistent with
Section 5 of Central Bank Circular No. 580 series of 1977.
IV. Assuming arguedo that defedant PCIBank did not accept,

endorse or negotiate in due course the subject checks, it is
liable, under Article 2154 of the Civil Code, to return the money
which it admits having received, and which was credited to it
its Central bank account.16
The main issue presented for our consideration by these petitions

could be simplified as follows: Has petitioner Ford the right to recover
from the collecting bank (PCIBank) and the drawee bank (Citibank)
the value of the checks intended as payment to the Commissioner
of Internal Revenue? Or has Ford's cause of action already
prescribed?
Note that in these cases, the checks were drawn against the
drawee bank, but the title of the person negotiating the same was
allegedly defective because the instrument was obtained by fraud
and unlawful means, and the proceeds of the checks were not
remitted to the payee. It was established that instead of paying the

suigeneris
checks to the CIR, for the settlement of the approprite quarterly
percentage taxes of Ford, the checks were diverted and encashed
for the eventual distribution among the mmbers of the syndicate. As
to the unlawful negotiation of the check the applicable law is
Section 55 of the Negotiable Instruments Law (NIL), which provides:
"When title defective -- The title of a person who negotiates an

instrument is defective within the meaning of this Act when he
obtained the instrument, or any signature thereto, by fraud,
duress, or fore and fear, or other unlawful means, or for an
illegal consideration, or when he negotiates it in breach of faith
or under such circumstances as amount to a fraud."
Pursuant to this provision, it is vital to show that the negotiation is

made by the perpetator in breach of faith amounting to fraud. The
person negotiating the checks must have gone beyond the
authority given by his principal. If the principal could prove that there
was no negligence in the performance of his duties, he may set up
the personal defense to escape liability and recover from other
parties who. Though their own negligence, alowed the commission
of the crime.
In this case, we note that the direct perpetrators of the offense,

namely the embezzlers belonging to a syndicate, are now fugitives
from justice. They have, even if temporarily, escaped liability for the
embezzlement of millions of pesos. We are thus left only with the task
of determining who of the present parties before us must bear the
burden of loss of these millions. It all boils down to thequestion of
liability based on the degree of negligence among the parties
concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of

the "imputed contributory negligence" that would defeat its claim for
reimbursement, bearing ing mind that its employees, Godofredo
Rivera and Alexis Marindo, were among the members of the
syndicate.
Citibank points out that Ford allowed its very own employee,
Godofredo Rivera, to negotiate the checks to his co-conspirators,
instead of delivering them to the designated authorized collecting
bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the
fact that Ford was remiss in the supervision and control of its own
employees, inasmuch as it only discovered the syndicate's activities
through the information given by the payee of the checks after an
unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly

authorized Godofredo Rivera to divert the proceeds of Citibank
Check No. SN-04867, instead of using it to pay the BIR. As to the
suigeneris
subsequent run-around of unds of Citibank Check Nos. SN-10597 and
16508, PCIBank claims that the proximate cause of the damge to
Ford lies in its own officers and employees who carried out the
fradulent schemes and the transactions. These circumstances were
not checked by other officers of the company including its
comptroller or internal auditor. PCIBank contends that the inaction of
Ford despite the enormity of the amount involved was a sheer
negligence and stated that, as between two innocent persons, one
of whom must suffer the consequences of a breach of trust, the one
who made it possible, by his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its
duties. It avers that there was no evidence presented before the trial
court showing lack of diligence on the part of Ford. And, citing the
case of Gempesaw vs. Court of Appeals,17 Ford argues that even if
there was a finding therein that the drawer was negligent, the
drawee bank was still ordered to pay damages.
Furthermore, Ford contends the Godofredo rivera was not

authorized to make any representation in its behalf, specifically, to
divert the proceeds of the checks. It adds that Citibank raised the
issue of imputed negligence against Ford for the first time on appeal.
Thus, it should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of

employer in a master-servant relationship is instructive. Since a
master may be held for his servant's wrongful act, the law imputes to
the master the act of the servant, and if that act is negligent or
wrongful and proximately results in injury to a third person, the
negligence or wrongful conduct is the negligence or wrongful
conduct of the master, for which he is liable.18 The general rule is that
if the master is injured by the negligence of a third person and by the
concuring contributory negligence of his own servant or agent, the
latter's negligence is imputed to his superior and will defeat the
superior's action against the third person, asuming, of course that the
contributory negligence was the proximate cause of the injury of
which complaint is made.19
Accordingly, we need to determine whether or not the action of

Godofredo Rivera, Ford's General Ledger Accountant, and/or Alexis
Marindo, his assistant, was the proximate cause of the loss or
damage. AS defined, proximate cause is that which, in the natural
and continuous sequence, unbroken by any efficient, intervening
cause produces the injury and without the result would not have
occurred.20
It appears that although the employees of Ford initiated the

transactions attributable to an organized syndicate, in our view, their

suigeneris
actions were not the proximate cause of encashing the checks
payable to the CIR. The degree of Ford's negligence, if any, could
not be characterized as the proximate cause of the injury to the
parties.
The Board of Directors of Ford, we note, did not confirm the request
of Godofredo Rivera to recall Citibank Check No. SN-04867. Rivera's
instruction to replace the said check with PCIBank's Manager's
Check was not in theordinary course of business which could have
prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it

was established that these checks were made payable to the CIR.
Both were crossed checks. These checks were apparently turned
around by Ford's emploees, who were acting on their own personal
capacity.
Given these circumstances, the mere fact that the forgery was
committed by a drawer-payor's confidential employee or agent,
who by virtue of his position had unusual facilities for perpertrating
the fraud and imposing the forged paper upon the bank, does
notentitle the bank toshift the loss to the drawer-payor, in the
absence of some circumstance raising estoppel against the
drawer.21 This rule likewise applies to the checks fraudulently
negotiated or diverted by the confidential employees who hold
them in their possession.
With respect to the negligence of PCIBank in the payment of the

three checks involved, separately, the trial courts found variations
between the negotiation of Citibank Check No. SN-04867 and the
misapplication of total proceeds of Checks SN-10597 and 16508.
Therefore, we have to scrutinize, separately, PCIBank's share of
negligence when the syndicate achieved its ultimate agenda of
stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its

Ermita Branch. It was coursed through the ordinary banking
transaction, sent to Central Clearing with the indorsement at the
back "all prior indorsements and/or lack of indorsements
guaranteed," and was presented to Citibank for payment.
Thereafter PCIBank, instead of remitting the proceeds to the CIR,
prepared two of its Manager's checks and enabled the syndicate to
encash the same.
On record, PCIBank failed to verify the authority of Mr. Rivera to

negotiate the checks. The neglect of PCIBank employees to verify
whether his letter requesting for the replacement of the Citibank
suigeneris
Check No. SN-04867 was duly authorized, showed lack of care and
prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect

the payment of taxpayers in behalf of the BIR. As an agent of BIR,
PCIBank is duty bound to consult its principal regarding the
unwarranted instructions given by the payor or its agent. As aptly
stated by the trial court, to wit:
"xxx. Since the questioned crossed check was deposited with

IBAA [now PCIBank], which claimed to be a
depository/collecting bank of BIR, it has the responsibility to
make sure that the check in question is deposited in Payee's
account only.
xxx xxx xxx
As agent of the BIR (the payee of the check), defendant IBAA

should receive instructions only from its principal BIR and not
from any other person especially so when that person is not
known to the defendant. It is very imprudent on the part of the
defendant IBAA to just rely on the alleged telephone call of the
one Godofredo Rivera and in his signature considering that the
plaintiff is not a client of the defendant IBAA."
It is a well-settled rule that the relationship between the payee or

holder of commercial paper and the bank to which it is sent for
collection is, in the absence of an argreement to the contrary, that
of principal and agent.22 A bank which receives such paper for
collection is the agent of the payee or holder.23
Even considering arguendo, that the diversion of the amount of a

check payable to the collecting bank in behalf of the designated
payee may be allowed, still such diversion must be properly
authorized by the payor. Otherwise stated, the diversion can be
justified only by proof of authority from the drawer, or that the
drawer has clothed his agent with apparent authority to receive the
proceeds of such check.
Citibank further argues that PCI Bank's clearing stamp appearing at

the back of the questioned checks stating that ALL PRIOR
INDORSEMENTS AND/OR LACK OF INDORSEMENTS GURANTEED
should render PCIBank liable because it made it pass through the
clearing house and therefore Citibank had no other option but to
pay it. Thus, Citibank had no other option but to pay it. Thus, Citibank
assets that the proximate cause of Ford's injury is the gross
negligence of PCIBank. Since the questione dcrossed check was
deposited with PCIBank, which claimed to be a
depository/collecting bank of the BIR, it had the responsibility to
suigeneris
make sure that the check in questions is deposited in Payee's
account only.
Indeed, the crossing of the check with the phrase "Payee's Account
Only," is a warning that the check should be deposited only in the
account of the CIR. Thus, it is the duty of the collecting bank PCIBank
to ascertain that the check be deposited in payee's account only.
Therefore, it is the collecting bank (PCIBank) which is bound to
scruninize the check and to know its depositors before it could make
the clearing indorsement "all prior indorsements and/or lack of
indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking

Corporation,24 we ruled:
"Anent petitioner's liability on said instruments, this court is in full

accord with the ruling of the PCHC's Board of Directors that:
'In presenting the checks for clearing and for payment, the
defendant made an express guarantee on the validity of "all
prior endorsements." Thus, stamped at the back of the checks
are the defedant's clear warranty: ALL PRIOR ENDORSEMENTS
AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such
warranty, plaintiff would not have paid on the checks.'
No amount of legal jargon can reverse the clear meaning of

defendant's warranty. As the warranty has proven to be false
and inaccurate, the defendant is liable for any damage arising
out of the falsity of its representation."25
Lastly, banking business requires that the one who first cashes and
negotiates the check must take some percautions to learn whether
or not it is genuine. And if the one cashing the check through
indifference or othe circumstance assists the forger in committing the
fraud, he should not be permitted to retain the proceeds of the
check from the drawee whose sole fault was that it did not discover
the forgery or the defect in the title of the person negotiating the
instrument before paying the check. For this reason, a bank which
cashes a check drawn upon another bank, without requiring proof
as to the identity of persons presenting it, or making inquiries with
regard to them, cannot hold the proceeds against the drawee
when the proceeds of the checks were afterwards diverted to the
hands of a third party. In such cases the drawee bank has a right to
believe that the cashing bank (or the collecting bank) had, by the
usual proper investigation, satisfied itself of the authenticity of the
negotiation of the checks. Thus, one who encashed a check which
had been forged or diverted and in turn received payment thereon
from the drawee, is guilty of negligence which proximately
contributed to the success of the fraud practiced on the drawee
suigeneris
bank. The latter may recover from the holder the money paid on the
check.26
Having established that the collecting bank's negligence is the

proximate cause of the loss, we conclude that PCIBank is liable in
the amount corresponding to the proceeds of Citibank Check No.
SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no
official act in the ordinary course of business that would attribute to it
the case of the embezzlement of Citibank Check Numbers SN-10597
and 16508, because PCIBank did not actually receive nor hold the
two Ford checks at all. The trial court held, thus:
"Neither is there any proof that defendant PCIBank contributed

any official or conscious participation in the process of the
embezzlement. This Court is convinced that the switching
operation (involving the checks while in transit for "clearing")
were the clandestine or hidden actuations performed by the
members of the syndicate in their own personl, covert and
private capacity and done without the knowledge of the
defendant PCIBank…"27
In this case, there was no evidence presented confirming the

conscious particiapation of PCIBank in the embezzlement. As a
general rule, however, a banking corporation is liable for the
wrongful or tortuous acts and declarations of its officers or agents
within the course and scope of their employment.28 A bank will be
held liable for the negligence of its officers or agents when acting
within the course and scope of their employment. It may be liable
for the tortuous acts of its officers even as regards that species of tort
of which malice is an essential element. In this case, we find a
situation where the PCIBank appears also to be the victim of the
scheme hatched by a syndicate in which its own management
employees had particiapted.
The pro-manager of San Andres Branch of PCIBank, Remberto

Castro, received Citibank Check Numbers SN-10597 and 16508. He
passed the checks to a co-conspirator, an Assistant Manager of
PCIBank's Meralco Branch, who helped Castro open a Checking
account of a fictitious person named "Reynaldo Reyes." Castro
deposited a worthless Bank of America Check in exactly the same
amount of Ford checks. The syndicate tampered with the checks
and succeeded in replacing the worthless checks and the eventual
encashment of Citibank Check Nos. SN 10597 and 16508. The
PCIBank Ptro-manager, Castro, and his co-conspirator Assistant
Manager apparently performed their activities using facilities in their
suigeneris
official capacity or authority but for their personal and private gain
or benefit.
A bank holding out its officers and agents as worthy of confidence

will not be permitted to profit by the frauds these officers or agents
were enabled to perpetrate in the apparent course of their
employment; nor will t be permitted to shirk its responsibility for such
frauds, even though no benefit may accrue to the bank therefrom.
For the general rule is that a bank is liable for the fraudulent acts or
representations of an officer or agent acting within the course and
apparent scope of his employment or authority.29 And if an officer or
employee of a bank, in his official capacity, receives money to
satisfy an evidence of indebetedness lodged with his bank for
collection, the bank is liable for his misappropriation of such sum.30
Moreover, as correctly pointed out by Ford, Section 531 of Central

Bank Circular No. 580, Series of 1977 provides that any theft affecting
items in transit for clearing, shall be for the account of sending bank,
which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank's
shoulders alone.
The evidence on record shows that Citibank as drawee bank was

likewise negligent in the performance of its duties. Citibank failed to
establish that its payment of Ford's checjs were made in due course
and legally in order. In its defense, Citibank claims the genuineness
and due execution of said checks, considering that Citibank (1) has
no knowledge of any informity in the issuance of the checks in
question (2) coupled by the fact that said checks were sufficiently
funded and (3) the endorsement of the Payee or lack thereof was
guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation to
honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to
Ford an absolute and contractual duty to pay the proceeds of the
subject check only to the payee thereof, the CIR. Citing Section 6232
of the Negotiable Instruments Law, Ford argues that by accepting
the instrument, the acceptro which is Citibank engages that it will
pay according to the tenor of its acceptance, and that it will pay
only to the payee, (the CIR), considering the fact that here the
check was crossed with annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer for

the damages incurred by Ford on Citibank Checks Numbers SN
10597 and 16508, because of the contractual relationship existing
between the two. Citibank, as the drawee bank breached its
contractual obligation with Ford and such degree of culpability

suigeneris
contributed to the damage caused to the latter. On this score, we
agree with the respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597

and 16508 before paying the amount of the proceeds thereof to the
collecting bank of the BIR. One thing is clear from the record: the
clearing stamps at the back of Citibank Check Nos. SN 10597 and
16508 do not bear any initials. Citibank failed to notice and verify the
absence of the clearing stamps. Had this been duly examined, the
switching of the worthless checks to Citibank Check Nos. 10597 and
16508 would have been discovered in time. For this reason, Citibank
had indeed failed to perform what was incumbent upon it, which is
to ensure that the amount of the checks should be paid only to its
designated payee. The fact that the drawee bank did not discover
the irregularity seasonably, in our view, consitutes negligence in
carrying out the bank's duty to its depositors. The point is that as a
business affected with public interest and because of the nature of
its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary
nature of their relationship.33
Thus, invoking the doctrine of comparative negligence, we are of

the view that both PCIBank and Citibank failed in their respective
obligations and both were negligent in the selection and supervision
of their employees resulting in the encashment of Citibank Check
Nos. SN 10597 AND 16508. Thus, we are constrained to hold them
equally liable for the loss of the proceeds of said checks issued by
Ford in favor of the CIR.
Time and again, we have stressed that banking business is so

impressed with public interest where the trust and confidence of the
public in general is of paramount umportance such that the
appropriate standard of diligence must be very high, if not the
highest, degree of diligence.34 A bank's liability as obligor is not
merely vicarious but primary, wherein the defense of exercise of due
diligence in the selection and supervision of its employees is of no
moment.35
Banks handle daily transactions involving millions of pesos.36 By the

very nature of their work the degree of responsibility, care and
trustworthiness expected of their employees and officials is far
greater than those of ordinary clerks and employees.37 Banks are
expected to exercise the highest degree of diligence in the selection
and supervision of their employees.38
On the issue of prescription, PCIBank claims that the action of Ford

had prescribed because of its inability to seek judicial relief
seasonably, considering that the alleged negligent act took place

suigeneris
prior to December 19, 1977 but the relief was sought only in 1983, or
seven years thereafter.
The statute of limitations begins to run when the bank gives the
depositor notice of the payment, which is ordinarily when the check
is returned to the alleged drawer as a voucher with a statement of
his account,39 and an action upon a check is ordinarily governed by
the statutory period applicable to instruments in writing.40
Our laws on the matter provide that the action upon a written
contract must be brought within ten year from the time the right of
action accrues.41 hence, the reckoning time for the prescriptive
period begins when the instrument was issued and the
corresponding check was returned by the bank to its depositor
(normally a month thereafter). Applying the same rule, the cause of
action for the recovery of the proceeds of Citibank Check No. SN
04867 would normally be a month after December 19, 1977, when
Citibank paid the face value of the check in the amount of
P4,746,114.41. Since the original complaint for the cause of action
was filed on January 20, 1984, barely six years had lapsed. Thus, we
conclude that Ford's cause of action to recover the amount of
Citibank Check No. SN 04867 was seasonably filed within the period
provided by law.
Finally, we also find thet Ford is not completely blameless in its failure
to detect the fraud. Failure on the part of the depositor to examine
its passbook, statements of account, and cancelled checks and to
give notice within a reasonable time (or as required by statute) of
any discrepancy which it may in the exercise of due care and
diligence find therein, serves to mitigate the banks' liability by
reducing the award of interest from twelve percent (12%) to six
percent (6%) per annum. As provided in Article 1172 of the Civil
Code of the Philippines, respondibility arising from negligence in the
performance of every kind of obligation is also demandable, but
such liability may be regulated by the courts, according to the
circumstances. In quasi-delicts, the contributory negligence of the
plaintiff shall reduce the damages that he may recover.42
WHEREFORE, the assailed Decision and Resolution of the Court of

Appeals in CA-G.R. CV No. 25017 are AFFIRMED. PCIBank, know
formerly as Insular Bank of Asia and America, id declared solely
responsible for the loss of the proceeds of Citibank Check No SN
04867 in the amount P4,746,114.41, which shall be paid together with
six percent (6%) interest thereon to Ford Philippines Inc. from the date
when the original complaint was filed until said amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-

G.R. No. 28430 are MODIFIED as follows: PCIBank and Citibank are

suigeneris
adjudged liable for and must share the loss, (concerning the
proceeds of Citibank Check Numbers SN 10597 and 16508 totalling
P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDERED to
pay Ford Philippines Inc. P6,081,649.05, with six percent (6%) interest
thereon, from the date the complaint was filed until full payment of
said amount.1âwphi1.nêt
Costs against Philippine Commercial International Bank and Citibank

N.A.
SO ORDERED.
Bellosillo, Mendoza, Buena, De Leon, Jr., JJ, concur.
PCIB V. CA
350 SCRA 446
FACTS:
Ford Philippines filed actions to recover from the drawee bank

Citibank and
collecting bank PCIB the value of several checks payable
to the Commissioner of Internal Revenue which were
embezzled allegedly by an
organized syndicate. What prompted this action was the drawi
ng of a
check by Ford, which it deposited to PCIB as payment and wa
s debited from their Citibank account. It later on found out that the
payment wasn’t
received by the Commissioner. Meanwhile, according to the N
BI report, one of the checks issued by petitioner was withdrawn from
PCIB for alleged mistake in the amount to be paid. This was
replaced with manager’s check
by PCIB, which were allegedly stolen by the syndicate and de
posited in their own account.
The trial court decided in favor of Ford.
ISSUE:
Has Ford the right to recover the value of the checks intended as
payment to CIR?
HELD:

suigeneris
The checks were drawn against the drawee bank but the title of the
person negotiating the same was allegedly defective because the
instrument was
obtained by fraud and unlawful means, and the proceeds of t
he checks were not remitted to the payee. It was established that
instead paying the
Commissioner, the checks were diverted and encashed for the
eventual distribution among members of the syndicate.
Pursuant to this, it is vital to show that the negotiation is made

by the perpetrator in breach of faith amounting to fraud. The
person negotiating the checks must have gone beyond the
authority given by his principal. If the principal could prove that
there was no negligence in the performance
of his duties, he may set up the personal defense to escape li
ability and recover from other parties who, through their own
negligence, allowed the commission of the crime.
It should be resolved if Ford is guilty of the imputed contributor

y negligence that would defeat its claim for reimbursement, bearing
in mind that its employees were among the members of the
syndicate. It appears
although the employees of Ford initiated the transactions attribu
table to
the organized syndicate, their actions were not the proximate c
ause of
encashing the checks payable to CIR. The degree of Ford’s n
egligence couldn’t be characterized as the
proximate cause of the injury to parties. The mere fact that th
e forgery was committed by a drawer-payor’s confidential
employee or agent, who by virtue of his position had unusual
facilities for perpetrating the fraud and imposing the forged paper
upon the bank, doesn’t entitle the bank to shift the loss to the
drawer-payor, in the absence of some circumstance raising estoppel
against the drawer.
Note: not only PCIB but also Citibank is responsible for negligen
ce. Citibank was negligent in the performance of its duties as a
drawee
bank. It failed to establish its payments of Ford’s checks were
made in due course and legally in order.
G.R. No. 121413,121479,128604 January 29, 2001
Lessons Applicable: Liabilities of the Parties (Negotiable Instruments

Law)

suigeneris
FACTS:
 These consolidated petitions involve several fraudulently

negotiated checks
 October 19, 1977: Ford drew and issued its Citibank Check of
P4,746,114.41, in favor of the Commissioner of Internal Revenue
(CIR) as payment of percentage or manufacturer's sales taxes
for the third quarter of 1977
o check was deposited with the IBAA (now PCIBank) and

was subsequently cleared at the Central Bank
 Ford, with leave of court, filed a third-party complaint before

the trial court impleading Pacific Banking Corporation (PBC)
and Godofredo Rivera, as third party defendants
o dismissed the complaint against PBC for lack of cause of

action
o dismissed the third-party complaint against Godofredo

Rivera because he could not be served with summons as
a "fugitive from justice"
 trial court: Citibank and IBAA (now PCI Bank), jointly and
severally, to pay the Ford
 April 20, 1979, Ford drew another Citibank Check of

P6,311,591.73, representing the payment of percentage tax for
the first quarter of 1979 payable to the CIR
 Both checks were "crossed checks" and contain two diagonal

lines on its upper corner between, which were written the words
"payable to the payee's account only."
 The checks never reached the payee, CIR
 As far as the BIR is concernced, the said two BIR Revenue Tax
Receipts were considered "fake and spurious".
o forced Ford to pay the BIR anew, while an action was filed
against Citibank and PCIBank for recovery
 RTC: Mr. Godofredo Rivera was employed by FORD as its

General Ledger Accountant. He prepared the check for
payment to the BIR. Instead, of delivering to the payee, he
gave it to Remberto Castro, a co-conspirator who was a pro-
manager of PCIB. Castro opened a Checking Account in the
name of a fictitious person "Reynaldo Reyes" with connivance
of Dulay, assistant manager of PCIB
suigeneris
 After an initial deposit of P100 to validate the account, Castro
deposited a worthless Bank of America Check in exactly the
same amount as the first FORD check while this worthless check
was coursed through PCIB's main office enroute to the Central
Bank for clearing, replaced this worthless check with Ford's and
accordingly tampered the accompanying documents to
cover the replacement. As a result, Ford's check was cleared
by CITIBANK, and the fictitious deposit account of 'Reynaldo
Reyes' was credited at the PCIB
 December 9, 1988: RTC Citibank (drawee bank) liable for the

value of the 2 checks while absolving PCIBank (collecting
bank) from any liability
ISSUE: W/N Ford can hold both PCIB and Citibank liable
HELD: YES. CA AFFIRMED. PCIBank, know formerly as Insular Bank of

Asia and America, id declared solely responsible for the loss of the
proceeds of Citibank Check in the amount P4,746,114.41. However,
MODIFIED as follows: PCIBank and Citibank are adjudged liable for
and must share the loss, concerning the proceeds of Citibank Check
Numbers SN 10597 and 16508 on a 50-50 ratio to pay Ford
 GR: if the master is injured by the negligence of a third person

and by the concuring contributory negligence of his own
servant or agent, the latter's negligence is imputed to his
superior and will defeat the superior's action against the third
person, asuming, of course that the contributory negligence
was the proximate cause of the injury of which complaint is
made.
 although the employees of Ford initiated the transactions

attributable to an organized syndicate, in our view, their
actions were not the proximate cause of encashing the checks
payable to the CIR
o degree of Ford's negligence, if any, could not be

characterized as the proximate cause of the injury to the
parties
 Rivera's instruction to replace the check with PCIBank's

Manager's Check was not in the ordinary course of business
which could have prompted PCIBank to validate the same.
o checks were made payable to the CIR
o Both were crossed checks

suigeneris
 These checks were apparently turned around by
Ford's emploees, who were acting on their own
personal capacity.
 Given these circumstances, the mere fact that the forgery was
committed by a drawer-payor's confidential employee or
agent, who by virtue of his position had unusual facilities for
perpertrating the fraud and imposing the forged paper upon
the bank, does not entitle the bank to shift the loss to the
drawer-payor, in the absence of some circumstance raising
estoppel against the drawer.
o This rule likewise applies to the checks fraudulently

negotiated or diverted by the confidential employees
who hold them in their possession.
 Furthermore, it was admitted that PCIBank is authorized to

collect the payment of taxpayers in behalf of the BIR.
o As an agent of BIR, PCIBank is duty bound to consult its

principal regarding the unwarranted instructions given by
the payor or its agent
o Otherwise stated, the diversion can be justified only by

proof of authority from the drawer, or that the drawer has
clothed his agent with apparent authority to receive the
proceeds of such check.
o it is the duty of the collecting bank PCIBank to ascertain

that the check be deposited in payee's account only.
Therefore, it is the collecting bank (PCIBank) which is
bound to scruninize the check and to know its depositors
before it could make the clearing indorsement "all prior
indorsements and/or lack of indorsement guaranteed".
 PCIBank did not actually receive nor hold the 2 Ford checks at
all. Neither is there any proof that defendant PCIBank
contributed any official or conscious participation in the
process of the embezzlement.
o the switching operation (involving the checks while in

transit for "clearing") were the clandestine or hidden
actuations performed by the members of the syndicate in
their own personl, covert and private capacity and done
without the knowledge of the defendant PCIBank…
 clearing stamps at the back of Citibank Check do not bear

any initials

suigeneris
o Citibank failed to notice and verify the absence of the
clearing stamps
o For this reason, Citibank had indeed failed to perform

what was incumbent upon it, which is to ensure that the
amount of the checks should be paid only to its
designated payee. The fact that the drawee bank did not
discover the irregularity seasonably, in our view, consitutes
negligence in carrying out the bank's duty to its
depositors.
 invoking the doctrine of comparative negligence, both

PCIBank and Citibank failed in their respective obligations and
both were negligent in the selection and supervision of their
employees resulting in the encashment
o hold them equally liable for the loss of the proceeds of the
checks issued by Ford in favor of the CIR
 The statute of limitations begins to run when the bank gives the
depositor notice of the payment, which is ordinarily when the
check is returned to the alleged drawer as a voucher with a
statement of his account, and an action upon a check is
ordinarily governed by the statutory period applicable to
instruments in writing.
o Our laws on the matter provide that the action upon a

written contract must be brought within ten year from the
time the right of action accrues hence, the reckoning
time for the prescriptive period begins when the
instrument was issued and the corresponding check was
returned by the bank to its depositor (normally a month
thereafter).
 Applying the same rule, the cause of action for the

recovery of the proceeds of Citibank Check No. SN
04867 would normally be a month after December
19, 1977, when Citibank paid the face value of the
check in the amount of P4,746,114.41. Since the
original complaint for the cause of action was filed
on January 20, 1984, barely six years had lapsed.
Thus, we conclude that Ford's cause of action to
recover the amount of Citibank Check No. SN 04867
was seasonably filed within the period provided by
law.
 Failure on the part of the FORD depositor to examine its

passbook, statements of account, and cancelled checks and
to give notice within a reasonable time (or as required by
statute) of any discrepancy which it may in the exercise of due
suigeneris
care and diligence find therein, serves to mitigate the banks'
liability by reducing the award of interest from twelve percent
(12%) to six percent (6%) per annum.
o Article 1172 of the Civil Code of the Philippines,

respondibility arising from negligence in the performance
of every kind of obligation is also demandable, but such
liability may be regulated by the courts, according to the
circumstances. In quasi-delicts, the contributory
negligence of the plaintiff shall reduce the damages that
he may recover.
350 SCRA 446 – Mercantile Law – Negotiable Instruments Law – Rights

of the Holder – What Constitutes a Holder in Due Course –
Negligence of the Collecting Bank and the Drawee Bank
There are three cases consolidated here: G.R. No. 121413 (PCIB vs
CA and Ford and Citibank), G.R. No. 121479 (Ford vs CA and
Citibank and PCIB), and G.R. No. 128604 (Ford vs Citibank and PCIB
and CA).
G.R. No. 121413/G.R. No. 121479
In October 1977, Ford Philippines drew a Citibank check in the

amount of P4,746,114.41 in favor of the Commissioner of the Internal
Revenue (CIR). The check represents Ford’s tax payment for the third
quarter of 1977. On the face of the check was written “Payee’s
account only” which means that the check cannot be encashed
and can only be deposited with the CIR’s savings account (which is
with Metrobank). The said check was however presented to PCIB
and PCIB accepted the same. PCIB then indorsed the check for
clearing to Citibank. Citibank cleared the check and paid PCIB
P4,746,114.41. CIR later informed Ford that it never received the tax
payment.
An investigation ensued and it was discovered that Ford’s

accountant Godofredo Rivera, when the check was deposited with
PCIB, recalled the check since there was allegedly an error in the
computation of the tax to be paid. PCIB, as instructed by Rivera,
replaced the check with two of its manager’s checks.
It was further discovered that Rivera was actually a member of a

syndicate and the manager’s checks were subsequently deposited
with the Pacific Banking Corporation by other members of the

suigeneris
syndicate. Thereafter, Rivera and the other members became
fugitives of justice.
G.R. No. 128604
In July 1978 and in April 1979, Ford drew two checks in the amounts
of P5,851,706.37 and P6,311,591.73 respectively. Both checks are
again for tax payments. Both checks are for “Payee’s account only”
or for the CIR’s bank savings account only with Metrobank. Again,
these checks never reached the CIR.
In an investigation, it was found that these checks were embezzled

by the same syndicate to which Rivera was a member. It was
established that an employee of PCIB, also a member of the
syndicate, created a PCIB account under a fictitious name upon
which the two checks, through high end manipulation, were
deposited. PCIB unwittingly endorsed the checks to Citibank which
the latter cleared. Upon clearing, the amount was withdrawn from
the fictitious account by syndicate members.
ISSUE: What are the liabilities of each party?
HELD: G.R. No. 121413/G.R. No. 121479
PCIB is liable for the amount of the check (P4,746,114.41). PCIB, as a

collecting bank has been negligent in verifying the authority of
Rivera to negotiate the check. It failed to ascertain whether or not
Rivera can validly recall the check and have them be replaced with
PCIB’s manager’s checks as in fact, Ford has no knowledge and did
not authorize such. A bank (in this case PCIB) which cashes a check
drawn upon another bank (in this case Citibank), without requiring
proof as to the identity of persons presenting it, or making inquiries
with regard to them, cannot hold the proceeds against the drawee
when the proceeds of the checks were afterwards diverted to the
hands of a third party. Hence, PCIB is liable for the amount of the
embezzled check.
G.R. No. 128604
PCIB and Citibank are liable for the amount of the checks on a 50-50
basis.
As a general rule, a bank is liable for the negligent or tortuous act of

its employees within the course and apparent scope of their
employment or authority. Hence, PCIB is liable for the fraudulent act
of its employee who set up the savings account under a fictitious
name.

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Citibank is likewise liable because it was negligent in the
performance of its obligations with respect to its agreement with
Ford. The checks which were drawn against Ford’s account with
Citibank clearly states that they are payable to the CIR only yet
Citibank delivered said payments to PCIB. Citibank however argues
that the checks were indorsed by PCIB to Citibank and that the
latter has nothing to do but to pay it. The Supreme Court cited
Section 62 of the Negotiable Instruments Law which mandates the
Citibank, as an acceptor of the checks, to engage in paying the
checks according to the tenor of the acceptance which is to deliver
the payment to the “payee’s account only”.
But the Supreme Court ruled that in the consolidated cases, that
PCIB and Citibank are not the only negligent parties. Ford is also
negligent for failing to examine its passbook in a timely manner
which could have avoided further loss. But this negligence is not the
proximate cause of the loss but is merely contributory. Nevertheless,
this mitigates the liability of PCIB and Citibank hence the rate of
interest, with which PCIB and Citibank is to pay Ford, is lowered from
12% to 6% per annum.
Ching vs. Secretary of Justice (481 SCRA 602 [2006])
G. R. No. 164317 February 6, 2006
ALFREDO CHING, Petitioner,

vs.
THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS-
VILLAVERT, JUDGE EDGARDO SUDIAM of the Regional Trial Court,
Manila, Branch 52; RIZAL COMMERCIAL BANKING CORP. and THE
PEOPLE OF THE PHILIPPINES, Respondents.
DECISION
CALLEJO, SR., J.:
Before the Court is a petition for review on certiorari of the Decision 1

of the Court of Appeals (CA) in CA-G.R. SP No. 57169 dismissing the
petition for certiorari, prohibition and mandamus filed by petitioner
Alfredo Ching, and its Resolution2 dated June 28, 2004 denying the
motion for reconsideration thereof.
Petitioner was the Senior Vice-President of Philippine Blooming Mills,

Inc. (PBMI). Sometime in September to October 1980, PBMI, through
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petitioner, applied with the Rizal Commercial Banking Corporation
(respondent bank) for the issuance of commercial letters of credit to
finance its importation of assorted goods.3
Respondent bank approved the application, and irrevocable letters

of credit were issued in favor of petitioner. The goods were
purchased and delivered in trust to PBMI. Petitioner signed 13 trust
receipts4 as surety, acknowledging delivery of the following goods:
T/R Date Maturity Principal Description of

Nos. Granted Date Goods
1845 12-05-80 03-05-81 P1,596,470.05 79.9425 M/T "SDK"

Brand Synthetic
Graphite Electrode
1853 12-08-80 03-06-81 P198,150.67 3,000 pcs. (15

bundles) Calorized
Lance Pipes
1824 11-28-80 02-26-81 P707,879.71 One Lot High Fired

Refractory Tundish
Bricks
1798 11-21-80 02-19-81 P835,526.25 5 cases spare parts

for CCM
1808 11-21-80 02-19-81 P370,332.52 200 pcs. ingot

moulds
2042 01-30-81 04-30-81 P469,669.29 High Fired

Refractory Nozzle
Bricks
1801 11-21-80 02-19-81 P2,001,715.17 Synthetic Graphite

Electrode [with]
tapered pitch filed
nipples
1857 12-09-80 03-09-81 P197,843.61 3,000 pcs. (15

bundles calorized
lance pipes [)]
1895 12-17-80 03-17-81 P67,652.04 Spare parts for

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Spectrophotometer
1911 12-22-80 03-20-81 P91,497.85 50 pcs. Ingot

moulds
2041 01-30-81 04-30-81 P91,456.97 50 pcs. Ingot

moulds
2099 02-10-81 05-11-81 P66,162.26 8 pcs. Kubota Rolls

for rolling mills
2100 02-10-81 05-12-81 P210,748.00 Spare parts for

Lacolaboratory
Equipment5
Under the receipts, petitioner agreed to hold the goods in trust for
the said bank, with authority to sell but not by way of conditional
sale, pledge or otherwise; and in case such goods were sold, to turn
over the proceeds thereof as soon as received, to apply against the
relative acceptances and payment of other indebtedness to
respondent bank. In case the goods remained unsold within the
specified period, the goods were to be returned to respondent bank
without any need of demand. Thus, said "goods, manufactured
products or proceeds thereof, whether in the form of money or bills,
receivables, or accounts separate and capable of identification"
were respondent bank’s property.
When the trust receipts matured, petitioner failed to return the goods
to respondent bank, or to return their value amounting to
P6,940,280.66 despite demands. Thus, the bank filed a criminal
complaint for estafa6 against petitioner in the Office of the City
Prosecutor of Manila.
After the requisite preliminary investigation, the City Prosecutor found

probable cause estafa under Article 315, paragraph 1(b) of the
Revised Penal Code, in relation to Presidential Decree (P.D.) No. 115,
otherwise known as the Trust Receipts Law. Thirteen (13) Informations
were filed against the petitioner before the Regional Trial Court (RTC)
of Manila. The cases were docketed as Criminal Cases No. 86-42169
to 86-42181, raffled to Branch 31 of said court.
Petitioner appealed the resolution of the City Prosecutor to the then

Minister of Justice. The appeal was dismissed in a Resolution 7 dated
March 17, 1987, and petitioner moved for its reconsideration. On
December 23, 1987, the Minister of Justice granted the motion, thus
reversing the previous resolution finding probable cause against

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petitioner.8 The City Prosecutor was ordered to move for the
withdrawal of the Informations.
This time, respondent bank filed a motion for reconsideration, which,

however, was denied on February 24, 1988.9 The RTC, for its part,
granted the Motion to Quash the Informations filed by petitioner on
the ground that the material allegations therein did not amount to
estafa.10
In the meantime, the Court rendered judgment in Allied Banking

Corporation v. Ordoñez,11 holding that the penal provision of P.D.
No. 115 encompasses any act violative of an obligation covered by
the trust receipt; it is not limited to transactions involving goods which
are to be sold (retailed), reshipped, stored or processed as a
component of a product ultimately sold. The Court also ruled that
"the non-payment of the amount covered by a trust receipt is an act
violative of the obligation of the entrustee to pay." 12
On February 27, 1995, respondent bank re-filed the criminal

complaint for estafa against petitioner before the Office of the City
Prosecutor of Manila. The case was docketed as I.S. No. 95B-07614.
Preliminary investigation ensued. On December 8, 1995, the City

Prosecutor ruled that there was no probable cause to charge
petitioner with violating P.D. No. 115, as petitioner’s liability was only
civil, not criminal, having signed the trust receipts as surety.13
Respondent bank appealed the resolution to the Department of
Justice (DOJ) via petition for review, alleging that the City Prosecutor
erred in ruling:
1. That there is no evidence to show that respondent

participated in the misappropriation of the goods subject of
the trust receipts;
2. That the respondent is a mere surety of the trust receipts; and
3. That the liability of the respondent is only civil in nature.14
On July 13, 1999, the Secretary of Justice issued Resolution No. 250 15
granting the petition and reversing the assailed resolution of the City
Prosecutor. According to the Justice Secretary, the petitioner, as
Senior Vice-President of PBMI, executed the 13 trust receipts and as
such, was the one responsible for the offense. Thus, the execution of
said receipts is enough to indict the petitioner as the official
responsible for violation of P.D. No. 115. The Justice Secretary also
declared that petitioner could not contend that P.D. No. 115 covers
only goods ultimately destined for sale, as this issue had already
been settled in Allied Banking Corporation v. Ordoñez,16 where the
Court ruled that P.D. No. 115 is "not limited to transactions in goods

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which are to be sold (retailed), reshipped, stored or processed as a
component of a product ultimately sold but covers failure to turn
over the proceeds of the sale of entrusted goods, or to return said
goods if unsold or not otherwise disposed of in accordance with the
terms of the trust receipts."
The Justice Secretary further stated that the respondent bound

himself under the terms of the trust receipts not only as a corporate
official of PBMI but also as its surety; hence, he could be proceeded
against in two (2) ways: first, as surety as determined by the Supreme
Court in its decision in Rizal Commercial Banking Corporation v.
Court of Appeals;17 and second, as the corporate official responsible
for the offense under P.D. No. 115, via criminal prosecution.
Moreover, P.D. No. 115 explicitly allows the prosecution of corporate
officers "without prejudice to the civil liabilities arising from the
criminal offense." Thus, according to the Justice Secretary, following
Rizal Commercial Banking Corporation, the civil liability imposed is
clearly separate and distinct from the criminal liability of the
accused under P.D. No. 115.
Conformably with the Resolution of the Secretary of Justice, the City

Prosecutor filed 13 Informations against petitioner for violation of P.D.
No. 115 before the RTC of Manila. The cases were docketed as
Criminal Cases No. 99-178596 to 99-178608 and consolidated for trial
before Branch 52 of said court. Petitioner filed a motion for
reconsideration, which the Secretary of Justice denied in a
Resolution18 dated January 17, 2000.
Petitioner then filed a petition for certiorari, prohibition and

mandamus with the CA, assailing the resolutions of the Secretary of
Justice on the following grounds:
1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND

IN FACT, ARE ACTING OPPRESSIVELY AGAINST ALFREDO CHING
WHEN THEY ALLOWED HIS PROSECUTION DESPITE THE FACT THAT
NO EVIDENCE HAD BEEN PRESENTED TO PROVE HIS
PARTICIPATION IN THE ALLEGED TRANSACTIONS.
2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT

IN GRAVE ABUSE OF DISCRETION AND IN EXCESS OF HIS
JURISDICTION WHEN THEY CONTINUED PROSECUTION OF THE
PETITIONER DESPITE THE LENGTH OF TIME INCURRED IN THE
TERMINATION OF THE PRELIMINARY INVESTIGATION THAT SHOULD
JUSTIFY THE DISMISSAL OF THE INSTANT CASE.
3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY

PROSECUTOR ACTED IN GRAVE ABUSE OF DISCRETION
AMOUNTING TO AN EXCESS OF JURISDICTION WHEN THEY

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CONTINUED THE PROSECUTION OF THE PETITIONER DESPITE LACK
OF SUFFICIENT BASIS.19
In his petition, petitioner incorporated a certification stating that "as

far as this Petition is concerned, no action or proceeding in the
Supreme Court, the Court of Appeals or different divisions thereof, or
any tribunal or agency. It is finally certified that if the affiant should
learn that a similar action or proceeding has been filed or is pending
before the Supreme Court, the Court of Appeals, or different divisions
thereof, of any other tribunal or agency, it hereby undertakes to
notify this Honorable Court within five (5) days from such notice."20
In its Comment on the petition, the Office of the Solicitor General

alleged that -
A.
THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED

THAT PETITIONER ALFREDO CHING IS THE OFFICER RESPONSIBLE
FOR THE OFFENSE CHARGED AND THAT THE ACTS OF PETITIONER
FALL WITHIN THE AMBIT OF VIOLATION OF P.D. [No.] 115 IN
RELATION TO ARTICLE 315, PAR. 1(B) OF THE REVISED PENAL
CODE.
B.
THERE IS NO MERIT IN PETITIONER’S CONTENTION THAT EXCESSIVE

DELAY HAS MARRED THE CONDUCT OF THE PRELIMINARY
INVESTIGATION OF THE CASE, JUSTIFYING ITS DISMISSAL.
C.
THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI,

PROHIBITION AND MANDAMUS IS NOT THE PROPER MODE OF
REVIEW FROM THE RESOLUTION OF THE DEPARTMENT OF JUSTICE.
THE PRESENT PETITION MUST THEREFORE BE DISMISSED.21
On April 22, 2004, the CA rendered judgment dismissing the petition

for lack of merit, and on procedural grounds. On the procedural
issue, it ruled that (a) the certification of non-forum shopping
executed by petitioner and incorporated in the petition was
defective for failure to comply with the first two of the three-fold
undertakings prescribed in Rule 7, Section 5 of the Revised Rules of
Civil Procedure; and (b) the petition for certiorari, prohibition and
mandamus was not the proper remedy of the petitioner.
On the merits of the petition, the CA ruled that the assailed

resolutions of the Secretary of Justice were correctly issued for the
following reasons: (a) petitioner, being the Senior Vice-President of

suigeneris
PBMI and the signatory to the trust receipts, is criminally liable for
violation of P.D. No. 115; (b) the issue raised by the petitioner, on
whether he violated P.D. No. 115 by his actuations, had already
been resolved and laid to rest in Allied Bank Corporation v.
Ordoñez;22 and (c) petitioner was estopped from raising the
City Prosecutor’s delay in the final disposition of the preliminary

investigation because he failed to do so in the DOJ.
Thus, petitioner filed the instant petition, alleging that:
THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION

ON THE GROUND THAT THE CERTIFICATION OF NON-FORUM
SHOPPING INCORPORATED THEREIN WAS DEFECTIVE.
II
THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE

ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION WAS COMMITTED BY THE SECRETARY OF JUSTICE
IN COMING OUT WITH THE ASSAILED RESOLUTIONS.23
The Court will delve into and resolve the issues seriatim.
The petitioner avers that the CA erred in dismissing his petition on a

mere technicality. He claims that the rules of procedure should be
used to promote, not frustrate, substantial justice. He insists that the
Rules of Court should be construed liberally especially when, as in
this case, his substantial rights are adversely affected; hence, the
deficiency in his certification of non-forum shopping should not result
in the dismissal of his petition.
The Office of the Solicitor General (OSG) takes the opposite view,
and asserts that indubitably, the certificate of non-forum shopping
incorporated in the petition before the CA is defective because it
failed to disclose essential facts about pending actions concerning
similar issues and parties. It asserts that petitioner’s failure to comply
with the Rules of Court is fatal to his petition. The OSG cited Section 2,
Rule 42, as well as the ruling of this Court in Melo v. Court of
Appeals.24
We agree with the ruling of the CA that the certification of non-

forum shopping petitioner incorporated in his petition before the
appellate court is defective. The certification reads:
It is further certified that as far as this Petition is concerned, no action

or proceeding in the Supreme Court, the Court of Appeals or
different divisions thereof, or any tribunal or agency.
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It is finally certified that if the affiant should learn that a similar action
or proceeding has been filed or is pending before the Supreme
Court, the Court of Appeals, or different divisions thereof, of any
other tribunal or agency, it hereby undertakes to notify this
Honorable Court within five (5) days from such notice.25
Under Section 1, second paragraph of Rule 65 of the Revised Rules

of Court, the petition should be accompanied by a sworn
certification of non-forum shopping, as provided in the third
paragraph of Section 3, Rule 46 of said Rules. The latter provision
reads in part:
SEC. 3. Contents and filing of petition; effect of non-compliance with

requirements. — The petition shall contain the full names and actual
addresses of all the petitioners and respondents, a concise
statement of the matters involved, the factual background of the
case and the grounds relied upon for the relief prayed for.
xxx
The petitioner shall also submit together with the petition a sworn
certification that he has not theretofore commenced any other
action involving the same issues in the Supreme Court, the Court of
Appeals or different divisions thereof, or any other tribunal or
agency; if there is such other action or proceeding, he must state
the status of the same; and if he should thereafter learn that a similar
action or proceeding has been filed or is pending before the
Supreme Court, the Court of Appeals, or different divisions thereof, or
any other tribunal or agency, he undertakes to promptly inform the
aforesaid courts and other tribunal or agency thereof within five (5)
days therefrom. xxx
Compliance with the certification against forum shopping is

separate from and independent of the avoidance of forum
shopping itself. The requirement is mandatory. The failure of the
petitioner to comply with the foregoing requirement shall be
sufficient ground for the dismissal of the petition without prejudice,
unless otherwise provided.26
Indubitably, the first paragraph of petitioner’s certification is

incomplete and unintelligible. Petitioner failed to certify that he "had
not heretofore commenced any other action involving the same
issues in the Supreme Court, the Court of Appeals or the different
divisions thereof or any other tribunal or agency" as required by
paragraph 4, Section 3, Rule 46 of the Revised Rules of Court.
We agree with petitioner’s contention that the certification is

designed to promote and facilitate the orderly administration of
justice, and therefore, should not be interpreted with absolute
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literalness. In his works on the Revised Rules of Civil Procedure, former
Supreme Court Justice Florenz Regalado states that, with respect to
the contents of the certification which the pleader may prepare, the
rule of substantial compliance may be availed of.27 However, there
must be a special circumstance or compelling reason which makes
the strict application of the requirement clearly unjustified. The
instant petition has not alleged any such extraneous circumstance.
Moreover, as worded, the certification cannot even be regarded as
substantial compliance with the procedural requirement. Thus, the
CA was not informed whether, aside from the petition before it,
petitioner had commenced any other action involving the same
issues in other tribunals.
On the merits of the petition, the CA ruled that the petitioner failed
to establish that the Secretary of Justice committed grave abuse of
discretion in finding probable cause against the petitioner for
violation of estafa under Article 315, paragraph 1(b) of the Revised
Penal Code, in relation to P.D. No. 115. Thus, the appellate court
ratiocinated:
Be that as it may, even on the merits, the arguments advanced in

support of the petition are not persuasive enough to justify the
desired conclusion that respondent Secretary of Justice gravely
abused its discretion in coming out with his assailed Resolutions.
Petitioner posits that, except for his being the Senior Vice-President of
the PBMI, there is no iota of evidence that he was a participes
crimines in violating the trust receipts sued upon; and that his liability,
if at all, is purely civil because he signed the said trust receipts merely
as a xxx surety and not as the entrustee. These assertions are,
however, too dull that they cannot even just dent the findings of the
respondent Secretary, viz:
"x x x it is apropos to quote section 13 of PD 115 which states in part,

viz:
‘xxx If the violation or offense is committed by a corporation,

partnership, association or other judicial entities, the penalty
provided for in this Decree shall be imposed upon the directors,
officers, employees or other officials or persons therein responsible for
the offense, without prejudice to the civil liabilities arising from the
criminal offense.’
"There is no dispute that it was the respondent, who as senior vice-

president of PBM, executed the thirteen (13) trust receipts. As such,
the law points to him as the official responsible for the offense. Since
a corporation cannot be proceeded against criminally because it
cannot commit crime in which personal violence or malicious intent
is required, criminal action is limited to the corporate agents guilty of

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an act amounting to a crime and never against the corporation
itself (West Coast Life Ins. Co. vs. Hurd, 27 Phil. 401; Times, [I]nc. v.
Reyes, 39 SCRA 303). Thus, the execution by respondent of said
receipts is enough to indict him as the official responsible for violation
of PD 115.
"Parenthetically, respondent is estopped to still contend that PD 115

covers only goods which are ultimately destined for sale and not
goods, like those imported by PBM, for use in manufacture. This issue
has already been settled in the Allied Banking Corporation case,
supra, where he was also a party, when the Supreme Court ruled
that PD 115 is ‘not limited to transactions in goods which are to be
sold (retailed), reshipped, stored or processed as a component or a
product ultimately sold’ but ‘covers failure to turn over the proceeds
of the sale of entrusted goods, or to return said goods if unsold or
disposed of in accordance with the terms of the trust receipts.’
"In regard to the other assigned errors, we note that the respondent
bound himself under the terms of the trust receipts not only as a
corporate official of PBM but also as its surety. It is evident that these
are two (2) capacities which do not exclude the other. Logically, he
can be proceeded against in two (2) ways: first, as surety as
determined by the Supreme Court in its decision in RCBC vs. Court of
Appeals, 178 SCRA 739; and, secondly, as the corporate official
responsible for the offense under PD 115, the present case is an
appropriate remedy under our penal law.
"Moreover, PD 115 explicitly allows the prosecution of corporate

officers ‘without prejudice to the civil liabilities arising from the
criminal offense’ thus, the civil liability imposed on respondent in
RCBC vs. Court of Appeals case is clearly separate and distinct from
his criminal liability under PD 115.’"28
Petitioner asserts that the appellate court’s ruling is erroneous

because (a) the transaction between PBMI and respondent bank is
not a trust receipt transaction; (b) he entered into the transaction
and was sued in his capacity as PBMI Senior Vice-President; (c) he
never received the goods as an entrustee for PBMI, hence, could not
have committed any dishonesty or abused the confidence of
respondent bank; and (d) PBMI acquired the goods and used the
same in operating its machineries and equipment and not for resale.
The OSG, for its part, submits a contrary view, to wit:
34. Petitioner further claims that he is not a person responsible for the
offense allegedly because "[b]eing charged as the Senior Vice-
President of Philippine Blooming Mills (PBM), petitioner cannot be
held criminally liable as the transactions sued upon were clearly
entered into in his capacity as an officer of the corporation" and
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that [h]e never received the goods as an entrustee for PBM as he
never had or took possession of the goods nor did he commit
dishonesty nor "abuse of confidence in transacting with RCBC." Such
argument is bereft of merit.
35. Petitioner’s being a Senior Vice-President of the Philippine

Blooming Mills does not exculpate him from any liability. Petitioner’s
responsibility as the corporate official of PBM who received the
goods in trust is premised on Section 13 of P.D. No. 115, which
provides:
Section 13. Penalty Clause. The failure of an entrustee to turn over

the proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the
crime of estafa, punishable under the provisions of Article Three
hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known
as the Revised Penal Code. If the violation or offense is committed
by a corporation, partnership, association or other juridical entities,
the penalty provided for in this Decree shall be imposed upon the
directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense. (Emphasis supplied)
36. Petitioner having participated in the negotiations for the trust

receipts and having received the goods for PBM, it was inevitable
that the petitioner is the proper corporate officer to be proceeded
against by virtue of the PBM’s violation of P.D. No. 115.29
The ruling of the CA is correct.
In Mendoza-Arce v. Office of the Ombudsman (Visayas),30 this Court

held that the acts of a quasi-judicial officer may be assailed by the
aggrieved party via a petition for certiorari and enjoined (a) when
necessary to afford adequate protection to the constitutional rights
of the accused; (b) when necessary for the orderly administration of
justice; (c) when the acts of the officer are without or in excess of
authority; (d) where the charges are manifestly false and motivated
by the lust for vengeance; and (e) when there is clearly no prima
facie case against the accused.31 The Court also declared that, if
the officer conducting a preliminary investigation (in that case, the
Office of the Ombudsman) acts without or in excess of his authority
and resolves to file an Information despite the absence of probable
cause, such act may be nullified by a writ of certiorari.32

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Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal
Procedure,33 the Information shall be prepared by the Investigating
Prosecutor against the respondent only if he or she finds probable
cause to hold such respondent for trial. The Investigating Prosecutor
acts without or in excess of his authority under the Rule if the
Information is filed against the respondent despite absence of
evidence showing probable cause therefor.34 If the Secretary of
Justice reverses the Resolution of the Investigating Prosecutor who
found no probable cause to hold the respondent for trial, and orders
such prosecutor to file the Information despite the absence of
probable cause, the Secretary of Justice acts contrary to law,
without authority and/or in excess of authority. Such resolution may
likewise be nullified in a petition for certiorari under Rule 65 of the
Revised Rules of Civil Procedure.35
A preliminary investigation, designed to secure the respondent

against hasty, malicious and oppressive prosecution, is an inquiry to
determine whether (a) a crime has been committed; and (b)
whether there is probable cause to believe that the accused is guilty
thereof. It is a means of discovering the person or persons who may
be reasonably charged with a crime. Probable cause need not be
based on clear and convincing evidence of guilt, as the
investigating officer acts upon probable cause of reasonable belief.
Probable cause implies probability of guilt and requires more than
bare suspicion but less than evidence which would justify a
conviction. A finding of probable cause needs only to rest on
evidence showing that more likely than not, a crime has been
committed by the suspect.36
However, while probable cause should be determined in a summary

manner, there is a need to examine the evidence with care to
prevent material damage to a potential accused’s constitutional
right to liberty and the guarantees of freedom and fair play 37 and to
protect the State from the burden of unnecessary expenses in
prosecuting alleged offenses and holding trials arising from false,
fraudulent or groundless charges.38
In this case, petitioner failed to establish that the Secretary of Justice

committed grave abuse of discretion in issuing the assailed
resolutions. Indeed, he acted in accord with law and the evidence.
Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:
Section 4. What constitutes a trust receipt transaction. A trust receipt

transaction, within the meaning of this Decree, is any transaction by
and between a person referred to in this Decree as the entruster,
and another person referred to in this Decree as entrustee, whereby
the entruster, who owns or holds absolute title or security interests

suigeneris
over certain specified goods, documents or instruments, releases the
same to the possession of the entrustee upon the latter’s execution
and delivery to the entruster of a signed document called a "trust
receipt" wherein the entrustee binds himself to hold the designated
goods, documents or instruments in trust for the entruster and to sell
or otherwise dispose of the goods, documents or instruments with the
obligation to turn over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster or as appears in the trust
receipt or the goods, documents or instruments themselves if they
are unsold or not otherwise disposed of, in accordance with the
terms and conditions specified in the trust receipt, or for other
purposes substantially equivalent to any of the following:
1. In case of goods or documents, (a) to sell the goods or

procure their sale; or (b) to manufacture or process the goods
with the purpose of ultimate sale; Provided, That, in the case of
goods delivered under trust receipt for the purpose of
manufacturing or processing before its ultimate sale, the
entruster shall retain its title over the goods whether in its original
or processed form until the entrustee has complied fully with his
obligation under the trust receipt; or (c) to load, unload, ship or
otherwise deal with them in a manner preliminary or necessary
to their sale; or
2. In the case of instruments a) to sell or procure their sale or

exchange; or b) to deliver them to a principal; or c) to effect
the consummation of some transactions involving delivery to a
depository or register; or d) to effect their presentation,
collection or renewal.
The sale of goods, documents or instruments by a person in the

business of selling goods, documents or instruments for profit who, at
the outset of the transaction, has, as against the buyer, general
property rights in such goods, documents or instruments, or who sells
the same to the buyer on credit, retaining title or other interest as
security for the payment of the purchase price, does not constitute a
trust receipt transaction and is outside the purview and coverage of
this Decree.
An entrustee is one having or taking possession of goods, documents

or instruments under a trust receipt transaction, and any successor in
interest of such person for the purpose of payment specified in the
trust receipt agreement.39 The entrustee is obliged to: (1) hold the
goods, documents or instruments in trust for the entruster and shall
dispose of them strictly in accordance with the terms and conditions
of the trust receipt; (2) receive the proceeds in trust for the entruster
and turn over the same to the entruster to the extent of the amount
owing to the entruster or as appears on the trust receipt; (3) insure

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the goods for their total value against loss from fire, theft, pilferage or
other casualties; (4) keep said goods or proceeds thereof whether in
money or whatever form, separate and capable of identification as
property of the entruster; (5) return the goods, documents or
instruments in the event of non-sale or upon demand of the
entruster; and (6) observe all other terms and conditions of the trust
receipt not contrary to the provisions of the decree.40
The entruster shall be entitled to the proceeds from the sale of the
goods, documents or instruments released under a trust receipt to
the entrustee to the extent of the amount owing to the entruster or
as appears in the trust receipt, or to the return of the goods,
documents or instruments in case of non-sale, and to the
enforcement of all other rights conferred on him in the trust receipt;
provided, such are not contrary to the provisions of the document.41
In the case at bar, the transaction between petitioner and

respondent bank falls under the trust receipt transactions envisaged
in P.D. No. 115. Respondent bank imported the goods and entrusted
the same to PBMI under the trust receipts signed by petitioner, as
entrustee, with the bank as entruster. The agreement was as follows:
And in consideration thereof, I/we hereby agree to hold said goods

in trust for the said BANK as its property with liberty to sell the same
within ____days from the date of the execution of this Trust Receipt
and for the Bank’s account, but without authority to make any other
disposition whatsoever of the said goods or any part thereof (or the
proceeds) either by way of conditional sale, pledge or otherwise.
I/we agree to keep the said goods insured to their full value against
loss from fire, theft, pilferage or other casualties as directed by the
BANK, the sum insured to be payable in case of loss to the BANK,
with the understanding that the BANK is, not to be chargeable with
the storage premium or insurance or any other expenses incurred on
said goods.
In case of sale, I/we further agree to turn over the proceeds thereof
as soon as received to the BANK, to apply against the relative
acceptances (as described above) and for the payment of any
other indebtedness of mine/ours to the BANK. In case of non-sale
within the period specified herein, I/we agree to return the goods
under this Trust Receipt to the BANK without any need of demand.
I/we agree to keep the said goods, manufactured products or

proceeds thereof, whether in the form of money or bills, receivables,
or accounts separate and capable of identification as property of
the BANK.42

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It must be stressed that P.D. No. 115 is a declaration by legislative
authority that, as a matter of public policy, the failure of person to
turn over the proceeds of the sale of the goods covered by a trust
receipt or to return said goods, if not sold, is a public nuisance to be
abated by the imposition of penal sanctions.43
The Court likewise rules that the issue of whether P.D. No. 115
encompasses transactions involving goods procured as a
component of a product ultimately sold has been resolved in the
affirmative in Allied Banking Corporation v. Ordoñez.44 The law
applies to goods used by the entrustee in the operation of its
machineries and equipment. The non-payment of the amount
covered by the trust receipts or the non-return of the goods covered
by the receipts, if not sold or otherwise not disposed of, violate the
entrustee’s obligation to pay the amount or to return the goods to
the entruster.
In Colinares v. Court of Appeals,45 the Court declared that there are

two possible situations in a trust receipt transaction. The first is
covered by the provision which refers to money received under the
obligation involving the duty to deliver it (entregarla) to the owner of
the merchandise sold. The second is covered by the provision which
refers to merchandise received under the obligation to return it
(devolvera) to the owner.46 Thus, failure of the entrustee to turn over
the proceeds of the sale of the goods covered by the trust receipts
to the entruster or to return said goods if they were not disposed of in
accordance with the terms of the trust receipt is a crime under P.D.
No. 115, without need of proving intent to defraud. The law punishes
dishonesty and abuse of confidence in the handling of money or
goods to the prejudice of the entruster, regardless of whether the
latter is the owner or not. A mere failure to deliver the proceeds of
the sale of the goods, if not sold, constitutes a criminal offense that
causes prejudice, not only to another, but more to the public
interest.47
The Court rules that although petitioner signed the trust receipts
merely as Senior Vice-President of PBMI and had no physical
possession of the goods, he cannot avoid prosecution for violation of
P.D. No. 115.
The penalty clause of the law, Section 13 of P.D. No. 115 reads:
Section 13. Penalty Clause. The failure of an entrustee to turn over

the proceeds of the sale of the goods, documents or instruments
covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods,
documents or instruments if they were not sold or disposed of in
accordance with the terms of the trust receipt shall constitute the

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crime of estafa, punishable under the provisions of Article Three
hundred and fifteen, paragraph one (b) of Act Numbered Three
thousand eight hundred and fifteen, as amended, otherwise known
as the Revised Penal Code.1âwphi1 If the violation or offense is
committed by a corporation, partnership, association or other
juridical entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other officials or
persons therein responsible for the offense, without prejudice to the
civil liabilities arising from the criminal offense.
The crime defined in P.D. No. 115 is malum prohibitum but is classified
as estafa under paragraph 1(b), Article 315 of the Revised Penal
Code, or estafa with abuse of confidence. It may be committed by
a corporation or other juridical entity or by natural persons. However,
the penalty for the crime is imprisonment for the periods provided in
said Article 315, which reads:
ARTICLE 315. Swindling (estafa). – Any person who shall defraud

another by any of the means mentioned hereinbelow shall be
punished by:
1st. The penalty of prision correccional in its maximum period to

prision mayor in its minimum period, if the amount of the fraud is
over 12,000 pesos but does not exceed 22,000 pesos; and if
such amount exceeds the latter sum, the penalty provided in
this paragraph shall be imposed in its maximum period, adding
one year for each additional 10,000 pesos; but the total
penalty which may be imposed shall not exceed twenty years.
In such cases, and in connection with the accessory penalties
which may be imposed and for the purpose of the other
provisions of this Code, the penalty shall be termed prision
mayor or reclusion temporal, as the case may be;
2nd. The penalty of prision correccional in its minimum and

medium periods, if the amount of the fraud is over 6,000 pesos
but does not exceed 12,000 pesos;
3rd. The penalty of arresto mayor in its maximum period to

prision correccional in its minimum period, if such amount is
over 200 pesos but does not exceed 6,000 pesos; and
4th. By arresto mayor in its medium and maximum periods, if such

amount does not exceed 200 pesos, provided that in the four cases
mentioned, the fraud be committed by any of the following means;
xxx
Though the entrustee is a corporation, nevertheless, the law

specifically makes the officers, employees or other officers or persons
responsible for the offense, without prejudice to the civil liabilities of
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such corporation and/or board of directors, officers, or other officials
or employees responsible for the offense. The rationale is that such
officers or employees are vested with the authority and responsibility
to devise means necessary to ensure compliance with the law and,
if they fail to do so, are held criminally accountable; thus, they have
a responsible share in the violations of the law.48
If the crime is committed by a corporation or other juridical entity,

the directors, officers, employees or other officers thereof responsible
for the offense shall be charged and penalized for the crime,
precisely because of the nature of the crime and the penalty
therefor. A corporation cannot be arrested and imprisoned; hence,
cannot be penalized for a crime punishable by imprisonment.49
However, a corporation may be charged and prosecuted for a
crime if the imposable penalty is fine. Even if the statute prescribes
both fine and imprisonment as penalty, a corporation may be
prosecuted and, if found guilty, may be fined.50
A crime is the doing of that which the penal code forbids to be

done, or omitting to do what it commands. A necessary part of the
definition of every crime is the designation of the author of the crime
upon whom the penalty is to be inflicted. When a criminal statute
designates an act of a corporation or a crime and prescribes
punishment therefor, it creates a criminal offense which, otherwise,
would not exist and such can be committed only by the corporation.
But when a penal statute does not expressly apply to corporations, it
does not create an offense for which a corporation may be
punished. On the other hand, if the State, by statute, defines a crime
that may be committed by a corporation but prescribes the penalty
therefor to be suffered by the officers, directors, or employees of
such corporation or other persons responsible for the offense, only
such individuals will suffer such penalty.51 Corporate officers or
employees, through whose act, default or omission the corporation
commits a crime, are themselves individually guilty of the crime.52
The principle applies whether or not the crime requires the

consciousness of wrongdoing. It applies to those corporate agents
who themselves commit the crime and to those, who, by virtue of
their managerial positions or other similar relation to the corporation,
could be deemed responsible for its commission, if by virtue of their
relationship to the corporation, they had the power to prevent the
act.53 Moreover, all parties active in promoting a crime, whether
agents or not, are principals.54 Whether such officers or employees
are benefited by their delictual acts is not a touchstone of their
criminal liability. Benefit is not an operative fact.
In this case, petitioner signed the trust receipts in question. He

cannot, thus, hide behind the cloak of the separate corporate

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personality of PBMI. In the words of Chief Justice Earl Warren, a
corporate officer cannot protect himself behind a corporation
where he is the actual, present and efficient actor.55
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of

merit. Costs against the petitioner.
SO ORDERED.
ROMEO J. CALLEJO, SR.

Associate Justice
WE CONCUR:
ARTEMIO V. PANGANIBAN
Chief Justice
Chairperson
CONSUELO YNARES-SANTIAGO MA. ALICIA AUSTRIA-MARTINEZ

MINITA V. CHICO-NAZARIO
Associate Justice
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, it is hereby

certified that the conclusions in the above decision were reached in
consultation before the case was assigned to the writer of the
opinion of the Court’s Division.
Chief Justice
February 6, 2006
Lessons Applicable: Corp. Officers or employees, through whose act,
default or omission the corp. commits a crime, are themselves
individually guilty of the crime (Corporate Law)
FACTS:
 Sept-Oct 1980: PBMI, through Ching, Senior VP of Philippine

Blooming Mills, Inc. (PBMI), applied with the Rizal Commercial

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Banking Corporation (RCBC) for the issuance of commercial
letters of credit to finance its importation of assorted goods
 RCBC approved the application, and irrevocable letters of

credit were issued in favor of Ching.
 The goods were purchased and delivered in trust to PBMI.
o Ching signed 13 trust receipts as surety, acknowledging

delivery of the goods
o Under the receipts, Ching agreed to hold the goods in

trust for RCBC, with authority to sell but not by way of
conditional sale, pledge or otherwise
 In case such goods were sold, to turn over the

proceeds thereof as soon as received, to apply
against the relative acceptances and payment of
other indebtedness to respondent bank.
 In case the goods remained unsold within the

specified period, the goods were to be returned to
RCBC without any need of demand.
 goods, manufactured products or proceeds thereof,

whether in the form of money or bills, receivables, or
accounts separate and capable of identification -
RCBC’s property
 When the trust receipts matured, Ching failed to return the

goods to RCBC, or to return their value amounting
toP6,940,280.66 despite demands.
o RCBC filed a criminal complaint for estafa against

petitioner in the Office of the City Prosecutor of Manila.
 December 8, 1995: no probable cause to charge

petitioner with violating P.D. No. 115, as petitioner’s
liability was only civil, not criminal, having signed the
trust receipts as surety
 RCBC appealed the resolution to the Department of Justice

(DOJ) via petition for review
o On July 13, 1999: reversed the assailed resolution of the

City Prosecutor
o execution of said receipts is enough to indict the Ching as

the official responsible for violation of P.D. No. 115
 April 22, 2004: CA dismissed the petition for lack of merit and on
procedural grounds
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 Ching filed a petition for certiorari, prohibition and mandamus
with the CA
ISSUE: W/N Ching should be held criminally liable.
HELD: YES. DENIED for lack of merit
 There is no dispute that it was the Ching executed the 13 trust

receipts.
o law points to him as the official responsible for the offense
o Since a corporation CANNOT be proceeded against

criminally because it CANNOT commit crime in which
personal violence or malicious intent is required, criminal
action is limited to the corporate agents guilty of an act
amounting to a crime and never against the corporation
itself
o execution by Ching of receipts is enough to indict him as

the official responsible for violation of PD 115
o RCBC is estopped to still contend that PD 115 covers only

goods which are ultimately destined for sale and not
goods, like those imported by PBM, for use in
manufacture.
o Moreover, PD 115 explicitly allows the prosecution of

corporate officers ‘without prejudice to the civil liabilities
arising from the criminal offense’ thus, the civil liability
imposed on respondent in RCBC vs. Court of Appeals
case is clearly separate and distinct from his criminal
liability under PD 115
 Ching’s being a Senior Vice-President of the Philippine

Blooming Mills does not exculpate him from any liability
 The crime defined in P.D. No. 115 is malum prohibitum but is

classified as estafa under paragraph 1(b), Article 315 of the
Revised Penal Code, or estafa with abuse of confidence. It
may be committed by a corporation or other juridical entity or
by natural persons. However, the penalty for the crime is
imprisonment for the periods provided in said Article 315.
 law specifically makes the officers, employees or other officers

or persons responsible for the offense, without prejudice to the
civil liabilities of such corporation and/or board of directors,
officers, or other officials or employees responsible for the
offense

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o rationale: officers or employees are vested with the
authority and responsibility to devise means necessary to
ensure compliance with the law and, if they fail to do so,
are held criminally accountable; thus, they have a
responsible share in the violations of the law
 If the crime is committed by a corporation or other juridical

entity, the directors, officers, employees or other officers thereof
responsible for the offense shall be charged and penalized for
the crime, precisely because of the nature of the crime and the
penalty therefor. A corporation cannot be arrested and
imprisoned; hence, cannot be penalized for a crime
punishable by imprisonment. However, a corporation may be
charged and prosecuted for a crime if the imposable penalty is
fine. Even if the statute prescribes both fine and imprisonment
as penalty, a corporation may be prosecuted and, if found
guilty, may be fined
 When a criminal statute designates an act of a corporation or

a crime and prescribes punishment therefor, it creates a
criminal offense which, otherwise, would not exist and such can
be committed only by the corporation. But when a penal
statute does not expressly apply to corporations, it does not
create an offense for which a corporation may be
punished. On the other hand, if the State, by statute, defines a
crime that may be committed by a corporation but prescribes
the penalty therefor to be suffered by the officers, directors, or
employees of such corporation or other persons responsible for
the offense, only such individuals will suffer such penalty.
Corporate officers or employees, through whose act, default or
omission the corporation commits a crime, are themselves
individually guilty of the crime. The principle applies whether or
not the crime requires the consciousness of wrongdoing. It
applies to those corporate agents who themselves commit the
crime and to those, who, by virtue of their managerial positions
or other similar relation to the corporation, could be deemed
responsible for its commission, if by virtue of their relationship to
the corporation, they had the power to prevent the
act. Benefit is not an operative fact.
The failure of person to turn over the proceeds of the sale of the
goods covered by the trust receipt to the entruster or to return said

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goods, if not sold, is a public nuisance to be abated by the
imposition of penal sanctions
Facts: Ching was the Senior Vice-President of Philippine Blooming

Mills, Inc. (PBMI). Sometime in September to October 1980, PBMI,
through petitioner, applied with the Rizal Commercial Banking
Corporation (respondent bank) for the issuance of commercial
letters of credit to finance its importation of assorted goods. Under
the receipts, petitioner agreed to hold the goods in trust for the said
bank, with authority to sell but not by way of conditional sale,
pledge or otherwise; and in case such goods were sold, to turn over
the proceeds thereof as soon as received, to apply against the
relative acceptances and payment of other indebtedness to
respondent bank. In case the goods remained unsold within the
specified period, the goods were to be returned to respondent bank
without any need of demand. Thus, said “goods, manufactured
products or proceeds thereof, whether in the form of money or bills,
receivables, or accounts separate and capable of identification”
were respondent bank’s property. When the trust receipts matured,
petitioner failed to return the goods to respondent bank, or to return
their value amounting to P6,940,280.66 despite demands. Thus, the
bank filed a criminal complaint for estafa 6 against petitioner in the
Office of the City Prosecutor of Manila.
Issue: Whether or not Ching is liable for Estafa
Held: In the case at bar, the transaction between petitioner and

respondent bank falls under the trust receipt transactions envisaged
in P.D. No. 115. Respondent bank imported the goods and entrusted
the same to PBMI under the trust receipts signed by petitioner, as
entrustee, with the bank as entruster. The failure of person to turn
over the proceeds of the sale of the goods covered by the trust
receipt to the entruster or to return said goods, if not sold, is a public
nuisance to be abated by the imposition of penal sanctions.—It must
be stressed that P.D. No. 115 is a declaration by legislative authority
that, as a matter of public policy, the failure of person to turn over
the proceeds of the sale of the goods covered by a trust receipt or
to return said goods, if not sold, is a public nuisance to be abated by
the imposition of penal sanctions.
Failure of the entrustee to turn over the proceeds of the sale of the
goods covered by the trust receipts to the entruster or to return said
goods if they were not disposed of in accordance with the terms of
the trust receipt is a crime under P.D. No. 115, without need of
proving intent to defraud.—In Colinares v. Court of Appeals, the
Court declared that there are two possible situations in a trust

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receipt transaction. The first is covered by the provision which refers
to money received under the obligation involving the duty to deliver
it (entregarla) to the owner of the merchandise sold. The second is
covered by the provision which refers to merchandise received
under the obligation to return it (devolvera) to the owner. Thus,
failure of the entrustee to turn over the proceeds of the sale of the
goods covered by the trust receipts to the entruster or to return said
goods if they were not disposed of in accordance with the terms of
the trust receipt is a crime under P.D. No. 115, without need of
proving intent to defraud. The law punishes dishonesty and abuse of
confidence in the handling of money or goods to the prejudice of
the entruster, regardless of whether the latter is the owner or not. A
mere failure to deliver the proceeds of the sale of the goods, if not
sold, constitutes a criminal offense that causes prejudice, not only to
another, but more to the public interest.
P.D. No. 115 is malum prohibitum but is classified as estafa under

paragraph 1(b), Article 315 of the Revised Penal Code, or estafa
with abuse of confidence.—The crime defined in P.D. No. 115 is
malum prohibitum but is classified as estafa under paragraph 1(b),
Article 315 of the Revised Penal Code, or estafa with abuse of
confidence. It may be committed by a corporation or other juridical
entity or by natural persons. However, the penalty for the crime is
imprisonment for the periods provided in said Article 315.
Meralco vs. T.E.A.M. Electronics Corp. (540 SCRA 62 [2007])
G.R. No. 131723 December 13, 2007
MANILA ELECTRIC COMPANY, petitioner,

vs.
T.E.A.M. ELECTRONICS CORPORATION, TECHNOLOGY ELECTRONICS
ASSEMBLY and MANAGEMENT PACIFIC CORPORATION; and ULTRA
ELECTRONICS INSTRUMENTS, INC., respondents.
DECISION
NACHURA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of

Court seeking the reversal of the Decision1 of the Court of Appeals
(CA) dated June 18, 1997 and its Resolution 2 dated December 3,
1997 in CA-G.R. CV No. 40282 denying the appeal filed by petitioner
Manila Electric Company.

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The facts of the case, as culled from the records, are as follows:
Respondent T.E.A.M. Electronics Corporation (TEC) was formerly

known as NS Electronics (Philippines), Inc. before 1982 and National
Semi-Conductors (Phils.) before 1988. TEC is wholly owned by
respondent Technology Electronics Assembly and Management
Pacific Corporation (TPC). On the other hand, petitioner Manila
Electric Company (Meralco) is a utility company supplying electricity
in the Metro Manila area.
Petitioner and NS Electronics (Philippines), Inc., the predecessor-in-

interest of respondent TEC, were parties to two separate contracts
denominated as Agreements for the Sale of Electric Energy under
the following account numbers: 09341-1322-163 and 09341-1812-13.4
Under the aforesaid agreements, petitioner undertook to supply
TEC's building known as Dyna Craft International Manila (DCIM)
located at Electronics Avenue, Food Terminal Complex, Taguig,
Metro Manila, with electric power. Another contract was entered
into for the supply of electric power to TEC's NS Building under
Account No. 19389-0900-10.
In September 1986, TEC, under its former name National Semi-

Conductors (Phils.) entered into a Contract of Lease5 with
respondent Ultra Electronics Industries, Inc. (Ultra) for the use of the
former's DCIM building for a period of five years or until September
1991. Ultra was, however, ejected from the premises on February 12,
1988 by virtue of a court order, for repeated violation of the terms
and conditions of the lease contract.
On September 28, 1987, a team of petitioner's inspectors conducted

a surprise inspection of the electric meters installed at the DCIM
building, witnessed by Ultra's6 representative, Mr. Willie Abangan. The
two meters covered by account numbers 09341-1322-16 and 09341-
1812-13, were found to be allegedly tampered with and did not
register the actual power consumption in the building. The results of
the inspection were reflected in the Service Inspection Reports7
prepared by the team.
In a letter dated November 25, 1987, petitioner informed TEC of the

results of the inspection and demanded from the latter the payment
of P7,040,401.01 representing its unregistered consumption from
February 10, 1986 until September 28, 1987, as a result of the alleged
tampering of the meters.8 TEC received the letters on January 7,
1988. Since Ultra was in possession of the subject building during the
covered period, TEC's Managing Director, Mr. Bobby Tan, referred
the demand letter to Ultra9 which, in turn, informed TEC that its
Executive Vice-President had met with petitioner's representative.
Ultra further intimated that assuming that there was tampering of the

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meters, petitioner's assessment was excessive.10 For failure of TEC to
pay the differential billing, petitioner disconnected the electricity
supply to the DCIM building on April 29, 1988.
TEC demanded from petitioner the reconnection of electrical

service, claiming that it had nothing to do with the alleged
tampering but the latter refused to heed the demand. Hence, TEC
filed a complaint on May 27, 1988 before the Energy Regulatory
Board (ERB) praying that electric power be restored to the DCIM
building.11 The ERB immediately ordered the reconnection of the
service but petitioner complied with it only on October 12, 1988 after
TEC paid P1,000,000.00, under protest. The complaint before the ERB
was later withdrawn as the parties deemed it best to have the issues
threshed out in the regular courts. Prior to the reconnection, or on
June 7, 1988, petitioner conducted a scheduled inspection of the
questioned meters and found them to have been tampered anew.12
Meanwhile, on April 25, 1988, petitioner conducted another

inspection, this time, in TEC's NS Building. The inspection allegedly
revealed that the electric meters were not registering the correct
power consumption. Petitioner, thus, sent a letter dated June 18,
1988 demanding payment of P280,813.72 representing the
differential billing.13 TEC denied petitioner's allegations and claim in a
letter dated June 29, 1988.14 Petitioner, thus, sent TEC another letter
demanding payment of the aforesaid amount, with a warning that
the electric service would be disconnected in case of continued
refusal to pay the differential billing.15 To avert the impending
disconnection of electrical service, TEC paid the above amount,
under protest.16
On January 13, 1989, TEC and TPC filed a complaint for damages
against petitioner and Ultra17 before the Regional Trial Court (RTC) of
Pasig. The case was raffled to Branch 162 and was docketed as Civil
Case No. 56851.18 Upon the filing of the parties' answer to the
complaint, pre-trial was scheduled.
At the pre-trial, the parties agreed to limit the issues, as follows:
1. Whether or not the defendant Meralco is liable for the

plaintiffs' disconnection of electric service at DCIM Building.
2. Whether or not the plaintiff is liable for (sic) the defendant for
the differential billings in the amount of P7,040,401.01.
3. Whether or not the plaintiff is liable to defendant for

exemplary damages.19
For failure of the parties to reach an amicable settlement, trial on the

merits ensued. On June 17, 1992, the trial court rendered a Decision

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in favor of respondents TEC and TPC, and against respondent Ultra
and petitioner. The pertinent portion of the decision reads:
WHEREFORE, judgment is hereby rendered in this case in favor

of the plaintiffs and against the defendants as follows:
(1) Ordering both defendants Meralco and ULTRA

Electronics Instruments, Inc. to jointly and severally
reimburse plaintiff TEC actual damages in the amount of
ONE MILLION PESOS with legal rate of interest from the
date of the filing of this case on January 19, 1989 until the
said amount shall have been fully paid;
(2) Ordering defendant Meralco to pay to plaintiff TEC the

amount of P280,813.72 as actual damages with legal rate
of interest also from January 19, 1989;
(3) Ordering defendant Meralco to pay to plaintiff TPC the

amount of P150,000.00 as actual damages with interest at
legal rate from January 19, 1989;
(4) Condemning defendant Meralco to pay both plaintiffs

moral damages in the amount pf P500,000.00;
(5) Condemning defendant Meralco to pay both plaintiffs

corrective and/or exemplary damages in the amount of
P200,000.00;
(6) Ordering defendant Meralco to pay attorney's fees in

the amount of P200,000.00
Costs against defendant Meralco.
SO ORDERED.20
The trial court found the evidence of petitioner insufficient to prove

that TEC was guilty of tampering the meter installations. The
deformed condition of the meter seal and the existence of an
opening in the wire duct leading to the transformer vault did not, in
themselves, prove the alleged tampering, especially since access to
the transformer was given only to petitioner's employees.21 The
sudden drop in TEC's (or Ultra's) electric consumption did not, per se,
show meter tampering. The delay in the sending of notice of the
results of the inspection was likewise viewed by the court as
evidence of inefficiency and arbitrariness on the part of petitioner.
More importantly, petitioner's act of disconnecting the DCIM
building's electric supply constituted bad faith and thus makes it
liable for damages.22 The court further denied petitioner's claim of
differential billing primarily on the ground of equitable negligence.23

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Considering that TEC and TPC paid P1,000,000.00 to avert the
disconnection of electric power; and because Ultra manifested to
settle the claims of petitioner, the court imposed solidary liability on
both Ultra and petitioner for the payment of the P1,000,000.00.
Ultra and petitioner appealed to the CA which affirmed the RTC

decision, with a modification of the amount of actual damages and
interest thereon. The dispositive portion of the CA decision dated
June 18, 1997, states:
WHEREFORE, this Court renders judgment affirming in toto the

Decision rendered by the trial court with the slight modification
that the interest at legal rate shall be computed from January
13, 1989 and that Meralco shall pay plaintiff T.E.A.M. Electronics
Corporation and Technology Electronics Assembly and
Management Pacific Corporation the sum of P150,000.00 per
month for five (5) months for actual damages incurred when it
was compelled to lease a generator set with interest at the
legal rate from the above-stated date.
SO ORDERED.24
The appellate court agreed with the RTC's conclusion. In addition, it

considered petitioner negligent for failing to discover the alleged
defects in the electric meters; in belatedly notifying TEC and TPC of
the results of the inspection; and in disconnecting the electric power
without prior notice.
Petitioner now comes before this Court in this petition for review on
certiorari contending that:
The Court of Appeals committed grievous errors and decided

matters of substance contrary to law and the rulings of this
Honorable Court:
1. In finding that the issue in the case is whether there was

deliberate tampering of the metering installations at the
building owned by TEC.
2. In not finding that the issue is: whether or not, based on the
tampered meters, whether or not petitioner is entitled to
differential billing, and if so, how much.
3. In declaring that petitioner ME RALCO had the burden of

proof to show by clear and convincing evidence that with
respect to the tampered meters that TEC and/or TPC authored
their tampering.

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4. In finding that petitioner Meralco should not have held TEC
and/or TPC responsible for the acts of Ultra.
5. In finding that TEC should not be held liable for the tampering
of this electric meter in its DCIM Building.
6. In finding that there was no notice of disconnection.
7. In finding that petitioner MERALCO was negligent in informing

TEC of the alleged tampering.
8. In making the finding that it is difficult to believe that when

petitioner MERALCO inspected on June 7, 1988 the meter
installations, they were found to be tampered.
9. In declaring that petitioner MERALCO estopped from

claiming any tampering of the meters.
10. In finding that "the method employed by MERALCO to as

certain (sic) the 'correct' amount of electricity consumed is
questionable";
11. In declaring that MERALCO all throughout its dealings with

TEC took on an "attitude" which is oppressive, wanton and
reckless.
12. In declaring that MERALCO acted arbitrarily in inspecting

TEC's DCIM building and the NS building.
13. In declaring that respondents TEC and TPC are entitled to

the damages which it awarded.
14. In not declaring that petitioner is entitled to the differential

bill.
15. In not declaring that respondents are liable to petitioner for

exemplary damages, attorney's fee and expenses for
litigation.25
The petition must fail.
The issues for resolution can be summarized as follows: 1) whether or

not TEC tampered with the electric meters installed at its DCIM and
NS buildings; 2) If so, whether or not it is liable for the differential
billing as computed by petitioner; and 3) whether or not petitioner
was justified in disconnecting the electric power supply in TEC's DCIM
building.
Petitioner insists that the tampering of the electric meters installed at

the DCIM and NS buildings owned by respondent TEC has been

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established by overwhelming evidence, as specifically shown by the
shorting devices found during the inspection. Thus, says petitioner,
tampering of the meter is no longer an issue.
It is obvious that petitioner wants this Court to revisit the factual

findings of the lower courts. Well-established is the doctrine that
under Rule 45 of the Rules of Court, only questions of law, not of fact,
may be raised before the Court. We would like to stress that this
Court is not a trier of facts and may not re-examine and weigh anew
the respective evidence of the parties. Factual findings of the trial
court, especially those affirmed by the Court of Appeals, are binding
on this Court.26
Looking at the record, we note that petitioner claims to have

discovered three incidences of meter-tampering; twice in the DCIM
building on September 28, 1987 and June 7, 1988; and once in the
NS building on April 24, 1988.
The first instance was supposedly discovered on September 28, 1987.

The inspector allegedly found the presence of a short circuiting
device and saw that the meter seal was deformed. In addition,
petitioner, through the Supervising Engineer of its Special Billing
Analysis Department,27 claimed that there was a sudden and
unexplainable drop in TEC's electrical consumption starting February
10, 1986. On the basis of the foregoing, petitioner concluded that
the electric meters were tampered with.
However, contrary to petitioner's claim that there was a drastic and

unexplainable drop in TEC's electric consumption during the
affected period, the Pattern of TEC's Electrical Consumption28 shows
that the sudden drop is not peculiar to the said period. Noteworthy is
the observation of the RTC in this wise:
In fact, in Account No. 09341-1812-13 (heretofore referred as

Account/Meter No. 2), as evidenced by Exhibits "35" and "35-A,"
there was likewise a sudden drop of electrical consumption
from the year 1984 which recorded an average 141,300
kwh/month to 1985 which recorded an average kwh/month at
87,600 or a difference-drop of 53,700 kwh/month; from 1985's
87,600 recorded consumption, the same dropped to 18,600
kwh/month or a difference-drop of 69,000 kwh/month. Surely, a
drop of 53,700 could be equally categorized as a sudden drop
amounting to 69,000 which, incidentally, the Meralco claimed
as "unexplainable. x x x.29
The witnesses for petitioner who testified on the alleged tampering of

the electric meters, declared that tampering is committed by
consumers to prevent the meter from registering the correct amount
of electric consumption, and result in a reduced monthly electric bill,
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while continuing to enjoy the same power supply. Only the
registration of actual electric energy consumption, not the supply of
electricity, is affected when a meter is tampered with.30 The
witnesses claimed that after the inspection, the tampered electric
meters were corrected, so that they would register the correct
consumption of TEC. Logically, then, after the correction of the
allegedly tampered meters, the customer's registered consumption
would go up.
In this case, the period claimed to have been affected by the

tampered electric meters is from February 1986 until September 1987.
Based on petitioner's Billing Record31 (for the DCIM building), TEC's
monthly electric consumption on Account No. 9341-1322-16 was
between 4,500 and 27,000 kwh.32 Account No. 9341-1812-13 showed
a monthly consumption between 9,600 and 34,200 kwh.33 It is
interesting to note that, after correction of the allegedly tampered
meters, TEC's monthly electric consumption from October 1987 to
February 1988 (the last month that Ultra occupied the DCIM building)
was between 8,700 and 24,300 kwh in its first account, and 16,200 to
46,800 kwh on the second account.
Even more revealing is the fact that TEC's meters registered 9,300
kwh and 19,200 kwh consumption on the first and second accounts,
respectively, a month prior to the inspection. On the first month after
the meters were corrected, TEC's electric consumption registered at
9,300 kwh and 22,200 kwh on the respective accounts. These figures
clearly show that there was no palpably drastic difference between
the consumption before and after the inspection, casting a cloud of
doubt over petitioner's claim of meter-tampering. Indeed, Ultra's
explanation that the corporation was losing; thus, it had lesser
consumption of electric power appear to be the more plausible
reason for the drop in electric consumption.
Petitioner likewise claimed that when the subject meters were again
inspected on June 7, 1988, they were found to have been tampered
anew. The Court notes that prior to the inspection, TEC was informed
about it; and months before the inspection, there was an unsettled
controversy between TEC and petitioner, brought about by the
disconnection of electric power and the non-payment of differential
billing. We are more disposed to accept the trial court's conclusion
that it is hard to believe that a customer previously apprehended for
tampered meters and assessed P7 million would further jeopardize
itself in the eyes of petitioner.34 If it is true that there was evidence of
tampering found on September 28, 1987 and again on June 7, 1988,
the better view would be that the defective meters were not
actually corrected after the first inspection. If so, then Manila Electric
Company v. Macro Textile Mills Corporation35 would apply, where
we said that we cannot sanction a situation wherein the defects in

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the electric meter are allowed to continue indefinitely until suddenly,
the public utilities demand payment for the unrecorded electricity
utilized when they could have remedied the situation immediately.
Petitioner's failure to do so may encourage neglect of public utilities
to the detriment of the consuming public. Corollarily, it must be
underscored that petitioner has the imperative duty to make a
reasonable and proper inspection of its apparatus and equipment
to ensure that they do not malfunction, and the due diligence to
discover and repair defects therein. Failure to perform such duties
constitutes negligence.36 By reason of said negligence, public utilities
run the risk of forfeiting amounts originally due from their customers.37
As to the alleged tampering of the electric meter in TEC's NS

building, suffice it to state that the allegation was not proven,
considering that the meters therein were enclosed in a metal
cabinet the metal seal of which was unbroken, with petitioner
having sole access to the said meters.38
In view of the negative finding on the alleged tampering of electric

meters on TEC's DCIM and NS buildings, petitioner's claim of
differential billing was correctly denied by the trial and appellate
courts. With greater reason, therefore, could petitioner not exercise
the right of immediate disconnection.
The law in force at the time material to this controversy was

Presidential Decree (P.D.) No. 40139 issued on March 1, 1974.40 The
decree penalized unauthorized installation of water, electrical or
telephone connections and such acts as the use of tampered
electrical meters. It was issued in answer to the urgent need to put
an end to illegal activities that prejudice the economic well-being of
both the companies concerned and the consuming public.41 P.D.
401 granted the electric companies the right to conduct inspections
of electric meters and the criminal prosecution42 of erring consumers
who were found to have tampered with their electric meters. It did
not expressly provide for more expedient remedies such as the
charging of differential billing and immediate disconnection against
erring consumers. Thus, electric companies found a creative way of
availing themselves of such remedies by inserting into their service
contracts (or agreements for the sale of electric energy) a provision
for differential billing with the option of disconnection upon non-
payment by the erring consumer. The Court has recognized the
validity of such stipulations.43 However, recourse to differential billing
with disconnection was subject to the prior requirement of a 48-hour
written notice of disconnection.44
Petitioner, in the instant case, resorted to the remedy of

disconnection without prior notice. While it is true that petitioner sent
a demand letter to TEC for the payment of differential billing, it did

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not include any notice that the electric supply would be
disconnected. In fine, petitioner abused the remedies granted to it
under P.D. 401 and Revised General Order No. 1 by outrightly
depriving TEC of electrical services without first notifying it of the
impending disconnection. Accordingly, the CA did not err in
affirming the RTC decision.
As to the damages awarded by the CA, we deem it proper to

modify the same. Actual damages are compensation for an injury
that will put the injured party in the position where it was before the
injury. They pertain to such injuries or losses that are actually
sustained and susceptible of measurement. Except as provided by
law or by stipulation, a party is entitled to adequate compensation
only for such pecuniary loss as is duly proven. Basic is the rule that to
recover actual damages, not only must the amount of loss be
capable of proof; it must also be actually proven with a reasonable
degree of certainty, premised upon competent proof or the best
evidence obtainable.45
Respondent TEC sufficiently established, and petitioner in fact

admitted, that the former paid P1,000,000.00 and P280,813.72 under
protest, the amounts representing a portion of the latter's claim of
differential billing. With the finding that no tampering was committed
and, thus, no differential billing due, the aforesaid amounts should
be returned by petitioner, with interest, as ordered by the Court of
Appeals and pursuant to the guidelines set forth by the Court.46
However, despite the appellate court's conclusion that no

tampering was committed, it held Ultra solidarily liable with petitioner
for P1,000,000.00, only because the former, as occupant of the
building, promised to settle the claims of the latter. This ruling is
erroneous. Ultra's promise was conditioned upon the finding of
defect or tampering of the meters. It did not acknowledge any
culpability and liability, and absent any tampered meter, it is absurd
to make the lawful occupant liable. It was petitioner who received
the P1 million; thus, it alone should be held liable for the return of the
amount.
TEC also sufficiently established its claim for the reimbursement of the
amount paid as rentals for the generator set it was constrained to
rent by reason of the illegal disconnection of electrical service. The
official receipts and purchase orders submitted by TEC as evidence
sufficiently show that such rentals were indeed made. However, the
amount of P150,000.00 per month for five months, awarded by the
CA, is excessive. Instead, a total sum of P150,000.00, as found by the
RTC, is proper.

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As to the payment of exemplary damages and attorney's fees, we
find no cogent reason to disturb the same. Exemplary damages are
imposed by way of example or correction for the public good in
addition to moral, temperate, liquidated, or compensatory
damages.47 In this case, to serve as an example – that before a
disconnection of electrical supply can be effected by a public utility,
the requisites of law must be complied with – we affirm the award of
P200,000.00 as exemplary damages. With the award of exemplary
damages, the award of attorney's fees is likewise proper, pursuant to
Article 220848 of the Civil Code. It is obvious that TEC needed the
services of a lawyer to argue its cause through three levels of the
judicial hierarchy. Thus, the award of P200,000.00 is in order.49
We, however, deem it proper to delete the award of moral

damages. TEC's claim was premised allegedly on the damage to its
goodwill and reputation.50 As a rule, a corporation is not entitled to
moral damages because, not being a natural person, it cannot
experience physical suffering or sentiments like wounded feelings,
serious anxiety, mental anguish and moral shock. The only exception
to this rule is when the corporation has a reputation that is debased,
resulting in its humiliation in the business realm.51 But in such a case, it
is imperative for the claimant to present proof to justify the award. It
is essential to prove the existence of the factual basis of the damage
and its causal relation to petitioner's acts.52 In the present case, the
records are bereft of any evidence that the name or reputation of
TEC/TPC has been debased as a result of petitioner's acts. Besides,
the trial court simply awarded moral damages in the dispositive
portion of its decision without stating the basis thereof.
WHEREFORE, the petition is DENIED. The Decision of the Court of

Appeals in CA-G.R. CV No. 40282 dated June 18, 1997 and its
Resolution dated December 3, 1997 are AFFIRMED with the following
MODIFICATIONS: (1) the award of P150,000.00 per month for five
months as reimbursement for the rentals of the generator set is
REDUCED to P150,000.00; and (2) the award of P500,000.00 as moral
damages is hereby DELETED.
SO ORDERED.
Ynares-Santiago, Chairperson, Austria-Marinez, Chico-Nazario,

Reyes, JJ., concur.
Acebedo Optical vs. CA (329 SCRA 314 [2000])

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G.R. No. 100152 March 31, 2000
ACEBEDO OPTICAL COMPANY, INC., petitioner,

vs.
THE HONORABLE COURT OF APPEALS, Hon. MAMINDIARA
MANGOTARA, in his capacity as Presiding Judge of the RTC, 12th
Judicial Region, Br. 1, Iligan City; SAMAHANG OPTOMETRIST Sa
PILIPINAS — Iligan City Chapter, LEO T. CAHANAP, City Legal Officer,
and Hon. CAMILO P. CABILI, City Mayor of Iligan, respondents.
PURISIMA, J.:
At bar is a petition for review under Rule 45 of the Rules of Court

seeking to nullify the dismissal by the Court of Appeals of the original
petition for certiorari, prohibition and mandamus filed by the herein
petitioner against the City Mayor and City Legal Officer of Iligan and
the Samahang Optometrist sa Pilipinas — Iligan Chapter (SOPI, for
brevity).
The antecedent facts leading to the filing of the instant petition are
as follows:
Petitioner applied with the Office of the City Mayor of Iligan for a
business permit. After consideration of petitioner's application and
the opposition interposed thereto by local optometrists, respondent
City Mayor issued Business Permit No. 5342 subject to the following
conditions:
1. Since it is a corporation, Acebedo cannot put up an optical

clinic but only a commercial store;
2. Acebedo cannot examine and/or prescribe reading and

similar optical glasses for patients, because these are functions
of optical clinics;
3. Acebedo cannot sell reading and similar eyeglasses without

a prescription having first been made by an independent
optometrist (not its employee) or independent optical clinic.
Acebedo can only sell directly to the public, without need of a
prescription, Ray-Ban and similar eyeglasses;
4. Acebedo cannot advertise optical lenses and eyeglasses,

but can advertise Ray-Ban and similar glasses and frames;
5. Acebedo is allowed to grind lenses but only upon the

prescription of an independent optometrist. 1
On December 5, 1988, private respondent Samahan ng Optometrist

Sa Pilipinas (SOPI), Iligan Chapter, through its Acting President, Dr.
Frances B. Apostol, lodged a complaint against the petitioner before
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the Office of the City Mayor, alleging that Acebedo had violated
the conditions set forth in its business permit and requesting the
cancellation and/or revocation of such permit.
Acting on such complaint, then City Mayor Camilo P. Cabili

designated City Legal Officer Leo T. Cahanap to conduct an
investigation on the matter. On July 12, 1989, respondent City Legal
Officer submitted a report to the City Mayor finding the herein
petitioner guilty of violating all the conditions of its business permit
and recommending the disqualification of petitioner from operating
its business in Iligan City. The report further advised that no new
permit shall be granted to petitioner for the year 1989 and should
only be given time to wind up its affairs.
On July 19, 1989, the City Mayor sent petitioner a Notice of

Resolution and Cancellation of Business Permit effective as of said
date and giving petitioner three (3) months to wind up its affairs.
On October 17, 1989, petitioner brought a petition for certiorari,

prohibition and mandamus with prayer for restraining
order/preliminary injunction against the respondents, City Mayor,
City Legal Officer and Samahan ng Optometrists sa Pilipinas-Iligan
City Chapter (SOPI), docketed as Civil Case No. 1497 before the
Regional Trial Court of Iligan City, Branch I. Petitioner alleged that (1)
it was denied due process because it was not given an opportunity
to present its evidence during the investigation conducted by the
City Legal Officer; (2) it was denied equal protection of the laws as
the limitations imposed on its business permit were not imposed on
similar businesses in Iligan City; (3) the City Mayor had no authority to
impose the special conditions on its business permit; and (4) the City
Legal Officer had no authority to conduct the investigation as the
matter falls within the exclusive jurisdiction of the Professional
Regulation Commission and the Board of Optometry.
Respondent SOPI interposed a Motion to Dismiss the Petition on the

ground of non-exhaustion of administrative remedies but on
November 24, 1989, Presiding Judge Mamindiara P. Mangotara
deferred resolution of such Motion to Dismiss until after trial of the
case on the merits. However, the prayer for a writ of preliminary
injunction was granted. Thereafter, respondent SOPI filed its
answer.1âwphi1.nêt
On May 30, 1990, the trial court dismissed the petition for failure to
exhaust administrative remedies, and dissolved the writ of preliminary
injunction it earlier issued. Petitioner's motion for reconsideration met
the same fate. It was denied by an Order dated June 28, 1990.
On October 3, 1990, instead of taking an appeal, petitioner filed a

petition for certiorari, prohibition and mandamus with the Court of
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Appeals seeking to set aside the questioned Order of Dismissal,
branding the same as tainted with grave abuse of discretion on the
part of the trial court.
On January 24, 1991, the Ninth Division 2 of the Court of Appeals

dismissed the petition for lack of merit. Petitioner's motion
reconsideration was also denied in the Resolution dated May 15,
1991.
Undaunted, petitioner has come before this court via the present
petition, theorizing that:
A.
THE RESPONDENT COURT, WHILE CORRECTLY HOLDING THAT THE

RESPONDENT CITY MAYOR ACTED BEYOND HIS AUTHORITY IN
IMPOSING THE SPECIAL CONDITIONS IN THE PERMIT AS THEY HAD
NO BASIS IN ANY LAW OR ORDINANCE, ERRED IN HOLDING THAT
THE SAID SPECIAL CONDITIONS NEVERTHELESS BECAME BINDING
ON PETITIONER UPON ITS ACCEPTANCE THEREOF AS A PRIVATE
AGREEMENT OR CONTRACT.
B.
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT

THE CONTRACT BETWEEN PETITIONER AND THE CITY OF ILIGAN
WAS ENTERED INTO BY THE LATTER IN THE PERFORMANCE OF ITS
PROPRIETARY FUNCTIONS.
Although petitioner agrees with the finding of the Court of Appeals

that respondent City Mayor acted beyond the scope of his authority
in imposing the assailed conditions in subject business permit, it has
excepted to the ruling of the Court of Appeals that the said
conditions nonetheless became binding on petitioner, once
accepted, as a private agreement or contract. Petitioner maintains
that the said special conditions are null and void for being ultra vires
and cannot be given effect; and therefore, the principle of estoppel
cannot apply against it.
On the other hand, the public respondents, City Mayor and City
Legal Officer, private respondent SOPI and the Office of the Solicitor
General contend that as a valid exercise of police power,
respondent City Mayor has the authority to impose, as he did,
special conditions in the grant of business permits.
Police power as an inherent attribute of sovereignty is the power to

prescribe regulations to promote the health, morals, peace,

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education, good order or safety and general welfare of the people.
9 The State, through the legislature, has delegated the exercise of
police power to local government units, as agencies of the State, in

order to effectively accomplish and carry out the declared objects
of their creation. 4 This delegation of police power is embodied in the
general welfare clause of the Local Government Code which
provides:
Sec. 6. General Welfare. — Every local government unit shall

exercise the powers expressly granted, those necessarily
implied therefrom, as well as powers necessary, appropriate, or
incidental for its efficient and effective governance, and those
which are essential to the promotion of the general welfare.
Within their respective territorial jurisdictions, local government
units shall ensure and support, among other things, the
preservation and enrichment of culture, promote health and
safety, enhance the right of the people to a balanced
ecology, encourage and support the development of
appropriate and self-reliant scientific and technological
capabilities, improve public morals, enhance economic
prosperity and social justice, promote full employment among
their residents, maintain peace and order, and preserve the
comfort and convenience of their inhabitants.
The scope of police power has been held to be so comprehensive

as to encompass almost all matters affecting the health, safety,
peace, order, morals, comfort and convenience of the community.
Police power is essentially regulatory in nature and the power to issue
licenses or grant business permits, if exercised for a regulatory and
not revenue-raising purpose, is within the ambit of this power. 5
The authority of city mayors to issue or grant licenses and business

permits is beyond cavil. It is provided for by law. Section 171,
paragraph 2 (n) of Batas Pambansa Bilang 337 otherwise known as
the Local Government Code of 1983, reads:
Sec. 171. The City Mayor shall:
xxx xxx xxx
n) Grant or refuse to grant, pursuant to law, city licenses or

permits, and revoke the same for violation of law or ordinance
or the conditions upon which they are granted.
However, the power to grant or issue licenses or business permits

must always be exercised in accordance with law, with utmost
observance of the rights of all concerned to due process and equal
protection of the law.

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Succinct and in point is the ruling of this Court, that:
. . . While a business may be regulated, such regulation must,

however, be within the bounds of reason, i.e., the regulatory
ordinance must be reasonable, and its provision cannot be
oppressive amounting to an arbitrary interference with the
business or calling subject of regulation. A lawful business or
calling may not, under the guise of regulation, be unreasonably
interfered with even by the exercise of police power. . . .
xxx xxx xxx
. . . The exercise of police power by the local government is

valid unless it contravenes the fundamental law of the land or
an act of the legislature, or unless it is against public policy or is
unreasonable, oppressive, partial, discriminating or in
derogation of a common right. 6
In the case under consideration, the business permit granted by

respondent City Mayor to petitioner was burdened with several
conditions. Petitioner agrees with the holding by the Court of
Appeals that respondent City Mayor acted beyond his authority in
imposing such special conditions in its permit as the same have no
basis in the law or ordinance. Public respondents and private
respondent SOPI, on the other hand, are one in saying that the
imposition of said special conditions on petitioner's business permit is
well within the authority of the City Mayor as a valid exercise of
police power.
As aptly discussed by the Solicitor General in his Comment, the

power to issue licenses and permits necessarily includes the corollary
power to revoke, withdraw or cancel the same. And the power to
revoke or cancel, likewise includes the power to restrict through the
imposition of certain conditions. In the case of Austin-Hardware, Inc.
vs. Court of Appeals, 7 it was held that the power to license carries
with it the authority to provide reasonable terms and conditions
under which the licensed business shall be conducted. As the
Solicitor General puts it:
If the City Mayor is empowered to grant or refuse to grant a

license, which is a broader power, it stands to reason that he
can also exercise a lesser power that is reasonably incidental to
his express power, i.e. to restrict a license through the imposition
of certain conditions, especially so that there is no positive
prohibition to the exercise of such prerogative by the City
Mayor, nor is there any particular official or body vested with
such authority. 8

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However, the present inquiry does not stop there, as the Solicitor
General believes. The power or authority of the City Mayor to impose
conditions or restrictions in the business permit is indisputable. What
petitioner assails are the conditions imposed in its particular case
which, it complains, amount to a confiscation of the business in
which petitioner is engaged.
Distinction must be made between the grant of a license or permit

to do business and the issuance of a license to engage in the
practice of a particular profession. The first is usually granted by the
local authorities and the second is issued by the Board or
Commission tasked to regulate the particular profession. A business
permit authorizes the person, natural or otherwise, to engage in
business or some form of commercial activity. A professional license,
on the other hand, is the grant of authority to a natural person to
engage in the practice or exercise of his or her profession.
In the case at bar, what is sought by petitioner from respondent City

Mayor is a permit to engage in the business of running an optical
shop. It does not purport to seek a license to engage in the practice
of optometry as a corporate body or entity, although it does have in
its employ, persons who are duly licensed to practice optometry by
the Board of Examiners in Optometry.
The case of Samahan ng Optometrists sa Pilipinas vs. Acebedo

International Corporation, G.R. No. 117097, 9 promulgated by this
Court on March 21, 1997, is in point. The factual antecedents of that
case are similar to those of the case under consideration and the
issue ultimately resolved therein is exactly the same issue posed for
resolution by this Court en banc.
In the said case, the Acebedo International Corporation filed with

the Office of the Municipal Mayor an application for a business
permit for the operation of a branch of Acebedo Optical in Candon,
Ilocos Sur. The application was opposed by the Samahan ng
Optometrists sa Pilipinas-Ilocos Sur Chapter, theorizing that Acebedo
is a juridical entity not qualified to practice optometry. A committee
was created by the Office of the Mayor to study private
respondent's application. Upon recommendation of the said
committee, Acebedo's application for a business permit was denied.
Acebedo filed a petition with the Regional Trial Court but the same
was dismissed. On appeal, however, the Court of Appeals reversed
the trial court's disposition, prompting the Samahan ng Optometrists
to elevate the matter to this Court.
The First Division of this Court, then composed of Honorable Justice

Teodoro Padilla, Josue Bellosillo, Jose Vitug and Santiago Kapunan,
with Honorable Justice Regino Hermosisima, Jr. as ponente, denied

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the petition and ruled in favor of respondent Acebedo International
Corporation, holding that "the fact that private respondent hires
optometrists who practice their profession in the course of their
employment in private respondent's optical shops, does not translate
into a practice of optometry by private respondent itself," 10 The
Court further elucidated that in both the old and new Optometry
Law, R.A. No. 1998, superseded by R.A. No. 8050, it is significant to
note that there is no prohibition against the hiring by corporations of
optometrists. The Court concluded thus:
All told, there is no law that prohibits the hiring by corporations

of optometrists or considers the hiring by corporations of
optometrists as a practice by the corporation itself of the
profession of optometry.
In the present case, the objective of the imposition of subject

conditions on petitioner's business permit could be attained by
requiring the optometrists in petitioner's employ to produce a valid
certificate of registration as optometrist, from the Board of Examiners
in Optometry. A business permit is issued primarily to regulate the
conduct of business and the City Mayor cannot, through the
issuance of such permit, regulate the practice of a profession, like
that of optometry. Such a function is within the exclusive domain of
the administrative agency specifically empowered by law to
supervise the profession, in this case the Professional Regulations
Commission and the Board of Examiners in Optometry.
It is significant to note that during the deliberations of the bicameral

conference committee of the Senate and the House of
Representatives on R.A. 8050 (Senate Bill No. 1998 and House Bill No.
14100), the committee failed to reach a consensus as to the
prohibition on indirect practice of optometry by corporations. The
proponent of the bill, former Senator Freddie Webb, admitted thus:
Senator Webb: xxx xxx xxx
The focus of contention remains to be the proposal of

prohibiting the indirect practice of optometry by
corporations.1âwphi1 We took a second look and even a third
look at the issue in the bicameral conference, but a
compromise remained elusive. 11
Former Senator Leticia Ramos-Shahani likewise voted her reservation

in casting her vote:
Senator Shahani: Mr. President.
The optometry bills have evoked controversial views from the

members of the panel. While we realize the need to uplift the

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standards of optometry as a profession, the consesnsus of both
Houses was to avoid touching sensitive issues which properly
belong to judicial determination. Thus, the bicameral
conference committee decided to leave the issue of indirect
practice of optometry and the use of trade names open to the
wisdom of the Courts which are vested with the prerogative of
interpreting the laws. 12
From the foregoing, it is thus evident that Congress has not adopted
a unanimous position on the matter of prohibition of indirect
practice of optometry by corporations, specifically on the hiring and
employment of licensed optometrists by optical corporations. It is
clear that Congress left the resolution of such issue for judicial
determination, and it is therefore proper for this Court to resolve the
issue.
Even in the United States, jurisprudence varies and there is a conflict

of opinions among the federal courts as to the right of a corporation
or individual not himself licensed, to hire and employ licensed
optometrists. 13
Courts have distinguished between optometry as a learned

profession in the category of law and medicine, and optometry as a
mechanical art. And, insofar as the courts regard optometry as
merely a mechanical art, they have tended to find nothing
objectionable in the making and selling of eyeglasses, spectacles
and lenses by corporations so long as the patient is actually
examined and prescribed for by a qualified practitioner. 14
The primary purpose of the statute regulating the practice of

optometry is to insure that optometrical services are to be rendered
by competent and licensed persons in order to protect the health
and physical welfare of the people from the dangers engendered
by unlicensed practice. Such purpose may be fully accomplished
although the person rendering the service is employed by a
corporation. 15
Furthermore, it was ruled that the employment of a qualified

optometrist by a corporation is not against public policy. 16 Unless
prohibited by statutes, a corporation has all the contractual rights
that an individual has 17 and it does not become the practice of
medicine or optometry because of the presence of a physician or
optometrist. 18 The manufacturing, selling, trading and bartering of
eyeglasses and spectacles as articles of merchandise do not
constitute the practice of optometry. 19
In the case of Dvorine vs. Castelberg Jewelry Corporation, 20

defendant corporation conducted as part of its business, a
department for the sale of eyeglasses and the furnishing of
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optometrical services to its clients. It employed a registered
optometrist who was compensated at a regular salary and
commission and who was furnished instruments and appliances
needed for the work, as well as an office. In holding that corporation
was not engaged in the practice of optometry, the court ruled that
there is no public policy forbidding the commercialization of
optometry, as in law and medicine, and recognized the general
practice of making it a commercial business by advertising and
selling eyeglasses.
To accomplish the objective of the regulation, a state may provide

by statute that corporations cannot sell eyeglasses, spectacles, and
lenses unless a duly licensed physician or a duly qualified optometrist
is in charge of, and in personal attendance at the place where such
articles are sold. 21 In such a case, the patient's primary and essential
safeguard lies in the optometrist's control of the "treatment" by
means of prescription and preliminary and final examination. 22
In analogy, it is noteworthy that private hospitals are maintained by

corporations incorporated for the purpose of furnishing medical and
surgical treatment. In the course of providing such treatments, these
corporations employ physicians, surgeons and medical practitioners,
in the same way that in the course of manufacturing and selling
eyeglasses, eye frames and optical lenses, optical shops hire
licensed optometrists to examine, prescribe and dispense
ophthalmic lenses. No one has ever charged that these corporations
are engaged in the practice of medicine. There is indeed no valid
basis for treating corporations engaged in the business of running
optical shops differently.
It also bears stressing, as petitioner has pointed out, that the public
and private respondents did not appeal from the ruling of the Court
of Appeals. Consequently, the holding by the Court of Appeals that
the act of respondent City Mayor in imposing the questioned special
conditions on petitioner's business permit is ultra vires cannot be put
into issue here by the respondents. It is well-settled that:
A party who has not appealed from the decision may not
obtain any affirmative relief from the appellate court other
than what he had obtain from the lower court, if any, whose
decision is brought up on appeal. 23
. . . an appellee who is not an appellant may assign errors in his

brief where his purpose is to maintain the judgment on other
grounds, but he cannot seek modification or reversal of the
judgment or affirmative relief unless he has also appealed. 24
Thus, respondents' submission that the imposition of subject special

conditions on petitioner's business permit is not ultra vires cannot
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prevail over the finding and ruling by the Court of Appeals from
which they (respondents) did not appeal.
Anent the second assigned error, petitioner maintains that its

business permit issued by the City Mayor is not a contract entered
into by Iligan City in the exercise of its proprietary functions, such that
although petitioner agreed to such conditions, it cannot be held in
estoppel since ultra vires acts cannot be given effect.
Respondents, on the other hand, agree with the ruling of the Court
of Appeals that the business permit in question is in the nature of a
contract between Iligan City and the herein petitioner, the terms
and conditions of which are binding upon agreement, and that
petitioner is estopped from questioning the same. Moreover, in the
Resolution denying petitioner's motion for reconsideration, the Court
of Appeals held that the contract between the petitioner and the
City of Iligan was entered into by the latter in the performance of its
proprietary functions.
This Court holds otherwise. It had occasion to rule that a license or

permit is not in the nature of a contract but a special privilege.
. . . a license or a permit is not a contract between the

sovereignty and the licensee or permitee, and is not a property
in the constitutional sense, as to which the constitutional
proscription against impairment of the obligation of contracts
may extend. A license is rather in the nature of a special
privilege, of a permission or authority to do what is within its
terms. It is not in any way vested, permanent or absolute. 25
It is therefore decisively clear that estoppel cannot apply in this case.

The fact that petitioner acquiesced in the special conditions
imposed by the City Mayor in subject business permit does not
preclude it from challenging the said imposition, which is ultra vires or
beyond the ambit of authority of respondent City Mayor. Ultra vires
acts or acts which are clearly beyond the scope of one's authority
are null and void and cannot be given any effect. The doctrine of
estoppel cannot operate to give effect to an act which is otherwise
null and void or ultra vires.
The Court of Appeals erred in adjudging subject business permit as

having been issued by responded City Mayor in the performance of
proprietary functions of Iligan City. As hereinabove elaborated upon,
the issuance of business licenses and permits by a municipality or city
is essentially regulatory in nature. The authority, which devolved
upon local government units to issue or grant such licenses or
permits, is essentially in the exercise of the police power of the State
within the contemplation of the general welfare clause of the Local
Government Code.
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WHEREFORE, the petition is GRANTED; the Decision of the Court of
Appeals in CA-GR SP No. 22995 REVERSED: and the respondent City
Mayor is hereby ordered to reissue petitioner's business permit in
accordance with law and with this disposition. No pronouncement
as to costs.
SO ORDERED.
Bellosillo, Puno, Mendoza, Quisumbing, Buena, Gonzaga-Reyes,

Ynares-Santiago and De Leon, Jr., JJ., concur.
Kapunan, J., see concurring opinion.
Vitug, J., please see dissent.
Davide, Jr., C.J., I join Justice Vitug in his dissent.
Melo, J., I join the dissent of Justice Vitug.
Panganiban, J., I join Justice Vitug's Dissent.
Pardo, J., I join dissent of Justice Vitug.
Footnotes
1Annex A to Memorandum of Respondent City Mayor and City
Legal Officer of Iligan, Rollo, p. 231-232.
2Associate Justice Luis Javellana, ponente; Associate Justice
Alfredo Marigomen and Associate Justice Artemon Luna,
members.
3 Binay vs. Domingo, 201 SCRA 508.
4 Tatel vs. Municipality of Virac, 207 SCRA 157.
5Procter and Gamble Phils. vs. The Municipality of Jagna, 94
SCRA 894.
6 Balacuit vs. CFI of Agusan del Norte, 163 SCRA 182.
7 69 SCRA 564.
8 Comment by the Solicitor General, p. 8; Rollo, p. 78.
9 270 SCRA 298.
10 Ibid, p. 306.
11Saturday, June 3, 1995, "Approval of the Conference
Committee Report on S. No. 1998 and H. No. 14100, Record of
the Senate, p. 847.
12 Ibid.

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13 128 ALR 586.
14HOUSE of $8.50 Eyeglasses, Inc. vs. State Board of Optometry,
288 Ala 349, 261 So 2d 27; State ex rel. Board of Optometry vs.
Sears Roebuck and Co., 102 Ariz 175, 427 Pd 126.
15Silver v. Lansburgh and Brother, 72 App DC 77, 11 F2d 518, 128
ALR 582; 61 Am Jur 2d 289.
16Georgia State Examiners v. Friedman's Jewelers (183 Ga 669,
189 SE 238).
17State ex rel. McKittrick vs. Gate City Optical Co., 339 Mo 427,
97 SW 2d 89).
18 Dickson vs. Flynn, 246 App Div 341, 286 NYS 225.
19State ex rel. Brother vs. Beck Jewelry Enterprises, Inc., 220 Ind.
276, 41 NE 2d 622, 141 ALR 876) (61 Am Jur 187); Kindy
Opticians, Inc. vs. State Board of Examiners in Optometry, 1939,
291 Mich 152, 289 NW 112, 113; New Jersey State Bd. of
Optometrists vs. S.S. Kresge Co., 113 NJL 287, 174 A 353).
20 Dvorine vs. Castelberg Jewelry Corp., 170 Md. 661, 185 A 562.
21 Roschen vs. Ward, 279 US 337, 73 L Ed 722, 49 S Ct 336.
Small and Maine Board of Registration and examination in

22
Optometry, 293 A 2d 786.

23Policarpio vs. CA, 269 SCRA 344; Pison-Arceo Agricultural and
Development Corporation vs. NLRC, 279 SCRA 312; Quintanilla
vs. CA, 279 SCRA 397.
La Campana Food Products, Inc. vs. Philippine Commercial

24
and Industrial Bank, 142 SCRA 394, 398.

25 Gonzalo Sy Trading vs. Central Bank, 70 SCRA 570.
The Lawphil Project - Arellano Law Foundation
Separate Opinions
KAPUNAN, J., separate and concurring opinion;

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I concur with the opinion of Mr. Justice Purisima. In addition, I would
like to state the following: The issues that present themselves in the
case at bar are the following: First, can a corporation which is not a
natural person, engage in the practice of optometry? Second, can
a corporation, by employing optometrists as an incident to and in
the ordinary course of its business of selling optical wares, supplies,
substances and instruments, be said to be indirectly practicing
optometry? Third, are the commercial restrictions in the business
license a proper exercise of police power under the specific
circumstances of this case?
The rule is that the corporate practice of any profession, including

optometry, must never be sanctioned. The public policy behind such
rulings is universal, and is based on the nation that the ethics of any
profession is based upon individual responsibility, personal
accountability and independence, which are all lost where one
verily acts as a mere agent, or alter ego, of unlicensed persons or
corporations.
II
The second question provides no easy answer and actually depends

on the facts and circumstance surrounding a particular case. What
is well-settled, however, is that in the absence of a statute
specifically prohibiting a corporation from hiring duly licensed
optometrists, the employment by such corporation of said
professionals is not tantamount to practice of optometry by the
corporation itself. Thus, in Samahan ng Optometrists sa Pilipinas, et al.
vs. Acebedo International Corporation, 1 we held that:
. . . The fact that private respondent hires optometrists who

practice their profession in the course of their employment in
private respondent's optical shops, does not translate into a
practice of optometry by private respondent itself. Private
respondent is a corporation created and organized for the
purpose of conducting the business of selling optical lenses or
eyeglasses, among others. The clientele of private respondent
understandably, would largely be composed of persons with
defective vision and thus need the proper lenses to correct the
same and enable them to gain normal vision. The
determination of the proper lenses to sell to private
respondent's clientele entails the employment of optometrists
who have been precisely trained for that purpose. Private
respondent's business is not the determination itself of the
proper lenses needed by persons with defective vision. Private
respondent's business, rather, is the buying and importing of

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eyeglasses and lenses and other similar or allied instruments
from suppliers thereof and selling the same to consumers.
For petitioners argument to hold water, there need be clear

showing that R.A. No. 1998 prohibits a corporation from hiring
optometrists, for only then would it be undeniably evident that
the intention of the legislature is to preclude the formation of
the so-called optometry corporations because such is
tantamount to the practice of the profession of optometry
which is legally exercisable only by natural persons and
professional partnerships. We have carefully reviewed R.A. No.
1998 however, and we find nothing therein that supports
petitioner's insistent claims.
It is interesting to note that during the Senate deliberations on the

enactment of R.A. 8050, a widely-debated and highly controversial
provision directly prohibiting the indirect practice of optometry, was
eventually deleted from the original bill and was, therefore, not
included in the final version of the law.2 That original provision states:
Prohibition against the Indirect Practice of Optometry — No

person, natural or juridical, other than an optometrist in good
standing or a partnership composed solely of optometrists, shall
hire, employ, join with or otherwise use the services of an
optometrist for the purpose of practicing optometry: Provided
however, That this prohibition shall not apply to the government
of the Philippines or any of its agencies or instrumentalities and
to persons who are exempted under the immediate preceding
section.
By deleting the aforequoted controversial provision and by

deliberately failing to provide one directly addressing the matter of
whether or not duly-licensed optometrists may practice their
profession as employees of corporations, it is evident that it was the
legislative intent to leave to the judiciary the resolution of whatever
issues that may arise in the application of the law. Senator Shahani
explained:
The optometry bills have evoked controversial views from the

Members of the panel. While we realize the need to uplift the
standards of optometry as a profession, the consensus of both
Houses was to avoid touching sensitive issues which properly
belong to judicial determination. Thus, the bicameral
conference committee decided to leave the issue of indirect
practice of optometry and the use of trade names open to the
wisdom of the Courts which are vested with the prerogative of
interpreting the laws. 3

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While the hiring by corporations of optometrists does not necessarily
translate into the corporate practice of profession, which is, without
question, prohibited and against public policy, factual relationships
between the corporation and the employee-optometrist have been
inquired into by some courts in the United States to determine
whether or not there is an unauthorized corporate practice of the
profession, that is, whether or not it is the corporation, and not its
licensed employees, which is unduly engaged in the practice of
optometry.
In many cases, the measure of control is particularly determinative. 4

Where it appears that the optical company has the power of
regulation or control of the professional activities of the licensed
optometrists, including corporation's power to dismiss, and including
any influence over the mode and manner of eye examinations and
resulting professional judgments, the reciprocal arrangement is held
to constitute the unlicensed practice of optometry. 5 In another
case, advertisement of the corporation is a factor. Where a statute
provides that a person licensed to practice optometry is forbidden
to advertise, practice, or attempt to practice "under a name other
than his own," 6 advertisement of the corporation is held to lead the
public to believe that it (the corporation) is practicing optometry.
This provision, according to the court, is certainly antagonistic to the
view that a corporation might practice optometry through a
licensed optometrist.
The manner of compensation has also been held to be an important

factor in determining whether or not a corporation is unlawfully
engaged in the practice of optometry. Where the corporation
exercises in any manner, control over the payment of fees to be
charged by the optometrist, 7 where an optometrist receives a
monthly salary from the corporation purporting to be a percentage
of payments made by certain customers, 8 and where the
prescription does not carry the name of the licensed optometrist, but
rather that of the corporate defendant, such has been held as
sufficient indications that there is unlawful corporate practice of the
profession.9
In this case, the imposition of conditions by the respondent mayor in

the business permit was premature, there being no factual basis for
him to conclude whether or not there was a danger that corporate
practice of optometry was to take place should the business permit
to operate an optical shop be granted to the petitioner. The
conditions on the business permit were imposed even before
petitioner began operating its optical shop in Iligan city, the alleged
breach of which was the basis for the permit's cancellation and the
institution of this case in court. It was not within respondent mayor's

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functions to determine the proper scope and application of the
Optometry Law by imposing the conditions in the business permit.
III
In this connection, I do not fully share with the view that the exercise
of the optometrists' specialization is no different from the practice of
other regulated professions which can be done individually or in
association with duly-licensed colleagues only.
Sec. 3 of R.A. 8050 defines optometry as:
The science and art of examining the human eye, analyzing

the ocular function, prescribing and dispensing ophthalmic
lenses, prisms, contact lenses and their accessories and
solutions, low vision aids, and similar appliances and devices,
conducting ocular exercises, vision training, orthoptics, installing
prosthetics, using authorized diagnostic pharmaceutical agents
(DPA), and other preventive or corrective measures or
procedures for the aid, correction, rehabilitation or relief of the
human eye, or to attain maximum vision and comfort.
The words "ophthalmologist", "optometrist" and "optician", though

closely related, should be distinguished. An ophthalmologist is a duly
licensed physician who specializes in the care of eyes. Optometrists
merely examine the eyes for refractive error, recognize (but does not
treat) diseases of the eye, and fill prescriptions for eyeglasses. 10
Optometrists also adapt frames and lenses to overcome errors of
refraction and restores, as nearly as possible with these mechanical
appliances, normal human vision. The optician is engaged in the
business of furnishing lenses to customers on the prescriptions of
licensed optometrists or qualified physicians, putting the lenses into
frames selected by the customer, and fitting the frames to the face.
11
Optometry is distinguished from other professions by the nature of

relationships created between the optometrist and the client. It has
been held that the traditional relationship between physician and
patient does not exist in the practice of optometry, since such
practice involves no relationship of trust and confidence as exists
between a physician and a patient, or as between an attorney and
client. The argument is that, considering the nature and scope of the
optometrist's functions, no such trust relationship exists and,
consequently, there is no public policy to be subserved by
prohibiting optometrists to practice their profession as employees of
corporations. In the case of Silver v. Lansburgh, a U.S. Court held:
. . . Both in the case of the physician and the lawyer, the person
seeking his services must break down the barriers of reserve
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which otherwise serve to protect him and deliberately reveal to
his professional adviser secrets of physical or mental disability or
secrets of business of the most intimate nature. These necessary
disclosures create the personal relationship which cannot exist
between patient or client and a profit-seeking corporation. The
universal recognition of this immediate, unbroken, and
confidential association between doctor and lawyer and those
who engage their services early created and still justifies the
rule that their allegiance must be wholeheartedly to the patient
or the client, not to another. Nothing of this nature applies to
the practice of optometry. 12
Optometrists must also exercise the amount of care, skill and

diligence which is exercised generally in the community by other
practitioners in the same field, and as is mandated by the rules
regulating their profession, wherever and however they practice
their profession. Optometry has also been distinguished from other
professions in that the selling of services in the former, is intertwined
with the selling of goods. It has been held that "the optometrist and
optician are also engaged in the sale of a product, corrective
lenses, and accordingly the activities of an optometrist lie between
those associated with the practice of a profession and those
characteristic of a merchandising concern." 13
Anent the question of whether optometrists may practice their

profession as employees of corporations, many courts in the United
States have based their decisions on the distinctions and differences
in the required degree of learning and training required. Generally,
such decisions depend on whether the courts classify optometry as a
mere "mechanical art" or as a "learned profession" such as law or
medicine. Where courts consider optometry as a mere mechanical
art, optometrists are not prevented from being employed in
corporations, the courts holding that where the statute itself does not
specifically control, the reasons for preventing the practice of law
and medicine to corporations do not apply, to optometry. In the
case of Silver v. Lansburgh & Co., the court found:
. . . Optometry is a mechanical art which requires skill and a

knowledge of the use of certain mechanical instruments and
appliances designed to measure and record the errors and
deviations from the normal found in the human eye, but is not a
learned profession comparable to law, medicine, and theology
and that, though certain standards of education are
prescribed by the statute and by rules of the board created
under it, optometry is not a part of medicine. 14
The U.S. Court of Appeals for the District of Columbia to which the
aforementioned case was appealed, did concede that in their view,

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optometry is a profession, as the term is colloquially used,
nonetheless, the court also said that there is no reason why a
corporation cannot employ licensed optometrist. Thus:
. . . but that fact is not enough to bring the rule into effect.
There is no more reason to prohibit a corporation, organized for
the purpose, from employing licensed optometrists, than there
is to prohibit similar employment of accountants, architects or
engineers. We know of no instance in which the right in any of
these cases has ever been challenged, though universally all
are deemed professions. 15
IV
The assailed conditions imposed in the subject business permit are

ultra vires because they are unreasonable. Police power is often
characterized as the most essential, insistent and the least limitable
of powers, extending as it does to all the great public needs. 16 It is
the inherent and plenary power in the State which enables it to
prohibit all that is hurtful to the comfort, safety, and welfare of
society. 17
In the area of local governments, the police power of a municipality

exists solely by virtue of legislative or constitutional grant. 18 In view,
however, of the constitutional grant of local autonomy, the
argument on presumption of reasonableness in the exercise of the
police power by local government may be persuasive. But this
awesome character of police power is not without limits because
the determination of what is proper exercise of such power is subject
to the supervision of the courts. 19 This is specially true in this case
where police power is used to justify restriction on the right to
engage in a legitimate employment or business, which right receive
protection and recognition as a portion of the individual freedoms
secured by the due process clause of the Constitution.
A justification for a licensing requirement and other forms of

restrictions generally requires a showing that the measures at least
tend to promote public health, morals, safety or welfare. Whenever
a business is affected with public interest it may be subject to
regulation to protect at the public against danger and injustice.
However, the scope of regulations of trades and occupation is
determined by the principle that an exercise of the police power
must confer public benefit commensurate with the burden imposed
upon private rights and property, and the means adapted must be
suitable to the end in view, impartial in operation, and not unduly
oppressive upon individuals. 20 The burden imposed must not
interfere with rights of private property and freedom of contract
beyond the necessity of the situation. 21 The test, thus, is the classic

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reasonableness and propriety of the measures or means in the
promotion of the ends sought to be accomplished.
Under the rubric of general welfare, what is the specific public policy
involved in the exercise of police power in this case? Or in
constitutional language, what is the end sought to be achieved?
The City Mayor in its comment to the petition cites the "safety and
well-being of the people of Iligan — especially the poor and naive
among them." 22 The Solicitor General, on the other hand, cites
protection of "public morals, health, safety or welfare" 23 and "to
promote the prosperity and general welfare of the local government
unit and its inhabitants." 24 With the lack of discussion in the pleadings
on how these general concerns will be served by the specific means
adapted, we can only speculate.
In terms of promoting safety, public health or welfare, it may be

argued that allowing corporations to employ licensed optometrists
may compromise professional accountability. Because corporations
are generally seen as more concerned at bottom with profits, the
motivation to sell might prevail over professional ethics. Again this is
mere speculation. Just being "big" is not a sin. Under the general
scheme of the equal protection clause of our Constitution, "bigness"
should not be a disadvantage in terms of benefits conferred and
liabilities imposed.
Jurisprudence in the United States is replete with cases on the issue

of validity of governmental regulation relating to optometry. 25 In a
case upholding the validity of a statute prohibiting a corporation
from practicing optometry, directly or indirectly, and from employing
registered optometrist to examine the eyes of its customers, a US
court cited the public policy that one who practices a profession is
apt to have less regard for professional ethics and to be less
amenable to regulation for their enforcement when he has no
contractual obligations to the client. 26
There are generally four types of commercial restrictions in the

practice of optometry. 27 These are:
1) Employment Restrictions which usually provide that it is

unprofessional conduct or an illegal practice for an optometrist
to accept employment from unlicensed person or non-
professional Corporations; 28
2) Restrictions on Location prohibit optometrist to work in an

office not devoted exclusively to the practice of optometry or
in which materials are displayed pertaining to a commercial
undertaking not related to the practice of optometry;

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3) Branch Office Restrictions usually set a maximum number of
branch Offices an optometrist may operate or require the
optometrist to be on personal attendance a certain proportion
of time the office is open to the public;
4) Trade Name Restrictions declare illegal or unethical for an

optometrist to practice under a name other than his or her
name or under a false or assumed name. This last type of
restriction has a distinct discriminatory impact on non-
professional corporations. 29
The public policy cited to justify these different types of restrictions is

generally consumer protection by elimination of low-quality services.
30 Lay-employed optometrists, 31 may employ various cost-cutting
techniques like brief and inadequate eye examinations, in order to

increase profits. Those who practice under a trade name lack
personal accountability and the motivation to maintain a personal
reputation for high-quality service. The management of non-
professional optical firms may, likewise, interfere with the "doctor-
patient" relationship and professional judgments concerning patient
welfare. Thus, the argument is offered that commercial practice
restrictions are necessary to prevent lay-employed optometrist from
increasing their market share by selling services at lower prices and
substituting low for high quality case without consumer recognition of
the change in quality. 32
Closer to home, the Senate proceedings discussing Senate Bill No.

1998, the precursor of RA 8050, is enlightening as to the rationale
behind the original proposal to specifically prohibit employment by
corporations of optometrists.33
The exchange between Senator Webb, Chairman of the Committee

on Health and Demography, and Senator Macapagal is instructive:
Senator Macapagal: Mr. President, what I will ask comes from

the concern of corporations that hire optometrists. What they
would like to know from the Gentleman is what is the rationale
behind prohibiting corporations from engaging the services of
optometrists.
Senator Webb: Mr. President, a corporation is not the same as

an individual human being for one thing. A corporation cannot
be a doctor or a lawyer. Only a human being may be
permitted to practice medicine or law.
xxx xxx xxx
The optometrist for one thing has a peculiar relationship with a

patient and this is primarily based not on profit, though people

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will say that one enters a profession primarily to make money.
But under their Code of Ethics, it is clearly stated that one goes
there as a doctor primarily to cure people.
A corporation, Mr. President, is a different entity. Primarily it is

there to make money. In fact, if a corporation were to hire an
optometrist then he is divided between his loyalty to the
corporation and his love and affection for his patient because
a corporation may have a specific product that it wants to
push. And as such, an optometrist is told to push a particular
product for whatever it is worth. "Kailangang itulak natin ito
sapagkat ito ang ating produkto."
Sa optometrist po ay hindi ganoon sapagkat wala kayong

makikitang abogado o duktor na nag-a-advertise na ang
ginagamit ay trade name or corporate name. In fact, in
advertisement, though not very clear kung pinapayagan itoy,
ay hindi kayo puwedeng gumamit ng korporasyon kundi iyong
mga pangalan. At iyan po ang ipinagbabawal.
Hindi po ipinagbabawal ang pagpapatuloy ng negosyo ng

mga optometrist. Ang ipinagbabawal lamang ay iyong
korporasyon dahil alam naman nating pag mayroong
sakunang nangyari ay napakahirap idimanda ang
korporasyon. Hindi katulad ng isang tao na personal and
pagdadala ng serbisyo kaya mas madaling matunton ang
kaniyang pagkakamali hindi kapareho ng isang korporasyon.
Senator Macapagal: Subalit kung ihahambing po natin sa

isang hospital, mayroong duktor iyong hospital at nagkaroon
ng sakuna, nadi-demanda rin naman iyong hospital. Hindi po
ba pareho na rin iyon kung idi-demanda iyong korporasyon na
mayroong optometrist na nagtatrabaho doon?
Senator Webb: Tama po iyan ngunit ang hospital ay regulated

by the Department of Health. Ang korporasyon po ay hindi
man lamang regulated by Professional Regulation Commission
hindi kapareho ng mga optometrist, they are regulated. Wala
pong nag-reregulate sa korporasyon. Kung mayroon kayong
optical shop ngayon, wala pong nagre-regulate diyan kaya
ang maaaring mabigyan ng kasalanan ay iyong optometrist
na nagtatrabaho sa kanila. Ngunit sila po ay libre sa kasong
pagkakamali. Nabanggit din ng isang korporasyon na
napakarami nilang trabahador na madi-displace. Iyan po ay
aking sasagutin mamaya. 34
After intense interpellation by Senator Gonzales, Senator Webb

conceded that the proposal was also meant to "equalize the

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playing field" between a corporation and one personally practicing
optometry. 35
While the above-mentioned objectives are legitimate, the means

employed may be unduly oppressive upon individuals. For example,
one distinct feature of the regulation involved is that on its face, it
purports to regulate business and commerce. In its application and
effect, however, the business license practically prohibits individuals
from seeking legitimate employment from corporations. The nullity of
the regulation, therefore, arises from its operation.
That the exercise of police powers is subject to judicial review is

without question. Police powers being the most pervasive and most
demanding of the three inherent powers of State, its exercise is not
unbrindled and must in all cases meet the test of legitimacy, both in
the ends it seeks to achieve as well as in the means employed to
achieve them. Applying such test to the present case therefore, it is
clear that the respondent mayor acted in excess of his legitimate
authority. The purported ends sought to be achieved go no deeper
than a recital of the General Welfare clause: i.e., "the safety and
well-being of the people", "safeguarding the general public,
especially the poor. . .," without establishing how those goals could
be reasonably achieved by imposing such conditions in the permit.
Furthermore, the means employed effectively deprive optometrists
of basic property right: that is, the right to seek legitimate
employment of their choice, which cannot be arbitrarily infringed
upon regulations that are contrary to law.
The primary purpose of the Optometry Law is to ensure that the

service would be rendered by competent and licensed persons and
thereby protect the public from inexpertness. Despite the public
respondent's assertions that the conditions in the business permit
were made for the purpose of "safeguarding the general public and
especially the poor who are easily gulled by misleading
advertisements," hence, falling within the ambit of police powers
granted to local officials under the Local Government Code, this
Court sees no cogent reason why such purpose cannot be attained
even if the persons rendering the service are employed by a
corporation. Optometrists, like any other professionals are,
nonetheless, bound by the same standards of professional conduct,
care, skill and diligence, whether they practice as independent
optometrists or as employees of unlicensed persons or corporations.
Footnotes
1 270 SCRA 298, 306 (1997).

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2Record of the Senate, p. 351, Wed. Feb. 1, 1995, as read by
Senator Gonzales.
3Record of the Senate, Sat. June 3, 1995, p. 847 (Emphasis
ours.)
4State ex. rel. Fatzer v. Zale Jewelry Co., (1956) 179 Kan 628, 298
P2d 283.
5State ex. rel. Beck v. Goldman Jewelry Co., 142 Kan 881, 51
P2d 995, 102 ALR 334.
6 Eisensith v. Buhl Optical Co. (1934)—W, Va.—, 178 S.E.695.
7Rowe v. Burt's Inc. (1939, App) 17 Ohio Ops 1, 30 Oio L Abs 203,
31 NE2d 725.
8 Eddy v, Board of Optometry (1935)— W. Va.—, 182 S.E. 870.
9 Kendal v. Beiling (1943) 295 Ky 782, 175 SW2d 489.
10Williamson v. Lee Optical of Oklahoma (1955) 348 US 483, 99 L
ed 563, 75 S Ct 461, reh den 349 US 925, 99 L ed 1256, 75 S Ct
657.
11 State v. Rones (1953), 223 La 839, 67 So 2d 99.
12 Silver v. Lansburgh & Bro, (1940) (—App DC—, 111 F(2d) 518).
13 Barbee v. Rogers (Tex) 425 SW2d 342.
14 Supra note 12 at 583.
15 Id., at 585.
Ermita-Malate Hotel and Motel Operators Association, Inc. v.

16
Mayor of Manila, 20 SCRA 849 (1967).

17 Ibid., Rubi v. Provincial Board, 39 Phil. 660 (1918).
18Rep. Act No. 7160 (1991), Sec. 16. General Welfare. — Every
local government unit shall exercise the powers expressly
granted, those necessarily implied therefrom, as well as powers
necessary, appropriate or incidental for its efficient and
effective governance, and those which are essential to the
promotion of the general welfare. Within their respective
territorial jurisdictions, local government units shall ensure and
support, among other things, the preservation and enrichment
of culture, promote health and safety, enhance the right of the
people to a balanced ecology, encourage and support the

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development of appropriate and self-reliant scientific and
technological capabilities, improve public morals, enhance
economic prosperity and social justice, promote full
employment among their residents, maintain peace and order,
and preserve the comfort and convenience of their
inhabitants.1âwphi1.nêt
19 US v. Toribio, 15 Phil, 85, 98 (1910).
Direct Plumbing Supply Co. v. Dayton, 138 Ohio St 540, 38

20
NE2d 70 (1941).
21 Akron v. McElligott, 166 Iowa 297, 147 NW 773 (1914).
22 Rollo, p. 55.
23 Id., at 77.
24 Id., at 78.
25See for example E.W.H., Annotation, Constitutionality of
Statutes and Validity of Regulations Relating to Optometry, 98
A.L.R. 905 (1935); L.S. Tellier, Annotation, Validity of
Governmental Regulation of Optometry, 22 A.L.R. 2d 939
(1952).
26 Neil v. Gimbel Bros. 330 Pa 213, 199A 179 (1938).
27Deborah Hass-Wilson, The Effect of Commercial Practice
Restrictions. The Case of Optometry, 29 J.L. & ECon. 165 (1986)
28 Ibid. In the US, Professional Corporations differ from non-
professional corporations in that Professional Corporation law
requires each stockholder of a professional corporation to be a
licensed member of the profession for which the corporation is
organized to practice.
29 Id., at 170-172.
30Id., at 183. However, the study found that commercial
practice restrictions increase the price of opthalmic goods and
services without statistically significant effect on quality. In plain
language, these commercial restrictions are not protecting the
consumers.
Ibid. Optometrist employed by drug and department stores

31
and other non-professional firms.

32 Id., at 169.

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33 Supra, note 2 and 3.
34Record of Senate, Volume IV, p. 56 (January 31, 1995), pp.
273-274.
35 Id., at 58, (February 1, 1995), p. 352.
The Lawphil Project - Arellano Law Foundation
VITUG, J., dissenting opinion;
The instant case on appeal by certiorari under Rule 45 of the Revised

Rules of Court assails the decision, dated 24 January 1991, and the
resolution, dated 15 May 1991, of respondent Court of Appeals in
CA-G.R. SP NO. 22995, entitled "Acebedo Optical Company, Inc.,
petitioner, vs. Hon. Mamindiara p. Mangotara in his capacity as
Presiding Judge of the Regional Trial Court, 12th Judicial Region,
Branch 1, Iligan City, Samahan ng Optometrists sa Pilipinas-Iligan City
Chapter, Leo T. Cahanap, City Legal Officer of Iligan, and Hon.
Camilo P. Cabili, City Mayor of Iligan, respondents," affirming that of
the trial court. The issue focuses on whether or not petitioner
corporation is, in fact, engaged in an unauthorized practice of
optometry. The trial court and the appellate court have both held in
the affirmative.
The relevant antecedents. —
On 26 November 1988, the Office of the City Mayor of Iligan issued

Business Permit No. 5342 to petitioner, upon its application therefor,
for the operation of a branch office-store of Acebedo Optical Clinic
in the city. The permit was subject to various conditions, among them
being that Acebedo was not to put up an optical clinic but only a
commercial store and that Acebedo could not examine and/or
prescribe reading and similar optical glasses for patients nor to
advertise or sell reading and similar eyeglasses without a prescription
having first been made by an independent optometrist or an
independent optical clinic. Nevertheless, Acebedo was authorized
to advertise or sell directly to the public, without need of a
prescription, Ray-Ban and similar eyeglasses. It could also grind
lenses but only upon the prescription of an independent optometrist.
For the alleged breach of the conditions specified in the business

permit granted to Acebedo, private respondent Samahan ng
Optometrists sa Pilipinas ("SOPI"), Iligan Chapter, filed a complaint
with the Office of the City Mayor. SOPI sought the revocation and/or
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cancellation of Acebedo's business permit. Acting on the complaint,
the Office of the City Mayor directed its City Legal Officer, Leo T.
Cahanap, to look into the matter. On 12 July 1989, the latter
submitted his report which confirmed that Acebedo had indeed
violated the conditions of its business permit. Acting on the
recommendation of the City Legal Officer, the city government, on
19 July 1989, sent petitioner a "Notice of Resolution and Cancellation
of Business Permit" effective "immediately" and gave it a period of
three months within which to wind up its affairs.
The action of the city government prompted petitioner to bring up,

on 17 October 1989, a petition for certiorari, prohibition and
mandamus, with a prayer for restraining order/preliminary injunction,
before the Regional Trial Court, Branch 1, of Iligan City, against
respondents Mayor Camilo Cabili, Leo Cahanap, and SOPI.
The petition substantially averred that petitioner was denied due

process because it was not given an opportunity to present its
evidence during the investigation; that it was denied equal
protection because the conditions imposed on it were not being
imposed on other business enterprises in Iligan City; that respondent
mayor had no authority to impose special conditions; that
respondent City Legal Officer had no jurisdiction to conduct the
investigation since the matter was within the exclusive jurisdiction of
the Professional Regulation Commission and the Board of
Optometry; and that respondents City Mayor and City Legal Officer
had acted with grave abuse of discretion in cancelling petitioner's
permit.
Respondent SOPI interposed a motion to dismiss the petition, alleging

that Acebedo had failed to exhaust its administrative remedies.
Presiding Judge Mamindiara P. Mangotara deferred the resolution of
the motion but granted the prayer of petitioner for a writ of
preliminary injunction. On 30 May 1990, however, the Regional Trial
Court ultimately dismissed the petition for the failure of petitioner to
exhaust administrative remedies and thus dissolved the writ of
preliminary injunction it had previously issued. Petitioner's motion for
reconsideration was likewise denied in an order, dated 28 June 1990,
of the trial court.
In the petition for certiorari, prohibition, and mandamus filed with the
Court of Appeals, petitioner sought to set aside the assailed order of
dismissal, aforementioned, ascribing grave abuse of discretion on
the part of the trial court. The appellate court, on 24 January 1991,
dismissed the petition for lack of merit. It also rejected, in its
Resolution of 15 May 1991, a motion for the reconsideration of the
dismissal.

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In its petition for review on certiorari before this Court, Acebedo
would have it that —
A.
THE RESPONDENT COURT, WHILE CORRECTLY HOLDING THAT THE

RESPONDENT CITY MAYOR ACTED BEYOND HIS AUTHORITY IN
IMPOSING THE SPECIAL CONDITIONS IN THE PERMIT AS THEY HAD
NO BASIS IN ANY LAW OR ORDINANCE, ERRED IN HOLDING THAT
THE SAID SPECIAL CONDITIONS NEVERTHELESS BECAME BINDING
ON PETITIONER UPON ITS ACCEPTANCE THEREOF AS A PRIVATE
AGREEMENT OR CONTRACT.
B.
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT

THE CONTRACT BETWEEN PETITIONER AND THE CITY OF ILIGAN
WAS ENTERED INTO BY THE LATTER IN THE PERFORMANCE OF ITS
PROPRIETARY FUNCTIONS.
Petitioner, in fine, does not now dispute its having violated the
conditions stated in the business permit 1 issued by the City Mayor
but would instead assail the authority of the mayor to impose the
aforesaid conditions.
The courts below, in my humble view, should be sustained.
The questioned conditionalities imposed on the business permit of

Acebedo are activities that cannot be performed by a corporation
without such engagement being translated into an unauthorized
practice of optometry. The exercise of this profession is no different
from the practice of other regulated professions which can only be
undertaken by individuals duly licensed therefor.
Republic Act No. 8050, otherwise known as the Revised Optometry

Law, like Republic Act No. 1998, 2 the old Optometry Law, specifically
prohibits any person from practicing or attempting to practice
optometry without such person having been first admitted to the
practice of that profession and granted a valid certificate of
registration signed by the Commissioner of the Professional
Regulation Commission and by all members of the Board of
Optometry.3 Section 5 Act No. 8050 reads:
Sec. 5. Prohibition Against the Unauthorized Practice of

Optometry. — No person shall practice optometry as defined in
Section 3 of this Act nor perform any of the acts constituting the
practice of optometry as setforth in Section 4 hereof, without
having been first admitted to the practice of this profession
under the provisions of this Act and its implementing rules and

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regulations: Provided, That this prohibition shall not apply to
regularly licensed and duly registered physicians who have
received post-graduate training in the diagnosis and treatment
of eye diseases: Provided, however, That the examination of
the human eye by duly registered physicians in connection with
the physical examination of patients shall not be considered as
practice of optometry: Provided, further, That public health
workers trained and involved in the government's blindness
prevention program may conduct only visual acuity test and
visual screening.
Under Section 4 of that law, any of the following acts would

constitute the practice of optometry; to wit:
a) The examination of the human eye through the employment

of subjective and objective procedures, including the use of
specific topical diagnostic pharmaceutical agents or drugs
and instruments, tools, equipment, implements, visual aids,
apparatuses, machines, ocular exercises, and related devices,
for the purpose of determining the condition and acuity of
human vision to correct and improve the same in accordance
with subsections (b), (c) and (d) hereof.
b) The prescription and dispensing of ophthalmic lenses, prisms,

contact lenses and their accessories and solutions, frames and
their accessories, and supplies for the purpose of correcting
and treating defects, deficiencies and abnormalities of vision;
c) The conduct of ocular exercises and vision training, the

provision of orthoptics and other devices and procedures to
aid and correct abnormalities of human vision, and the
installation of prosthetic devices;
d) The counseling of patients with regard to vision and eye care

and hygiene;
e) The establishment of offices, clinics, and similar places where

optometric services are offered; and
f) The collection of professional fees for the performance of any

of the acts mentioned in paragraphs (a), (b), (c) and (d) of this
section.
The case at bar is notably different from that of "Samahan ng

Optometrists Sa Pilipinas, Ilocos Sur-Abra Chapter vs. Acebedo
International Corporation" 4 where the only issue submitted is
whether or not Acebedo can hire licensed optometrists without
impinging on the Optometry Law (R.A. No. 1998). In ruling that

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Acebedo can have duly licensed optometrists in its employ, the
Court held:
Petitioners' contentions are, however, untenable. The fact that

private respondent hires optometrists who practice their
profession in the course of their employment in private
respondent's optical shops, does not translate into a practice of
optometry by private respondent itself. Private respondent is a
corporation created and organized for the purpose of
conducting the business of selling optical lenses or eyeglasses,
among others. The clientele of private respondent
understandably, would largely be composed of persons with
defective vision and thus need the proper lenses to correct the
same and enable them to gain normal vision. The
determination of the proper lenses to sell to private
respondent's clientele entails the employment of optometrists
who have been precisely trained for that purpose. Private
respondent's business is not, the determination itself of the
proper lenses needed by persons with defective vision. Private
respondent's business, rather, is the buying and importing of
eyeglasses and lenses, and other similar or allied instruments
from suppliers thereof and selling the same to consumers. 5
In much the same vein, there would be no legal impediment for a

lawyer, a physician, an accountant or any other person duly
licensed to engage in the practice of a regulated profession to be
hired or employed by a corporation but, by such employment, the
corporation may not itself then carry on and exercise the regulated
activity.
Petitioner argues that respondent City Mayor has acted beyond his
authority in imposing the conditions expressed in Acebedo's permit.
The contention is bereft of merit. The city Mayor has merely restated
what the Optometry Law mandates. Under Section 171, paragraph
2(n), of the then Local Government Code, 6 the City Mayor, being
the Chief Executive of the Local Government, has had the authority
to "grant or refuse to grant, pursuant to law, city licenses or permits,
and revoke the same for violation of law or ordinance or the
conditions upon which they are granted." Its equivalent provision in
the Local Government Code of 1991 is now found in Section 445,
paragraph 3(iv), which empowers city mayors to "issue licenses and
permits and suspend or revoke the same for any violation of the
conditions upon which said licenses or permits (are) issued, pursuant
to law or ordinance." Municipal corporations are agencies of the
State for the promotion and maintenance of local self-governance
and are endowed with police power in order to effectively
accomplish the declared objects of their creation. 7 An attribute of
sovereignty, police power has been defined to be the power to

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prescribed regulations to promote the health, morals, education,
good order or safety, and general welfare of the people. 8
A license or permits is not a contract between the sovereign and the

grantee, rather, it is a special privilege, a permission or authority to
do what would be within its terms; it is neither vested nor permanent
that can at no time be withdrawn or taken back by the grantor. The
Solicitor General has posited correctly is disagreeing with the
appellate court which has mistaken the conditions imposed by
respondent City Mayor as being binding on both the city
government and petitioner upon the thesis that the permit issued by
him partakes the nature of a private agreement or contract. For a
permit be impressed with a contractual character, it must be clearly
demonstrated that the very administrative agency, which is the
source of the permit, can place that burden on itself as such. 9
Accordingly, I vote to deny the petition.
Acebedo Optical Company, Inc. vs. The Honorable Court of Appeals
G.R. No. 100152 March 31, 2000
Petitioner: Acebedo Optical Company, Inc.
Respondent: The Honorable Court of Appeals
Facts: Petitioner applied with the Office of the City Mayor of Iligan for
a business permit. After consideration of petitioner's application and
the opposition interposed thereto by local optometrists, respondent
City Mayor issued Business Permit No. 5342 subject to the following
conditions: (1) Since it is a corporation, Acebedo cannot put up an
optical clinic but only a commercial store; (2) It cannot examine
and/or prescribe reading and similar optical glasses for patients,
because these are functions of optical clinics; (3) It cannot sell
reading and similar eyeglasses without a prescription having first
been made by an independent optometrist or independent optical
clinic. Acebedo can only sell directly to the public, without need of
a prescription, Ray-Ban and similar eyeglasses; (4) It cannot advertise
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optical lenses and eyeglasses, but can advertise Ray-Ban and similar
glasses and frames; (5) It is allowed to grind lenses but only upon the
prescription of an independent optometrist.
On December 5, 1988, private respondent Samahan ng Optometrist
Sa Pilipinas (SOPI lodged a complaint against the petitioner alleging
that Acebedo had violated the conditions set forth in its business
permit and requesting the cancellation and/or revocation of such
permit. On July 19, 1989, the City Mayor sent petitioner a Notice of
Resolution and Cancellation of Business Permit effective as of said
date and giving petitioner three (3) months to wind up its affairs.
Issue: Whether the City Mayor has the authority to impose special
conditions, as a valid exercise of police power, in the grant of
business permits
Ruling: Police power as an inherent attribute of sovereignty is the

power to prescribe regulations to promote the health, morals,
peace, education, good order or safety and general welfare of the
people. It is essentially regulatory in nature and the power to issue
licenses or grant business permits, if exercised for a regulatory and
not revenue-raising purpose, is within the ambit of this power. The
authority of city mayors to issue or grant licenses and business permits
is beyond cavil. However, the power to grant or issue licenses or
business permits must always be exercised in accordance with law,
with utmost observance of the rights of all concerned to due process
and equal protection of the law.
In the case under consideration, the business permit granted by

respondent City Mayor to petitioner was burdened with several
conditions. Petitioner agrees with the holding by the Court of
Appeals that respondent City Mayor acted beyond his authority in
imposing such special conditions in its permit as the same have no
basis in the law or ordinance. Public respondents and private
respondent SOPI are one in saying that the imposition of said special
conditions is well within the authority of the City Mayor as a valid
exercise of police power.
The issuance of business licenses and permits by a municipality or city

is essentially regulatory in nature. The authority, which devolved
upon local government units to issue or grant such licenses or
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permits, is essentially in the exercise of the police power of the State
within the contemplation of the general welfare clause of the Local
Government Code.
What is sought by petitioner from respondent City Mayor is a permit

to engage in the business of running an optical shop. It does not
purport to seek a license to engage in the practice of optometry.
The objective of the imposition of subject conditions on petitioner's
business permit could be attained by requiring the optometrists in
petitioner's employ to produce a valid certificate of registration as
optometrist, from the Board of Examiners in Optometry. A business
permit is issued primarily to regulate the conduct of business and the
City Mayor cannot, through the issuance of such permit, regulate
the practice of a profession. Such a function is within the exclusive
domain of the administrative agency specifically empowered by
law to supervise the profession, in this case the Professional
Regulations Commission and the Board of Examiners in Optometry.
Sawadjaan vs. CA (459 SCRA 516 [2005])
G.R. No. 141735 June 8, 2005
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 Decision1 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

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the service, and its Resolution2 of 15 December 1999 dismissing
petitioner’s 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

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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 SAWADJAAN’S 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 Commission’s 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.
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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

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

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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 CSC’s
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:

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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

petitioner’s 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.

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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, Sawadjaan’s 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 Trial12 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
Certification13 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."
Sawadjaan’s 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 by-laws; 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

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(to Respondent’s Consolidated Comment,)18 and Reply (to the
Alleged Comments of Respondent Al-Amanah Islamic Bank of the
Philippines)."19 On 13 October 2000, he informed this Court that he
had terminated his lawyer’s 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 Petitioner’s 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 AIIBP’s 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 Petitioner’s 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 SolGen’s 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 OGCC’s 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 OGCC’s
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 AIIBP’s Memorandum);33 15) Reply
Memorandum (To: CSC’s Memorandum) With Ex-Parte Urgent
Motion for Additional Extension of time to File Reply Memorandum
(To: AIIBP’s Memorandum);34 and 16) Reply Memorandum (To:
OGCC’s Memorandum for Respondent AIIBP).35
Petitioner’s 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

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The records show that petitioner’s 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
instances38 where the extraordinary remedy of certiorari 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. Petitioner’s 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 petitioner’s 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 AIIBP’s 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

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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 government-owned corporations, one of
which is respondent bank."42 At the very least, by its failure to submit
its by-laws on time, the AIIBP may be considered a de facto
corporation43 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, petitioner’s argument is irrelevant because this case is

not a corporate controversy, but a labor dispute; and it is an
employer’s 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-sari store, it is an undisputed fact that
AIIBP is the petitioner’s 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.481avvphi1
Even if we were to consider the facts behind petitioner Sawadjaan’s

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
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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 Sawadjaan’s

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 CAMEC’s loan of P500,000.00 in 1987 and
CAMEC’s P5 Million loan in 1988, respondent knowing fully well the
Bank’s policy of not accepting encumbered properties as collateral.
Respondent SAWADJAAN’s 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

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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
Sawadjaan’s 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.
Davide, Jr., C.J., Panganiban, Quisumbing, Ynares-Santiago,

Sandoval-Gutierrez, Carpio, Austria-Martinez, Corona, Carpio-
Morales, Callejo, Sr., Azcuna, Tinga, and Garcia, JJ., concur.
What is the effect of non-filing of the articles of incorporation within

the required period?
Failure to submit the by-laws within 30 days from incorporation does

not automatically dissolve the corporation. It is merely a ground for
suspension or revocation of its charter after proper notice and
hearing. The corporation is, at the very least, a de facto corporation
whose existence may not be collaterally attacked. (Sawadjaan v.
CA, G.R. No. 142284, June 8, 2005)
Lozano vs. De Los Santos (274 SCRA 452 [1997])

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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.
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

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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:
Sec. 5. . . . [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

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cases where the corporation, partnership or association
possesses sufficient property to cover all its debts but
foresees the impossibility of meeting them when they
respectively fall due or in cases where the corporation,
partnership or association has no sufficient assets to over
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, partnership and
associations with the end in view that investments in these entities
may be encouraged and protected, and their 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 is 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

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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 person. 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, Romero, Mendoza and Torres, Jr., JJ., concur.
Footnotes
274 SCRA 452 – Business Organization – Corporation Law –

Jurisdiction of the SEC
Reynaldo Lozano was the president of KAMAJDA (Kapatirang

Mabalacat-Angeles Jeepney Drivers’ Association, Inc.). Antonio
Anda was the president of SAMAJODA (Samahang Angeles-
Mabalacat Jeepney Operators’ and Drivers’ Association, Inc.). In
1995, the two agreed to consolidate the two corporations, thus,
UMAJODA (Unified Mabalacat-Angeles Jeepney Operators’ and
Drivers Association, Inc.). In the same year, elections for the officers
of UMAJODA were held. Lozano and Anda both ran for president.
Lozano won but Anda alleged fraud and the elections and
thereafter he refused to participate with UMAJODA. Anda

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continued to collect fees from members of SAMAJODA and refused
to recognize Lozano as president of UMAJODA. Lozano then filed
a complaint for damages against Anda with the MCTC of
Mabalacat (and Magalang), Pampanga. Anda moved for the
dismissal of the case for lack of jurisdiction. The MCTC judge denied
Anda’s motion. On certiorari, Judge Eliezer De Los Santos of RTC
Angeles City reversed and ordered the dismissal of the case on the
ground that what is involved is an intra-corporate dispute which
should be under the jurisdiction of the Securities and Exchange
Commission (SEC).
ISSUE: Whether or not the RTC Judge is correct.
HELD: No. The regular courts have jurisdiction over the case. The case
between Lozano and Anda is not an intra-corporate dispute.
UMAJODA is not yet incorporated. It is yet to submit its articles of
incorporation to the SEC. It is not even a dispute between KAMAJDA
or SAMAJODA. The controversy between Lozano and Anda does not
arise from intra-corporate relations but rather from a mere conflict
from their plan to merge the two associations.
NOTE: Regular courts can now hear intra-corporate disputes

(expanded jurisdiction).
Int’l Express Travel vs. CA (343 SCRA 674 [2000])
G.R. No. 119002 October 19, 2000
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner,

vs.
HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL
FEDERATION, respondents.
DECISION
KAPUNAN, J.:
On June 30 1989, petitioner International Express Travel and Tour

Services, Inc., through its managing director, wrote a letter to the
Philippine Football Federation (Federation), through its president
private respondent Henri Kahn, wherein the former offered its
services as a travel agency to the latter.1 The offer was accepted.

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Petitioner secured the airline tickets for the trips of the athletes and
officials of the Federation to the South East Asian Games in Kuala
Lumpur as well as various other trips to the People's Republic of
China and Brisbane. The total cost of the tickets amounted to
P449,654.83. For the tickets received, the Federation made two
partial payments, both in September of 1989, in the total amount of
P176,467.50.2
On 4 October 1989, petitioner wrote the Federation, through the

private respondent a demand letter requesting for the amount of
P265,894.33.3 On 30 October 1989, the Federation, through the
Project Gintong Alay, paid the amount of P31,603.00.4
On 27 December 1989, Henri Kahn issued a personal check in the

amount of P50,000 as partial payment for the outstanding balance
of the Federation.5 Thereafter, no further payments were made
despite repeated demands.
This prompted petitioner to file a civil case before the Regional Trial
Court of Manila. Petitioner sued Henri Kahn in his personal capacity
and as President of the Federation and impleaded the Federation as
an alternative defendant. Petitioner sought to hold Henri Kahn liable
for the unpaid balance for the tickets purchased by the Federation
on the ground that Henri Kahn allegedly guaranteed the said
obligation.6
Henri Kahn filed his answer with counterclaim. While not denying the
allegation that the Federation owed the amount P207,524.20,
representing the unpaid balance for the plane tickets, he averred
that the petitioner has no cause of action against him either in his
personal capacity or in his official capacity as president of the
Federation. He maintained that he did not guarantee payment but
merely acted as an agent of the Federation which has a separate
and distinct juridical personality.7
On the other hand, the Federation failed to file its answer, hence,
was declared in default by the trial court.8
In due course, the trial court rendered judgment and ruled in favor
of the petitioner and declared Henri Kahn personally liable for the
unpaid obligation of the Federation. In arriving at the said ruling, the
trial court rationalized:
Defendant Henri Kahn would have been correct in his contentions

had it been duly established that defendant Federation is a
corporation. The trouble, however, is that neither the plaintiff nor the
defendant Henri Kahn has adduced any evidence proving the
corporate existence of the defendant Federation. In paragraph 2 of
its complaint, plaintiff asserted that "Defendant Philippine Football
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Federation is a sports association xxx." This has not been denied by
defendant Henri Kahn in his Answer. Being the President of
defendant Federation, its corporate existence is within the personal
knowledge of defendant Henri Kahn. He could have easily denied
specifically the assertion of the plaintiff that it is a mere sports
association, if it were a domestic corporation. But he did not.
xxx
A voluntary unincorporated association, like defendant Federation

has no power to enter into, or to ratify, a contract. The contract
entered into by its officers or agents on behalf of such association is
not binding on, or enforceable against it. The officers or agents are
themselves personally liable.
x x x9
The dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is rendered ordering defendant Henri Kahn to

pay the plaintiff the principal sum of P207,524.20, plus the interest
thereon at the legal rate computed from July 5, 1990, the date the
complaint was filed, until the principal obligation is fully liquidated;
and another sum of P15,000.00 for attorney's fees.
The complaint of the plaintiff against the Philippine Football

Federation and the counterclaims of the defendant Henri Kahn are
hereby dismissed.
With the costs against defendant Henri Kahn.10
Only Henri Kahn elevated the above decision to the Court of

Appeals. On 21 December 1994, the respondent court rendered a
decision reversing the trial court, the decretal portion of said
decision reads:
WHEREFORE, premises considered, the judgment appealed from is

hereby REVERSED and SET ASIDE and another one is rendered
dismissing the complaint against defendant Henri S. Kahn.11
In finding for Henri Kahn, the Court of Appeals recognized the

juridical existence of the Federation. It rationalized that since
petitioner failed to prove that Henri Kahn guaranteed the obligation
of the Federation, he should not be held liable for the same as said
entity has a separate and distinct personality from its officers.
Petitioner filed a motion for reconsideration and as an alternative

prayer pleaded that the Federation be held liable for the unpaid
obligation. The same was denied by the appellate court in its
resolution of 8 February 1995, where it stated that:
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As to the alternative prayer for the Modification of the Decision by
expressly declaring in the dispositive portion thereof the Philippine
Football Federation (PFF) as liable for the unpaid obligation, it should
be remembered that the trial court dismissed the complaint against
the Philippine Football Federation, and the plaintiff did not appeal
from this decision. Hence, the Philippine Football Federation is not a
party to this appeal and consequently, no judgment may be
pronounced by this Court against the PFF without violating the due
process clause, let alone the fact that the judgment dismissing the
complaint against it, had already become final by virtue of the
plaintiff's failure to appeal therefrom. The alternative prayer is
therefore similarly DENIED.12
Petitioner now seeks recourse to this Court and alleges that the
respondent court committed the following assigned errors:13
A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING

THAT PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL
FEDERATION (PFF) AS A CORPORATE ENTITY AND IN NOT
HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE ONE
WHO REPRESENTED THE PFF AS HAVING A CORPORATE
PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING

PRIVATE RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE
OBLIGATION OF THE UNINCORPORATED PFF, HAVING
NEGOTIATED WITH PETITIONER AND CONTRACTED THE
OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL PAYMENT
AND ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS

NOT PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS
ERRED IN NOT EXPRESSLY DECLARING IN ITS DECISION THAT THE
PFF IS SOLELY LIABLE FOR THE OBLIGATION.
The resolution of the case at bar hinges on the determination of the

existence of the Philippine Football Federation as a juridical person.
In the assailed decision, the appellate court recognized the
existence of the Federation. In support of this, the CA cited Republic
Act 3135, otherwise known as the Revised Charter of the Philippine
Amateur Athletic Federation, and Presidential Decree No. 604 as the
laws from which said Federation derives its existence.
As correctly observed by the appellate court, both R.A. 3135 and

P.D. No. 604 recognized the juridical existence of national sports
associations. This may be gleaned from the powers and functions
granted to these associations. Section 14 of R.A. 3135 provides:

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SEC. 14. Functions, powers and duties of Associations. - The National
Sports' Association shall have the following functions, powers and
duties:
1. To adopt a constitution and by-laws for their internal

organization and government;
2. To raise funds by donations, benefits, and other means for

their purposes.
3. To purchase, sell, lease or otherwise encumber property both

real and personal, for the accomplishment of their purpose;
4. To affiliate with international or regional sports' Associations

after due consultation with the executive committee;
xxx
13. To perform such other acts as may be necessary for the

proper accomplishment of their purposes and not inconsistent
with this Act.
Section 8 of P.D. 604, grants similar functions to these sports

associations:
SEC. 8. Functions, Powers, and Duties of National Sports Association. -

The National sports associations shall have the following functions,
powers, and duties:
1. Adopt a Constitution and By-Laws for their internal

organization and government which shall be submitted to the
Department and any amendment thereto shall take effect
upon approval by the Department: Provided, however, That no
team, school, club, organization, or entity shall be admitted as
a voting member of an association unless 60 per cent of the
athletes composing said team, school, club, organization, or
entity are Filipino citizens;
2. Raise funds by donations, benefits, and other means for their

purpose subject to the approval of the Department;
3. Purchase, sell, lease, or otherwise encumber property, both

real and personal, for the accomplishment of their purpose;
4. Conduct local, interport, and international competitions,

other than the Olympic and Asian Games, for the promotion of
their sport;
5. Affiliate with international or regional sports associations after

due consultation with the Department;

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xxx
13. Perform such other functions as may be provided by law.
The above powers and functions granted to national sports

associations clearly indicate that these entities may acquire a
juridical personality. The power to purchase, sell, lease and
encumber property are acts which may only be done by persons,
whether natural or artificial, with juridical capacity. However, while
we agree with the appellate court that national sports associations
may be accorded corporate status, such does not automatically
take place by the mere passage of these laws.
It is a basic postulate that before a corporation may acquire juridical

personality, the State must give its consent either in the form of a
special law or a general enabling act. We cannot agree with the
view of the appellate court and the private respondent that the
Philippine Football Federation came into existence upon the
passage of these laws. Nowhere can it be found in R.A. 3135 or P.D.
604 any provision creating the Philippine Football Federation. These
laws merely recognized the existence of national sports associations
and provided the manner by which these entities may acquire
juridical personality. Section 11 of R.A. 3135 provides:
SEC. 11. National Sports' Association; organization and recognition. -

A National Association shall be organized for each individual sports
in the Philippines in the manner hereinafter provided to constitute
the Philippine Amateur Athletic Federation. Applications for
recognition as a National Sports' Association shall be filed with the
executive committee together with, among others, a copy of the
constitution and by-laws and a list of the members of the proposed
association, and a filing fee of ten pesos.
The Executive Committee shall give the recognition applied for if it is

satisfied that said association will promote the purposes of this Act
and particularly section three thereof. No application shall be held
pending for more than three months after the filing thereof without
any action having been taken thereon by the executive committee.
Should the application be rejected, the reasons for such rejection
shall be clearly stated in a written communication to the applicant.
Failure to specify the reasons for the rejection shall not affect the
application which shall be considered as unacted upon: Provided,
however, That until the executive committee herein provided shall
have been formed, applications for recognition shall be passed
upon by the duly elected members of the present executive
committee of the Philippine Amateur Athletic Federation. The said
executive committee shall be dissolved upon the organization of the
executive committee herein provided: Provided, further, That the

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functioning executive committee is charged with the responsibility of
seeing to it that the National Sports' Associations are formed and
organized within six months from and after the passage of this Act.
Section 7 of P.D. 604, similarly provides:
SEC. 7. National Sports Associations. - Application for accreditation or

recognition as a national sports association for each individual sport
in the Philippines shall be filed with the Department together with,
among others, a copy of the Constitution and By-Laws and a list of
the members of the proposed association.
The Department shall give the recognition applied for if it is satisfied

that the national sports association to be organized will promote the
objectives of this Decree and has substantially complied with the
rules and regulations of the Department: Provided, That the
Department may withdraw accreditation or recognition for violation
of this Decree and such rules and regulations formulated by it.
The Department shall supervise the national sports association:

Provided, That the latter shall have exclusive technical control over
the development and promotion of the particular sport for which
they are organized.
Clearly the above cited provisions require that before an entity may
be considered as a national sports association, such entity must be
recognized by the accrediting organization, the Philippine Amateur
Athletic Federation under R.A. 3135, and the Department of Youth
and Sports Development under P.D. 604. This fact of recognition,
however, Henri Kahn failed to substantiate. In attempting to prove
the juridical existence of the Federation, Henri Kahn attached to his
motion for reconsideration before the trial court a copy of the
constitution and by-laws of the Philippine Football Federation.
Unfortunately, the same does not prove that said Federation has
indeed been recognized and accredited by either the Philippine
Amateur Athletic Federation or the Department of Youth and Sports
Development. Accordingly, we rule that the Philippine Football
Federation is not a national sports association within the purview of
the aforementioned laws and does not have corporate existence of
its own.
Thus being said, it follows that private respondent Henry Kahn should
be held liable for the unpaid obligations of the unincorporated
Philippine Football Federation. It is a settled principal in corporation
law that any person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges
and becomes personally liable for contract entered into or for other
acts performed as such agent.14 As president of the Federation,
Henri Kahn is presumed to have known about the corporate
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existence or non-existence of the Federation. We cannot subscribe
to the position taken by the appellate court that even assuming that
the Federation was defectively incorporated, the petitioner cannot
deny the corporate existence of the Federation because it had
contracted and dealt with the Federation in such a manner as to
recognize and in effect admit its existence.15 The doctrine of
corporation by estoppel is mistakenly applied by the respondent
court to the petitioner. The application of the doctrine applies to a
third party only when he tries to escape liability on a contract from
which he has benefited on the irrelevant ground of defective
incorporation.16 In the case at bar, the petitioner is not trying to
escape liability from the contract but rather is the one claiming from
the contract.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE.

The decision of the Regional Trial Court of Manila, Branch 35, in Civil
Case No. 90-53595 is hereby REINSTATED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ.,

concur.
Polytechnic University vs. CA (368 SCRA 691 [2001])
G.R. No. 143513 November 14, 2001
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and FIRESTONE CERAMICS, INC., respondents.
x---------------------------------------------------------x
G.R. No. 143590 November 14, 2001
NATIONAL DEVELOPMENT CORPORATION, petitioner,

vs.
FIRESTONE CERAMICS, INC., respondents.
BELLOSILLO, J.:
A litigation is not simply a contest of litigants before the bar of public

opinion; more than that, it is a pursuit of justice through legal and
equitable means. To prevent the search for justice from evolving into

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a competition for public approval, society invests the judiciary with
complete independence thereby insulating it from demands
expressed through any medium, the press not excluded. Thus, if the
court would merely reflect, and worse, succumb to the great
pressures of the day, the end result, it is feared, would be a travesty
of justice.
In the early sixties, petitioner National Development Corporation

(NDC), a government owned and controlled corporation created
under CA 182 as amended by CA 311 and PD No. 668, had in its
disposal a ten (10)-hectare property located along Pureza St., Sta.
Mesa, Manila. The estate was popularly known as the NDC
compound and covered by Transfer Certificates of Title Nos. 92885,
110301 and 145470.
Sometime in May 1965 private respondent Firestone Ceramics Inc.

(FIRESTONE) manifested its desire to lease a portion of the property
for its ceramic manufacturing business. On 24 August 1965 NDC and
FIRESTONE entered into a contract of lease denominated as
Contract No. C-30-65 covering a portion of the property measured
at 2.90118 hectares for use as a manufacturing plant for a term of
ten (10) years, renewable for another ten (10) years under the same
terms and conditions.1 In consequence of the agreement, FIRESTONE
constructed on the leased premises several warehouses and other
improvements needed for the fabrication of ceramic products.
Three and a half (3-1/2) years later, or on 8 January 1969, FIRESTONE

entered into a second contract of lease with NDC over the latter's
four (4)-unit pre-fabricated reparation steel warehouse stored in
Daliao, Davao. FIRESTONE agreed to ship the warehouse to Manila
for eventual assembly within the NDC compound. The second
contract, denominated as Contract No. C-26-68, was for similar use
as a ceramic manufacturing plant and was agreed expressly to be
"co-extensive with the lease of LESSEE with LESSOR on the 2.60
hectare-lot."2
On 31 July 1974 the parties signed a similar contract concerning a six

(6)-unit pre-fabricated steel warehouse which, as agreed upon by
the parties, would expire on 2 December 1978.3 Prior to the
expiration of the aforementioned contract, FIRESTONE wrote NDC
requesting for an extension of their lease agreement. Consequently
on 29 November 1978 the Board of Directors of NDC adopted
Resolution No. 11-78-117 extending the term of the lease, subject to
several conditions among which was that in the event NDC "with the
approval of higher authorities, decide to dispose and sell these
properties including the lot, priority should be given to the LESSEE"4
(underscoring supplied). On 22 December 1978, in pursuance of the
resolution, the parties entered into a new agreement for a ten-year

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lease of the property, renewable for another ten (10) years, expressly
granting FIRESTONE the first option to purchase the leased premises
in the event that it decided "to dispose and sell these properties
including the lot . . . . "5
The contracts of lease conspicuously contain an identically worded

provision requiring FIRESTONE to construct buildings and other
improvements within the leased premises worth several hundred
thousands of pesos.6
The parties' lessor-lessee relationship went smoothly until early 1988

when FIRESTONE, cognizant of the impending expiration of their
lease agreement with NDC, informed the latter through several
letters and telephone calls that it was renewing its lease over the
property. While its letter of 17 March 1988 was answered by Antonio
A. Henson, General Manager of NDC, who promised immediate
action on the matter, the rest of its communications remained
unacknowledged.7 FIRESTONE's predicament worsened when rumors
of NDC's supposed plans to dispose of the subject property in favor
of petitioner Polytechnic University of the Philippines (PUP) came to
its knowledge. Forthwith, FIRESTONE served notice on NDC
conveying its desire to purchase the property in the exercise of its
contractual right of first refusal.
Apprehensive that its interest in the property would be disregarded,

FIRESTONE instituted an action for specific performance to compel
NDC to sell the leased property in its favor. FIRESTONE averred that it
was pre-empting the impending sale of the NDC compound to
petitioner PUP in violation of its leasehold rights over the 2.60-
hectare8 property and the warehouses thereon which would expire
in 1999. FIRESTONE likewise prayed for the issuance of a writ of
preliminary injunction to enjoin NDC from disposing of the property
pending the settlement of the controversy.9
In support of its complaint, FIRESTONE adduced in evidence a letter

of Antonio A. Henson dated 15 July 1988 addressed to Mr. Jake C.
Lagonera, Director and Special Assistant to Executive Secretary
Catalino Macaraeg, reviewing a proposed memorandum order
submitted to then President Corazon C. Aquino transferring the
whole NDC compound, including the leased property, in favor of
petitioner PUP. Attached to the letter was a draft of the proposed
memorandum order as well as a summary of existing leases on the
subject property. The survey listed FIRESTONE as lessee of a portion of
the property, placed at 29,00010 square meters, whose contract with
NDC was set to expire on 31 December 198911 renewable for another
ten (10) years at the option of the lessee. The report expressly
recognized FIRESTONE's right of first refusal to purchase the leased
property "should the lessor decide to sell the same."12

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Meanwhile, on 21 February 1989 PUP moved to intervene and
asserted its interest in the subject property, arguing that a "purchaser
pendente lite of property which is subject of a litigation is entitled to
intervene in the proceedings."13 PUP referred to Memorandum Order
No. 214 issued by then President Aquino ordering the transfer of the
whole NDC compound to the National Government, which in turn
would convey the aforementioned property in favor of PUP at
acquisition cost. The issuance was supposedly made in recognition
of PUP's status as the "Poor Man's University" as well as its serious need
to extend its campus in order to accommodate the growing student
population. The order of conveyance of the 10.31-hectare property
would automatically result in the cancellation of NDC's total
obligation in favor of the National Government in the amount of
P57,193,201.64.
Convinced that PUP was a necessary party to the controversy that

ought to be joined as party defendant in order to avoid multiplicity
of suits, the trial court granted PUP's motion to intervene. FIRESTONE
moved for reconsideration but was denied. On certiorari, the Court
of Appeals affirmed the order of the trial court. FIRESTONE came to
us on review but in a Resolution dated 11 July 1990 we upheld PUP's
inclusion as party-defendant in the present controversy.
Following the denial of its petition, FIRESTONE amended its complaint

to include PUP and Executive Secretary Catalino Macaraeg, Jr., as
party-defendants, and sought the annulment of Memorandum
Order No. 214. FIRESTONE alleged that although Memorandum
Order No. 214 was issued "subject to such liens/leases existing [on the
subject property]," PUP disregarded and violated its existing lease by
increasing the rental rate at P200,000.00 a month while demanding
that it vacated the premises immediately.14 FIRESTONE prayed that in
the event Memorandum Order No. 214 was not declared
unconstitutional, the property should be sold in its favor at the price
for which it was sold to PUP - P554.74 per square meter or for a total
purchase price of P14,423,240.00.15
Petitioner PUP, in its answer to the amended complaint, argued in

essence that the lease contract covering the property had expired
long before the institution of the complaint, and that further, the right
of first refusal invoked by FIRESTONE applied solely to the six-unit pre-
fabricated warehouse and not the lot upon which it stood.
After trial on the merits, judgment was rendered declaring the

contracts of lease executed between FIRESTONE and NDC covering
the 2.60-hectare property and the warehouses constructed thereon
valid and existing until 2 June 1999. PUP was ordered and directed to
sell to FIRESTONE the "2.6 hectare leased premises or as may be
determined by actual verification and survey of the actual size of

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the leased properties where plaintiff's fire brick factory is located" at
P1,500.00 per square meter considering that, as admitted by
FIRESTONE, such was the prevailing market price thereof.
The trial court ruled that the contracts of lease executed between
FIRESTONE and NDC were interrelated and inseparable because
"each of them forms part of the integral system of plaintiff's brick
manufacturing plant x x x if one of the leased premises will be taken
apart or otherwise detached from the two others, the purpose of the
lease as well as plaintiff's business operations would be rendered
useless and inoperative."16 It thus decreed that FIRESTONE could
exercise its option to purchase the property until 2 June 1999
inasmuch as the 22 December 1978 contract embodied a covenant
to renew the lease for another ten (10) years at the option of the
lessee as well as an agreement giving the lessee the right of first
refusal.
The trial court also sustained the constitutionality of Memorandum

Order No. 214 which was not per se hostile to FIRESTONE's property
rights, but deplored as prejudicial thereto the "very manner with
which defendants NDC and PUP interpreted and applied the same,
ignoring in the process that plaintiff has existing contracts of lease
protectable by express provisions in the Memorandum No. 214
itself."17 It further explained that the questioned memorandum was
issued "subject to such liens/leases existing thereon" 18 and petitioner
PUP was under express instructions "to enter, occupy and take
possession of the transferred property subject to such leases or liens
and encumbrances that may be existing thereon"19 (italics supplied).
Petitioners PUP, NDC and the Executive Secretary separately filed

their Notice of Appeal, but a few days thereafter, or on 3 September
1996, perhaps realizing the groundlessness and the futility of it all, the
Executive Secretary withdrew his appeal.20
Subsequently, the Court of Appeals affirmed the decision of the trial

court ordering the sale of the property in favor of FIRESTONE but
deleted the award of attorney's fees in the amount of Three Hundred
Thousand Pesos (P300,000.00). Accordingly, FIRESTONE was given a
grace period of six (6) months from finality of the court's judgment
within which to purchase the property in questioned in the exercise
of its right of first refusal. The Court of Appeals observed that as there
was a sale of the subject property, NDC could not excuse itself from
its obligation TO OFFER THE PROPERTY FOR SALE FIRST TO FIRESTONE
BEFORE IT COULD TO OTHER PARTIES. The Court of Appeals held:
"NDC cannot look to Memorandum Order No. 214 to excuse or
shield it from its contractual obligations to FIRESTONE. There is nothing
therein that allows NDC to disavow or repudiate the solemn

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engagement that it freely and voluntarily undertook, or agreed to
undertake."21
PUP moved for reconsideration asserting that in ordering the sale of

the property in favor of FIRESTONE the courts a quo unfairly created
a contract to sell between the parties. It argued that the "court
cannot substitute or decree its mind or consent for that of the parties
in determining whether or not a contract (has been) perfected
between PUP and NDC."22 PUP further contended that since "a real
property located in Sta. Mesa can readily command a sum of
P10,000.00 per square (meter)," the lower court gravely erred in
ordering the sale of the property at only P1,500.00 per square meter.
PUP also advanced the theory that the enactment of Memorandum
Order No. 214 amounted to a withdrawal of the option to purchase
the property granted to FIRESTONE. NDC, for its part, vigorously
contended that the contracts of lease executed between the
parties had expired without being renewed by FIRESTONE;
consequently, FIRESTONE was no longer entitled to any preferential
right in the sale or disposition of the leased property.
We do not see it the way PUP and NDC did. It is elementary that a
party to a contract cannot unilaterally withdraw a right of first refusal
that stands upon valuable consideration. That principle was clearly
upheld by the Court of Appeals when it denied on 6 June 2000 the
twin motions for reconsideration filed by PUP and NDC on the ground
that the appellants failed to advance new arguments substantial
enough to warrant a reversal of the Decision sought to be
reconsidered.23 On 28 June 2000 PUP filed an urgent motion for an
additional period of fifteen (15) days from 29 June 2000 or until 14
July 2000 within which to file a Petition for Review on Certiorari of the
Decision of the Court of Appeals.
On the last day of the extended period PUP filed its Petition for
Review on Certiorari assailing the Decision of the Court of Appeals of
6 December 1999 as well as the Resolution of 6 June 2000 denying
reconsideration thereof. PUP raised two issues: (a) whether the courts
a quo erred when they "conjectured" that the transfer of the leased
property from NDC to PUP amounted to a sale; and, (b) whether
FIRESTONE can rightfully invoke its right of first refusal. Petitioner
posited that if we were to place our imprimatur on the decisions of
the courts a quo, "public welfare or specifically the constitutional
priority accorded to education" would greatly be prejudiced.24
Paradoxically, our paramount interest in education does not license

us, or any party for that matter, to destroy the sanctity of binding
obligations. Education may be prioritized for legislative or budgetary
purposes, but we doubt if such importance can be used to
confiscate private property such as FIRESTONE's right of first refusal.

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On 17 July 2000 we denied PUP's motion for extension of fifteen (15)
days within which to appeal inasmuch as the aforesaid pleading
lacked an affidavit of service of copies thereof on the Court of
Appeals and the adverse party, as well as written explanation for not
filing and serving the pleading personally.25
Accordingly, on 26 July 2000 we issued a Resolution dismissing PUP's

Petition for Review for having been filed out of time. PUP moved for
reconsideration imploring a resolution or decision on the merits of its
petition. Strangely, about the same time, several articles came out in
the newspapers assailing the denial of the petition. The daily papers
reported that we unreasonably dismissed PUP's petition on technical
grounds, affirming in the process the decision of the trial court to sell
the disputed property to the prejudice of the government in the
amount of P1,000,000,000.00.26 Counsel for petitioner PUP, alleged
that the trial court and the Court of Appeals "have decided a
question of substance in a way definitely not in accord with law or
jurisprudence."27
At the outset, let it be noted that the amount of P1,000,000,000.00 as

reported in the papers was way too exaggerated, if not fantastic.
We stress that NDC itself sold the whole 10.31-hectare property to
PUP at only P57,193,201.64 which represents NDC's obligation to the
national government that was, in exchange, written off. The price
offered per square meter of the property was pegged at P554.74.
FIRESTONE's leased premises would therefore be worth only
P14,423,240.00. From any angle, this amount is certainly far below the
ballyhooed price of P1,000,000,000.00.
On 4 October 2000 we granted PUP's Motion for Reconsideration to

give it a chance to ventilate its right, if any it still had in the leased
premises, thereby paving the way for a reinstatement of its Petition
for Review.28 In its appeal, PUP took to task the courts a quo for
supposedly "substituting or decreeing its mind or consent for that of
the parties (referring to NDC and PUP) in determining whether or not
a contract of sale was perfected." PUP also argued that inasmuch as
"it is the parties alone whose minds must meet in reference to the
subject matter and cause," it concluded that it was error for the
lower courts to have decreed the existence of a sale of the NDC
compound thus allowing FIRESTONE to exercise its right of first refusal.
On the other hand, NDC separately filed its own Petition for Review
and advanced arguments which, in fine, centered on whether or
not the transaction between petitioners NDC and PUP amounted to
a sale considering that "ownership of the property remained with the
government."29 Petitioner NDC introduced the novel proposition that
if the parties involved are both government entities the transaction
cannot be legally called a sale.

suigeneris
In due course both petitions were consolidated.30
We believe that the courts a quo did not hypothesize, much less
conjure, the sale of the disputed property by NDC in favor of
petitioner PUP. Aside from the fact that the intention of NDC and PUP
to enter into a contract of sale was clearly expressed in the
Memorandum Order No. 214,31 a close perusal of the circumstances
of this case strengthens the theory that the conveyance of the
property from NDC to PUP was one of absolute sale, for a valuable
consideration, and not a mere paper transfer as argued by
petitioners.
A contract of sale, as defined in the Civil Code, is a contract where

one of the parties obligates himself to transfer the ownership of and
to deliver a determinate thing to the other or others who shall pay
therefore a sum certain in money or its equivalent.32 It is therefore a
general requisite for the existence of a valid and enforceable
contract of sale that it be mutually obligatory, i.e., there should be a
concurrence of the promise of the vendor to sell a determinate thing
and the promise of the vendee to receive and pay for the property
so delivered and transferred. The Civil Code provision is, in effect, a
"catch-all" provision which effectively brings within its grasp a whole
gamut of transfers whereby ownership of a thing is ceded for a
consideration.
Contrary to what petitioners PUP and NDC propose, there is not just
one party involved in the questioned transaction. Petitioners NDC
and PUP have their respective charters and therefore each
possesses a separate and distinct individual personality.33 The
inherent weakness of NDC's proposition that there was no sale as it
was only the government which was involved in the transaction thus
reveals itself. Tersely put, it is not necessary to write an extended
dissertation on government owned and controlled corporations and
their legal personalities. Beyond cavil, a government owned and
controlled corporation has a personality of its own, distinct and
separate from that of the government.34 The intervention in the
transaction of the Office of the President through the Executive
Secretary did not change the independent existence of these
entities. The involvement of the Office of the President was limited to
brokering the consequent relationship between NDC and PUP. But
the withdrawal of the appeal by the Executive Secretary is
considered significant as he knew, after a review of the records, that
the transaction was subject to existing liens and encumbrances,
particularly the priority to purchase the leased premises in favor of
FIRESTONE.
True that there may be instances when a particular deed does not
disclose the real intentions of the parties, but their action may

suigeneris
nevertheless indicate that a binding obligation has been
undertaken. Since the conduct of the parties to a contract may be
sufficient to establish the existence of an agreement and the terms
thereof, it becomes necessary for the courts to examine the
contemporaneous behavior of the parties in establishing the
existence of their contract.
The preponderance of evidence shows that NDC sold to PUP the

whole NDC compound, including the leased premises, without the
knowledge much less consent of private respondent FIRESTONE
which had a valid and existing right of first refusal.
All three (3) essential elements of a valid sale, without which there
can be no sale, were attendant in the "disposition" and "transfer" of
the property from NDC to PUP - consent of the parties, determinate
subject matter, and consideration therefor.
Consent to the sale is obvious from the prefatory clauses of

Memorandum Order No. 214 which explicitly states the
acquiescence of the parties to the sale of the property -
WHEREAS, PUP has expressed its willingness to acquire said NDC

properties and NDC has expressed its willingness to sell the
properties to PUP (underscoring supplied).35
Furthermore, the cancellation of NDC's liabilities in favor of the

National Government in the amount of P57,193,201.64 constituted
the "consideration" for the sale. As correctly observed by the Court of
Appeals-
The defendants-appellants' interpretation that there was a

mere transfer, and not a sale, apart from being specious
sophistry and a mere play of words, is too strained and
hairsplitting. For it is axiomatic that every sale imposes upon the
vendor the obligation to transfer ownership as an essential
element of the contract. Transfer of title or an agreement to
transfer title for a price paid, or promised to be paid, is the very
essence of sale (Kerr & Co. v. Lingad, 38 SCRA 524; Schmid &
Oberly, Inc., v. RJL Martinez Fishing Corp., 166 SCRA 493). At
whatever legal angle we view it, therefore, the inescapable
fact remains that all the requisites of a valid sale were
attendant in the transaction between co-defendants-
appellants NDC and PUP concerning the realities subject of the
present suit.36
What is more, the conduct of petitioner PUP immediately after the

transaction is in itself an admission that there was a sale of the NDC
compound in its favor. Thus, after the issuance of Memorandum
Order No. 214 petitioner PUP asserted its ownership over the property
suigeneris
by posting notices within the compound advising residents and
occupants to vacate the premises.37 In its Motion for Intervention
petitioner PUP also admitted that its interest as a "purchaser
pendente lite" would be better protected if it was joined as party-
defendant in the controversy thereby confessing that it indeed
purchased the property.
In light of the foregoing disquisition, we now proceed to determine

whether FIRESTONE should be allowed to exercise its right of first
refusal over the property. Such right was expressly stated by NDC
and FIRESTONE in par. XV of their third contract denominated as A-
10-78 executed on 22 December 1978 which, as found by the courts
a quo, was interrelated to and inseparable from their first contract
denominated as C-30-65 executed on 24 August 1965 and their
second contract denominated as C-26-68 executed on 8 January
1969. Thus -
Should the LESSOR desire to sell the leased premises during the term
of this Agreement, or any extension thereof, the LESSOR shall first give
to the LESSEE, which shall have the right of first option to purchase
the leased premises subject to mutual agreement of both parties.38
In the instant case, the right of first refusal is an integral and indivisible
part of the contract of lease and is inseparable from the whole
contract. The consideration for the right is built into the reciprocal
obligations of the parties. Thus, it is not correct for petitioners to insist
that there was no consideration paid by FIRESTONE to entitle it to the
exercise of the right, inasmuch as the stipulation is part and parcel of
the contract of lease making the consideration for the lease the
same as that for the option.
It is a settled principle in civil law that when a lease contract

contains a right of first refusal, the lessor is under a legal duty to the
lessee not to sell to anybody at any price until after he has made an
offer to sell to the latter at a certain price and the lessee has failed
to accept it.39 The lessee has a right that the lessor's first offer shall be
in his favor.
The option in this case was incorporated in the contracts of lease by

NDC for the benefit of FIRESTONE which, in view of the total amount
of its investments in the property, wanted to be assured that it would
be given the first opportunity to buy the property at a price for which
it would be offered. Consistent with their agreement, it was then
implicit for NDC to have first offered the leased premises of 2.60
hectares to FIRESTONE prior to the sale in favor of PUP. Only if
FIRESTONE failed to exercise its right of first priority could NDC lawfully
sell the property to petitioner PUP.

suigeneris
It now becomes apropos to ask whether the courts a quo were
correct in fixing the proper consideration of the sale at P1,500.00 per
square meter. In contracts of sale, the basis of the right of first refusal
must be the current offer of the seller to sell or the offer to purchase
of the prospective buyer. Only after the lessee-grantee fails to
exercise its right under the same terms and within the period
contemplated can the owner validly offer to sell the property to a
third person, again, under the same terms as offered to the
grantee.40 It appearing that the whole NDC compound was sold to
PUP for P554.74 per square meter, it would have been more proper
for the courts below to have ordered the sale of the property also at
the same price. However, since FIRESTONE never raised this as an
issue, while on the other hand it admitted that the value of the
property stood at P1,500.00 per square meter, then we see no
compelling reason to modify the holdings of the courts a quo that
the leased premises be sold at that price.
Our attention is invited by petitioners to Ang Yu Asuncion v. CA41 in

concluding that if our holding in Ang Yu would be applied to the
facts of this case then FIRESTONE's "option, if still subsisting, is not
enforceable," the option being merely a preparatory contract which
cannot be enforced.
The contention has no merit. At the heels of Ang Yu came Equatorial

Realty Development, Inc., v. Mayfair Theater, Inc.,42 where after
much deliberation we declared, and so we hold, that a right of first
refusal is neither "amorphous nor merely preparatory" and can be
enforced and executed according to its terms. Thus, in Equatorial we
ordered the rescission of the sale which was made in violation of the
lessee's right of first refusal and further ordered the sale of the leased
property in favor of Mayfair Theater, as grantee of the right.
Emphatically, we held that "(a right of first priority) should be
enforced according to the law on contracts instead of the
panoramic and indefinite rule on human relations." We then
concluded that the execution of the right of first refusal consists in
directing the grantor to comply with his obligation according to the
terms at which he should have offered the property in favor of the
grantee and at that price when the offer should have been made.
One final word. Petitioner PUP should be cautioned against bidding

for public sympathy by bewailing the dismissal of its petition before
the press. Such advocacy is not likely to elicit the compassion of this
Court or of any court for that matter. An entreaty for a favorable
disposition of a case not made directly through pleadings and oral
arguments before the courts do not persuade us, for as judges, we
are ruled only by our forsworn duty to give justice where justice is
due.

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WHEREFORE, the petitions in G.R. No. 143513 and G.R. No. 143590 are
DENIED. Inasmuch as the first contract of lease fixed the area of the
leased premises at 2.90118 hectares while the second contract
placed it at 2.60 hectares, let a ground survey of the leased premises
be immediately conducted by a duly licensed, registered surveyor
at the expense of private respondent FIRESTONE CERAMICS, INC.,
within two (2) months from finality of the judgment in this case.
Thereafter, private respondent FIRESTONE CERAMICS, INC., shall have
six (6) months from receipt of the approved survey within which to
exercise its right to purchase the leased property at P1,500.00 per
square meter, and petitioner Polytechnic University of the Philippines
is ordered to reconvey the property to FIRESTONE CERAMICS, INC., in
the exercise of its right of first refusal upon payment of the purchase
price thereof.
SO ORDERED.
Mendoza, Buena, and De Leon, Jr., JJ., concur.

Quisumbing, J., no part due to prior close relations.
Polytechnic University of the Philippines vs Court of Appeals and

Firestone Ceramics
National Development Corporation vs Firestone Ceramics Inc.
[GR No. 143513 and 143590. November 14, 2001]
Bellosilo, J.:
Facts:
Petitioner National Development Corp., a government owned and

controlled corporation, had in its disposal a 10 hectares property.
Sometime in May 1965, private respondent Firestone Corporation
manifested its desire to lease a portion of it for ceramic
manufacturing business. On August 24, 1965, both parties entered
into a contract of lease for a term of 10 years renewable for another
10 years. Prior to the expiration of the aforementioned contract,
Firestone wrote NDC requesting for an extension of their lease
agreement. It was renewed with an express grant to Firestone of the
first option to purchase the leased premise in the event that it was
decided "to dispose and sell the properties including the lot..."

suigeneris
Cognizant of the impending expiration of the leased agreement,
Firestone informed NDC through letters and calls that it was renewing
its lease. No answer was given. Firestone's predicament worsened
when it learned of NDC's supposed plans to dispose the subject
property in favor of petitioner Polytechnic University of the
Philippines. PUP referred to Memorandum Order No. 214 issued by
then President Aquino ordering the transfer of the whole NDC
compound to the National Government. The order of conveyance
would automatically result in the cancellation of NDC's total
obligation in favor of the National Government.
Firestone instituted an action for specific performance to compel

NDC to sell the leased property in its favor.
Issue:
1. Whether or not there is a valid sale between NDC and PUP.
Ruling
A contract of sale, as defined in the Civil Code, is a contract where
one of the parties obligates himself to transfer the ownership of and
to deliver a determinate thing to the other or others who shall pay
therefore a sum certain in money or its equivalent. It is therefore a
general requisite for the existence of a valid and enforceable
contract of sale that it be mutually obligatory, i.e., there should be a
concurrence of the promise of the vendor to sell a determinate thing
and the promise of the vendee to receive and pay for the property
so delivered and transferred. The Civil Code provision is, in effect, a
"catch-all" provision which effectively brings within its grasp a whole
gamut of transfers whereby ownership of a thing is ceded for a
consideration.
All three (3) essential elements of a valid sale, without which there
can be no sale, were attendant in the "disposition" and "transfer" of
the property from NDC to PUP - consent of the parties, determinate
subject matter, and consideration therefor.
Consent to the sale is obvious from the prefatory clauses of

Memorandum Order No. 214 which explicitly states the
acquiescence of the parties to the sale of the property. Furthermore,
the cancellation of NDC's liabilities in favor of the National
Government constituted the "consideration" for the sale.

suigeneris
Baluyot vs. Holganza (325 SCRA 248 [2000])
G.R. No. 136374 February 9, 2000
FRANCISCA S. BALUYOT, petitioner,

vs.
PAUL E. HOLGANZA and the OFFICE OF THE OMBUDSMAN (VISAYAS)
represented by its Deputy Ombudsman for the Visayas ARTURO C.
MOJICA, Director VIRGINIA PALANCA-SANTIAGO, and Graft
Investigation Officer I ANNA MARIE P. MILITANTE, respondents.
DE LEON, JR., J.:
Before us is a special civil action for certiorari, seeking the reversal of

the Orders dated August 21, 1998 and October 28, 1998 issued by
the Office of the Ombudsman, which denied petitioner's motion to
dismiss and motion for reconsideration, respectively.1âwphi1.nêt
The facts are:
During a spot audit conducted on March 21, 1977 by a team of

auditors from the Philippine National Red Cross (PNRC)
headquarters, a cash shortage of P154,350.13 was discovered in the
funds of its Bohol chapter. The chapter administrator, petitioner
Francisca S. Baluyot, was held accountable for the shortage.
Thereafter, on January 8, 1998, private respondent Paul E. Holganza,
in his capacity as a member of the board of directors of the Bohol
chapter, filed an affidavit-complaint1 before the Office of the
Ombudsman charging petitioner of malversation under Article 217 of
the Revised Penal Code. The complaint was docketed as OMB-VIS-
CRIM-98-0022. However, upon recommendation by respondent
Anna Marie P. Militante, Graft Investigation Officer I, an
administrative docket for dishonesty was also opened against
petitioner; hence, OMB-VIS-ADM-98-0063.2
On February 6, 1998, public respondent issued an Order 3 requiring

petitioner to file her counter-affidavit to the charges of malversation
and dishonesty within ten days from notice, with a warning that her
failure to comply would be construed as a waiver on her part to
refute the charges, and that the case would be resolved based on
the evidence on record. On March 14, 1998, petitioner filed her
counter-affidavit,4 raising principally the defense that public
respondent had no jurisdiction over the controversy. She argued that
the Ombudsman had authority only over government-owned or
controlled corporations, which the PNRC was not, or so she claimed.

suigeneris
On August 21, 1998, public respondent issued the first assailed Order 5
denying petitioner's motion to dismiss. It further scheduled a
clarificatory hearing on the criminal aspect of the complaint and a
preliminary conference on its administrative aspect on September 2,
1998. Petitioner received the order on August 26, 1998 and she filed
a motion for reconsideration6 the next day.
On October 28, 1998, public respondent issued the second assailed

Order7 denying petitioner's motion for reconsideration. Hence, this
recourse.
We dismiss the petition.
Petitioner contends that the Ombudsman has no jurisdiction over the

subject matter of the controversy since the PNRC is allegedly a
private voluntary organization. The following circumstances, she
insists, are indicative of the private character of the organization: (1)
the PNRC does not receive any budgetary support from the
government, and that all money given to it by the latter and its
instrumentalities become private funds of the organization; (2) funds
for the payment of personnel's salaries and other emoluments come
from yearly fund campaigns, private contributions and rentals from
its properties; and (3) it is not audited by the Commission on Audit.
Petitioner states that the PNRC falls under the International
Federation of Red Cross, a Switzerland-based organization, and that
the power to discipline employees accused of misconduct,
malfeasance, or immorality belongs to the PNRC Secretary General
by virtue of Section "G", Article IX of its by-laws.8 She threatens that
"to classify the PNRC as a government-owned or controlled
corporation would create a dangerous precedent as it would lose its
neutrality, independence and impartiality . . . .9
Practically the same issue was addressed in Camporedondo v.

National Labor Relations Commission, et. al.,10 where an almost
identical set of facts obtained. Petitioner therein was the
administrator of the Surigao del Norte chapter of the PNRC. An audit
conducted by a field auditor revealed a shortage in the chapter
funds in the sum of P109,000.00. When required to restitute the
amount of P135,927.78, petitioner therein instead applied for early
retirement, which was denied by the Secretary General of the PNRC.
Subsequently, the petitioner filed a complaint for illegal dismissal and
damages against PNRC before the National Labor Relations
Commission. In turn, PNRC moved to dismiss the complaint on the
ground of lack of jurisdiction, averring that PNRC was a government
corporation whose employees are embraced by civil service
regulation. The labor arbiter dismissed the complaint, and the
Commission sustained his order. The petitioner assailed the dismissal
of his complaint via a petition for certiorari, contending that the

suigeneris
PNRC is a private organization and not a government-owned or
controlled corporation. In dismissing the petition, we ruled thus:
Resolving the issue set out in the opening paragraph of this

opinion, we rule that the Philippine National Red Cross (PNRC) is
a government owned and controlled corporation, with an
original charter under Republic Act No. 95, as amended. The
test to determine whether a corporation is government owned
or controlled, or private in nature is simple. Is it created by its
own charter for the exercise of a public function, or by
incorporation under the general corporation law? Those with
special charters are government corporations subject to its
provisions, and its employees are under the jurisdiction of the
Civil Service Commission, and are compulsory members of the
Government Service Insurance System. The PNRC was not
"impliedly converted to a private corporation" simply because
its charter was amended to vest in it the authority to secure
loans, be exempted from payment of all duties, taxes, fees and
other charges of all kinds on all importations and purchases for
its exclusive use, on donations for its disaster relief work and
other services and in its benefits and fund raising drives, and be
allotted one lottery draw a year by the Philippine Charity
Sweepstakes Office for the support of its disaster relief
operation in addition to its existing lottery draws for blood
program.
Clearly then, public respondent has jurisdiction over the matter,

pursuant to Section 13, of Republic Act No. 6770, otherwise known as
"The Ombudsman Act of 1989", to wit:
Sec. 13. Mandate. — The Ombudsman and his Deputies, as

protectors of the people, shall act promptly on complaints filed
in any form or manner against officers or employees of the
Government, or of any subdivision, agency or instrumentality
thereof, including government-owned or controlled
corporations, and enforce their administrative, civil and criminal
liability in ever case where the evidence warrants in order to
promote efficient service by the Government to the people.11
WHEREFORE, the petition for certiorari is hereby DISMISSED. Costs

against petitioner.
SO ORDERED.1âwphi1.nêt
Quisumbing and Buena, JJ., concur.

Bellosillo, J., no part due relation of a party.
Mendoza, J., no part due to personal relation to one of parties.

suigeneris
Francisca Baluyot vs Paul Holganza and the Office of the
Ombudsman (Visayas) represented by Arturo Mojica, Dir. Virginia
Planca-Santiago and Graft Investigation Officer Anna Marie
Militante (February 9, 2000)
Incorporation Test to determine Nature of Corporation ( Private/
Public)
Facts: During a spot audit in 1977, the auditors from the Philippine
National Red Cross (PNRC) headquarters discovered a case
shortage in the funds of its Bohol chapter. The chapter administrator,
petitioner Baluyot, was held accountable and thereafter,
respondent Holganza as member of the board Bohol chapter, filed a
complaint with the Ofc. of the Ombudsman for malversation. Upon
recommendation of respondent Militante, an administratiave docket
of dishonesty was also opened against Baluyot. Baluyot raised the
defense that the Ombudsman had no jurisdiction as he had
authority only over government owned or controlled corporations
which the PNRC was not. She gives as evidence of its private
character 1) it does not receive budgetary support from the
government and all money given to it by the latter and its
instrumentalities become private funds of the organization. 2) funds
for the payment of personnel’s salaries and other emoluments come
from yearly fund campaigns, private contributions and rentals from
its properties. 3) it is not audited by COA. PNRC, petitioner claims
falls under the International Federation of Red Cross, Swiss-based
organization.
Issue: Whether or not PNRC is a government owned or controlled

corporation or a private corporation.
Held: The Court cited the case of Camporedondo vs.

NLRC. “Resolving the issue set out…we rule that the PNRC is a
government owned and controlled corporation, with an original
charter under RA No. 95, as amended, The test to determine
whether a corporation is government owned or controlled or private
in nature is simple. Is it created by its own charter for the exercise of
a public function, or by incorporation under the general corporation
law? Those with special charters are government corporations
subject to its provisions, and its employees are under the jurisdiction
of the Civil Service Commission, and are compulsory members of the
GSIS. The PNRC was not “impliedly converted to a private
corporation” simply because its charter was amended to vest in it
the authority to secure loans, be exempted from payment of all
duties, taxes, fees and other charges of all kinds on all importations
and purchases for its exclusive use, on donations for its disaster relief
work and other services and in its benefits and fund raising
drives…” Clearly then, public respondent has jurisdiction over the
matter.

suigeneris
Castillo vs. Balinghasay (440 SCRA 442 [2004])
G.R. No. 150976 October 18, 2004
CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. FLORES, XERXES

NAVARRO, MARIA ANTONIA TEMPLO and MEDICAL CENTER
PARAÑAQUE, INC., petitioners,
vs.
ANGELES BALINGHASAY, RENATO BERNABE, ALODIA DEL ROSARIO,
ROMEO FUNTILA, TERESITA GAYANILO, RUSTICO JIMENEZ, ARACELI**
JO, ESMERALDA MEDINA, CECILIA MONTALBAN, VIRGILIO OBLEPIAS,
CARMENCITA PARRENO, CESAR REYES, REYNALDO SAVET, SERAPIO
TACCAD, VICENTE VALDEZ, SALVACION VILLAMORA, and HUMBERTO
VILLAREAL, respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the Partial Judgment1 dated November 26,

2001 in Civil Case No. 01-0140, of the Regional Trial Court (RTC) of
Parañaque City, Branch 258. The trial court declared the February 9,
2001, election of the board of directors of the Medical Center
Parañaque, Inc. (MCPI) valid. The Partial Judgment dismissed
petitioners’ first cause of action, specifically, to annul said election
for depriving petitioners their voting rights and to be voted on as
members of the board.
The facts, as culled from records, are as follows:
Petitioners and the respondents are stockholders of MCPI, with

the former holding Class "B" shares and the latter owning Class
"A" shares.
MCPI is a domestic corporation with offices at Dr. A. Santos Avenue,

Sucat, Parañaque City. It was organized sometime in September
1977. At the time of its incorporation, Act No. 1459, the old
Corporation Law was still in force and effect. Article VII of MCPI’s
original Articles of Incorporation, as approved by the Securities and
Exchange Commission (SEC) on October 26, 1977, reads as follows:
SEVENTH. That the authorized capital stock of the corporation is

TWO MILLION (P2,000,000.00) PESOS, Philippine Currency,
divided into TWO THOUSAND (2,000) SHARES at a par value of
P100 each share, whereby the ONE THOUSAND SHARES issued
to, and subscribed by, the incorporating stockholders shall be

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classified as Class A shares while the other ONE THOUSAND
unissued shares shall be considered as Class B shares. Only
holders of Class A shares can have the right to vote and the
right to be elected as directors or as corporate officers.2 (Stress
supplied)
On July 31, 1981, Article VII of the Articles of Incorporation of MCPI

was amended, to read thus:
SEVENTH. That the authorized capital stock of the corporation is

FIVE MILLION (P5,000,000.00) PESOS, divided as follows:
CLASS NO. OF SHARES PAR VALUE
"A" 1,000 P1,000.00
"B" 4,000 P1,000.00
Only holders of Class A shares have the right to vote and the
right to be elected as directors or as corporate officers.3
(Emphasis supplied)
The foregoing amendment was approved by the SEC on June 7,

1983. While the amendment granted the right to vote and to be
elected as directors or corporate officers only to holders of Class "A"
shares, holders of Class "B" stocks were granted the same rights and
privileges as holders of Class "A" stocks with respect to the payment
of dividends.
On September 9, 1992, Article VII was again amended to provide as

follows:
SEVENTH: That the authorized capital stock of the corporation is

THIRTY TWO MILLION PESOS (P32,000,000.00) divided as follows:
CLASS NO. OF SHARES PAR VALUE
"A" 1,000 P1,000.00
"B" 31,000 1,000.00
Except when otherwise provided by law, only holders of Class

"A" shares have the right to vote and the right to be elected as
directors or as corporate officers4 (Stress and underscoring
supplied).
The SEC approved the foregoing amendment on September 22,

1993.

suigeneris
On February 9, 2001, the shareholders of MCPI held their annual
stockholders’ meeting and election for directors. During the course
of the proceedings, respondent Rustico Jimenez, citing Article VII, as
amended, and notwithstanding MCPI’s history, declared over the
objections of herein petitioners, that no Class "B" shareholder was
qualified to run or be voted upon as a director. In the past, MCPI
had seen holders of Class "B" shares voted for and serve as members
of the corporate board and some Class "B" share owners were in fact
nominated for election as board members. Nonetheless, Jimenez
went on to announce that the candidates holding Class "A" shares
were the winners of all seats in the corporate board. The petitioners
protested, claiming that Article VII was null and void for depriving
them, as Class "B" shareholders, of their right to vote and to be voted
upon, in violation of the Corporation Code (Batas Pambansa Blg.
68), as amended.
On March 22, 2001, after their protest was given short shrift, herein
petitioners filed a Complaint for Injunction, Accounting and
Damages, docketed as Civil Case No. CV-01-0140 before the RTC of
Parañaque City, Branch 258. Said complaint was founded on two (2)
principal causes of action, namely:
a. Annulment of the declaration of directors of the MCPI made

during the February 9, 2001 Annual Stockholders’ Meeting, and
for the conduct of an election whereat all stockholders,
irrespective of the classification of the shares they hold, should
be afforded their right to vote and be voted for; and
b. Stockholders’ derivative suit challenging the validity of a

contract entered into by the Board of Directors of MCPI for the
operation of the ultrasound unit.5
Subsequently, the complaint was amended to implead MCPI as

party-plaintiff for purposes only of the second cause of action.
Before the trial court, the herein petitioners alleged that they were
deprived of their right to vote and to be voted on as directors at the
annual stockholders’ meeting held on February 9, 2001, because
respondents had erroneously relied on Article VII of the Articles of
Incorporation of MCPI, despite Article VII being contrary to the
Corporation Code, thus null and void. Additionally, respondents
were in estoppel, because in the past, petitioners were allowed to
vote and to be elected as members of the board. They further
claimed that the privilege granted to the Class "A" shareholders was
more in the nature of a right granted to founder’s shares.
In their Answer, the respondents averred that the provisions of Article

VII clearly and categorically state that only holders of Class "A"
shares have the exclusive right to vote and be elected as directors
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and officers of the corporation. They denied that the exclusivity was
intended only as a privilege granted to founder’s shares, as no such
proviso is found in the Articles of Incorporation. The respondents
further claimed that the exclusivity of the right granted to Class "A"
holders cannot be defeated or impaired by any subsequent
legislative enactment, e.g. the New Corporation Code, as the
Articles of Incorporation is an intra-corporate contract between the
corporation and its members; between the corporation and its
stockholders; and among the stockholders. They submit that to allow
Class "B" shareholders to vote and be elected as directors would
constitute a violation of MCPI’s franchise or charter as granted by
the State.
At the pre-trial, the trial court ruled that a partial judgment could be
rendered on the first cause of action and required the parties to
submit their respective position papers or memoranda.
On November 26, 2001, the RTC rendered the Partial Judgment, the
WHEREFORE, viewed in the light of the foregoing, the election

held on February 9, 2001 is VALID as the holders of CLASS "B"
shares are not entitled to vote and be voted for and this case
based on the First Cause of Action is DISMISSED.
SO ORDERED.6
In finding for the respondents, the trial court ruled that corporations
had the power to classify their shares of stocks, such as "voting and
non-voting" shares, conformably with Section 67 of the Corporation
Code of the Philippines. It pointed out that Article VII of both the
original and amended Articles of Incorporation clearly provided that
only Class "A" shareholders could vote and be voted for to the
exclusion of Class "B" shareholders, the exception being in instances
provided by law, such as those enumerated in Section 6, paragraph
6 of the Corporation Code. The RTC found merit in the respondents’
theory that the Articles of Incorporation, which defines the rights and
limitations of all its shareholders, is a contract between MCPI and its
shareholders. It is thus the law between the parties and should be
strictly enforced as to them. It brushed aside the petitioners’ claim
that the Class "A" shareholders were in estoppel, as the election of
Class "B" shareholders to the corporate board may be deemed as a
mere act of benevolence on the part of the officers. Finally, the
court brushed aside the "founder’s shares" theory of the petitioners
for lack of factual basis.
Hence, this petition submitting the sole legal issue of whether or not
the Court a quo, in rendering the Partial Judgment dated November

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26, 2001, has decided a question of substance in a way not in
accord with law and jurisprudence considering that:
1. Under the Corporation Code, the exclusive voting right and

right to be voted granted by the Articles of Incorporation of the
MCPI to Class A shareholders is null and void, or already
extinguished;
2. Hence, the declaration of directors made during the

February 9, 2001 Annual Stockholders’ Meeting on the basis of
the purported exclusive voting rights is null and void for having
been done without the benefit of an election and in violation
of the rights of plaintiffs and Class B shareholders; and
3. Perforce, another election should be conducted to elect the

directors of the MCPI, this time affording the holders of Class B
shares full voting right and the right to be voted.8
The issue for our resolution is whether or not holders of Class "B" shares
of the MCPI may be deprived of the right to vote and be voted for
as directors in MCPI.
Before us, petitioners assert that Article VII of the Articles of

Incorporation of MCPI, which denied them voting rights, is null and
void for being contrary to Section 6 of the Corporation Code. They
point out that Section 6 prohibits the deprivation of voting rights
except as to preferred and redeemable shares only. Hence, under
the present law on corporations, all shareholders, regardless of
classification, other than holders of preferred or redeemable shares,
are entitled to vote and to be elected as corporate directors or
officers. Since the Class "B" shareholders are not classified as holders
of either preferred or redeemable shares, then it necessarily follows
that they are entitled to vote and to be voted for as directors or
officers.
The respondents, in turn, maintain that the grant of exclusive voting

rights to Class "A" shares is clearly provided in the Articles of
Incorporation and is in accord with Section 59 of the Corporation
Law (Act No. 1459), which was the prevailing law when MCPI was
incorporated in 1977. They likewise submit that as the Articles of
Incorporation of MCPI is in the nature of a contract between the
corporation and its shareholders and Section 6 of the Corporation
Code could not retroactively apply to it without violating the non-
impairment clause10 of the Constitution.
When Article VII of the Articles of Incorporation of MCPI was

amended in 1992, the phrase "except when otherwise provided by

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law" was inserted in the provision governing the grant of voting
powers to Class "A" shareholders. This particular amendment is
relevant for it speaks of a law providing for exceptions to the
exclusive grant of voting rights to Class "A" stockholders. Which law
was the amendment referring to? The determination of which law to
apply is necessary. There are two laws being cited and relied upon
by the parties in this case. In this instance, the law in force at the time
of the 1992 amendment was the Corporation Code (B.P. Blg. 68), not
the Corporation Law (Act No. 1459), which had been repealed by
then.
We find and so hold that the law referred to in the amendment to

Article VII refers to the Corporation Code and no other law. At the
time of the incorporation of MCPI in 1977, the right of a corporation
to classify its shares of stock was sanctioned by Section 5 of Act No.
1459. The law repealing Act No. 1459, B.P. Blg. 68, retained the same
grant of right of classification of stock shares to corporations, but with
a significant change. Under Section 6 of B.P. Blg. 68, the
requirements and restrictions on voting rights were explicitly provided
for, such that "no share may be deprived of voting rights except
those classified and issued as "preferred" or "redeemable" shares,
unless otherwise provided in this Code" and that "there shall always
be a class or series of shares which have complete voting rights."
Section 6 of the Corporation Code being deemed written into Article
VII of the Articles of Incorporation of MCPI, it necessarily follows that
unless Class "B" shares of MCPI stocks are clearly categorized to be
"preferred" or "redeemable" shares, the holders of said Class "B"
shares may not be deprived of their voting rights. Note that there is
nothing in the Articles of Incorporation nor an iota of evidence on
record to show that Class "B" shares were categorized as either
"preferred" or "redeemable" shares. The only possible conclusion is
that Class "B" shares fall under neither category and thus, under the
law, are allowed to exercise voting rights.
One of the rights of a stockholder is the right to participate in the

control and management of the corporation that is exercised
through his vote. The right to vote is a right inherent in and incidental
to the ownership of corporate stock, and as such is a property right.
The stockholder cannot be deprived of the right to vote his stock nor
may the right be essentially impaired, either by the legislature or by
the corporation, without his consent, through amending the charter,
or the by-laws.11
Neither do we find merit in respondents’ position that Section 6 of the

Corporation Code cannot apply to MCPI without running afoul of
the non-impairment clause of the Bill of Rights. Section 14812 of the
Corporation Code expressly provides that it shall apply to
corporations in existence at the time of the effectivity of the Code.

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Hence, the non-impairment clause is inapplicable in this instance.
When Article VII of the Articles of Incorporation of MCPI were
amended in 1992, the board of directors and stockholders must
have been aware of Section 6 of the Corporation Code and
intended that Article VII be construed in harmony with the Code,
which was then already in force and effect. Since Section 6 of the
Corporation Code expressly prohibits the deprivation of voting rights,
except as to "preferred" and "redeemable" shares, then Article VII of
the Articles of Incorporation cannot be construed as granting
exclusive voting rights to Class "A" shareholders, to the prejudice of
Class "B" shareholders, without running afoul of the letter and spirit of
The respondents then take the tack that the phrase "except when
otherwise provided by law" found in the amended Articles is only a
handwritten insertion and could have been inserted by anybody
and that no board resolution was ever passed authorizing or
approving said amendment.
Said contention is not for this Court to pass upon, involving as it does
a factual question, which is not proper in this petition. In an appeal
via certiorari, only questions of law may be reviewed.13 Besides,
respondents did not adduce persuasive evidence, but only bare
allegations, to support their suspicion. The presumption that in the
amendment process, the ordinary course of business has been
followed14 and that official duty has been regularly performed15 on
the part of the SEC, applies in this case.
WHEREFORE, the petition is GRANTED. The Partial Judgment dated

November 26, 2001 of the Regional Trial Court of Parañaque City,
Branch 258, in Civil Case No. 01-0140 is REVERSED AND SET ASIDE. No
pronouncement as to costs.
SO ORDERED.
LEONARDO A. QUISUMBING
Davide, Jr., Ynares-Santiago, Carpio, and Azcuna*, JJ., concur.
Footnotes
* On Leave.
** Sometimes "Arceli" in some parts of the records.
1 Rollo, pp. 44-47. Penned by Hon. Judge Raul E. De Leon.
2 Id. at 128-129.
3 Id. at 83-84.
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4 Id. at 71-72.
5 Id. at 377.
6 Rollo, p. 47.
7 SEC. 6. Classification of shares. – The shares of stock of stock
corporations may be divided into classes or series of shares, or
both, any of which classes or series of shares may have such
rights, privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of the
shares or series of shares may have a par value or have no par
value as may be provided for in the articles of incorporation:
Provided, however, That banks, trust companies, insurance
companies, public utilities, and building and loan associations
shall not be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may

be given preference in the distribution of the assets of the
corporation in case of liquidation and in the distribution of
dividends, or such other preferences as may be stated in
the articles of incorporation which are not violative of the
provisions of this Code; Provided, That preferred shares of
stock may be issued only with a stated par value. The
Board of Directors, where authorized in the articles of
incorporation, may fix the terms and conditions of
preferred shares of stock or any series thereof: Provided,
That such terms and conditions shall be effective upon
filing of a certificate thereof with the Securities and
Exchange Commission.
Shares of capital stock issued without par value shall be

deemed fully paid and non-assessable and the holder of
such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided, That shares without
par value may not be issued for a consideration less than
the value of five (P5.00) pesos per share; Provided, further,
That the entire consideration received by the corporation
for its no-par value shares shall be treated as capital and
shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the

purpose of insuring compliance with constitutional or legal
requirements.

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Except as otherwise provided by the articles of
incorporation and stated in the certificate of stock, each
share shall be equal in all respects to every other share.
Where the articles of incorporation provide for non-voting

shares in the cases allowed by this Code, the holders of
such shares shall nevertheless be entitled to vote on the
following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other

disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded

indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with

another corporation or other corporations;
7. Investment of corporate funds in another

corporation or business in accordance with this
Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding

paragraph, the vote necessary to approve a particular
corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights.
8 Rollo, p. 23.
9 SEC. 5. The shares of any corporation formed under this Act
may be divided into classes with such rights, voting powers,
preferences, and restrictions as may be provided for in the
articles of incorporation. Any or all of the shares may have a
par value or have no par value, as provided in the articles of
incorporation: Provided, however, That banks, trust companies,
insurance companies, and building and loan associations shall
not be permitted to issue no-par value shares of stock. Subject
to the laws creating and defining the duties of the Public
Service Commission, shares of capital stock without par value
may be issued from time to time, (a) for such consideration as
may be prescribed in the articles of incorporation; or (b) in the
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absence of fraud in the transaction, for such consideration as,
from time to time, may be fixed by the board of directors
pursuant to authority conferred in the articles of incorporation;
or (c) for such consideration as shall be consented to or
approved by the holders of a majority of the shares entitled to
vote at a meeting called in the manner prescribed by the by-
laws, provided the call for such meeting shall contain notice of
such purpose. Any or all shares so issued shall be deemed fully
paid and non-assessable and the holder of such shares shall
not be liable to the corporation or to its creditors in respect
thereto: Provided, however, That shares without par value may
not be issued for a consideration less than the value of five
pesos per share. Except as otherwise provided by the articles of
incorporation, and stated in the certificate of stock, each share
shall be in all respects equal to every other share.
Preferred shares of stock issued by any corporation the

holders of which are entitled to any preference in the
distribution of the assets of the corporation in case of
liquidation, may be issued only with a stated par value
and, in all certificates for such shares of stock, the amount
which the holder of each of such preferred shares shall be
entitled to receive from the assets of the corporation in
preference to holders of other shares, shall be stated.
The entire consideration received by the corporation for

its no-par value shares shall be treated as capital, and
shall not be available for distribution as dividends.
10THE 1987 CONSTITUTION OF THE REPUBLIC OF THE PHILIPPINES,
Article III.
SEC. 10. No law impairing the obligation of contracts shall

be passed.
11William Meade Fletcher, 5 FLETCHER CYCLOPEDIA OF THE
LAW OF PRIVATE CORPORATIONS § 2025, 116 (Revised Volume
1976).
12SEC. 148. Applicability to existing corporations. – All
corporations lawfully existing and doing business in the
Philippines on the date of the effectivity of this Code and
heretofore authorized, licensed or registered by the Securities
and Exchange Commission, shall be deemed to have been
authorized, licensed or registered under the provisions of this
Code, subject to the terms and conditions of its license, and
shall be governed by the provisions hereof: Provided, That
where any such corporation is affected by the new
requirements of this Code, said corporation shall, unless
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otherwise herein provided, be given a period of not more than
two (2) years from the effectivity of this Code within which to
comply with the same. (Emphasis supplied)
Commissioner of Internal Revenue vs. CA (301 SCRA 152 [1999])
G.R. No. 108576 January 20, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO
CORP., respondents.
MARTINEZ, J.:
Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal

of the decision of the Court of Appeals (CA) 1 which affirmed the
ruling of the Court of Tax Appeals (CTA) 2 that private respondent A.
Soriano Corporation's (hereinafter ANSCOR) redemption and
exchange of the stocks of its foreign stockholders cannot be
considered as "essentially equivalent to a distribution of taxable
dividends" under, Section 83(b) of the 1939 Internal Revenue Act. 3
Sometime in the 1930s, Don Andres Soriano, a citizen and resident of

the United States, formed the corporation "A. Soriano Y Cia",
predecessor of ANSCOR, with a P1,000,000.00 capitalization divided
into 10,000 common shares at a par value of P100/share. ANSCOR is
wholly owned and controlled by the family of Don Andres, who are
all non-resident aliens. 4 In 1937, Don Andres subscribed to 4,963
shares of the 5,000 shares originally issued. 5
On September 12, 1945, ANSCOR's authorized capital stock was

increased to P2,500,000.00 divided into 25,000 common shares with
the same par value of the additional 15,000 shares, only 10,000 was
issued which were all subscribed by Don Andres, after the other
stockholders waived in favor of the former their pre-emptive rights to
subscribe to the new issues. 6 This increased his subscription to 14,963
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common shares. 7 A month later, 8 Don Andres transferred 1,250
shares each to his two sons, Jose and Andres, Jr., as their initial
investments in ANSCOR. 9 Both sons are foreigners. 10
By 1947, ANSCOR declared stock dividends. Other stock dividend

declarations were made between 1949 and December 20, 1963. 11
On December 30, 1964 Don Andres died. As of that date, the
records revealed that he has a total shareholdings of 185,154 shares
12 — 50,495 of which are original issues and the balance of 134.659
shares as stock dividend declarations. 13 Correspondingly, one-half of

that shareholdings or 92,577 14 shares were transferred to his wife,
Doña Carmen Soriano, as her conjugal share. The other half formed
part of his estate. 15
A day after Don Andres died, ANSCOR increased its capital stock to
P20M 16 and in 1966 further increased it to P30M. 17 In the same year
(December 1966), stock dividends worth 46,290 and 46,287 shares
were respectively received by the Don Andres estate 18 and Doña
Carmen from ANSCOR. Hence, increasing their accumulated
shareholdings to 138,867 and 138,864 19 common shares each. 20
On December 28, 1967, Doña Carmen requested a ruling from the

United States Internal Revenue Service (IRS), inquiring if an exchange
of common with preferred shares may be considered as a tax
avoidance scheme 21 under Section 367 of the 1954 U.S. Revenue
Act. 22 By January 2, 1968, ANSCOR reclassified its existing 300,000
common shares into 150,000 common and 150,000 preferred shares.
23
In a letter-reply dated February 1968, the IRS opined that the

exchange is only a recapitalization scheme and not tax avoidance.
24 Consequently, 25 on March 31, 1968 Doña Carmen exchanged her
whole 138,864 common shares for 138,860 of the newly reclassified

preferred shares. The estate of Don Andres in turn, exchanged 11,140
of its common shares, for the remaining 11,140 preferred shares, thus
reducing its (the estate) common shares to 127,727. 26
On June 30, 1968, pursuant to a Board Resolution, ANSCOR

redeemed 28,000 common shares from the Don Andres' estate. By
November 1968, the Board further increased ANSCOR's capital stock
to P75M divided into 150,000 preferred shares and 600,000 common
shares. 27 About a year later, ANSCOR again redeemed 80,000
common shares from the Don Andres' estate, 28 further reducing the
latter's common shareholdings to 19,727. As stated in the Board
Resolutions, ANSCOR's business purpose for both redemptions of
stocks is to partially retire said stocks as treasury shares in order to
reduce the company's foreign exchange remittances in case cash
dividends are declared. 29

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In 1973, after examining ANSCOR's books of account and records,
Revenue examiners issued a report proposing that ANSCOR be
assessed for deficiency withholding tax-at-source, pursuant to
Sections 53 and 54 of the 1939 Revenue Code, 30 for the year 1968
and the second quarter of 1969 based on the transactions of
exchange 31 and redemption of stocks. 31 The Bureau of Internal
Revenue (BIR) made the corresponding assessments despite the
claim of ANSCOR that it availed of the tax amnesty under
Presidential Decree
(P.D.) 23 32 which were amended by P.D.'s 67 and 157. 33 However,
petitioner ruled that the invoked decrees do not cover Sections 53
and 54 in relation to Article 83(b) of the 1939 Revenue Act under
which ANSCOR was assessed. 34 ANSCOR's subsequent protest on
the assessments was denied in 1983 by petitioner. 35
Subsequently, ANSCOR filed a petition for review with the CTA

assailing the tax assessments on the redemptions and exchange of
stocks. In its decision, the Tax Court reversed petitioner's ruling, after
finding sufficient evidence to overcome the prima facie correctness
of the questioned assessments. 36 In a petition for review the CA as
mentioned, affirmed the ruling of the CTA. 37 Hence, this petition.
The bone of contention is the interpretation and application of

Section 83(b) of the 1939 Revenue Act 38 which provides:
Sec. 83. Distribution of dividends or assets by corporations.

—
(b) Stock dividends — A stock dividend representing the

transfer of surplus to capital account shall not be subject
to tax. However, if a corporation cancels or redeems
stock issued as a dividend at such time and in such
manner as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent to
the distribution of a taxable dividend, the amount so
distributed in redemption or cancellation of the stock shall
be considered as taxable income to the extent it
represents a distribution of earnings or profits
accumulated after March first, nineteen hundred and
thirteen. (Emphasis supplied)
Specifically, the issue is whether ANSCOR's redemption of stocks

from its stockholder as well as the exchange of common with
preferred shares can be considered as "essentially equivalent
to the distribution of taxable dividend" making the proceeds
thereof taxable under the provisions of the above-quoted law.
Petitioner contends that the exchange transaction a tantamount to

"cancellation" under Section 83(b) making the proceeds thereof
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taxable. It also argues that the Section applies to stock dividends
which is the bulk of stocks that ANSCOR redeemed. Further,
petitioner claims that under the "net effect test," the estate of Don
Andres gained from the redemption. Accordingly, it was the duty of
ANSCOR to withhold the tax-at-source arising from the two
transactions, pursuant to Section 53 and 54 of the 1939 Revenue Act.
39
ANSCOR, however, avers that it has no duty to withhold any tax

either from the Don Andres estate or from Doña Carmen based on
the two transactions, because the same were done for legitimate
business purposes which are (a) to reduce its foreign exchange
remittances in the event the company would declare cash
dividends, 40 and to (b) subsequently "filipinized" ownership of
ANSCOR, as allegedly, envisioned by Don Andres. 41 It likewise
invoked the amnesty provisions of P.D. 67.
We must emphasize that the application of Sec. 83(b) depends on

the special factual circumstances of each case. 42 The findings of
facts of a special court (CTA) exercising particular expertise on the
subject of tax, generally binds this Court, 43 considering that it is
substantially similar to the findings of the CA which is the final arbiter
of questions of facts. 44 The issue in this case does not only deal with
facts but whether the law applies to a particular set of facts.
Moreover, this Court is not necessarily bound by the lower courts'
conclusions of law drawn from such facts. 45
AMNESTY:
We will deal first with the issue of tax amnesty. Section 1 of P.D. 67 46
provides:
1. In all cases of voluntary disclosures of previously

untaxed income and/or wealth such as earnings, receipts,
gifts, bequests or any other acquisitions from any source
whatsoever which are taxable under the National Internal
Revenue Code, as amended, realized here or abroad by
any taxpayer, natural or judicial; the collection of all
internal revenue taxes including the increments or
penalties or account of non-payment as well as all civil,
criminal or administrative liabilities arising from or incident
to such disclosures under the National Internal Revenue
Code, the Revised Penal Code, the Anti-Graft and
Corrupt Practices Act, the Revised Administrative Code,
the Civil Service laws and regulations, laws and
regulations on Immigration and Deportation, or any other
applicable law or proclamation, are hereby condoned
and, in lieu thereof, a tax of ten (10%) per centum on such

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previously untaxed income or wealth, is hereby imposed,
subject to the following conditions: (conditions omitted)
[Emphasis supplied].
The decree condones "the collection of all internal revenue

taxes including the increments or penalties or account of non-
payment as well as all civil, criminal or administrative liable
arising from or incident to" (voluntary) disclosures under the
NIRC of previously untaxed income and/or wealth "realized
here or abroad by any taxpayer, natural or juridical."
May the withholding agent, in such capacity, be deemed a

taxpayer for it to avail of the amnesty? An income taxpayer covers
all persons who derive taxable income. 47 ANSCOR was assessed by
petitioner for deficiency withholding tax under Section 53 and 54 of
the 1939 Code. As such, it is being held liable in its capacity as a
withholding agent and not its personality as a taxpayer.
In the operation of the withholding tax system, the withholding agent

is the payor, a separate entity acting no more than an agent of the
government for the collection of the tax 48 in order to ensure its
payments; 49 the payer is the taxpayer — he is the person subject to
tax impose by law; 50 and the payee is the taxing authority. 51 In
other words, the withholding agent is merely a tax collector, not a
taxpayer. Under the withholding system, however, the agent-payor
becomes a payee by fiction of law. His (agent) liability is direct and
independent from the taxpayer, 52 because the income tax is still
impose on and due from the latter. The agent is not liable for the tax
as no wealth flowed into him — he earned no income. The Tax Code
only makes the agent personally liable for the tax 53 arising from the
breach of its legal duty to withhold as distinguish from its duty to pay
tax since:
the government's cause of action against the withholding

is not for the collection of income tax, but for the
enforcement of the withholding provision of Section 53 of
the Tax Code, compliance with which is imposed on the
withholding agent and not upon the taxpayer. 54
Not being a taxpayer, a withholding agent, like ANSCOR in this

transaction is not protected by the amnesty under the decree.
Codal provisions on withholding tax are mandatory and must be

complied with by the withholding agent. 55 The taxpayer should not
answer for the non-performance by the withholding agent of its legal
duty to withhold unless there is collusion or bad faith. The former
could not be deemed to have evaded the tax had the withholding
agent performed its duty. This could be the situation for which the
amnesty decree was intended. Thus, to curtail tax evasion and give
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tax evaders a chance to reform, 56 it was deemed administratively
feasible to grant tax amnesty in certain instances. In addition, a "tax
amnesty, much like a tax exemption, is never favored nor presumed
in law and if granted by a statute, the term of the amnesty like that
of a tax exemption must be construed strictly against the taxpayer
and liberally in favor of the taxing authority. 57 The rule on strictissimi
juris equally applies. 58 So that, any doubt in the application of an
amnesty law/decree should be resolved in favor of the taxing
authority.
Furthermore, ANSCOR's claim of amnesty cannot prosper.

The implementing rules of P.D. 370 which expanded
amnesty on previously untaxed income under P.D. 23 is
very explicit, to wit:
Sec. 4. Cases not covered by amnesty. — The following

cases are not covered by the amnesty subject of these
regulations:
xxx xxx xxx
(2) Tax liabilities with or without assessments, on

withholding tax at source provided under Section 53 and
54 of the National Internal Revenue Code, as amended; 59
ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax

Code. Thus, by specific provision of law, it is not covered by the
amnesty.
TAX ON STOCK DIVIDENDS
General Rule
Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of
the U.S. Revenue Code of 1928. 60 It laid down the general rule
known as the proportionate test 61 wherein stock dividends once
issued form part of the capital and, thus, subject to income tax. 62
Specifically, the general rule states that:
A stock dividend representing the transfer of surplus to

capital account shall not be subject to tax.
Having been derived from a foreign law, resort to the jurisprudence

of its origin may shed light. Under the US Revenue Code, this
provision originally referred to "stock dividends" only, without any
exception. Stock dividends, strictly speaking, represent capital and
do not constitute income to its
recipient. 63 So that the mere issuance thereof is not yet subject to
income tax 64 as they are nothing but an "enrichment through

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increase in value of capital
investment." 65 As capital, the stock dividends postpone the
realization of profits because the "fund represented by the new stock
has been transferred from surplus to capital and no longer available
for actual distribution." 66 Income in tax law is "an amount of money
coming to a person within a specified time, whether as payment for
services, interest, or profit from investment." 67 It means cash or its
equivalent. 68 It is gain derived and severed from capital, 69 from
labor or from both combined 70 — so that to tax a stock dividend
would be to tax a capital increase rather than the income. 71 In a
loose sense, stock dividends issued by the corporation, are
considered unrealized gain, and cannot be subjected to income tax
until that gain has been realized. Before the realization, stock
dividends are nothing but a representation of an interest in the
corporate properties. 72 As capital, it is not yet subject to income tax.
It should be noted that capital and income are different. Capital is
wealth or fund; whereas income is profit or gain or the flow of
wealth. 73 The determining factor for the imposition of income tax is
whether any gain or profit was derived from a transaction. 74
The Exception
However, if a corporation cancels or redeems stock issued

as a dividend at such time and in such manner as to
make the distribution and cancellation or redemption, in
whole or in part, essentially equivalent to the distribution of
a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be
considered as taxable income to the extent it represents
a distribution of earnings or profits accumulated after
March first, nineteen hundred and thirteen. (Emphasis
supplied).
In a response to the ruling of the American Supreme Court in the

case of Eisner v. Macomber 75 (that pro rata stock dividends are not
taxable income), the exempting clause above quoted was added
because provision corporation found a loophole in the original
provision. They resorted to devious means to circumvent the law and
evade the tax. Corporate earnings would be distributed under the
guise of its initial capitalization by declaring the stock dividends
previously issued and later redeem said dividends by paying cash to
the stockholder. This process of issuance-redemption amounts to a
distribution of taxable cash dividends which was lust delayed so as
to escape the tax. It becomes a convenient technical strategy to
avoid the effects of taxation.
Thus, to plug the loophole — the exempting clause was added. It

provides that the redemption or cancellation of stock dividends,

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depending on the "time" and "manner" it was made, is essentially
equivalent to a distribution of taxable dividends," making the
proceeds thereof "taxable income" "to the extent it represents
profits". The exception was designed to prevent the issuance and
cancellation or redemption of stock dividends, which is
fundamentally not taxable, from being made use of as a device for
the actual distribution of cash dividends, which is taxable. 76 Thus,
the provision had the obvious purpose of preventing a

corporation from avoiding dividend tax treatment by
distributing earnings to its shareholders in two transactions
— a pro rata stock dividend followed by a pro rata
redemption — that would have the same economic
consequences as a simple dividend. 77
Although redemption and cancellation are generally

considered capital transactions, as such. they are not subject
to tax. However, it does not necessarily mean that a
shareholder may not realize a taxable gain from such
transactions. 78 Simply put, depending on the circumstances,
the proceeds of redemption of stock dividends are essentially
distribution of cash dividends, which when paid becomes the
absolute property of the stockholder. Thereafter, the latter
becomes the exclusive owner thereof and can exercise the
freedom of choice. 79 Having realized gain from that
redemption, the income earner cannot escape income tax. 80
As qualified by the phrase "such time and in such manner," the

exception was not intended to characterize as taxable dividend
every distribution of earnings arising from the redemption of stock
dividend. 81 So that, whether the amount distributed in the
redemption should be treated as the equivalent of a "taxable
dividend" is a question of fact, 82 which is determinable on "the basis
of the particular facts of the transaction in question. 83 No decisive
test can be used to determine the application of the exemption
under Section 83(b). The use of the words "such manner" and
"essentially equivalent" negative any idea that a weighted formula
can resolve a crucial issue — Should the distribution be treated as
taxable dividend. 84 On this aspect, American courts developed
certain recognized criteria, which includes the following: 85
1) the presence or absence of real business

purpose,
2) the amount of earnings and profits available

for the declaration of a regular dividends and
the corporation's past record with respect to
the declaration of dividends,

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3) the effect of the distribution, as compared
with the declaration of regular dividend,
4) the lapse of time between issuance and

redemption, 86
5) the presence of a substantial surplus 87 and a

generous supply of cash which invites suspicion
as does a meager policy in relation both to
current earnings and accumulated surplus, 88
REDEMPTION AND CANCELLATION
For the exempting clause of Section, 83(b) to apply, it is

indispensable that: (a) there is redemption or cancellation; (b)
the transaction involves stock dividends and (c) the "time and
manner" of the transaction makes it "essentially equivalent to a
distribution of taxable dividends." Of these, the most important
is the third.
Redemption is repurchase, a reacquisition of stock by a corporation

which issued the stock 89 in exchange for property, whether or not
the acquired stock is cancelled, retired or held in the treasury. 90
Essentially, the corporation gets back some of its stock, distributes
cash or property to the shareholder in payment for the stock, and
continues in business as before. The redemption of stock dividends
previously issued is used as a veil for the constructive distribution of
cash dividends. In the instant case, there is no dispute that ANSCOR
redeemed shares of stocks from a stockholder (Don Andres) twice
(28,000 and 80,000 common shares). But where did the shares
redeemed come from? If its source is the original capital
subscriptions upon establishment of the corporation or from initial
capital investment in an existing enterprise, its redemption to the
concurrent value of acquisition may not invite the application of
Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere
return of capital. On the contrary, if the redeemed shares are from
stock dividend declarations other than as initial capital investment,
the proceeds of the redemption is additional wealth, for it is not
merely a return of capital but a gain thereon.
It is not the stock dividends but the proceeds of its redemption that
may be deemed as taxable dividends. Here, it is undisputed that at
the time of the last redemption, the original common shares owned
by the estate were only 25,247.5 91 This means that from the total of
108,000 shares redeemed from the estate, the balance of 82,752.5
(108,000 less 25,247.5) must have come from stock dividends.
Besides, in the absence of evidence to the contrary, the Tax Code
presumes that every distribution of corporate property, in whole or in
part, is made out of corporate profits 92 such as stock dividends. The
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capital cannot be distributed in the form of redemption of stock
dividends without violating the trust fund doctrine — wherein the
capital stock, property and other assets of the corporation are
regarded as equity in trust for the payment of the corporate
creditors. 93 Once capital, it is always capital. 94 That doctrine was
intended for the protection of corporate creditors. 95
With respect to the third requisite, ANSCOR redeemed stock

dividends issued just 2 to 3 years earlier. The time alone that lapsed
from the issuance to the redemption is not a sufficient indicator to
determine taxability. It is a must to consider the factual
circumstances as to the manner of both the issuance and the
redemption. The "time" element is a factor to show a device to
evade tax and the scheme of cancelling or redeeming the same
shares is a method usually adopted to accomplish the end sought. 96
Was this transaction used as a "continuing plan," "device" or "artifice"
to evade payment of tax? It is necessary to determine the "net
effect" of the transaction between the shareholder-income taxpayer
and the acquiring (redeeming) corporation. 97 The "net effect" test is
not evidence or testimony to be considered; it is rather an inference
to be drawn or a conclusion to be reached. 98 It is also important to
know whether the issuance of stock dividends was dictated by
legitimate business reasons, the presence of which might negate a
tax evasion plan. 99
The issuance of stock dividends and its subsequent redemption must

be separate, distinct, and not related, for the redemption to be
considered a legitimate tax scheme. 100 Redemption cannot be
used as a cloak to distribute corporate earnings. 101 Otherwise, the
apparent intention to avoid tax becomes doubtful as the intention
to evade becomes manifest. It has been ruled that:
[A]n operation with no business or corporate purpose — is

a mere devise which put on the form of a corporate
reorganization as a disguise for concealing its real
character, and the sole object and accomplishment of
which was the consummation of a preconceived plan,
not to reorganize a business or any part of a business, but
to transfer a parcel of corporate shares to a stockholder.
102
Depending on each case, the exempting provision of Sec. 83(b) of

the 1939 Code may not be applicable if the redeemed shares were
issued with bona fide business purpose, 103 which is judged after
each and every step of the transaction have been considered and
the whole transaction does not amount to a tax evasion scheme.

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ANSCOR invoked two reasons to justify the redemptions — (1) the
alleged "filipinization" program and (2) the reduction of foreign
exchange remittances in case cash dividends are declared. The
Court is not concerned with the wisdom of these purposes but on
their relevance to the whole transaction which can be inferred from
the outcome thereof. Again, it is the "net effect rather than the
motives and plans of the taxpayer or his corporation" 104 that is the
fundamental guide in administering Sec. 83(b). This tax provision is
aimed at the result. 105 It also applies even if at the time of the
issuance of the stock dividend, there was no intention to redeem it
as a means of distributing profit or avoiding tax on dividends. 106 The
existence of legitimate business purposes in support of the
redemption of stock dividends is immaterial in income taxation. It has
no relevance in determining "dividend equivalence". 107 Such
purposes may be material only upon the issuance of the stock
dividends. The test of taxability under the exempting clause, when it
provides "such time and manner" as would make the redemption
"essentially equivalent to the distribution of a taxable dividend", is
whether the redemption resulted into a flow of wealth. If no wealth is
realized from the redemption, there may not be a dividend
equivalence treatment. In the metaphor of Eisner v. Macomber,
income is not deemed "realize" until the fruit has fallen or been
plucked from the tree.
The three
Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 108576 January 20, 1999
vs.
THE COURT OF APPEALS, COURT OF TAX APPEALS and A. SORIANO

CORP., respondents.
DECISION
MARTINEZ, J.:

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Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal
of the decision of the Court of Appeals (CA)1 which affirmed the
ruling of the Court of Tax Appeals (CTA) 2 that private respondent A.
Soriano Corporation’s (hereinafter ANSCOR) redemption and
exchange of the stocks of its foreign stockholders cannot be
considered as “essentially equivalent to a distribution of taxable
dividends” under, Section 83(b) of the 1939 Internal Revenue Act. 3
Sometime in the 1930s, Don Andres Soriano, a citizen and resident of

the United States, formed the corporation “A. Soriano Y Cia”,
predecessor of ANSCOR, with a P1,000,000.00 capitalization divided
into 10,000 common shares at a par value of P100/share. ANSCOR is
wholly owned and controlled by the family of Don Andres, who are
all non-resident aliens. 4 In 1937, Don Andres subscribed to 4,963
shares of the 5,000 shares originally issued. 5
On September 12, 1945, ANSCOR’s authorized capital stock was

increased to P2,500,000.00 divided into 25,000 common shares with
the same par value, of the additional 15,000 shares, only 10,000 was
issued which were all subscribed by Don Andres, after the other
stockholders waived in favor of the former their pre-emptive rights to
subscribe to the new issues. 6 This increased his subscription to 14,963
common shares. 7 A month later, 8 Don Andres transferred 1,250
shares each to his two sons, Jose and Andres, Jr., as their initial
investments in ANSCOR. 9 Both sons are foreigners. 10
By 1947, ANSCOR declared stock dividends. Other stock dividend

declarations were made between 1949 and December 20,
1963. 11 On December 30, 1964 Don Andres died. As of that date, the
records revealed that he has a total shareholdings of 185,154
shares 12 — 50,495 of which are original issues and the balance of
134,659 shares as stock dividend declarations. 13 Correspondingly,
one-half of that shareholdings or 92,577 14 shares were transferred to
his wife, Doña Carmen Soriano, as her conjugal share. The other half
formed part of his estate. 15
A day after Don Andres died, ANSCOR increased its capital stock to
P20M 16 and in 1966 further increased it to P30M. 17 In the same year
(December 1966), stock dividends worth 46,290 and 46,287 shares
were respectively received by the Don Andres estate 18 and Doña
Carmen from ANSCOR. Hence, increasing their accumulated
shareholdings to 138,867 and 138,864 19 common shares each. 20
On December 28, 1967, Doña Carmen requested a ruling from the

United States Internal Revenue Service (IRS), inquiring if an exchange
of common with preferred shares may be considered as a tax
avoidance scheme 21under Section 367 of the 1954 U.S. Revenue
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Act. 22 By January 2, 1968, ANSCOR reclassified its existing 300,000
common shares into 150,000 common and 150,000 preferred
shares. 23
In a letter-reply dated February 1968, the IRS opined that the

exchange is only a recapitalization scheme and not tax
avoidance. 24 Consequently, 25 on March 31, 1968 Doña Carmen
exchanged her whole 138,864 common shares for 138,860 of the
newly reclassified preferred shares. The estate of Don Andres in turn,
exchanged 11,140 of its common shares, for the remaining 11,140
preferred shares, thus reducing its (the estate) common shares to
127,727. 26
On June 30, 1968, pursuant to a Board Resolution, ANSCOR

redeemed 28,000 common shares from the Don Andres’ estate. By
November 1968, the Board further increased ANSCOR’s capital stock
to P75M divided into 150,000 preferred shares and 600,000 common
shares. 27 About a year later, ANSCOR again redeemed 80,000
common shares from the Don Andres’ estate, 28 further reducing the
latter’s common shareholdings to 19,727. As stated in the Board
Resolutions, ANSCOR’s business purpose for both redemptions of
stocks is to partially retire said stocks as treasury shares in order to
reduce the company’s foreign exchange remittances in case cash
dividends are declared. 29
In 1973, after examining ANSCOR’s books of account and records,

Revenue examiners issued a report proposing that ANSCOR be
assessed for deficiency withholding tax-at-source, pursuant to
Sections 53 and 54 of the 1939 Revenue Code, 30 for the year 1968
and the second quarter of 1969 based on the transactions of
exchange 31 and redemption of stocks. 31 The Bureau of Internal
Revenue (BIR) made the corresponding assessments despite the
claim of ANSCOR that it availed of the tax amnesty under
Presidential Decree (P.D.) 23 32 which were amended by P.D.’s 67
and 157. 33 However, petitioner ruled that the invoked decrees do
not cover Sections 53 and 54 in relation to Article 83(b) of the 1939
Revenue Act under which ANSCOR was assessed. 34 ANSCOR’s
subsequent protest on the assessments was denied in 1983 by
petitioner. 35
Subsequently, ANSCOR filed a petition for review with the CTA

assailing the tax assessments on the redemptions and exchange of
stocks. In its decision, the Tax Court reversed petitioner’s ruling, after
finding sufficient evidence to overcome the prima facie correctness
of the questioned assessments. 36 In a petition for review the CA as
mentioned, affirmed the ruling of the CTA. 37 Hence, this petition.

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The bone of contention is the interpretation and application of
Section 83(b) of the 1939 Revenue Act 38 which provides:
Sec. 83. Distribution of dividends or assets by corporations. —
(b) Stock dividends — A stock dividend representing the transfer of

surplus to capital account shall not be subject to tax. However, if a
corporation cancels or redeems stock issued as a dividend at such
time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially equivalent
to the distribution of a taxable dividend, the amount so distributed in
redemption or cancellation of the stock shall be considered
as taxable income to the extent it represents a distribution of
earnings or profits accumulated after March first, nineteen hundred
and thirteen. (Emphasis supplied)
Specifically, the issue is whether ANSCOR’s redemption of stocks

from its stockholder as well as the exchange of common with
preferred shares can be considered as “essentially equivalent to the
distribution of taxable dividend” making the proceeds thereof
taxable under the provisions of the above-quoted law.
Petitioner contends that the exchange transaction is tantamount to

“cancellation” under Section 83(b) making the proceeds thereof
taxable. It also argues that the Section applies to stock dividends
which is the bulk of stocks that ANSCOR redeemed. Further,
petitioner claims that under the “net effect test,” the estate of Don
Andres gained from the redemption. Accordingly, it was the duty of
ANSCOR to withhold the tax-at-source arising from the two
transactions, pursuant to Section 53 and 54 of the 1939 Revenue
Act. 39
ANSCOR, however, avers that it has no duty to withhold any tax

either from the Don Andres estate or from Doña Carmen based on
the two transactions, because the same were done for legitimate
business purposes which are (a) to reduce its foreign exchange
remittances in the event the company would declare cash
dividends, 40 and to (b) subsequently “filipinized” ownership of
ANSCOR, as allegedly, envisioned by Don Andres. 41 It likewise
invoked the amnesty provisions of P.D. 67.
We must emphasize that the application of Sec. 83(b) depends on

the special factual circumstances of each case.42 The findings of
facts of a special court (CTA) exercising particular expertise on the
subject of tax, generally binds this Court, 43 considering that it is
substantially similar to the findings of the CA which is the final arbiter
of questions of facts. 44 The issue in this case does not only deal with
facts but whether the law applies to a particular set of facts.

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Moreover, this Court is not necessarily bound by the lower courts’
conclusions of law drawn from such facts. 45
AMNESTY:
We will deal first with the issue of tax amnesty. Section 1 of P.D.
67 46 provides:
1. In all cases of voluntary disclosures of previously untaxed income

and/or wealth such as earnings, receipts, gifts, bequests or any other
acquisitions from any source whatsoever which are taxable under
the National Internal Revenue Code, as amended, realized here or
abroad by any taxpayer, natural or judicial; the collection of all
internal revenue taxes including the increments or penalties or
account of non-payment as well as all civil, criminal or administrative
liabilities arising from or incident to such disclosures under the
National Internal Revenue Code, the Revised Penal Code, the Anti-
Graft and Corrupt Practices Act, the Revised Administrative Code,
the Civil Service laws and regulations, laws and regulations on
Immigration and Deportation, or any other applicable law or
proclamation, are hereby condoned and, in lieu thereof, a tax of
ten (10%) per centum on such previously untaxed income or wealth,
is hereby imposed, subject to the following conditions: (conditions
omitted) [Emphasis supplied].
The decree condones “the collection of all internal revenue taxes

including the increments or penalties or account of non-payment as
well as all civil, criminal or administrative liable arising from or
incident to” (voluntary) disclosures under the NIRC of previously
untaxed income and/or wealth “realized here or abroad by any
taxpayer, natural or juridical.”
May the withholding agent, in such capacity, be deemed a

taxpayer for it to avail of the amnesty? An income taxpayer covers
all persons who derive taxable income. 47 ANSCOR was assessed by
petitioner for deficiency withholding tax under Section 53 and 54 of
the 1939 Code. As such, it is being held liable in its capacity as a
withholding agent and not its personality as a taxpayer.
In the operation of the withholding tax system, the withholding agent

is the payor, a separate entity acting no more than an agent of the
government for the collection of the tax 48 in order to ensure its
payments; 49 the payer is the taxpayer — he is the person subject to
tax impose by law; 50 and the payee is the taxing authority. 51 In
other words, the withholding agent is merely a tax collector, not a
taxpayer. Under the withholding system, however, the agent-payor
becomes a payee by fiction of law. His (agent) liability is direct and
independent from the taxpayer, 52 because the income tax is still
impose on and due from the latter. The agent is not liable for the tax
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as no wealth flowed into him — he earned no income. The Tax Code
only makes the agent personally liable for the tax 53 arising from the
breach of its legal duty to withhold as distinguish from its duty to pay
tax since:
the government’s cause of action against the withholding is not for

the collection of income tax, but for the enforcement of the
withholding provision of Section 53 of the Tax Code, compliance
with which is imposed on the withholding agent and not upon the
taxpayer. 54
Not being a taxpayer, a withholding agent, like ANSCOR in this

transaction is not protected by the amnesty under the decree.
Codal provisions on withholding tax are mandatory and must be

complied with by the withholding agent. 55 The taxpayer should not
answer for the non-performance by the withholding agent of its legal
duty to withhold unless there is collusion or bad faith. The former
could not be deemed to have evaded the tax had the withholding
agent performed its duty. This could be the situation for which the
amnesty decree was intended. Thus, to curtail tax evasion and give
tax evaders a chance to reform, 56 it was deemed administratively
feasible to grant tax amnesty in certain instances. In addition, a “tax
amnesty, much like a tax exemption, is never favored nor presumed
in law and if granted by a statute, the term of the amnesty like that
of a tax exemption must be construed strictly against the taxpayer
and liberally in favor of the taxing authority. 57 The rule on strictissimi
juris equally applies. 58 So that, any doubt in the application of an
amnesty law/decree should be resolved in favor of the taxing
authority.
Furthermore, ANSCOR’s claim of amnesty cannot prosper. The

implementing rules of P.D. 370 which expanded amnesty on
previously untaxed income under P.D. 23 is very explicit, to wit:
Sec. 4. Cases not covered by amnesty. — The following cases are

not covered by the amnesty subject of these regulations:
xxx xxx xxx
(2) Tax liabilities with or without assessments, on withholding tax at

source provided under Section 53 and 54 of the National Internal
Revenue Code, as amended; 59
ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax

Code. Thus, by specific provision of law, it is not covered by the
amnesty.
TAX ON STOCK DIVIDENDS

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General Rule
Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of
the U.S. Revenue Code of 1928. 60 It laid down the general rule
known as the proportionate test 61 wherein stock dividends once
issued form part of the capital and, thus, subject to income
tax. 62 Specifically, the general rule states that:
A stock dividend representing the transfer of surplus to capital

account shall not be subject to tax.
Having been derived from a foreign law, resort to the jurisprudence

of its origin may shed light. Under the US Revenue Code, this
provision originally referred to “stock dividends” only, without any
exception. Stock dividends, strictly speaking, represent capital and
do not constitute income to its recipient. 63 So that the mere issuance
thereof is not yet subject to income tax 64 as they are nothing but an
“enrichment through increase in value of capital
investment.” 65 As capital, the stock dividends postpone the
realization of profits because the “fund represented by the new
stock has been transferred from surplus to capital and no longer
available for actual distribution.” 66 Income in tax law is “an amount
of money coming to a person within a specified time, whether as
payment for services, interest, or profit from investment.” 67 It means
cash or its equivalent. 68 It is gain derived and severed from
capital, 69 from labor or from both combined 70 — so that to tax a
stock dividend would be to tax a capital increase rather than the
income. 71 In a loose sense, stock dividends issued by the
corporation, are considered unrealized gain, and cannot be
subjected to income tax until that gain has been realized. Before the
realization, stock dividends are nothing but a representation of an
interest in the corporate properties. 72 As capital, it is not yet subject
to income tax. It should be noted that capital and income are
different. Capital is wealth or fund; whereas income is profit or gain
or the flow of wealth. 73 The determining factor for the imposition of
income tax is whether any gain or profit was derived from a
transaction. 74
The Exception
However, if a corporation cancels or redeems stock issued as

a dividend at such time and in such manner as to make
the distribution and cancellation or redemption, in whole or in part,
essentially equivalent to the distribution of a taxable dividend, the
amount so distributed in redemption or cancellation of the stock
shall be considered as taxable income to the extent it represents a
distribution of earnings or profits accumulated after March first,
nineteen hundred and thirteen. (Emphasis supplied).

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In a response to the ruling of the American Supreme Court in the
case of Eisner v. Macomber 75 (that pro rata stock dividends are not
taxable income), the exempting clause above quoted was added
because provision corporation found a loophole in the original
provision. They resorted to devious means to circumvent the law and
evade the tax. Corporate earnings would be distributed under the
guise of its initial capitalization by declaring the stock dividends
previously issued and later redeem said dividends by paying cash to
the stockholder. This process of issuance-redemption amounts to a
distribution of taxable cash dividends which was lust delayed so as
to escape the tax. It becomes a convenient technical strategy to
avoid the effects of taxation.
Thus, to plug the loophole — the exempting clause was added. It

provides that the redemption or cancellation of stock dividends,
depending on the “time” and “manner” it was made, is essentially
equivalent to a distribution of taxable dividends,” making the
proceeds thereof “taxable income” “to the extent it represents
profits”. The exception was designed to prevent the issuance and
cancellation or redemption of stock dividends, which is
fundamentally not taxable, from being made use of as a device for
the actual distribution of cash dividends, which is taxable. 76 Thus,
the provision had the obvious purpose of preventing a corporation

from avoiding dividend tax treatment by distributing earnings to its
shareholders in two transactions — a pro rata stock dividend
followed by a pro rata redemption — that would have the same
economic consequences as a simple dividend. 77
Although redemption and cancellation are generally considered

capital transactions, as such. they are not subject to tax. However, it
does not necessarily mean that a shareholder may not realize a
taxable gain from such transactions. 78 Simply put, depending on the
circumstances, the proceeds of redemption of stock dividends are
essentially distribution of cash dividends, which when paid becomes
the absolute property of the stockholder. Thereafter, the latter
becomes the exclusive owner thereof and can exercise the freedom
of choice. 79 Having realized gain from that redemption, the income
earner cannot escape income tax. 80
As qualified by the phrase “such time and in such manner,” the

exception was not intended to characterize as taxable dividend
every distribution of earnings arising from the redemption of stock
dividend. 81 So that, whether the amount distributed in the
redemption should be treated as the equivalent of a “taxable
dividend” is a question of fact, 82 which is determinable on “the basis
of the particular facts of the transaction in question. 83 No decisive
test can be used to determine the application of the exemption

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under Section 83(b). The use of the words “such manner” and
“essentially equivalent” negative any idea that a weighted formula
can resolve a crucial issue — Should the distribution be treated as
taxable dividend. 84 On this aspect, American courts developed
certain recognized criteria, which includes the following: 85
1) the presence or absence of real business purpose,
2) the amount of earnings and profits available for the declaration of

a regular dividends and the corporation’s past record with respect
to the declaration of dividends,
3) the effect of the distribution, as compared with the declaration of

regular dividend,
4) the lapse of time between issuance and redemption, 86
5) the presence of a substantial surplus 87 and a generous supply of

cash which invites suspicion as does a meager policy in relation both
to current earnings and accumulated surplus,88
REDEMPTION AND CANCELLATION
For the exempting clause of Section, 83(b) to apply, it is

indispensable that: (a) there is redemption or cancellation; (b) the
transaction involves stock dividends and (c) the “time and manner”
of the transaction makes it “essentially equivalent to a distribution of
taxable dividends.” Of these, the most important is the third.
Redemption is repurchase, a reacquisition of stock by a corporation

which issued the stock 89 in exchange for property, whether or not
the acquired stock is cancelled, retired or held in the
treasury. 90 Essentially, the corporation gets back some of its stock,
distributes cash or property to the shareholder in payment for the
stock, and continues in business as before. The redemption of stock
dividends previously issued is used as a veil for the constructive
distribution of cash dividends. In the instant case, there is no dispute
that ANSCOR redeemed shares of stocks from a stockholder (Don
Andres) twice (28,000 and 80,000 common shares). But where did
the shares redeemed come from? If its source is the original capital
subscriptions upon establishment of the corporation or from initial
capital investment in an existing enterprise, its redemption to the
concurrent value of acquisition may not invite the application of
Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere
return of capital. On the contrary, if the redeemed shares are from
stock dividend declarations other than as initial capital investment,
the proceeds of the redemption is additional wealth, for it is not
merely a return of capital but a gain thereon.

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It is not the stock dividends but the proceeds of its redemption that
may be deemed as taxable dividends. Here, it is undisputed that at
the time of the last redemption, the original common shares owned
by the estate were only 25,247.5 91 This means that from the total of
108,000 shares redeemed from the estate, the balance of 82,752.5
(108,000 less 25,247.5) must have come from stock dividends.
Besides, in the absence of evidence to the contrary, the Tax Code
presumes that every distribution of corporate property, in whole or in
part, is made out of corporate profits 92 such as stock dividends. The
capital cannot be distributed in the form of redemption of stock
dividends without violating the trust fund doctrine — wherein the
capital stock, property and other assets of the corporation are
creditors. 93 Once capital, it is always capital. 94 That doctrine was
intended for the protection of corporate creditors. 95
With respect to the third requisite, ANSCOR redeemed stock

dividends issued just 2 to 3 years earlier. The time alone that lapsed
from the issuance to the redemption is not a sufficient indicator to
determine taxability. It is a must to consider the factual
circumstances as to the manner of both the issuance and the
redemption. The “time” element is a factor to show a device to
evade tax and the scheme of cancelling or redeeming the same
shares is a method usually adopted to accomplish the end
sought. 96 Was this transaction used as a “continuing plan,” “device”
or “artifice” to evade payment of tax? It is necessary to determine
the “net effect” of the transaction between the shareholder-income
taxpayer and the acquiring (redeeming) corporation. 97 The “net
effect” test is not evidence or testimony to be considered; it is rather
an inference to be drawn or a conclusion to be reached.98 It is also
important to know whether the issuance of stock dividends was
dictated by legitimate business reasons, the presence of which
might negate a tax evasion plan. 99
The issuance of stock dividends and its subsequent redemption must

be separate, distinct, and not related, for the redemption to be
considered a legitimate tax scheme. 100 Redemption cannot be
used as a cloak to distribute corporate earnings. 101 Otherwise, the
apparent intention to avoid tax becomes doubtful as the intention
to evade becomes manifest. It has been ruled that:
[A]n operation with no business or corporate purpose — is a mere

devise which put on the form of a corporate reorganization as a
disguise for concealing its real character, and the sole object and
accomplishment of which was the consummation of a
preconceived plan, not to reorganize a business or any part of a
business, but to transfer a parcel of corporate shares to a
stockholder. 102

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Depending on each case, the exempting provision of Sec. 83(b) of
the 1939 Code may not be applicable if the redeemed shares were
issued with bona fide business purpose, 103 which is judged after
each and every step of the transaction have been considered and
the whole transaction does not amount to a tax evasion scheme.
ANSCOR invoked two reasons to justify the redemptions — (1) the

alleged “filipinization” program and (2) the reduction of foreign
exchange remittances in case cash dividends are declared. The
Court is not concerned with the wisdom of these purposes but on
their relevance to the whole transaction which can be inferred from
the outcome thereof. Again, it is the “net effect rather than the
motives and plans of the taxpayer or his corporation”104 that is the
fundamental guide in administering Sec. 83(b). This tax provision is
aimed at the result. 105 It also applies even if at the time of the
issuance of the stock dividend, there was no intention to redeem it
as a means of distributing profit or avoiding tax on dividends. 106 The
existence of legitimate business purposes in support of the
redemption of stock dividends is immaterial in income taxation. It has
no relevance in determining “dividend equivalence”. 107 Such
purposes may be material only upon the issuance of the stock
dividends. The test of taxability under the exempting clause, when it
provides “such time and manner” as would make the redemption
“essentially equivalent to the distribution of a taxable dividend”, is
whether the redemption resulted into a flow of wealth. If no wealth is
realized from the redemption, there may not be a dividend
equivalence treatment. In the metaphor of Eisner v. Macomber,
income is not deemed “realize” until the fruit has fallen or been
plucked from the tree.
The three elements in the imposition of income tax are: (1) there
must be gain or and profit, (2) that the gain or profit is realized or
received, actually or constructively, 108 and (3) it is not exempted by
law or treaty from income tax. Any business purpose as to why or
how the income was earned by the taxpayer is not a requirement.
Income tax is assessed on income received from any property,
activity or service that produces the income because the Tax Code
stands as an indifferent neutral party on the matter of where income
comes from. 109
As stated above, the test of taxability under the exempting clause of

Section 83(b) is, whether income was realized through the
redemption of stock dividends. The redemption converts into money
the stock dividends which become a realized profit or gain and
consequently, the stockholder’s separate property. 110 Profits derived
from the capital invested cannot escape income tax. As realized
income, the proceeds of the redeemed stock dividends can be
reached by income taxation regardless of the existence of any

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business purpose for the redemption. Otherwise, to rule that the said
proceeds are exempt from income tax when the redemption is
supported by legitimate business reasons would defeat the very
purpose of imposing tax on income. Such argument would open the
door for income earners not to pay tax so long as the person from
whom the income was derived has legitimate business reasons. In
other words, the payment of tax under the exempting clause of
Section 83(b) would be made to depend not on the income of the
taxpayer, but on the business purposes of a third party (the
corporation herein) from whom the income was earned. This is
absurd, illogical and impractical considering that the Bureau of
Internal Revenue (BIR) would be pestered with instances in
determining the legitimacy of business reasons that every income
earner may interposed. It is not administratively feasible and cannot
therefore be allowed.
The ruling in the American cases cited and relied upon by ANSCOR
that “the redeemed shares are the equivalent of dividend only if the
shares were not issued for genuine business purposes”, 111 or the
“redeemed shares have been issued by a corporation bona
fide” 112 bears no relevance in determining the non-taxability of the
proceeds of redemption ANSCOR, relying heavily and applying said
cases, argued that so long as the redemption is supported by valid
corporate purposes the proceeds are not subject to tax. 113 The
adoption by the courts below 114 of such argument is misleading if
not misplaced. A review of the cited American cases shows that the
presence or absence of “genuine business purposes” may be
material with respect to the issuance or declaration of stock
dividends but not on its subsequent redemption. The issuance and
the redemption of stocks are two different transactions. Although the
existence of legitimate corporate purposes may justify a
corporation’s acquisition of its own shares under Section 41 of the
Corporation Code, 115 such purposes cannot excuse the stockholder
from the effects of taxation arising from the redemption. If the
issuance of stock dividends is part of a tax evasion plan and thus,
without legitimate business reasons, the redemption becomes
suspicious which exempting clause. The substance of the whole
transaction, not its form, usually controls the tax consequences.116
The two purposes invoked by ANSCOR, under the facts of this case
are no excuse for its tax liability. First, the alleged “filipinization” plan
cannot be considered legitimate as it was not implemented until the
BIR started making assessments on the proceeds of the redemption.
Such corporate plan was not stated in nor supported by any Board
Resolution but a mere afterthought interposed by the counsel of
ANSCOR. Being a separate entity, the corporation can act only
through its Board of Directors. 117 The Board Resolutions authorizing
the redemptions state only one purpose — reduction of foreign

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exchange remittances in case cash dividends are declared. Not
even this purpose can be given credence. Records show that
despite the existence of enormous corporate profits no cash
dividend was ever declared by ANSCOR from 1945 until the BIR
started making assessments in the early 1970’s. Although a
corporation under certain exceptions, has the prerogative when to
issue dividends, yet when no cash dividends was issued for about
three decades, this circumstance negates the legitimacy of
ANSCOR’s alleged purposes. Moreover, to issue stock dividends is to
increase the shareholdings of ANSCOR’s foreign stockholders
contrary to its “filipinization” plan. This would also increase rather
than reduce their need for foreign exchange remittances in case of
cash dividend declaration, considering that ANSCOR is a family
corporation where the majority shares at the time of redemptions
were held by Don Andres’ foreign heirs.
Secondly, assuming arguendo, that those business purposes are

legitimate, the same cannot be a valid excuse for the imposition of
tax. Otherwise, the taxpayer’s liability to pay income tax would be
made to depend upon a third person who did not earn the income
being taxed. Furthermore, even if the said purposes support the
redemption and justify the issuance of stock dividends, the same has
no bearing whatsoever on the imposition of the tax herein assessed
because the proceeds of the redemption are deemed taxable
dividends since it was shown that income was generated therefrom.
Thirdly, ANSCOR argued that to treat as “taxable dividend” the

proceeds of the redeemed stock dividends would be to impose on
such stock an undisclosed lien and would be extremely unfair to
intervening purchase, i.e. those who buys the stock dividends after
their issuance. 118 Such argument, however, bears no relevance in
this case as no intervening buyer is involved. And even if there is an
intervening buyer, it is necessary to look into the factual milieu of the
case if income was realized from the transaction. Again, we reiterate
that the dividend equivalence test depends on such “time and
manner” of the transaction and its net effect. The undisclosed
lien119 may be unfair to a subsequent stock buyer who has no capital
interest in the company. But the unfairness may not be true to an
original subscriber like Don Andres, who holds stock dividends as
gains from his investments. The subsequent buyer who buys stock
dividends is investing capital. It just so happen that what he bought is
stock dividends. The effect of its (stock dividends) redemption from
that subsequent buyer is merely to return his capital subscription,
which is income if redeemed from the original subscriber.
After considering the manner and the circumstances by which the

issuance and redemption of stock dividends were made, there is no
other conclusion but that the proceeds thereof are essentially

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considered equivalent to a distribution of taxable dividends. As
“taxable dividend” under Section 83(b), it is part of the “entire
income” subject to tax under Section 22 in relation to Section
21 120 of the 1939 Code. Moreover, under Section 29(a) of said Code,
dividends are included in “gross income”. As income, it is subject to
income tax which is required to be withheld at source. The 1997 Tax
Code may have altered the situation but it does not change this
disposition.
EXCHANGE OF COMMON WITH PREFERRED SHARES 121
Exchange is an act of taking or giving one thing for another

involving 122 reciprocal transfer 123 and is generally considered as a
taxable transaction. The exchange of common stocks with preferred
stocks, or preferred for common or a combination of either for both,
may not produce a recognized gain or loss, so long as the provisions
of Section 83(b) is not applicable. This is true in a trade between two
(2) persons as well as a trade between a stockholder and a
corporation. In general, this trade must be parts of merger, transfer
to controlled corporation, corporate acquisitions or corporate
reorganizations. No taxable gain or loss may be recognized on
exchange of property, stock or securities related to
reorganizations. 124
Both the Tax Court and the Court of Appeals found that ANSCOR
reclassified its shares into common and preferred, and that parts of
the common shares of the Don Andres estate and all of Doña
Carmen’s shares were exchanged for the whole 150.000 preferred
shares. Thereafter, both the Don Andres estate and Doña Carmen
remained as corporate subscribers except that their subscriptions
now include preferred shares. There was no change in their
proportional interest after the exchange. There was no cash flow.
Both stocks had the same par value. Under the facts herein, any
difference in their market value would be immaterial at the time of
exchange because no income is yet realized — it was a mere
corporate paper transaction. It would have been different, if the
exchange transaction resulted into a flow of wealth, in which case
income tax may be imposed. 125
Reclassification of shares does not always bring any substantial

alteration in the subscriber’s proportional interest. But the exchange
is different — there would be a shifting of the balance of stock
features, like priority in dividend declarations or absence of voting
rights. Yet neither the reclassification nor exchange per se, yields
realize income for tax purposes. A common stock represents the
residual ownership interest in the corporation. It is a basic class of
stock ordinarily and usually issued without extraordinary rights or
privileges and entitles the shareholder to a pro rata division of

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profits. 126 Preferred stocks are those which entitle the shareholder to
some priority on dividends and asset distribution. 127
Both shares are part of the corporation’s capital stock. Both

stockholders are no different from ordinary investors who take on the
same investment risks. Preferred and common shareholders
participate in the same venture, willing to share in the profits and
losses of the enterprise. 128 Moreover, under the doctrine of equality
of shares — all stocks issued by the corporation are presumed equal
with the same privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences. 129
In this case, the exchange of shares, without more, produces no

realized income to the subscriber. There is only a modification of the
subscriber’s rights and privileges — which is not a flow of wealth for
tax purposes. The issue of taxable dividend may arise only once a
subscriber disposes of his entire interest and not when there is still
maintenance of proprietary interest. 130
WHEREFORE, premises considered, the decision of the Court of

Appeals is MODIFIED in that ANSCOR’s redemption of 82,752.5 stock
dividends is herein considered as essentially equivalent to a
distribution of taxable dividends for which it is LIABLE for the
withholding tax-at-source. The decision is AFFIRMED in all other
respects.
SO ORDERED.
Davide, Jr., C.J., Melo, Kapunan and Pardo, JJ., concur.
READ CASE DIGEST HERE.
Footnotes
1 Court of Appeals decision, promulgated on January 15, 1993,

penned by Justice O. Herrera with Justices Montoya and
Montenegro, concurring. The dispositive portion of which reads:
WHEREFORE, finding no such abuse or improvident exercise of

authority or discretion, the decision of the Court of Tax Appeals must
be as it is hereby AFFIRMED. (Rollo, p. 121; CA Decision, p. 18)
2 Decision in CTA Case No. 3710, dated July 4, 1991 penned by

Associate Judge Roaquin with Judges A. Reyes and E. Acosta,
concurring. (Annex “A”; Rollo, pp. 61-101, CTA Decision, p. 41). The

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WHEREFORE, premises considered, the presumption of prima
facie correctness of the assessments issued by the respondent
having been overcome by sufficient and convincing evidence
presented by petitioner, the decision appealed from is hereby
reversed.
Without pronouncement as to costs.
3 Commonwealth Act 466, as amended, otherwise known as the Tax

Code of 1939, Section 83(b) was renumbered to Sec. 66(b) by P.D.
1158, as amended, also known as the 1977 NIRC (took effect June 3,
1977) with further codification under the NIRC of 1986 (Sec. 42, P.D.
1994). Said provision was later renumbered to Sec. 73(b) by R.A. 8424
or the “Tax Reform Act of 1997” (took effect January 1, 1998) which
provides exactly the same rule.
4 CTA Decision, p. 2; Rollo, p. 62.
5 The total original subscription of Don Andres was 4,971 shares

including the 8 shares of his 4 nominees with 2 shares each. (Rollo, p.
63).
6 Ibid.
7 According to the CA, the total shareholdings of Don Andres after

the new shares were issued is 15,471 common shares. (Rollo, p. 105).
8 Petitioner claims the transfer was made on October 27, 1947.

(Memorandum of Petitioner, p. 3).
9 Rollo, pp. 63-64.
10 Petition, filed March 10, 1993, p. 5; Rollo, p. 13; Petitioner’s

Memorandum, p. 3.
11 A 100% dividend was declared in 1947; 12,590 in 1949; 15,108 in

1950 (Rollo, p. 64).
12 This figure includes the qualifying shares of the nominees of Don

Andres.
13 Rollo, p. 65.
14 Rollo, pp. 15,65.
15 Special Proceedings for the settlement of the estate of Don

Andres was filed before the then Court of First Instance (CFI) of Rizal
and was terminated on November, 1974, (Rollo, pp. 66-67).
16 Rollo, pp. 66, 105.

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17 Rollo, pp. 67, 105.
18 Reference to the “Don Andres Estate” is only for the purpose of

identity of the personalities involved.
19 Rollo, pp. 68, 106.
20 The CA ruled that the shareholdings of both the Don Andres

estate and Doña Carmen each consisted of 22,756 original common
shares and the rest as accumulated stock dividends (Rollo, p. 106).
However, upon the death of Don Andres, his estate supposedly
received 25,247.5 common shares which is one-half of the 50,495
original common shares.
21 Tax avoidance as distinguish from tax evasion.
22 Rollo, p. 68.
23 Annex “G”, Folder I, CTA Records, pp. 89-90; Rollo, pp. 69, 106.
24 Rollo, pp. 68-69.
25 ANSCOR’s Articles of Incorporation was amended by reclassifying

a certain number of the common shares as preferred shares. (CTA
Decision, p. 9; Rollo, p. 69).
26 Rollo, pp. 69, 106.
27 Rollo, p. 70.
28 Rollo, pp. 70-71, 106.
29 Rollo, p. 70.
30 Sec. 53. Withholding of tax at source. — . . . (b) Nonresident aliens.

— All persons, corporations and general copartnerships (compañias
colectivas), in whatever capacity acting, including lessees or
mortgagors of real or personal property, trustees acting in any trust
capacity, executors, administrators, receivers, conservators,
fiduciaries, employers, and all officers and employees of the
Government of the Philippines having the control, receipt, custody,
disposal, or payment of interested, dividends, rents, salaries, wages,
premiums, annuities, compensation, remunerations, emoluments,
other fixed or determinable annual or periodical gains, profits, and
income of any non-resident alien individual, not engaged in trade or
business within the Philippines and not having any office or place of
business therein, shall (except in the cases provided for in subsection
(a) of this section) deduct and withhold from such annual or
periodical gains, profits, and income a tax equal to twenty per
centum thereof: Provided, That no such deduction or withholding

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shall be required in the case of dividends paid by a foreign
corporation unless (1) such corporation is engaged in trade or
business within the Philippines and (2) more than eighty-five per
centum of the gross income of such corporation for the three-year
period ending with the close of its taxable year preceding the
declaration of such dividends (or for such part of such period as the
corporation has been in existence) was derived from sources within
the Philippines as determined under the provisions of section thirty-
seven: Provided, further, That the Commissioner of Internal Revenue
may authorize such tax to be deducted and withheld from the
interest upon any securities the owners of which are not known to
the withholding agent. (As amended by Sec. 9 Rep. Act No. 2343).
(c) Return and payment. — Every person required to deduct and

withhold any tax under this section shall make the return thereof, in
duplicate, on or before the fifteenth day of April of each year, and,
on or before the time fixed by law for the payment of the tax, shall
pay the amount withheld to the officer of the Government of the
Philippines authorized to receive it. Every such person is made
personally liable for such tax, and is indemnified against the claims
and demands of any persons for the amount of any payments made
in accordance with the provision of this section. (As amended by
Sec. 9, Rep. Act No. 2343).
(d) Income of recipient. — Income upon which any tax is required to

be withheld at the source under this section shall be included in the
return of the recipient of such income, but any amount of tax so
withheld shall be credited against the amount of income tax as
computed in such return and the amount, if any, by which the
income tax collected at source exceeds the tax due on the return
shall be refunded subject to the provision of section 309.
Sec. 54. Payment of corporation income tax at source. — In the case

of foreign corporations subject to taxation under this Title not
engaged in trade or business within the Philippines and not having
any office or place of business therein, there shall be deducted and
withheld at the source in the same manner and upon the same
items as is provided in section fifty-three a tax equal to thirty per
centum thereof, and such tax shall be returned and paid in the
same manner and subject to the same conditions as provided in
that section; Provided, however, That no such deduction or
withholding shall be required in the case of reinsurance premiums
ceded to foreign insurance corporations not engaged in trade or
business in the Philippines and having no office or place of business
in the Philippines and having no officer or place of business therein.
(As amended by Sec. 10, R.A. No. 2343, and Sec. 2, R.A. No. 3825).

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31 For the 1968 and the 1969 deficiency withholding tax, private
respondent was assessed P3,428,613.90 and P2,950,000.00,
respectively or for a total of P6,378,613.50. Certain documents from
the records shows that the 1969 assessments were reduced. (Folder I,
CTA records in case no. 3710, p. 289; Rollo, pp. 71-72, 106.)
32 Rollo, pp. 72, 107.
33 P.D. 23 dated October 16, 1972 is entitled “Proclaiming a Tax

Amnesty Subject to Certain Exceptions.”
34 Rollo, p. 72.
35 Rollo, p. 24.
36 CTA Decision, p. 41; Rollo, p. 101.
37 CA Decision, p. 18; Rollo, p. 121.
38 The original provision was retained in R.A. 8424 except that the
reference to the year was deleted.
39 Petitioner’s Reply, pp. 2, 10.
40 Board of Directors Resolutions dated June 15, 1968 and October

30, 1969 (BIR Records, Folder III, PP. 12-13; 7-8).
41 Comment, pp. 13-14; Rejoinder, pp. 4-5.
42 Gloninger v. Commissioner, 339 F2d 211; Blotch v. U.S. 261 F. Supp.

597, 386 F2d 839; John P. Elton v. Commissioner, 47 B.T.A. 111.
43 Philippine Refining Company v. CA, 326 Phil. 680, (1996);

Commissioner of Internal Revenue v. CA 312 Phil., 337; Commissioner
of Internal Revenue v. Philippine American Life Insurance Co., 244
SCRA 446 (1995); CIR v. Administratix of the Estate of Echarri, 67 Phil.
502.
44 Binalay v. Manalo, 195 SCRA 374, 380 citing Sese v. IAC, 152 SCRA
585.
45 See Manila Bay Club Corp. v. CA , 62 SCAD 435; 315 Phil. 807
(1995); Pilar Development Corporation v. IAC, 146 SCRA 215 (1986).
46 Promulgated November 24, 1972.
47 Tan v. Del Rosario, 55 SCAD 831 (1994).
48 Phil. Guaranty Co., Inc. v. C.I.R., 15 SCRA 1 (1965).
49 Bank of America v. CA, 53 SCAD 406, 413 (1994).

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50 Sec. 20(n), 1986 Tax Code.
51 The pronouncement of the Court in the case of Bank of

America, supra that the payee is the taxpayer should not be
confused with the payee in the case at bar. Therein, the payee
referred to is the foreign entity recipient of profit remitted by a local
company. Herein, the payee referred to is the party who received
money as tax.
52 Commissioner of Internal Revenue v. Procter and Gamble, 204

SCRA 377 (1991).
53 Phil. Guaranty v. CIR, supra. See also Sec. 53 (c) 1939 Tax Code,
as amended by R.A. No. 2343 which provided in part that “. . . . Every
such person is made personally, liable for such tax . . . .”
54 See Commissioner of Internal Revenue v. Malayan Insurance, 129

Phil. 165, 170 (1967) citing Jai Alai v. Republic, L-17462, May 29, 1967;
1967 B PHILD 460.
55 Ibid.
56 The Whereas clauses of P.D. No. 23 provides in part:
xxx xxx xxx
WHEREAS, it is the policy of the Government to give tax evaders a

chance to reform and be a part of the New Society with a clean
slate;
WHEREAS, tax evaders who wish to relent and are willing to reform
may be reluctant to disclose their liability for income taxes because
of the criminal and civil penalties attendant to tax evasion;
xxx xxx xxx
57 People v. Castañeda, Jr., 165 SCRA 327, 341 (1988) citing E.

Rodriguez Inc. v. The Collector of Internal Revenue, 139 Phil. 354
(1969) and Commissioner of Internal Revenue v. A.D. Guerrero, 128
Phil. 197 (1967).
58 E. Rodriguez Inc. v. Collector of Internal Revenue, supra,: Province

of Tarlac vs. Alcantara, 216 SCRA 790; See also La Carlota Sugar
Central v. Jimenez, 112 Phil. 232 (1961) cited in Phil. Guaranty v.
CIR, supra.
59 Sec. 4 of Revenue Regulations No. 2-74, dated January 14, 1974

(70, O.G. 1472, February 25, 1974).
60 Later known as the U.S. Revenue Code of 1939.

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61 Michie’s Federal Tax Handbook, 1967 ed., p. 196.
62 Under Section 21(c)(2) of the 1986 NIRC, as amended, dividends

are subject to a tax of either 0% as of January 1, 1989 or to the
schedule under Section 22(a)(2) or not subject to tax under Section
24(e)(4) and 24(a)(6)D. Under the Tax Reform Act of 1997, dividends
are subject to a final tax.
63 Pasados v. Warner, 279 US 340, 73 L ed 729 (1929); See also Eisner

v. Macomber, 64 L ed 521 at 525, and Towne v. Eisner, 245 US 418,
Gibbons v. Mahon, 136 U.S. 549, 560, 34 L ed 525, 527.
64 Fisher v. Trinidad, 43 Phil. 973, 974.
65 Towne v. Eisner.
66 Fisher v. Trinidad, supra.; Eisner v. Macomber, supra at 530.
67 Conwi v. CTA, 213 SCRA 83 (1992); Fisher v. Trinidad, supra.
68 Ibid.
69 The “gain derived from capital” is “not a gain accruing to capital,

nor a growth or increment of value in the investment, but a gain, a
profit, something of exchangeable value proceeding from the
property, severed or drawn by the claimant for separate use, benefit
and disposal.” U.S. v. Phellis, 257 US 156, 42 S Ct 63, 65, 66 L ed 180;
Taft v. Bowers, 278 US 470, 49 S Ct 199 cited in Matic, Jr., Income
Taxation in the Philippines, 1970 ed. P. 93.
70 Doyle v. Mitchell Brothers Co., 247 US 179, 38 S. Ct.

467 citing Stratton’s Independence v. Howbert, 231 U.S. 399, 415, 34
S. Ct. 136, 58 L ed 385.
71 Towne v. Eisner, supra.
72 Eisner v. Macomber, 252 US 189 cited in Fisher v. Trinidad, supra.
73 See Fisher, “The Nature and Capital of Income”, cited in Cesar

Rey, The Tax Code Annotated, 1958 ed., p. 32 and 1964 ed. P. 42;
Madrigal, et. al., v. Rafferty, et. al., 38 Phil. 414, See also Section 36,
Old Income tax Regulations.
74 CIR v. Administratix of the Estate of Echerri, 67 Phil. 502.
75 252 U.S. 189, 64 L ed 521, 40 S Ct 189 ALR 9 ALR 1570 (1920).
76 CIR v. Brown, 293 U.S. 570.

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77 United States v. Davis, 397 U.S. 301, 25 L ed 2d 323, 328, 90 S Ct
1041 (1970).
78 105 A.L.R. 774-775.
79 Eisner v. Macomber, supra., 524 citing Davis v. Jackson, 25 N.E. 21.
80 Wise v. Meer, 78 Phil. 655; Ogan v. Meer, 83 Phil. 844.
81 Helvering v. Griffiths, 318 U.S. 371.
82 Hirsch v. CIR, 124 F2d 24; Commissioner v. Babson, 70 F2d 304;

Randolph v. Commissioner, 76 F2d 472; Commissioner v. Champion,
78 F2d 513; Brown v. Commissioner, 79 F2d 73; McGuire v.
Commissioner, 84 F2d 432.
83 Bains v. United States, 289 F2d 644, 646 (1961); See also Ferro v.
Comm., 242 F2d 838; Callan Court Co. v. Cobb, 274 F2d 532.
84 Flanagan v. Helvering, 116 F2d 937.
85 Himmel v. Comm., 338 F2d 815; Blount v. Comm., 425 F2d 921;
Comm. v. Berenbaum, 369 F2d 337.
86 Adler v. Comm., 77 F2d 733; Robinson v. Comm., 69 F2d 972.
87 Brown v. Comm., 79 F2d 73; Hyman v. Helvering, 71 F2d 342.
88 Levin v. Comm., 385 F2d 521.
89 West Tax Law Dictionary, 1993 ed., p. 691; Seda v. CIR, 82 T.C. 484
(1984).
90 33A Am Jur 2d, Federal Taxation (1995) Par. 4852; Income Tax
Techniques, J.K. Lasser Institute, vol. IV, Chapter 11, 11, 02.
91 This figure represents Don Andres’ conjugal share. (Memorandum

for private respondent, p. 19).
92 Sec. 83 (c) [1939 NIRC] later Sec. 66(c) [1977 NIRC, as amended]
and now Sec. 73 (c) [1997 Tax Code] provides that; “Dividends
distributed are deemed made from most recently accumulated
profits. — Any distribution made to the shareholders or members of a
corporation in the year nineteen hundred and thirty-nine or
subsequent tax years, shall be deemed to have been made from
the most recently accumulated profits or surplus, and shall constitute
a part of the annual income of the distributee for the year in which
received: . . . .”; See also Hyman v. Helvering, 71 F2d 342, 344.

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93 Boman Environmental Development Corporation v. CA, 167 SCRA
540 (1985); Under Section 43 of the New Corporation Code (B.P. 68),
corporations can declare dividends out of the “unrestricted retained
earnings” and under Section 122 thereof, it cannot distribute any of
its assets or property except upon lawful distribution and after all
debts and liabilities settled.
94 Hyman v. Helvering, supra.
95 Steinberg v. Velasco, 52 Phil. 953 (1925); Phil. Trust Co. v. Rivera, 44

Phil. 469 (1923).
96 Ibid.
97 See Phelps v. Commissioner, 247 F 2d 156, 158-159.
98 Bradbury v. Comm., 298 F2d 111; Bloch v. U.S., 386 F2d 839.
99 Asmussen v. CIR, 36 B.T.A. (F) 878; See also Neff v. U.S., 301 F2d
330; Cohen v. U.S. , 192 F Supp. 216; Herman v. Comm., 283 F2d 227;
Kessner v. Comm., 248 F2d 943; Comm. v. Pope, 239 F2d 881; U.S. v.
Fewel, 255 F2d 496.
100 Bryan v. CIR, 20 B.T.A. (F) 73.
101 CIR v. Cordingley, 78 F2d 118.
102 Helvering v. Gregory, 293 U.S. 465 cited in Commissioner of

Internal Revenue v. Rufino, 148 SCRA 42, 50 (1987).
103 Patty v. Helvering, 98 F2d 717.
104 Bloch v. U.S., 261 F Supp. 597, 386 F2d 839; Boyle v. Comm., 187
F2d 557; Commissioner v. Estate of Bedford, 325 U.S. 283, 89 L ed
1611, 65 S Ct 1157; See also the cases of Hirsch, Flanagan and
Davis, supra.
105 Hirsch v. Commissioner, supra; Hill v. Commissioner, supra.
106 McGuire v. Commissioner, 84 F2d 431; Brown, Jr., v.

Commissioner, 79 F2d 73; Hill v. Commissioner, 66 F2d 45.
107 Northup v. U.S., 240 F 2d 304, 307; See also McGinty v.

Commissioner, 325 F2d 820, 821-822; U.S. v. Davis, 397 U.S. 301 (1990).
108 Some authorities add that the gain or profit must not only
realized but must also recognized. (33A Am Jur 2d, Federal Taxation
[1995] par. 10000).
109 Commissioner of Internal Revenue v. Manning, 66 SCRA 14.

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110 Eisner v. Macomber, supra, at 529.
111 De Nobili Cigar Co. v. Commissioner, 143 F 2d 436.
112 Patty v. Helvering, 98 F 2d 717.
113 Comment, pp. 14-16; Rollo, pp. 127-129; Rejoinder, p. 4; Rollo, p.

195.
114 CTA Decision, pp. 31-32; Rollo, pp. 91-92; CA Decision, pp. 11-
13; Rollo, pp. 114-116.
115 Batas Pambansa Blg. 68, Section 41 provides: “Powers to acquire

own shares. — A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate purpose or
purposes, including but not limited to the following; Provided that the
corporation has unrestricted retained earnings in its books to cover
the shares to be purchased or acquired:
1.) To eliminate fractional shares arising out of the stock dividends;
2.) To collect or compromise an indebtedness to the corporation,

arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale; and
3.) To pay dissenting or withdrawing stockholders entitled to

payment for their shares under then provisions of this Code.
116 Michie, Federal Tax Handbook, p. 101.
117 Sec. 23 of B.P. 68, also known as the Corporation Code of the
Philippines.
118 Rollo, p. 113.
119 To make the stock dividend taxable is to impose an undisclosed

lien and would be unfair to intervening purchasers. (Commissioner v.
Cordingley, 78 F2d 118).
120 Sec. 22. Tax on nonresident alien individual.— (a) Nonresident

alien engaged in trade or business within the Philippines. — There
shall be levied, collected and paid for each taxable year upon the
entire income received from all sources within the Philippines by
every nonresident alien individual engaged in trade or business
within the Philippines the tax imposed by Section 21. (as amended
by R.As. 2343 & 3841).
Sec. 21. Rates of tax on citizens or residents. — There shall be levied,

collected and paid annually upon the entire income received in the
preceding taxable year from all sources by every individual, a citizen

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or resident of the Philippines, a tax equal to the sum of the following:
. . . . (as amended by R.A. 2343)
121 See 1986 and 1997 Tax Code where exchange of stocks is
subject to a capital gains tax.
122 US v. Paire, 31 F. Supp. 898, 900; Kessler v. US, 124 F2d 152, 154.
123 Horwick v. CIR, 133 F2d 732, 737.
124 McDonald Restaurant v. CIR, 688 F2d 520, (1982); West Tax Law
Dictionary, 1993 ed., Minn., West Publishing Co., pp. 676, 780.
125 Under the 1997 Tax Code, exchange of stocks is subject to

capital gains tax.
126 13 Am. Jur. 318; Fletcher cited in Agbayani, Commercial Law,

Vol. 3 (1979 ed.), p. 89.
127 In re Siberkraus, 229 NY Supp., 735.
128 2 Fletcher Cyc. Corp., p. 831 citing Best v. Oklahoma Mill Co., 14
Okla 135 Par 1005.
129 Sec. 5 par. 1, last sentence of Act 1459 [Old Corporation Law]
now Sec. 6 of B.P. 68 requires that the distinguishing features be
stated also in the Certificate of Stock.
130 McDonald v. CIR, supra.
301 SCRA 152 – Business Organization – Corporation Law – Trust Fund

Doctrine
Don Andres Soriano (American), founder of A. Soriano Corp. (ASC)

had a total shareholdings of 185,154 shares. Broken down, the shares
comprise of 50,495 shares which were of original issue when the
corporation was founded and 134,659 shares as stock dividend
declarations. So in 1964 when Soriano died, half of the shares he held
went to his wife as her conjugal share (wife’s “legitime”) and the
other half (92,577 shares, which is further broken down to 25,247.5
original issue shares and 82,752.5 stock dividend shares) went to the
estate. For sometime after his death, his estate still continued to
receive stock dividends from ASC until it grew to at least 108,000
shares.

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In 1968, ASC through its Board issued a resolution for the redemption
of shares from Soriano’s estate purportedly for the planned
“Filipinization” of ASC. Eventually, 108,000 shares were redeemed
from the Soriano Estate. In 1973, a tax audit was conducted.
Eventually, the Commissioner of Internal Revenue (CIR) issued an
assessment against ASC for deficiency withholding tax-at-source. The
CIR explained that when the redemption was made, the estate
profited (because ASC would have to pay the estate to redeem),
and so ASC would have withheld tax payments from the Soriano
Estate yet it remitted no such withheld tax to the government.
ASC averred that it is not duty bound to withhold tax from the estate
because it redeemed the said shares for purposes of “Filipinization”
of ASC and also to reduce its remittance abroad.
ISSUE: Whether or not ASC’s arguments are tenable.
HELD: No. The reason behind the redemption is not material. The
proceeds from a redemption is taxable and ASC is duty bound to
withhold the tax at source. The Soriano Estate definitely profited from
the redemption and such profit is taxable, and again, ASC had the
duty to withhold the tax. There was a total of 108,000 shares
redeemed from the estate. 25,247.5 of that was original issue from
the capital of ASC. The rest (82,752.5) of the shares are deemed to
have been from stock dividend shares. Sale of stock dividends is
taxable. It is also to be noted that in the absence of evidence to the
contrary, the Tax Code presumes that every distribution of corporate
property, in whole or in part, is made out of corporate profits such as
stock dividends.
It cannot be argued that all the 108,000 shares were distributed from
the capital of ASC and that the latter is merely redeeming them as
such. The capital cannot be distributed in the form of redemption of
stock dividends without violating the trust fund doctrine — wherein
the capital stock, property and other assets of the corporation are
creditors. Once capital, it is always capital. That doctrine was
intended for the protection of corporate creditors.
Republic Planters Bank vs. Agana (269 SCRA 1 [1997])
G.R. No. 51765 March 3, 1997
REPUBLIC PLANTERS BANK, petitioner,

vs.

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HON. ENRIQUE A. AGANA, SR., as Presiding Judge, Court of First
Instance of Rizal, Branch XXVIII, Pasay City, ROBES-FRANCISCO
REALTY & DEVELOPMENT CORPORATION and ADALIA F. ROBES,
respondents.
HERMOSISIMA, JR., J.:
This is a petition for certiorari seeking the annulment of the Decision 1

of the then Court of First Instance of Rizal 2 for having been rendered
in grave abuse of discretion. Private respondents Robes-Francisco
Realty and Development Corporation (hereafter, "the Corporation")
and Adalia F. Robes filed in the court a quo, an action for specific
performance to compel petitioner to redeem 800 preferred shares of
stock with a face value of P8,000.00 and to pay 1% quarterly interest
thereon as quarterly dividend owing them under the terms and
conditions of the certificates of stock.
The court a quo rendered judgment in favor of private respondents;

hence, this instant petition.
Herein parties debate only legal issues, no issues of fact having been
raised by them in the court a quo. For ready reference, however, the
following narration of pertinent transactions and events is in order:
On September 18, 1961, private respondent Corporation secured a

loan from petitioner in the amount of P120,000.00. As part of the
proceeds of the loan, preferred shares of stocks were issued to
private respondent Corporation, through its officers then, private
respondent Adalia F. Robes and one Carlos F. Robes. In other words,
instead of giving the legal tender totaling to the full amount of the
loan, which is P120,000.00, petitioner lent such amount partially in the
form of money and partially in the form of stock certificates
numbered 3204 and 3205, each for 400 shares with a par value of
P10.00 per share, or for P4,000.00 each, for a total of P8,000.00. Said
stock certificates were in the name of private respondent Adalia F.
Robes and Carlos F. Robes, who subsequently, however, endorsed
his shares in favor of Adalia F. Robes.
Said certificates of stock bear the following terms and conditions:
The Preferred Stock shall have the following rights,

preferences, qualifications and limitations, to wit:
1. Of the right to receive a quarterly dividend of One Per

Centum (1%), cumulative and participating.
xxx xxx xxx

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2. That such preferred shares may be redeemed, by the
system of drawing lots, at any time after two (2) years from
the date of issue at the option of the Corporation. . . .
On January 31, 1979, private respondents proceeded against

petitioner and filed a Complaint anchored on private respondents'
alleged rights to collect dividends under the preferred shares in
question and to have petitioner redeem the same under the terms
and conditions of the stock certificates. Private respondents
attached to their complaint, a letter-demand dated January 5, 1979
which, significantly, was not formally offered in evidence.
Petitioner filed a Motion to Dismiss 3 private respondents' Complaint

on the following grounds: (1) that the trial court had no jurisdiction
over the subject-matter of the action; (2) that the action was
unenforceable under substantive law; and (3) that the action was
barred by the statute of limitations and/or laches.
Petitioner's Motion to Dismiss was denied by the trial court in an

Order dated March 16, 1979. 4 Petitioner then filed its Answer on May
2, 1979. 5 Thereafter, the trial court gave the parties ten (10) days
from July 30, 1979 to submit their respective memoranda after the
submission of which the case would be deemed submitted for
resolution. 6
On September 7, 1979, the trial court rendered the herein assailed

decision in favor of private respondents. In ordering petitioner to pay
private respondents the face value of the stock certificates as
redemption price, plus 1% quarterly interest thereon until full
payment, the trial court ruled:
There being no issue of fact raised by either of the parties

who filed their respective memoranda delineating their
respective contentions, a judgment on the pleadings,
conformably with an earlier order of the Court, appears to
be in order.
From a further perusal of the pleadings, it appears that the

provision of the stock certificates in question to the effect
that the plaintiffs shall have the right to receive a quarterly
dividend of One Per Centum (1%), cumulative and
participating, clearly and unequivocably [sic] indicates
that the same are "interest bearing stocks" which are
stocks issued by a corporation under an agreement to
pay a certain rate of interest thereon (5 Thompson, Sec.
3439). As such, plaintiffs become entitled to the payment
thereof as a matter of right without necessity of a prior
declaration of dividend.

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On the question of the redemption by the defendant of
said preferred shares of stock, the very wordings of the
terms and conditions in said stock certificates clearly
allows the same.
To allow the herein defendant not to redeem said

preferred shares of stock and/or pay the interest due
thereon despite the clear import of said provisions by the
mere invocation of alleged Central Bank Circulars
prohibiting the same is tantamount to an impairment of
the obligation of contracts enshrined in no less than the
fundamental law itself.
Moreover, the herein defendant is considered in estoppel

from taking shelter behind a General Banking Act
provision to the effect that it cannot buy its own shares of
stocks considering that the very terms and conditions in
said stock certificates allowing their redemption are its
own handiwork.
As to the claim by the defendant that plaintiffs' cause of

action is barred by prescription, suffice it to state that the
running of the prescriptive period was considered
interrupted by the written extrajudicial demands made by
the plaintiffs from the defendant. 7
Aggrieved by the decision of the trial court, petitioner elevated the

case before us essentially on pure questions of law. Petitioner's
statement of the issues that it submits for us to adjudicate upon, is as
follows:
A. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF

JURISDICTION IN ORDERING PETITIONER TO PAY
RESPONDENT ADALIA F. ROBES THE AMOUNT OF P8213.69
AS INTERESTS FROM 1961 TO 1979 ON HER PREFERRED
SHARES.
B. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF

JURISDICTION IN ORDERING PETITIONER TO REDEEM
RESPONDENT ADALIA F. ROBES' PREFERRED SHARES FOR
P8,000.00.
C. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF

JURISDICTION IN DISREGARDING THE ORDER OF THE
CENTRAL BANK TO PETITIONER TO DESIST FROM REDEEMING

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ITS PREFERRED SHARES AND FROM PAYING DIVIDENDS
THEREON . . . .
D. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE

COMPLAINT DOES NOT STATE A CAUSE OF ACTION.
E. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE

CLAIM OF RESPONDENT ADALIA F. ROBES IS BARRED BY
PRESCRIPTION OR LACHES. 8
The petition is meritorious.
Before passing upon the merits of this petition, it may be pertinent to

provide an overview on the nature of preferred shares and the
redemption thereof, considering that these issues lie at the heart of
the dispute.
A preferred share of stock, on one hand, is one which entitles the

holder thereof to certain preferences over the holders of common
stock. The preferences are designed to induce persons to subscribe
for shares of a corporation. 9 Preferred shares take a multiplicity of
forms. The most common forms may be classified into two: (1)
preferred shares as to assets; and (2) preferred shares as to
dividends. The former is a share which gives the holder thereof
preference in the distribution of the assets of the corporation in case
of liquidation; 10 the latter is a share the holder of which is entitled to
receive dividends on said share to the extent agreed upon before
any dividends at all are paid to the holders of common stock. 11
There is no guaranty, however, that the share will receive any
dividends. Under the old Corporation Law in force at the time the
contract between the petitioner and the private respondents was
entered into, it was provided that "no corporation shall make or
declare any dividend except from the surplus profits arising from its
business, or distribute its capital stock or property other than actual
profits among its members or stockholders until after the payment of
its debts and the termination of its existence by limitation or lawful
dissolution." 12 Similarly, the present Corporation Code 13 provides
that the board of directors of a stock corporation may declare
dividends only out of unrestricted retained earnings. 14 The Code, in
Section 43, adopting the change made in accounting terminology,
substituted the phrase "unrestricted retained earnings," which may
be a more precise term, in place of "surplus profits arising from its
business" in the former law. Thus, the declaration of dividends is
dependent upon the availability of surplus profit or unrestricted
retained earnings, as the case may be. Preferences granted to
preferred stockholders, moreover, do not give them a lien upon the
property of the corporation nor make them creditors of the
corporation, the right of the former being always subordinate to the

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latter. Dividends are thus payable only when there are profits earned
by the corporation and as a general rule, even if there are existing
profits, the board of directors has the discretion to determine
whether or not dividends are to be declared. 15 Shareholders, both
common and preferred, are considered risk takers who invest capital
in the business and who can look only to what is left after corporate
debts and liabilities are fully paid. 16
Redeemable shares, on the other hand, are shares usually preferred,

which by their terms are redeemable at a fixed date, or at the
option of either issuing corporation, or the stockholder, or both at a
certain redemption price. 17 A redemption by the corporation of its
stock is, in a sense, a repurchase of it for cancellation. 18 The present
Code allows redemption of shares even if there are no unrestricted
retained earnings on the books of the corporation. This is a new
provision which in effect qualifies the general rule that the
corporation cannot purchase its own shares except out of current
retained earnings. 19 However, while redeemable shares may be
redeemed regardless of the existence of unrestricted retained
earnings, this is subject to the condition that the corporation has,
after such redemption, assets in its books to cover debts and
liabilities inclusive of capital stock. Redemption, therefore, may not
be made where the corporation is insolvent or if such redemption will
cause insolvency or inability of the corporation to meet its debts as
they mature. 20
We come now to the merits of the case. The petitioner argues that it
cannot be compelled to redeem the preferred shares issued to the
private respondent. We agree. Respondent judge, in ruling that
petitioner must redeem the shares in question, stated that:
On the question of the redemption by the defendant of

said preferred shares of stock, the very wordings of the
terms and conditions in said stock certificates clearly
allows the same. 21
What respondent judge failed to recognize was that while the

stock certificate does allow redemption, the option to do so
was clearly vested in the petitioner bank. The redemption
therefore is clearly the type known as "optional". Thus, except
as otherwise provided in the stock certificate, the redemption
rests entirely with the corporation and the stockholder is without
right to either compel or refuse the redemption of its stock. 22
Furthermore, the terms and conditions set forth therein use the
word "may". It is a settled doctrine in statutory construction that
the word "may" denotes discretion, and cannot be construed
as having a mandatory effect. We fail to see how respondent
judge can ignore what, in his words, are the "very wordings of

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the terms and conditions in said stock certificates" and construe
what is clearly a mere option to be his legal basis for
compelling the petitioner to redeem the shares in question.
The redemption of said shares cannot be allowed. As pointed out by

the petitioner, the Central Bank made a finding that said petitioner
has been suffering from chronic reserve deficiency, 23 and that such
finding resulted in a directive, issued on January 31, 1973 by then
Gov. G.S. Licaros of the Central Bank, to the President and Acting
Chairman of the Board of the petitioner bank prohibiting the latter
from redeeming any preferred share, on the ground that said
redemption would reduce the assets of the Bank to the prejudice of
its depositors and creditors. 24 Redemption of preferred shares was
prohibited for a just and valid reason. The directive issued by the
Central Bank Governor was obviously meant to preserve the status
quo, and to prevent the financial ruin of a banking institution that
would have resulted in adverse repercussions, not only to its
depositors and creditors, but also to the banking industry as a whole.
The directive, in limiting the exercise of a right granted by law to a
corporate entity, may thus be considered as an exercise of police
power. The respondent judge insists that the directive constitutes an
impairment of the obligation of contracts. It has, however, been
settled that the Constitutional guaranty of non-impairment of
obligations of contract is limited by the exercise of the police power
of the state, the reason being that public welfare is superior to
private rights. 25
The respondent judge also stated that since the stock certificate
granted the private respondents the right to receive a quarterly
dividend of One Per Centum (1%) cumulative and participating, it
"clearly and unequivocably (sic) indicates that the same are "interest
bearing stocks" or stocks issued by a corporation under an
agreement to pay a certain rate of interest thereon. As such,
plaintiffs (private respondents herein) become entitled to the
payment thereof as a matter of right without necessity of a prior
declaration of dividend." 26 There is no legal basis for this observation.
Both Sec. 16 of the Corporation Law and Sec. 43 of the present
Corporation Code prohibit the issuance of any stock dividend
without the approval of stockholders, representing not less than two-
thirds (2/3) of the outstanding capital stock at a regular or special
meeting duly called for the purpose. These provisions underscore the
fact that payment of dividends to a stockholder is not a matter of
right but a matter of consensus. Furthermore, "interest bearing
stocks", on which the corporation agrees absolutely to pay interest
before dividends are paid to common stockholders, is legal only
when construed as requiring payment of interest as dividends from
net earnings or surplus only. 27 Clearly, the respondent judge, in
compelling the petitioner to redeem the shares in question and to

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pay the corresponding dividends, committed grave abuse of
discretion amounting to lack or excess of jurisdiction in ignoring both
the terms and conditions specified in the stock certificate, as well as
the clear mandate of the law.
Anent the issue of prescription, this Court so holds that the claim of
private respondent is already barred by prescription as well as
laches. Art. 1144 of the New Civil Code provides that a right of
action that is founded upon a written contract prescribes in ten (10)
years. The letter-demand made by the private respondents to the
petitioner was made only on January 5, 1979, or almost eighteen
years after receipt of the written contract in the form of the stock
certificate. As noted earlier, this letter-demand, significantly, was not
formally offered in evidence, nor were any other evidence of
demand presented. Therefore, we conclude that the only time the
private respondents saw it fit to assert their rights, if any, to the
preferred shares of stock, was after the lapse of almost eighteen
years. The same clearly indicates that the right of the private
respondents to any relief under the law has already prescribed.
Moreover, the claim of the private respondents is also barred by
laches. Laches has been defined as the failure or neglect, for an
unreasonable length of time, to do that which by exercising due
diligence could or should have been done earlier; it is negligence or
omission to assert a right within a reasonable time, warranting a
presumption that the party entitled to assert it either has abandoned
it or declined to assert it. 28
Considering that the terms and conditions set forth in the stock
certificate clearly indicate that redemption of the preferred shares
may be made at any time after the lapse of two years from the date
of issue, private respondents should have taken it upon themselves,
after the lapse of the said period, to inquire from the petitioner the
reason why the said shares have not been redeemed. As it is, not
only two years had lapsed, as agreed upon, but an additional
sixteen years passed before the private respondents saw it fit to
demand their right. The petitioner, at the time it issued said preferred
shares to the private respondents in 1961, could not have known that
it would be suffering from chronic reserve deficiency twelve years
later. Had the private respondents been vigilant in asserting their
rights, the redemption could have been effected at a time when the
petitioner bank was not suffering from any financial crisis.
WHEREFORE, the instant petition, being impressed with merit, is

hereby GRANTED. The challenged decision of respondent judge is
set aside and the complaint against the petitioner is dismissed.
Costs against the private respondents.

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SO ORDERED.
Bellosillo, Vitug and Kapunan, JJ., concur.
Padilla, J., concurs in the result.
Footnotes
Republic Planters Bank vs. Agana, Sr. [March 3, 1997]

Rights of Holders of Perferred Shares
Legality of Interest Bearing Shares
1. Private respondent Robes Francisco Realty & Dev’t Corp. secured

a loan from petitioner in the amount of P120,000.00. As part of the
proceeds of the loan, preferred shares of stocks were issued to
private respondent corporation. In other words, instead of giving the
legal tender totaling to the full amount of the loan which is
P120,000.00, petitioner lent such amount partially in the form of stock
certificates numbered 3204 and 3205, each for 400 shares with a par
value of P10.00 per share, or for P4,000 each, for a total of
P8,000.00. Said stock certificates were in the name of private
respondent Adalia Robes and Carlos Robes, who, however,
subsequently endorsed his shares in favor of Adalia Robes.
Said certificates of stock bear the following terms and conditions:
1. The right to receive a quarterly dividend of 1%, cumulative and
participating.
2. That such preferred shares may be redeemed, by the system of
drawing lots, at any time after 2 years from the date of issue at the
option of the Corporation.
Private respondents proceeded against petitioner and filed a
complaint anchored on private respondents’ alleged rights to
collect dividends under the preferred shares in question and to have
petitioner redeem the same under the terms and conditions of the
stock certificates.
The trial court ordered the petitioner to pay private respondents the
face value of the stock certificates as redemption price, plus 1%
quarterly interest. Hence this petition.
Issue: W/N respondents have the right to collect dividends and

whether they can compel petitioner to redeem the preferred shares.
Held:
1. A preferred share of stock is one which entitles the holder thereof
to certain preferences over the holders of common stock. The
preferences are designed to induce persons to subscribe for shares

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of a corporation. Preferred shares take a multiplicity of forms. The
most common forms may be classified into two: (1) preferred shares
as to assets; and (2) preferred as to dividends. The former is a share
which gives the holder thereof the preference in the distribution of
the assets of the corporation in case of liquidation; the latter is a
share the holder of which is entitled to receive dividends on said
share to the extent agreed upon before any dividends at all are
paid to the holders of common stock. There is no guarantee,
however, that the share will receive any dividends.
2. Preferences granted to preferred stockholders do not give them
a lien upon the property of the corporation nor make them creditors
of the corporation, the right of the former being always subordinate
to the latter. Shareholders, both common and preferred are
considered risk takers who invest capital in the business arid who can
look only to what is left after corporate debts and liabilities are fully
paid.
3. Redeemable shares are shares usually preferred, which by their
terms are redeemable at a fixed date, or at the option of either
issuing corporation, or the stockholder, or both at certain redemption
price; redemption may not be made where the corporation is
insolvent or if such redemption will cause insolvency or inability of the
corporation to meet its debts as they mature.
4. While the stock certificates in the case at bar does allow
redemption, the option to do so was clearly vested in the petitioner
bank. The redemption is therefore optional.
5. The redemption of said shares cannot be allowed. The Central
Bank made a finding that said petitioner has been suffering from
chronic reserve deficiency, and that such finding resulted in the
directive prohibiting the petitioner bank from redeeming any
preferred share, on the ground that said redemption would reduce
the assets of the Bank to the prejudice of its depositors and
creditors. Redemption of preferred shares was prohibited for a just
and valid reason.
6. “Interest bearing stocks”, on which the corporation agrees
absolutely to pay interest before dividends are paid to common
stockholders, is legal only when construed as requiring payment of
interest as dividends from net earnings or surplus only.
Lanuza vs. CA (454 SCRA 54 [2005])
G.R. No. 131394 March 28, 2005

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JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES,
Petitioner,
vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION,
DOLORES ONRUBIA, ELENITA NOLASCO, JUAN O. NOLASCO III, ESTATE
OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT MARINE SCHOOL,
INC., Respondents.
DECISION
TINGA, J.:
Presented in the case at bar is the apparently straight-forward but

complicated question: What should be the basis of quorum for a
stockholders’ meeting—the outstanding capital stock as indicated in
the articles of incorporation or that contained in the company’s
stock and transfer book?
Petitioners seek to nullify the Court of Appeals’ Decision in CA–G.R.

SP No. 414731 promulgated on 18 August 1997, affirming the SEC
Order dated 20 June 1996, and the Resolution2 of the Court of
Appeals dated 31 October 1997 which denied petitioners’ motion
for reconsideration.
The antecedents are not disputed.
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was

incorporated, with seven hundred (700) founders’ shares and
seventy-six (76) common shares as its initial capital stock subscription
reflected in the articles of incorporation. However, private
respondents and their predecessors who were in control of PMMSI
registered the company’s stock and transfer book for the first time in
1978, recording thirty-three (33) common shares as the only issued
and outstanding shares of PMMSI. Sometime in 1979, a special
stockholders’ meeting was called and held on the basis of what was
considered as a quorum of twenty-seven (27) common shares,
representing more than two-thirds (2/3) of the common shares issued
and outstanding.
In 1982, the heirs of one of the original incorporators, Juan Acayan,

filed a petition with the Securities and Exchange Commission (SEC)
for the registration of their property rights over one hundred (120)
founders’ shares and twelve (12) common shares owned by their
father. The SEC hearing officer held that the heirs of Acayan were
entitled to the claimed shares and called for a special stockholders’
meeting to elect a new set of officers.3 The SEC En Banc affirmed the
decision. As a result, the shares of Acayan were recorded in the
stock and transfer book.

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On 06 May 1992, a special stockholders’ meeting was held to elect a
new set of directors. Private respondents thereafter filed a petition
with the SEC questioning the validity of the 06 May 1992
stockholders’ meeting, alleging that the quorum for the said meeting
should not be based on the 165 issued and outstanding shares as
per the stock and transfer book, but on the initial subscribed capital
stock of seven hundred seventy-six (776) shares, as reflected in the
1952 Articles of Incorporation. The petition was dismissed.4 Appeal
was made to the SEC En Banc, which granted said appeal, holding
that the shares of the deceased incorporators should be duly
represented by their respective administrators or heirs concerned.
The SEC directed the parties to call for a stockholders meeting on
the basis of the stockholdings reflected in the articles of
incorporation for the purpose of electing a new set of officers for the
corporation.5
Petitioners, who are PMMSI stockholders, filed a petition for review

with the Court of Appeals.6 Rebecca Acayan, Jayne O. Abuid, Willie
O. Abuid and Renato Cervantes, stockholders and directors of
PMMSI, earlier filed another petition for review of the same SEC En
Banc’s orders. The petitions were thereafter consolidated.7 The
consolidated petitions essentially raised the following issues, viz: (a)
whether the basis the outstanding capital stock and accordingly
also for determining the quorum at stockholders’ meetings it should
be the 1978 stock and transfer book or if it should be the 1952 articles
of incorporation; and (b) whether the Court of Appeals "gravely
erred in applying the Espejo Decision to the benefit of respondents." 8
The "Espejo Decision" is the decision of the SEC en banc in SEC Case
No. 2289 which ordered the recording of the shares of Jose Acayan
in the stock and transfer book.
The Court of Appeals held that for purposes of transacting business,

the quorum should be based on the outstanding capital stock as
found in the articles of incorporation.9 As to the second issue, the
Court of Appeals held that the ruling in the Acayan case would ipso
facto benefit the private respondents, since to require a separate
judicial declaration to recognize the shares of the original
incorporators would entail unnecessary delay and expense. Besides,
the Court of Appeals added, the incorporators have already proved
their stockholdings through the provisions of the articles of
incorporation.10
In the instant petition, petitioners claim that the 1992 stockholders’

meeting was valid and legal. They submit that reliance on the 1952
articles of incorporation for determining the quorum negates the
existence and validity of the stock and transfer book which private
respondents themselves prepared. In addition, they posit that private
respondents cannot avail of the benefits secured by the heirs of

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Acayan, as private respondents must show and prove entitlement to
the founders and common shares in a separate and independent
action/proceeding.
In private respondents’ Memorandum11 dated 08 March 2000, they

point out that the instant petition raises the same facts and issues as
those raised in G.R. No. 13131512, which was denied by the First
Division of this Court on 18 January 1999 for failure to show that the
Court of Appeals committed any reversible error. They add that as a
logical consequence, the instant petition should be dismissed on the
ground of res judicata. Furthermore, private respondents claim that
in view of the applicability of the rule on res judicata, petitioners’
counsel should be cited for contempt for violating the rule against
forum-shopping.13
For their part, petitioners claim that the principle of res judicata does
not apply to the instant case. They argue that the instant petition is
separate and distinct from G.R. No. 131315, there being no identity
of parties, and more importantly, the parties in the two petitions
have their own distinct rights and interests in relation to the subject
matter in litigation. For the same reasons, they claim that counsel for
petitioners cannot be found guilty of forum-shopping.14
In their Manifestation and Motion15 dated 22 September 2004,

private respondents moved for the dismissal of the instant petition in
view of the dismissal of G.R. No. 131315. Attached to the said
manifestation is a copy of the Entry of Judgment16 issued by the First
Division dated 01 December 1999.
The petition must be denied, not on res judicata, but on the ground
that like the petition in G.R. No. 131315 it fails to impute reversible
error to the challenged Court of Appeals’ Decision.
Res judicata does not apply in

the case at bar.
Res judicata means a matter adjudged, a thing judicially acted

upon or decided; a thing or matter settled by judgment.17 The
doctrine of res judicata provides that a final judgment, on the merits
rendered by a court of competent jurisdiction is conclusive as to the
rights of the parties and their privies and constitutes an absolute bar
to subsequent actions involving the same claim, demand, or cause
of action.18 The elements of res judicata are (a) identity of parties or
at least such as representing the same interest in both actions; (b)
identity of rights asserted and relief prayed for, the relief being
founded on the same facts; and (c) the identity in the two (2)
particulars is such that any judgment which may be rendered in the
other action will, regardless of which party is successful, amount to
res judicata in the action under consideration.19
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There is no dispute as to the identity of subject matter since the
crucial point in both cases is the propriety of including the still
unproven shares of respondents for purposes of determining the
quorum. Petitioners, however, deny that there is identity of parties
and causes of actions between the two petitions.
The test often used in determining whether causes of action are

identical is to ascertain whether the same facts or evidence would
support and establish the former and present causes of action.20
More significantly, there is identity of causes of action when the
judgment sought will be inconsistent with the prior judgment.21 In
both petitions, petitioners assert that the Court of Appeals’ Decision
effectively negates the existence and validity of the stock and
transfer book, as well as automatically grants private respondents’
shares of stocks which they do not own, or the ownership of which
remains to be unproved. Petitioners in the two petitions rely on the
entries in the stock and transfer book as the proper basis for
computing the quorum, and consequently determine the degree of
control one has over the company. Essentially, the affirmance of the
SEC Order had the effect of diminishing their control and interests in
the company, as it allowed the participation of the individual private
respondents in the election of officers of the corporation.
Absolute identity of parties is not a condition sine qua non for res
judicata to apply—a shared identity of interest is sufficient to invoke
the coverage of the principle.22 However, there is no identity of
parties between the two cases. The parties in the two petitions have
their own rights and interests in relation to the subject matter in
litigation. As stated by petitioners in their Reply to Respondents’
Memorandum,23 there are no two separate actions filed, but rather,
two separate petitions for review on certiorari filed by two distinct
parties with the Court and represented by their own counsels, arising
from an adverse consolidated decision promulgated by the Court of
Appeals in one action or proceeding.24 As such, res judicata is not
present in the instant case.
Likewise, there is no basis for declaring petitioners or their counsel

guilty of violating the rules against forum-shopping. In the
Verification/Certification25 portion of the petition, petitioners clearly
stated that there was then a pending motion for reconsideration of
the 18 August 1997 Decision of the Court of Appeals in the
consolidated cases (CA-G.R. SP No. 41473 and CA-G.R. SP No.
41403) filed by the Abuids, as well as a motion for clarification.
Moreover, the records indicate that petitioners filed their
Manifestation26 dated 20 January 1998, informing the Court of their
receipt of the petition in G.R. No. 131315 in compliance with their
duty to inform the Court of the pendency of another similar petition.

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The Court finds that petitioners substantially complied with the rules
against forum-shopping.
The Decision of the Court of

Appeals must be upheld.
The petition in this case involves the same facts and substantially the
same issues and arguments as those in G.R. No. 131315 which the
First Division has long denied with finality. The First Division found the
petition before it inadequate in failing to raise any reversible error on
the part of the Court of Appeals. We reach a similar conclusion as
regards the present petition.
The crucial issue in this case is whether it is the company’s stock and
transfer book, or its 1952 Articles of Incorporation, which determines
stockholders’ shareholdings, and provides the basis for computing
the quorum.
We agree with the Court of Appeals.
The articles of incorporation has been described as one that defines

the charter of the corporation and the contractual relationships
between the State and the corporation, the stockholders and the
State, and between the corporation and its stockholders.27 When
PMMSI was incorporated, the prevailing law was Act No. 1459,
otherwise known as "The Corporation Law." Section 6 thereof states:
Sec. 6. Five or more persons, not exceeding fifteen, a majority

of whom are residents of the Philippines, may form a private
corporation for any lawful purpose or purposes by filing with the
Securities and Exchange Commission articles of incorporation
duly executed and acknowledged before a notary public,
setting forth:
....
(7) If it be a stock corporation, the amount of its capital stock,

in lawful money of the Philippines, and the number of shares
into which it is divided, and if such stock be in whole or in part
without par value then such fact shall be stated; Provided,
however, That as to stock without par value the articles of
incorporation need only state the number of shares into which
said capital stock is divided.
(8) If it be a stock corporation, the amount of capital stock or

number of shares of no-par stock actually subscribed, the
amount or number of shares of no-par stock subscribed by
each and the sum paid by each on his subscription. . . .28

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A review of PMMSI’s articles of incorporation29 shows that the
corporation complied with the requirements laid down by Act No.
1459. It provides in part:
7. That the capital stock of the said corporation is NINETY

THOUSAND PESOS (P90,000.00) divided into two classes, namely:
FOUNDERS’ STOCK - 1,000 shares at P20 par value- P 20,000.00
COMMON STOCK- 700 shares at P 100 par value – P 70,000.00
TOTAL ---------------------1,700 shares----------------------------P 90,000.00
....
8. That the amount of the entire capital stock which has been
actually subscribed is TWENTY ONE THOUSAND SIX HUNDRED
PESOS (P21,600.00) and the following persons have subscribed
for the number of shares and amount of capital stock set out
after their respective names:
SUBSCRIBER SUBSCRIBED AMOUNT

SUBSCRIBED
No. of Shares Par Value
Crispulo J. 120 Founders P 2,400.00

Onrubia
Juan H. Acayan 120 " 2, 400.00
Martin P. 100 " 2, 000.00

Sagarbarria
Mauricio G. 50 " 1, 000.00

Gallaga
Luis Renteria 50 " 1, 000.00
Faustina M. de 140 " 2, 800.00

Onrubia
Mrs. Ramon 40 " 800.00

Araneta

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Carlos M. 80 " 1,600.00
Onrubia
700 P 14,000.00
SUBSCRIBER SUBSCRIBED AMOUNT

SUBSCRIBED
No. of Shares
Par Value
Crispulo J. 12 Common P 1,200.00

Onrubia
Juan H. Acayan 12 " 1,200.00
Martin P. 8" 800.00

Sagarbarria
Mauricio G. 8" 800.00

Gallaga
Luis Renteria 8" 800.00
Faustina M. de 12 " 1,200.00

Onrubia
Mrs. Ramon 8" 800.00

Araneta
Carlos M. 8" 800.00

Onrubia
76 P7,600.0030
There is no gainsaying that the contents of the articles of

incorporation are binding, not only on the corporation, but also on its
shareholders. In the instant case, the articles of incorporation
indicate that at the time of incorporation, the incorporators were
bona fide stockholders of seven hundred (700) founders’ shares and

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seventy-six (76) common shares. Hence, at that time, the
corporation had 776 issued and outstanding shares.
On the other hand, a stock and transfer book is the book which
records the names and addresses of all stockholders arranged
alphabetically, the installments paid and unpaid on all stock for
which subscription has been made, and the date of payment
thereof; a statement of every alienation, sale or transfer of stock
made, the date thereof and by and to whom made; and such other
entries as may be prescribed by law.31 A stock and transfer book is
necessary as a measure of precaution, expediency and
convenience since it provides the only certain and accurate
method of establishing the various corporate acts and transactions
and of showing the ownership of stock and like matters.32 However, a
stock and transfer book, like other corporate books and records, is
not in any sense a public record, and thus is not exclusive evidence
of the matters and things which ordinarily are or should be written
therein.33 In fact, it is generally held that the records and minutes of a
corporation are not conclusive even against the corporation but are
prima facie evidence only,34 and may be impeached or even
contradicted by other competent evidence.35 Thus, parol evidence
may be admitted to supply omissions in the records or explain
ambiguities, or to contradict such records.36
In 1980, Batas Pambansa Blg. 68, otherwise known as "The

Corporation Code of the Philippines" supplanted Act No. 1459. BP
Blg. 68 provides:
Sec. 24. Election of directors or trustees.—At all elections of

directors or trustees, there must be present, either in person or
by representative authorized to act by written proxy, the
owners of a majority of the outstanding capital stock, or if there
be no capital stock, a majority of the members entitled to vote.
...
Sec. 52. Quorum in meetings.- Unless otherwise provided for in

this Code or in the by-laws, a quorum shall consist of the
stockholders representing a majority of the outstanding capital
stock or majority of the members in the case of non-stock
corporation.
Outstanding capital stock, on the other hand, is defined by the

Code as:
Sec. 137. Outstanding capital stock defined.— The term

"outstanding capital stock" as used in this code, means the
total shares of stock issued to subscribers or stockholders
whether or not fully or partially paid (as long as there is binding
subscription agreement) except treasury shares.
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Thus, quorum is based on the totality of the shares which have been
subscribed and issued, whether it be founders’ shares or common
shares.37 In the instant case, two figures are being pitted against
each other— those contained in the articles of incorporation, and
those listed in the stock and transfer book.
To base the computation of quorum solely on the obviously

deficient, if not inaccurate stock and transfer book, and completely
disregarding the issued and outstanding shares as indicated in the
articles of incorporation would work injustice to the owners and/or
successors in interest of the said shares. This case is one instance
where resort to documents other than the stock and transfer books is
necessary. The stock and transfer book of PMMSI cannot be used as
the sole basis for determining the quorum as it does not reflect the
totality of shares which have been subscribed, more so when the
articles of incorporation show a significantly larger amount of shares
issued and outstanding as compared to that listed in the stock and
transfer book. As aptly stated by the SEC in its Order dated 15 July
1996:38
It is to be explained, that if at the onset of incorporation a

corporation has 771 shares subscribed, the Stock and Transfer
Book should likewise reflect 771 shares. Any sale, disposition or
even reacquisition of the company of its own shares, in which it
becomes treasury shares, would not affect the total number of
shares in the Stock and Transfer Book. All that will change are
the entries as to the owners of the shares but not as to the
amount of shares already subscribed.
This is precisely the reason why the Stock and Transfer Book was
not given probative value. Did the shares, which were not
recorded in the Stock and Transfer Book, but were recorded in
the Articles of Iincorporation just vanish into thin air? . . . .39
As shown above, at the time the corporation was set-up, there were
already seven hundred seventy-six (776) issued and outstanding
shares as reflected in the articles of incorporation. No proof was
adduced as to any transaction effected on these shares from the
time PMMSI was incorporated up to the time the instant petition was
filed, except for the thirty-three (33) shares which were recorded in
the stock and transfer book in 1978, and the additional one hundred
thirty-two (132) in 1982. But obviously, the shares so ordered recorded
in the stock and transfer book are among the shares reflected in the
articles of incorporation as the shares subscribed to by the
incorporators named therein.
One who is actually a stockholder cannot be denied his right to vote

by the corporation merely because the corporate officers failed to

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keep its records accurately.40 A corporation’s records are not the
only evidence of the ownership of stock in a corporation.41 In an
American case,42 persons claiming shareholders status in a
professional corporation were listed as stockholders in the
amendment to the articles of incorporation. On that basis, they were
in all respects treated as shareholders. In fact, the acts and conduct
of the parties may even constitute sufficient evidence of one’s status
as a shareholder or member.43 In the instant case, no less than the
articles of incorporation declare the incorporators to have in their
name the founders and several common shares. Thus, to disregard
the contents of the articles of incorporation would be to pretend
that the basic document which legally triggered the creation of the
corporation does not exist and accordingly to allow great injustice to
be caused to the incorporators and their heirs.
Petitioners argue that the Court of Appeals "gravely erred in

applying the Espejo decision to the benefit of respondents." The
Court believes that the more precise statement of the issue is
whether in its assailed Decision, the Court of Appeals can declare
private respondents as the heirs of the incorporators, and
consequently register the founders shares in their name. However,
this issue as recast is not actually determinative of the present
controversy as explained below.
Petitioners claim that the Decision of the Court of Appeals

unilaterally divested them of their shares in PMMSI as recorded in the
stock and transfer book and instantly created inexistent shares in
favor of private respondents. We do not agree.
The assailed Decision merely declared that a separate judicial

declaration to recognize the shares of the original incorporators
would entail unnecessary delay and expense on the part of the
litigants, considering that the incorporators had already proved
ownership of such shares as shown in the articles of incorporation.44
There was no declaration of who the individual owners of these
shares were on the date of the promulgation of the Decision. As
properly stated by the SEC in its Order dated 20 June 1996, to which
the appellate court’s Decision should be related, "if at all, the
ownership of these shares should only be subjected to the proper
judicial (probate) or extrajudicial proceedings in order to determine
the respective shares of the legal heirs of the deceased
incorporators."45
WHEREFORE, the petition is DENIED and the assailed Decision is

AFFIRMED. Costs against petitioners.
SO ORDERED.

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Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario,
JJ., concur.
Lanuza vs. CA
GR No. 131394 | March 28, 2005
Facts:
Petitioners seek to nullify the Court of Appeals’ Decision in CA–
G.R. SP No. 414731 promulgated on 18 August 1997, affirming the
SEC Order dated 20 June 1996, and the Resolution2 of the Court of
Appeals dated 31 October 1997 which denied petitioners’ motion
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was
incorporated, with seven hundred (700) founders’ shares and
seventy-six (76) common shares as its initial capital stock subscription
reflected in the articles of incorporation
Onrubia et. al, who were in control of PMMSI registered the
company’s stock and transfer book for the first time in 1978,
recording thirty-three (33) common shares as the only issued and
outstanding shares of PMMSI.
In 1979, a special stockholders’ meeting was called and held on
the basis of what was considered as a quorum of twenty-seven (27)
common shares, representing more than two-thirds (2/3) of the
common shares issued and outstanding.
In 1982, Juan Acayan, one of the heirs of the incorporators filed
a petition for the registration of their property rights was filed before
the SEC over 120 founders’ shares and 12 common shares owned by
their father
SEC Hearing Officer: heirs of Acayan were entitled to the
claimed shares and called for a special stockholders’ meeting to
elect a new set of officers.
SEC en banc: affirmed the decision
As a result, the shares of Acayan were recorded in the stock and
transfer book.
On May 6, 1992, a special stockholders’ meeting was held to
elect a new set of directors
Onrubia et al filed a petition with SEC questioning the validity of
said meeting alleging that the quorum for the said meeting should
not be based on the 165 issued and outstanding shares as per the
stock and transfer book, but on the initial subscribed capital stock of
seven hundred seventy-six (776) shares, as reflected in the 1952
Articles of Incorporation
Petition was dismissed
SC en banc: shares of the deceased incorporators should be
duly represented by their respective administrators or heirs
concerned. Called for a stockholders meeting on the basis of the
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stockholdings reflected in the articles of incorporation for the
purpose of electing a new set of officers for the corporation
Lanuza, Acayan et al, who are PMMSI stockholders, filed a
petition for review with the CA, raising the following issues:
1. whether the basis the outstanding capital stock and accordingly
also for determining the quorum at stockholders’ meetings it should
be the 1978 stock and transfer book or if it should be the 1952 articles
of incorporation
(They contended that the basis is the stock and transfer book, not
articles of incorporation in computing the quorum)
2. whether the Espejo decision (decision of SEC en banc ordering
the recording of the shares of Jose Acayan in the stock and transfer
book) is applicable to the benefit of Onrubia et al
CA decision:
1. For purposes of transacting business, the quorum should be
based on the outstanding capital stock as found in the articles of
incorporation
2. To require a separate judicial declaration to recognize the shares
of the original incorporators would entail unnecessary delay and
expense. Besides. the incorporators have already proved their
stockholdings through the provisions of the articles of incorporation.
Appeal was made by Lanuza et al before the SC
Lanuza et al’ contention:
a. 1992 stockholders’ meeting was valid and legal
b. Reliance on the 1952 articles of incorporation for determining

the quorum negates the existence and validity of the stock and
transfer book Onrubia et al prepared
c. Onrubia et al must show and prove entitlement to the founders

and common shares in a separate and independent
action/proceeding in order to avail of the benefits secured by
the heirs of Acayan
Onrubia et al’s contention, based on the Memorandum: petition

should be dismissed on the ground of res judicata
Another appeal was made
Lanuza et al’s contention: instant petition is separate and
distinct from G.R. No. 131315, there being no identity of parties, and
more importantly, the parties in the two petitions have their own
distinct rights and interests in relation to the subject matter in
litigation
Onrubia et al’s manifestation and motion: moved for the
dismissal of the case

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Issue: What should be the basis of quorum for a stockholders’
meeting—the outstanding capital stock as indicated in the articles
of incorporation or that contained in the company’s stock and
transfer book?
Ruling:
Articles of Incorporation
- Defines the charter of the corporation and the contractual
relationships between the State and the corporation, the
stockholders and the State, and between the corporation and its
stockholders.
- Contents are binding, not only on the corporation, but also on its
shareholders.
Stock and transfer book
- Book which records the names and addresses of all stockholders
arranged alphabetically, the installments paid and unpaid on all
stock for which subscription has been made, and the date of
payment thereof; a statement of every alienation, sale or transfer of
stock made, the date thereof and by and to whom made; and such
other entries as may be prescribed by law
- necessary as a measure of precaution, expediency and
convenience since it provides the only certain and accurate
method of establishing the various corporate acts and transactions
and of showing the ownership of stock and like matters
- Not public record, and thus is not exclusive evidence of the
matters and things which ordinarily are or should be written therein
In this case, the articles of incorporation indicate that at the time
of incorporation, the incorporators were bona fide stockholders of
700 founders’ shares and 76 common shares. Hence, at that time,
the corporation had 776 issued and outstanding shares.
According to Sec. 52 of the Corp Code, “a quorum shall consist
of the stockholders representing a majority of the outstanding
capital stock.” As such, quorum is based on the totality of the shares
which have been subscribed and issued, whether it be founders’
shares or common shares
To base the computation of quorum solely on the obviously
deficient, if not inaccurate stock and transfer book, and completely
disregarding the issued and outstanding shares as indicated in the
articles of incorporation would work injustice to the owners and/or
successors in interest of the said shares.
The stock and transfer book of PMMSI cannot be used as the
sole basis for determining the quorum as it does not reflect the
totality of shares which have been subscribed, more so when the
articles of incorporation show a significantly larger amount of shares
issued and outstanding as compared to that listed in the stock and
transfer book.

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One who is actually a stockholder cannot be denied his right to
vote by the corporation merely because the corporate officers
failed to keep its records accurately. A corporation’s records are not
the only evidence of the ownership of stock in a corporation.
It is no less than the articles of incorporation that declare the
incorporators to have in their name the founders and several
common shares. Thus, to disregard the contents of the articles of
incorporation would be to pretend that the basic document which
legally triggered the creation of the corporation does not exist and
accordingly to allow great injustice to be caused to the
incorporators and their heirs
WHEREFORE, the petition is DENIED and the assailed Decision is

AFFIRMED. Costs against petitioners
Ang Mga Kaanib sa Iglesia ng Dios vs. Iglesia ng Dios Kay Kristo
Hesus (372 SCRA 171 [2001])
G.R. No. 137592 December 12, 2001
ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA

BANSANG PILIPINAS, INC., petitioner,
vs.
IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG
KATOTOHANAN, respondent.
This is a petition for review assailing the Decision dated October 7,

19971 and the Resolution dated February 16, 19992 of the Court of
Appeals in CA-G.R. SP No. 40933, which affirmed the Decision of the
Securities and Exchange and Commission (SEC) in SEC-AC No. 539.3
Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng

Katotohanan (Church of God in Christ Jesus, the Pillar and Ground of
Truth),4 is a non-stock religious society or corporation registered in
1936. Sometime in 1976, one Eliseo Soriano and several other
members of respondent corporation disassociated themselves from

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the latter and succeeded in registering on March 30, 1977 a new
non-stock religious society or corporation, named Iglesia ng Dios Kay
Kristo Hesus, Haligi at Saligan ng Katotohanan.
On July 16, 1979, respondent corporation filed with the SEC a petition
to compel the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng
Katotohanan to change its corporate name, which petition was
docketed as SEC Case No. 1774. On May 4, 1988, the SEC rendered
judgment in favor of respondent, ordering the Iglesia ng Dios Kay
Kristo Hesus, Haligi at Saligan ng Katotohanan to change its
corporate name to another name that is not similar or identical to
any name already used by a corporation, partnership or association
registered with the Commission.5 No appeal was taken from said
decision.
It appears that during the pendency of SEC Case No. 1774, Soriano,
et al., caused the registration on April 25, 1980 of petitioner
corporation, Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus,
H.S.K, sa Bansang Pilipinas. The acronym "H.S.K." stands for Haligi at
Saligan ng Katotohanan.6
On March 2, 1994, respondent corporation filed before the SEC a

petition, docketed as SEC Case No. 03-94-4704, praying that
petitioner be compelled to change its corporate name and be
barred from using the same or similar name on the ground that the
same causes confusion among their members as well as the public.
Petitioner filed a motion to dismiss on the ground of lack of cause of

action. The motion to dismiss was denied. Thereafter, for failure to file
an answer, petitioner was declared in default and respondent was
allowed to present its evidence ex parte.
On November 20, 1995, the SEC rendered a decision ordering

petitioner to change its corporate name. The dispositive portion
thereof reads:
PREMISES CONSIDERED, judgment is hereby rendered in favor of

the petitioner (respondent herein).
Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic),

H.S.K. sa Bansang Pilipinas (petitioner herein) is hereby
MANDATED to change its corporate name to another not
deceptively similar or identical to the same already used by the
Petitioner, any corporation, association, and/or partnership
presently registered with the Commission.
Let a copy of this Decision be furnished the Records Division

and the Corporate and Legal Department [CLD] of this

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Commission for their records, reference and/or for whatever
requisite action, if any, to be undertaken at their end.
SO ORDERED.7
Petitioner appealed to the SEC En Banc, where its appeal was

docketed as SEC-AC No. 539. In a decision dated March 4, 1996, the
SEC En Banc affirmed the above decision, upon a finding that
petitioner's corporate name was identical or confusingly or
deceptively similar to that of respondent's corporate name.8
Petitioner filed a petition for review with the Court of Appeals. On

October 7, 1997, the Court of Appeals rendered the assailed
decision affirming the decision of the SEC En Banc. Petitioner's
motion for reconsideration was denied by the Court of Appeals on
February 16, 1992.
Hence, the instant petition for review, raising the following

assignment of errors:
THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT

PETITIONER HAS NOT BEEN DEPRIVED OF ITS RIGHT TO PROCEDURAL
DUE PROCESS, THE HONORABLE COURT OF APPEALS DISREGARDED
THE JURISPRUDENCE APPLICABLE TO THE CASE AT BAR AND INSTEAD
RELIED ON TOTALLY INAPPLICABLE JURISPRUDENCE.
II
THE HONORABLE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF

THE CIVIL CODE PROVISIONS ON EXTINCTIVE PRESCRIPTION, THEREBY
RESULTING IN ITS FAILURE TO FIND THAT THE RESPONDENT'S RIGHT OF
ACTION TO INSTITUTE THE SEC CASE HAS SINCE PRESCRIBED PRIOR TO
ITS INSTITUTION.
III
THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND

PROPERLY APPLY THE EXCEPTIONS ESTABLISHED BY JURISPRUDENCE IN
THE APPLICATION OF SECTION 18 OF THE CORPORATION CODE TO
THE INSTANT CASE.
IV
THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY

APPRECIATE THE SCOPE OF THE CONSTITUTIONAL GUARANTEE ON
RELIGIOUS FREEDOM, THEREBY FAILING TO APPLY THE SAME TO
PROTECT PETITIONER'S RIGHTS.9

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Invoking the case of Legarda v. Court of Appeals,10 petitioner insists
that the decision of the Court of Appeals and the SEC should be set
aside because the negligence of its former counsel of record, Atty.
Joaquin Garaygay, in failing to file an answer after its motion to
dismiss was denied by the SEC, deprived them of their day in court.
The contention is without merit. As a general rule, the negligence of

counsel binds the client. This is based on the rule that any act
performed by a lawyer within the scope of his general or implied
authority is regarded as an act of his client.11 An exception to the
foregoing is where the reckless or gross negligence of the counsel
deprives the client of due process of law. 12 Said exception,
however, does not obtain in the present case.
In Legarda v. Court of Appeals, the effort of the counsel in

defending his client's cause consisted in filing a motion for extension
of time to file answer before the trial court. When his client was
declared in default, the counsel did nothing and allowed the
judgment by default to become final and executory. Upon the
insistence of his client, the counsel filed a petition to annul the
judgment with the Court of Appeals, which denied the petition, and
again the counsel allowed the denial to become final and
executory. This Court found the counsel grossly negligent and
consequently declared as null and void the decision adverse to his
client.
The factual antecedents of the case at bar are different. Atty.

Garaygay filed before the SEC a motion to dismiss on the ground of
lack of cause of action. When his client was declared in default for
failure to file an answer, Atty. Garaygay moved for reconsideration
and lifting of the order of default.13 After judgment by default was
rendered against petitioner corporation, Atty. Garaygay filed a
motion for extension of time to appeal/motion for reconsideration,
and thereafter a motion to set aside the decision.14
Evidently, Atty. Garaygay was only guilty of simple negligence.

Although he failed to file an answer that led to the rendition of a
judgment by default against petitioner, his efforts were palpably real,
albeit bereft of zeal.15
Likewise, the issue of prescription, which petitioner raised for the first
time on appeal to the Court of Appeals, is untenable. Its failure to
raise prescription before the SEC can only be construed as a waiver
of that defense.16 At any rate, the SEC has the authority to de-
register at all times and under all circumstances corporate names
which in its estimation are likely to spawn confusion. It is the duty of
the SEC to prevent confusion in the use of corporate names not only

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for the protection of the corporations involved but more so for the
protection of the public.17
Section 18 of the Corporation Code provides:
Corporate Name. — No corporate name may be allowed by

the Securities and Exchange Commission if the proposed name
is identical or deceptively or confusingly similar to that of any
existing corporation or to any other name already protected
by law or is patently deceptive, confusing or is contrary to
existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate
of incorporation under the amended name.
Corollary thereto, the pertinent portion of the SEC Guidelines on

Corporate Names states:
(d) If the proposed name contains a word similar to a word

already used as part of the firm name or style of a registered
company, the proposed name must contain two other words
different from the name of the company already registered;
Parties organizing a corporation must choose a name at their peril;

and the use of a name similar to one adopted by another
corporation, whether a business or a nonprofit organization, if
misleading or likely to injure in the exercise of its corporate functions,
regardless of intent, may be prevented by the corporation having a
prior right, by a suit for injunction against the new corporation to
prevent the use of the name.18
Petitioner claims that it complied with the aforecited SEC guideline

by adding not only two but eight words to their registered name, to
wit: "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.," which,
petitioner argues, effectively distinguished it from respondent
corporation.
The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas,
Inc." in petitioner's name are, as correctly observed by the SEC,
merely descriptive of and also referring to the members, or kaanib,
of respondent who are likewise residing in the Philippines. These
words can hardly serve as an effective differentiating medium
necessary to avoid confusion or difficulty in distinguishing petitioner
from respondent. This is especially so, since both petitioner and
respondent corporations are using the same acronym — H.S.K.;19 not
to mention the fact that both are espousing religious beliefs and
operating in the same place. Parenthetically, it is well to mention
that the acronym H.S.K. used by petitioner stands for "Haligi at
Saligan ng Katotohanan."20

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Then, too, the records reveal that in holding out their corporate
name to the public, petitioner highlights the dominant words
"IGLESIA NG DIOS KAY KRISTO HESUS, HALIGI AT SALIGAN NG
KATOTOHANAN," which is strikingly similar to respondent's corporate
name, thus making it even more evident that the additional words
"Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.", are merely
descriptive of and pertaining to the members of respondent
corporation.21
Significantly, the only difference between the corporate names of

petitioner and respondent are the words SALIGAN and SUHAY. These
words are synonymous — both mean ground, foundation or support.
Hence, this case is on all fours with Universal Mills Corporation v.
Universal Textile Mills, Inc.,22 where the Court ruled that the corporate
names Universal Mills Corporation and Universal Textile Mills, Inc., are
undisputably so similar that even under the test of "reasonable care
and observation" confusion may arise.
Furthermore, the wholesale appropriation by petitioner of

respondent's corporate name cannot find justification under the
generic word rule. We agree with the Court of Appeals' conclusion
that a contrary ruling would encourage other corporations to adopt
verbatim and register an existing and protected corporate name, to
the detriment of the public.
The fact that there are other non-stock religious societies or

corporations using the names Church of the Living God, Inc., Church
of God Jesus Christ the Son of God the Head, Church of God in
Christ & By the Holy Spirit, and other similar names, is of no
consequence. It does not authorize the use by petitioner of the
essential and distinguishing feature of respondent's registered and
protected corporate name.23
We need not belabor the fourth issue raised by petitioner. Certainly,

ordering petitioner to change its corporate name is not a violation of
its constitutionally guaranteed right to religious freedom. In so doing,
the SEC merely compelled petitioner to abide by one of the SEC
guidelines in the approval of partnership and corporate names,
namely its undertaking to manifest its willingness to change its
corporate name in the event another person, firm, or entity has
acquired a prior right to the use of the said firm name or one
deceptively or confusingly similar to it.
WHEREFORE, in view of all the foregoing, the instant petition for

review is DENIED. The appealed decision of the Court of Appeals is
AFFIRMED in toto.
SO ORDERED.

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Davide, Jr., C .J ., Kapunan and Pardo, JJ ., concur.
Puno, J ., on official leave.
Ang Mga Kaanib vs. Iglesia (December 12, 2001)
FACTS: Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay

ng Katotohanan (Church of God in Christ Jesus, the Pillar and
Ground of Truth), is a non-stock religious society or corporation
registered in 1936. Sometime in 1976, one Eliseo Soriano and several
other members of respondent corporation disassociated themselves
from the latter and succeeded in registering on March 30, 1977 a
new non-stock religious society or corporation, named Iglesia ng Dios
Kay Kristo Hesus, Haligi at Saligan ng Katotohanan. Respondent
corporation filed with the SEC a petition to compel the Iglesia ng
Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its
corporate name to another name that is not similar or identical to
any name already used by a corporation, partnership or association
registered with the Commission. Petitioner is compelled to change its
corporate name and be barred from using the same or similar name
on the ground that the same causes confusion among their
members as well as the public. SEC rendered a decision ordering
petitioner to change its corporate name. The Court of Appeals
rendered the assailed decision affirming the decision of the SEC En
Banc.
ISSUE: Whether the court of appeals failed to properly appreciate

the scope of the constitutional guarantee on religious freedom
RULING: The additional words "Ang Mga Kaanib " and "Sa Bansang
Pilipinas, Inc." in petitioner's name are, as correctly observed by the
SEC, merely descriptive of and also referring to the members, or
kaanib, of respondent who are likewise residing in the Philippines.
These words can hardly serve as an effective differentiating medium
necessary to avoid confusion or difficulty in distinguishing petitioner
from respondent. This is especially so, since both petitioner and
respondent corporations are using the same acronym — H.S.K.; not
to mention the fact that both are espousing religious beliefs and
operating in the same place. The fact that there are other non-stock
religious societies or corporations using the names Church of the

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Living God, Inc., Church of God Jesus Christ the Son of God the
Head, Church of God in Christ & By the Holy Spirit, and other similar
names, is of no consequence. It does not authorize the use by
petitioner of the essential and distinguishing feature of respondent's
registered and protected corporate name. Ordering petitioner to
change its corporate name is not a violation of its constitutionally
guaranteed right to religious freedom. In so doing, the SEC merely
compelled petitioner to abide by one of the SEC guidelines in the
approval of partnership and corporate names, namely its
undertaking to manifest its willingness to change its corporate name
in the event another person, firm, or entity has acquired a prior right
to the use of the said firm name or one deceptively or confusingly
similar to it. The instant petition for review is DENIED. The appealed
decision of the Court of Appeals is AFFIRMED in toto.
Hyatt Elevators vs. Goldstar Elevators, Phils. (473 SCRA 705 [2005]
G.R. No. 161026 October 24, 2005
HYATT ELEVATORS AND ESCALATORS CORPORATION, Petitioner,

vs.
GOLDSTAR ELEVATORS, PHILS., INC.,* Respondent.
DECISION
PANGANIBAN, J.:
ell established in our jurisprudence is the rule that the residence of a

corporation is the place where its principal office is located, as
stated in its Articles of Incorporation.
The Case
Before us is a Petition for Review1 on Certiorari, under Rule 45 of the

Rules of Court, assailing the June 26, 2003 Decision 2 and the
November 27, 2003 Resolution3 of the Court of Appeals (CA) in CA-
GR SP No. 74319. The decretal portion of the Decision reads as
follows:

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"WHEREFORE, in view of the foregoing, the assailed Orders dated
May 27, 2002 and October 1, 2002 of the RTC, Branch 213,
Mandaluyong City in Civil Case No. 99-600, are hereby SET ASIDE. The
said case is hereby ordered DISMISSED on the ground of improper
venue."4
The assailed Resolution denied petitioner’s Motion for

Reconsideration.
The Facts
The relevant facts of the case are summarized by the CA in this wise:
"Petitioner [herein Respondent] Goldstar Elevator Philippines, Inc.

(GOLDSTAR for brevity) is a domestic corporation primarily engaged
in the business of marketing, distributing, selling, importing, installing,
and maintaining elevators and escalators, with address at 6th Floor,
Jacinta II Building, 64 EDSA, Guadalupe, Makati City.
"On the other hand, private respondent [herein petitioner] Hyatt

Elevators and Escalators Company (HYATT for brevity) is a domestic
corporation similarly engaged in the business of selling, installing and
maintaining/servicing elevators, escalators and parking equipment,
with address at the 6th Floor, Dao I Condominium, Salcedo St.,
Legaspi Village, Makati, as stated in its Articles of Incorporation.
"On February 23, 1999, HYATT filed a Complaint for unfair trade
practices and damages under Articles 19, 20 and 21 of the Civil
Code of the Philippines against LG Industrial Systems Co. Ltd. (LGISC)
and LG International Corporation (LGIC), alleging among others,
that: in 1988, it was appointed by LGIC and LGISC as the exclusive
distributor of LG elevators and escalators in the Philippines under a
‘Distributorship Agreement’; x x x LGISC, in the latter part of 1996,
made a proposal to change the exclusive distributorship agency to
that of a joint venture partnership; while it looked forward to a
healthy and fruitful negotiation for a joint venture, however, the
various meetings it had with LGISC and LGIC, through the latter’s
representatives, were conducted in utmost bad faith and with
malevolent intentions; in the middle of the negotiations, in order to
put pressures upon it, LGISC and LGIC terminated the Exclusive
Distributorship Agreement; x x x [A]s a consequence, [HYATT]
suffered P120,000,000.00 as actual damages, representing loss of
earnings and business opportunities, P20,000,000.00 as damages for
its reputation and goodwill, P1,000,000.00 as and by way of
exemplary damages, and P500,000.00 as and by way of attorney’s
fees.
"On March 17, 1999, LGISC and LGIC filed a Motion to Dismiss raising
the following grounds: (1) lack of jurisdiction over the persons of
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defendants, summons not having been served on its resident agent;
(2) improper venue; and (3) failure to state a cause of action. The
[trial] court denied the said motion in an Order dated January 7,
2000.
"On March 6, 2000, LGISC and LGIC filed an Answer with Compulsory
Counterclaim ex abundante cautela. Thereafter, they filed a ‘Motion
for Reconsideration and to Expunge Complaint’ which was denied.
"On December 4, 2000, HYATT filed a motion for leave of court to

amend the complaint, alleging that subsequent to the filing of the
complaint, it learned that LGISC transferred all its organization, assets
and goodwill, as a consequence of a joint venture agreement with
Otis Elevator Company of the USA, to LG Otis Elevator Company (LG
OTIS, for brevity). Thus, LGISC was to be substituted or changed to LG
OTIS, its successor-in-interest. Likewise, the motion averred that x x x
GOLDSTAR was being utilized by LG OTIS and LGIC in perpetrating
their unlawful and unjustified acts against HYATT. Consequently, in
order to afford complete relief, GOLDSTAR was to be additionally
impleaded as a party-defendant. Hence, in the Amended
Complaint, HYATT impleaded x x x GOLDSTAR as a party-defendant,
and all references to LGISC were correspondingly replaced with LG
OTIS.
"On December 18, 2000, LG OTIS (LGISC) and LGIC filed their
opposition to HYATT’s motion to amend the complaint. It argued
that: (1) the inclusion of GOLDSTAR as party-defendant would lead
to a change in the theory of the case since the latter took no part in
the negotiations which led to the alleged unfair trade practices
subject of the case; and (b) HYATT’s move to amend the complaint
at that time was dilatory, considering that HYATT was aware of the
existence of GOLDSTAR for almost two years before it sought its
inclusion as party-defendant.
"On January 8, 2001, the [trial] court admitted the Amended

Complaint. LG OTIS (LGISC) and LGIC filed a motion for
reconsideration thereto but was similarly rebuffed on October 4,
2001.
"On April 12, 2002, x x x GOLDSTAR filed a Motion to Dismiss the

amended complaint, raising the following grounds: (1) the venue
was improperly laid, as neither HYATT nor defendants reside in
Mandaluyong City, where the original case was filed; and (2) failure
to state a cause of action against [respondent], since the amended
complaint fails to allege with certainty what specific ultimate acts x x
x Goldstar performed in violation of x x x Hyatt’s rights. In the Order
dated May 27, 2002, which is the main subject of the present

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petition, the [trial] court denied the motion to dismiss, ratiocinating
as follows:
‘Upon perusal of the factual and legal arguments raised by the

movants-defendants, the court finds that these are substantially the
same issues posed by the then defendant LG Industrial System Co.
particularly the matter dealing [with] the issues of improper venue,
failure to state cause of action as well as this court’s lack of
jurisdiction. Under the circumstances obtaining, the court resolves to
rule that the complaint sufficiently states a cause of action and that
the venue is properly laid. It is significant to note that in the
amended complaint, the same allegations are adopted as in the
original complaint with respect to the Goldstar Philippines to enable
this court to adjudicate a complete determination or settlement of
the claim subject of the action it appearing preliminarily as
sufficiently alleged in the plaintiff’s pleading that said Goldstar
Elevator Philippines Inc., is being managed and operated by the
same Korean officers of defendants LG-OTIS Elevator Company and
LG International Corporation.’
"On June 11, 2002, [Respondent] GOLDSTAR filed a motion for

reconsideration thereto. On June 18, 2002, without waiving the
grounds it raised in its motion to dismiss, [it] also filed an ‘Answer Ad
Cautelam’. On October 1, 2002, [its] motion for reconsideration was
denied.
"From the aforesaid Order denying x x x Goldstar’s motion for

reconsideration, it filed the x x x petition for certiorari [before the CA]
alleging grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of the [trial] court in issuing the assailed Orders
dated May 27, 2002 and October 1, 2002." 5
The CA ruled that the trial court had committed palpable error
amounting to grave abuse of discretion when the latter denied
respondent’s Motion to Dismiss. The appellate court held that the
venue was clearly improper, because none of the litigants "resided"
in Mandaluyong City, where the case was filed.
According to the appellate court, since Makati was the principal

place of business of both respondent and petitioner, as stated in the
latter’s Articles of Incorporation, that place was controlling for
purposes of determining the proper venue. The fact that petitioner
had abandoned its principal office in Makati years prior to the filing
of the original case did not affect the venue where personal actions
could be commenced and tried.

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The Issue
In its Memorandum, petitioner submits this sole issue for our

consideration:
"Whether or not the Court of Appeals, in reversing the ruling of the

Regional Trial Court, erred as a matter of law and jurisprudence, as
well as committed grave abuse of discretion, in holding that in the
light of the peculiar facts of this case, venue was improper[.]" 7
This Court’s Ruling
The Petition has no merit.
Sole Issue:
Venue
The resolution of this case rests upon a proper understanding of

Section 2 of Rule 4 of the 1997 Revised Rules of Court:
"Sec. 2. Venue of personal actions. – All other actions may be

commenced and tried where the plaintiff or any of the principal
plaintiff resides, or where the defendant or any of the principal
defendant resides, or in the case of a non-resident defendant where
he may be found, at the election of the plaintiff."
Since both parties to this case are corporations, there is a need to

clarify the meaning of "residence." The law recognizes two types of
persons: (1) natural and (2) juridical. Corporations come under the
latter in accordance with Article 44(3) of the Civil Code.8
Residence is the permanent home -- the place to which, whenever

absent for business or pleasure, one intends to return.9 Residence is
vital when dealing with venue.10 A corporation, however, has no
residence in the same sense in which this term is applied to a natural
person. This is precisely the reason why the Court in Young Auto
Supply Company v. Court of Appeals11 ruled that "for practical
purposes, a corporation is in a metaphysical sense a resident of the
place where its principal office is located as stated in the articles of
incorporation."12 Even before this ruling, it has already been
established that the residence of a corporation is the place where its
principal office is established.13
This Court has also definitively ruled that for purposes of venue, the
term "residence" is synonymous with "domicile."14 Correspondingly,
the Civil Code provides:
"Art. 51. When the law creating or recognizing them, or any other
provision does not fix the domicile of juridical persons, the same shall
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be understood to be the place where their legal representation is
established or where they exercise their principal functions." 15
It now becomes apparent that the residence or domicile of a

juridical person is fixed by "the law creating or recognizing" it. Under
Section 14(3) of the Corporation Code, the place where the
principal office of the corporation is to be located is one of the
required contents of the articles of incorporation, which shall be filed
with the Securities and Exchange Commission (SEC).
In the present case, there is no question as to the residence of

respondent. What needs to be examined is that of petitioner.
Admittedly,16 the latter’s principal place of business is Makati, as
indicated in its Articles of Incorporation. Since the principal place of
business of a corporation determines its residence or domicile, then
the place indicated in petitioner’s articles of incorporation becomes
controlling in determining the venue for this case.
Petitioner argues that the Rules of Court do not provide that when
the plaintiff is a corporation, the complaint should be filed in the
location of its principal office as indicated in its articles of
incorporation.17 Jurisprudence has, however, settled that the place
where the principal office of a corporation is located, as stated in
the articles, indeed establishes its residence.18 This ruling is important
in determining the venue of an action by or against a corporation,19
as in the present case.
Without merit is the argument of petitioner that the locality stated in

its Articles of Incorporation does not conclusively indicate that its
principal office is still in the same place. We agree with the appellate
court in its observation that the requirement to state in the articles
the place where the principal office of the corporation is to be
located "is not a meaningless requirement. That proviso would be
rendered nugatory if corporations were to be allowed to simply
disregard what is expressly stated in their Articles of Incorporation." 20
Inconclusive are the bare allegations of petitioner that it had closed

its Makati office and relocated to Mandaluyong City, and that
respondent was well aware of those circumstances. Assuming
arguendo that they transacted business with each other in the
Mandaluyong office of petitioner, the fact remains that, in law, the
latter’s residence was still the place indicated in its Articles of
Incorporation. Further unacceptable is its faulty reasoning that the
ground for the CA’s dismissal of its Complaint was its failure to
amend its Articles of Incorporation so as to reflect its actual and
present principal office. The appellate court was clear enough in its
ruling that the Complaint was dismissed because the venue had

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been improperly laid, not because of the failure of petitioner to
amend the latter’s Articles of Incorporation.
Indeed, it is a legal truism that the rules on the venue of personal

actions are fixed for the convenience of the plaintiffs and their
witnesses. Equally settled, however, is the principle that choosing the
venue of an action is not left to a plaintiff’s caprice; the matter is
regulated by the Rules of Court.21 Allowing petitioner’s arguments
may lead precisely to what this Court was trying to avoid in Young
Auto Supply Company v. CA:22 the creation of confusion and untold
inconveniences to party litigants. Thus enunciated the CA:
"x x x. To insist that the proper venue is the actual principal office and
not that stated in its Articles of Incorporation would indeed create
confusion and work untold inconvenience. Enterprising litigants may,
out of some ulterior motives, easily circumvent the rules on venue by
the simple expedient of closing old offices and opening new ones in
another place that they may find well to suit their needs."23
We find it necessary to remind party litigants, especially corporations,

as follows:
"The rules on venue, like the other procedural rules, are designed to
insure a just and orderly administration of justice or the impartial and
evenhanded determination of every action and proceeding.
Obviously, this objective will not be attained if the plaintiff is given
unrestricted freedom to choose the court where he may file his
complaint or petition.
"The choice of venue should not be left to the plaintiff’s whim or

caprice. He may be impelled by some ulterior motivation in choosing
to file a case in a particular court even if not allowed by the rules on
venue."24
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision

and Resolution AFFIRMED. Costs against petitioner.
SO ORDERED.
Associate Justice
Chairman, Third Division
W E C O N C U R:

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Associate Justice Associate Justice
CONCHITA CARPIO MORALES CANCIO C. GARCIA
ATTESTATION
I attest that the conclusions in the above decision had been

Associate Justice
Chairman, Third Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairman’s Attestation, it is hereby certified that the conclusions in
the above Decision had been reached in consultation before the
case was assigned to the writer of the opinion of the Court’s Division.
HILARIO G. DAVIDE, JR.
Chief Justice
NHA vs. CA (456 SCRA 17 [2005])
G.R. No. 148830. April 13, 2005
NATIONAL HOUSING AUTHORITY, Petitioners,

vs.
COURT OF APPEALS, BULACAN GARDEN CORPORATION and MANILA
SEEDLING BANK FOUNDATION, INC., Respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review1 seeking to set aside the Decision2 dated
30 March 2001 of the Court of Appeals ("appellate court") in CA-G.R.

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CV No. 48382, as well as its Resolution dated 25 June 2001 denying
the motion for reconsideration. The appellate court reversed the
Decision3 of Branch 87 of the Regional Trial Court of Quezon City
("trial court") dated 8 March 1994 in Civil Case No. Q-53464. The trial
court dismissed the complaint for injunction filed by Bulacan Garden
Corporation ("BGC") against the National Housing Authority ("NHA").
BGC wanted to enjoin the NHA from demolishing BGC’s facilities on
a lot leased from Manila Seedling Bank Foundation, Inc. ("MSBF").
MSBF allegedly has usufructuary rights over the lot leased to BGC.
Antecedent Facts
On 24 October 1968, Proclamation No. 481 issued by then President

Ferdinand Marcos set aside a 120-hectare portion of land in Quezon
City owned by the NHA4 as reserved property for the site of the
National Government Center ("NGC"). On 19 September 1977,
President Marcos issued Proclamation No. 1670, which removed a
seven-hectare portion from the coverage of the NGC. Proclamation
No. 1670 gave MSBF usufructuary rights over this segregated portion,
as follows:
Pursuant to the powers vested in me by the Constitution and the

laws of the Philippines, I, FERDINAND E. MARCOS, President of the
Republic of the Philippines, do hereby exclude from the operation of
Proclamation No. 481, dated October 24, 1968, which established
the National Government Center Site, certain parcels of land
embraced therein and reserving the same for the Manila Seedling
Bank Foundation, Inc., for use in its operation and projects, subject to
private rights if any there be, and to future survey, under the
administration of the Foundation.
This parcel of land, which shall embrace 7 hectares, shall be

determined by the future survey based on the technical descriptions
found in Proclamation No. 481, and most particularly on the original
survey of the area, dated July 1910 to June 1911, and on the
subdivision survey dated April 19-25, 1968. (Emphasis added)
MSBF occupied the area granted by Proclamation No. 1670. Over

the years, MSBF’s occupancy exceeded the seven-hectare area
subject to its usufructuary rights. By 1987, MSBF occupied
approximately 16 hectares. By then the land occupied by MSBF was
bounded by Epifanio de los Santos Avenue ("EDSA") to the west,
Agham Road to the east, Quezon Avenue to the south and a creek
to the north.
On 18 August 1987, MSBF leased a portion of the area it occupied to

BGC and other stallholders. BGC leased the portion facing EDSA,
which occupies 4,590 square meters of the 16-hectare area.

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On 11 November 1987, President Corazon Aquino issued
Memorandum Order No. 127 ("MO 127") which revoked the reserved
status of "the 50 hectares, more or less, remaining out of the 120
hectares of the NHA property reserved as site of the National
Government Center." MO 127 also authorized the NHA to
commercialize the area and to sell it to the public.
On 15 August 1988, acting on the power granted under MO 127, the

NHA gave BGC ten days to vacate its occupied area. Any structure
left behind after the expiration of the ten-day period will be
demolished by NHA.
BGC then filed a complaint for injunction on 21 April 1988 before the
trial court. On 26 May 1988, BGC amended its complaint to include
MSBF as its co-plaintiff.
The Trial Court’s Ruling
The trial court agreed with BGC and MSBF that Proclamation No.
1670 gave MSBF the right to conduct the survey, which would
establish the seven-hectare area covered by MSBF’s usufructuary
rights. However, the trial court held that MSBF failed to act
seasonably on this right to conduct the survey. The trial court ruled
that the previous surveys conducted by MSBF covered 16 hectares,
and were thus inappropriate to determine the seven-hectare area.
The trial court concluded that to allow MSBF to determine the seven-
hectare area now would be grossly unfair to the grantor of the
usufruct.
On 8 March 1994, the trial court dismissed BGC’s complaint for

injunction. Thus:
Premises considered, the complaint praying to enjoin the National

Housing Authority from carrying out the demolition of the plaintiff’s
structure, improvements and facilities in the premises in question is
hereby DISMISSED, but the suggestion for the Court to rule that
Memorandum Order 127 has repealed Proclamation No. 1670 is
DENIED. No costs.
SO ORDERED.5
The NHA demolished BGC’s facilities soon thereafter.
The Appellate Court’s Ruling
Not content with the trial court’s ruling, BGC appealed the trial
court’s Decision to the appellate court. Initially, the appellate court
agreed with the trial court that Proclamation No. 1670 granted MSBF
the right to determine the location of the seven-hectare area

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covered by its usufructuary rights. However, the appellate court
ruled that MSBF did in fact assert this right by conducting two surveys
and erecting its main structures in the area of its choice.
On 30 March 2001, the appellate court reversed the trial court’s

ruling. Thus:
WHEREFORE, premises considered, the Decision dated March 8, 1994

of the Regional Trial Court of Quezon City, Branch 87, is hereby
REVERSED and SET ASIDE. The National Housing Authority is enjoined
from demolishing the structures, facilities and improvements of the
plaintiff-appellant Bulacan Garden Corporation at its leased
premises located in Quezon City which premises were covered by
Proclamation No. 1670, during the existence of the contract of lease
it (Bulacan Garden) had entered with the plaintiff-appellant Manila
Seedling Bank Foundation, Inc.
No costs.
SO ORDERED.6
The NHA filed a motion for reconsideration, which was denied by the
appellate court on 25 June 2001.
Hence, this petition.
The Issues
The following issues are considered by this Court for resolution:
WHETHER THE PETITION IS NOW MOOT BECAUSE OF THE DEMOLITION

OF THE STRUCTURES OF BGC; and
WHETHER THE PREMISES LEASED BY BGC FROM MSBF IS WITHIN THE

SEVEN-HECTARE AREA THAT PROCLAMATION NO. 1670 GRANTED TO
MSBF BY WAY OF USUFRUCT.
We remand this petition to the trial court for a joint survey to

determine finally the metes and bounds of the seven-hectare area
subject to MSBF’s usufructuary rights.
Whether the Petition is Moot because of the
Demolition of BGC’s Facilities
BGC claims that the issue is now moot due to NHA’s demolition of
BGC’s facilities after the trial court dismissed BGC’s complaint for

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injunction. BGC argues that there is nothing more to enjoin and that
there are no longer any rights left for adjudication.
We disagree.
BGC may have lost interest in this case due to the demolition of its
premises, but its co-plaintiff, MSBF, has not. The issue for resolution has
a direct effect on MSBF’s usufructuary rights. There is yet the central
question of the exact location of the seven-hectare area granted by
Proclamation No. 1670 to MSBF. This issue is squarely raised in this
petition. There is a need to settle this issue to forestall future disputes
and to put this 20-year litigation to rest.
On the Location of the Seven-Hectare Area Granted by
Proclamation No. 1670 to MSBF as Usufructuary
Rule 45 of the 1997 Rules of Civil Procedure limits the jurisdiction of

this Court to the review of errors of law.7 Absent any of the
established grounds for exception,8 this Court will not disturb findings
of fact of lower courts. Though the matter raised in this petition is
factual, it deserves resolution because the findings of the trial court
and the appellate court conflict on several points.
The entire area bounded by Agham Road to the east, EDSA to the
west, Quezon Avenue to the south and by a creek to the north
measures approximately 16 hectares. Proclamation No. 1670 gave
MSBF a usufruct over only a seven-hectare area. The BGC’s leased
portion is located along EDSA.
A usufruct may be constituted for a specified term and under such

conditions as the parties may deem convenient subject to the legal
provisions on usufruct.9 A usufructuary may lease the object held in
usufruct.10 Thus, the NHA may not evict BGC if the 4,590 square meter
portion MSBF leased to BGC is within the seven-hectare area held in
usufruct by MSBF. The owner of the property must respect the lease
entered into by the usufructuary so long as the usufruct exists.11
However, the NHA has the right to evict BGC if BGC occupied a
portion outside of the seven-hectare area covered by MSBF’s
usufructuary rights.
MSBF’s survey shows that BGC’s stall is within the seven-hectare area.
On the other hand, NHA’s survey shows otherwise. The entire
controversy revolves on the question of whose land survey should
prevail.
MSBF’s survey plots the location of the seven-hectare portion by

starting its measurement from Quezon Avenue going northward
along EDSA up until the creek, which serves as the northern

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boundary of the land in question. Mr. Ben Malto ("Malto"), surveyor
for MSBF, based his survey method on the fact that MSBF’s main
facilities are located within this area.
On the other hand, NHA’s survey determines the seven-hectare

portion by starting its measurement from Quezon Avenue going
towards Agham Road. Mr. Rogelio Inobaya ("Inobaya"), surveyor for
NHA, based his survey method on the fact that he saw MSBF’s gate
fronting Agham Road.
BGC presented the testimony of Mr. Lucito M. Bertol ("Bertol"),

General Manager of MSBF. Bertol presented a map,12 which detailed
the area presently occupied by MSBF. The map had a yellow-
shaded portion, which was supposed to indicate the seven-hectare
area. It was clear from both the map and Bertol’s testimony that
MSBF knew that it had occupied an area in excess of the seven-
hectare area granted by Proclamation No. 1670.13 Upon cross-
examination, Bertol admitted that he personally did not know the
exact boundaries of the seven-hectare area.14 Bertol also admitted
that MSBF prepared the map without consulting NHA, the owner of
the property.15
BGC also presented the testimony of Malto, a registered forester and

the Assistant Vice-President of Planning, Research and Marketing of
MSBF. Malto testified that he conducted the land survey, which was
used to construct the map presented by Bertol.16 Bertol clarified that
he authorized two surveys, one in 1984 when he first joined MSBF,
and the other in 1986.17 In both instances, Mr. Malto testified that he
was asked to survey a total of 16 hectares, not just seven hectares.
Malto testified that he conducted the second survey in 1986 on the
instruction of MSBF’s general manager. According to Malto, it was
only in the second survey that he was told to determine the seven-
hectare portion. Malto further clarified that he based the technical
descriptions of both surveys on a previously existing survey of the
property.18
The NHA presented the testimony of Inobaya, a geodetic engineer

employed by the NHA. Inobaya testified that as part of the NHA’s
Survey Division, his duties included conducting surveys of properties
administered by the NHA.19 Inobaya conducted his survey in May
1988 to determine whether BGC was occupying an area outside the
seven-hectare area MSBF held in usufruct.20 Inobaya surveyed the
area occupied by MSBF following the same technical descriptions
used by Malto. Inobaya also came to the same conclusion that the
area occupied by MSBF, as indicated by the boundaries in the
technical descriptions, covered a total of 16 hectares. He further
testified that the seven-hectare portion in the map presented by

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BGC,21 which was constructed by Malto, does not tally with the
boundaries BGC and MSBF indicated in their complaint.
Article 565 of the Civil Code states:
ART. 565. The rights and obligations of the usufructuary shall be those
provided in the title constituting the usufruct; in default of such title,
or in case it is deficient, the provisions contained in the two following
Chapters shall be observed.
In the present case, Proclamation No. 1670 is the title constituting the
usufruct. Proclamation No. 1670 categorically states that the seven-
hectare area shall be determined "by future survey under the
administration of the Foundation subject to private rights if there be
any." The appellate court and the trial court agree that MSBF has the
latitude to determine the location of its seven-hectare usufruct
portion within the 16-hectare area. The appellate court and the trial
court disagree, however, whether MSBF seasonably exercised this
right.
It is clear that MSBF conducted at least two surveys. Although both

surveys covered a total of 16 hectares, the second survey
specifically indicated a seven-hectare area shaded in yellow. MSBF
made the first survey in 1984 and the second in 1986, way before the
present controversy started. MSBF conducted the two surveys before
the lease to BGC. The trial court ruled that MSBF did not act
seasonably in exercising its right to conduct the survey. Confronted
with evidence that MSBF did in fact conduct two surveys, the trial
court dismissed the two surveys as self-serving. This is clearly an error
on the part of the trial court. Proclamation No. 1670 authorized MSBF
to determine the location of the seven-hectare area. This authority,
coupled with the fact that Proclamation No. 1670 did not state the
location of the seven-hectare area, leaves no room for doubt that
Proclamation No. 1670 left it to MSBF to choose the location of the
seven-hectare area under its usufruct.
More evidence supports MSBF’s stand on the location of the seven-

hectare area. The main structures of MSBF are found in the area
indicated by MSBF’s survey. These structures are the main office, the
three green houses, the warehouse and the composting area. On
the other hand, the NHA’s delineation of the seven-hectare area
would cover only the four hardening bays and the display area. It is
easy to distinguish between these two groups of structures. The first
group covers buildings and facilities that MSBF needs for its
operations. MSBF built these structures before the present
controversy started. The second group covers facilities less essential
to MSBF’s existence. This distinction is decisive as to which survey

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should prevail. It is clear that the MSBF intended to use the yellow-
shaded area primarily because it erected its main structures there.
Inobaya testified that his main consideration in using Agham Road

as the starting point for his survey was the presence of a gate there.
The location of the gate is not a sufficient basis to determine the
starting point. MSBF’s right as a usufructuary as granted by
Proclamation No. 1670 should rest on something more substantial
than where MSBF chose to place a gate.
To prefer the NHA’s survey to MSBF’s survey will strip MSBF of most of
its main facilities. Only the main building of MSBF will remain with
MSBF since the main building is near the corner of EDSA and Quezon
Avenue. The rest of MSBF’s main facilities will be outside the seven-
hectare area.
On the other hand, this Court cannot countenance MSBF’s act of

exceeding the seven-hectare portion granted to it by Proclamation
No. 1670. A usufruct is not simply about rights and privileges. A
usufructuary has the duty to protect the owner’s interests. One such
duty is found in Article 601 of the Civil Code which states:
ART. 601. The usufructuary shall be obliged to notify the owner of any
act of a third person, of which he may have knowledge, that may
be prejudicial to the rights of ownership, and he shall be liable should
he not do so, for damages, as if they had been caused through his
own fault.
A usufruct gives a right to enjoy the property of another with the

obligation of preserving its form and substance, unless the title
constituting it or the law otherwise provides.22 This controversy would
not have arisen had MSBF respected the limit of the beneficial use
given to it. MSBF’s encroachment of its benefactor’s property gave
birth to the confusion that attended this case. To put this matter
entirely to rest, it is not enough to remind the NHA to respect MSBF’s
choice of the location of its seven-hectare area. MSBF, for its part,
must vacate the area that is not part of its usufruct. MSBF’s rights
begin and end within the seven-hectare portion of its usufruct. This
Court agrees with the trial court that MSBF has abused the privilege
given it under Proclamation No. 1670. The direct corollary of
enforcing MSBF’s rights within the seven-hectare area is the negation
of any of MSBF’s acts beyond it.
The seven-hectare portion of MSBF is no longer easily determinable

considering the varied structures erected within and surrounding the
area. Both parties advance different reasons why their own surveys
should be preferred. At this point, the determination of the seven-
hectare portion cannot be made to rely on a choice between the
NHA’s and MSBF’s survey. There is a need for a new survey, one
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conducted jointly by the NHA and MSBF, to remove all doubts on the
exact location of the seven-hectare area and thus avoid future
controversies. This new survey should consider existing structures of
MSBF. It should as much as possible include all of the facilities of MSBF
within the seven-hectare portion without sacrificing contiguity.
A final point. Article 605 of the Civil Code states:
ART. 605. Usufruct cannot be constituted in favor of a town,

corporation, or association for more than fifty years. If it has been
constituted, and before the expiration of such period the town is
abandoned, or the corporation or association is dissolved, the
usufruct shall be extinguished by reason thereof. (Emphasis added)
The law clearly limits any usufruct constituted in favor of a

corporation or association to 50 years. A usufruct is meant only as a
lifetime grant. Unlike a natural person, a corporation or association’s
lifetime may be extended indefinitely. The usufruct would then be
perpetual. This is especially invidious in cases where the usufruct
given to a corporation or association covers public land.
Proclamation No. 1670 was issued 19 September 1977, or 28 years
ago. Hence, under Article 605, the usufruct in favor of MSBF has 22
years left.
MO 127 released approximately 50 hectares of the NHA property as

reserved site for the National Government Center. However, MO 127
does not affect MSBF’s seven-hectare area since under
Proclamation No. 1670, MSBF’s seven-hectare area was already
"exclude[d] from the operation of Proclamation No. 481, dated
October 24, 1968, which established the National Government
Center Site."
WHEREFORE, the Decision of the Court of Appeals dated 30 March

2001 and its Resolution dated 25 June 2001 in CA-G.R. CV No. 48382
are SET ASIDE. This case is REMANDED to Branch 87 of the Regional
Trial Court of Quezon City, which shall order a joint survey by the
National Housing Authority and Manila Seedling Bank Foundation,
Inc. to determine the metes and bounds of the seven-hectare
portion of Manila Seedling Bank Foundation, Inc. under Proclamation
No. 1670. The seven-hectare portion shall be contiguous and shall
include as much as possible all existing major improvements of
Manila Seedling Bank Foundation, Inc. The parties shall submit the
joint survey to the Regional Trial Court for its approval within sixty days
from the date ordering the joint survey.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-Santiago, and

Azcuna, JJ., concur.
suigeneris
Nautica Canning Corp. vs. Yumul (473 SCRA 415 [2005])
G.R. No. 164588 October 19, 2005
NAUTICA CANNING CORPORATION, FIRST DOMINION PRIME

HOLDINGS, INC. and FERNANDO R. ARGUELLES, JR., Petitioners
vs.
ROBERTO C. YUMUL, Respondent.
DECISION
Petitioners assail the September 26, 2001 Decision 1 of the Court of

Appeals in CA-G.R. SP No. 61919, affirming in toto the Decision of the
Securities and Exchange Commission (SEC) En Banc in SEC Case No.
10-96-5455, as well as the July 16, 2004 Resolution 2 denying the
The facts of the case show that Nautica Canning Corporation

(Nautica) was organized and incorporated on May 11, 1994 with an
authorized capital stock of P40,000,000 divided into 400,000 shares
with a par value of P100.00 per share. It had a subscribed capital
stock of P10,000,000 with paid-in subscriptions from its incorporators
as follows:3
Name No. of Shares Amount Subscribed Amount Paid
ALVIN Y. DEE 89,991 P8,999,100 P4,499,100
JONATHAN Y. DEE 2 200 200
JOANNA D. LAUREL 2 200 200
DARLENE EDSA MARIE
GONZALES 2 200 200
JENNIFER Y. DEE 2 200 200
ROBERTO C. YUMUL 1 100 100
JERRY ANGPING 10,000 1,000,000 500,000
-------------- -------------------- -------------------

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100,000 P10,000,000 P5,000,000
On December 19, 1994, respondent Roberto C. Yumul was

appointed Chief Operating Officer/General Manager of Nautica
with a monthly compensation of P85,000 and an additional
compensation equal to 5% of the company’s operating profit for the
calendar year.4 On the same date, First Dominion Prime Holdings,
Inc., Nautica’s parent company, through its Chairman Alvin Y. Dee,
granted Yumul an Option to Purchase5 up to 15% of the total stocks it
subscribed from Nautica.
On June 22, 1995, a Deed of Trust and Assignment 6 was executed

between First Dominion Prime Holdings, Inc. and Yumul whereby the
former assigned 14,999 of its subscribed shares in Nautica to the
latter. The deed stated that the 14,999 "shares were acquired and
paid for in the name of the ASSIGNOR only for convenience, but
actually executed in behalf of and in trust for the ASSIGNEE."
In March 1996, Nautica declared a P35,000,000 cash dividend,

P8,250,000 of which was paid to Yumul representing his 15% share.
After Yumul’s resignation from Nautica on August 5, 1996, he wrote a

letter7 to Dee requesting the latter to formalize his offer to buy
Yumul’s 15% share in Nautica on or before August 20, 1996; and
demanding the issuance of the corresponding certificate of shares in
his name should Dee refuse to buy the same. Dee, through Atty.
Fernando R. Arguelles, Jr., Nautica’s corporate secretary, denied the
request claiming that Yumul was not a stockholder of Nautica.
On September 6, 19968 and September 9, 1996,9 Yumul requested

that the Deed of Trust and Assignment be recorded in the Stock and
Transfer Book of Nautica, and that he, as a stockholder, be allowed
to inspect its books and records.
Yumul’s requests were denied allegedly because he neither

exercised the option to purchase the shares nor paid for the
acquisition price of the 14,999 shares. Atty. Arguelles maintained that
the cash dividend received by Yumul is held by him only in trust for
First Dominion Prime Holdings, Inc.
Thus, Yumul filed on October 3, 1996, before the SEC a petition for
mandamus with damages, with prayer that the Deed of Trust and
Assignment be recorded in the Stock and Transfer Book of Nautica
and that the certificate of stocks corresponding thereto be issued in
his name.10
On October 12, 2000, the SEC En Banc rendered the Decision,11 the

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WHEREFORE, judgment is hereby rendered in favor of the petitioner
and against the respondents, as follows:
1. Declaring petitioner as a stockholder of respondent Nautica;
2. Declaring petitioner as beneficial owner of 14,999 shares of

Nautica under the Deed of Trust and Assignment dated June 22,
1995
3. Declaring petitioner to be entitled to the right of inspection of the

books of the corporation pursuant to the pertinent provisions of the
Corporation Code; and
4. Directing the Corporate Secretary of Nautica to recognize and

register the Deed of Trust and Assignment dated June 22, 1995.
SO ORDERED.12
On appeal, the Court of Appeals affirmed the decision of the SEC En

Banc. Petitioners’ motion for reconsideration was denied in a
Resolution dated July 16, 2004.
At the outset, we note that petitioners’ recourse to this Court via a

"combined" petition under Rule 65 and an appeal under Rule 45 of
the Rules of Court is irregular. A petition for review under Rule 45 is
the proper remedy of a party aggrieved by a decision of the Court
of Appeals, which is not identical to a petition for certiorari under
Rule 65. Under Rule 45, decisions, final orders or resolutions of the
Court of Appeals is appealed by filing a petition for review, which is
a continuation of the appellate process over the original case.13 On
the other hand, the writ of certiorari under Rule 65 is filed when
petitioner has no plain, speedy and adequate remedy in the
ordinary course of law against its perceived grievance. A remedy is
considered "plain, speedy and adequate" if it will promptly relieve
the petitioner from the injurious effects of the judgment and the acts
of the lower court or agency.
In this case, petitioners’ speedy, available and adequate remedy is

appeal via Rule 45, and not certiorari under Rule 65. Notwithstanding
petitioners’ procedural lapse, we shall treat the petition as one filed
under Rule 45.
The petition is partly meritorious.
Petitioners contend that Yumul was not a stockholder of Nautica;

that he was just a nominal owner of one share as the beneficial
ownership belonged to Dee who paid for said share when Nautica
was incorporated. They presented China Banking Corporation
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Check No. A2620636 and Citibank Check No. B82642 as proof of
payment by Dee; a letter by Dee dated July 15, 1994 requesting the
corporate secretary of Nautica to issue a certificate of stock in
Yumul’s name but in trust for Dee; and Stock Certificate No. 6 with
annotation "ITF Alvin Y. Dee" which means that respondent held said
stock "In Trust For Alvin Y. Dee".
Indeed, it is possible for a business to be wholly owned by one

individual. The validity of its incorporation is not affected when such
individual gives nominal ownership of only one share of stock to
each of the other four incorporators. This is not necessarily illegal.14
But, this is valid only between or among the incorporators privy to the
agreement. It does bind the corporation which, at the time the
agreement is made, was non-existent. Thus, incorporators continue
to be stockholders of a corporation unless, subsequent to the
incorporation, they have validly transferred their subscriptions to the
real parties in interest. As between the corporation on the one hand,
and its shareholders and third persons on the other, the corporation
looks only to its books for the purpose of determining who its
shareholders are.15
In the case at bar, the SEC and the Court of Appeals correctly found
Yumul to be a stockholder of Nautica, of one share of stock
recorded in Yumul’s name, although allegedly held in trust for Dee.
Nautica’s Articles of Incorporation and By-laws, as well as the
General Information Sheet filed with the SEC indicated that Yumul
was an incorporator and subscriber of one share.16 Even granting
that there was an agreement between Yumul and Dee whereby the
former is holding the share in trust for Dee, the same is binding only
as between them. From the corporation’s vantage point, Yumul is its
stockholder with one share, considering that there is no showing that
Yumul transferred his subscription to Dee, the alleged real owner of
the share, after Nautica’s incorporation.
We held in Ponce v. Alsons Cement Corp.17 that:
... [A] transfer of shares of stock not recorded in the stock and
transfer book of the corporation is non-existent as far as the
corporation is concerned. As between the corporation on one
hand, and its shareholders and third persons on the other, the
corporation looks only to its books for the purpose of determining
who its shareholders are. It is only when the transfer has been
recorded in the stock and transfer book that a corporation may
rightfully regard the transferee as one of its stockholders. From this
time, the consequent obligation on the part of the corporation to
recognize such rights as it is mandated by law to recognize arises.

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Hence, without such recording, the transferee may not be regarded
by the corporation as one among its stockholders and the
corporation may legally refuse the issuance of stock certificates[.]
Moreover, the contents of the articles of incorporation bind the

corporation and its stockholders. Its contents cannot be disregarded
considering that it was the basic document which legally triggered
the creation of the corporation.18
The Court of Appeals, in affirming the factual findings of SEC, held

that:
The evidence submitted by petitioners to establish trust is palpably

incompetent, consisting mainly of the self-serving allegations by the
petitioners and the China Banking Corporation checks issued as
payment for the shares of stock of Nautica. Dee did not testify on the
supposed trust relationship between him and Yumul. While Atty.
Arguelles testified, his testimony is barren of probative value since he
had no first-hand knowledge of the relationship in question. The
isolated fact that Dee might have paid for the share in the name of
Yumul did not by itself make the latter a man of straw. Such act of
payment is so nebulous and equivocal that it can not yield the
meaning which the petitioners would want to squeeze from it
without the clarificatory testimony of Dee.19
We see no cogent reason to set aside the factual findings of the

SEC, as upheld by the Court of Appeals. Findings of fact of quasi-
judicial agencies, like the SEC, are generally accorded respect and
even finality by the Supreme Court, if supported by substantial
evidence, in recognition of their expertise on the specific matters
under their consideration,20 moreso if the same has been upheld by
the appellate court, as in this case.
Besides, other than petitioners’ self-serving assertion that the

beneficial ownership belongs to Dee, they failed to show that the
subscription was transferred to Dee after Nautica’s incorporation.
The conduct of the parties also constitute sufficient proof of Yumul’s
status as a stockholder. On April 4, 1995, Yumul was elected during
the regular annual stockholders’ meeting as a Director of Nautica’s
Board of Directors.21 Thereafter, he was elected as president of
Nautica.22 Thus, Nautica and its stockholders knowingly held
respondent out to the public as an officer and a stockholder of the
corporation.
Section 23 of Batas Pambansa (BP) Blg. 68 or The Corporation Code

of the Philippines requires that every director must own at least one
share of the capital stock of the corporation of which he is a
director. Before one may be elected president of the corporation,
he must be a director.23 Since Yumul was elected as Nautica’s
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Director and as President thereof, it follows that he must have owned
at least one share of the corporation’s capital stock.
Thus, from the point of view of the corporation, Yumul was the owner
of one share of stock. As such, the SEC correctly ruled that he has
the right to inspect the books and records of Nautica,24 pursuant to
Section 74 of BP Blg. 68 which states that the records of all business
transactions of the corporation and the minutes of any meetings
shall be open to inspection by any director, trustee, stockholder or
member of the corporation at reasonable hours on business days
and he may demand, in writing, for a copy of excerpts from said
records or minutes, at his expense.
As to whether or not Yumul is the beneficial owner of the 14,999

shares of stocks of Nautica, petitioners allege that Yumul was given
the option to purchase shares of stocks in Nautica under the Option
to Purchase dated December 19, 1994. However, he failed to
exercise the option, thus there was no cause or consideration for the
Deed of Trust and Assignment, which makes it void for being
simulated or fictitious.25
Anent this issue, the SEC did not make a categorical finding on
whether Yumul exercised his option and also on the validity of the
Deed of Trust and Assignment. Instead, it held that:
... Although unsubstantiated, the apparent objective of the

respondents’ allegation was to refute petitioners claim over the
shares covered by the Deed of Trust and Assignment. This must
therefore be deemed as nothing but a ploy to deprive petitioner of
his right over the shares in question, which to us should not be
countenanced.26
Neither did the Court of Appeals rule on the issue as it only held that:
Petitioners also contend that the Deed is a simulated contract.
Simulation is "the declaration of a fictitious will, deliberately made by

agreement of the parties, in order to produce, for the purposes of
deception, the appearances of a judicial act which does not exist or
is different with that which was really executed." The characteristic of
simulation is that the apparent contract is not really desired or
intended to produce legal effect or in any way alter the juridical
situation of the parties.
The requisites for simulation are: (a) an outward declaration of will

different from the will of the parties; (b) the false appearance must
have been intended by mutual agreement; and (c) the purpose is
to deceive third persons. These requisites have not been proven in
this case.27

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Thus, other than defining and enumerating the requisites of a
simulated contract or deed, the Court of Appeals did not make a
determination whether the SEC has the jurisdiction to resolve the
issue and whether the questioned deed was fictitious or simulated.
In Intestate Estate of Alexander T. Ty v. Court of Appeals,28 we held

that:
… The question raised in the complaints is whether or not there was

indeed a sale in the absence of cause or consideration. The proper
forum for such a dispute is a regular trial court. The Court agrees with
the ruling of the Court of Appeals that no special corporate skill is
necessary in resolving the issue of the validity of the transfer of shares
from one stockholder to another of the same corporation. Both
actions, although involving different property, sought to declare the
nullity of the transfers of said property to the decedent on the
ground that they were not supported by any cause or consideration,
and thus, are considered void ab initio for being absolutely
simulated or fictitious. The determination whether a contract is
simulated or not is an issue that could be resolved by applying
pertinent provisions of the Civil Code, particularly those relative to
obligations and contracts. Disputes concerning the application of
the Civil Code are properly cognizable by courts of general
jurisdiction. No special skill is necessary that would require the
technical expertise of the SEC. (Emphasis supplied)
Thus, when the controversy involves matters purely civil in character,

it is beyond the ambit of the limited jurisdiction of the SEC. As held in
Viray v. Court of Appeals,29 the better policy in determining which
body has jurisdiction over a case would be to consider not only the
status or relationship of the parties, but also the nature of the
question that is the subject of their controversy. This, however, is now
moot and academic due to the passage of Republic Act No. 8799
or The Securities Regulation Code which took effect on August 8,
2000. The Act transferred from the SEC to the regional trial court
jurisdiction over cases involving intra-corporate disputes. Thus,
whether or not the issue is intra-corporate, it is now the regional trial
court and no longer the SEC that takes cognizance of the
controversy.
Considering that the issue of the validity of the Deed of Trust and
Assignment is civil in nature, thus, under the competence of the
regular courts, and the failure of the SEC and the Court of Appeals
to make a determinative finding as to its validity, we are constrained
to refrain from ruling on whether or not Yumul can compel the
corporate secretary to register said deed. It is only after an
appropriate case is filed and decision rendered thereon by the
proper forum can the issue be resolved.

suigeneris
WHEREFORE, the petition is PARTIALLY GRANTED. The September 26,
2001 Decision of the Court of Appeals in CA-G.R. SP No. 61919, is
AFFIRMED insofar as it declares respondent Roberto C. Yumul as a
subscriber and stockholder of one share of stock of Nautica Canning
Corporation. The Decision is REVERSED and SET ASIDE insofar as it
affirms the validity of the Deed of Trust and Assignment and orders its
registration in the Stock and Transfer Book of Nautica Canning
Corporation.
SO ORDERED.
CONSUELO YNARES-SANTIAGO
Associate Justice
WE CONCUR:
China Banking Corp. vs. CA (270 SCRA 503 [1997])
G.R. No. 117604 March 26, 1997
CHINA BANKING CORPORATION, petitioner,

vs.
COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB, INC.,
respondents.
KAPUNAN, J.:
Through a petition for review on certiorari under Rule 45 of the

Revised Rules of Court, petitioner China Banking Corporation seeks
the reversal of the decision of the Court of Appeals dated 15 August
1994 nullifying the Securities and Exchange Commission's order and
resolution dated 4 June 1993 and 7 December 1993, respectively, for
lack of jurisdiction. Similarly impugned is the Court of Appeals'
resolution dated 4 September 1994 which denied petitioner's motion
The case unfolds thus:
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a

stockholder of private respondent Valley Golf & Country Club, Inc.
(VGCCI, for brevity), pledged his Stock Certificate No. 1219 to
petitioner China Banking Corporation (CBC, for brevity). 1

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On 16 September 1974, petitioner wrote VGCCI requesting that the
aforementioned pledge agreement be recorded in its books. 2
In a letter dated 27 September 1974, VGCCI replied that the deed of

pledge executed by Calapatia in petitioner's favor was duly noted in
its corporate books. 3
On 3 August 1983, Calapatia obtained a loan of P20,000.00 from

petitioner, payment of which was secured by the aforestated
pledge agreement still existing between Calapatia and petitioner. 4
Due to Calapatia's failure to pay his obligation, petitioner, on 12 April

1985, filed a petition for extrajudicial foreclosure before Notary Public
Antonio T. de Vera of Manila, requesting the latter to conduct a
public auction sale of the pledged stock. 5
On 14 May 1985, petitioner informed VGCCI of the above-

mentioned foreclosure proceedings and requested that the
pledged stock be transferred to its (petitioner's) name and the same
be recorded in the corporate books. However, on 15 July 1985,
VGCCI wrote petitioner expressing its inability to accede to
petitioner's request in view of Calapatia's unsettled accounts with
the club. 6
Despite the foregoing, Notary Public de Vera held a public auction

on 17 September 1985 and petitioner emerged as the highest bidder
at P20,000.00 for the pledged stock. Consequently, petitioner was
issued the corresponding certificate of sale. 7
On 21 November 1985, VGCCI sent Calapatia a notice demanding

full payment of his overdue account in the amount of P18,783.24. 8
Said notice was followed by a demand letter dated 12 December
1985 for the same amount 9 and another notice dated 22 November
1986 for P23,483.24. 10
On 4 December 1986, VGCCI caused to be published in the

newspaper Daily Express a notice of auction sale of a number of its
stock certificates, to be held on 10 December 1986 at 10:00 a.m.
Included therein was Calapatia's own share of stock (Stock
Certificate No. 1219).
Through a letter dated 15 December 1986, VGCCI informed

Calapatia of the termination of his membership due to the sale of his
share of stock in the 10 December 1986 auction. 11
On 5 May 1989, petitioner advised VGCCI that it is the new owner of

Calapatia's Stock Certificate No. 1219 by virtue of being the highest
bidder in the 17 September 1985 auction and requested that a new
certificate of stock be issued in its name. 12

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On 2 March 1990, VGCCI replied that "for reason of delinquency"
Calapatia's stock was sold at the public auction held on 10
December 1986 for P25,000.00. 13
On 9 March 1990, petitioner protested the sale by VGCCI of the

subject share of stock and thereafter filed a case with the Regional
Trial Court of Makati for the nullification of the 10 December 1986
auction and for the issuance of a new stock certificate in its name. 14
On 18 June 1990, the Regional Trial Court of Makati dismissed the

complaint for lack of jurisdiction over the subject matter on the
theory that it involves an intra-corporate dispute and on 27 August
1990 denied petitioner's motion for reconsideration.
On 20 September 1990, petitioner filed a complaint with the

Securities and Exchange Commission (SEC) for the nullification of the
sale of Calapatia's stock by VGCCI; the cancellation of any new
stock certificate issued pursuant thereto; for the issuance of a new
certificate in petitioner's name; and for damages, attorney's fees
and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a

decision in favor of VGCCI, stating in the main that "(c)onsidering
that the said share is delinquent, (VGCCI) had valid reason not to
transfer the share in the name of the petitioner in the books of
(VGCCI) until liquidation of
delinquency." 15 Consequently, the case was dismissed. 16
On 14 April 1992, Hearing Officer Perea denied petitioner's motion for

reconsideration. 17
Petitioner appealed to the SEC en banc and on 4 June 1993, the

Commission issued an order reversing the decision of its hearing
officer. It declared thus:
The Commission en banc believes that appellant-

petitioner has a prior right over the pledged share and
because of pledgor's failure to pay the principal debt
upon maturity, appellant-petitioner can proceed with the
foreclosure of the pledged share.
WHEREFORE, premises considered, the Orders of January

3, 1992 and April 14, 1992 are hereby SET ASIDE. The
auction sale conducted by appellee-respondent Club on
December 10, 1986 is declared NULL and VOID. Finally,
appellee-respondent Club is ordered to issue another
membership certificate in the name of appellant-
petitioner bank.

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SO ORDERED. 18
VGCCI sought reconsideration of the abovecited order. However,

the SEC denied the same in its resolution dated 7 December 1993. 19
The sudden turn of events sent VGCCI to seek redress from the Court
of Appeals. On 15 August 1994, the Court of Appeals rendered its
decision nullifying and setting aside the orders of the SEC and its
hearing officer on ground of lack of jurisdiction over the subject
matter and, consequently, dismissed petitioner's original complaint.
The Court of Appeals declared that the controversy between CBC
and VGCCI is not intra-corporate. It ruled as follows:
In order that the respondent Commission can take

cognizance of a case, the controversy must pertain to
any of the following relationships: (a) between the
corporation, partnership or association and the public; (b)
between the corporation, partnership or association and
its stockholders, partners, members, or officers; (c)
between the corporation, partnership or association and
the state in so far as its franchise, permit or license to
operate is concerned, and (d) among the stockholders,
partners or associates themselves (Union Glass and
Container Corporation vs. SEC, November 28, 1983, 126
SCRA 31). The establishment of any of the relationship
mentioned will not necessarily always confer jurisdiction
over the dispute on the Securities and Exchange
Commission to the exclusion of the regular courts. The
statement made in Philex Mining Corp. vs. Reyes, 118
SCRA 602, that the rule admits of no exceptions or
distinctions is not that absolute. The better policy in
determining which body has jurisdiction over a case
would be to consider not only the status or relationship of
the parties but also the nature of the question that is the
subject of their controversy (Viray vs. Court of Appeals,
November 9, 1990, 191 SCRA 308, 322-323).
Indeed, the controversy between petitioner and

respondent bank which involves ownership of the stock
that used to belong to Calapatia, Jr. is not within the
competence of respondent Commission to decide. It is
not any of those mentioned in the aforecited case.
WHEREFORE, the decision dated June 4, 1993, and order

dated December 7, 1993 of respondent Securities and
Exchange Commission (Annexes Y and BB, petition) and
of its hearing officer dated January 3, 1992 and April 14,
1992 (Annexes S and W, petition) are all nullified and set

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aside for lack of jurisdiction over the subject matter of the
case. Accordingly, the complaint of respondent China
Banking Corporation (Annex Q, petition) is DISMISSED. No
pronouncement as to costs in this instance.
SO ORDERED. 20
Petitioner moved for reconsideration but the same was denied by

the Court of Appeals in its resolution dated 5 October 1994. 21
Hence, this petition wherein the following issues were raised:
II
ISSUES
WHETHER OR NOT RESPONDENT COURT OF APPEALS

(Former Eighth Division) GRAVELY ERRED WHEN:
1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE

04, 1993 AND ORDER DATED DECEMBER 07, 1993 OF THE
SECURITIES AND EXCHANGE COMMISSION EN BANC, AND
WHEN IT DISMISSED THE COMPLAINT OF PETITIONER
AGAINST RESPONDENT VALLEY GOLF ALL FOR LACK OF
JURISDICTION OVER THE SUBJECT MATTER OF THE CASE;
2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES

AND EXCHANGE COMMISSION EN BANC DATED JUNE 04,
1993 DESPITE PREPONDERANT EVIDENCE SHOWING THAT
PETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP
CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT
VALLEY GOLF.
The petition is granted.
The basic issue we must first hurdle is which body has jurisdiction over
the controversy, the regular courts or the SEC.
P. D. No. 902-A conferred upon the SEC the following pertinent

powers:
Sec. 3. The Commission shall have absolute jurisdiction,

supervision and control over all corporations, partnerships
or associations, who are the grantees of primary
franchises and/or a license or permit issued by the
government to operate in the Philippines, and in the
exercise of its authority, it shall have the power to enlist the
aid and support of and to deputize any and all
enforcement agencies of the government, civil or military

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as well as any private institution, corporation, firm,
association or person.
xxx xxx xxx
Sec. 5. In addition to the regulatory and adjudicative

functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws
and decrees, it shall have 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 intra-corporate

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 property to cover all of its debts but
foresees the impossibility of meeting them when
they respectively fall due or in cases where the
corporation, partnership or association has no
sufficient assets to cover its liabilities, but is
under the Management Committee created
pursuant to this Decree.

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The aforecited law was expounded upon in Viray v. CA 22 and in the
recent cases of Mainland Construction Co., Inc. v. Movilla 23 and
Bernardo v. CA, 24 thus:
. . . .The better policy in determining which body has

jurisdiction over a case would be to consider not only the
status or relationship of the parties but also the nature of
the question that is the subject of their controversy.
Applying the foregoing principles in the case at bar, to ascertain

which tribunal has jurisdiction we have to determine therefore
whether or not petitioner is a stockholder of VGCCI and whether or
not the nature of the controversy between petitioner and private
respondent corporation is intra-corporate.
As to the first query, there is no question that the purchase of the

subject share or membership certificate at public auction by
petitioner (and the issuance to it of the corresponding Certificate of
Sale) transferred ownership of the same to the latter and thus
entitled petitioner to have the said share registered in its name as a
member of VGCCI. It is readily observed that VGCCI did not assail
the transfer directly and has in fact, in its letter of 27 September 1974,
expressly recognized the pledge agreement executed by the
original owner, Calapatia, in favor of petitioner and has even noted
said agreement in its corporate books. 25 In addition, Calapatia, the
original owner of the subject share, has not contested the said
transfer.
By virtue of the afore-mentioned sale, petitioner became a bona

fide stockholder of VGCCI and, therefore, the conflict that arose
between petitioner and VGCCI aptly exemplies an intra-corporate
controversy between a corporation and its stockholder under Sec.
5(b) of P.D. 902-A.
An important consideration, moreover, is the nature of the

controversy between petitioner and private respondent corporation.
VGCCI claims a prior right over the subject share anchored mainly
on Sec. 3, Art VIII of its by-laws which provides that "after a member
shall have been posted as delinquent, the Board may order
his/her/its share sold to satisfy the claims of the Club. . ." 26 It is
pursuant to this provision that VGCCI also sold the subject share at
public auction, of which it was the highest bidder. VGCCI caps its
argument by asserting that its corporate by-laws should prevail. The
bone of contention, thus, is the proper interpretation and
application of VGCCI's aforequoted by-laws, a subject which
irrefutably calls for the special competence of the SEC.
We reiterate herein the sound policy enunciated by the Court in

Abejo v. De la Cruz 27:
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6. In the fifties, the Court taking cognizance of the move
to vest jurisdiction in administrative commissions and
boards the power to resolve specialized disputes in the
field of labor (as in corporations, public transportation and
public utilities) ruled that Congress in requiring the
Industrial Court's intervention in the resolution of labor-
management controversies likely to cause strikes or
lockouts meant such jurisdiction to be exclusive, although
it did not so expressly state in the law. The Court held that
under the "sense-making and expeditious doctrine of
primary jurisdiction . . . the courts cannot or will not
determine a controversy involving a question which is
within the jurisdiction of an administrative tribunal, where
the question demands the exercise of sound
administrative discretion requiring the special knowledge,
experience, and services of the administrative tribunal to
determine technical and intricate matters of fact, and a
uniformity of ruling is essential to comply with the purposes
of the regulatory statute administered.
In this era of clogged court dockets, the need for

specialized administrative boards or commissions with the
special knowledge, experience and capability to hear
and determine promptly disputes on technical matters or
essentially factual matters, subject to judicial review in
case of grave abuse of discretion, has become well nigh
indispensable. Thus, in 1984, the Court noted that
"between the power lodged in an administrative body
and a court, the unmistakable trend has been to refer it to
the former. 'Increasingly, this Court has been committed
to the view that unless the law speaks clearly and
unequivocably, the choice should fall on [an
administrative agency.]'" The Court in the earlier case of
Ebon v. De Guzman, noted that the lawmaking authority,
in restoring to the labor arbiters and the NLRC their
jurisdiction to award all kinds of damages in labor cases,
as against the previous P.D. amendment splitting their
jurisdiction with the regular courts, "evidently, . . . had
second thoughts about depriving the Labor Arbiters and
the NLRC of the jurisdiction to award damages in labor
cases because that setup would mean duplicity of suits,
splitting the cause of action and possible conflicting
findings and conclusions by two tribunals on one and the
same claim."
In this case, the need for the SEC's technical expertise cannot be
over-emphasized involving as it does the meticulous analysis and
correct interpretation of a corporation's by-laws as well as the

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applicable provisions of the Corporation Code in order to determine
the validity of VGCCI's claims. The SEC, therefore, took proper
cognizance of the instant case.
VGCCI further contends that petitioner is estopped from denying its

earlier position, in the first complaint it filed with the RTC of Makati
(Civil Case No. 90-1112) that there is no intra-corporate relations
between itself and VGCCI.
VGCCI's contention lacks merit.
In Zamora v. Court of Appeals, 28 this Court, through Mr. Justice

Isagani A. Cruz, declared that:
It follows that as a rule the filing of a complaint with one

court which has no jurisdiction over it does not prevent the
plaintiff from filing the same complaint later with the
competent court. The plaintiff is not estopped from doing
so simply because it made a mistake before in the choice
of the proper forum. . . .
We remind VGCCI that in the same proceedings before the RTC of

Makati, it categorically stated (in its motion to dismiss) that the case
between itself and petitioner is intra-corporate and insisted that it is
the SEC and not the regular courts which has jurisdiction. This is
precisely the reason why the said court dismissed petitioner's
complaint and led to petitioner's recourse to the SEC.
Having resolved the issue on jurisdiction, instead of remanding the

whole case to the Court of Appeals, this Court likewise deems it
procedurally sound to proceed and rule on its merits in the same
proceedings.
It must be underscored that petitioner did not confine the instant

petition for review on certiorari on the issue of jurisdiction. In its
assignment of errors, petitioner specifically raised questions on the
merits of the case. In turn, in its responsive pleadings, private
respondent duly answered and countered all the issues raised by
petitioner.
Applicable to this case is the principle succinctly enunciated in the

case of Heirs of Crisanta Y. Gabriel-Almoradie v. Court of Appeals, 29
citing Escudero v. Dulay 30 and The Roman Catholic Archbishop of
Manila v. Court of Appeals. 31
In the interest of the public and for the expeditious

administration of justice the issue on infringement shall be
resolved by the court considering that this case has

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dragged on for years and has gone from one forum to
another.
It is a rule of procedure for the Supreme Court to strive to

settle the entire controversy in a single proceeding
leaving no root or branch to bear the seeds of future
litigation. No useful purpose will be served if a case or the
determination of an issue in a case is remanded to the
trial court only to have its decision raised again to the
Court of Appeals and from there to the Supreme Court.
We have laid down the rule that the remand of the case
or of an issue to the lower court for further reception of
evidence is not necessary where the Court is in position to
resolve the dispute based on the records before it and
particularly where the ends of justice would not be
subserved by the remand thereof. Moreover, the Supreme
Court is clothed with ample authority to review matters,
even those not raised on appeal if it finds that their
consideration is necessary in arriving at a just disposition of
the case.
In the recent case of China Banking Corp., et al. v. Court of Appeals,

et al., 32 this Court, through Mr. Justice Ricardo J. Francisco, ruled in
this wise:
At the outset, the Court's attention is drawn to the fact

that since the filing of this suit before the trial court, none
of the substantial issues have been resolved. To avoid and
gloss over the issues raised by the parties, as what the trial
court and respondent Court of Appeals did, would unduly
prolong this litigation involving a rather simple case of
foreclosure of mortgage. Undoubtedly, this will run
counter to the avowed purpose of the rules, i.e., to assist
the parties in obtaining just, speedy and inexpensive
determination of every action or proceeding. The Court,
therefore, feels that the central issues of the case, albeit
unresolved by the courts below, should now be settled
specially as they involved pure questions of law.
Furthermore, the pleadings of the respective parties on file
have amply ventilated their various positions and
arguments on the matter necessitating prompt
adjudication.
In the case at bar, since we already have the records of the case
(from the proceedings before the SEC) sufficient to enable us to
render a sound judgment and since only questions of law were
raised (the proper jurisdiction for Supreme Court review), we can,

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therefore, unerringly take cognizance of and rule on the merits of the
case.
The procedural niceties settled, we proceed to the merits.
VGCCI assails the validity of the pledge agreement executed by

Calapatia in petitioner's favor. It contends that the same was null
and void for lack of consideration because the pledge agreement
was entered into on 21 August
1974 33 but the loan or promissory note which it secured was
obtained by Calapatia much later or only on 3 August 1983. 34
VGCCI's contention is unmeritorious.
A careful perusal of the pledge agreement will readily reveal that

the contracting parties explicitly stipulated therein that the said
pledge will also stand as security for any future advancements (or
renewals thereof) that Calapatia (the pledgor) may procure from
petitioner:
xxx xxx xxx
This pledge is given as security for the prompt payment

when due of all loans, overdrafts, promissory notes, drafts,
bills or exchange, discounts, and all other obligations of
every kind which have heretofore been contracted, or
which may hereafter be contracted, by the PLEDGOR(S)
and/or DEBTOR(S) or any one of them, in favor of the
PLEDGEE, including discounts of Chinese drafts, bills of
exchange, promissory notes, etc., without any further
endorsement by the PLEDGOR(S) and/or Debtor(s) up to
the sum of TWENTY THOUSAND (P20,000.00) PESOS,
together with the accrued interest thereon, as hereinafter
provided, plus the costs, losses, damages and expenses
(including attorney's fees) which PLEDGEE may incur in
connection with the collection thereof. 35 (Emphasis ours.)
The validity of the pledge agreement between petitioner and

Calapatia cannot thus be held suspect by VGCCI. As candidly
explained by petitioner, the promissory note of 3 August 1983 in the
amount of P20,000.00 was but a renewal of the first promissory note
covered by the same pledge agreement.
VGCCI likewise insists that due to Calapatia's failure to settle his

delinquent accounts, it had the right to sell the share in question in
accordance with the express provision found in its by-laws.
Private respondent's insistence comes to naught. It is significant to

note that VGCCI began sending notices of delinquency to

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Calapatia after it was informed by petitioner (through its letter dated
14 May 1985) of the foreclosure proceedings initiated against
Calapatia's pledged share, although Calapatia has been
delinquent in paying his monthly dues to the club since 1975.
Stranger still, petitioner, whom VGCCI had officially recognized as
the pledgee of Calapatia's share, was neither informed nor furnished
copies of these letters of overdue accounts until VGCCI itself sold the
pledged share at another public auction. By doing so, VGCCI
completely disregarded petitioner's rights as pledgee. It even failed
to give petitioner notice of said auction sale. Such actuations of
VGCCI thus belie its claim of good faith.
In defending its actions, VGCCI likewise maintains that petitioner is

bound by its by-laws. It argues in this wise:
The general rule really is that third persons are not bound
by the by-laws of a corporation since they are not privy
thereto (Fleischer v. Botica Nolasco, 47 Phil. 584). The
exception to this is when third persons have actual or
constructive knowledge of the same. In the case at bar,
petitioner had actual knowledge of the by-laws of private
respondent when petitioner foreclosed the pledge made
by Calapatia and when petitioner purchased the share
foreclosed on September 17, 1985. This is proven by the
fact that prior thereto, i.e., on May 14, 1985 petitioner
even quoted a portion of private respondent's by-laws
which is material to the issue herein in a letter it wrote to
private respondent. Because of this actual knowledge of
such by-laws then the same bound the petitioner as of the
time when petitioner purchased the share. Since the by-
laws was already binding upon petitioner when the latter
purchased the share of Calapatia on September 17, 1985
then the petitioner purchased the said share subject to
the right of the private respondent to sell the said share for
reasons of delinquency and the right of private
respondent to have a first lien on said shares as these
rights are provided for in the by-laws very very clearly. 36
VGCCI misunderstood the import of our ruling in Fleischer v. Botica

Nolasco Co.: 37
And moreover, the by-law now in question cannot have

any effect on the appellee. He had no knowledge of
such by-law when the shares were assigned to him. He
obtained them in good faith and for a valuable
consideration. He was not a privy to the contract created
by said by-law between the shareholder Manuel Gonzales

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and the Botica Nolasco, Inc. Said by-law cannot operate
to defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his

shares without first offering them to the corporation for a
period of thirty days is not binding upon an assignee of
the stock as a personal contract, although his assignor
knew of the by-law and took part in its adoption. (10 Cyc.,
579; Ireland vs. Globe Milling Co., 21 R.I., 9.)
When no restriction is placed by public law on the transfer

of corporate stock, a purchaser is not affected by any
contractual restriction of which he had no notice.
(Brinkerhoff-Farris Trust & Savings Co. vs. Home Lumber Co.,
118 Mo., 447.)
The assignment of shares of stock in a corporation by one

who has assented to an unauthorized by-law has only the
effect of a contract by, and enforceable against, the
assignor; the assignee is not bound by such by-law by
virtue of the assignment alone. (Ireland vs. Globe Milling
Co., 21 R.I., 9.)
A by-law of a corporation which provides that transfers of

stock shall not be valid unless approved by the board of
directors, while it may be enforced as a reasonable
regulation for the protection of the corporation against
worthless stockholders, cannot be made available to
defeat the rights of third persons. (Farmers' and
Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.)
(Emphasis ours.)
In order to be bound, the third party must have acquired knowledge

of the pertinent by-laws at the time the transaction or agreement
between said third party and the shareholder was entered into, in
this case, at the time the pledge agreement was executed. VGCCI
could have easily informed petitioner of its by-laws when it sent
notice formally recognizing petitioner as pledgee of one of its shares
registered in Calapatia's name. Petitioner's belated notice of said
by-laws at the time of foreclosure will not suffice. The ruling of the
SEC en banc is particularly instructive:
By-laws signifies the rules and regulations or private laws

enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and its
stockholders or members and directors and officers with
relation thereto and among themselves in their relation to
it. In other words, by-laws are the relatively permanent
and continuing rules of action adopted by the
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corporation for its own government and that of the
individuals composing it and having the direction,
management and control of its affairs, in whole or in part,
in the management and control of its affairs and
activities. (9 Fletcher 4166, 1982 Ed.)
The purpose of a by-law is to regulate the conduct and

define the duties of the members towards the corporation
and among themselves. They are self-imposed and,
although adopted pursuant to statutory authority, have
no status as public law. (Ibid.)
Therefore, it is the generally accepted rule that third

persons are not bound by by-laws, except when they
have knowledge of the provisions either actually or
constructively. In the case of Fleisher v. Botica Nolasco, 47
Phil. 584, the Supreme Court held that the by-law
restricting the transfer of shares cannot have any effect
on the transferee of the shares in question as he "had no
knowledge of such by-law when the shares were assigned
to him. He obtained them in good faith and for a valuable
consideration. He was not a privy to the contract created
by the by-law between the shareholder . . . and the
Botica Nolasco, Inc. Said by-law cannot operate to
defeat his right as a purchaser. (Emphasis supplied.)
By analogy of the above-cited case, the Commission en

banc is of the opinion that said case is applicable to the
present controversy. Appellant-petitioner bank as a third
party can not be bound by appellee-respondent's by-
laws. It must be recalled that when appellee-respondent
communicated to appellant-petitioner bank that the
pledge agreement was duly noted in the club's books
there was no mention of the shareholder-pledgor's unpaid
accounts. The transcript of stenographic notes of the June
25, 1991 Hearing reveals that the pledgor became
delinquent only in 1975. Thus, appellant-petitioner was in
good faith when the pledge agreement was contracted.
The Commission en banc also believes that for the

exception to the general accepted rule that third persons
are not bound by by-laws to be applicable and binding
upon the pledgee, knowledge of the provisions of the
VGCI By-laws must be acquired at the time the pledge
agreement was contracted. Knowledge of said provisions,
either actual or constructive, at the time of foreclosure will
not affect pledgee's right over the pledged share. Art.
2087 of the Civil Code provides that it is also of the

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essence of these contracts that when the principal
obligation becomes due, the things in which the pledge
or mortgage consists maybe alienated for the payment to
the creditor.
In a letter dated March 10, 1976 addressed to Valley Golf

Club, Inc., the Commission issued an opinion to the effect
that:
According to the weight of authority, the

pledgee's right is entitled to full protection
without surrender of the certificate, their
cancellation, and the issuance to him of new
ones, and when done, the pledgee will be fully
protected against a subsequent purchaser
who would be charged with constructive
notice that the certificate is covered by the
pledge. (12-A Fletcher 502)
The pledgee is entitled to retain possession of

the stock until the pledgor pays or tenders to
him the amount due on the debt secured. In
other words, the pledgee has the right to resort
to its collateral for the payment of the debts.
(Ibid, 502)
To cancel the pledged certificate outright and

the issuance of new certificate to a third person
who purchased the same certificate covered
by the pledge, will certainly defeat the right of
the pledgee to resort to its collateral for the
payment of the debt. The pledgor or his
representative or registered stockholders has no
right to require a return of the pledged stock
until the debt for which it was given as security
is paid and satisfied, regardless of the length of
time which have elapsed since debt was
created. (12-A Fletcher 409)
A bona fide pledgee takes free from any latent or secret

equities or liens in favor either of the corporation or of third
persons, if he has no notice thereof, but not otherwise. He
also takes it free of liens or claims that may subsequently
arise in favor of the corporation if it has notice of the
pledge, although no demand for a transfer of the stock to
the pledgee on the corporate books has been made. (12-
A Fletcher 5634, 1982 ed., citing Snyder v. Eagle Fruit Co.,
75 F2d739) 38

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Similarly, VGCCI's contention that petitioner is duty-bound to know its
by-laws because of Art. 2099 of the Civil Code which stipulates that
the creditor must take care of the thing pledged with the diligence
of a good father of a family, fails to convince. The case of Cruz &
Serrano v. Chua A. H. Lee, 39 is clearly not applicable:
In applying this provision to the situation before us it must

be borne in mind that the ordinary pawn ticket is a
document by virtue of which the property in the thing
pledged passes from hand to hand by mere delivery of
the ticket; and the contract of the pledge is, therefore,
absolvable to bearer. It results that one who takes a pawn
ticket in pledge acquires domination over the pledge;
and it is the holder who must renew the pledge, if it is to
be kept alive.
It is quite obvious from the aforequoted case that a

membership share is quite different in character from a pawn
ticket and to reiterate, petitioner was never informed of
Calapatia's unpaid accounts and the restrictive provisions in
VGCCI's by-laws.
Finally, Sec. 63 of the Corporation Code which provides that "no

shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation" cannot
be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid
claim arising from unpaid subscription, and not to any indebtedness
which a subscriber or stockholder may owe the corporation arising
from any other transaction." 40 In the case at bar, the subscription for
the share in question has been fully paid as evidenced by the
issuance of Membership Certificate No. 1219. 41 What Calapatia
owed the corporation were merely the monthly dues. Hence, the
aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed decision of the Court

of Appeals is REVERSED and the order of the SEC en banc dated 4
June 1993 is hereby AFFIRMED.
SO ORDERED.
Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.
Salafranca vs. Philamlife (Pamplona) Village Homeowners

Association (300 SCRA 469 [1998])

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G.R. No. 121791 December 23, 1998
ENRIQUE SALAFRANCA, petitioner,

vs.
PHILAMLIFE (PAMPLONA) VILLAGE HOMEOWNERS ASSOCIATION, INC.,
BONIFACIO DAZO and THE SECOND DIVISION, NATIONAL LABOR
RELATIONS COMMISSION (NLRC), respondents.
ROMERO, J.:
Petitioner Enrique Salafranca started working with the private

respondent Philamlife Village Homeowners Association on May 1,
1981 as administrative officer for a period of six months. From this
date until December 31, 1983, petitioner was reappointed to his
position three more times. 1 As administrative officer, petitioner was
generally responsible for the management of the village's day to
day activities. 2 After petitioner's term of employment expired on
December 31, 1983, he still continued to work in the same capacity,
albeit, without the benefit of a renewed contract.
Sometime in 1987, private respondent decided to amend its by-laws.

Included therein was a provision regarding officers, specifically, the
position of administrative officer under which said officer shall hold
office at the pleasure of the Board of Directors. In view of this
development, private respondent, on July 3, 1987, informed the
petitioner that his term of office shall be coterminus with the Board of
Directors which appointed him to his position. Furthermore, until he
submits a medical certificate showing his state of health, his
employment shall be on a month-to-month basis. 3 Oddly,
notwithstanding the failure of herein petitioner to submit his medical
certificate, he continued working until his termination in December
1992. 4 Claiming that his services had been unlawfully and
unceremoniously dispensed with, petitioner filed a complaint for
illegal dismissal with money claims and for damages. 5
After the submission by the parties of their respective position papers

and other pleadings, the Labor Arbiter rendered a decision 6
ordering private respondent to pay the petitioner the amount of
P257,833.33 representing his backwages, separation pay and 13th
month pay. In justifying the award, the Labor Arbiter elucidated:
Respondents' contention that complainant's term of

employment was co-terminus with the term of Office of
the Board of Directors, is wanting in merit. Records show
that complainant had been hired in 1981 while the
Amendment of the respondents' By-Laws making the
position of an Administrative Officer co-terminus with the
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term of the Board of Directors was made in 1987.
Evidently, the said Amendment would not be applicable
to the case of complainant who had become a regular
employee long time before the Amendment took place.
Moreover, the Amendment should be applied
prospectively and not retroactively.
On appeal by the private respondent, the NLRC reversed the

decision of the Labor Arbiter and rendered a new one 7 reducing
petitioner's monetary award to only one-half (1/2) month pay for
every year of service representing his retirement pay. In other words,
the NLRC viewed the dismissal of the petitioner as a valid act by the
private respondent.
The fact that he continued to perform the function of the

office of administrative officer without extension or re-
appointment thereafter, to our mind, did not in any way
make his employment permanent as in fact, he was even
reminded of the nature of his position by then president of
the association Jaime Y. Ladao in a letter of 3 July 1987.
His reply to the aforesaid letter, claiming his employment
regular, and viz a viz, referring to submit his medical
certificate, notwithstanding, to our mind, merely
underscored the need to define his position as, in fact, the
Association's Rules and Regulations were amended if but
to put to rest the tenural (sic) limit of the office of the
Administrative Officer in accordance with its earlier
intention, that it is co-terminus with that of the members of
the Board of Directors.
WHEREFORE, the decision appealed from is hereby set

aside. Respondents are hereby ordered to pay herein
appellee one half (1/2) month pay for every year of
service representing his retirement pay.
In view of the sudden turn of events, petitioner has elevated the

case to this Court assigning the following errors: 8
1. The NLRC gravely abused its discretion when it ruled

that the employment of the Petitioner is not purely based
on considerations of Employer-Employee relationship.
2. Petitioner was illegally dismissed by private respondents.
As to the first assigned error by the petitioner, we need not dwell on

this at length. We agree with the Solicitor General's observation that
an employer-employee relationship exists between the petitioner
and the private respondent. 9

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xxx xxx xxx
The first element is present in this case. Petitioner was hired

as Administrative Officer by respondents. In fact, he was
extended successive appointments by respondents.
The second element is also present since it is not denied

that respondent PVHA paid petitioner a fixed salary for his
services.
As to the third element, it can be seen from the Records

that respondents had the power of dismissal over
petitioner. In their letter dated December 7, 1992,
respondents informed petitioner that they had decided to
discontinue his services. In their Position Paper submitted
to the Labor Arbiter, respondents stated that petitioner
"was dismissed for cause." (p. 17, Record).
With respect to the fourth and most important element,

respondents controlled the work of petitioner not only with
respect to the ends to be achieved but also the means
used in reaching such ends.
Relative to the second assigned error of the petitioner, both the

Solicitor General and the private respondent take the stance that
petitioner was not illegally dismissed. 10 On this aspect, we disagree
with their contentions.
On the outset, there is no dispute that petitioner had already

attained the status of a regular employee, as evidenced by his
eleven years of service with the private respondent. Accordingly,
petitioner enjoys the right to security of tenure 11 and his services may
be terminated only for causes provided by law. 12
Viewed in this light, while private respondent has the right to

terminate the services of petitioner, this is subject to both substantive
and procedural grounds. 13 The substantive causes for dismissal are
those provided in Articles 282 and 283 of the, Labor Code, 14 while
the procedural grounds refer to the observance of the requirement
of due process. 15 In all these instances, it is the private respondent,
being the employer, who must prove the validity of the dismissal. 16
Having reviewed the records of this case carefully, we conclude that

private respondent utterly failed to substantiate petitioner's dismissal,
rendering the latter's termination illegal. At the risk of being
redundant, it must be stressed that these requirements are
mandatory and non-compliance therewith renders any judgment
reached by the management void and inexistent. 17

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While private respondent imputes "gross negligence," and "serious
misconduct" as the causes of petitioner's dismissal, 18 not a shred of
evidence was offered in support thereof, other than bare and
uncorroborated allegations. The facts and circumstances regarding
such alleged infractions were never explained, While it is true that
private respondent, through its president Bonifacio Dazo, executed
an affidavit narrating the alleged violations of the petitioner, 19 these
were never corroborated by concrete or competent evidence. It is
settled that no undue importance should be given to a sworn
statement or affidavit as a piece of evidence because, being taken
ex-parte, an affidavit is almost always incomplete and inaccurate. 20
Furthermore, it must be noted that when petitioner was terminated in
1992, these alleged infractions were never raised nor communicated
to him. In fact, these were only revealed after the complaint was
filed by the petitioner in 1993. Why there was a delay was never
adequately explained by private respondent.
Likewise, we note that Dazo himself was not presented as a witness

to give the petitioner an opportunity to cross-examine him and
propound clarificatory questions regarding matters averred in his
affidavit. All told, the foregoing lapses and the belated submission of
the affidavit, cast doubt as to the credibility of the allegations. In
sum, the dismissal of the petitioner had no factual basis whatsoever.
The rule is that unsubstantiated accusations without more, are not
tantamount to guilt. 21
As regards the issue of procedural due process, private respondent

justifies its non-compliance therewith in this wise:
The Association Officers, being his peers and friends had a

problem however in terminating his services. He had been
found to have committed infractions as previously
enumerated. PVHA could have proceeded with a full-
blown investigation to hear these charges, but the ordeal
might break the old man's heart as this will surely affect his
standing in the community. So they decided to make their
move as discreetly (but legally) as possible to save the
petitioner's reputation. Terminating him in accordance
with the provision of the by-laws of the Association without
pointing out his numerous faults and malfeasance in
office and with one-half month pay for every year of
service in accordance with the Retirement Law was the
best and only alternative.
We are not impressed. The reasoning advanced by the private

respondent is as puerile as it is preposterous.

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The essence of due process is to afford the party an opportunity to
be heard and defend himself, to cleanse his name and reputation
from any taint. It includes the twin requirements of notice and
hearing. 22 This concept evolved from the basic tenet that one's
employment or profession is a property right protected by the
constitutional guaranty of due process of law. 23 Hence, an
individual's separation from work must be founded on clearly-
established facts, not on mere conjectures and suspicions. 24
In light of the foregoing, private respondent's arguments are clearly

baseless and without merit. In truth, instead of protecting petitioner's
reputation, private respondent succeeded in doing exactly the
opposite — it condemned the petitioner without even hearing his
side. It is stating the obvious that dismissal, being the ultimate penalty
that can be meted out to an employee, should be based on a clear
or convincing ground. 25 As such, a decision to terminate an
employee without fully apprising him of the facts, on the pretext that
the twin requirements of notice and hearing are unnecessary or
useless, is an invalid and obnoxious exercise of management
prerogative.
Furthermore, private respondent, in an effort to validate the dismissal

of the petitioner, posits the theory that the latter's position is
coterminus with that of the Village's Board of Directors, as provided
for in its amended by-laws. 26
Admittedly, the right to amend the by-laws lies solely in the discretion
of the employer, this being in the exercise of management
prerogative or business judgment. However this right, extensive as it
may be, cannot impair the obligation of existing contracts or rights.
Prescinding from these premises, private respondent's insistence that

it can legally dismiss petitioner on the ground that his tenure has
expired is untenable. To reiterate, petitioner, being a regular
employee, is entitled to security of tenure, hence, his services may
only be terminated for causes provided by law. 27 A contrary
interpretation would not find justification in the laws or the
Constitution. If we were to rule otherwise, it would enable an
employer to remove any employee from his employment by the
simple expediency of amending its by-laws and providing that
his/her position shall cease to exist upon the occurrence of a
specified event.
If private respondent wanted to make the petitioner's position co-

terminus with that of the Board of Directors, then the amendment
must be effective after petitioner's stay with the private respondent,
not during his term. Obviously, the measure taken by the private
respondent in amending its by-laws is nothing but a devious, but

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crude, attempt to circumvent petitioner's right to security of tenure
as a regular employee guaranteed under the Labor Code. 28
Interestingly, the Solicitor General is of the view that what actually

transpired was that petitioner was retired from his employment,
considering the fact that in 1992 he was already 70 years old and
not terminated. 29
While there seems to be a semblance of plausibility in this contention

for the matter of extension of service of such employee or official is
addressed to the sound discretion of the employer, still we have no
doubt that this was just a mere after-thought — a dismissal disguised
as retirement.
In the proceedings before the Labor Arbiter, it is noteworthy that

private respondent never raised the issue of compulsory retirement,
30 as a cause for terminating petitioner's service. In its appeal before
the NLRC, this ground was never discussed. In fact, private

respondent, in justifying the termination of the petitioner, still
anchored its claim on the applicability of the amended by-laws. This
omission is fatal to private respondent's cause, for the rule is well-
settled that matters, theories or arguments not brought out in the
proceedings below will ordinarily not be considered by a reviewing
court, as they cannot be raised for the first time on appeal. 31
Undaunted, private respondent now asserts that the instant petition

was filed out of time, 32 considering that the assailed NLRC decision
was received on June 28, 1995 while this petition was filed on
September 20, 1995. At this juncture, we take this opportunity to state
that under the 1997 Rules of Civil Procedure, a petition for certiorari
must now be instituted within sixty days of receipt of the assailed
judgment, order or resolution. 33 However, since this case arose in
1995 and the aforementioned rule only took effect on July 1, 1997
then the old rule is applicable. Since prior to the effectivity of the
new rule, a special civil action of certiorari should be instituted within
a period of three months, 34 the instant petition which was filed on
September 20, 1995 or two months and twenty-two days thereafter,
was still within the reglementary period.
With respect to the issue of the monetary award to be given to the

petitioner, private respondent argues that he deserves only
retirement pay and nothing more. This position would have been
tenable had petitioner not been illegally dismissed. However, since
we have already ruled petitioner's dismissal as without just cause and
lacking due process, the award of backwages and reinstatement is
proper. 35
In this particular case, reinstatement is no longer feasible since

petitioner was already 70 years old at the time he was removed from
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his employment. As a substitute thereof, separation pay is generally
awarded, 36 the amount of which must be equivalent to one-month
salary for every year of service. 37
With respect to the amount of backwages which, incidentally is

different from separation pay, 38 it now settled that an illegally
dismissed employee is entitled to its full payment as long as the
cause of action accrued after March 21, 1989. 39 Considering that
petitioner was terminated from the service on December 9, 1992,
which is after March 21, 1989, he is entitled to full backwages from
the time of the illegal dismissal without any, qualification or
deduction. 40
As regards the issue of retirement pay, private respondent asserts

that the correct amount should be one-half (1/2) month salary for
every year of service. This time we agree with private respondent's
contention. The pertinent law is Article 287 of the Labor Code, as
amended by Republic Act No. 7641, which reads:
Art. 287. Retirement. — Any employee may be retired

upon reaching the retirement age established in the
collective bargaining agreement or other applicable
employment contract.
In case of retirement, the employee shall he entitled to

receive such retirement benefits as he may have earned
under existing laws and any collective bargaining
agreement and other agreements: Provided, however,
That an employee's retirement benefits under any
collective bargaining and other agreements shall not be
less than those provided herein.
In the absence of a retirement plan or agreement

providing for retirement benefits of employees in the
establishment, an employee upon reaching the age of
sixty (60) years or more, but not beyond sixty-five (65)
years which is hereby declared the compulsory retirement
age, who has served at least five (5) years in the said
establishment, may retire and shall be entitled to
retirement pay equivalent to at least one-half (1/2) month
salary for every year of service, a fraction of al least six (6)
months being considered as one whole year.
xxx xxx xxx
With respect to the issue that petitioner, being a managerial

employee, is not entitled to thirteenth month pay, Memorandum
Order No. 28, as implemented by the Revised Guidelines on the

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Implementation of the 13th Month Pay Law dated November 16,
1987, provides:
Sec. 1 of Presidential Decree No. 851 is hereby modified to

the extent that all employers are hereby required to pay
all their rank and file employees a 13th month pay not
later than December 24 of every year.
Clearly, therefore, the foregoing exempts managerial employees

from this benefit. Of course, this does not preclude an employer from
granting other bonuses, in lieu of the 13th month pay, to managerial
employees in its discretion.
Finally, we cannot simply ignore private respondent's malicious

scheme to remove petitioner from his position which is contrary to
good customs and effected in an oppressive manner, thus
warranting an award of moral and exemplary damages to the
petitioner. 41 Moreover, since petitioner was forced to litigate and
incur expenses to protect his right and interests, he is entitled to
attorney's fees. 42
WHEREFORE, in view of the foregoing, the instant petition is

GRANTED. The NLRC decision dated June 15, 1995 is hereby
REVERSED and SET ASIDE. Private respondent Philamlife Village
Homeowners Association is ORDERED: (1) to pay petitioner Enrique
Salafranca separation pay equivalent to one month salary for every
year of service; (2) to pay his full backwages in accordance with our
ruling in Bustamante v. NLRC; 43 (3) to pay his retirement pay in
accordance with Article 287 of the Labor Code, as amended by
Republic Act No. 7641, (4) to pay moral and exemplary damages in
the amount of twenty thousand (P20,000.00) pesos and ten
thousand (P10,000.00) pesos, respectively; 44 and (5) to pay ten (10%)
percent of the total amount due to petitioner, as attorney's fees.
Consequently, the respondent NLRC is ORDERED to COMPUTE the
total monetary benefits awarded in accordance with this decision
and to submit its compliance thereon within thirty (30) days from
notice of this decision.
SO ORDERED.
Kapunan, Purisima and Pardo, JJ., concur.
Footnotes
1 Annex "B," "C," "D" of Petition, pp. 26-29.
2 Ibid., p. 59.
3 Id., p. 61.

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4 Id., p. 30.
5 Id., pp. 35-36.
6 Id., pp. 137-144.
7 Rollo, pp. 174-186.
8 Id., p. 10.
9 Comment, Rollo, pp. 254-255.
10 Id., p. 255.
11 Philippine School of Business Administration (PSBA)-

Manila v. NLRC, 261 SCRA 189 (1996).
12 San Miguel Jeepney Service v. NLRC, 265 SCRA 38

(1996).
13 Manuel v. N.C. Construction Supply, 282 SCRA 326

(1997); Shoppers Gain Supermart v. NLRC, 259 SCRA 411
(1996).
14 Art. 282. Termination by employer. — An employer may

terminate an employment for any of the following causes:
(a) Serious misconduct or willful disobedience by the

employee of the lawful orders of his employer or
representative in connection with his work;
(b) Gross and habitual neglect by the employee of his

duties;
(c) Fraud or willful breach by the employee of the trust

reposed in him by his employer or duly authorized
representative;
(d) Commission of a crime or offense by the employee

against the person of his employer or any immediate
member of his family or his duly authorized representative;
and
(e) Other causes analogous to the foregoing.
Art. 283. Closure of establishment and reduction of

personnel. — The employer may also terminate the
employment of any employee due to the installation of
labor saving devices, redundancy, retrenchment to
prevent losses or the closing or cessation of operation of

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the establishment or undertaking unless the closing is for
the purpose of circumventing the provisions of this Title, by
serving a written notice on the workers and the Ministry of
Labor and Employment at least one (1) month before the
intended date thereof. In case of termination due to the
installation of labor saving devices or redundancy, the
worker affected thereby shall be entitled to a separation
pay equivalent to at least his one (1) month pay or to at
least one (1) month pay for every year of service,
whichever is higher. In case of retrenchment to prevent
losses and in cases of closures or cessation of operations
of establishment or undertaking not due to serious
business losses or financial reverses, the separation pay
shall be equivalent to one (1) month pay or at least one-
half (1/2) month pay for every year of service, whichever
is higher. A fraction of at least six (6) months shall be
considered one (1) whole year.
300 SCRA 469 – Business Organization – Corporation Law – By-Laws

Must Not Impair Existing Rights
In 1981, Enrique Salafranca was hired as an administrative officer by

the Philamlife Village Homeowners Associaiton, Inc. (PVHAI).
Salafranca was tasked to manage the village’s day to day activities.
His employment was originally for 6 months only but his contract was
renewed multiple times until 1983. But even after 1983, he was still
allowed to continue work even without a renewed contract. In 1987,
PVHAI amended its by-laws. Among the amendment was a provision
that the administrative officer (Salafranca) shall have a tenure which
is co-terminus with the Board of Directors which appointed him. In
1992, the tenure of said Board of Directors expired and so Salafranca
was terminated.
ISSUE: Whether or not Salafranca was illegally dismissed.
HELD: Yes. At that time, Salafranca already enjoys security of tenure

because he is already a regular employee. It is true that PVHAI has
the right to amend its by-laws but such amendment must not impair
existing contracts or rights. In this case, the provision that
Salafranca’s position shall be co-terminus with the appointing Board
impairs his right to security of tenure which has already vested even
prior to the amendment of the by-laws in 1987.

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PMI Colleges vs. NLRC (277 SCRA 462 [1997])
G.R. No. 121466 August 15, 1997
PMI COLLEGES, petitioner,

vs.
THE NATIONAL LABOR RELATIONS COMMISSION and ALEJANDRO GA
LVA N, respondents.
ROMERO, J.:
Subject of the instant petition for certiorari under Rule 65 of the Rules
of Court is the resolution 1 of public respondent National Labor
Relations Commission 2 rendered on August 4, 1995, affirming in toto
the December 7, 1994 decision 3 of Labor Arbiter Pablo C. Espiritu
declaring petitioner PMI Colleges liable to pay private respondent
Alejandro Galvan P405,000.00 in unpaid wages and P40,532.00 as
attorney's fees.
A chronicle of the pertinent events on record leading to the filing of

the instant petition is as follows:
On July 7, 1991, petitioner, an educational institution offering courses

on basic seaman's training and other marine-related courses, hired
private respondent as contractual instructor with an agreement that
the latter shall be paid at an hourly rate of P30.00 to P50.00,
depending on the description of load subjects and on the schedule
for teaching the same. Pursuant to this engagement, private
respondent then organized classes in marine engineering.
Initially, private respondent and other instructors were compensated

for services rendered during the first three periods of the
abovementioned contract. However, for reasons unknown to private
respondent, he stopped receiving payment for the succeeding
rendition of services. This claim of non-payment was embodied in a
letter dated March 3, 1992, written by petitioner's Acting Director,
Casimiro A. Aguinaldo, addressed to its President, Atty. Santiago
Pastor, calling attention to and appealing for the early approval and
release of the salaries of its instructors including that of private
respondent. It appeared further in said letter that the salary of
private respondent corresponding to the shipyard and plant visits
and the ongoing on-the-job training of Class 41 on board MV "Sweet

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Glory" of Sweet Lines, Inc. was not yet included. This request of the
Acting Director apparently went unheeded. Repeated demands
having likewise failed, private respondent was soon constrained to
file a complaint 4 before the National Capital Region Arbitration
Branch on September 14, 1993 seeking payment for salaries earned
from the following: (1) basic seaman course Classes 41 and 42 for the
period covering October 1991 to September 1992; (2) shipyard and
plant visits and on-the-job training of Classes 41 and 42 for the period
covering October 1991 to September 1992 on board M/V "Sweet
Glory" vessel; and (3) as Acting Director of Seaman Training Course
for 3-1/2 months.
In support of the abovementioned claims, private respondent

submitted documentary evidence which were annexed to his
complaint, such as the detailed load and schedule of classes with
number of class hours and rate per hour (Annex "A"); PMI Colleges
Basic Seaman Training Course (Annex "B"); the aforementioned
letter-request for payment of salaries by the Acting Director of PMI
Colleges (Annex "C"); unpaid load of private respondent (Annex "D");
and vouchers prepared by the accounting department of petitioner
but whose amounts indicated therein were actually never paid to
private respondent (Exhibit "E").
Private respondent's claims, as expected, were resisted by petitioner.

It alleged that classes in the courses offered which complainant
claimed to have remained unpaid were not held or conducted in
the school premises of PMI Colleges. Only private respondent, it was
argued, knew whether classes were indeed conducted. In the same
vein, petitioner maintained that it exercised no appropriate and
proper supervision of the said classes which activities allegedly
violated certain rules and regulations of the Department of
Education, Culture and Sports (DECS). Furthermore, the claims,
according to petitioner, were all exaggerated and that, at any rate,
private respondent abandoned his work at the time he should have
commenced the same.
In reply, private respondent belied petitioner's allegations

contending, among others, that he conducted lectures within the
premises of petitioner's rented space located at 5th Floor,
Manufacturers Bldg., Sta. Cruz, Manila; that his students duly enrolled
with the Registrar's Office of petitioner; that shipyard and plant visits
were conducted at Fort San Felipe, Cavite Naval Base; that
petitioner was fully aware of said shipyard and plant visits because it
even wrote a letter for that purpose; and that basic seaman courses
41 and 42 were sanctioned by the DECS as shown by the records of
the Registrar's Office.

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Later in the proceedings below, petitioner manifested that Mr. Tomas
G. Cloma, Jr., a member of the petitioner's Board of Trustees wrote a
letter 5 to the Chairman of the Board on May 23, 1994, clarifying the
case of private respondent and stating therein, inter alia, that under
petitioner's by-laws only the Chairman is authorized to sign any
contract and that private respondent, in any event, failed to submit
documents on the alleged shipyard and plant visits in Cavite Naval
Base.
Attempts at amicable settlement having failed, the parties were

required to submit their respective position papers. Thereafter, on
June 16, 1994, the Labor Arbiter issued an order declaring the case
submitted for decision on the basis of the position papers which the
parties filed. Petitioner, however, vigorously opposed this order
insisting that there should be a formal trial on the merits in view of the
important factual issues raised. In another order dated July 22, 1994,
the Labor Arbiter impliedly denied petitioner's opposition, reiterating
that the case was already submitted for decision. Hence, a decision
was subsequently rendered by the Labor Arbiter on December 7,
1994 finding for the private respondent. On appeal, the NLRC
affirmed the same in toto in its decision of August 4, 1995.
Aggrieved, petitioner now pleads for the Court to resolve the

following issues in its favor, to wit:
I. Whether the money claims of private respondent

representing salaries/wages as contractual instructor for class
instruction, on-the-job training and shipboard and plant visits
have valid legal and factual bases;
II. Whether claims for salaries/wages for services relative to on-

the-job training and shipboard and plant visits by instructors,
assuming the same were really conducted, have valid bases;
III. Whether the petitioner was denied its right to procedural due
process; and
IV. Whether the NLRC findings in its questioned resolution have

sound legal and factual support.
We see no compelling reason to grant petitioner's plea; the same

must, therefore, be dismissed.
At once, a mere perusal of the issues raised by petitioner already

invites dismissal for demonstrated ignorance and disregard of settled
rules on certiorari. Except perhaps for the third issue, the rest glaringly
call for a re-examination, evaluation and appreciation of the weight
and sufficiency of factual evidence presented before the Labor
Arbiter. This, of course, the Court cannot do in the exercise of its

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certiorari jurisdiction without transgressing the well-defined limits
thereof. The corrective power of the Court in this regard is confined
only to jurisdictional issues and a determination of whether there is
such grave abuse of discretion amounting to lack or excess of
jurisdiction on the part of a tribunal or agency. So unyielding and
consistent are the decisional rules thereon that it is indeed surprising
why petitioner's counsel failed to accord them the observance they
deserve.
Thus, in San Miguel Foods, Inc. Cebu B-Men Feed Plant v. Hon.
Bienvenido Laguesma, 6 we were emphatic in declaring that:
This Court is definitely not the proper venue to consider this

matter for it is not a trier of facts. . . . Certiorari is a remedy
narrow in its scope and inflexible in character. It is not a general
utility tool in the legal workshop. Factual issues are not a proper
subject for certiorari, as the power of the Supreme Court to
review labor cases is limited to the issue of jurisdiction and
grave abuse of discretion. . . . (Emphasis supplied).
Of the same tenor was our disquisition in Ilocos Sur Electric

Cooperative, Inc. v. NLRC 7 where we made plain that:
In certiorari proceedings under Rule 65 of the Rules of Court,

judicial review by this Court does not go so far as to evaluate
the sufficiency of evidence upon which the Labor Arbiter and
the NLRC based their determinations, the inquiry being limited
essentially to whether or not said public respondents had acted
without or in excess of its jurisdiction or with grave abuse of
discretion. (Emphasis supplied).
To be sure, this does not mean that the Court would disregard
altogether the evidence presented. We merely declare that the
extent of review of evidence we ordinarily provide in other cases is
different when it is a special civil action of certiorari. The latter
commands us to merely determine whether there is basis established
on record to support the findings of a tribunal and such findings
meet the required quantum of proof, which in this instance, is
substantial evidence. Our deference to the expertise acquired by
quasi-judicial agencies and the limited scope granted to us in the
exercise of certiorari jurisdiction restrain us from going so far as to
probe into the correctness of a tribunal's evaluation of evidence,
unless there is palpable mistake and complete disregard thereof in
which case certiorari would be proper. In plain terms, in certiorari
proceedings, we are concerned with mere "errors of jurisdiction" and
not "errors of judgment." Thus:
The rule is settled that the original and exclusive jurisdiction of

this Court to review a decision of respondent NLRC (or
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Executive Labor Arbiter as in this case) in a petition for certiorari
under Rule 65 does not normally include an inquiry into the
correctness of its evaluation of the evidence. Errors of
judgment, as distinguished from errors of jurisdiction, are not
within the province of a special civil action for certiorari, which
is merely confined to issues of jurisdiction or grave abuse of
discretion. It is thus incumbent upon petitioner to satisfactorily
establish that respondent Commission or executive labor arbiter
acted capriciously and whimsically in total disregard of
evidence material to or even decisive of the controversy, in
order that the extraordinary writ of certiorari will lie. By grave
abuse of discretion is meant such capricious and whimsical
exercise of judgment as is equivalent to lack of jurisdiction, and
it must be shown that the discretion was exercised arbitrarily or
despotically. For certiorari to lie there must be capricious,
arbitrary and whimsical exercise of power, the very antithesis of
the judicial prerogative in accordance with centuries of both
civil law and common law traditions. 8
The Court entertains no doubt that the foregoing doctrines apply

with equal force in the case at bar.
In any event, granting that we may have to delve into the facts and
evidence of the parties, we still find no puissant justification for us to
adjudge both the Labor Arbiter's and NLRC's appreciation of such
evidence as indicative of any grave abuse of discretion.
First. Petitioner places so much emphasis on its argument that private

respondent did not produce a copy of the contract pursuant to
which he rendered services. This argument is, of course, puerile. The
absence of such copy does not in any manner negate the existence
of a contract of employment since "(C)ontracts shall be obligatory,
in whatever form they have
been entered into, provided all the essential requisites for their
validity are present." 9 The only exception to this rule is "when the law
requires that a contract be in some form in order that it may be valid
or enforceable, or that a contract be proved in a certain way."
However, there is no requirement under the law that the contract of
employment of the kind entered into by petitioner with private
respondent should be in any particular form. While it may have been
desirable for private respondent to have produced a copy of his
contract if one really exists, but the absence thereof, in any case,
does not militate against his claims inasmuch as:
No particular form of evidence is required to prove the

existence of an employer-employee relationship. Any
competent and relevant evidence to prove the relationship
may be admitted. For, if only documentary evidence would be

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required to show that relationship, no scheming employer
would ever be brought before the bar of justice, as no
employer would wish to come out with any trace of the
illegality he has authored considering that it should take much
weightier proof to invalidate a written instrument. . . . 10
At any rate, the vouchers prepared by petitioner's own accounting

department and the letter-request of its Acting Director asking for
payment of private respondent's services suffice to support a
reasonable conclusion that private respondent was employed with
petitioner. How else could one explain the fact that private
respondent was supposed to be paid the amounts mentioned in
those documents if he were not employed? Petitioner's evidence is
wanting in this respect while private respondent affirmatively stated
that the same arose out of his employment with petitioner. As
between the two, the latter is weightier inasmuch as we accord
affirmative testimony greater value than a negative one. For the
foregoing reasons, we find it difficult to agree with petitioner's
assertion that the absence of a copy of the alleged contract should
nullify private respondent's claims.
Neither can we concede that such contract would be invalid just

because the signatory thereon was not the Chairman of the Board
which allegedly violated petitioner's by-laws. Since by-laws operate
merely as internal rules among the stockholders, they cannot affect
or prejudice third persons who deal with the corporation, unless they
have knowledge of the same." 11 No proof appears on record that
private respondent ever knew anything about the provisions of said
by-laws. In fact, petitioner itself merely asserts the same without even
bothering to attach a copy or excerpt thereof to show that there is
such a provision. How can it now expect the Labor Arbiter and the
NLRC to believe it? That this allegation has never been denied by
private respondent does not necessarily signify admission of its
existence because technicalities of law and procedure and the rules
obtaining in the courts of law do not strictly apply to proceedings of
this nature.
Second. Petitioner bewails the fact that both the Labor Arbiter and
the NLRC accorded due weight to the documents prepared by
private respondent since they are said to be self-serving. "Self-serving
evidence" is not to be literally taken as evidence that serves one's
selfish interest. 12 The fact alone that most of the documents
submitted in evidence by private respondent were prepared by him
does not make them self-serving since they have been offered in the
proceedings before the Labor Arbiter and that ample opportunity
was given to petitioner to rebut their veracity and authenticity.
Petitioner, however, opted to merely deny them which denial,
ironically, is actually what is considered self-serving evidence 13 and,

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therefore, deserves scant consideration. In any event, any denial
made by petitioner cannot stand against the affirmative and fairly
detailed manner by which private respondent supported his claims,
such as the places where he conducted his classes, on-the-job
training and shipyard and plant visits; the rate he applied and the
duration of said rendition of services; the fact that he was indeed
engaged as a contractual instructor by petitioner; and that part of
his services was not yet remunerated. These evidence, to reiterate,
have never been effectively refuted by petitioner.
Third. As regards the amounts demanded by private respondent, we

can only rely upon the evidence presented which, in this case,
consists of the computation of private respondent, as well as the
findings of both the Labor Arbiter and the NLRC. Petitioner, it must be
stressed, presented no satisfactory proof to the contrary. Absent
such proof, we are constrained to rely upon private respondent's
otherwise straightforward explanation of his claims.
Fourth. The absence of a formal hearing or trial before the Labor

Arbiter is no cause for petitioner to impute grave abuse of discretion.
Whether to conduct one or not depends on the sole discretion of
the Labor Arbiter, taking into account the position papers and
supporting documents submitted by the parties on every issue
presented. If the Labor Arbiter, in his judgment, is confident that he
can rely on the documents before him, he cannot be faulted for not
conducting a formal trial anymore, unless it would appear that, in
view of the particular circumstances of a case, the documents,
without more, are really insufficient.
As applied to the instant case, we can understand why the Labor

Arbiter has opted not to proceed to trial, considering that private
respondent, through annexes to his position paper, has adequately
established that, first of all, he was an employee of petitioner;
second, the nature and character of his services, and finally, the
amounts due him in consideration of his services. Petitioner, it should
be reiterated, failed to controvert them. Actually, it offered only four
documents later in the course of the proceedings. It has only itself to
blame if it did not attach its supporting evidence with its position
paper. It cannot now insist that there be a trial to give it an
opportunity to ventilate what it should have done earlier. Section 3,
Rule V of the New Rules of Procedure of the NLRC is very clear on the
matter:
Sec. 3. . . .
These verified position papers . . . shall be accompanied by all

supporting documents including the affidavits of their
respective witnesses which shall take the place of the latter's

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direct testimony. The parties shall thereafter not be allowed to
allege facts, or present evidence to prove facts, not referred to
and any cause or causes of action not included in the
complaint or position papers, affidavits and other documents. .
. . (Emphasis supplied).
Thus, given the mandate of said rule, petitioner should have foreseen
that the Labor Arbiter, in view of the non-litigious nature of the
proceedings before it, might not proceed at all to trial. Petitioner
cannot now be heard to complain of lack of due process. The
following is apropos:
The petitioners should not have assumed that after they

submitted their position papers, the Labor Arbiter would call for
a formal trial or hearing. The holding of a trial is discretionary on
the Labor Arbiter, it is not a matter of right of the parties,
especially in this case, where the private respondents had
already presented their documentary evidence.
xxx xxx xxx
The petitioners did ask in their position paper for a hearing to

thresh out some factual matters pertinent to their case.
However, they had no right or reason to assume that their
request would be granted. The petitioners should have
attached to their position paper all the documents that would
prove their claim in case it was decided that no hearing should
be conducted or was necessary. In fact, the rules require that
position papers shall be accompanied by all supporting
documents, including affidavits of witnesses in lieu of their direct
testimony. 14
It must be noted that adequate opportunity was given to petitioner

in the presentation of its evidence, such as when the Labor Arbiter
granted petitioner's Manifestation and Motion 15 dated July 22, 1994
allowing it to submit four more documents. This opportunity
notwithstanding, petitioner still failed to fully proffer all its evidence
which might help the Labor Arbiter in resolving the issues. What it
desired instead, as stated in its petition, 16 was to "require
presentation of witnesses buttressed by relevant documents in
support thereof." But this is precisely the opportunity given to
petitioner when the Labor Arbiter granted its Motion and
Manifestation. It should have presented the documents it was
proposing to submit. The affidavits of its witnesses would have
sufficed in lieu of their direct testimony 17 to clarify what it perceives
to be complex factual issues. We rule that the Labor Arbiter and the
NLRC were not remiss in their duty to afford petitioner due process.
The essence of due process is merely that a party be afforded a

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reasonable opportunity to be heard and to submit any evidence he
may have in support of his defense. 18
WHEREFORE, in view of the foregoing, the instant petition is hereby

DISMISSED for lack of merit while the resolution of the National Labor
Relations Commission dated August 4, 1995 is hereby AFFIRMED.
SO ORDERED.
Regalado, Puno and Mendoza, JJ., concur.
Torres, Jr., J., is on Leave.
Footnotes
277 SCRA 462 – Business Organization – Corporation Law – By-laws

and Innocent Third Persons
In 1991, PMI Colleges hired the services of Alejandro Galvan for the
latter to teach in said institution. However, for unknown reasons, PMI
defaulted from paying the remunerations due to Galvan. Galvan
made demands but were ignored by PMI. Eventually, Galvan filed a
labor case against PMI. Galvan got a favorable judgment from the
Labor Arbiter; this was affirmed by the National Labor Relations
Commission. On appeal, PMI reiterated, among others, that the
employment of Galvan is void because it did not comply with its by-
laws. Apparently, the by-laws require that an employment contract
must be signed by the Chairman of the Board of PMI. PMI asserts that
Galvan’s employment contract was not signed by the Chairman of
the Board.
ISSUE: Whether or not Galvan’s employment contract is void.
HELD: No. PMI Colleges never even presented a copy of the by-laws
to prove the existence of such provision. But even if it did, the
employment contract cannot be rendered invalid just because it
does not bear the signature of the Chairman of the Board of PMI. By-
Laws operate merely as internal rules among the stockholders, they
cannot affect or prejudice third persons who deal with the
corporation, unless they have knowledge of the same. In this case,
PMI was not able to prove that Galvan knew of said provision in the
by-laws when he was employed by PMI.
Filipinas Port Services vs. Go (518 SCRA 453 [2007])

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G.R. No. 161886 March 16, 2007
FILIPINAS PORT SERVICES, INC., represented by stockholders,

ELIODORO C. CRUZ and MINDANAO TERMINAL AND BROKERAGE
SERVICES, INC., Petitioners,
vs.
VICTORIANO S. GO, ARSENIO LOPEZ CHUA, EDGAR C. TRINIDAD,
HERMENEGILDO M. TRINIDAD, JESUS SYBICO, MARY JEAN D. CO,
HENRY CHUA, JOSELITO S. JAYME, ERNESTO S. JAYME, and ELIEZER B.
DE JESUS, Respondents.
DECISION
GARCIA, J.:
Assailed and sought to be set aside in this petition for review on

certiorari is the Decision1 dated 19 January 2004 of the Court of
Appeals (CA) in CA-G.R. CV No. 73827, reversing an earlier decision
of the Regional Trial Court (RTC) of Davao City and accordingly
dismissing the derivative suit instituted by petitioner Eliodoro C. Cruz
for and in behalf of the stockholders of co-petitioner Filipinas Port
Services, Inc. (Filport, hereafter).
The case is actually an intra-corporate dispute involving Filport, a

domestic corporation engaged in stevedoring services with principal
office in Davao City. It was initially instituted with the Securities and
Exchange Commission (SEC) where the case hibernated and
remained unresolved for several years until it was overtaken by the
enactment into law, on 19 July 2000, of Republic Act (R.A.) No. 8799,
otherwise known as the Securities Regulation Code. From the SEC
and consistent with R.A. No. 8799, the case was transferred to the
RTC of Manila, Branch 14, sitting as a corporate court. Subsequently,
upon respondents’ motion, the case eventually landed at the RTC of
Davao City where it was docketed as Civil Case No. 28,552-2001.
RTC-Davao City, Branch 10, ruled in favor of the petitioners
prompting respondents to go to the CA in CA-G.R. CV No. 73827. This
time, the respondents prevailed, hence, this petition for review by
the petitioners.
The relevant facts:
On 4 September 1992, petitioner Eliodoro C. Cruz, Filport’s president

from 1968 until he lost his bid for reelection as Filport’s president
during the general stockholders’ meeting in 1991, wrote a letter 2 to
the corporation’s Board of Directors questioning the board’s creation

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of the following positions with a monthly remuneration of P13,050.00
each, and the election thereto of certain members of the board, to
wit:
Asst. Vice-President for Corporate Planning - Edgar C. Trinidad

(Director)
Asst. Vice-President for Operations - Eliezer B. de Jesus (Director)
Asst. Vice-President for Finance - Mary Jean D. Co (Director)
Asst. Vice-President for Administration - Henry Chua (Director)
Special Asst. to the Chairman - Arsenio Lopez Chua (Director)
Special Asst. to the President - Fortunato V. de Castro
In his aforesaid letter, Cruz requested the board to take necessary

action/actions to recover from those elected to the aforementioned
positions the salaries they have received.
On 15 September 1992, the board met and took up Cruz’s letter. The
records do not show what specific action/actions the board had
taken on the letter. Evidently, whatever action/actions the board
took did not sit well with Cruz.
On 14 June 1993, Cruz, purportedly in representation of Filport and its

stockholders, among which is herein co-petitioner Mindanao
Terminal and Brokerage Services, Inc. (Minterbro), filed with the SEC
a petition3 which he describes as a derivative suit against the herein
respondents who were then the incumbent members of Filport’s
Board of Directors, for alleged acts of mismanagement detrimental
to the interest of the corporation and its shareholders at large,
namely:
1. creation of an executive committee in 1991 composed of

seven (7) members of the board with compensation of P500.00
for each member per meeting, an office which, to Cruz, is not
provided for in the by-laws of the corporation and whose
function merely duplicates those of the President and General
Manager;
2. increase in the emoluments of the Chairman, Vice-President,

Treasurer and Assistant General Manager which increases are
greatly disproportionate to the volume and character of the
work of the directors holding said positions;
3. re-creation of the positions of Assistant Vice-Presidents (AVPs)

for Corporate Planning, Operations, Finance and
Administration, and the election thereto of board members
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Edgar C. Trinidad, Eliezer de Jesus, Mary Jean D. Co and Henry
Chua, respectively; and
4. creation of the additional positions of Special Assistants to

the President and the Board Chairman, with Fortunato V. de
Castro and Arsenio Lopez Chua elected to the same, the
directors elected/appointed thereto not doing any work to
deserve the monthly remuneration of P13,050.00 each.
In the same petition, docketed as SEC Case No. 06-93-4491, Cruz

alleged that despite demands made upon the respondent members
of the board of directors to desist from creating the positions in
question and to account for the amounts incurred in creating the
same, the demands were unheeded. Cruz thus prayed that the
respondent members of the board of directors be made to pay
Filport, jointly and severally, the sums of money variedly representing
the damages incurred as a result of the creation of the
offices/positions complained of and the aggregate amount of the
questioned increased salaries.
In their common Answer with Counterclaim,4 the respondents denied

the allegations of mismanagement and materially averred as
follows:
1. the creation of the executive committee and the grant of

per diems for the attendance of each member are allowed
under the by-laws of the corporation;
2. the increases in the salaries/emoluments of the Chairman,

Vice-President, Treasurer and Assistant General Manager were
well within the financial capacity of the corporation and well-
deserved by the officers elected thereto; and
3. the positions of AVPs for Corporate Planning, Operations,

Finance and Administration were already in existence during
the tenure of Cruz as president of the corporation, and were
merely recreated by the Board, adding that all those
appointed to said positions of Assistant Vice Presidents, as well
as the additional position of Special Assistants to the Chairman
and the President, rendered services to deserve their
compensation.
In the same Answer, respondents further averred that Cruz and his
co-petitioner Minterbro, while admittedly stockholders of Filport,
have no authority nor standing to bring the so-called "derivative suit"
for and in behalf of the corporation; that respondent Mary Jean D.
Co has already ceased to be a corporate director and so with
Fortunato V. de Castro, one of those holding an assailed position;
and that no demand to cease and desist from further committing
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the acts complained of was made upon the board. By way of
affirmative defenses, respondents asserted that (1) the petition is not
duly verified by petitioner Filport which is the real party-in-interest; (2)
Filport, as represented by Cruz and Minterbro, failed to exhaust
remedies for redress within the corporation before bringing the suit;
and (3) the petition does not show that the stockholders bringing the
suit are joined as nominal parties. In support of their counterclaim,
respondents averred that Cruz filed the alleged derivative suit in bad
faith and purely for harassment purposes on account of his non-
reelection to the board in the 1991 general stockholders’ meeting.
As earlier narrated, the derivative suit (SEC Case No. 06-93-4491)

hibernated with the SEC for a long period of time. With the
enactment of R.A. No. 8799, the case was first turned over to the RTC
of Manila, Branch 14, sitting as a corporate court. Thereafter, on
respondents’ motion, it was eventually transferred to the RTC of
Davao City whereat it was docketed as Civil Case No. 28,552-2001
and raffled to Branch 10 thereof.
On 10 December 2001, RTC-Davao City rendered its decision5 in the

case. Even as it found that (1) Filport’s Board of Directors has the
power to create positions not provided for in the by-laws of the
corporation since the board is the governing body; and (2) the
increases in the salaries of the board chairman, vice-president,
treasurer and assistant general manager are reasonable, the trial
court nonetheless rendered judgment against the respondents by
ordering the directors holding the positions of Assistant Vice President
for Corporate Planning, Special Assistant to the President and
Special Assistant to the Board Chairman to refund to the corporation
the salaries they have received as such officers "considering that
Filipinas Port Services is not a big corporation requiring multiple
executive positions" and that said positions "were just created for
accommodation." We quote the fallo of the trial court’s decision.
WHEREFORE, judgment is rendered ordering:
Edgar C. Trinidad under the third and fourth causes of action to

restore to the corporation the total amount of salaries he received as
assistant vice president for corporate planning; and likewise ordering
Fortunato V. de Castro and Arsenio Lopez Chua under the fourth
cause of action to restore to the corporation the salaries they each
received as special assistants respectively to the president and
board chairman. In case of insolvency of any or all of them, the
members of the board who created their positions are subsidiarily
liable.
The counter claim is dismissed.

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From the adverse decision of the trial court, herein respondents went
on appeal to the CA in CA-G.R. CV No. 73827.
In its decision6 of 19 January 2004, the CA, taking exceptions to the

findings of the trial court that the creation of the positions of Assistant
Vice President for Corporate Planning, Special Assistant to the
President and Special Assistant to the Board Chairman was merely
for accommodation purposes, granted the respondents’ appeal,
reversed and set aside the appealed decision of the trial court and
accordingly dismissed the so-called derivative suit filed by Cruz, et
al., thus:
IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the

challenged decision is REVERSED and SET ASIDE, and a new one
entered DISMISSING Civil Case No. 28,552-2001 with no
pronouncement as to costs.
SO ORDERED.
Intrigued, and quite understandably, by the fact that, in its decision,

the CA, before proceeding to address the merits of the appeal,
prefaced its disposition with the statement reading "[T]he appeal is
bereft of merit,"7 thereby contradicting the very fallo of its own
decision and the discussions made in the body thereof, respondents
filed with the appellate court a Motion For Nunc Pro Tunc Order,8
thereunder praying that the phrase "[T]he appeal is bereft of merit,"
be corrected to read "[T]he appeal is impressed with merit." In its
resolution9 of 23 April 2004, the CA granted the respondents’ motion
and accordingly effected the desired correction.
Hence, petitioners’ present recourse.
Petitioners assigned four (4) errors allegedly committed by the CA.

For clarity, we shall formulate the issues as follows:
1. Whether the CA erred in holding that Filport’s Board of

Directors acted within its powers in creating the executive
committee and the positions of AVPs for Corporate Planning,
Operations, Finance and Administration, and those of the
Special Assistants to the President and the Board Chairman,
each with corresponding remuneration, and in increasing the
salaries of the positions of Board Chairman, Vice-President,
Treasurer and Assistant General Manager; and
2. Whether the CA erred in finding that no evidence exists to

prove that (a) the positions of AVP for Corporate Planning,
Special Assistant to the President and Special Assistant to the
Board Chairman were created merely for accommodation,
and (b) the salaries/emoluments corresponding to said

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positions were actually paid to and received by the directors
appointed thereto.
For their part, respondents, aside from questioning the propriety of

the instant petition as the same allegedly raises only questions of fact
and not of law, also put in issue the purported derivative nature of
the main suit initiated by petitioner Eliodoro C. Cruz allegedly in
representation of and in behalf of Filport and its stockholders.
The petition is bereft of merit.
It is axiomatic that in petitions for review on certiorari under Rule 45 of

the Rules of Court, only questions of law may be raised and passed
upon by the Court. Factual findings of the CA are binding and
conclusive and will not be reviewed or disturbed on appeal.10 Of
course, the rule is not cast in stone; it admits of certain exceptions,
such as when the findings of fact of the appellate court are at
variance with those of the trial court,11 as here. For this reason, and
for a proper and complete resolution of the case, we shall delve into
the records and reexamine the same.
The governing body of a corporation is its board of directors. Section

23 of the Corporation Code12 explicitly provides that unless otherwise
provided therein, the corporate powers of all corporations formed
under the Code shall be exercised, all business conducted and all
property of the corporation shall be controlled and held by a board
of directors. Thus, with the exception only of some powers expressly
granted by law to stockholders (or members, in case of non-stock
corporations), the board of directors (or trustees, in case of non-stock
corporations) has the sole authority to determine policies, enter into
contracts, and conduct the ordinary business of the corporation
within the scope of its charter, i.e., its articles of incorporation, by-
laws and relevant provisions of law. Verily, the authority of the board
of directors is restricted to the management of the regular business
affairs of the corporation, unless more extensive power is expressly
conferred.
The raison d’etre behind the conferment of corporate powers on the

board of directors is not lost on the Court. Indeed, the concentration
in the board of the powers of control of corporate business and of
appointment of corporate officers and managers is necessary for
efficiency in any large organization. Stockholders are too numerous,
scattered and unfamiliar with the business of a corporation to
conduct its business directly. And so the plan of corporate
organization is for the stockholders to choose the directors who shall
control and supervise the conduct of corporate business.13
In the present case, the board’s creation of the positions of Assistant

Vice Presidents for Corporate Planning, Operations, Finance and
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Administration, and those of the Special Assistants to the President
and the Board Chairman, was in accordance with the regular
business operations of Filport as it is authorized to do so by the
corporation’s by-laws, pursuant to the Corporation Code.
The election of officers of a corporation is provided for under Section

25 of the Code which reads:
Sec. 25. Corporate officers, quorum. – Immediately after their

election, the directors of a corporation must formally organize by the
election of a president, who shall be a director, a treasurer who may
or may not be a director, a secretary who shall be a resident and
citizen of the Philippines, and such other officers as may be provided
for in the by-laws. (Emphasis supplied.)
In turn, the amended Bylaws of Filport14 provides the following:
Officers of the corporation, as provided for by the by-laws, shall be

elected by the board of directors at their first meeting after the
election of Directors. xxx
The officers of the corporation shall be a Chairman of the Board,

President, a Vice-President, a Secretary, a Treasurer, a General
Manager and such other officers as the Board of Directors may from
time to time provide, and these officers shall be elected to hold
office until their successors are elected and qualified. (Emphasis
supplied.)
Likewise, the fixing of the corresponding remuneration for the

positions in question is provided for in the same by-laws of the
corporation, viz:
xxx The Board of Directors shall fix the compensation of the officers
and agents of the corporation. (Emphasis supplied.)
Unfortunately, the bylaws of the corporation are silent as to the

creation by its board of directors of an executive committee. Under
Section 3515 of the Corporation Code, the creation of an executive
committee must be provided for in the bylaws of the corporation.
Notwithstanding the silence of Filport’s bylaws on the matter, we

cannot rule that the creation of the executive committee by the
board of directors is illegal or unlawful. One reason is the absence of
a showing as to the true nature and functions of said executive
committee considering that the "executive committee," referred to
in Section 35 of the Corporation Code which is as powerful as the
board of directors and in effect acting for the board itself, should be
distinguished from other committees which are within the
competency of the board to create at anytime and whose actions

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require ratification and confirmation by the board.16 Another reason
is that, ratiocinated by both the two (2) courts below, the Board of
Directors has the power to create positions not provided for in
Filport’s bylaws since the board is the corporation’s governing body,
clearly upholding the power of its board to exercise its prerogatives
in managing the business affairs of the corporation.
As well, it may not be amiss to point out that, as testified to and

admitted by petitioner Cruz himself, it was during his incumbency as
Filport president that the executive committee in question was
created, and that he was even the one who moved for the creation
of the positions of the AVPs for Operations, Finance and
Administration. By his acquiescence and/or ratification of the
creation of the aforesaid offices, Cruz is virtually precluded from
suing to declare such acts of the board as invalid or illegal. And it
makes no difference that he sues in behalf of himself and of the
other stockholders. Indeed, as his voice was not heard in protest
when he was still Filport’s president, raising a hue and cry only now
leads to the inevitable conclusion that he did so out of spite and
resentment for his non-reelection as president of the corporation.
With regard to the increased emoluments of the Board Chairman,

Vice-President, Treasurer and Assistant General Manager which are
supposedly disproportionate to the volume and nature of their work,
the Court, after a judicious scrutiny of the increase vis-à-vis the value
of the services rendered to the corporation by the officers
concerned, agrees with the findings of both the trial and appellate
courts as to the reasonableness and fairness thereof.
Continuing, petitioners contend that the CA did not appreciate their

evidence as to the alleged acts of mismanagement by the then
incumbent board. A perusal of the records, however, reveals that
petitioners merely relied on the testimony of Cruz in support of their
bold claim of mismanagement. To the mind of the Court, Cruz’
testimony on the matter of mismanagement is bereft of any
foundation. As it were, his testimony consists merely of insinuations of
alleged wrongdoings on the part of the board. Without more,
petitioners’ posture of mismanagement must fall and with it goes
their prayer to hold the respondents liable therefor.
But even assuming, in gratia argumenti, that there was

mismanagement resulting to corporate damages and/or business
losses, still the respondents may not be held liable in the absence, as
here, of a showing of bad faith in doing the acts complained of.
If the cause of the losses is merely error in business judgment, not

amounting to bad faith or negligence, directors and/or officers are
not liable.17 For them to be held accountable, the mismanagement

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and the resulting losses on account thereof are not the only matters
to be proven; it is likewise necessary to show that the directors
and/or officers acted in bad faith and with malice in doing the
assailed acts. Bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some moral obliquity
and conscious doing of a wrong, a breach of a known duty through
some motive or interest or ill-will partaking of the nature of fraud.18
We have searched the records and nowhere do we find a "dishonest
purpose" or "some moral obliquity," or "conscious doing of a wrong"
on the part of the respondents that "partakes of the nature of fraud."
We thus extend concurrence to the following findings of the CA,

affirmatory of those of the trial court:
xxx As a matter of fact, it was during the term of appellee Cruz, as

president and director, that the executive committee was created.
What is more, it was appellee himself who moved for the creation of
the positions of assistant vice presidents for operations, for finance,
and for administration. He should not be heard to complain
thereafter for similar corporate acts.
The increase in the salaries of the board chairman, president,

treasurer, and assistant general manager are indeed reasonable
enough in view of the responsibilities assigned to them, and the
special knowledge required, to be able to effectively discharge their
respective functions and duties.
Surely, factual findings of trial courts, especially when affirmed by the

CA, are binding and conclusive on this Court.
There is, however, a factual matter over which the CA and the trial
court parted ways. We refer to the accommodation angle.
The trial court was with petitioner Cruz in saying that the creation of
the positions of the three (3) AVPs for Corporate Planning, Special
Assistant to the President and Special Assistant to the Board
Chairman, each with a salary of P13,050.00 a month, was merely for
accommodation purposes considering that Filport is not a big
corporation requiring multiple executive positions. Hence, the trial
court’s order for said officers to return the amounts they received as
compensation.
On the other hand, the CA took issue with the trial court and ruled
that Cruz’s accommodation theory is not based on facts and
without any evidentiary substantiation.
We concur with the line of the appellate court. For truly, aside from
Cruz’s bare and self-serving testimony, no other evidence was
presented to show the fact of "accommodation." By itself, the

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testimony of Cruz is not enough to support his claim that
accommodation was the underlying factor behind the creation of
the aforementioned three (3) positions.
It is elementary in procedural law that bare allegations do not

constitute evidence adequate to support a conclusion. It is basic in
the rule of evidence that he who alleges a fact bears the burden of
proving it by the quantum of proof required. Bare allegations,
unsubstantiated by evidence, are not equivalent to proof under the
Rules of Court.19 The party having the burden of proof must establish
his case by a preponderance of evidence.20
Besides, the determination of the necessity for additional offices

and/or positions in a corporation is a management prerogative
which courts are not wont to review in the absence of any proof that
such prerogative was exercised in bad faith or with
malice.1awphi1.nét
Indeed, it would be an improper judicial intrusion into the internal

affairs of Filport were the Court to determine the propriety or
impropriety of the creation of offices therein and the grant of salary
increases to officers thereof. Such are corporate and/or business
decisions which only the corporation’s Board of Directors can
determine.
So it is that in Philippine Stock Exchange, Inc. v. CA,21 the Court

unequivocally held:
Questions of policy or of management are left solely to the honest

decision of the board as the business manager of the corporation,
and the court is without authority to substitute its judgment for that of
the board, and as long as it acts in good faith and in the exercise of
honest judgment in the interest of the corporation, its orders are not
reviewable by the courts.
In a last-ditch attempt to salvage their cause, petitioners assert that

the CA went beyond the issues raised in the court of origin when it
ruled on the absence of receipt of actual payment of the
salaries/emoluments pertaining to the positions of Assistant Vice-
President for Corporate Planning, Special Assistant to the Board
Chairman and Special Assistant to the President. Petitioners insist that
the issue of nonpayment was never raised by the respondents
before the trial court, as in fact, the latter allegedly admitted the
same in their Answer With Counterclaim.
By claiming that Filport suffered damages because the directors

appointed to the assailed positions are not doing anything to

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deserve their compensation, petitioners are saddled with the burden
of proving that salaries were actually paid. Since the trial court, in
effect, found that the petitioners successfully proved payment of the
salaries when it directed the reimbursements of the same,
respondents necessarily have to raise the issue on appeal. And the
CA rightly resolved the issue when it found that no evidence of
actual payment of the salaries in question was actually adduced.
Respondents’ alleged admission of the fact of payment cannot be
inferred from a reading of the pertinent portions of the parties’
respective initiatory pleadings. Respondents’ allegations in their
Answer With Counterclaim that the officers corresponding to the
positions created "performed the work called for in their positions" or
"deserve their compensation," cannot be interpreted to mean that
they were "actually paid" such compensation. Directly put, the
averment that "one deserves one’s compensation" does not
necessarily carry the implication that "such compensation was
actually remitted or received." And because payment was not duly
proven, there is no evidentiary or factual basis for the trial court to
direct respondents to make reimbursements thereof to the
corporation.
This brings us to the respondents’ claim that the case filed by the
petitioners before the SEC, which eventually landed in RTC-Davao
City as Civil Case No. 28,552-2001, is not a derivative suit, as
maintained by the petitioners.
We sustain the petitioners.
Under the Corporation Code, where a corporation is an injured

party, its power to sue is lodged with its board of directors or trustees.
But an individual stockholder may be permitted to institute a
derivative suit in behalf of the corporation in order to protect or
vindicate corporate rights whenever the officials of the corporation
refuse to sue, or when a demand upon them to file the necessary
action would be futile because they are the ones to be sued, or
because they hold control of the corporation.22 In such actions, the
corporation is the real party-in-interest while the suing stockholder, in
behalf of the corporation, is only a nominal party.23
Here, the action below is principally for damages resulting from

alleged mismanagement of the affairs of Filport by its
directors/officers, it being alleged that the acts of mismanagement
are detrimental to the interests of Filport. Thus, the injury complained
of primarily pertains to the corporation so that the suit for relief should
be by the corporation. However, since the ones to be sued are the
directors/officers of the corporation itself, a stockholder, like
petitioner Cruz, may validly institute a "derivative suit" to vindicate
the alleged corporate injury, in which case Cruz is only a nominal

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party while Filport is the real party-in-interest. For sure, in the prayer
portion of petitioners’ petition before the SEC, the reliefs prayed
were asked to be made in favor of Filport.
Besides, the requisites before a derivative suit can be filed by a

stockholder are present in this case, to wit:
a) the party bringing suit should be a shareholder as of the time

of the act or transaction complained of, the number of his
shares not being material;
b) he has tried to exhaust intra-corporate remedies, i.e., has

made a demand on the board of directors for the appropriate
relief but the latter has failed or refused to heed his plea; and
c) the cause of action actually devolves on the corporation,

the wrongdoing or harm having been, or being caused to the
corporation and not to the particular stockholder bringing the
suit.24
Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he

sought without success to have its board of directors remedy what
he perceived as wrong when he wrote a letter requesting the board
to do the necessary action in his complaint; and (3) the alleged
wrong was in truth a wrong against the stockholders of the
corporation generally, and not against Cruz or Minterbro, in
particular. In the end, it is Filport, not Cruz which directly stands to
benefit from the suit. And while it is true that the complaining
stockholder must show to the satisfaction of the court that he has
exhausted all the means within his reach to attain within the
corporation itself the redress for his grievances, or actions in
conformity to his wishes, nonetheless, where the corporation is under
the complete control of the principal defendants, as here, there is
no necessity of making a demand upon the directors. The reason is
obvious: a demand upon the board to institute an action and
prosecute the same effectively would have been useless and an
exercise in futility. In fine, we rule and so hold that the petition filed
with the SEC at the instance of Cruz, which ultimately found its way
to the RTC of Davao City as Civil Case No. 28,552-2001, is a derivative
suit of which Cruz has the necessary legal standing to institute.
WHEREFORE, the petition is DENIED and the challenged decision of

the CA is AFFIRMED in all respects.
SO ORDERED.

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CANCIO C. GARCIA
Associate Justice
Lessons Applicable: Rationale for "Centralized Management"

Doctrine
FACTS:
 Sept 4 1992: Eliodoro C. Cruz, Filport’s president from 1968-1991,

wrote a letter to the corporation’s BOD questioning the
creation and election of the following positions with a monthly
remuneration of P13,050.00 each. Cruz requested the board to
take necessary action/actions to recover from those elected to
the aforementioned positions the salaries they have received.
 Jun 4 1993: Cruz, purportedly in representation of Filport and its

stockholders, among which is herein co-petitioner Mindanao
Terminal and Brokerage Services, Inc. (Minterbro), filed with the
SEC a derivative suit against Filport's BOD for acts of
mismanagement detrimental to the interest of the corporation
and its shareholders at large.
o Cruz prayed that the BOD be made to pay Filport, jointly

and severally, the sums of money variedly representing
the damages incurred as a result of the creation of the
offices/positions complained of and the aggregate
amount of the questioned increased salaries.
 RTC: BOD have the power to create positions not in the by-laws
and can increase salaries. But Edgar C. Trinidad under the third
and fourth causes of action to restore to the corporation the
total amount of salaries he received as assistant vice president
for corporate planning; and likewise ordering Fortunato V. de
Castro and Arsenio Lopez Chua under the fourth cause of
action to restore to the corporation the salaries they each
received as special assistants respectively to the president and
board chairman. In case of insolvency of any or all of them, the
members of the board who created their positions are
subsidiarily liable.
 Appealed: creation of the positions merely for accommodation

purposes - GRANTED
ISSUES:
1. W/N there was mismanagement - NO

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2. W/N there is a proper derivative suit - YES
HELD: CA Affirmed
1. NO
 Section 35 of the Corporation Code, the creation of an

executive committee (as powerful as the BOD) must be
provided for in the bylaws of the corporation
o Notwithstanding the silence of Filport’s bylaws on the

matter, we cannot rule that the creation of the executive
committee by the board of directors is illegal or unlawful.
One reason is the absence of a showing as to the true
nature and functions of executive committee
 But even assuming there was mismanagement resulting to

corporate damages and/or business losses, respondents may
not be held liable in the absence of a showing of bad faith in
doing the acts complained of. ("dishonest purpose","some
moral obliquity","conscious doing of a wrong", "partakes of the
nature of fraud")
 determination of the necessity for additional offices and/or

positions in a corporation is a management prerogative which
courts are not wont to review in the absence of any proof that
such prerogative was exercised in bad faith or with malice
2. YES
 Besides, the requisites before a derivative suit can be filed by a

stockholder: - present

of the act or transaction complained of, the number of his
shares not being material; - a stockholder of Filport

made a demand on the board of directors for the appropriate
relief but the latter has failed or refused to heed his plea; and
- he wrote a letter
c) the cause of action actually devolves on the corporation,

the wrongdoing or harm having been, or being caused to the
corporation and not to the particular stockholder bringing the

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suit. - wrong against the stockholders of the corporation
generally
FILIPINAS PORT SERVICES INC v. GO, ET AL.
FACTS:
The case involves a petition for review on certiorari.
We have here Eliodoro C. Cruz suing on behalf of the

stockholders of Filipinas Port Services alleging that there has been
numerous cases of mismanagement by the board of directors:
1. creation of an executive committee not provided for in the by-

laws of the corporation
2. disproportionate increase in the salary of officials
3. re-creation of already existing positions
4. creation of additional positions with holders not doing any work

to deserve any monthly remuneration.
He prayed for the return of the salary received by all the

unnecessarily appointed members.
The Trial Court sided with the respondent and ruled that the creation
of the executive committee and the additional position was
legitimate given that it was provided by the corporation’s by-law.
However, the prayer for the return of salaries received was granted,
even if the positions and the committee were valid, for the court

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ruled that Filipinas Port Services is not a big corporation requiring
multiple executive positions.
The respondents appealed the decision and they received a

favourable decision as the Court of Appeals granted the
respondents’ appeal, reversed and set aside the appealed decision
of the trial court and accordingly dismissed the so-called derivative
suit filed by Cruz, et al.,
Cruz did not take the decision sitting down, hence the petition.
To counter the appeal filed by Cruz, respondents also claim that

what Cruz filed is not a derivative suit.
The petition was denied and the challenged decision of the CA

was affirmed. Only, the Supreme Court clarified the issue involving
the legitimacy of the derivative suit.
ISSUE:
Was the case filed by Cruz, on behalf of Filipinas Port Services Inc., a
derivative suit?
HELD:
YES.
Under the Corporation Code, where a corporation is an injured

party, its power to sue is lodged with its board of directors or
trustees. But an individual stockholder or an individual trustee may be
permitted to institute a derivative suit in behalf of the corporation in
order to protect or vindicate corporate rights whenever the officials

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of the corporation refuse to sue, or when a demand upon them to
file the necessary action would be futile because they are the ones
to be sued, or because they hold control of the corporation. In such
actions, the corporation is the real party-in-interest while the suing
stockholder, in behalf of the corporation, is only a nominal part.
Here, the action below is principally for damages resulting from

alleged mismanagement of the affairs of Filport by its
directors/officers, it being alleged that the acts of mismanagement
are detrimental to the interests of Filport. Thus, the injury complained
of primarily pertains to the corporation so that the suit for relief should
be by the corporation. However, since the ones to be sued are the
directors/officers of the corporation itself, a stockholder, like
petitioner Cruz, may validly institute a “derivative suit” to vindicate
the alleged corporate injury, in which case Cruz is only a nominal
party while Filport is the real party-in-interest.
Besides, the requisites before a derivative suit can be filed by a

stockholder or individual trustee are present in this case, to wit:

of the act or transaction complained of, the number of his shares not
being material;

made a demand on the board of directors for the appropriate relief
but the latter has failed or refused to heed his plea; and

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c) the cause of action actually devolves on the corporation, the
wrongdoing or harm having been, or being caused to the
corporation and not to the particular stockholder bringing the suit.
Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he

sought without success to have its board of directors remedy what
he perceived as wrong when he wrote a letter requesting the board
to do the necessary action in his complaint; and (3) the alleged
wrong was in truth a wrong against the stockholders of the
corporation generally, and not against Cruz or Minterbro, in
particular. And while it is true that the complaining stockholder must
show to the satisfaction of the court that he has exhausted all the
means within his reach to attain within the corporation itself the
redress for his grievances, or actions in conformity to his wishes,
nonetheless, where the corporation is under the complete control of
the principal defendants or other trustees, as here, there is no
necessity of making a demand upon the directors. The reason is
obvious: a demand upon the board to institute an action and
prosecute the same effectively would have been useless and an
exercise in futility.
Bottom line, when it comes to cases involving two or more trustees,

an individual trustee can file a derivative suit duly following the
requisites without the need to exhaust internal remedies where the
trusteeship is under the complete control of the other trustees for it
will be a waste of time.
Boyer-Roxas vs. CA (211 SCRA 470 [1992])

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G.R. No. 100866 July 14, 1992
REBECCA BOYER-ROXAS and GUILLERMO ROXAS, petitioners,

vs.
HON. COURT OF APPEALS and HEIRS OF EUGENIA V. ROXAS, INC.,
respondents.
GUTIERREZ, JR., J.:
This is a petition to review the decision and resolution of the Court of

Appeals in CA-G.R. No. 14530 affirming the earlier decision of the
Regional Trial Court of Laguna, Branch 37, at Calamba, in the
consolidated RTC Civil Case Nos. 802-84-C and 803-84-C entitled
"Heirs of Eugenia V. Roxas, Inc. v. Rebecca Boyer-Roxas" and Heirs of
Eugenia V. Roxas, Inc. v. Guillermo Roxas," the dispositive portion of
which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered

in favor of the plaintiff and against the defendants, by
ordering as it is hereby ordered that:
1) In RTC Civil Case No. 802-84-C: Rebecca Boyer-Roxas

and all persons claiming under her to:
a) Immediately vacate the residential house near the

Balugbugan pool located inside the premises of the
Hidden Valley Springs Resort at Limao, Calauan, Laguna;
b) Pay the plaintiff the amount of P300.00 per month from

September 10, 1983, for her occupancy of the residential
house until the same is vacated;
c) Remove the unfinished building erected on the land of

the plaintiff within ninety (90) days from receipt of this
decision;
d) Pay the plaintiff the amount of P100.00 per month from

September 10, 1983, until the said unfinished building is
removed from the land of the plaintiff; and
e) Pay the costs.
2) In RTC Civil Case No. 803-84-C: Guillermo Roxas and all

persons claiming under him to:
a) Immediately vacate the residential house near the

tennis court located within the premises of the Hidden
Valley Springs Resort at Limao, Calauan, Laguna;

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b) Pay the plaintiff the amount of P300.00 per month from
September 10, 1983, for his occupancy of the said
residential house until the same is vacated; and
c) Pay the costs. (Rollo, p. 36)
In two (2) separate complaints for recovery of possession filed with

the Regional Trial Court of Laguna against petitioners Rebecca
Boyer-Roxas and Guillermo Roxas respectively, respondent
corporation, Heirs of Eugenia V. Roxas, Inc., prayed for the
ejectment of the petitioners from buildings inside the Hidden Valley
Springs Resort located at Limao, Calauan, Laguna allegedly owned
by the respondent corporation.
In the case of petitioner Rebecca Boyer-Roxas (Civil Case No-802-84-

C), the respondent corporation alleged that Rebecca is in
possession of two (2) houses, one of which is still under construction,
built at the expense of the respondent corporation; and that her
occupancy on the two (2) houses was only upon the tolerance of
the respondent corporation.
In the case of petitioner Guillermo Roxas (Civil Case No. 803-84-C),

the respondent corporation alleged that Guillermo occupies a
house which was built at the expense of the former during the time
when Guillermo's father, Eriberto Roxas, was still living and was the
general manager of the respondent corporation; that the house was
originally intended as a recreation hall but was converted for the
residential use of Guillermo; and that Guillermo's possession over the
house and lot was only upon the tolerance of the respondent
corporation.
In both cases, the respondent corporation alleged that the

petitioners never paid rentals for the use of the buildings and the lots
and that they ignored the demand letters for them to vacate the
buildings.
In their separate answers, the petitioners traversed the allegations in

the complaint by stating that they are heirs of Eugenia V. Roxas and
therefore, co-owners of the Hidden Valley Springs Resort; and as co-
owners of the property, they have the right to stay within its premises.
The cases were consolidated and tried jointly.
At the pre-trial, the parties limited the issues as follows:
1) whether plaintiff is entitled to recover the questioned

premises;

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2) whether plaintiff is entitled to reasonable rental for
occupancy of the premises in question;
3) whether the defendant is legally authorized to pierce

the veil of corporate fiction and interpose the same as a
defense in an accion publiciana;
4) whether the defendants are truly builders in good faith,

entitled to occupy the questioned premises;
5) whether plaintiff is entitled to damages and reasonable

compensation for the use of the questioned premises;
6) whether the defendants are entitled to their

counterclaim to recover moral and exemplary damages
as well as attorney's fees in the two cases;
7) whether the presence and occupancy by the

defendants on the premises in questioned (sic) hampers,
deters or impairs plaintiff's operation of Hidden Valley
Springs Resort; and
8) whether or not a unilateral and sudden withdrawal of

plaintiffs tolerance allowing defendants' occupancy of
the premises in questioned (sic) is unjust enrichment.
(Original Records, 486)
Upon motion of the plaintiff respondent corporation, Presiding Judge

Francisco Ma. Guerrero of Branch 34 issued an Order dated April 25,
1986 inhibiting himself from further trying the case. The cases were re-
raffled to Branch 37 presided by Judge Odilon Bautista. Judge
Bautista continued the hearing of the cases.
For failure of the petitioners (defendants below) and their counsel to

attend the October 22, 1986 hearing despite notice, and upon
motion of the respondent corporation, the court issued on the same
day, October 22, 1986, an Order considering the cases submitted for
decision. At this stage of the proceedings, the petitioners had not yet
presented their evidence while the respondent corporation had
completed the presentation of its evidence.
The evidence of the respondent corporation upon which the lower

court based its decision is as follows:
To support the complaints, the plaintiff offered the

testimonies of Maria Milagros Roxas and that of Victoria
Roxas Villarta as well as Exhibits "A" to "M-3".
The evidence of the plaintiff established the following:

that the plaintiff, Heirs of Eugenia V Roxas, Incorporated,
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was incorporated on December 4, 1962 (Exh. "C") with the
primary purpose of engaging in agriculture to develop the
properties inherited from Eugenia V. Roxas and that of y
Eufrocino Roxas; that the Articles of Incorporation of the
plaintiff, in 1971, was amended to allow it to engage in
the resort business (Exh.
"C-1"); that the incorporators as original members of the
board of directors of the plaintiff were all members of the
same family, with Eufrocino Roxas having the biggest
share; that accordingly, the plaintiff put up a resort known
as Hidden Valley Springs Resort on a portion of its land
located at Bo. Limao, Calauan, Laguna, and covered by
TCT No. 32639 (Exhs. "A" and "A-l"); that improvements
were introduced in the resort by the plaintiff and among
them were cottages, houses or buildings, swimming pools,
tennis court, restaurant and open pavilions; that the house
near the Balugbugan Pool (Exh. "B-l") being occupied by
Rebecca B. Roxas was originally intended as staff house
but later used as the residence of Eriberto Roxas,
deceased husband of the defendant Rebecca Boyer-
Roxas and father of Guillermo Roxas; that this house
presently being occupied by Rebecca B. Roxas was built
from corporate funds; that the construction of the
unfinished house (Exh. "B-2") was started by the defendant
Rebecca Boyer-Roxas and her husband Eriberto Roxas;
that the third building (Exh. "B-3") presently being
occupied by Guillermo Roxas was originally intended as a
recreation hall but later converted as a residential house;
that this house was built also from corporate funds; that
the said house occupied by Guillermo Roxas when it was
being built had nipa roofing but was later changed to
galvanized iron sheets; that at the beginning, it had no
partition downstairs and the second floor was an open
space; that the conversion from a recreation hall to a
residential house was with the knowledge of Eufrocino
Roxas and was not objected to by any of the Board of
Directors of the plaintiff; that most of the materials used in
converting the building into a residential house came
from the materials left by Coppola, a film producer, who
filmed the movie "Apocalypse Now"; that Coppola left the
materials as part of his payment for rents of the rooms that
he occupied in the resort; that after the said recreation
hall was converted into a residential house, defendant
Guillermo Roxas moved in and occupied the same
together with his family sometime in 1977 or 1978; that
during the time Eufrocino Roxas was still alive, Eriberto
Roxas was the general manager of the corporation and

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there was seldom any board meeting; that Eufrocino
Roxas together with Eriberto Roxas were (sic) the ones
who were running the corporation; that during this time,
Eriberto Roxas was the restaurant and wine
concessionaire of the resort; that after the death of
Eufrocino Roxas, Eriberto Roxas continued as the general
manager until his death in 1980; that after the death of
Eriberto Roxas in 1980, the defendants Rebecca B. Roxas
and Guillermo Roxas, committed acts that impeded the
plaintiff's expansion and normal operation of the resort;
that the plaintiff could not even use its own pavilions,
kitchen and other facilities because of the acts of the
defendants which led to the filing of criminal cases in
court; that cases were even filed before the Ministry of
Tourism, Bureau of Domestic Trade and the Office of the
President by the parties herein; that the defendants
violated the resolution and orders of the Ministry of Tourism
dated July 28, 1983, August 3, 1983 and November 26,
1984 (Exhs. "G", "H" and "H-l") which ordered them or the
corporation they represent to desist from and to turn over
immediately to the plaintiff the management and
operation of the restaurant and wine outlets of the said
resort (Exh. "G-l"); that the defendants also violated the
decision of the Bureau of Domestic Trade dated October
23, 1983 (Exh. "C"); that on August 27, 1983, because of
the acts of the defendants, the Board of Directors of the
plaintiff adopted Resolution No. 83-12 series of 1983 (Exh.
"F") authorizing the ejectment of the defendants from the
premises occupied by them; that on September 1, 1983,
demand letters were sent to Rebecca Boyer-Roxas and
Guillermo Roxas (Exhs. "D" and "D-1") demanding that they
vacate the respective premises they occupy; and that
the dispute between the plaintiff and the defendants was
brought before the barangay level and the same was not
settled (Exhs. "E" and "E-l"). (Original Records, pp. 454-456)
The petitioners appealed the decision to the Court of Appeals.

However, as stated earlier, the appellate court affirmed the lower
court's decision. The Petitioners' motion for reconsideration was
likewise denied.
In a resolution dated February 5, 1992, we gave due course to the

petition.
The petitioners now contend:

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I Respondent Court erred when it refused to pierce the veil of
corporate fiction over private respondent and maintain the
petitioners in their possession and/or occupancy of the subject
premises considering that petitioners are owners of aliquot part of
the properties of private respondent. Besides, private respondent
itself discarded the mantle of corporate fiction by acts and/or
omissions of its board of directors and/or stockholders.
II The respondent Court erred in not holding that petitioners were in

fact denied due process or their day in court brought about by the
gross negligence of their former counsel.
III The respondent Court misapplied the law when it ordered

petitioner Rebecca Boyer-Roxas to remove the unfinished building in
RTC Case No. 802-84-C, when the trial court opined that she spent
her own funds for the construction thereof. (CA Rollo, pp. 17-18)
Were the petitioners denied due process of law in the lower court?
After the cases were re-raffled to the sala of Presiding Judge Odilon
Bautista of Branch 37 the following events transpired:
On July 3, 1986, the lower court issued an Order setting the hearing
of the cases on July 21, 1986. Petitioner Rebecca V. Roxas received
a copy of the Order on July 15, 1986, while petitioner Guillermo Roxas
received his copy on July 18, 1986. Atty. Conrado Manicad, the
petitioners' counsel received another copy of the Order on July 11,
1986. (Original Records, p. 260)
On motion of the respondent corporation's counsel, the lower court

issued an Order dated July 15, 1986 cancelling the July 21, 1986
hearing and resetting the hearing to August 11, 1986. (Original
records, 262-263) Three separate copies of the order were sent and
received by the petitioners and their counsel. (Original Records, pp.
268, 269, 271)
A motion to cancel and re-schedule the August 11, 1986 hearing

filed by the respondent corporation's counsel was denied in an
Order dated August 8, 1986. Again separate copies of the Order
were sent and received by the petitioners and their counsel.
(Original Records, pp. 276-279)
At the hearing held on August 11, 1986, only Atty. Benito P. Fabie,
counsel for the respondent corporation appeared. Neither the
petitioners nor their counsel appeared despite notice of hearing. The
lower court then issued an Order on the same date, to wit:
ORDER

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When these cases were called for continuation of trial,
Atty. Benito P. Fabie appeared before this Court,
however, the defendants and their lawyer despite receipt
of the Order setting the case for hearing today failed to
appear. On Motion of Atty. Fabie, further cross
examination of witness Victoria Vallarta is hereby
considered as having been waived.
The plaintiff is hereby given twenty (20) days from today

within which to submit formal offer of evidence and
defendants are also given ten (10) days from receipt of
such formal offer of evidence to file their objection
thereto.
In the meantime, hearing in these cases is set to

September 29, 1986 at 10:00 o'clock in the morning.
(Original Records, p. 286)
Copies of the Order were sent and received by the petitioners and
their counsel on the following dates — Rebecca Boyer-Roxas on
August 20, 1986, Guillermo Roxas on August 26, 1986, and Atty.
Conrado Manicad on September 19, 1986. (Original Records, pp.
288-290)
On September 1, 1986, the respondent corporation filed its "Formal

Offer of Evidence." In an Order dated September 29, 1986, the lower
court issued an Order admitting exhibits "A" to "M-3" submitted by the
respondent corporation in its "Formal Offer of Evidence . . . there
being no objection . . ." (Original Records, p. 418) Copies of this
Order were sent and received by the petitioners and their counsel
on the following dates: Rebecca Boyer-Roxas on October 9, 1986;
Guillermo Roxas on October 9, 1986 and Atty. Conrado Manicad on
October 4, 1986 (Original Records, pp. 420, 421, 428).
The scheduled hearing on September 29, 1986 did not push through
as the petitioners and their counsel were not present prompting Atty.
Benito Fabie, the respondent corporation's counsel to move that the
cases be submitted for decision. The lower court denied the motion
and set the cases for hearing on October 22, 1986. However, in its
Order dated September 29, 1986, the court warned that in the event
the petitioners and their counsel failed to appear on the next
scheduled hearing, the court shall consider the cases submitted for
decision based on the evidence on record. (Original Records, p. 429,
430 and 431)
Separate copies of this Order were sent and received by the

petitioners and their counsel on the following dates: Rebecca Boyer-
Roxas on October 9, 1986, Guillermo Roxas on October 9, 1986; and

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Atty. Conrado Manicad on October 1, 1986. (Original Records, pp.
429-430)
Despite notice, the petitioners and their counsel again failed to

attend the scheduled October 22, 1986 hearing. Atty. Fabie
representing the respondent corporation was present. Hence, in its
Order dated October 22, 1986, on motion of Atty. Fabie and
pursuant to the order dated September 29, 1986, the Court
considered the cases submitted for decision. (Original Records, p.
436)
On November 14, 1986, the respondent corporation, filed a

"Manifestation", stating that ". . . it is submitting without further
argument its "Opposition to the Motion for Reconsideration" for the
consideration of the Honorable Court in resolving subject incident."
(Original Records, p. 442)
On December 16, 1986, the lower court issued an Order, to wit:
ORDER
Considering that the Court up to this date has not

received any Motion for Reconsideration filed by the
defendants in the above-entitled cases, the Court cannot
act on the Opposition to Motion for Reconsideration filed
by the plaintiff and received by the Court on November
14, 1986. (Original Records, p. 446)
On January 15, 1987, the lower court rendered the questioned

decision in the two (2) cases. (Original Records, pp. 453-459)
On January 20, 1987, Atty. Conrado Manicad, the petitioners'

counsel filed an Ex-Parte Manifestation and attached thereto, a
motion for reconsideration of the October 22, 1986 Order submitting
the cases for decision. He prayed that the Order be set aside and
the cases be re-opened for reception of evidence for the
petitioners. He averred that: 1) within the reglementary period he
prepared the motion for reconsideration and among other
documents, the draft was sent to his law office thru his messenger;
after signing the final copies, he caused the service of a copy to the
respondent corporation's counsel with the instruction that the copy
of the Court be filed; however, there was a miscommunication
between his secretary and messenger in that the secretary mailed
the copy for the respondent corporation's counsel and placed the
rest in an envelope for the messenger to file the same in court but
the messenger thought that it was the secretary who would file it; it
was only later on when it was discovered that the copy for the Court
has not yet been filed and that such failure to file the motion for
reconsideration was due to excusable neglect and/or accident. The
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motion for reconsideration contained the following allegations: that
on the date set for hearing (October 22, 1986), he was on his way to
Calamba to attend the hearing but his car suffered transmission
breakdown; and that despite efforts to repair said transmission, the
car remained inoperative resulting in his absence at the said
hearing. (Original Records, pp. 460-469)
On February 3, 1987, Atty. Manicad filed a motion for

reconsideration of the January 15, 1987 decision. He explained that
he had to file the motion because the receiving clerk refused to
admit the motion for reconsideration attached to the ex-parte
manifestation because there was no proof of service to the other
party. Included in the motion for reconsideration was a notice of
hearing of the motion on February 3, 1987. (Original Records, p. 476-
A)
On February 4, 1987, the respondent corporation through its counsel

filed a Manifestation and Motion manifesting that they received the
copy of the motion for reconsideration only today (February 4, 1987),
hence they prayed for the postponement of the hearing. (Original
Records, pp. 478-479)
On the same day, February 4, 1987, the lower court issued an Order
setting the hearing on February 13, 1987 on the ground that it
received the motion for reconsideration late. Copies of this Order
were sent separately to the petitioners and their counsel. The records
show that Atty. Manicad received his copy on February 11, 1987. As
regards the petitioners, the records reveal that Rebecca Boyer-
Roxas did not receive her copy while as regards Guillermo Roxas,
somebody signed for him but did not indicate when the copy was
received. (Original Records, pp. 481-483)
At the scheduled February 13, 1987 hearing, the counsels for the
parties were present. However, the hearing was reset for March 6,
1987 in order to allow the respondent corporation to file its
opposition to the motion for reconsideration. (Order dated February
13, 1987, Original Records, p. 486) Copies of the Order were sent and
received by the petitioners and their counsel on the following dates:
Rebecca Boyer-Roxas on February 23, 1987; Guillermo Roxas on
February 23, 1987 and Atty. Manicad on February 19, 1987. (Original
Records, pp. 487, 489-490)
The records are not clear as to whether or not the scheduled hearing
on March 6, 1987 was held. Nevertheless, the records reveal that on
March 13, 1987, the lower court issued an Order denying the motion
The well-settled doctrine is that the client is bound by the mistakes of

his lawyer. (Aguila v. Court of First Instance of Batangas, Branch I, 160
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SCRA 352 [1988]; See also Vivero v. Santos, et al., 98 Phil. 500 [1956];
Isaac v. Mendoza, 89 Phil. 279 [1951]; Montes v. Court of First
Instance of Tayabas, 48 Phil. 640 [1926]; People v. Manzanilla, 43 Phil.
167 [1922]; United States v. Dungca, 27 Phil. 274 [1914]; and United
States v. Umali, 15 Phil. 33 [1910]) This rule, however, has its
exceptions. Thus, in several cases, we ruled that the party is not
bound by the actions of his counsel in case the gross negligence of
the counsel resulted in the client's deprivation of his property without
due process of law. In the case of Legarda v. Court of Appeals (195
SCRA 418 [1991]), we said:
In People's Homesite & Housing Corp. v. Tiongco and

Escasa (12 SCRA 471 [1964]), this Court ruled as follows:
Procedural technicality should not be made a

bar to the vindication of a legitimate
grievance. When such technicality deserts from
being an aid to Justice, the courts are justified
in excepting from its operation a particular
case. Where there was something fishy and
suspicious about the actuations of the former
counsel of petitioners in the case at bar, in that
he did not give any significance at all to the
processes of the court, which has proven
prejudicial to the rights of said clients, under a
lame and flimsy explanation that the court's
processes just escaped his attention, it is held
that said lawyer deprived his clients of their day
in court, thus entitling said clients to petition for
relief from judgment despite the lapse of the
reglementary period for filing said period for
filing said petition.
In Escudero v. Judge Dulay (158 SCRA 69 [1988]), this

Court, in holding that the counsel's blunder in procedure is
an exception to the rule that the client is bound by the
mistakes of counsel, made the following disquisition:
Petitioners contend, through their new counsel,

that the judgment rendered against them by
the respondent court was null and void,
because they were therein deprived of their
day in court and divested of their property
without due process of law, through the gross
ignorance, mistake and negligence of their
previous counsel. They acknowledge that,
while as a rule, clients are bound by the
mistake of their counsel, the rule should not be

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applied automatically to their case, as their trial
counsel's blunder in procedure and gross
ignorance of existing jurisprudence changed
their cause of action and violated their
substantial rights.
We are impressed with petitioner's contentions.
xxx xxx xxx
While this Court is cognizant of the rule that,

generally, a client will suffer consequences of
the negligence, mistake or lack of
competence of his counsel, in the interest of
Justice and equity, exceptions may be made
to such rule, in accordance with the facts and
circumstances of each case. Adherence to the
general rule would, in the instant case, result in
the outright deprivation of their property
through a technicality.
In its questioned decision dated November 19, 1989 the

Court of Appeals found, in no uncertain terms, the
negligence of the then counsel for petitioners when he
failed to file the proper motion to dismiss or to draw a
compromise agreement if it was true that they agreed on
a settlement of the case; or in simply filing an answer; and
that after having been furnished a copy of the decision
by the court he failed to appeal therefrom or to file a
petition for relief from the order declaring petitioners in
default. In all these instances the appellate court found
said counsel negligent but his acts were held to bind his
client, petitioners herein, nevertheless.
The Court disagrees and finds that the negligence of

counsel in this case appears to be so gross and
inexcusable. This was compounded by the fact, that after
petitioner gave said counsel another chance to make up
for his omissions by asking him to file a petition for
annulment of the judgment in the appellate court, again
counsel abandoned the case of petitioner in that after he
received a copy of the adverse judgment of the
appellate court, he did not do anything to save the
situation or inform his client of the judgment. He allowed
the judgment to lapse and become final. Such reckless
and gross negligence should not be allowed to bind the
petitioner. Petitioner was thereby effectively deprived of
her day in court. (at pp. 426-427)

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The herein petitioners, however, are not similarly situated as the
parties mentioned in the abovecited cases. We cannot rule that
they, too, were victims of the gross negligence of their counsel.
The petitioners are to be blamed for the October 22, 1986 order
issued by the lower court submitting the cases for decision. They
received notices of the scheduled hearings and yet they did not do
anything. More specifically, the parties received notice of the Order
dated September 29, 1986 with the warning that if they fail to attend
the October 22, 1986 hearing, the cases would be submitted for
decision based on the evidence on record. Earlier, at the scheduled
hearing on September 29, 1986, the counsel for the respondent
corporation moved that the cases be submitted for decision for
failure of the petitioners and their counsel to attend despite notice.
The lower court denied the motion and gave the petitioners and
their counsel another chance by rescheduling the October 22, 1986
hearing.
Indeed, the petitioners knew all along that their counsel was not
attending the scheduled hearings. They did not take steps to
change their counsel or make him attend to their cases until it was
too late. On the contrary, they continued to retain the services of
Atty. Manicad knowing fully well his lapses vis-a-vis their cases. They,
therefore, cannot raise the alleged gross negligence of their counsel
resulting in their denial of due process to warrant the reversal of the
lower court's decision. In a similar case, Aguila v. Court of First
Instance of Batangas, Branch 1 (supra), we ruled:
In the instant case, the petitioner should have noticed the

succession of errors committed by his counsel and taken
appropriate steps for his replacement before it was
altogether too late. He did not. On the contrary, he
continued to retain his counsel through the series of
proceedings that all resulted in the rejection of his cause,
obviously through such counsel's "ineptitude" and, let it be
added, the clients' forbearance. The petitioner's reverses
should have cautioned him that his lawyer was
mishandling his case and moved him to seek the help of
other counsel, which he did in the end but rather tardily.
Now petitioner wants us to nullify all of the antecedent

proceedings and recognize his earlier claims to the
disputed property on the justification that his counsel was
grossly inept. Such a reason is hardly plausible as the
petitioner's new counsel should know. Otherwise, all a
defeated party would have to do to salvage his case is
claim neglect or mistake on the part of his counsel as a
ground for reversing the adverse judgment. There would

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be no end to litigation if these were allowed as every
shortcoming of counsel could be the subject of challenge
by his client through another counsel who, if he is also
found wanting, would likewise be disowned by the same
client through another counsel, and so on ad infinitum.
This would render court proceedings indefinite, tentative
and subject to reopening at any time by the mere
subterfuge of replacing counsel. (at pp. 357-358)
We now discuss the merits of the cases.
In the first assignment of error, the petitioners maintain that their

possession of the questioned properties must be respected in view of
their ownership of an aliquot portion of all the properties of the
respondent corporation being stockholders thereof. They propose
that the veil of corporate fiction be pierced, considering the
circumstances under which the respondent corporation was formed.
Originally, the questioned properties belonged to Eugenia V. Roxas.

After her death, the heirs of Eugenia V. Roxas, among them the
petitioners herein, decided to form a corporation — Heirs of Eugenia
V. Roxas, Incorporated (private respondent herein) with the inherited
properties as capital of the corporation. The corporation was
incorporated on December 4, 1962 with the primary purpose of
engaging in agriculture to develop the inherited properties. The
Articles of Incorporation of the respondent corporation were
amended in 1971 to allow it to engage in the resort business.
Accordingly, the corporation put up a resort known as Hidden Valley
Springs Resort where the questioned properties are located.
These facts, however, do not justify the position taken by the

petitioners.
The respondent is a bona fide corporation. As such, it has a juridical

personality of its own separate from the members composing it.
(Western Agro Industrial Corporation v. Court of Appeals, 188 SCRA
709 [1990]; Tan Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205
[1988]; Yutivo Sons Hardware Company v. Court of Tax Appeals, 1
SCRA 160 [1961]; Emilio Cano Enterprises, Inc. v. Court of Industrial
Relations, 13 SCRA 290 [1965]) There is no dispute that title over the
questioned land where the Hidden Valley Springs Resort is located is
registered in the name of the corporation. The records also show
that the staff house being occupied by petitioner Rebecca Boyer-
Roxas and the recreation hall which was later on converted into a
residential house occupied by petitioner Guillermo Roxas are owned
by the respondent corporation. Regarding properties owned by a
corporation, we stated in the case of Stockholders of F. Guanzon
and Sons, Inc. v. Register of Deeds of Manila, (6 SCRA 373 [1962]):

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xxx xxx xxx
. . . Properties registered in the name of the corporation

are owned by it as an entity separate and distinct from its
members. While shares of stock constitute personal
property, they do not represent property of the
corporation. The corporation has property of its own
which consists chiefly of real estate (Nelson v. Owen, 113
Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W.
743). A share of stock only typifies an aliquot part of the
corporation's property, or the right to share in its proceeds
to that extent when distributed according to law and
equity (Hall & Faley v. Alabama Terminal, 173 Ala., 398, 56
So. 235), but its holder is not the owner of any part of the
capital of the corporation (Bradley v. Bauder, 36 Ohio St.,
28). Nor is he entitled to the possession of any definite
portion of its property or assets (Gottfried V. Miller, 104 U.S.,
521; Jones v. Davis, 35 Ohio St., 474). The stockholder is not
a co-owner or tenant in common of the corporate
property (Harton v. Johnston, 166 Ala., 317, 51 So. 992). (at
pp. 375-376)
The petitioners point out that their occupancy of the staff house
which was later used as the residence of Eriberto Roxas, husband of
petitioner Rebecca Boyer-Roxas and the recreation hall which was
converted into a residential house were with the blessings of
Eufrocino Roxas, the deceased husband of Eugenia V. Roxas, who
was the majority and controlling stockholder of the corporation. In
his lifetime, Eufrocino Roxas together with Eriberto Roxas, the
husband of petitioner Rebecca Boyer-Roxas, and the father of
petitioner Guillermo Roxas managed the corporation. The Board of
Directors did not object to such an arrangement. The petitioners
argue that . . . the authority thus given by Eufrocino Roxas for the
conversion of the recreation hall into a residential house can no
longer be questioned by the stockholders of the private respondent
and/or its board of directors for they impliedly but no leas explicitly
delegated such authority to said Eufrocino Roxas. (Rollo, p. 12)
Again, we must emphasize that the respondent corporation has a

distinct personality separate from its members. The corporation
transacts its business only through its officers or agents. (Western Agro
Industrial Corporation v. Court of Appeals, supra). Whatever
authority these officers or agents may have is derived from the
board of directors or other governing body unless conferred by the
charter of the corporation. An officer's power as an agent of the
corporation must be sought from the statute, charter, the by-laws or
in a delegation of authority to such officer, from the acts of the

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board of directors, formally expressed or implied from a habit or
custom of doing business. (Vicente v. Geraldez, 52 SCRA 210 [1973])
In the present case, the record shows that Eufrocino V. Roxas who
then controlled the management of the corporation, being the
majority stockholder, consented to the petitioners' stay within the
questioned properties. Specifically, Eufrocino Roxas gave his consent
to the conversion of the recreation hall to a residential house, now
occupied by petitioner Guillermo Roxas. The Board of Directors did
not object to the actions of Eufrocino Roxas. The petitioners were
allowed to stay within the questioned properties until August 27,
1983, when the Board of Directors approved a Resolution ejecting
the petitioners, to wit:
R E S O L U T I O N No. 83-12
RESOLVED, That Rebecca B. Roxas and Guillermo Roxas,

and all persons claiming under them, be ejected from
their occupancy of the Hidden Valley Springs compound
on which their houses have been constructed and/or are
being constructed only on tolerance of the Corporation
and without any contract therefor, in order to give way to
the Corporation's expansion and improvement program
and obviate prejudice to the operation of the Hidden
Valley Springs Resort by their continued interference.
RESOLVED, Further that the services of Atty. Benito P. Fabie

be engaged and that he be authorized as he is hereby
authorized to effect the ejectment, including the filing of
the corresponding suits, if necessary to do so. (Original
Records, p. 327)
We find nothing irregular in the adoption of the Resolution by the

Board of Directors. The petitioners' stay within the questioned
properties was merely by tolerance of the respondent corporation in
deference to the wishes of Eufrocino Roxas, who during his lifetime,
controlled and managed the corporation. Eufrocino Roxas' actions
could not have bound the corporation forever. The petitioners have
not cited any provision of the corporation by-laws or any resolution
or act of the Board of Directors which authorized Eufrocino Roxas to
allow them to stay within the company premises forever. We rule
that in the absence of any existing contract between the petitioners
and the respondent corporation, the corporation may elect to eject
the petitioners at any time it wishes for the benefit and interest of the
respondent corporation.
The petitioners' suggestion that the veil of the corporate fiction

should be pierced is untenable. The separate personality of the
corporation may be disregarded only when the corporation is used
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"as a cloak or cover for fraud or illegality, or to work injustice, or
where necessary to achieve equity or when necessary for the
protection of the creditors." (Sulong Bayan, Inc. v. Araneta, Inc., 72
SCRA 347 [1976] cited in Tan Boon Bee & Co., Inc., v. Jarencio, supra
and Western Agro Industrial Corporation v. Court of Appeals, supra)
The circumstances in the present cases do not fall under any of the
enumerated categories.
In the third assignment of error, the petitioners insist that as regards

the unfinished building, Rebecca Boyer-Roxas is a builder in good
faith.
The construction of the unfinished building started when Eriberto

Roxas, husband of Rebecca Boyer-Roxas, was still alive and was the
general manager of the respondent corporation. The couple used
their own funds to finance the construction of the building. The
Board of Directors of the corporation, however, did not object to the
construction. They allowed the construction to continue despite the
fact that it was within the property of the corporation. Under these
circumstances, we agree with the petitioners that the provision of
Article 453 of the Civil Code should have been applied by the lower
courts.
If there was bad faith, not only on the part of the person
who built, planted or sown on the land of another but also
on the part of the owner of such land, the rights of one
and the other shall be the same as though both had
acted in good faith.
In such a case, the provisions of Article 448 of the Civil Code govern
the relationship between petitioner Rebecca-Boyer-Roxas and the
respondent corporation, to wit:
Art. 448 — The owner of the land on which anything has

been built, sown or planted in good faith, shall have the
right to appropriate as his own the works, sowing or
planting after payment of the indemnity provided for in
articles 546 and 548, or to oblige the one who built or
planted to pay the price of the land, and the one who
sowed, the proper rent. However, the builder or planter
cannot be obliged to buy the land if its value is
considerably more than that of the building or trees. In
such case, he shall pay reasonable rent, if the owner of
the land does not choose to appropriate the buildings or
trees after proper indemnity. The parties shall agree upon
the terms of the lease and in case of disagreement, the
court shall fix the terms thereof.
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WHEREFORE, the present petition is partly GRANTED. The questioned
decision of the Court of Appeals affirming the decision of the
Regional Trial Court of Laguna, Branch 37, in RTC Civil Case No. 802-
84-C is MODIFIED in that subparagraphs (c) and (d) of Paragraph 1
of the dispositive portion of the decision are deleted. In their stead,
the petitioner Rebecca Boyer-Roxas and the respondent
corporation are ordered to follow the provisions of Article 448 of the
Civil Code as regards the questioned unfinished building in RTC Civil
Case No. 802-84-C. The questioned decision is affirmed in all other
respects.
SO ORDERED.
Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.
AF Realty & Dev., Inc. vs. Dieselman Freight Services Co. (373 SCRA
385 [2002])
G.R. No. 111448 January 16, 2002
AF REALTY & DEVELOPMENT, INC. and ZENAIDA R. RANULLO,

petitioners,
vs.
DIESELMAN FREIGHT SERVICES, CO., MANUEL C. CRUZ, JR. and MIDAS
DEVELOPMENT CORPORATION, respondents.
Petition for review on certiorari assailing the Decision dated

December 10, 1992 and the Resolution (Amending Decision) dated
August 5, 1993 of the Court of Appeals in CA-G.R. CV No. 30133.
Dieselman Freight Service Co. (Dieselman for brevity) is a domestic

corporation and a registered owner of a parcel of commercial lot
consisting of 2,094 square meters, located at 104 E. Rodriguez
Avenue, Barrio Ugong, Pasig City, Metro Manila. The property is
covered by Transfer Certificate of Title No. 39849 issued by the
Registry of Deeds of the Province of Rizal.1
On May 10, 1988, Manuel C. Cruz, Jr., a member of the board of

directors of Dieselman, issued a letter denominated as "Authority To
Sell Real Estate"2 to Cristeta N. Polintan, a real estate broker of the
CNP Real Estate Brokerage. Cruz, Jr. authorized Polintan "to look for a
buyer/buyers and negotiate the sale" of the lot at P3,000.00 per
square meter, or a total of P6,282,000.00. Cruz, Jr. has no written
authority from Dieselman to sell the lot.
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In turn, Cristeta Polintan, through a letter3 dated May 19, 1988,
authorized Felicisima ("Mimi") Noble4 to sell the same lot.
Felicisima Noble then offered for sale the property to AF Realty &
Development, Inc. (AF Realty) at P2,500.00 per square meter.5
Zenaida Ranullo, board member and vice-president of AF Realty,
accepted the offer and issued a check in the amount of P300,000.00
payable to the order of Dieselman. Polintan received the check and
signed an "Acknowledgement Receipt"6 indicating that the amount
of P300,000.00 represents the partial payment of the property but
refundable within two weeks should AF Realty disapprove Ranullo's
action on the matter.
On June 29, 1988, AF Realty confirmed its intention to buy the lot.
Hence, Ranullo asked Polintan for the board resolution of Dieselman
authorizing the sale of the property. However, Polintan could only
give Ranullo the original copy of TCT No. 39849, the tax declaration
and tax receipt for the lot, and a photocopy of the Articles of
Incorporation of Dieselman.7
On August 2, 1988, Manuel F. Cruz, Sr., president of Dieselman,

acknowledged receipt of the said P300,000.00 as "earnest money"
but required AF Realty to finalize the sale at P4,000.00 per square
meter.8 AF Realty replied that it has paid an initial down payment of
P300,000.00 and is willing to pay the balance.9
However, on August 13, 1988, Mr. Cruz, Sr. terminated the offer and
demanded from AF Realty the return of the title of the lot earlier
delivered by Polintan.10
Claiming that there was a perfected contract of sale between

them, AF Realty filed with the Regional Trial Court, Branch 160, Pasig
City a complaint for specific performance (Civil Case No. 56278)
against Dieselman and Cruz, Jr.. The complaint prays that Dieselman
be ordered to execute and deliver a final deed of sale in favor of AF
Realty.11 In its amended complaint,12 AF Realty asked for payment of
P1,500,000.00 as compensatory damages; P400,000.00 as attorney's
fees; and P500,000.00 as exemplary damages.
In its answer, Dieselman alleged that there was no meeting of the

minds between the parties in the sale of the property and that it did
not authorize any person to enter into such transaction on its behalf.
Meanwhile, on July 30, 1988, Dieselman and Midas Development

Corporation (Midas) executed a Deed of Absolute Sale13 of the
same property. The agreed price was P2,800.00 per square meter.
Midas delivered to Dieselman P500,000.00 as down payment and
deposited the balance of P5,300,000.00 in escrow account with the
PCIBank.
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Constrained to protect its interest in the property, Midas filed on April
3, 1989 a Motion for Leave to Intervene in Civil Case No. 56278.
Midas alleged that it has purchased the property and took
possession thereof, hence Dieselman cannot be compelled to sell
and convey it to AF Realty. The trial court granted Midas' motion.
After trial, the lower court rendered the challenged Decision holding
that the acts of Cruz, Jr. bound Dieselman in the sale of the lot to AF
Realty.14 Consequently, the perfected contract of sale between
Dieselman and AF Realty bars Midas' intervention. The trial court also
held that Midas acted in bad faith when it initially paid Dieselman
P500,000.00 even without seeing the latter's title to the property.
Moreover, the notarial report of the sale was not submitted to the
Clerk of Court of the Quezon City RTC and the balance of
P5,300,000.00 purportedly deposited in escrow by Midas with a bank
was not established.1âwphi1.nêt
The dispositive portion of the trial court's Decision reads:
"WHEREFORE, foregoing considered, judgment is hereby

rendered ordering defendant to execute and deliver to
plaintiffs the final deed of sale of the property covered by the
Transfer Certificate of Title No. 39849 of the Registry of Deed of
Rizal, Metro Manila District II, including the improvements
thereon, and ordering defendants to pay plaintiffs attorney's
fees in the amount of P50,000.00 and to pay the costs.
"The counterclaim of defendants is necessarily dismissed.
"The counterclaim and/or the complaint in intervention are

likewise dismissed
"SO ORDERED."15
Dissatisfied, all the parties appealed to the Court of Appeals.
AF Realty alleged that the trial court erred in not holding Dieselman
liable for moral, compensatory and exemplary damages, and in
dismissing its counterclaim against Midas.
Upon the other hand, Dieselman and Midas claimed that the trial
court erred in finding that a contract of sale between Dieselman
and AF Realty was perfected. Midas further averred that there was
no bad faith on its part when it purchased the lot from Dieselman.
In its Decision dated December 10, 1992, the Court of Appeals

reversed the judgment of the trial court holding that since Cruz, Jr.
was not authorized in writing by Dieselman to sell the subject
property to AF Realty, the sale was not perfected; and that the

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Deed of Absolute Sale between Dieselman and Midas is valid, there
being no bad faith on the part of the latter. The Court of Appeals
then declared Dieselman and Cruz, Jr. jointly and severally liable to
AF Realty for P100,000.00 as moral damages; P100,000.00 as
exemplary damages; and P100,000.00 as attorney's fees.16
On August 5, 1993, the Court of Appeals, upon motions for

reconsideration filed by the parties, promulgated an Amending
Decision, the dispositive portion of which reads:
"WHEREFORE, The Decision promulgated on October 10, 1992, is

hereby AMENDED in the sense that only defendant Mr. Manuel
Cruz, Jr. should be made liable to pay the plaintiffs the
damages and attorney's fees awarded therein, plus the
amount of P300,000.00 unless, in the case of the said
P300,000.00, the same is still deposited with the Court which
should be restituted to plaintiffs.
"SO ORDERED."17
AF Realty now comes to this Court via the instant petition alleging
that the Court of Appeals committed errors of law.
The focal issue for consideration by this Court is who between

petitioner AF Realty and respondent Midas has a right over the
subject lot.
The Court of Appeals, in reversing the judgment of the trial court,

made the following ratiocination:
"From the foregoing scenario, the fact that the board of

directors of Dieselman never authorized, verbally and in writing,
Cruz, Jr. to sell the property in question or to look for buyers and
negotiate the sale of the subject property is undeniable.
"While Cristeta Polintan was actually authorized by Cruz, Jr. to

look for buyers and negotiate the sale of the subject property, it
should be noted that Cruz, Jr. could not confer on Polintan any
authority which he himself did not have. Nemo dat quod non
habet. In the same manner, Felicisima Noble could not have
possessed authority broader in scope, being a mere extension
of Polintan's purported authority, for it is a legal truism in our
jurisdiction that a spring cannot rise higher than its source.
Succinctly stated, the alleged sale of the subject property was
effected through persons who were absolutely without any
authority whatsoever from Dieselman.
"The argument that Dieselman ratified the contract by

accepting the P300,000.00 as partial payment of the purchase

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price of the subject property is equally untenable. The sale of
land through an agent without any written authority is void.
xxx xxx xxx
"On the contrary, anent the sale of the subject property by

Dieselman to intervenor Midas, the records bear out that Midas
purchased the same from Dieselman on 30 July 1988. The
notice of lis pendens was subsequently annotated on the title
of the property by plaintiffs on 15 August 1988. However, this
subsequent annotation of the notice of lis pendens certainly
operated prospectively and did not retroact to make the
previous sale of the property to Midas a conveyance in bad
faith. A subsequently registered notice of lis pendens surely is
not proof of bad faith. It must therefore be borne in mind that
the 30 July 1988 deed of sale between Midas and Dieselman is
a document duly certified by notary public under his hand and
seal. x x x. Such a deed of sale being public document
acknowledged before a notary public is admissible as to the
date and fact of its execution without further proof of its due
execution and delivery (Bael vs. Intermediate Appellate Court,
169 SCRA617; Joson vs. Baltazar, 194 SCRA 114) and to prove
the defects and lack of consent in the execution thereof, the
evidence must be strong and not merely preponderant x x x." 18
We agree with the Court of Appeals.
Section 23 of the Corporation Code expressly provides that the

corporate powers of all corporations shall be exercised by the board
of directors. Just as a natural person may authorize another to do
certain acts in his behalf, so may the board of directors of a
corporation validly delegate some of its functions to individual
officers or agents appointed by it.19 Thus, contracts or acts of a
corporation must be made either by the board of directors or by a
corporate agent duly authorized by the board.20 Absent such valid
delegation/authorization, the rule is that the declarations of an
individual director relating to the affairs of the corporation, but not in
the course of, or connected with, the performance of authorized
duties of such director, are held not binding on the corporation.21
In the instant case, it is undisputed that respondent Cruz, Jr. has no

written authority from the board of directors of respondent
Dieselman to sell or to negotiate the sale of the lot, much less to
appoint other persons for the same purpose. Respondent Cruz, Jr.'s
lack of such authority precludes him from conferring any authority to
Polintan involving the subject realty. Necessarily, neither could
Polintan authorize Felicisima Noble. Clearly, the collective acts of

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respondent Cruz, Jr., Polintan and Noble cannot bind Dieselman in
the purported contract of sale.
Petitioner AF Realty maintains that the sale of land by an

unauthorized agent may be ratified where, as here, there is
acceptance of the benefits involved. In this case the receipt by
respondent Cruz, Jr. from AF Realty of the P300,000.00 as partial
payment of the lot effectively binds respondent Dieselman.22
Involved in this case is a sale of land through an agent. Thus, the law
on agency under the Civil Code takes precedence. This is well
stressed in Yao Ka Sin Trading vs. Court of Appeals:23
"Since a corporation, such as the private respondent, can act

only through its officers and agents, all acts within the powers of
said corporation may be performed by agents of its selection;
and, except so far as limitations or restrictions may be imposed
by special charter, by-law, or statutory provisions, the same
general principles of law which govern the relation of agency
for a natural person govern the officer or agent of a
corporation, of whatever status or rank, in respect to his power
to act for the corporation; and agents when once appointed, or
members acting in their stead, are subject to the same rules,
liabilities, and incapacities as are agents of individuals and
private persons." (Emphasis supplied)
Pertinently, Article 1874 of the same Code provides:
"ART. 1874. When a sale of 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." (Emphasis supplied)
Considering that respondent Cruz, Jr., Cristeta Polintan and

Felicisima Ranullo were not authorized by respondent Dieselman to
sell its lot, the supposed contract is void. Being a void contract, it is
not susceptible of ratification by clear mandate of Article 1409 of the
Civil Code, thus:
"ART. 1409. The following contracts are inexistent and void from
the very beginning:
xxx
(7) Those expressly prohibited or declared void by law.
"These contracts cannot be ratified. Neither can the right to set

up the defense of illegality be waived." (Emphasis supplied)

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Upon the other hand, the validity of the sale of the subject lot to
respondent Midas is unquestionable. As aptly noted by the Court of
Appeals,24 the sale was authorized by a board resolution of
respondent Dieselman dated May 27, 1988.1âwphi1.nêt
The Court of Appeals awarded attorney's fees and moral and

exemplary damages in favor of petitioner AF Realty and against
respondent Cruz, Jr.. The award was made by reason of a breach of
contract imputable to respondent Cruz, Jr. for having acted in bad
faith. We are no persuaded. It bears stressing that petitioner Zenaida
Ranullo, board member and vice-president of petitioner AF Realty
who accepted the offer to sell the property, admitted in her
testimony25that a board resolution from respondent Dieselman
authorizing the sale is necessary to bind the latter in the transaction;
and that respondent Cruz, Jr. has no such written authority. In fact,
despite demand, such written authority was not presented to her.26
This notwithstanding, petitioner Ranullo tendered a partial payment
for the unauthorized transaction. Clearly, respondent Cruz, Jr. should
not be held liable for damages and attorney's fees.
WHEREFORE, the assailed Decision and Resolution of the Court of

Appeals are hereby AFFIRMED with MODIFICATION in the sense that
the award of damages and attorney's fees is deleted. Respondent
Dieselman is ordered to return to petitioner AF Realty its partial
payment of P300,000.00. Costs against petitioners.
SO ORDERED.
Melo, Vitug, Panganiban, and Carpio, JJ., concur.
Commercial Law – Corporation Law – Power of the Board – Ultra

Vires Acts of Corporate Officers – Agency
In 1988, Manuel Cruz, Jr., a board member of Dieselman Freight

Services, Co. (DFS) authorized Cristeta Polintan to sell a 2,094 sq. m.
parcel of land owned by DFS. Polintan in turn authorized Felicisima
Noble to sell the same lot. Noble then offered AF Realty &
Development, Co., represented by Zenaida Ranullo, the land at the
rate of P2,500.00 per sq. m. AF Realty accepted the offer and issued
a P300,000 check as downpayment.
However, it appeared that DFS did not authorize Cruz, Jr. to sell the
said land. Nevertheless, Manuel Cruz, Sr. (father) and president of
DFS, accepted the check but modified the offer. He increased the
selling price to P4,000.00 per sq. m. AF Realty, in its response, did not
exactly agree nor disagree with the counter-offer but only said it is
willing to pay the balance (but was not clear at what rate).
Eventually, DFS sold the property to someone else.

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Now AF Realty is suing DFS for specific performance. It claims that
DFS ratified the contract when it accepted the check and made a
counter-offer.
ISSUE: Whether or not the sale made through an agent was ratified.
HELD: No. There was no valid agency created. The Board of Directors
of DFS never authorized Cruz, Jr. to sell the land. Hence, the
agreement between Cruz, Jr. and Polintan, as well as the
subsequent agreement between Polintan and Noble, never bound
the corporation. Therefore the sale transacted by Noble purportedly
on behalf of Polintan and ultimately purportedly on behalf of DFS is
void.
Being a void sale, it cannot be ratified even if Cruz, Sr. accepted the
check and made a counter-offer. (Cruz, Sr. returned the check
anyway). Under Article 1409 of the Civil Code, void transactions can
never be ratified because they were void from the very beginning.
San Juan Structural vs. CA (296 SCRA 631 [1998])
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.
PANGANIBAN, J.:
May corporate treasurer, by herself and without any authorization

from he 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
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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 defendant-appellee 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, plaintiff-appellant paid the downpayment
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-appellee's 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 Cashier's 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-appellee's treasurer,
Nenita Lee Gruenberg, did not appear; that defendant-
appellee Motorich Sales Corporation despite repeated
demands and in utter disregard of its commitments had

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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
defendant-appellee 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 Corporation's 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 Corporation's 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 Corporation's 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
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of the amended complaint; that Mrs. Gruenberg's
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-
appellant's 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 damage.
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

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and monopolies, a corporation may
by a majority vote of its board of
directors . . . sell, lease, exchange,
mortgage, pledge or otherwise
dispose of all or substantially all of its
property and assets including its
goodwill . . . when authorized by the
vote of the stockholders representing
at least two third (2/3) of the
outstanding capital stock . . .
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.

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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;

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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 JUAN STRUCTURAL

& STEEL FABRICATORS
TRANSFEROR 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 petitioner's

arguments and affirmed the Decision of the RTC with the
modification that Respondent Nenita Lee Gruenberg was ordered to
refund P100,000 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:

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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 attorney's 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 Gruenberg's

testimony as recorded in the transcript of
stenographic notes material to the disposition
of this case?
4. Are respondents liable for damages and

attorney's fees?
The Court's 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

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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 corporation's 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 bound at their peril, if they would hold the
principal liable, to ascertain not only the fact of agency but also the

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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
respondent's 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 treasurer's
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.
Art. 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:
xxx xxx xxx
(5) To enter any contract by which the ownership of an

immovable is transmitted or acquired either gratuitously or
for a valuable consideration;
xxx xxx xxx.

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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 Gruenberg's signature. Certainly, this document
alone does not prove that her acts were authorized or ratified by
Motorich.
Art. 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
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adds that, being solely owned by the Spouses Gruenberg, the
company can 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 the 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 investor's 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 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

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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
corporation's 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. . . . .
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 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 ". . . 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. In Dulay, 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

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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 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 he
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,

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however, is insufficient to prove that Nenita Gruenberg was
authorized to represent Respondent Motorich in the sale of its
immovable property. Said excerpt 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
Gruenberg's authority to sell the lot.

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Fourth Issue:
Damages and Attorney's Fees
Finally, petitioner prays for damages and attorney's fees, alleging

that "[i]n an utter display of malice and bad faith, respondents
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
Gruenberg's 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 attorney's 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 ". . . 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

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such as Gruenberg. Neither can he be oblivious to his duty to
ascertain the scope of Gruenberg's authorization to enter into a
contract to sell a parcel of land belonging to Motorich.
Indeed, petitioner's claim of fraud and bad faith is unsubstantiated

and fails to persuade the Court. Indubitably, petitioner appears to
be the victim of its own officer's 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 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 Civil Code
provides that "[p]ayment by reason of a mistake in the contruction 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.
Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.
296 SCRA 631 – Business Organization – Corporation Law – Piercing

the Veil of Corporate Fiction
In 1989, San Juan Structural and Steel Fabricators, Inc. (San Juan)
alleged that it entered into a contract of sale with Motorich Sales
Corporation (Motorich) through the latter’s treasurer, Nenita
Gruenberg. The subject of the sale was a parcel of land owned by
Motorich. San Juan advanced P100k to Nenita as earnest money.
On the day agreed upon on which Nenita was supposed to deliver

the title of the land to Motorich, Nenita did not show up. Nenita and
Motorich did not heed the subsequent demand of San Juan to
comply with the contract hence San Juan sued Motorich. Motorich,
in its defense, argued that it is not bound by the acts of its treasurer,
Nenita, since her act in contracting with San Juan was not
authorized by the corporate board.
San Juan raised the issue that Nenita was actually the wife of the
President of Motorich; that Nenita and her husband owns 98% of the
corporation’s capital stocks; that as such, it is a close corporation
and that makes Nenita and the President as principal stockholders

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who do not need any authorization from the corporate board; that
in this case, the corporate veil may be properly pierced.
ISSUE: Whether or not San Juan is correct.
HELD: No. Motorich is right in invoking that it is not bound by the acts
of Nenita because her act in entering into a contract with San Juan
was not authorized by the board of directors of Motorich. Nenita is
however ordered to return the P100k.
There is no merit in the contention that the corporate veil should be

pierced even though it is true that Nenita and her husband own 98%
of the capital stocks of Motorich. The corporate veil can only be
pierced if the corporate fiction is merely used by the incorporators to
shield themselves against liability for fraud, illegality or inequity
committed on third persons. It is incumbent upon San Juan to prove
that Nenita or her husband is merely using Motorich to defraud San
Juan. In this case however, San Juan utterly failed to establish that
Motorich 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 San Juan.
Phil. Associate of Stock Transfer & Registry Agencies, Inc. vs. CA

(536 SCRA 61 [2007])
G.R. No. 137321 October 15, 2007
PHILIPPINE ASSOCIATION OF STOCK TRANSFER AND REGISTRY

AGENCIES, INC., Petitioner,
vs.
THE HONORABLE COURT OF APPEALS; THE HONORABLE SECURITIES
AND EXCHANGE COMMISSION; AND SEC CHAIRMAN PERFECTO R.
YASAY, JR., Respondents.
DECISION
QUISUMBING, J.:
This is a petition for review on certiorari seeking to reverse the

Decision1 dated June 17, 1998 of the Court of Appeals in CA-G.R. SP
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No. 41320, as well as its Resolution2 dated January 13, 1999, denying
the motion for reconsideration.
The facts are as follows.
Petitioner Philippine Association of Stock Transfer and Registry

Agencies, Inc. is an association of stock transfer agents principally
engaged in the registration of stock transfers in the stock-and-
transfer book of corporations.
On May 10, 1996, petitioner’s Board of Directors unanimously

approved a resolution allowing its members to increase the transfer
processing fee they charge their clients from P45 per certificate to
P75 per certificate, effective July 1, 1996; and eventually to P100 per
certificate, effective October 1, 1996. The resolution also authorized
the imposition of a processing fee for the cancellation of stock
certificates at P20 per certificate effective July 1, 1996. According to
petitioner, the rates had to be increased since it had been over five
years since the old rates were fixed and an increase of its fees was
needed to sustain the financial viability of the association and
upgrade facilities and services.
After a dialogue with petitioner, public respondent Securities and

Exchange Commission (SEC) allowed petitioner to impose the P75
per certificate transfer fee and P20 per certificate cancellation fee
effective July 1, 1996. But, approval of the additional increase of the
transfer fees to P100 per certificate effective October 1, 1996, was
withheld until after a public hearing. The SEC issued a letter-
authorization to this effect on June 20, 1996.
Thereafter, on June 24, 1996, the Philippine Association of Securities

Brokers and Dealers, Inc. registered its objection to the measure
advanced by petitioner and requested the SEC to defer its
implementation. On June 27, 1996, the SEC advised petitioner to
hold in abeyance the implementation of the increases until the
matter was cleared with all the parties concerned. The SEC stated
that it was reconsidering its earlier approval in light of the opposition
and required petitioner to file comment. Petitioner nonetheless
proceeded with the implementation of the increased fees.
The SEC wrote petitioner on July 1, 1996, reiterating the directive of

June 27, 1996. On July 2, 1996, following a complaint from the
Philippine Stock Exchange, the SEC again sent petitioner a second
letter strongly urging petitioner to desist from implementing the new
rates in the interest of all participants in the security market.
Petitioner replied on July 3, 1996 that it had no intention of defying

the orders but stated that it could no longer hold in abeyance the
implementation of the new fees because its members had already
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put in place the procedures necessary for their implementation.
Petitioner also argued that the imposition of the processing fee was
a management prerogative, which was beyond the SEC’s authority
to regulate absent an express rule or regulation.
On July 8, 1996, the SEC issued Order No. 104, series of 1996,
enjoining petitioner from imposing the new fees:
WHEREFORE, pursuant to the powers vested in the Commission under

Sec. 40 of the Revised Securities Act, PASTRA is hereby enjoined to
defer the implementation of the new rates. Further, the members of
its Board of Directors and officers are hereby directed to appear
before the Commission on Thursday, July 11, 1996 at 2:00 o’clock in
the afternoon at the Commission Room, 5th Flr., SEC Bldg., EDSA,
Mandaluyong City to show cause why no administrative sanctions
should be imposed upon them.3
During the hearing, petitioner admitted that it had started imposing

the fees. It further admitted that aside from the questioned fees, it
had likewise started imposing fees ranging from P50 to P500 for
report of shareholdings or list of certificates; certification of
shareholdings or other stockholder information requested by external
auditors and validation of status of certificates, all without prior
approval of the Commission. Thus, for violating its orders, the SEC
ordered petitioner to pay a basic fine of P5,000 and a daily fine of
P500 for continuing violations:
In view of the foregoing, PASTRA is hereby declared as having defied

a lawful Order of the Commission for which it is imposed a basic fine
of P5,000.00 plus a daily fine of P500.00 for continuing violations
payable to the Commission within five days from actual receipt of
this Order and it is hereby ordered to immediately cease and desist
from imposing the new rates for issuance and cancellation of stock
certificates, until further orders from this Commission.
SO ORDERED.4
Aggrieved, petitioner went to the Court of Appeals on certiorari

contending that the SEC acted with grave abuse of discretion or
lack or excess of jurisdiction in issuing the above orders. The
appellate court issued a temporary restraining order on July 26, 1996,
and a writ of preliminary injunction on August 26, 1996.
On June 17, 1998, the appellate court dismissed the petition. It ruled
that the power to regulate petitioner’s fees was included in the
general power given to the SEC under Section 405 of The Revised
Securities Act to regulate, supervise, examine, suspend or otherwise
discontinue, the operation of securities-related organizations like
petitioner.
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The appellate court likewise denied petitioner’s motion for
reconsideration. Hence, this appeal.
While this case was pending, The Revised Securities Act by authority
of which the assailed orders were issued was repealed by Republic
Act No. 8799 or The Securities Regulation Code,6 which became
effective on August 8, 2000. Nonetheless, we find it pertinent to rule
on the parties’ submissions considering that the effects of the July 11,
1996 Order had not been obliterated by the repeal of The Revised
Securities Act and there is still present a need to rule on whether
petitioner was liable for the fees imposed upon it.
Petitioner submits that the Court of Appeals committed reversible

error:
I.
WHEN [IT] FAILED TO RULE THAT THE SEC AND CHAIRMAN YASAY,
IN ISSUING THE COMMISSION’S CONTROVERTED ORDERS DATED
JULY 8 AND JULY 11, 1996, VIOLATED PASTRA’S CONSTITUTIONAL
RIGHT TO DUE PROCESS OF LAW;
II.
WHEN [IT] FAILED TO RULE THAT THE SEC AND CHAIRMAN YASAY
COMMITTED GRAVE ABUSE OF DISCRETION AND IN EXCESS OF
THEIR JURISDICTION WHEN THEY ISSUED THE COMMISSION’S
CONTROVERTED ORDERS DATED JULY 8 AND JULY 11, 1996;
AND,
III.
WHEN [IT] RULED THAT THE SEC AND CHAIRMAN YASAY HAVE
LEGAL BASIS IN ISSUING THE COMMISSION’S CONTROVERTED
ORDERS DATED JULY 8 AND JULY 11, 1996.7
Essentially, the issue for our resolution is whether the SEC acted with
grave abuse of discretion or lack or excess of jurisdiction in issuing
the controverted Orders of July 8 and 11, 1996.
Petitioner argues that the SEC violated petitioner’s right to due

process because it issued the July 8, 1996 cease-and-desist order
without first conducting a hearing. Petitioner likewise laments that
while said order required petitioner’s board of directors to appear
before the SEC to show cause why no administrative sanctions
should be imposed on them, petitioner’s board of directors attended
the hearing without the assistance of counsel because the Director
of the SEC Brokers and Exchanges Department had allegedly
assured them that the order was only a standard order and nothing

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to worry about. Petitioner also contends that even if its board did
attend with counsel or present evidence, its evidence would not
have been considered anyway because the Order of July 11, 1996
had allegedly been prepared as early as July 8, 1996. In support of
this suspicion, petitioner points out that the date "July 8, 1996" was
replaced with the date "July 11, 1996" before it was signed by
Chairman Perfecto R. Yasay, Jr., who did not attend the meeting.
Petitioner adds that the SEC cannot restrict petitioner’s members

from increasing the transfer and processing fees they charge their
clients because there is no specific law, rule or regulation authorizing
it. Section 40 of the then Revised Securities Act, according to
petitioner, only lays down the general powers of the SEC to regulate
and supervise the corporate activities of organizations related to or
connected with the securities market like petitioner. It could not be
interpreted to justify the SEC’s unjustified interference with
petitioner’s decision to increase its transfer fees and impose
processing fees, especially since the decision involved a
management prerogative and was intended to protect the viability
of petitioner’s members.8
For its part, the Office of the Solicitor General (OSG) counters that
petitioner’s allegations of denial of due process are baseless. The
OSG cites that petitioner was given ample opportunity to present its
case at the July 11, 1996 hearing and was adequately heard
through the series of letters it sent to the SEC to explain its refusal to
obey the latter’s directives. Also, there is no evidence to support its
allegation that the July 11, 1996 Order was prepared in advance or
that it was issued without considering the evidence for the parties.
As regards the SEC’s power over petitioner’s stock transfer fees, the
OSG argues that the power to determine said fees was necessarily
implied in the SEC’s general power under Section 40 of The Revised
Securities Act to regulate and supervise the operations of transfer
agents such as petitioner’s member-corporations. The OSG adds
that petitioner’s discretion to increase its fees was not purely a
management prerogative and was properly the subject of
regulation considering that it significantly affects the market for
securities.9
We find the instant petition bereft of merit. The Court notes that
before its repeal, Section 47 of The Revised Securities Act clearly
gave the SEC the power to enjoin the acts or practices of securities-
related organizations even without first conducting a hearing if,
upon proper investigation or verification, the SEC is of the opinion
that there exists the possibility that the act or practice may cause
grave or irreparable injury to the investing public, if left unrestrained.
Section 47 clearly provided,

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SEC. 47. Cease and desist order.—The Commission, after proper
investigation or verification, motu proprio, or upon verified complaint
by any aggrieved party, may issue a cease and desist order without
the necessity of a prior hearing if in its judgment the act or practice,
unless restrained may cause grave or irreparable injury or prejudice
to the investing public or may amount to fraud or violation of the
disclosure requirements of this Act and the rules and regulations of
the Commission. (Emphasis supplied.)
xxxx
Said section enforces the power of general supervision of the SEC

under Section 40 of the then Revised Securities Act.
As a securities-related organization under the jurisdiction and

supervision of the SEC by virtue of Section 40 of The Revised Securities
Act and Section 3 of Presidential Decree No. 902-A,10 petitioner was
under the obligation to comply with the July 8, 1996 Order. Defiance
of the order was subject to administrative sanctions provided in
Section 4611 of The Revised Securities Act.
Petitioner failed to show that the SEC, which undoubtedly possessed

the necessary expertise in matters relating to the regulation of the
securities market, gravely abused its discretion in finding that there
was a possibility that the increase in fees and imposition of
cancellation fees will cause grave or irreparable injury or prejudice
to the investing public. Indeed, petitioner did not advance any
argument to counter the SEC’s finding. Thus, there appears to be no
substantial reason to nullify the July 8, 1996 Order. This is true,
especially considering that, as pointed out by the OSG, petitioner’s
fee increases have far-reaching effects on the capital market.
Charging exorbitant processing fees could discourage many small
prospective investors and curtail the infusion of money into the
capital market and hamper its growth.
Furthermore, there is no merit in petitioner’s contention that even if it

had appeared at the hearing of July 11, 1996 with counsel and
presented its evidence, the SEC would not have considered it
because the Order of July 11, 1996 was in fact prepared earlier on
July 8, 1996. It is clear from the order itself that the July 11, 1996 Order
was edited from the computer file of the July 8, 1996 Order, and that
the error in the date was merely an oversight in editing the softcopy
before it was printed.
Similarly, there is no merit to petitioner’s claim that it was misled into

attending the July 11, 1996 hearing without counsel. Whether the
Director of the SEC Brokers and Exchanges Department assured
petitioner’s board that the July 8, 1996 Order was only a standard
order and nothing to worry about, is a question of fact which this
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Court cannot entertain considering that this Court is not a trier of
facts.12 Needless to stress, the assurance could not be interpreted as
outright prohibition to bring in petitioner’s counsel.
Moreover, it devolved upon petitioner to protect its interests

adequately considering the clear implications of the Order of July 8,
1996. Petitioner had only itself to blame for its failure to present its
evidence during the July 11, 1996 hearing.1âwphi1
In Philippine Stock Exchange, Inc. v. Court of Appeals, 13 the Court

held that the SEC is without authority to substitute its judgment for
that of the corporation’s board of directors on business matters so
long as the board of directors acts in good faith. This Court notes,
however, that this case involves, not whether petitioner’s actions
pertained to management prerogatives or whether petitioner acted
in good faith. Rather, this case involves the question of whether the
SEC had the power to enjoin petitioner’s planned increase in fees
after the SEC had determined that said act if pursued may cause
grave or irreparable injury or prejudice to the investing public.
Petitioner was fined for violating the SEC’s cease-and-desist order
which the SEC had issued to protect the interest of the investing
public, and not simply for exercising its judgment in the manner it
deems appropriate for its business.
The regulatory and supervisory powers of the Commission under

Section 40 of the then Revised Securities Act, in our view, were broad
enough to include the power to regulate petitioner’s fees. Indeed,
Section 47 gave the Commission the power to enjoin motu proprio
any act or practice of petitioner which could cause grave or
irreparable injury or prejudice to the investing public. The intentional
omission in the law of any qualification as to what acts or practices
are subject to the control and supervision of the SEC under Section
47 confirms the broad extent of the SEC’s regulatory powers over the
operations of securities-related organizations like petitioner.
The SEC’s authority to issue the cease-and-desist order being

indubitable under Section 47 in relation to Section 40 of the then
Revised Securities Act, and there being no showing that the SEC
committed grave abuse of discretion in finding basis to issue said
order, we rule that the Court of Appeals committed no reversible
error in affirming the assailed orders. For its open and admitted
defiance of a lawful cease-and-desist order, petitioner was held
appropriately liable for the payment of the penalty imposed on it in
the SEC’s July 11, 1996 Order.
WHEREFORE, the instant petition for review on certiorari is DENIED for

lack of merit. The Decision dated June 17, 1998 and Resolution

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dated January 13, 1999, of the Court of Appeals in CA-G.R. SP No.
41320 are affirmed. Costs against petitioner.
SO ORDERED.
Associate Justice
WE CONCUR:
ANTONIO T. CARPIO
Associate Justice
CONCHITA CARPIO MORALES DANTE O. TINGA

PRESBITERO J. VELASCO, JR.

Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision had been

Associate Justice
Chairperson
CERTIFICATION
Chairperson’s Attestation, I certify that the conclusions in the above
Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court’s Division.
REYNATO S. PUNO
Chief Justice
Footnotes
1Rollo, pp. 110-121-A. Penned by Associate Justice Bernardo Ll.
Salas, with Associate Justices Eloy R. Bello, Jr. and Candido V.
Rivera concurring.
2 Id. at 130.
3 Id. at 52.

suigeneris
4 Id. at 58.
5 SEC. 40. Power of the Commission with respect to securities
related organizations. — The Commission shall have the power
to grant license as a condition for, and to regulate, supervise,
examine, suspend or otherwise discontinue, the operation of
organizations whose operations are related to or connected
with the securities market such as but not limited to clearing
houses, securities depositories, transfer agents, registrars, fiscal
and paying agents, computer services, news disseminating
services, proxy solicitors, statistical agencies, securities rating
agencies, and securities information processors which are
engaged in the business of: (1) collecting, processing, or
preparing for distribution or publication, or assisting,
participating in, or coordinating the distribution or publication
of, information with respect to transactions in or quotations for
any security or (2) distributing or publishing, whether by means
of a ticker tape, a communications network, a terminal display
device, or otherwise, on a current and continuing basis,
information with respect to such transactions or quotations.
6 Approved on July 19, 2000.
7 Rollo, pp. 14-15.
8 Id. at 18.
9 Id. at 162-165.
10Reorganization of the Securities and Exchange Commission
with Additional Powers and Placing the said Agency Under the
Administrative Supervision of the Office of the President
xxxx
SEC. 3. The Commission shall have absolute jurisdiction,

supervision and control over all corporations, partnerships
or associations, who are the grantees of primary franchise
and/or a license or permit issued by the government to
operate in the Philippines;…
11SEC. 46. Administrative sanctions.—If, after proper notice and
hearing, the Commission finds that there is a violation of this
Act, its rules, or its orders or that any registrant has, in a
registration statement and its supporting papers and other
reports required by law or rules to be filed with the Commission,
made any untrue statement of a material fact, or omitted to
state any material fact required to be stated therein or
necessary to make the statements therein not misleading, or

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refused to permit any lawful examination into its affairs, it shall,
in its discretion, impose any or all of the following sanctions:
xxxx
(b) A fine of no less than two hundred (P200.00) pesos nor

more than fifty thousand (P50,000.00) pesos plus not more
than five hundred (P500.00) pesos for each day of
continuing violation;
xxxx
12Springfield Development Corporation, Inc. v. Hon. Presiding
Judge of Regional Trial Court of Misamis Oriental, G.R. No.
142628, February 6, 2007, 514 SCRA 326, 343.
13 G.R. No. 125469, October 27, 1997, 281 SCRA 232.
Islamic Directorate of Phils. vs. CA (272 SCRA 454 [1997])
G.R. No. 117897 May 14, 1997
ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and

SECURITIES & EXCHANGE COMMISSION, petitioners,
vs.
COURT OF APPEALS and IGLESIA NI CRISTO, respondents.
The subject of this petition for review is the Decision of the public
respondent Court of Appeals, 1 dated October 28, 1994, setting
aside the portion of the Decision of the Securities and Exchange
Commission (SEC, for short) in SEC Case No. 4012 which declared null
and void the sale of two (2) parcels of land in Quezon City covered
by the Deed of Absolute Sale entered into by and between private
respondent Iglesia Ni Cristo (INC, for short) and the Islamic
Directorate of the Philippines, Inc., Carpizo Group, (IDP, for short).
The following facts appear of record.

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Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic
leaders of all Muslim major tribal groups in the Philippines headed by
Dean Cesar Adib Majul organized and incorporated the ISLAMIC
DIRECTORATE OF THE PHILIPPINES (IDP), the primary purpose of which
is to establish an Islamic Center in Quezon City for the construction of
a "Mosque (prayer place), Madrasah (Arabic School), and other
religious infrastructures" so as to facilitate the effective practice of
Islamic faith in the area. 2
Towards this end, that is, in the same year, the Libyan government
donated money to the IDP to purchase land at Culiat, Tandang
Sora, Quezon City, to be used as a Center for the Islamic populace.
The land, with an area of 49,652 square meters, was covered by two
titles: Transfer Certificate of Title Nos. RT-26520 (176616) 3 and RT-
26521 (170567), 4 both registered in the name of IDP.
It appears that in 1971, the Board of Trustees of the IDP was

composed of the following per Article 6 of its Articles of
Incorporation:
Senator Mamintal Tamano 5

Congressman Ali Dimaporo
Congressman Salipada Pendatun
Dean Cesar Adib Majul
Sultan Harun Al-Rashid Lucman
Delegate Ahmad Alonto
Commissioner Datu Mama Sinsuat
Mayor Aminkadra Abubakar 6
According to the petitioner, in 1972, after the purchase of the land

by the Libyan government in the name of IDP, Martial Law was
declared by the late President Ferdinand Marcos. Most of the
members of the 1971 Board of Trustees like Senators Mamintal
Tamano, Salipada Pendatun, Ahmad Alonto, and Congressman Al-
Rashid Lucman flew to the Middle East to escape political
persecution.
Thereafter, two Muslim groups sprung, the Carpizo Group, headed

by Engineer Farouk Carpizo, and the Abbas Group, led by Mrs.
Zorayda Tamano and Atty. Firdaussi Abbas. Both groups claimed to
be the legitimate IDP. Significantly, on October 3, 1986, the SEC, in a
suit between these two contending groups, came out with a
Decision in SEC Case No. 2687 declaring the election of both the
Carpizo Group and the Abbas Group as IDP board members to be
null and void. The dispositive portion of the SEC Decision reads:
WHEREFORE, judgment is hereby rendered declaring the

elections of both the petitioners 7 and respondents 8 as
null and void for being violative of the Articles of
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Incorporation of petitioner corporation. With the
nullification of the election of the respondents, the
approved by-laws which they certified to this Commission
as members of the Board of Trustees must necessarily be
likewise declared null and void. However, before any
election of the members of the Board of Trustees could be
conducted, there must be an approved by-laws to
govern the internal government of the association
including the conduct of election. And since the election
of both petitioners and respondents have been declared
null and void, a vacuum is created as to who should
adopt the by-laws and certify its adoption. To remedy this
unfortunate situation that the association has found itself
in, the members of the petitioning corporation are hereby
authorized to prepare and adopt their by-laws for
submission to the Commission. Once approved, an
election of the members of the Board of Trustees shall
immediately be called pursuant to the approved by-laws.
SO ORDERED. 9
Neither group, however, took the necessary steps prescribed by the

SEC in its October 3, 1986 Decision, and, thus, no valid election of the
members of the Board of Trustees of IDP was ever called. Although
the Carpizo Group 10 attempted to submit a set of by-laws, the SEC
found that, aside from Engineer Farouk Carpizo and Atty. Musib Buat,
those who prepared and adopted the by-laws were not bona fide
members of the IDP, thus rendering the adoption of the by-laws
likewise null and void.
On April 20, 1989, without having been properly elected as new

members of the Board of Trustee of IDP, the Carpizo Group caused
to be signed an alleged Board Resolution 11 of the IDP, authorizing
the sale of the subject two parcels of land to the private respondent
INC for a consideration of P22,343,400.00, which sale was evidenced
by a Deed of Absolute Sale 12 dated April 20, 1989.
On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed
by former Senator Mamintal Tamano, or the Tamano Group, filed a
petition before the SEC, docketed as SEC Case No. 4012, seeking to
declare null and void the Deed of Absolute Sale signed by the
Carpizo Group and the INC since the group of Engineer Carpizo was
not the legitimate Board of Trustees of the IDP.
Meanwhile, private respondent INC, pursuant to the Deed of

Absolute Sale executed in its favor, filed an action for Specific
Performance with Damages against the vendor, Carpizo Group,
before Branch 81 of the Regional Trial Court of Quezon City,

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docketed as Civil Case No. Q-90-6937, to compel said group to clear
the property of squatters and deliver complete and full physical
possession thereof to INC. Likewise, INC filed a motion in the same
case to compel one Mrs. Leticia P. Ligon to produce and surrender
to the Register of Deeds of Quezon City the owner's duplicate copy
of TCT Nos. RT-26521 and RT-26520 covering the aforementioned two
parcels of land, so that the sale in INC's favor may be registered and
new titles issued in the name of INC. Mrs. Ligon was alleged to be the
mortgagee of the two parcels of land executed in her favor by
certain Abdulrahman R.T. Linzag and Rowaida Busran-Sampaco
claimed to be in behalf of the Carpizo Group.
The IDP-Tamano Group, on June 11, 1991, sought to intervene in Civil

Case No. Q-90-6937 averring, inter alia:
xxx xxx xxx
2. That the Intervenor has filed a case before the Securities

and Exchange Commission (SEC) against Mr. Farouk
Carpizo, et. al., who, through false schemes and
machinations, succeeded in executing the Deed of Sale
between the IDP and the Iglesia Ni Kristo (plaintiff in the
instant case) and which Deed of Sale is the subject of the
case at bar;
3. That the said case before the SEC is docketed as Case

No. 04012, the main issue of which is whether or not the
aforesaid Deed of Sale between IDP and the Iglesia ni
Kristo is null and void, hence, Intervenor's legal interest in
the instant case. A copy of the said case is hereto
attached as Annex "A";
4. That, furthermore, Intervenor herein is the duly

constituted body which can lawfully and legally represent
the Islamic Directorate of the Philippines;
xxx xxx xxx 13
Private respondent INC opposed the motion arguing, inter alia, that
the issue sought to be litigated by way of intervention is an intra-
corporate dispute which falls under the jurisdiction of the SEC. 14
Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of

Quezon City, denied petitioner's motion to intervene on the ground
of lack of juridical personality of the IDP-Tamano Group and that the
issues being raised by way of intervention are intra-corporate in
nature, jurisdiction thereto properly pertaining to the SEC. 15

suigeneris
Apprised of the pendency of SEC Case No. 4012 involving the
controverted status of the IDP-Carpizo Group but without waiting for
the outcome of said case, Judge Reyes, on September 12, 1991,
rendered Partial Judgment in Civil Case No. Q-90-6937 ordering the
IDP-Carpizo Group to comply with its obligation under the Deed of
Sale of clearing the subject lots of squatters and of delivering the
actual possession thereof to INC. 16
Thereupon, Judge Reyes in another Order, dated March 2, 1992,

pertaining also to Civil Case No. Q-90-6937, treated INC as the
rightful owner of the real properties and disposed as follows:
WHEREFORE, Leticia P. Ligon is hereby ordered to produce

and/or surrender to plaintiff 17 the owner's copy of RT-
26521 (170567) and RT-26520 (176616) in open court for
the registration of the Deed of Absolute Sale in the latter's
name and the annotation of the mortgage executed in
her favor by herein defendant Islamic Directorate of the
Philippines on the new transfer certificate of title to be
issued to plaintiff.
SO ORDERED. 18
On April 6, 1992, the above Order was amended by Judge Reyes

directing Ligon "to deliver the owner's duplicate copies of TCT Nos.
RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of
Quezon City for the purposes stated in the Order of March 2, 1992." 19
Mortgagee Ligon went to the Court of Appeals, thru a petition for

certiorari, docketed as CA-G.R No. SP-27973, assailing the foregoing
Orders of Judge Reyes. The appellate court dismissed her petition on
October 28, 1992. 20
Undaunted, Ligon filed a petition for review before the Supreme

Court which was docketed as G.R. No. 107751.
In the meantime, the SEC, on July 5, 1993, finally came out with a
Decision in SEC Case No. 4012 in this wise:
1. Declaring the by-laws submitted by the respondents 21

as unauthorized, and hence, null and void.
2. Declaring the sale of the two (2) parcels of land in

Quezon City covered by the Deed of Absolute Sale
entered into by Iglesia ni Kristo and the Islamic Directorate
of the Philippines, Inc. 22 null and void;
3. Declaring the election of the Board of Directors, 23 of

the corporation from 1986 to 1991 as null and void;

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4. Declaring the acceptance of the respondents, except
Farouk Carpizo and Musnib Buat, as members of the IDP
null and void.
No pronouncement as to cost.
SO ORDERED. 24
Private respondent INC filed a Motion for Intervention, dated

September 7, 1993, in SEC Case No. 4012, but the same was denied
on account of the fact that the decision of the case had become
final and executory, no appeal having been taken therefrom. 25
INC elevated SEC Case No. 4012 to the public respondent Court of
Appeals by way of a special civil action for certiorari, docketed as
CA-G.R SP No. 33295. On October 28, 1994, the court a quo
promulgated a Decision in CA-G.R. SP No. 33295 granting INC's
petition. The portion of the SEC Decision in SEC Case No. 4012 which
declared the sale of the two (2) lots in question to INC as void was
ordered set aside by the Court of Appeals.
Thus, the IDP-Tamano Group brought the instant petition for review,
dated December 21, 1994, submitting that the Court of Appeals
gravely erred in:
1) Not upholding the jurisdiction of the SEC to declare the nullity of

the sale;
2) Encouraging multiplicity of suits; and
3) Not applying the principles of estoppel and laches. 26
While the above petition was pending, however, the Supreme Court
rendered judgment in G.R. No. 107751 on the petition filed by Mrs.
Leticia P. Ligon. The Decision, dated June 1, 1995, denied the Ligon
petition and affirmed the October 28, 1992 Decision of the Court of
Appeals in CA-G.R. No. SP-27973 which sustained the Order of Judge
Reyes compelling mortgagee Ligon to surrender the owner's
duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520
(176616) to the Register of Deeds of Quezon City so that the Deed of
Absolute Sale in INC's favor may be properly registered.
Before we rule upon the main issue posited in this petition, we would
like to point out that our disposition in G.R. No. 107751 entitled, "Ligon
v. Court of Appeals," promulgated on June 1, 1995, in no wise
constitutes res judicata such that the petition under consideration
would be barred if it were the ease. Quite the contrary, the requisites
or res judicata do not obtain in the case at bench.

suigeneris
Section 49, Rule 39 of the Revised Rules of Court lays down the dual
aspects of res judicata in actions in personam, to wit:
Effect of judgment. — The effect of a judgment or final

order rendered by a court or judge of the Philippines,
having jurisdiction to pronounce the judgment or order,
may be as follows:
xxx xxx xxx
(b) In other cases the judgment or order is, with respect to

the matter directly adjudged or as to any other matter
that could have been raised in relation thereto,
conclusive between the parties and their successors in
interest by title subsequent to the commencement of the
action or special proceeding, litigating for the same thing
and under the same title and in the same capacity;
(c) In any other litigation between the same parties or

their successors in interest, that only is deemed to have
been adjudged in a former judgment which appears
upon its face to have been so adjudged, or which was
actually and necessarily included therein or necessary
thereto.
Section 49(b) enunciates the first concept of res judicata known as

"bar by prior judgment," whereas, Section 49(c) is referred to as
"conclusiveness of judgment."
There is "bar by former judgment" when, between the first case

where the judgment was rendered, and the second case where
such judgment is invoked, there is identity of parties, subject matter
and cause of action. When the three identities are present, the
judgment on the merits rendered in the first constitutes an absolute
bar to the subsequent action. But where between the first case
wherein judgment is rendered and the second case wherein such
judgment is invoked, there is only identity of parties but there is no
identity of cause of action, the judgment is conclusive in the second
case, only as to those matters actually and directly controverted
and determined, and not as to matters merely involved therein. This
is what is termed "conclusiveness of judgment." 27
Neither of these concepts of res judicata find relevant application in

the case at bench. While there may be identity of subject matter
(IDP property) in both cases, there is no identity of parties. The
principal parties in G.R. No. 107751 were mortgagee Leticia P. Ligon,
as petitioner, and the Iglesia Ni Cristo, as private respondent. The IDP,
as represented by the 1971 Board of Trustees or the Tamano Group,
was only made an ancillary party in G.R. No. 107751 as intervenor. 28
suigeneris
It was never originally a principal party thereto. It must be noted that
intervention is not an independent action, but is merely collateral,
accessory, or ancillary to the principal action. It is just an
interlocutory proceeding dependent on or subsidiary to the case
between the original
parties. 29 Indeed, the IDP-Tamano Group cannot be considered a
principal party in G.R. No. 107751 for purposes of applying the
principle of res judicata since the contrary goes against the true
import of the action of intervention as a mere subsidiary proceeding
without an independent life apart from the principal action as well
as the intrinsic character of the intervenor as a mere subordinate
party in the main case whose right may be said to be only in aid of
the right of the original party. 30 It is only in the present case, actually,
where the IDP-Tamano Group became a principal party, as
petitioner, with the Iglesia Ni Cristo, as private respondent. Clearly,
there is no identity of parties in both cases.
In this connection, although it is true that Civil Case No. Q-90-6937,

which gave rise to G.R. No. 107751, was entitled, "Iglesia Ni Kristo,
Plaintiff v. Islamic Directorate of the Philippines, Defendant," 31 the
IDP can not be considered essentially a formal party thereto for the
simple reason that it was not duly represented by a legitimate Board
of Trustees in that case. As a necessary consequence, Civil Case No.
Q-90-6937, a case for Specific Performance with Damages, a mere
action in personam, did not become final and executory insofar as
the true IDP is concerned since petitioner corporation, for want of
legitimate representation, was effectively deprived of its day in court
in said case. Res inter alios judicatae nullum allis praejudicium
faciunt. Matters adjudged in a cause do not prejudice those who
were not parties to it. 32 Elsewise put, no person (natural or juridical)
shall be affected by a proceeding to which he is a stranger. 33
Granting arguendo, that IDP may be considered a principal party in

Ligon, res judicata as a "bar by former judgment" will still not set in on
the ground that the cause of action in the two cases are different.
The cause of action in G.R. No. 107751 is the surrender of the owner's
duplicate copy of the transfer certificates of title to the rightful
possessor thereof, whereas the cause of action in the present case is
the validity of the Carpizo Group-INC Deed of Absolute Sale.
Res Judicata in the form of "conclusiveness of judgment" cannot

likewise apply for the reason that any mention at all in Ligon as to the
validity of the disputed Carpizo Board-INC sale may only be deemed
incidental to the resolution of the primary issue posed in said case
which is: Who between Ligon and INC has the better right of
possession over the owner's duplicate copy of the TCTs covering the
IDP property? G.R. No. 107751 cannot be considered determinative
and conclusive on the matter of the validity of the sale for this

suigeneris
particular issue was not the principal thrust of Ligon. To rule otherwise
would be to cause grave and irreparable injustice to IDP which
never gave its consent to the sale, thru a legitimate Board of
Trustees.
In any case, while it is true that the principle of res judicata is a

fundamental component of our judicial system, it should be
disregarded if its rigid application would involve the sacrifice of
justice to technicality. 34
The main question though in this petition is: Did the Court of Appeals
commit reversible error in setting aside that portion of the SEC's
Decision in SEC Case No. 4012 which declared the sale of two (2)
parcels of land in Quezon City between the IDP-Carpizo Group and
private respondent INC null and void?
We rule in the affirmative.
There can be no question as to the authority of the SEC to pass upon

the issue as to who among the different contending groups is the
legitimate Board of Trustees of the IDP since this is a matter properly
falling within the original and exclusive jurisdiction of the SEC by
virtue of Sections 3 and 5(c) of Presidential Decree No. 902-A:
Sec. 3. The Commission shall have absolute jurisdiction,

supervision and control over all corporations, partnership
or associations, who are the grantees of primary
franchises and/or a license or permit issued by the
government to operate in the Philippines . . . .
xxx xxx xxx
Sec. 5. In addition to the regulatory and adjudicative

functions of the Securities and Exchange Commission over
corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws
and decrees, it shall have original and exclusive
jurisdiction to hear and decide cases involving:
xxx xxx xxx
c) Controversies in the selection or appointment of

directors, trustees, officers, or managers of such
corporations, partnerships or associations. . . . .
If the SEC can declare who is the legitimate IDP Board, then by
parity of reasoning, it can also declare who is not the legitimate
IDP Board. This is precisely what the SEC did in SEC Case No.
4012 when it adjudged the election of the Carpizo Group to

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the IDP Board of Trustees to be null and
void. 35 By this ruling, the SEC in effect made the unequivocal
finding that the IDP-Carpizo Group is a bogus Board of Trustees.
Consequently, the Carpizo Group is bereft of any authority
whatsoever to bind IDP in any kind of transaction including the
sale or disposition of ID property.
It must be noted that SEC Case No. 4012 is not the first case wherein
the SEC had the opportunity to pass upon the status of the Carpizo
Group. As far back as October 3, 1986, the SEC, in Case No. 2687, 36
in a suit between the Carpizo Group and the Abbas Group, already
declared the election of the Carpizo Group (as well as the Abbas
Group) to the IDP Board as null and void for being violative of the
Articles of Incorporation. 37 Nothing thus becomes more settled than
that the IDP-Carpizo Group with whom private respondent INC
contracted is a fake Board.
Premises considered, all acts carried out by the Carpizo Board,

particularly the sale of the Tandang Sora property, allegedly in the
name of the IDP, have to be struck down for having been done
without the consent of the IDP thru a legitimate Board of Trustees.
Article 1318 of the New Civil Code lays down the essential requisites
of contracts:
There is no contract unless the following requisites concur:
(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.
All these elements must be present to constitute a valid

contract. For, where even one is absent, the contract is void. As
succinctly put by Tolentino, consent is essential for the
existence of a contract, and where it is wanting, the contract is
non-existent. 38 In this case, the IDP, owner of the subject
parcels of land, never gave its consent, thru a legitimate Board
of Trustees, to the disputed Deed of Absolute Sale executed in
favor of INC. This is, therefore, a case not only of vitiated
consent, but one where consent on the part of one of the
supposed contracting parties is totally wanting. Ineluctably, the
subject sale is void and produces no effect whatsoever.
The Carpizo Group-INC sale is further deemed null and void ab initio
because of the Carpizo Group's failure to comply with Section 40 of
the Corporation Code pertaining to the disposition of all or
substantially all assets of the corporation:

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Sec. 40. Sale or other disposition of assets. — Subject to
the provisions of existing laws on illegal combinations and
monopolies, a corporation may, by a majority vote of its
board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets, including its
goodwill, upon terms and conditions and for such
consideration, which may be money, stocks, bonds or
other instruments for the payment of money or other
property or consideration, as its board of directors or
trustees may deem expedient, when authorized by the
vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock; or in case of non-
stock corporation, by the vote of at least two-thirds (2/3)
of the members, in a stockholders' or members' meeting
duly called for the purpose. Written notice of the
proposed action and of the time and place of the
meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books
of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder may exercise his
appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover

substantially all the corporate property and assets if
thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for
which it was incorporated.
xxx xxx xxx
The Tandang Sora property, it appears from the records, constitutes

the only property of the IDP. Hence, its sale to a third-party is a sale
or disposition of all the corporate property and assets of IDP falling
squarely within the contemplation of the foregoing section. For the
sale to be valid, the majority vote of the legitimate Board of Trustees,
concurred in by the vote of at least 2/3 of the bona fide members of
the corporation should have been obtained. These twin
requirements were not met as the Carpizo Group which voted to sell
the Tandang Sora property was a fake Board of Trustees, and those
whose names and signatures were affixed by the Carpizo Group
together with the sham Board Resolution authorizing the negotiation
for the sale were, from all indications, not bona fide members of the
IDP as they were made to appear to be. Apparently, there are only
fifteen (15) official members of the petitioner corporation including
the eight (8) members of the Board of Trustees. 39

suigeneris
All told, the disputed Deed of Absolute Sale executed by the fake
Carpizo Board and private respondent INC was intrinsically void ab
initio.
Private respondent INC nevertheless questions the authority of the

SEC to nullify the sale for being made outside of its jurisdiction, the
same not being an intra-corporate dispute.
The resolution of the question as to whether or not the SEC had

jurisdiction to declare the subject sale null and void is rendered moot
and academic by the inherent nullity of the highly dubious sale due
to lack of consent of the IDP, owner of the subject property. No end
of substantial justice will be served if we reverse the SEC's conclusion
on the matter, and remand the case to the regular courts for further
litigation over an issue which is already determinable based on what
we have in the records.
It is unfortunate that private respondent INC opposed the motion for

intervention filed by the 1971 Board of Trustees in Civil Case. No. Q-
90-6937, a case for Specific Performance with Damages between
INC and the Carpizo Group on the subject Deed of Absolute Sale.
The legitimate IDP Board could have been granted ample
opportunity before the regional trial court to shed light on the true
status of the Carpizo Board and settled the matter as to the validity
of the sale then and there. But INC, wanting to acquire the property
at all costs and threatened by the participation of the legitimate IDP
Board in the civil suit, argued for the denial of the motion averring,
inter alia, that the issue sought to be litigated by the movant is intra-
corporate in nature and outside the jurisdiction of the regional trial
court. 40 As a result, the motion for intervention was denied. When
the Decision in SEC Case No. 4012 came out nullifying the sale, INC
came forward, this time, quibbling over the issue that it is the regional
trial court, and not the SEC, which has jurisdiction to rule on the
validity of the sale. INC is here trifling with the courts. We cannot put
a premium on this clever legal maneuverings of private respondent
which, if countenanced, would result in a failure of justice.
Furthermore, the Court observes that the INC bought the questioned
property from the Carpizo Group without even seeing the owner's
duplicate copy of the titles covering the property. This is very strange
considering that the subject lot is a large piece of real property in
Quezon City worth millions, and that under the Torrens System of
Registration, the minimum requirement for one to be a good faith
buyer for value is that the vendee at least sees the owner's duplicate
copy of the title and relies upon the same. 41 The private respondent,
presumably knowledgeable on the aforesaid workings of the Torrens
System, did not take heed of this and nevertheless went through with
the sale with undue haste. The unexplained eagerness of INC to buy

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this valuable piece of land in Quezon City without even being
presented with the owner's copy of the titles casts very serious doubt
on the rightfulness of its position as vendee in the transaction.
WHEREFORE, the petition is GRANTED. The Decision of the public

respondent Court of Appeals dated October 28, 1994 in CA-G.R. SP
No. 33295 is SET ASIDE. The Decision of the Securities and Exchange
Commission dated July 5, 1993 in SEC Case No. 4012 is REINSTATED.
The Register of Deeds of Quezon City is hereby ordered to cancel
the registration of the Deed of Absolute Sale in the name of
respondent Iglesia Ni Cristo, if one has already been made. If new
titles have been issued in the name of Iglesia Ni Cristo, the Register of
Deeds is hereby ordered to cancel the same, and issue new ones in
the name of petitioner Islamic Directorate of the Philippines.
Petitioner corporation is ordered to return to private respondent
whatever amount has been initially paid by INC as consideration for
the property with legal interest, if the same was actually received by
IDP. Otherwise, INC may run after Engineer Farouk Carpizo and his
group for the amount of money paid.
SO ORDERED.
Kapunan, J., concurs.
Vitug, J,. concurs in the result.
Bellosillo, J., took no part.
Padilla, J., is on leave.
Footnotes
ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and

SECURITIES & EXCHANGE COMMISSION, petitioners, vs.COURT OF
APPEALS and IGLESIA NI CRISTO, respondents.
G.R. No. 117897, 14 May 1997.
1971, the ISLAMIC DIRECTORATE OF THE PHILIPPINES ("IDP") was

incorporated with the primary purpose of establishing a mosque,
school, and other religious infrastructures in Quezon City.
IDP purchased a 49,652-square meter lot in Tandang Sora, QC,

which was covered by TCT Nos. RT-26520 (176616) and RT-26521
(170567).

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When President Marcos declared martial law in 1972, most of the
members of the 1971 Board of Trustees ("Tamano Group")flew to the
Middle East to escape political persecution.
Thereafter, two contending groups claiming to be the IDP Board of

Trustees sprung: the Carpizo group and Abbas group.
In a suit between the two groups, SEC rendered a decision in 1986

declaring both groups to be null and void. SEC recommeded that
the a new by-laws be approved and a new election be conducted
upon the approval of the by-laws. However, the SEC
recommendation was not heeded.
In 1989, the Carpizo group passed a Board Resolution authorizing the

sale of the land to Iglesia Ni Cristo ("INC"), and a Deed of Sale was
eventually executed.
In 1991, the Tamano Group filed a petition before the SEC

questioning the sale.
Meanwhile, INC filed a suit for specific performance before RTC

Branch 81 against the Carpizo group. INC also moved to compel a
certain Leticia Ligon (who is apparently the mortgagee of the lot) to
surrender the title.
The Tamano group sought to intervene, but the intervention was

denied despite being informed of the pending SEC case. In 1992, the
Court subsequently ruled that the INC as the rightful owner of the
land, and ordered Ligon to surrender the titles for annotation. Ligon
appealed to CA and SC, but her appeals were denied.
In 1993, the SEC ruled that the sale was null and void . On appeal CA
reversed the SEC ruling.
MAIN ISSUE: W/N the sale between the Carpizo group and INC is null
and void.
RULING: YES.
Since the SEC has declared the Carpizo group as a void Board of

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Trustees, the sale it entered into with INC is likewise void. Without a
valid consent of a contracting party, there can be no valid contract.
In this case, the IDP, never gave its consent, through a legitimate
Board of Trustees, to the disputed Deed of Absolute Sale executed in
favor of INC. Therefore, this is a case not only of vitiated consent, but
one where consent on the part of one of the supposed contracting
parties is totally wanting. Ineluctably, the subject sale is void and
produces no effect whatsoever.
Further, the Carpizo group failed to comply with Section 40 of the

Corporation Code, which provides that: " ... a corporation may, by a
majority vote of its board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets... when authorized by the
vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock; or in case of non-stock corporation, by
the vote of at least two-thirds (2/3) of the members, in a
stockholders' or members' meeting duly called for the purpose...."
The subject lot constitutes the only property of IDP. Hence, its sale to
a third-party is a sale or disposition of all the corporate property and
assets of IDP. For the sale to be valid, the majority vote of the
legitimate Board of Trustees, concurred in by the vote of at least 2/3
of the bona fide members of the corporation should have been
obtained. These twin requirements were not met in the case at bar.
ANCILLARY ISSUE: W/N The Ligon ruling constitutes res judicata.
RULING: NO.
Section 49(b), Rule 39 enunciates the first concept of res judicata

known as "bar by prior judgment," whereas, Section 49(c), Rule 39 is
referred to as "conclusiveness of judgment."
There is "bar by former judgment" when, between the first case

where the judgment was rendered, and the second case where
such judgment is invoked, there is identity of parties, subject matter
and cause of action. When the three identities are present, the
judgment on the merits rendered in the first constitutes an absolute
bar to the subsequent action. But where between the first case

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wherein judgment is rendered and the second case wherein such
judgment is invoked, there is only identity of parties but there is no
identity of cause of action, the judgment is conclusive in the second
case, only as to those matters actually and directly controverted
and determined, and not as to matters merely involved therein. This
is what is termed "conclusiveness of judgment."
Neither applies to the case at bar. There is no "bar by former

judgment" since while there may be identity of subject matter (IDP
property) in both cases, there is no identity of parties. The principal
parties in the first case were Ligon and the Iglesia Ni Cristo. The IDP
can not be considered essentially a formal party thereto for the
simple reason that it was not duly represented by a legitimate Board
of Trustees.
Res Judicata in the form of "conclusiveness of judgment" cannot

likewise apply for the reason that the primary issue in the first case is
the possession of the titles, and not the sale of the land, as in this
case.
Islamic Directorate of the Philippines vs. CA Case Digest
Islamic Directorate of the Philippines vs. Court of Appeals
[GR 117897, 14 May 1997]
Facts: Sometime in 1971, Islamic leaders of all Muslim major tribal

groups in the Philippines headed by Dean Cesar Adib Majul
organized and incorporated the ISLAMIC DIRECTORATE OF THE
PHILIPPINES (IDP), the primary purpose of which is to establish an
Islamic Center in Quezon City for, the construction of a "Mosque
(prayer place, Madrasah (Arabic School), and other religious
infrastructures" so as to facilitate the effective practice of Islamic
faith in the area. Towards this end, that is, in the same year, the
Libyan government donated money to the IDP to purchase land at
Culiat, Tandang Sora, Quezon City, to be used as a Center for the
Islamic populace. The land, with an area of 49,652 square meters,
we covered by two titles: TCTs RT-26520 (176616) and RT-26521
(170567), both registered in the name of IDP. In 1971, the Board of
Trustees of the IDP was composed of Senator Mamintal Tamano,
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Congressman Ali Dimaporo, Congressman Salipada Pendatun, Dean
Cesar Adib Majul, Sultan Harun Al-Rashid Lucman, Delegate Ahmad
Alonto, Commissioner Datu Mama Sinsuat and Mayor Aminkadra
Abubakar. In 1972, after the purchase of the land by the Libyan
government in the name of IDP, Martial Law was declared by the
late President Ferdinand Marcos.
Most of the members of the 1971 Board of Trustees like Senators

Mamintal Tamano, Salipada Pendatun, Ahmad Alonto, and
Congressman Al-Rashid Lucman flew to the Middle East to escape
political persecution. Thereafter, two Muslim groups sprung, the
Carpizo Group, headed by Engineer Farouk Carpizo, and the Abbas
Group, led by Mrs. Zorayda Tamano and Atty. Firdaussi Abbas. Both
groups claimed to be the legitimate IDP. Significantly, on 3 October
1986, the SEC, in a suit between these two contending groups, came
out with a Decision in SEC Case 2687 declaring the election of both
the Carpizo Group and the Abbas Group as IDP board members to
be null and void. Neither group, however, took the necessary steps
prescribed by the SEC in its 3 October 1986 Decision, and no valid
election of the members of the Board of Trustees of IDP was ever
called. Although the Carpizo Group attempted to submit a set of by-
laws, the SEC found that, aside from that Engineer Farouk Carpizo
and Atty. Musib Buat, those who prepared and adopted the by-laws
were not bona fide members of the IDP, thus rendering the adoption
of the by-laws likewise null and void. On 20 April 1989, without having
been properly elected as new members of the Board of Trustees of
IDP, the Carpizo Group caused to be signed an alleged Board
Resolution of the IDP, authorizing the sale of the subject two parcels
of land to the Iglesia ni Cristo (INC) for a consideration of
P22,343,400.00, which sale was evidenced by a Deed of Absolute
Sale 12 dated 20 April 1989. On 30 May 1991, the 1971 IDP Board of
Trustees headed by former Senator Mamintal Tamano, or the
Tamano Group, filed a petition before the SEC (SEC Case 4012)
seeking to declare null and void the Deed of Absolute Sale signed
by the Carpizo Group and the INC since the group of Engineer
Carpizo was not the legitimate Board of Trustees of the IDP.
Meanwhile, INC, pursuant to the Deed of Absolute Sale executed in

its favor, filed an action for Specific Performance with Damages

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against the vendor, Carpizo Group, before Branch 81 of the
Regional Trial Court of Quezon City (Civil Case Q-90-6937) to compel
said group to clear the property of squatters and deliver complete
and full physical possession thereof to INC. Likewise, INC filed a
motion in the same case to compel one Mrs. Leticia P. Ligon to
produce and surrender to the Register of Deeds of Quezon City the
owner's duplicate copy of TCTs RT-26521 and RT-26520 covering the
two parcels of land, so that the sale in INC's favor may be registered
and new titles issued in the name of INC. Mrs. Ligon was alleged to
be the mortgagee of the two parcels of land executed in her favor
by certain Abdulrahman R.T. Linzag and Rowaida Busran-Sampaco
claimed to be in behalf of the Carpizo Group. Judge Celia Lipana-
Reyes of Branch 81, Regional Trial Court of Quezon City, denied IDP's
motion to intervene on the ground of lack of juridical personality of
the IDP-Tamano Group and that the issues being raised by way of
intervention are intra-corporate in nature, jurisdiction thereto
properly pertaining to the SEC. Apprised of the pendency of SEC
Case 4012 involving the controverted status of the IDP-Carpizo
Group but without waiting for the outcome of said case, Judge
Reyes, on 12 September 1991, rendered Partial Judgment in Civil
Case Q-90-6937 ordering the IDP-Carpizo Group to comply with its
obligation under the Deed of Sale of clearing the subject lots of
squatters and of delivering the actual possession thereof to INC.
Thereupon Judge Reyes in another Order, dated 2 March 1992,
pertaining also to Civil Case Q-90-6937, treated INC as the rightful
owner of the real properties and disposed. On 6 April 1992, the Order
was amended by Judge Reyes directing Ligon "to deliver the owner's
duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520
(176616) to the Register of Deeds of Quezon City for the purposes
stated in the Order of March 2, 1992." Mortgagee Ligon went to the
Court of Appeals, thru a petition for certiorari (CA-GR SP-27973),
assailing the Orders of Judge Reyes. The appellate court dismissed
her petition on 28 October 1992. Undaunted, Ligon filed a petition for
review before the Supreme Court (GR 107751).
In the meantime, the SEC, on 5 July 1993, finally came out with a
Decision in SEC Case 4012, Declaring the by-laws submitted by the
IDP-Caprizo group as unauthorized, and hence, null and void;
declaring the sale of the two (2) parcels of land in Quezon City
covered by the Deed of Absolute Sale entered into by Iglesia ni

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Kristo and the Islamic Directorate of the Philippines, Inc. null and
void; declaring the election of the Board of Directors 23 of the
corporation from 1986 to 1991 as null and void; and Declaring the
acceptance of the respondents, except Farouk Carpizo and Musnib
Buat, as members of the IDP null and void. The INC filed a Motion for
Intervention, dated 7 September 1993, in SEC Case 4012, but the
same was denied on account of the fact that the decision of the
case had become final and executory, no appeal having been
taken therefrom. INC elevated SEC Case 4012 to the Court of
Appeals by way of a special civil action for certiorari (CA-GR SP
33295). On 28 October 1994, the appeallate court promulgated a
Decision granting INC's petition. The portion of the SEC Decision in
SEC Case 4012 which declared the sale of the two (2) lots in question
to INC as void was ordered set aside by the Court of Appeals. Thus,
the IDP-Tamano Group brought the petition for review, dated 21
December 1994, to the Supreme Court. While the petition was
pending, however, the Supreme Court rendered judgment in GR
107751 on the petition filed by Mrs. Leticia P. Ligon. The Decision,
dated 1 June 1995, denied the Ligon petition and affirmed the 28
October 1992 Decision of the Court of Appeals in CA-GR SP-27973
which sustained the Order of Judge Reyes compelling mortgagee
Ligon to surrender the owner's duplicate copies of TCTs RT-26521
(170567) and RT-26520 (176616) to the Register of Deeds of Quezon
City so that the Deed of Absolute Sale in INC's favor may be properly
registered.
Issue: Whether the Tandang Sora property was legitimately sold to

the INC.
Held: As far back as 3 October 1986, the SEC, in Case 2687, in a suit
between the Carpizo Group and the Abbas Group, already
declared the election of the Carpizo Group (as well as the Abbas
Group) to the IDP Board as null and void for being violative of the
Articles of Incorporation. Nothing thus becomes more settled than
that the IDP-Carpizo Group with whom INC contracted is a fake
Board. Premises considered, all acts carried out by the Carpizo
Board, particularly the sale of the Tandang Sora property, allegedly
in the name of the IDP, have to be struck down for having been
done without the consent of the IDP thru a legitimate Board of

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Trustees. Article 1318 of the New Civil Code lays down the essential
requisites of contracts, and where all these elements must be present
to constitute a valid contract. For, where even one is absent, the
contract is void. Specifically, consent is essential for the existence of
a contract, and where it is wanting, the contract is non-existent.
Herein, the IDP, owner of the subject parcels of land, never gave its
consent, thru a legitimate Board of Trustees, to the disputed Deed of
Absolute Sale executed in favor of INC. This is, therefore, a case not
only of vitiated consent, but one where consent on the part of one
of the supposed contracting parties is totally wanting. Ineluctably,
the subject sale is void and produces no effect whatsoever. The
Carpizo Group-INC sale is further deemed null and void ab initio
because of the Carpizo Group's failure to comply with Section 40 of
the Corporation Code pertaining to the disposition of all or
substantially all assets of the corporation. The Tandang Sora
property, it appears from the records, constitutes the only property of
the IDP. Hence, its sale to a third-party is a sale or disposition of all
the corporate property and assets of IDP falling squarely within the
contemplation of the foregoing section. For the sale to be valid, the
majority vote of the legitimate Board of Trustees, concurred in by the
vote of at least 2/3 of the bona fide members of the corporation
should have been obtained. These twin requirements were no met
as the Carpizo Group which voted to sell the Tandang Sora property
was a fake Board of Trustees, and those whose names and
signatures were affixed by the Carpizo Group together with the
sham Board Resolution authorizing the negotiation for the sale were,
from all indications, not bona fide members of the IDP as they were
made to appear to be. Apparently, there are only 15 official
members of the IDP including the 8 members of the Board of
Trustees. All told, the disputed Deed of Absolute Sale executed by
the fake Carpizo Board and INC was intrinsically void ab initio.
Lee vs. CA (205 SCRA 752 [1992])
G.R. No. 93695 February 4, 1992

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RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP.,
PABLO GONZALES, JR. and THOMAS GONZALES, respondents.
Cayanga, Zuniga & Angel Law Offices for petitioners.
Timbol & Associates for private respondents.
GUTIERREZ, JR., J.:
What is the nature of the voting trust agreement executed between

two parties in this case? Who owns the stocks of the corporation
under the terms of the voting trust agreement? How long can a
voting trust agreement remain valid and effective? Did a director of
the corporation cease to be such upon the creation of the voting
trust agreement? These are the questions the answers to which are
necessary in resolving the principal issue in this petition for certiorari
— whether or not there was proper service of summons on Alfa
Integrated Textile Mills (ALFA, for short) through the petitioners as
president and vice-president, allegedly, of the subject corporation
after the execution of a voting trust agreement between ALFA and
the Development Bank of the Philippines (DBP, for short).
From the records of the instant case, the following antecedent facts
appear:
On November 15, 1985, a complaint for a sum of money was filed by

the International Corporate Bank, Inc. against the private
respondents who, in turn, filed a third party complaint against ALFA
and the petitioners on March 17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss the

third party complaint which the Regional Trial Court of Makati,
Branch 58 denied in an Order dated June 27, 1988.
On July 18, 1988, the petitioners filed their answer to the third party
complaint.
Meanwhile, on July 12, 1988, the trial court issued an order requiring
the issuance of an alias summons upon ALFA through the DBP as a
consequence of the petitioner's letter informing the court that the
summons for ALFA was erroneously served upon them considering
that the management of ALFA had been transferred to the DBP.
In a manifestation dated July 22, 1988, the DBP claimed that it was
not authorized to receive summons on behalf of ALFA since the DBP

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had not taken over the company which has a separate and distinct
corporate personality and existence.
On August 4, 1988, the trial court issued an order advising the private
respondents to take the appropriate steps to serve the summons to
ALFA.
On August 16, 1988, the private respondents filed a Manifestation

and Motion for the Declaration of Proper Service of Summons which
the trial court granted on August 17, 1988.
On September 12, 1988, the petitioners filed a motion for

reconsideration submitting that Rule 14, section 13 of the Revised
Rules of Court is not applicable since they were no longer officers of
ALFA and that the private respondents should have availed of
another mode of service under Rule 14, Section 16 of the said Rules,
i.e., through publication to effect proper service upon ALFA.
In their Comment to the Motion for Reconsideration dated

September 27, 1988, the private respondents argued that the voting
trust agreement dated March 11, 1981 did not divest the petitioners
of their positions as president and executive vice-president of ALFA
so that service of summons upon ALFA through the petitioners as
corporate officers was proper.
On January 2, 1989, the trial court upheld the validity of the service
of summons on ALFA through the petitioners, thus, denying the
latter's motion for reconsideration and requiring ALFA to filed its
answer through the petitioners as its corporate officers.
On January 19, 1989, a second motion for reconsideration was filed

by the petitioners reiterating their stand that by virtue of the voting
trust agreement they ceased to be officers and directors of ALFA,
hence, they could no longer receive summons or any court
processes for or on behalf of ALFA. In support of their second motion
for reconsideration, the petitioners attached thereto a copy of the
voting trust agreement between all the stockholders of ALFA (the
petitioners included), on the one hand, and the DBP, on the other
hand, whereby the management and control of ALFA became
vested upon the DBP.
On April 25, 1989, the trial court reversed itself by setting aside its
previous Order dated January 2, 1989 and declared that service
upon the petitioners who were no longer corporate officers of ALFA
cannot be considered as proper service of summons on ALFA.
On May 15, 1989, the private respondents moved for a

reconsideration of the above Order which was affirmed by the court

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in its Order dated August 14, 1989 denying the private respondent's
On September 18, 1989, a petition for certiorari was belatedly

submitted by the private respondent before the public respondent
which, nonetheless, resolved to give due course thereto on
September 21, 1989.
On October 17, 1989, the trial court, not having been notified of the
pending petition for certiorari with public respondent issued an Order
declaring as final the Order dated April 25, 1989. The private
respondents in the said Order were required to take positive steps in
prosecuting the third party complaint in order that the court would
not be constrained to dismiss the same for failure to prosecute.
Subsequently, on October 25, 1989 the private respondents filed a
motion for reconsideration on which the trial court took no further
action.
On March 19, 1990, after the petitioners filed their answer to the
private respondents' petition for certiorari, the public respondent
rendered its decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the orders of

respondent judge dated April 25, 1989 and August 14,
1989 are hereby SET ASIDE and respondent corporation is
ordered to file its answer within the reglementary period.
(CA Decision, p. 8; Rollo, p. 24)
On April 11, 1990, the petitioners moved for a reconsideration of the

decision of the public respondent which resolved to deny the same
on May 10, 1990. Hence, the petitioners filed this certiorari petition
imputing grave abuse of discretion amounting to lack of jurisdiction
on the part of the public respondent in reversing the questioned
Orders dated April 25, 1989 and August 14, 1989 of the court a quo,
thus, holding that there was proper service of summons on ALFA
through the petitioners.
In the meantime, the public respondent inadvertently made an

entry of judgment on July 16, 1990 erroneously applying the rule that
the period during which a motion for reconsideration has been
pending must be deducted from the 15-day period to appeal.
However, in its Resolution dated January 3, 1991, the public
respondent set aside the aforestated entry of judgment after further
considering that the rule it relied on applies to appeals from
decisions of the Regional Trial Courts to the Court of Appeals, not to
appeals from its decision to us pursuant to our ruling in the case of
Refractories Corporation of the Philippines v. Intermediate Appellate
Court, 176 SCRA 539 [1989]. (CA Rollo, pp. 249-250)

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In their memorandum, the petitioners present the following
arguments, to wit:
(1) that the execution of the voting trust agreement by a

stockholders whereby all his shares to the corporation
have been transferred to the trustee deprives the
stockholders of his position as director of the corporation;
to rule otherwise, as the respondent Court of Appeals did,
would be violative of section 23 of the Corporation Code
( Rollo, pp. 270-3273); and
(2) that the petitioners were no longer acting or holding

any of the positions provided under Rule 14, Section 13 of
the Rules of Court authorized to receive service of
summons for and in behalf of the private domestic
corporation so that the service of summons on ALFA
effected through the petitioners is not valid and
ineffective; to maintain the respondent Court of Appeals'
position that ALFA was properly served its summons
through the petitioners would be contrary to the general
principle that a corporation can only be bound by such
acts which are within the scope of its officers' or agents'
authority (Rollo, pp. 273-275)
In resolving the issue of the propriety of the service of summons in the

instant case, we dwell first on the nature of a voting trust agreement
and the consequent effects upon its creation in the light of the
provisions of the Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of

the stockholders of a corporation and the trustee or by a
group of identical agreements between individual
stockholders and a common trustee, whereby it is
provided that for a term of years, or for a period
contingent upon a certain event, or until the agreement is
terminated, control over the stock owned by such
stockholders, either for certain purposes or for all purposes,
is to be lodged in the trustee, either with or without a
reservation to the owners, or persons designated by them,
of the power to direct how such control shall be used. (98
ALR 2d. 379 sec. 1 [d]; 19 Am J 2d Corp. sec. 685).
Under Section 59 of the new Corporation Code which expressly

recognizes voting trust agreements, a more definitive meaning may
be gathered. The said provision partly reads:

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Sec. 59. Voting Trusts — One or more stockholders of a
stock corporation may create a voting trust for the
purpose of conferring upon a trustee or trustees the right
to vote and other rights pertaining to the share for a
period rights pertaining to the shares for a period not
exceeding five (5) years at any one time: Provided, that in
the case of a voting trust specifically required as a
condition in a loan agreement, said voting trust may be
for a period exceeding (5) years but shall automatically
expire upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and shall
specify the terms and conditions thereof. A certified copy
of such agreement shall be filed with the corporation and
with the Securities and Exchange Commission; otherwise,
said agreement is ineffective and unenforceable. The
certificate or certificates of stock covered by the voting
trust agreement shall be cancelled and new ones shall be
issued in the name of the trustee or trustees stating that
they are issued pursuant to said agreement. In the books
of the corporation, it shall be noted that the transfer in the
name of the trustee or trustees is made pursuant to said
voting trust agreement.
By its very nature, a voting trust agreement results in the separation

of the voting rights of a stockholder from his other rights such as the
right to receive dividends, the right to inspect the books of the
corporation, the right to sell certain interests in the assets of the
corporation and other rights to which a stockholder may be entitled
until the liquidation of the corporation. However, in order to
distinguish a voting trust agreement from proxies and other voting
pools and agreements, it must pass three criteria or tests, namely: (1)
that the voting rights of the stock are separated from the other
attributes of ownership; (2) that the voting rights granted are
intended to be irrevocable for a definite period of time; and (3) that
the principal purpose of the grant of voting rights is to acquire voting
control of the corporation. (5 Fletcher, Cyclopedia of the Law on
Private Corporations, section 2075 [1976] p. 331 citing Tankersly v.
Albright, 374 F. Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust

agreement may confer upon a trustee not only the stockholder's
voting rights but also other rights pertaining to his shares as long as
the voting trust agreement is not entered "for the purpose of
circumventing the law against monopolies and illegal combinations
in restraint of trade or used for purposes of fraud." (section 59, 5th
paragraph of the Corporation Code) Thus, the traditional concept of
a voting trust agreement primarily intended to single out a
stockholder's right to vote from his other rights as such and made

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irrevocable for a limited duration may in practice become a legal
device whereby a transfer of the stockholder's shares is effected
subject to the specific provision of the voting trust agreement.
The execution of a voting trust agreement, therefore, may create a

dichotomy between the equitable or beneficial ownership of the
corporate shares of a stockholders, on the one hand, and the legal
title thereto on the other hand.
The law simply provides that a voting trust agreement is an

agreement in writing whereby one or more stockholders of a
corporation consent to transfer his or their shares to a trustee in order
to vest in the latter voting or other rights pertaining to said shares for
a period not exceeding five years upon the fulfillment of statutory
conditions and such other terms and conditions specified in the
agreement. The five year-period may be extended in cases where
the voting trust is executed pursuant to a loan agreement whereby
the period is made contingent upon full payment of the loan.
In the instant case, the point of controversy arises from the effects of
the creation of the voting trust agreement. The petitioners maintain
that with the execution of the voting trust agreement between them
and the other stockholders of ALFA, as one party, and the DBP, as
the other party, the former assigned and transferred all their shares in
ALFA to DBP, as trustee. They argue that by virtue to of the voting
trust agreement the petitioners can no longer be considered
directors of ALFA. In support of their contention, the petitioners
invoke section 23 of the Corporation Code which provides, in part,
that:
Every director must own at least one (1) share of the

capital stock of the corporation of which he is a director
which share shall stand in his name on the books of the
corporation. Any director who ceases to be the owner of
at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease
to be director . . . (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust
agreement between ALFA and the DBP had all the more
safeguarded the petitioners' continuance as officers and directors of
ALFA inasmuch as the general object of voting trust is to insure
permanency of the tenure of the directors of a corporation. They
cited the commentaries by Prof. Aguedo Agbayani on the right and
status of the transferring stockholders, to wit:
The "transferring stockholder", also called the "depositing

stockholder", is equitable owner for the stocks represented
by the voting trust certificates and the stock reversible on
suigeneris
termination of the trust by surrender. It is said that the
voting trust agreement does not destroy the status of the
transferring stockholders as such, and thus render them
ineligible as directors. But a more accurate statement
seems to be that for some purposes the depositing
stockholder holding voting trust certificates in lieu of his
stock and being the beneficial owner thereof, remains
and is treated as a stockholder. It seems to be deducible
from the case that he may sue as a stockholder if the suit
is in equity or is of an equitable nature, such as, a
technical stockholders' suit in right of the corporation.
[Commercial Laws of the Philippines by Agbayani, Vol. 3
pp. 492-493, citing 5 Fletcher 326, 327] (Rollo, p. 291)
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no
dispute as to the most immediate effect of a voting trust agreement
on the status of a stockholder who is a party to its execution — from
legal titleholder or owner of the shares subject of the voting trust
agreement, he becomes the equitable or beneficial owner.
(Salonga, Philippine Law on Private Corporations, 1958 ed., p. 268;
Pineda and Carlos, The Law on Private Corporations and Corporate
Practice, 1969 ed., p. 175; Campos and Lopez-Campos, The
Corporation Code; Comments, Notes & Selected Cases, 1981, ed.,
p. 386; Agbayani, Commentaries and Jurisprudence on the
Commercial Laws of the Philippines, Vol. 3, 1988 ed., p. 536). The
penultimate question, therefore, is whether the change in his status
deprives the stockholder of the right to qualify as a director under
section 23 of the present Corporation Code which deletes the
phrase "in his own right." Section 30 of the old Code states that:
Every director must own in his own right at least one share
of the capital stock of the stock corporation of which he is
a director, which stock shall stand in his name on the
books of the corporation. A director who ceases to be the
owner of at least one share of the capital stock of a stock
corporation of which is a director shall thereby cease to
be a director . . . (Emphasis supplied)
Under the old Corporation Code, the eligibility of a director, strictly

speaking, cannot be adversely affected by the simple act of such
director being a party to a voting trust agreement inasmuch as he
remains owner (although beneficial or equitable only) of the shares
subject of the voting trust agreement pursuant to which a transfer of
the stockholder's shares in favor of the trustee is required (section 36
of the old Corporation Code). No disqualification arises by virtue of

suigeneris
the phrase "in his own right" provided under the old Corporation
Code.
With the omission of the phrase "in his own right" the election of
trustees and other persons who in fact are not beneficial owners of
the shares registered in their names on the books of the corporation
becomes formally legalized (see Campos and Lopez-Campos,
supra, p. 296) Hence, this is a clear indication that in order to be
eligible as a director, what is material is the legal title to, not
beneficial ownership of, the stock as appearing on the books of the
corporation (2 Fletcher, Cyclopedia of the Law of Private
Corporations, section 300, p. 92 [1969] citing People v. Lihme, 269 Ill.
351, 109 N.E. 1051).
The facts of this case show that the petitioners, by virtue of the voting
trust agreement executed in 1981 disposed of all their shares through
assignment and delivery in favor of the DBP, as trustee.
Consequently, the petitioners ceased to own at least one share
standing in their names on the books of ALFA as required under
Section 23 of the new Corporation Code. They also ceased to have
anything to do with the management of the enterprise. The
petitioners ceased to be directors. Hence, the transfer of the
petitioners' shares to the DBP created vacancies in their respective
positions as directors of ALFA. The transfer of shares from the
stockholder of ALFA to the DBP is the essence of the subject voting
trust agreement as evident from the following stipulations:
1. The TRUSTORS hereby assign and deliver to the TRUSTEE

the certificate of the shares of the stocks owned by them
respectively and shall do all things necessary for the
transfer of their respective shares to the TRUSTEE on the
books of ALFA.
2. The TRUSTEE shall issue to each of the TRUSTORS a trust

certificate for the number of shares transferred, which
shall be transferrable in the same manner and with the
same effect as certificates of stock subject to the
provisions of this agreement;
3. The TRUSTEE shall vote upon the shares of stock at all

meetings of ALFA, annual or special, upon any resolution,
matter or business that may be submitted to any such
meeting, and shall possess in that respect the same
powers as owners of the equitable as well as the legal title
to the stock;
4. The TRUSTEE may cause to be transferred to any person

one share of stock for the purpose of qualifying such
person as director of ALFA, and cause a certificate of
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stock evidencing the share so transferred to be issued in
the name of such person;
xxx xxx xxx
9. Any stockholder not entering into this agreement may

transfer his shares to the same trustees without the need of
revising this agreement, and this agreement shall have the
same force and effect upon that said stockholder. (CA
Rollo, pp. 137-138; Emphasis supplied)
Considering that the voting trust agreement between ALFA and the
DBP transferred legal ownership of the stock covered by the
agreement to the DBP as trustee, the latter became the stockholder
of record with respect to the said shares of stocks. In the absence of
a showing that the DBP had caused to be transferred in their names
one share of stock for the purpose of qualifying as directors of ALFA,
the petitioners can no longer be deemed to have retained their
status as officers of ALFA which was the case before the execution of
the subject voting trust agreement. There appears to be no dispute
from the records that DBP has taken over full control and
management of the firm.
Moreover, in the Certification dated January 24, 1989 issued by the

DBP through one Elsa A. Guevarra, Vice-President of its Special
Accounts Department II, Remedial Management Group, the
petitioners were no longer included in the list of officers of ALFA "as of
April 1982." (CA Rollo, pp. 140-142)
Inasmuch as the private respondents in this case failed to

substantiate their claim that the subject voting trust agreement did
not deprive the petitioners of their position as directors of ALFA, the
public respondent committed a reversible error when it ruled that:
. . . while the individual respondents (petitioners Lee and

Lacdao) may have ceased to be president and vice-
president, respectively, of the corporation at the time of
service of summons on them on August 21, 1987, they
were at least up to that time, still directors . . .
The aforequoted statement is quite inaccurate in the light of the

express terms of Stipulation No. 4 of the subject voting trust
agreement. Both parties, ALFA and the DBP, were aware at the time
of the execution of the agreement that by virtue of the transfer of
shares of ALFA to the DBP, all the directors of ALFA were stripped of
their positions as such.
There can be no reliance on the inference that the five-year period

of the voting trust agreement in question had lapsed in 1986 so that

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the legal title to the stocks covered by the said voting trust
agreement ipso facto reverted to the petitioners as beneficial
owners pursuant to the 6th paragraph of section 59 of the new
Corporation Code which reads:
Unless expressly renewed, all rights granted in a voting

trust agreement shall automatically expire at the end of
the agreed period, and the voting trust certificate as well
as the certificates of stock in the name of the trustee or
trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the
transferors.
On the contrary, it is manifestly clear from the terms of the voting

trust agreement between ALFA and the DBP that the duration of the
agreement is contingent upon the fulfillment of certain obligations of
ALFA with the DBP. This is shown by the following portions of the
agreement.
WHEREAS, the TRUSTEE is one of the creditors of ALFA, and

its credit is secured by a first mortgage on the
manufacturing plant of said company;
WHEREAS, ALFA is also indebted to other creditors for

various financial accomodations and because of the
burden of these obligations is encountering very serious
difficulties in continuing with its operations.
WHEREAS, in consideration of additional accommodations

from the TRUSTEE, ALFA had offered and the TRUSTEE has
accepted participation in the management and control
of the company and to assure the aforesaid participation
by the TRUSTEE, the TRUSTORS have agreed to execute a
voting trust covering their shareholding in ALFA in favor of
the TRUSTEE;
AND WHEREAS, DBP is willing to accept the trust for the

purpose aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5) years,

and is renewable for as long as the obligations of ALFA
with DBP, or any portion thereof, remains outstanding; (CA
Rollo, pp. 137-138)

suigeneris
Had the five-year period of the voting trust agreement expired in
1986, the DBP would not have transferred all its rights, titles and
interests in ALFA "effective June 30, 1986" to the national government
through the Asset Privatization Trust (APT) as attested to in a
Certification dated January 24, 1989 of the Vice President of the
DBP's Special Accounts Department II. In the same certification, it is
stated that the DBP, from 1987 until 1989, had handled APT's account
which included ALFA's assets pursuant to a management agreement
by and between the DBP and APT (CA Rollo, p. 142) Hence, there is
evidence on record that at the time of the service of summons on
ALFA through the petitioners on August 21, 1987, the voting trust
agreement in question was not yet terminated so that the legal title
to the stocks of ALFA, then, still belonged to the DBP.
In view of the foregoing, the ultimate issue of whether or not there

was proper service of summons on ALFA through the petitioners is
readily answered in the negative.
Under section 13, Rule 14 of the Revised Rules of Court, it is provided

that:
Sec. 13. Service upon private domestic corporation or

partnership. — If the defendant is a corporation organized
under the laws of the Philippines or a partnership duly
registered, service may be made on the president,
manager, secretary, cashier, agent or any of its directors.
It is a basic principle in Corporation Law that a corporation has a

personality separate and distinct from the officers or members who
compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347
[1976]; Osias Academy v. Department of Labor and Employment, et
al., G.R. Nos. 83257-58, December 21, 1990). Thus, the above rule on
service of processes of a corporation enumerates the
representatives of a corporation who can validly receive court
processes on its behalf. Not every stockholder or officer can bind the
corporation considering the existence of a corporate entity separate
from those who compose it.
The rationale of the aforecited rule is that service must be made on

a representative so integrated with the corporation sued as to make
it a priori supposable that he will realize his responsibilities and know
what he should do with any legal papers served on him. (Far
Corporation v. Francisco, 146 SCRA 197 [1986] citing Villa Rey Transit,
Inc. v. Far East Motor Corp. 81 SCRA 303 [1978]).
The petitioners in this case do not fall under any of the enumerated
officers. The service of summons upon ALFA, through the petitioners,
therefore, is not valid. To rule otherwise, as correctly argued by the
petitioners, will contravene the general principle that a corporation
suigeneris
can only be bound by such acts which are within the scope of the
officer's or agent's authority. (see Vicente v. Geraldez, 52 SCRA 210
[1973]).
WHEREFORE, premises considered, the petition is hereby GRANTED.

The appealed decision dated March 19, 1990 and the Court of
Appeals' resolution of May 10, 1990 are SET ASIDE and the Orders
dated April 25, 1989 and October 17, 1989 issued by the Regional
Trial Court of Makati, Branch 58 are REINSTATED.
SO ORDERED.
Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.
G.R. No. 93695 February 4, 1992
Lessons Applicable: Voting Trust Agreements (Corporate Law)
FACTS:
 November 15, 1985: a complaint for a sum of money was filed

by the International Corporate Bank, Inc. (ICB) against the
private respondents
 March 17, 1986: private respondents, in turn, filed a 3rd-party

complaint against ALFA and ICB
 September 17, 1987: petitioners filed a motion to dismiss the

third party complaint - denied
 July 12, 1988: trial court issued an order requiring the issuance of
an alias summons upon ALFA through the DBP
o consequence of the petitioner's letter that

ALFA management was transferred to DBP
 July 22, 1988: DBP claimed that it was not authorized to receive
summons on behalf of ALFA

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 August 4, 1988: trial court issued an order advising the private
respondents to take the appropriate steps to serve the
summons to ALFA
 September 12, 1988: petitioners filed a motion for

reconsideration submitting that Rule 14, section 13 of the
Revised Rules of Court is not applicable since they were no
longer officers of ALFA and that the private respondents should
have availed of another mode of service under Rule 14,
Section 16 of the said Rules, i.e., through publication to effect
proper service upon ALFA - denied
 January 19, 1989: 2nd motion for reconsideration was filed by

the petitioners reiterating their stand that by virtue of the voting
trust agreement they ceased to be officers and directors of
ALFA
o attached a copy of the voting trust agreement between

all the stockholders of ALFA and the DBP whereby the
management and control of ALFA became vested upon
the DBP
 April 25, 1989: trial court reversed itself by setting aside its
previous Order dated January 2, 1989 and declared that
service upon the petitioners who were no longer corporate
officers of ALFA cannot be considered as proper service of
summons on ALFA
 October 17, 1989: trial court (NOT notified of the petition for
certiorari) declared final its decision on April 25, 1989
ISSUE: W/N the voting trust agreement is valid despite being contrary
to the general principle that a corporation can only be bound by
such acts which are within the scope of its officers' or agents'
authority
HELD:

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 voting trust
o trust created by an agreement between a group of the

stockholders of a corporation and the trustee or by a
group of identical agreements between individual
stockholders and a common trustee, whereby it is
provided that for a term of years, or for a period
contingent upon a certain event, or until the agreement is
terminated, control over the stock owned by such
stockholders, either for certain purposes or for all purposes,
is to be lodged in the trustee, either with or without a
reservation to the owners, or persons designated by them,
of the power to direct how such control shall be used
(Ballentine's Law Dictionary)
o Sec. 59. Voting Trusts — One or more stockholders of a

stock corporation may create a voting trust for the
purpose of conferring upon a trustee or trustees the right
to vote and other rights pertaining to the share for a
period rights pertaining to the shares for a period not
exceeding 5 years at any one time: Provided, that in the
case of a voting trust specifically required as a condition
in a loan agreement, said voting trust may be for a period
exceeding 5 years but shall automatically expire upon full
payment of the loan. A voting trust agreement must be in
writing and notarized, and shall specify the terms and
conditions thereof. A certified copy of such agreement
shall be filed with the corporation and with the Securities
and Exchange Commission; otherwise, said agreement is
ineffective and unenforceable. The certificate or
certificates of stock covered by the voting trust
agreement shall be cancelled and new ones shall be
issued in the name of the trustee or trustees stating that
they are issued pursuant to said agreement. In the books
of the corporation, it shall be noted that the transfer in the
name of the trustee or trustees is made pursuant to said
voting trust agreement.
Premium Marble Resources vs. CA (264 SCRA 11 [1996])

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G.R. No. 96551 November 4, 1996
PREMIUM MARBLE RESOURCES, INC., petitioner,

vs.
THE COURT OF APPEALS and INTERNATIONAL CORPORATE BANK,
respondents.
PRINTLINE CORPORATION, petitioner,

vs.
THE COURT OF APPEALS and INTERNATIONAL CORPORATE BANK,
respondents.
TORRES, JR., J.:
Assailed in the instant petition for review is the decision 1 of the Court
of Appeals in CA-G.R. CV No. 16810 dated September 28, 1990
which affirmed the trial court's dismissal of petitioners' complaint for
damages.
The antecedents:
On July 18, 1986, Premium Marble Resources, Inc. (Premium for

brevity), assisted by Atty. Arnulfo Dumadag as counsel, filed an
action for damages against International Corporate Bank which was
docketed as Civil Case No. 14413. The complaint states, inter alia:
3. Sometime in August to October 1982, Ayala Investment

and Development Corporation issued three (3) checks
[Nos. 097088, 097414 & 27884] in the aggregate amount of
P31,663.88 payable to the plaintiff and drawn against
Citibank;
xxx xxx xxx
5. On or about August to October 1982, former officers of

the plaintiff corporation headed by Saturnino G. Belen, Jr.,
without any authority whatsoever from the plaintiff
deposited the above-mentioned checks to the current
account of his conduit corporation, Intervest Merchant
Finance (Intervest, for brevity) which the latter maintained
with the defendant bank under account No. 0200-02027-
8;
6. Although the checks were clearly payable to the

plaintiff corporation and crossed on their face and for
payee's account only, defendant bank accepted the
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checks to be deposited to the current account of
Intervest and thereafter presented the same for collection
from the drawee bank which subsequently cleared the
same thus allowing Intervest to make use of the funds to
the prejudice of the plaintiff;
xxx xxx xxx
14. The plaintiff has demanded upon the defendant to

restitute the amount representing the value of the checks
but defendant refused and continue to refuse to honor
plaintiff's demands up to the present;
15. As a result of the illegal and irregular acts perpetrated

by the defendant bank, the plaintiff was damaged to the
extent of the amount of P31,663.88;
Premium prayed that judgment be rendered ordering

defendant bank to pay the amount of P31,663.88 representing
the value of the checks plus interest, P100,000.00 as exemplary
damages; and P30,000.00 as attorney's fees.
In its Answer International Corporate Bank alleged, inter alia, that

Premium has no capacity/personality/authority to sue in this instance
and the complaint should, therefore, be dismissed for failure to state
a cause of action.
A few days after Premium filed the said case, Printline Corporation, a
sister company of Premium also filed an action for damages against
International Corporate Bank docketed as Civil Case No. 14444.
Thereafter, both civil cases were consolidated.
Meantime, the same corporation, i.e., Premium, but this time

represented by Siguion Reyna, Montecillio and Ongsiako Law Office
as counsel, filed a motion to dismiss on the ground that the filing of
the case was without authority from its duly constituted board of
directors as shown by the excerpt of the minutes of the Premium's
board of directors' meeting. 2
In its opposition to the motion to dismiss, Premium thru Atty.

Dumadag contended that the persons who signed the board
resolution namely Belen, Jr., Nograles & Reyes, are not directors of
the corporation and were allegedly former officers and stockholders
of Premium who were dismissed for various irregularities and
fraudulent acts; that Siguion Reyna Law office is the lawyer of Belen
and Nograles and not of Premium and that the Articles of
Incorporation of Premium shows that Belen, Nograles and Reyes are
not majority stockholders.

suigeneris
On the other hand, Siguion Reyna Law firm as counsel of Premium in
a rejoinder, asserted that it is the general information sheet filed with
the Securities and Exchange Commission, among others, that is the
best evidence that would show who are the stockholders of a
corporation and not the Articles of Incorporation since the latter
does not keep track of the many changes that take place after new
stockholders subscribe to corporate shares of stocks.
In the interim, defendant bank filed a manifestation that it is

adopting in toto Premium's motion to dismiss and, therefore, joins it in
the praying for the dismissal of the present case on the ground that
Premium lacks authority from its duly constituted board of directors
to institute the action.
In its Order, the lower court concluded that:
Considering that the officers (directors) of plaintiff

corporation enumerated in the Articles of Incorporation,
filed on November 9, 1979, were "to serve until their
successors are elected and qualified" and considering
further that as of March 4, 1981, the officers of the plaintiff
corporation were Alberto Nograles, Fernando Hilario,
Augusto Galace, Jose L.R. Reyes, Pido Aguilar and
Saturnino Belen, Jr., who presumably are the officers
represented by the Siguion Reyna Law Firm, and that
together with the defendants, they are moving for the
dismissal of the above-entitled case, the Court finds that
the officers represented by Atty. Dumadag do not as yet
have the legal capacity to sue for and in behalf of the
plaintiff corporation and/or the filing of the present action
(Civil Case 14413) by them before Case No. 2688 of the
SEC could be decided is a premature exercise of
authority or assumption of legal capacity for and in behalf
of plaintiff corporation.
The issues raised in Civil Case No. 14444 are similar to those
raised in Civil Case No. 14413. This Court is of the opinion
that before SEC Case No. 2688 could be decided, neither
the set of officers represented by Atty. Dumadag nor that
set represented by the Siguion Reyna, Montecillo and
Ongsiako Law Office, may prosecute cases in the name
of the plaintiff corporation.
It is clear from the pleadings filed by the parties in these

two cases that the existence of a cause of action against
the defendants is dependent upon the resolution of the
case involving intra-corporate controversy still pending
before the SEC. 3

suigeneris
On appeal, the Court of Appeals affirmed the trial court's Order 4
which dismissed the consolidated cases. Hence, this petition.
Petitioner submits the following assignment of errors:
The Court of Appeals erred in giving due course to the

motion to dismiss filed by the Siguion Reyna Law Office
when the said motion is clearly filed not in behalf of the
petitioner but in behalf of the group of Belen who are the
clients of the said law office.
II
The Court of Appeals erred in giving due course to the

motion to dismiss filed by the Siguion Reyna Law Office in
behalf of petitioner when the said law office had already
appeared in other cases wherein the petitioner is the
adverse party.
III
The Court of Appeals erred when it ruled that undersigned

counsel was not authorized by the Board of Directors to
file Civil Case Nos. 14413 and 14444.
IV
The Court of Appeals erred in concluding that under SEC

Case No. 2688 the incumbent directors could not act for
and in behalf of the corporation.
The Court of Appeals is without jurisdiction to prohibit the

incumbent Board of Directors from acting and filing this
case when the SEC where SEC Case No. 2688 is pending
has not even made the prohibition.
We find the petition without merit.
The only issue in this case is whether or not the filing of the case for
damages against private respondent was authorized by a duly
constituted Board of Directors of the petitioner corporation.
Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar
Gan, Lionel Pengson, Jose Ma. Silva, Aderito Yujuico and Rodolfo
Millare, presented the Minutes 5 of the meeting of its Board of
Directors held on April 1, 1982, as proof that the filing of the case

suigeneris
against private respondent was authorized by the Board. On the
other hand, the second set of officers, viz., Saturnino G. Belen, Jr.,
Alberto C. Nograles and Jose L.R. Reyes, presented a Resolution 6
dated July 30, 1986, to show that Premium did not authorize the filing
in its behalf of any suit against the private respondent International
Corporate Bank.
Later on, petitioner submitted its Articles of Incorporation 7 dated

November 6, 1979 with the following as Directors: Mario C. Zavalla,
Pedro C. Celso, Oscar B. Gan, Lionel Pengson, and Jose Ma. Silva.
However, it appears from the general information sheet and the

Certification issued by the SEC on August 19, 1986 8 that as of March
4, 1981, the officers and members of the board of directors of the
Premium Marble Resources, Inc. were:
Alberto C. Nograles — President/Director

Fernando D. Hilario — Vice President/Director
Augusto I. Galace — Treasurer
Jose L.R. Reyes — Secretary/Director
Pido E. Aquilar — Director
Saturnino G. Belen, Jr. — Chairman of the Board.
While the Minutes of the Meeting of the Board on April 1, 1982 states
that the newly elected officers for the year 1982 were Oscar Gan,
Mario Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner failed
to show proof that this election was reported to the SEC. In fact, the
last entry in their General Information Sheet with the SEC, as of 1986
appears to be the set of officers elected in March 1981.
We agree with the finding of public respondent Court of Appeals,

that "in the absence of /any board resolution from its board of
directors the [sic] authority to act for and in behalf of the
corporation, the present action must necessarily fail. The power of
the corporation to sue and be sued in any court is lodged with the
board of directors that exercises its corporate powers. Thus, the issue
of authority and the invalidity of plaintiff-appellant 's subscription
which is still pending, is a matter that is also addressed, considering
the premises, to the sound judgment of the Securities & Exchange
Commission." 9
By the express mandate of the Corporation Code (Section 26), all

corporations duly organized pursuant thereto are required to submit
within the period therein stated (30 days) to the Securities and
Exchange Commission the names, nationalities and residences of
the directors, trustees and officers elected.
Sec. 26 of the Corporation Code provides, thus:

suigeneris
Sec. 26. Report of election of directors, trustees and
officers. — Within thirty (30) days after the election of the
directors, trustees and officers of the corporation, the
secretary, or any other officer of the corporation, shall
submit to the Securities and Exchange Commission, the
names, nationalities and residences of the directors,
trustees and officers elected. . . .
Evidently, the objective sought to be achieved by Section 26 is to

give the public information, under sanction of oath of responsible
officers, of the nature of business, financial condition and
operational status of the company together with information on its
key officers or managers so that those dealing with it and those who
intend to do business with it may know or have the means of
knowing facts concerning the corporation's financial resources and
business responsibility. 10
The claim, therefore, of petitioners as represented by Atty.

Dumadag, that Zaballa, et al., are the incumbent officers of
Premium has not been fully substantiated. In the absence of an
authority from the board of directors, no person, not even the
officers of the corporation, can validly bind the
corporation. 11
We find no reversible error in the decision sought to be reviewed.
ACCORDINGLY, for lack of merit, the petition is hereby DENIED.
SO ORDERED.
Regalado, Romero, Puno and Mendoza, JJ., concur.
In case where there are 2 lists of Board Of Directors submitted to SEC,

which one is controlling?
It is the list of directors in the latest general information sheet as filed

with the SEC which is controlling. (Premium Marble Resources, Inc. v.
CA, G.R. No. 96551, Nov. 4, 1996)
Raniel vs. Jochico (517 SCRA 221 [2007]); See SEC Opinion No.21,
s.2003, addressed to Atty. Juan de Ocampo
G.R. No. 153413 March 1, 2007

suigeneris
NECTARINA S. RANIEL and MA. VICTORIA R. PAG-ONG, Petitioners,
vs.
PAUL JOCHICO, JOHN STEFFENS and SURYA VIRIYA, Respondents.
DECISION
Assailed in the present Petition for Review on Certiorari is the

Decision1 of the Court of Appeals (CA) dated April 30, 2002, affirming
with modification the Decision dated October 27, 2000 rendered by
the Securities and Exchange Commission (SEC) which held as valid
the removal of petitioners Ma. Victoria R. Pag-ong (Pag-ong) as
director and Nectarina S. Raniel (Raniel) as director and corporate
officer of Nephro Systems Dialysis Center (Nephro).
Petitioners first questioned their removal in SEC Case No. 02-98-5902

for Declaration of Nullity of the Illegal Acts of Respondents, Damages
and Injunction. Petitioners, together with respondents Paul Jochico
(Jochico), John Steffens and Surya Viriya, were incorporators and
directors of Nephro, with Raniel acting as Corporate Secretary and
Administrator. The conflict started when petitioners questioned
respondents' plan to enter into a joint venture with the Butuan
Doctors' Hospital and College, Inc. sometime in December 1997.
Because of this, petitioners claim that respondents tried to compel
them to waive and assign their shares with Nephro but they refused.
Thereafter, Raniel sought an indefinite leave of absence due to
stress, but this was denied by Jochico, as Nephro President. Raniel,
nevertheless, did not report for work, causing Jochico to demand an
explanation from her why she should not be removed as
Administrator and Corporate Secretary. Raniel replied, expressing
her sentiments over the disapproval of her request for leave and
respondents' decision with regard to the Butuan venture.
On January 30, 1998, Jochico issued a Notice of Special Board

Meeting on February 2, 1998. Despite receipt of the notice,
petitioners did not attend the board meeting. In said meeting, the
Board passed several resolutions ratifying the disapproval of Raniel's
request for leave, dismissing her as Administrator of Nephro,
declaring the position of Corporate Secretary vacant, appointing
Otelio Jochico as the new Corporate Secretary and authorizing the
call of a Special Stockholders' Meeting on February 16, 1998 for the
purpose of the removal of petitioners as directors of Nephro.
Otelio Jochico issued the corresponding notices for the Special

Stockholders' Meeting to be held on February 16, 1998 which were
received by petitioners on February 2, 1998. Again, they did not
attend the meeting. The stockholders who were present removed

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the petitioners as directors of Nephro. Thus, petitioners filed SEC Case
No. 02-98-5902.
On October 27, 2000, the SEC rendered its Decision, the dispositive
WHEREFORE, the Commission so holds that complainants cannot be

awarded the reliefs prayed for in reinstating Nectarina S. Raniel as
secretary and administrator.
The corporation acting thru its Board of Directors can validly remove
its corporate officers, particularly complainant Nectarina S. Raniel as
corporate secretary, treasurer and administrator of the Dialysis Clinic.
Also, the Commission cannot grant the relief prayed for by

complainants in restraining the respondents from interfering in the
administration of the Dialysis Clinic owned by the corporation and
the use of corporate funds.
The administration of the Dialysis Clinic of the corporation and the

use of corporate funds, rightfully belong to the officers of the
corporation, which in this case are the respondents.
The counterclaim of respondents to return or assign back the

complainants' shares in favor of respondent Paul Jochico or his
nominee is hereby denied for lack of merit.
The respondents failed to show any clear and convincing evidence

to rebut the presumption of the validity and truthfulness of
documents submitted to the Commission in the grant of corporate
license.
The claim for attorney's fees and damages of both parties are
likewise denied for lack of merit, as neither party should be punished
for vindicating a right, which he/she believes should be protected or
enforced.
SO ORDERED.2
Dissatisfied, petitioners filed a petition for review with the CA.
On April 30, 2002, the CA rendered the assailed Decision, with the
following dispositive portion:
WHEREFORE, in light of the foregoing discussions, the appealed

decision of the Securities and Exchange Commission is hereby
AFFIRMED with the MODIFICATION that the renewal of petitioners as
directors of Nephro is declared valid.
SO ORDERED.3

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Respondents filed a Manifestation and Motion to Correct
Typographical Error, stating that the term "renewal" as provided in
the CA Decision should be "removal."4 Petitioners, on the other hand,
filed the present petition for review on certiorari.
On November 20, 2002, the CA issued a Resolution resolving to

refrain from acting on all pending incidents before it in view of the
filing of the petition with the Court.5
In the present petition, petitioners raised basically the same

argument they had before the SEC and the CA, i.e., their removal
from Nephro was not valid.
Both the SEC and the CA held that Pag-ong's removal as director
and Raniel's removal as director and officer of Nephro were valid.
For its part, the SEC ruled that the Board of Directors had sufficient
ground to remove Raniel as officer due to loss of trust and
confidence, as her abrupt and unauthorized leave of absence
exhibited her disregard of her responsibilities as an officer of the
corporation and disrupted the operations of Nephro. The SEC also
held that the Special Board Meeting held on February 2, 1998 was
valid and the resolutions adopted therein are binding on petitioners.6
The CA upheld the SEC's conclusions, adding further that the special
stockholders' meeting on February 16, 1998 was likewise validly held.
The CA also ruled that Pag-ong's removal as director of Nephro was
justified as it was due to her "undenied delay in the release of
Nephro's medical supplies from the warehouse of the Fly-High
Brokerage where she was an officer, on top of her and her co-
petitioner Raniel's absence from the aforementioned directors' and
stockholders' meetings of Nephro despite due notice."7
It is well to stress the settled rule that the findings of fact of

administrative bodies, such as the SEC, will not be interfered with by
the courts in the absence of grave abuse of discretion on the part of
said agencies, or unless the aforementioned findings are not
supported by substantial evidence. They carry even more weight
when affirmed by the CA.8 Such findings are accorded not only
great respect but even finality, and are binding upon this Court,
unless it is shown that it had arbitrarily disregarded or
misapprehended evidence before it to such an extent as to compel
a contrary conclusion had such evidence been properly
appreciated.9 This rule is rooted in the doctrine that this Court is not a
trier of facts, as well as in the respect to be accorded the
determinations made by administrative bodies in general on matters
falling within their respective fields of specialization or expertise.10
A review of the petition failed to demonstrate any reversible error

committed by the two tribunals, hence, the petition must be denied.
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It does not present any argument which convinces the Court that
the SEC and the CA made any misappreciation of the facts and the
applicable laws such that their decisions should be overturned.
A corporation exercises its powers through its board of directors

and/or its duly authorized officers and agents, except in instances
where the Corporation Code requires stockholders’ approval for
certain specific acts.11
Based on Section 23 of the Corporation Code which 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 x x x.
a corporation’s board of directors is understood to be that body

which (1) exercises all powers provided for under the Corporation
Code; (2) conducts all business of the corporation; and (3) controls
and holds all property of the corporation. Its members have been
characterized as trustees or directors clothed with a fiduciary
character. 12 Moreover, the directors may appoint officers and
agents and as incident to this power of appointment, they may
discharge those appointed.13
In this case, petitioner Raniel was removed as a corporate officer

through the resolution of Nephro's Board of Directors adopted in a
special meeting on February 2, 1998. As correctly ruled by the SEC,
petitioners' removal was a valid exercise of the powers of Nephro's
Board of Directors, viz.:
In the instant complaint, do respondents have sufficient grounds to

cause the removal of Raniel from her positions as Corporate
Secretary, Treasurer and Administrator of the Dialysis Clinic? Based
on the facts proven during the hearing of this case, the answer is in
the affirmative.
Raniel's letter of January 26, 1998 speaks for itself. Her request for an
indefinite leave, immediately effective yet without prior notice,
reveals a disregard of the critical responsibilities pertaining to the
sensitive positions she held in the corporation. Prior to her hasty
departure, Raniel did not make a proper turn-over of her duties and
had to be expressly requested to hand over documents and
records, including keys to the office and the cabinets (Exh. 15).
xxxx

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Since Raniel occupied all three positions in Nephro, it is not difficult to
foresee the disruption that her immediate and indefinite absence
can inflict on the operations of the company. By leaving abruptly,
Raniel abandoned the positions she is now trying to reclaim. Raniel's
actuation has been sufficiently proven to warrant loss of the Board's
confidence.14
The SEC also correctly concluded that petitioner Raniel was

removed as an officer of Nephro in compliance with established
procedure, thus:
The resolutions of the Board dismissing complainant Raniel from her

various positions in Nephro are valid. Notwithstanding the absence
of complainants from the meeting, a quorum was validly constituted.
x x x.
xxxx
Based on its articles of incorporation, Nephro has five directors – two

of the positions were occupied by complainants and the remaining
three are held by respondents. This being the case, the presence of
all three respondents in the Special Meeting of the Board on
February 2, 1998 established a quorum for the conduct of business.
The unanimous resolutions carried by the Board during such meeting
are therefore valid and binding against complainants.
It bears emphasis that Raniel was given sufficient opportunity to be

heard. Jochico's letters of January 26, 1998 and January 27, 1998,
albeit adversarial, recognized her right to explain herself and gave
her the chance to do so. In fact, Raniel did respond to Jochico's
letter on January 28, 1998 and took the occasion to voice her
opinions about Jochico's alleged "practice of using others for your
own benefit, without cost." (Exh. 14). Moreover, the Special Meeting
of the Board could have been the appropriate venue for Raniel to
air her side. Had Raniel decided to grace the meeting with her
presence, she could have explained herself before the board and
tried to convince them to allow her to keep her posts.15
Petitioners Raniel and Pag-ong's removal as members of Nephro's

Board of Directors was likewise valid.
Only stockholders or members have the power to remove the

directors or trustees elected by them, as laid down in Section 28 of
the Corporation Code,16 which provides in part:
SEC. 28. Removal of directors or trustees. -- Any director or trustee of

a corporation may be removed from office by a vote of the
stockholders holding or representing at least two-thirds (2/3) of the
outstanding capital stock, or if the corporation be a non-stock

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corporation, by a vote of at least two-thirds (2/3) of the members
entitled to vote: Provided, that such removal shall take place either
at a regular meeting of the corporation or at a special meeting
called for the purpose, and in either case, after previous notice to
stockholders or members of the corporation of the intention to
propose such removal at the meeting. A special meeting of the
stockholders or members of a corporation for the purpose of
removal of directors or trustees or any of them, must be called by the
secretary on order of the president or on the written demand of the
stockholders representing or holding at least a majority of the
outstanding capital stock, or if it be a non-stock corporation, on the
written demand of a majority of the members entitled to vote. x x x
Notice of the time and place of such meeting, as well as of the
intention to propose such removal, must be given by publication or
by written notice as prescribed in this Code. x x x Removal may be
with or without cause: Provided, That removal without cause may not
be used to deprive minority stockholders or members of the right of
representation to which they may be entitled under Section 24 of this
Code. (Emphasis supplied)
Petitioners do not dispute that the stockholders' meeting was held in

accordance with Nephro's By-Laws. The ownership of Nephro's
outstanding capital stock is distributed as follows: Jochico - 200
shares; Steffens - 100 shares; Viriya - 100 shares; Raniel - 75 shares;
and Pag-ong - 25 shares,17 or a total of 500 shares. A two-thirds vote
of Nephro's outstanding capital stock would be 333.33 shares, and
during the Stockholders' Special Meeting held on February 16, 1998,
400 shares voted for petitioners' removal. Said number of votes is
more than enough to oust petitioners from their respective positions
as members of the board, with or without cause.
Verily therefore, there is no cogent reason to grant the present

petition.
WHEREFORE, the petition is DENIED for lack of merit.
SO ORDERED.
MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice
Tan vs. Sycip (499 SCRA 216 [2006])
G.R. No. 153468 August 17, 2006

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PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN CO, JAMES
TAN, JUDITH TAN, ERNESTO TANCHI JR., EDWIN NGO, VIRGINIA KHOO,
SABINO PADILLA JR., EDUARDO P. LIZARES and GRACE CHRISTIAN
HIGH SCHOOL, Petitioners,
vs.
PAUL SYCIP and MERRITTO LIM, Respondents.
DECISION
PANGANIBAN, CJ.:
For stock corporations, the "quorum" referred to in Section 52 of the

Corporation Code is based on the number of outstanding voting
stocks. For nonstock corporations, only those who are actual, living
members with voting rights shall be counted in determining the
existence of a quorum during members’ meetings. Dead members
shall not be counted.
The Case
The present Petition for Review on Certiorari [1] under Rule 45 of the
Rules of Court seeks the reversal of the January 23 2 and May 7, 2002,
3 Resolutions of the Court of Appeals (CA) in CA-GR SP No. 68202.
The first assailed Resolution dismissed the appeal filed by petitioners

with the CA. Allegedly, without the proper authorization of the other
petitioners, the Verification and Certification of Non-Forum Shopping
were signed by only one of them -- Atty. Sabino Padilla Jr. The
second Resolution denied reconsideration.
The Facts
Petitioner Grace Christian High School (GCHS) is a nonstock, non-

profit educational corporation with fifteen (15) regular members,
who also constitute the board of trustees. [4] During the annual
members’ meeting held on April 6, 1998, there were only eleven (11)
[5] living member-trustees, as four (4) had already died. Out of the
eleven, seven (7) 6 attended the meeting through their respective

proxies. The meeting was convened and chaired by Atty. Sabino
Padilla Jr. over the objection of Atty. Antonio C. Pacis, who argued
that there was no quorum. 7 In the meeting, Petitioners Ernesto
Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to
replace the four deceased member-trustees.
When the controversy reached the Securities and Exchange

Commission (SEC), petitioners maintained that the deceased
member-trustees should not be counted in the computation of the
quorum because, upon their death, members automatically lost all
their rights (including the right to vote) and interests in the
corporation.

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SEC Hearing Officer Malthie G. Militar declared the April 6, 1998
meeting null and void for lack of quorum. She held that the basis for
determining the quorum in a meeting of members should be their
number as specified in the articles of incorporation, not simply the
number of living members. 8 She explained that the qualifying phrase
"entitled to vote" in Section 24 9 of the Corporation Code, which
provided the basis for determining a quorum for the election of
directors or trustees, should be read together with Section 89. 10
The hearing officer also opined that Article III (2) 11 of the By-Laws of
GCHS, insofar as it prescribed the mode of filling vacancies in the
board of trustees, must be interpreted in conjunction with Section 29
12 of the Corporation Code. The SEC en banc denied the appeal of
petitioners and affirmed the Decision of the hearing officer in toto. 13

It found to be untenable their contention that the word "members,"
as used in Section 52 14 of the Corporation Code, referred only to the
living members of a nonstock corporation. 15
As earlier stated, the CA dismissed the appeal of petitioners,

because the Verification and Certification of Non-Forum Shopping
had been signed only by Atty. Sabino Padilla Jr. No Special Power of
Attorney had been attached to show his authority to sign for the rest
of the petitioners.
Hence, this Petition. 16
Issues
Petitioners state the issues as follows:
"Petitioners principally pray for the resolution of the legal question of

whether or not in NON-STOCK corporations, dead members should
still be counted in determination of quorum for purposed of
conducting the Annual Members’ Meeting.
"Petitioners have maintained before the courts below that the DEAD
members should no longer be counted in computing quorum
primarily on the ground that members’ rights are ‘personal and non-
transferable’ as provided in Sections 90 and 91 of the Corporation
Code of the Philippines.
"The SEC ruled against the petitioners solely on the basis of a 1989
SEC Opinion that did not even involve a non-stock corporation as
petitioner GCHS.
"The Honorable Court of Appeals on the other hand simply refused to

resolve this question and instead dismissed the petition for review on
a technicality – the failure to timely submit an SPA from the
petitioners authorizing their co-petitioner Padilla, their counsel and

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also a petitioner before the Court of Appeals, to sign the petition on
behalf of the rest of the petitioners.
"Petitioners humbly submit that the action of both the SEC and the
Court of Appeals are not in accord with law particularly the
pronouncements of this Honorable Court in Escorpizo v. University of
Baguio (306 SCRA 497), Robern Development Corporation v. Quitain
(315 SCRA 150,) and MC Engineering, Inc. v. NLRC, (360 SCRA 183).
Due course should have been given the petition below and the
merits of the case decided in petitioners’ favor." 17
In sum, the issues may be stated simply in this wise: 1) whether the CA
erred in denying the Petition below, on the basis of a defective
Verification and Certification; and 2) whether dead members should
still be counted in the determination of the quorum, for purposes of
conducting the annual members’ meeting.
The present Petition is partly meritorious.
Procedural Issue:
Verification and Certification of Non-Forum Shopping
The Petition before the CA was initially flawed, because the

Verification and Certification of Non-Forum Shopping were signed by
only one, not by all, of the petitioners; further, it failed to show proof
that the signatory was authorized to sign on behalf of all of them.
Subsequently, however, petitioners submitted a Special Power of
Attorney, attesting that Atty. Padilla was authorized to file the action
on their behalf. 18
In the interest of substantial justice, this initial procedural lapse may

be excused. 19 There appears to be no intention to circumvent the
need for proper verification and certification, which are aimed at
assuring the truthfulness and correctness of the allegations in the
Petition for Review and at discouraging forum shopping. 20 More
important, the substantial merits of petitioners’ case and the purely
legal question involved in the Petition should be considered special
circumstances 21 or compelling reasons that justify an exception to
the strict requirements of the verification and the certification of non-
forum shopping. 22
Main Issue:
Basis for Quorum
Generally, stockholders’ or members’ meetings are called for the

purpose of electing directors or trustees 23 and transacting some
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other business calling for or requiring the action or consent of the
shareholders or members, 24 such as the amendment of the articles
of incorporation and bylaws, sale or disposition of all or substantially
all corporate assets, consolidation and merger and the like, or any
other business that may properly come before the meeting.
Under the Corporation Code, stockholders or members periodically

elect the board of directors or trustees, who are charged with the
management of the corporation. 25 The board, in turn, periodically
elects officers to carry out management functions on a day-to-day
basis. As owners, though, the stockholders or members have residual
powers over fundamental and major corporate changes.
While stockholders and members (in some instances) are entitled to

receive profits, the management and direction of the corporation
are lodged with their representatives and agents -- the board of
directors or trustees. 26 In other words, acts of management pertain
to the board; and those of ownership, to the stockholders or
members. In the latter case, the board cannot act alone, but must
seek approval of the stockholders or members. 27
Conformably with the foregoing principles, one of the most

important rights of a qualified shareholder or member is the right
to vote -- either personally or by proxy -- for the directors or trustees
who are to manage the corporate affairs. 28 The right to choose the
persons who will direct, manage and operate the corporation is
significant, because it is the main way in which a stockholder can
have a voice in the management of corporate affairs, or in which a
member in a nonstock corporation can have a say on how the
purposes and goals of the corporation may be achieved. 29 Once
the directors or trustees are elected, the stockholders or members
relinquish corporate powers to the board in accordance with law.
In the absence of an express charter or statutory provision to the

contrary, the general rule is that every member of a nonstock
corporation, and every legal owner of shares in a stock corporation,
has a right to be present and to vote in all corporate meetings.
Conversely, those who are not stockholders or members have no
right to vote. 30 Voting may be expressed personally, or through
proxies who vote in their representative capacities. 31 Generally, the
right to be present and to vote in a meeting is determined by the
time in which the meeting is held. 32
Section 52 of the Corporation Code states:
"Section 52. Quorum in Meetings. – Unless otherwise provided for in

this Code or in the by-laws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital stock or a majority
of the members in the case of non-stock corporations."
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In stock corporations, the presence of a quorum is ascertained and
counted on the basis of the outstanding capital stock, as defined by
the Code thus:
"SECTION 137. Outstanding capital stock defined. – The term

‘outstanding capital stock’ as used in this Code, means the total
shares of stock issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or partially paid,
except treasury shares." (Underscoring supplied)
The Right to Vote in
Stock Corporations
The right to vote is inherent in and incidental to the ownership of

corporate stocks. 33 It is settled that unissued stocks may not be
voted or considered in determining whether a quorum is present in a
stockholders’ meeting, or whether a requisite proportion of the stock
of the corporation is voted to adopt a certain measure or act. Only
stock actually issued and outstanding may be voted. 34 Under
Section 6 of the Corporation Code, each share of stock is entitled to
vote, unless otherwise provided in the articles of incorporation or
declared delinquent 35 under Section 67 of the Code.
Neither the stockholders nor the corporation can vote or represent

shares that have never passed to the ownership of stockholders; or,
having so passed, have again been purchased by the corporation.
36 These shares are not to be taken into consideration in determining
majorities. When the law speaks of a

given proportion of the stock, it must be construed to mean the
shares that have passed from the corporation, and that may be
voted. 37
Section 6 of the Corporation Code, in part, provides:
"Section 6. Classification of shares. – The shares of stock of stock

corporations may be divided into classes or series of shares, or both,
any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting
rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code:
Provided, further, that there shall always be a class or series of shares
which have complete voting rights.
xxxxxxxxx

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"Where the articles of incorporation provide for non-voting shares in
the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all

or substantially all of the corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another

corporation or other corporations;
7. Investment of corporate funds in another corporation or business

in accordance with this Code; and
8. Dissolution of the corporation.
"Except as provided in the immediately preceding paragraph, the

vote necessary to approve a particular corporate act as provided in
this Code shall be deemed to refer only to stocks with voting rights."
Taken in conjunction with Section 137, the last paragraph of Section

6 shows that the intention of the lawmakers was to base the quorum
mentioned in Section 52 on the number of outstanding voting stocks.
38
The Right to Vote in
Nonstock Corporations
In nonstock corporations, the voting rights attach to membership. 39

Members vote as persons, in accordance with the law and the
bylaws of the corporation. Each member shall be entitled to one
vote unless so limited, broadened, or denied in the articles of
incorporation or bylaws. 40 We hold that when the principle for
determining the quorum for stock corporations is applied by analogy
to nonstock corporations, only those who are actual members with
voting rights should be counted.
Under Section 52 of the Corporation Code, the majority of the

members representing the actual number of voting rights, not
the number or numerical constant that may originally be specified in
the articles of incorporation, constitutes the quorum. 41

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The March 3, 1986 SEC Opinion 42 cited by the hearing officer uses
the phrase "majority vote of the members"; likewise Section 48 of the
Corporation Code refers to 50 percent of 94 (the number of
registered members of the association mentioned therein) plus one.
The best evidence of who are the present members of the
corporation is the "membership book"; in the case of stock
corporations, it is the stock and transfer book. 43
Section 25 of the Code specifically provides that a majority of the

directors or trustees, as fixed in the articles of incorporation, shall
constitute a quorum for the transaction of corporate business (unless
the articles of incorporation or the bylaws provide for a greater
majority). If the intention of the lawmakers was to base the quorum in
the meetings of stockholders or members on their absolute number
as fixed in the articles of incorporation, it would have expressly
specified so. Otherwise, the only logical conclusion is that the
legislature did not have that intention.
Effect of the Death
of a Member or Shareholder
Having thus determined that the quorum in a members’ meeting is

to be reckoned as the actual number of members of the
corporation, the next question to resolve is what happens in the
event of the death of one of them.
In stock corporations, shareholders may generally transfer their

shares. Thus, on the death of a shareholder, the executor or
administrator duly appointed by the Court is vested with the legal
title to the stock and entitled to vote it. Until a settlement and division
of the estate is effected, the stocks of the decedent are held by the
administrator or executor. 44
On the other hand, membership in and all rights arising from a

nonstock corporation are personal and non-transferable, unless the
articles of incorporation or the bylaws of the corporation provide
otherwise. 45 In other words, the determination of whether or not
"dead members" are entitled to exercise their voting rights (through
their executor or administrator), depends on those articles of
incorporation or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall,

among others, be terminated by the death of the member. 46
Section 91 of the Corporation Code further provides that termination
extinguishes all the rights of a member of the corporation, unless
otherwise provided in the articles of incorporation or the bylaws.

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Applying Section 91 to the present case, we hold that dead
members who are dropped from the membership roster in the
manner and for the cause provided for in the By-Laws of GCHS are
not to be counted in determining the requisite vote in corporate
matters or the requisite quorum for the annual members’ meeting.
With 11 remaining members, the quorum in the present case should
be 6. Therefore, there being a quorum, the annual members’
meeting, conducted with six 47 members present, was valid.
Vacancy in the
Board of Trustees
As regards the filling of vacancies in the board of trustees, Section 29

of the Corporation Code provides:
"SECTION 29. Vacancies in the office of director or trustee. -- Any

vacancy occurring in the board of directors or trustees other than by
removal by the stockholders or members or by expiration of term,
may be filled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special
meeting called for that purpose. A director or trustee so elected to
fill a vacancy shall be elected only for the unexpired term of his
predecessor in office."
Undoubtedly, trustees may fill vacancies in the board, provided that

those remaining still constitute a quorum. The phrase "may be filled"
in Section 29 shows that the filling of vacancies in the board by the
remaining directors or trustees constituting a quorum is merely
permissive, not mandatory. 48 Corporations, therefore, may choose
how vacancies in their respective boards may be filled up -- either
by the remaining directors constituting a quorum, or by the
stockholders or members in a regular or special meeting called for
the purpose. 49
The By-Laws of GCHS prescribed the specific mode of filling up

existing vacancies in its board of directors; that is, by a majority vote
of the remaining members of the board. 50
While a majority of the remaining corporate members were present,

however, the "election" of the four trustees cannot be legally upheld
for the obvious reason that it was held in an annual meeting of the
members, not of the board of trustees. We are not unmindful of the
fact that the members of GCHS themselves also constitute the
trustees, but we cannot ignore the GCHS bylaw provision, which
specifically prescribes that vacancies in the board must be filled up
by the remaining trustees. In other words, these remaining member-
trustees must sit as a board in order to validly elect the new ones.
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Indeed, there is a well-defined distinction between a corporate act
to be done by the board and that by the constituent members of
the corporation. The board of trustees must act, not individually or
separately, but as a body in a lawful meeting. On the other hand, in
their annual meeting, the members may be represented by their
respective proxies, as in the contested annual members’ meeting of
GCHS.
WHEREFORE, the Petition is partly GRANTED.The assailed Resolutions

of the Court of Appeals are hereby REVERSED AND SET ASIDE. The
remaining members of the board of trustees of Grace Christian High
School (GCHS) may convene and fill up the vacancies in the board,
in accordance with this Decision. No pronouncement as to costs in
this instance.
SO ORDERED.
Chief Justice
Chairperson, First Division
W E C O N C U R:
CONSUELO YNARES-SANTIAGO, MA. ALICIA AUSTRIA-MARTINEZ
ROMEO J. CALLEJO, SR. MINITA V. CHICO-NAZARIO
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify that the
conclusions in the above Decision were reached in consultation
before the case was assigned to the writer of the opinion of the
Court’s Division.
Chief Justice
Footnotes
1 Dated June 25, 2002; rollo, pp. 10-24.
2Annex "A" of the Petition; rollo, p. 35. Penned by Justice B.A.
Adefuin-de la Cruz (Division chair) and concurred in by Justices
Wenceslao I. Agnir Jr. and Josefina Guevara-Salonga.
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3 Annex "B" of the Petition; rollo, p. 37.
4 Art. II (1), Amended By-Laws of GCHS, provides:
"1. Number – The regular members of the Corporation shall be

fifteen (15) in number and they shall constitute the Board of
Trustees. Associate, non-voting members may be admitted
upon such terms as the Board of Trustees may determine."
(Memorandum for petitioners, p. 2; rollo, p. 92.)
5 Petitioners James Tan, Paul Lee Tan, Andrew Liuson, Esther
Wong, Stephen Co; Respondents Paul Sycip and Merritto Lim
and four others not parties in this Petition – John Tan, Claro Ben
Lim, Wang Ta Peng and Anita So. (Memorandum for petitioners,
p. 2; rollo, p. 92.)
6 Wang Ta Peng, Esther Wong, Stephen Co and James L. Tan,
represented by Atty. Sabino Padilla; Paul Lee Tan and Andrew
Liuson, represented by Atty. Eduardo P. Lizares; and Anita So,
represented by Atty. Antonio C. Pacis. (Id.; id. at 92-93)
7See Decision dated June 21, 2000, SEC Case No. 08-98-6065,
p. 2; rollo, p. 40.
8 Id. at 4-6; id. at 42-43.
9 "Section 24. Election of directors or trustees. – At all elections of
directors or trustees, there must be present, either in person or
by representative authorized to act by written proxy, the
owners of a majority of the outstanding capital stock, or if there
be no capital stock, a majority of the members entitled to vote.
x x x. Any meeting of the stockholders or members called for an
election may adjourn from day to day or from time to time but
not sine die or indefinitely if, for any reason, no election is held,
or if there are not present or represented by proxy, at the
meeting, the owners of a majority of the outstanding capital
stock, or if there be no capital stock, a majority of the member
entitled to vote." (Underscoring supplied)
10"Section 89. Right to vote. – The right of the members of any
class or classes to vote may be limited, broadened or denied to
the extent specified in the articles of incorporation or the by-
laws. Unless so limited, broadened or denied, each member,
regardless of class, shall be entitled to one vote."
"Unless otherwise provided in the articles of incorporation or the

by-laws, a member may vote by proxy in accordance with the
provisions of this Code.

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"Voting by mail or other similar means by members of non-stock
corporations may be authorized by the by-laws of non-stock
corporations with the approval of, and under such conditions
which may be prescribed by, the Securities and Exchange
Commission."
11"Article III (2). Vacancies – Any vacancy in the Board of
Trustees shall be filled by a majority vote of the remaining
members of the Board." (Cited in Decision, SEC Case No. 08-98-
6065, p. 6; rollo, p. 43.)
12"Section 29. Vacancies in the office of director or trustee. –
Any vacancy occurring in the board of directors or trustees
other than by removal by the stockholders or members or by
expiration of term, may be filled by the vote of at least a
majority of the remaining directors or trustees, if still constituting
a quorum; otherwise, said vacancies must be filled by the
stockholders in a regular or special meeting called for that
purpose. x x x." (Underscoring supplied)
See SEC Order dated July 6, 2001, Annex "D" of Petition; rollo,
13
pp. 46-51.
14"Section 52. Quorum in meetings. – Unless otherwise provided
for in this Code or in the by-laws, a quorum shall consist of the
stockholders representing a majority of the outstanding capital
stock or a majority of the members in the case of non-stock
corporations." (Underscoring supplied)
15 SEC Order dated July 6, 2001, p. 3; rollo, p. 48.
16To resolve old cases, the Court created the Committee on
Zero Backlog of Cases on January 26, 2006. Consequently, the
Court resolved to prioritize the adjudication of long-pending
cases by redistributing them among all the justices. This case
was recently re-raffled and assigned to the undersigned
ponente for study and report.
17 Petitioner’s Memorandum, pp. 6-7; rollo, pp. 96-97.
18 Ateneo De Naga University v. Manalo, 458 SCRA 325, May 9,
2005; Vicar International Construction, Inc. v. FEB Leasing and
Finance Corporation, 456 SCRA 588, April 22, 2005; Alternative
Center for Organizational Reforms and Development, Inc.
(ACORD) v. Zamora, 459 SCRA 578, June 8, 2005.
19 Estares v. Court of Appeals, 459 SCRA 604, June 8, 2005; Torres
v. Specialized Packaging Development Corporation, 433 SCRA
455, July 6, 2004; National Steel Corp. v. CA, 436 Phil. 656,

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August 29, 2002; Sy Chin v. Court of Appeals, 399 Phil. 442,
November 23, 2000.
20 Pilipinas Shell Petroleum Corporation v. John Bordman Ltd. of
Iloilo, Inc., GR No. 159831, October 14, 2005.
21 In certain exceptional circumstances, the Court has allowed
the relaxation of the rule requiring verification and certification
of non-forum shopping. LDP Marketing, Inc., v. Monter, GR No.
159653, January 25, 2006 citing Uy v. Land Bank of the
Philippines, 336 SCRA 419, July 24, 2000, Roadway Express, Inc.
v. Court of Appeals, et al., 264 SCRA 696, November 21, 1996,
and Loyola v. Court of Appeals, et al., 245 SCRA 477, June 29,
1995; Ateneo De Naga University v. Manalo, 458 SCRA 325, May
9, 2005.
22 Uy v. Land Bank of the Philippines, supra.
23 Corporation Code, Sec. 24.
24See Corporation Code, Secs. 6, 16, 24, 28-30, 32, 34, 38, 40,
42-44, 46, 48, 77, 118-120.
"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 x x x."
26J. Campos, Jr. and M.C. Campos, The Corporation Code 341,
Vol. I (1990); see also Ramirez v. Orientalist Co., 38 Phil. 634
(1918).
27 J. Campos, Jr. and M.C. Campos, supra at 490.
285 Fletcher Cyclopedia of the Law of Private Corporations 116
(1976).
29 J. Campos, Jr. and M.C. Campos, supra note 26 at 436.
(1976).
31 Id.
32 Id.

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33 R. Lopez, The Corporation Code of the Phils. 396, Vol. I (1994).
(1976).
35"Section 71. Effect of delinquency. – No delinquent stock shall
be voted for or be entitled to vote or to representation at any
stockholders’ meeting. x x x."
36"Section 9. Treasury shares. – Treasury shares are shares of
stock which have been issued and fully paid for but
subsequently reacquired by the issuing corporation by
purchase, redemption, donation or through some other lawful
means. x x x."
"Section 57. Voting right for treasury shares. – Treasury shares

shall have no voting right as long as such stock remains in the
Treasury."
37 90 ALR 316.
39 R. Lopez, supra note 33 at 965.
41In Noremac, Inc. v. Centre Hill Court, Inc., (178 SE 877, March
14, 1935) the management and control of the corporation
were vested in lot owners who were members of the
corporation, by virtue of their ownership; and the bylaws
provided that a quorum should consist of members
representing a majority of the lots, numbered from 1 to 30,
inclusive; but the number of lots was later reduced to 29 so the
Court said that the majority of members representing actual
number of lots was a quorum.
The landmark case Avelino v. Cuenca (83 Phil. 17, March 4,

1949) can be used by analogy. In that case, the Supreme
Court said that "[t]here is a difference between a majority of "all
the members of the House" and a majority of "the House,"
which requires less number than the first.
In this case, the law refers to the "majority of the members" and
not the "majority of all the members." Thus, we can use the
same reasoning that the "majority of the members" requires a
lesser number than the "majority of all the members."
42See the Decision dated June 21, 2000, SEC Case No. 08-98-
6065, pp. 3-4; rollo, pp. 41-42.
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43 R. Lopez, supra note 33 at 973.
44SEC Letter-Opinion to Ms. Rosevelinda E. Calingasan, et al.,
(R. Lopez) May 14, 1993; Corporation Code, Sec. 55.
46See Petition, p. 11 (citing Art. III, Amended By-Laws of GCHS
on Termination of Membership); rollo, p. 20.
47Excluding Atty. Antonio C. Pacis (proxy for Anita So), who left
the meeting in protest of the alleged lack of quorum.
48SEC Letter-Opinion to Mr. Noe S. Andaya (R. Lopez)
September 20, 1990.
50Article III (2), By-laws of GCHS (cited in the Decision dated
June 21, 2000, SEC Case No. 08-98-6065, p. 6); rollo, p. 43.
G.R. No. 153468 August 17, 2006
Lessons Applicable: Release from Subscription Obligation (Corporate

Law)
FACTS:
 Grace Christian High School (GCHS) is a nonstock, non-profit

educational corporation w/ 15 regular members, who also
constitute the board of trustees.
 April 6, 1998: During the annual members’ meeting only 11 living

member-trustees, as 4 had already died.
o 7 attended the meeting through their respective proxies.
o The meeting was convened and chaired by Atty. Sabino

Padilla Jr. over the objection of Atty. Antonio C. Pacis,
who argued that there was no quorum.
o In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo,

Virginia Khoo, and Judith Tan were voted to replace the 4
deceased member-trustees.

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 SEC: meeting void due to lack of quorum (NOT living but based
on AIC)
o Sec 24 read together with Sec 89
 CA: Dismissed due to technicalities
ISSUE: W/N dead members should still be counted in the quorum -

NO based on by-laws
HELD: NO. remaining members of the board of trustees of GCHS may

convene and fill up the vacancies in the board
 Except as provided, the vote necessary to approve a particular

corporate act as provided in this Code shall be deemed to
refer only to stocks with voting rights:
o 1. Amendment of the articles of incorporation;
o 2. Adoption and amendment of by-laws;
o 3. Sale, lease, exchange, mortgage, pledge or other

disposition of all or substantially all of the corporation
property;
o 4. Incurring, creating or increasing bonded indebtedness;
o 5. Increase or decrease of capital stock;
o 6. Merger or consolidation of the corporation with another

corporation or other corporations;
o 7. Investment of corporate funds in another corporation or

business in accordance with this Code; and
o 8. Dissolution of the corporation.
 quorum in a members’ meeting is to be reckoned as the actual

number of members of the corporation
 stock corporations - shareholders may generally transfer their

shares
o on the death of a shareholder, the executor or

administrator duly appointed by the Court is vested with
the legal title to the stock and entitled to vote it
o Until a settlement and division of the estate is effected,

the stocks of the decedent are held by the administrator
or executor

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 nonstock corporation - personal and non-transferable unless
the articles of incorporation or the bylaws of the corporation
provide otherwise
o Section 91 of the Corporation Code: termination

extinguishes all the rights of a member of the corporation,
unless otherwise provided in the articles of incorporation
or the bylaws.
o whether or not "dead members" are entitled to exercise

their voting rights (through their executor or administrator),
depends on those articles of incorporation or bylaws
 By-Laws of GCHS: membership in the corporation

shall be terminated by the death of the member
 With 11 remaining members, the quorum = 6.
 SECTION 29. Vacancies in the office of director or trustee. -- Any

vacancy occurring in the board of directors or trustees other
than by removal by the stockholders or members or by
expiration of term, may be filled by the vote of at least a
majority of the remaining directors or trustees, if still constituting
a quorum; otherwise, said vacancies must be filled by the
stockholders in a regular or special meeting called for that
purpose. A director or trustee so elected to fill a vacancy shall
be elected only for the unexpired term of his predecessor in
office.
o the filling of vacancies in the board by the remaining

directors or trustees constituting a quorum is merely
permissive, not mandatory
 either by the remaining directors constituting a

quorum, or by the stockholders or members in a
regular or special meeting called for the purpose
 By-Laws of GCHS prescribed the specific mode

of filling up existing vacancies in its board of
directors; that is, by a majority vote of the
remaining members of the board
 remaining member-trustees must sit as a board

(as a body in a lawful meeting)
in order to validly elect the new ones

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Expertravel & Tours vs. CA (459 SCRA 147 [2005])
G.R. No. 152392 May 26, 2005
EXPERTRAVEL & TOURS, INC., petitioner,

vs.
COURT OF APPEALS and KOREAN AIRLINES, respondent.
DECISION
CALLEJO, SR., J.:
Before us is a petition for review on certiorari of the Decision1 of the

Court of Appeals (CA) in CA-G.R. SP No. 61000 dismissing the petition
for certiorari and mandamus filed by Expertravel and Tours, Inc. (ETI).
The Antecedents
Korean Airlines (KAL) is a corporation established and registered in

the Republic of South Korea and licensed to do business in the
Philippines. Its general manager in the Philippines is Suk Kyoo Kim,
while its appointed counsel was Atty. Mario Aguinaldo and his law
firm.
On September 6, 1999, KAL, through Atty. Aguinaldo, filed a

Complaint2 against ETI with the Regional Trial Court (RTC) of Manila,
for the collection of the principal amount of P260,150.00, plus
attorney’s fees and exemplary damages. The verification and
certification against forum shopping was signed by Atty. Aguinaldo,
who indicated therein that he was the resident agent and legal
counsel of KAL and had caused the preparation of the complaint.
ETI filed a motion to dismiss the complaint on the ground that Atty.
Aguinaldo was not authorized to execute the verification and
certificate of non-forum shopping as required by Section 5, Rule 7 of
the Rules of Court. KAL opposed the motion, contending that Atty.
Aguinaldo was its resident agent and was registered as such with the
Securities and Exchange Commission (SEC) as required by the
Corporation Code of the Philippines. It was further alleged that Atty.
Aguinaldo was also the corporate secretary of KAL. Appended to
the said opposition was the identification card of Atty. Aguinaldo,
showing that he was the lawyer of KAL.
During the hearing of January 28, 2000, Atty. Aguinaldo claimed that
he had been authorized to file the complaint through a resolution of
the KAL Board of Directors approved during a special meeting held

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on June 25, 1999. Upon his motion, KAL was given a period of 10
days within which to submit a copy of the said resolution. The trial
court granted the motion. Atty. Aguinaldo subsequently filed other
similar motions, which the trial court granted.
Finally, KAL submitted on March 6, 2000 an Affidavit3 of even date,

executed by its general manager Suk Kyoo Kim, alleging that the
board of directors conducted a special teleconference on June 25,
1999, which he and Atty. Aguinaldo attended. It was also averred
that in that same teleconference, the board of directors approved a
resolution authorizing Atty. Aguinaldo to execute the certificate of
non-forum shopping and to file the complaint. Suk Kyoo Kim also
alleged, however, that the corporation had no written copy of the
aforesaid resolution.
On April 12, 2000, the trial court issued an Order4 denying the motion
to dismiss, giving credence to the claims of Atty. Aguinaldo and Suk
Kyoo Kim that the KAL Board of Directors indeed conducted a
teleconference on June 25, 1999, during which it approved a
resolution as quoted in the submitted affidavit.
ETI filed a motion for the reconsideration of the Order, contending

that it was inappropriate for the court to take judicial notice of the
said teleconference without any prior hearing. The trial court denied
the motion in its Order5 dated August 8, 2000.
ETI then filed a petition for certiorari and mandamus, assailing the
orders of the RTC. In its comment on the petition, KAL appended a
certificate signed by Atty. Aguinaldo dated January 10, 2000,
worded as follows:
SECRETARY’S/RESIDENT AGENT’S CERTIFICATE
I, Mario A. Aguinaldo, of legal age, Filipino, and duly elected

and appointed Corporate Secretary and Resident Agent of
KOREAN AIRLINES, a foreign corporation duly organized and
existing under and by virtue of the laws of the Republic of
Korea and also duly registered and authorized to do business in
the Philippines, with office address at Ground Floor, LPL Plaza
Building, 124 Alfaro St., Salcedo Village, Makati City, HEREBY
CERTIFY that during a special meeting of the Board of Directors
of the Corporation held on June 25, 1999 at which a quorum
was present, the said Board unanimously passed, voted upon
and approved the following resolution which is now in full force
and effect, to wit:

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RESOLVED, that Mario A. Aguinaldo and his law firm M.A.
Aguinaldo & Associates or any of its lawyers are hereby
appointed and authorized to take with whatever legal
action necessary to effect the collection of the unpaid
account of Expert Travel & Tours. They are hereby
specifically authorized to prosecute, litigate, defend, sign
and execute any document or paper necessary to the
filing and prosecution of said claim in Court, attend the
Pre-Trial Proceedings and enter into a compromise
agreement relative to the above-mentioned claim.
IN WITNESS WHEREOF, I have hereunto affixed my signature this

10th day of January, 1999, in the City of Manila, Philippines.
(Sgd.)
MARIO A. AGUINALDO
Resident Agent
SUBSCRIBED AND SWORN to before me this 10th day of January,

1999, Atty. Mario A. Aguinaldo exhibiting to me his Community
Tax Certificate No. 14914545, issued on January 7, 2000 at
Manila, Philippines.
Doc. No. 119; (Sgd.)

Page No. 25; ATTY. HENRY D. ADASA
Book No. XXIV Notary Public
Series of 2000. Until December 31, 2000
PTR #889583/MLA 1/3/20006
On December 18, 2001, the CA rendered judgment dismissing the

petition, ruling that the verification and certificate of non-forum
shopping executed by Atty. Aguinaldo was sufficient compliance
with the Rules of Court. According to the appellate court, Atty.
Aguinaldo had been duly authorized by the board resolution
approved on June 25, 1999, and was the resident agent of KAL. As
such, the RTC could not be faulted for taking judicial notice of the
said teleconference of the KAL Board of Directors.
ETI filed a motion for reconsideration of the said decision, which the
CA denied. Thus, ETI, now the petitioner, comes to the Court by way
of petition for review on certiorari and raises the following issue:
DID PUBLIC RESPONDENT COURT OF APPEALS DEPART FROM THE

ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS
WHEN IT RENDERED ITS QUESTIONED DECISION AND WHEN IT

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ISSUED ITS QUESTIONED RESOLUTION, ANNEXES A AND B OF THE
INSTANT PETITION?7
The petitioner asserts that compliance with Section 5, Rule 7, of the

Rules of Court can be determined only from the contents of the
complaint and not by documents or pleadings outside thereof.
Hence, the trial court committed grave abuse of discretion
amounting to excess of jurisdiction, and the CA erred in considering
the affidavit of the respondent’s general manager, as well as the
Secretary’s/Resident Agent’s Certification and the resolution of the
board of directors contained therein, as proof of compliance with
the requirements of Section 5, Rule 7 of the Rules of Court. The
petitioner also maintains that the RTC cannot take judicial notice of
the said teleconference without prior hearing, nor any motion
therefor. The petitioner reiterates its submission that the
teleconference and the resolution adverted to by the respondent
was a mere fabrication.
The respondent, for its part, avers that the issue of whether modern
technology is used in the field of business is a factual issue; hence,
cannot be raised in a petition for review on certiorari under Rule 45
of the Rules of Court. On the merits of the petition, it insists that Atty.
Aguinaldo, as the resident agent and corporate secretary, is
authorized to sign and execute the certificate of non-forum
shopping required by Section 5, Rule 7 of the Rules of Court, on top
of the board resolution approved during the teleconference of June
25, 1999. The respondent insists that "technological advances in this
time and age are as commonplace as daybreak." Hence, the courts
may take judicial notice that the Philippine Long Distance Telephone
Company, Inc. had provided a record of corporate conferences
and meetings through FiberNet using fiber-optic transmission
technology, and that such technology facilitates voice and image
transmission with ease; this makes constant communication between
a foreign-based office and its Philippine-based branches faster and
easier, allowing for cost-cutting in terms of travel concerns. It points
out that even the E-Commerce Law has recognized this modern
technology. The respondent posits that the courts are aware of this
development in technology; hence, may take judicial notice thereof
without need of hearings. Even if such hearing is required, the
requirement is nevertheless satisfied if a party is allowed to file
pleadings by way of comment or opposition thereto.
In its reply, the petitioner pointed out that there are no rulings on the
matter of teleconferencing as a means of conducting meetings of
board of directors for purposes of passing a resolution; until and after
teleconferencing is recognized as a legitimate means of gathering a
quorum of board of directors, such cannot be taken judicial notice
of by the court. It asserts that safeguards must first be set up to

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prevent any mischief on the public or to protect the general public
from any possible fraud. It further proposes possible amendments to
the Corporation Code to give recognition to such manner of board
meetings to transact business for the corporation, or other related
corporate matters; until then, the petitioner asserts, teleconferencing
cannot be the subject of judicial notice.
The petitioner further avers that the supposed holding of a special

meeting on June 25, 1999 through teleconferencing where Atty.
Aguinaldo was supposedly given such an authority is a farce,
considering that there was no mention of where it was held, whether
in this country or elsewhere. It insists that the Corporation Code
requires board resolutions of corporations to be submitted to the
SEC. Even assuming that there was such a teleconference, it would
be against the provisions of the Corporation Code not to have any
record thereof.
The petitioner insists that the teleconference and resolution adverted

to by the respondent in its pleadings were mere fabrications foisted
by the respondent and its counsel on the RTC, the CA and this Court.
Section 5, Rule 7 of the Rules of Court provides:
SEC. 5. Certification against forum shopping.— The plaintiff or

principal party shall certify under oath in the complaint or other
initiatory pleading asserting a claim for relief, or in a sworn
certification annexed thereto and simultaneously filed
therewith: (a) that he has not theretofore commenced any
action or filed any claim involving the same issues in any court,
tribunal or quasi-judicial agency and, to the best of his
knowledge, no such other action or claim is pending therein;
(b) if there is such other pending action or claim, a complete
statement of the present status thereof; and (c) if he should
thereafter learn that the same or similar action or claim has
been filed or is pending, he shall report that fact within five (5)
days therefrom to the court wherein his aforesaid complaint or
initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be

curable by mere amendment of the complaint or other
initiatory pleading but shall be cause for the dismissal of the
case without prejudice, unless otherwise provided, upon
motion and after hearing. The submission of a false certification
or non-compliance with any of the undertakings therein shall
constitute indirect contempt of court, without prejudice to the
corresponding administrative and criminal actions. If the acts of
the party or his counsel clearly constitute willful and deliberate
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forum shopping, the same shall be ground for summary
dismissal with prejudice and shall constitute direct contempt, as
well as a cause for administrative sanctions.
It is settled that the requirement to file a certificate of non-forum

shopping is mandatory8 and that the failure to comply with this
requirement cannot be excused. The certification is a peculiar and
personal responsibility of the party, an assurance given to the court
or other tribunal that there are no other pending cases involving
basically the same parties, issues and causes of action. Hence, the
certification must be accomplished by the party himself because he
has actual knowledge of whether or not he has initiated similar
actions or proceedings in different courts or tribunals. Even his
counsel may be unaware of such facts.9 Hence, the requisite
certification executed by the plaintiff’s counsel will not suffice.10
In a case where the plaintiff is a private corporation, the certification

may be signed, for and on behalf of the said corporation, by a
specifically authorized person, including its retained counsel, who
has personal knowledge of the facts required to be established by
the documents. The reason was explained by the Court in National
Steel Corporation v. Court of Appeals,11 as follows:
Unlike natural persons, corporations may perform physical

actions only through properly delegated individuals; namely, its
officers and/or agents.
The corporation, such as the petitioner, has no powers except

those expressly conferred on it by the Corporation Code and
those that are implied by or are incidental to its existence. In
turn, a corporation exercises said powers through its board of
directors and/or its duly-authorized officers and agents. Physical
acts, like the signing of documents, can be performed only by
natural persons duly-authorized for the purpose by corporate
by-laws or by specific act of the board of directors. "All acts
within the powers of a corporation may be performed by
agents of its selection; and except so far as limitations or
restrictions which may be imposed by special charter, by-law,
or statutory provisions, the same general principles of law which
govern the relation of agency for a natural person govern the
officer or agent of a corporation, of whatever status or rank, in
respect to his power to act for the corporation; and agents
once appointed, or members acting in their stead, are subject
to the same rules, liabilities and incapacities as are agents of
individuals and private persons."
…
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… For who else knows of the circumstances required in the
Certificate but its own retained counsel. Its regular officers, like
its board chairman and president, may not even know the
details required therein.
Indeed, the certificate of non-forum shopping may be incorporated

in the complaint or appended thereto as an integral part of the
complaint. The rule is that compliance with the rule after the filing of
the complaint, or the dismissal of a complaint based on its non-
compliance with the rule, is impermissible. However, in exceptional
circumstances, the court may allow subsequent compliance with
the rule.12 If the authority of a party’s counsel to execute a
certificate of non-forum shopping is disputed by the adverse party,
the former is required to show proof of such authority or
representation.
In this case, the petitioner, as the defendant in the RTC, assailed the
authority of Atty. Aguinaldo to execute the requisite verification and
certificate of non-forum shopping as the resident agent and counsel
of the respondent. It was, thus, incumbent upon the respondent, as
the plaintiff, to allege and establish that Atty. Aguinaldo had such
authority to execute the requisite verification and certification for
and in its behalf. The respondent, however, failed to do so.
The verification and certificate of non-forum shopping which was

incorporated in the complaint and signed by Atty. Aguinaldo reads:
I, Mario A. Aguinaldo of legal age, Filipino, with office address

at Suite 210 Gedisco Centre, 1564 A. Mabini cor. P. Gil Sts.,
Ermita, Manila, after having sworn to in accordance with law
hereby deposes and say: THAT -
1. I am the Resident Agent and Legal Counsel of the plaintiff in

the above entitled case and have caused the preparation of
the above complaint;
2. I have read the complaint and that all the allegations

contained therein are true and correct based on the records
on files;
3. I hereby further certify that I have not commenced any other

action or proceeding involving the same issues in the Supreme
Court, the Court of Appeals, or different divisions thereof, or any
other tribunal or agency. If I subsequently learned that a similar
action or proceeding has been filed or is pending before the
Supreme Court, the Court of Appeals, or different divisions
thereof, or any tribunal or agency, I will notify the court, tribunal
or agency within five (5) days from such notice/knowledge.

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(Sgd.)
MARIO A. AGUINALDO
Affiant
CITY OF MANILA
SUBSCRIBED AND SWORN TO before me this 30th day of August,

1999, affiant exhibiting to me his Community Tax Certificate No.
00671047 issued on January 7, 1999 at Manila, Philippines.
Doc. No. 1005; (Sgd.)

Page No. 198;
Book No. XXI ATTY. HENRY D. ADASA
Series of 1999. Notary Public
Until December 31, 2000
PTR No. 320501 Mla.
1/4/9913
As gleaned from the aforequoted certification, there was no

allegation that Atty. Aguinaldo had been authorized to execute the
certificate of non-forum shopping by the respondent’s Board of
Directors; moreover, no such board resolution was appended
thereto or incorporated therein.
While Atty. Aguinaldo is the resident agent of the respondent in the

Philippines, this does not mean that he is authorized to execute the
requisite certification against forum shopping. Under Section 127, in
relation to Section 128 of the Corporation Code, the authority of the
resident agent of a foreign corporation with license to do business in
the Philippines is to receive, for and in behalf of the foreign
corporation, services and other legal processes in all actions and
other legal proceedings against such corporation, thus:
SEC. 127. Who may be a resident agent. – A resident agent

may either be an individual residing in the Philippines or a
domestic corporation lawfully transacting business in the
Philippines: Provided, That in the case of an individual, he must
be of good moral character and of sound financial standing.
SEC. 128. Resident agent; service of process. – The Securities

and Exchange Commission shall require as a condition
precedent to the issuance of the license to transact business in
the Philippines by any foreign corporation that such
corporation file with the Securities and Exchange Commission a
written power of attorney designating some persons who must
be a resident of the Philippines, on whom any summons and
other legal processes may be served in all actions or other legal

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proceedings against such corporation, and consenting that
service upon such resident agent shall be admitted and held
as valid as if served upon the duly-authorized officers of the
foreign corporation as its home office.14
Under the law, Atty. Aguinaldo was not specifically authorized to

execute a certificate of non-forum shopping as required by Section
5, Rule 7 of the Rules of Court. This is because while a resident agent
may be aware of actions filed against his principal (a foreign
corporation doing business in the Philippines), such resident may not
be aware of actions initiated by its principal, whether in the
Philippines against a domestic corporation or private individual, or in
the country where such corporation was organized and registered,
against a Philippine registered corporation or a Filipino citizen.
The respondent knew that its counsel, Atty. Aguinaldo, as its resident
agent, was not specifically authorized to execute the said
certification. It attempted to show its compliance with the rule
subsequent to the filing of its complaint by submitting, on March 6,
2000, a resolution purporting to have been approved by its Board of
Directors during a teleconference held on June 25, 1999, allegedly
with Atty. Aguinaldo and Suk Kyoo Kim in attendance. However,
such attempt of the respondent casts veritable doubt not only on its
claim that such a teleconference was held, but also on the approval
by the Board of Directors of the resolution authorizing Atty.
Aguinaldo to execute the certificate of non-forum shopping.
In its April 12, 2000 Order, the RTC took judicial notice that because
of the onset of modern technology, persons in one location may
confer with other persons in other places, and, based on the said
premise, concluded that Suk Kyoo Kim and Atty. Aguinaldo had a
teleconference with the respondent’s Board of Directors in South
Korea on June 25, 1999. The CA, likewise, gave credence to the
respondent’s claim that such a teleconference took place, as
contained in the affidavit of Suk Kyoo Kim, as well as Atty.
Aguinaldo’s certification.
Generally speaking, matters of judicial notice have three material

requisites: (1) the matter must be one of common and general
knowledge; (2) it must be well and authoritatively settled and not
doubtful or uncertain; and (3) it must be known to be within the limits
of the jurisdiction of the court. The principal guide in determining
what facts may be assumed to be judicially known is that of
notoriety. Hence, it can be said that judicial notice is limited to facts
evidenced by public records and facts of general notoriety.[15]
Moreover, a judicially noticed fact must be one not subject to a
reasonable dispute in that it is either: (1) generally known within the
territorial jurisdiction of the trial court; or (2) capable of accurate and

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ready determination by resorting to sources whose accuracy cannot
reasonably be questionable.16
Things of "common knowledge," of which courts take judicial matters

coming to the knowledge of men generally in the course of the
ordinary experiences of life, or they may be matters which are
generally accepted by mankind as true and are capable of ready
and unquestioned demonstration. Thus, facts which are universally
known, and which may be found in encyclopedias, dictionaries or
other publications, are judicially noticed, provided, they are of such
universal notoriety and so generally understood that they may be
regarded as forming part of the common knowledge of every
person. As the common knowledge of man ranges far and wide, a
wide variety of particular facts have been judicially noticed as being
matters of common knowledge. But a court cannot take judicial
notice of any fact which, in part, is dependent on the existence or
non-existence of a fact of which the court has no constructive
knowledge.17
In this age of modern technology, the courts may take judicial

notice that business transactions may be made by individuals
through teleconferencing. Teleconferencing is interactive group
communication (three or more people in two or more locations)
through an electronic medium. In general terms, teleconferencing
can bring people together under one roof even though they are
separated by hundreds of miles.18 This type of group communication
may be used in a number of ways, and have three basic types: (1)
video conferencing - television-like communication augmented with
sound; (2) computer conferencing - printed communication through
keyboard terminals, and (3) audio-conferencing-verbal
communication via the telephone with optional capacity for
telewriting or telecopying.19
A teleconference represents a unique alternative to face-to-face

(FTF) meetings. It was first introduced in the 1960’s with American
Telephone and Telegraph’s Picturephone. At that time, however, no
demand existed for the new technology. Travel costs were
reasonable and consumers were unwilling to pay the monthly
service charge for using the picturephone, which was regarded as
more of a novelty than as an actual means for everyday
communication.20 In time, people found it advantageous to hold
teleconferencing in the course of business and corporate
governance, because of the money saved, among other
advantages include:
1. People (including outside guest speakers) who wouldn’t

normally attend a distant FTF meeting can participate.

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2. Follow-up to earlier meetings can be done with relative ease
and little expense.
3. Socializing is minimal compared to an FTF meeting; therefore,

meetings are shorter and more oriented to the primary purpose
of the meeting.
4. Some routine meetings are more effective since one can

audio-conference from any location equipped with a
telephone.
5. Communication between the home office and field staffs is

maximized.
6. Severe climate and/or unreliable transportation may

necessitate teleconferencing.
7. Participants are generally better prepared than for FTF

meetings.
8. It is particularly satisfactory for simple problem-solving,

information exchange, and procedural tasks.
9. Group members participate more equally in well-moderated

teleconferences than an FTF meeting.21
On the other hand, other private corporations opt not to hold

teleconferences because of the following disadvantages:
1. Technical failures with equipment, including connections that

aren’t made.
2. Unsatisfactory for complex interpersonal communication,

such as negotiation or bargaining.
3. Impersonal, less easy to create an atmosphere of group

rapport.
4. Lack of participant familiarity with the equipment, the

medium itself, and meeting skills.
5. Acoustical problems within the teleconferencing rooms.
6. Difficulty in determining participant speaking order;

frequently one person monopolizes the meeting.
7. Greater participant preparation time needed.
8. Informal, one-to-one, social interaction not possible.22

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Indeed, teleconferencing can only facilitate the linking of people; it
does not alter the complexity of group communication. Although it
may be easier to communicate via teleconferencing, it may also be
easier to miscommunicate. Teleconferencing cannot satisfy the
individual needs of every type of meeting.23
In the Philippines, teleconferencing and videoconferencing of

members of board of directors of private corporations is a reality, in
light of Republic Act No. 8792. The Securities and Exchange
Commission issued SEC Memorandum Circular No. 15, on November
30, 2001, providing the guidelines to be complied with related to
such conferences.24 Thus, the Court agrees with the RTC that persons
in the Philippines may have a teleconference with a group of
persons in South Korea relating to business transactions or corporate
governance.
Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim
participated in a teleconference along with the respondent’s Board
of Directors, the Court is not convinced that one was conducted;
even if there had been one, the Court is not inclined to believe that
a board resolution was duly passed specifically authorizing Atty.
Aguinaldo to file the complaint and execute the required
certification against forum shopping.
The records show that the petitioner filed a motion to dismiss the
complaint on the ground that the respondent failed to comply with
Section 5, Rule 7 of the Rules of Court. The respondent opposed the
motion on December 1, 1999, on its contention that Atty. Aguinaldo,
its resident agent, was duly authorized to sue in its behalf. The
respondent, however, failed to establish its claim that Atty.
Aguinaldo was its resident agent in the Philippines. Even the
identification card25 of Atty. Aguinaldo which the respondent
appended to its pleading merely showed that he is the company
lawyer of the respondent’s Manila Regional Office.
The respondent, through Atty. Aguinaldo, announced the holding of

the teleconference only during the hearing of January 28, 2000; Atty.
Aguinaldo then prayed for ten days, or until February 8, 2000, within
which to submit the board resolution purportedly authorizing him to
file the complaint and execute the required certification against
forum shopping. The court granted the motion.26 The respondent,
however, failed to comply, and instead prayed for 15 more days to
submit the said resolution, contending that it was with its main office
in Korea. The court granted the motion per its Order27 dated
February 11, 2000. The respondent again prayed for an extension
within which to submit the said resolution, until March 6, 2000.28 It was
on the said date that the respondent submitted an affidavit of its
general manager Suk Kyoo Kim, stating, inter alia, that he and Atty.

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Aguinaldo attended the said teleconference on June 25, 1999,
where the Board of Directors supposedly approved the following
resolution:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A.

Aguinaldo & Associates or any of its lawyers are hereby
appointed and authorized to take with whatever legal action
necessary to effect the collection of the unpaid account of
Expert Travel & Tours. They are hereby specifically authorized to
prosecute, litigate, defend, sign and execute any document or
paper necessary to the filing and prosecution of said claim in
Court, attend the Pre-trial Proceedings and enter into a
compromise agreement relative to the above-mentioned
claim.29
But then, in the same affidavit, Suk Kyoo Kim declared that the
respondent "do[es] not keep a written copy of the aforesaid
Resolution" because no records of board resolutions approved
during teleconferences were kept. This belied the respondent’s
earlier allegation in its February 10, 2000 motion for extension of time
to submit the questioned resolution that it was in the custody of its
main office in Korea. The respondent gave the trial court the
impression that it needed time to secure a copy of the resolution
kept in Korea, only to allege later (via the affidavit of Suk Kyoo Kim)
that it had no such written copy. Moreover, Suk Kyoo Kim stated in
his affidavit that the resolution was embodied in the
Secretary’s/Resident Agent’s Certificate signed by Atty. Aguinaldo.
However, no such resolution was appended to the said certificate.
The respondent’s allegation that its board of directors conducted a

teleconference on June 25, 1999 and approved the said resolution
(with Atty. Aguinaldo in attendance) is incredible, given the
additional fact that no such allegation was made in the complaint. If
the resolution had indeed been approved on June 25, 1999, long
before the complaint was filed, the respondent should have
incorporated it in its complaint, or at least appended a copy
thereof. The respondent failed to do so. It was only on January 28,
2000 that the respondent claimed, for the first time, that there was
such a meeting of the Board of Directors held on June 25, 1999; it
even represented to the Court that a copy of its resolution was with
its main office in Korea, only to allege later that no written copy
existed. It was only on March 6, 2000 that the respondent alleged, for
the first time, that the meeting of the Board of Directors where the
resolution was approved was held via teleconference.
Worse still, it appears that as early as January 10, 1999, Atty.

Aguinaldo had signed a Secretary’s/Resident Agent’s Certificate
alleging that the board of directors held a teleconference on June

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25, 1999. No such certificate was appended to the complaint, which
was filed on September 6, 1999. More importantly, the respondent
did not explain why the said certificate was signed by Atty.
Aguinaldo as early as January 9, 1999, and yet was notarized one
year later (on January 10, 2000); it also did not explain its failure to
append the said certificate to the complaint, as well as to its
Compliance dated March 6, 2000. It was only on January 26, 2001
when the respondent filed its comment in the CA that it submitted
the Secretary’s/Resident Agent’s Certificate30 dated January 10,
2000.
The Court is, thus, more inclined to believe that the alleged
teleconference on June 25, 1999 never took place, and that the
resolution allegedly approved by the respondent’s Board of Directors
during the said teleconference was a mere concoction purposefully
foisted on the RTC, the CA and this Court, to avert the dismissal of its
complaint against the petitioner.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The

Decision of the Court of Appeals in CA-G.R. SP No. 61000 is REVERSED
and SET ASIDE. The Regional Trial Court of Manila is hereby ORDERED
to dismiss, without prejudice, the complaint of the respondent.
SO ORDERED.
Puno, Acting C.J., (Chairman), Austria-Martinez, and Chico-Nazario,

JJ., concur.
Tinga, J., out of the country.
Footnotes
1Penned by Associate Justice Elvi John S. Asuncion, with
Associate Justices Romeo A. Brawner (now Presiding Justice)
and Juan Q. Enriquez, Jr., concurring; Rollo, pp. 27-30.
2 Rollo, pp. 53-56.
3 Rollo, p. 109.
4 Id. at 47-50.
5 Rollo, pp. 51-52.
6 Rollo, p. 108.
7 Id. at 18.

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8Melo v. Court of Appeals, G.R. No. 123686, 16 November 1999,
318 SCRA 94.
9Digital Microwave Corporation v. Court of Appeals, G.R. No.
128550, 16 March 2000, 328 SCRA 286.
10United Residents Dominican Hill, Inc. v. COSLAP, G.R. No.
135945, 7 March 2001, 353 SCRA 782.
11 G.R. No. 134468, 29 August 2002, 388 SCRA 85.
12Uy v. Land Bank of the Philippines, G.R. No. 136100, 24 July
2000, 336 SCRA 419; and National Steel Corporation v. Court of
Appeals, supra.
13 Rollo, pp. 55-56.
14These provisions are the basis of Section 12, Rule 14 of the
Rules of Court, which reads:
SEC. 12. Service upon foreign private juridical entity. –

When the defendant is a foreign private juridical entity
which has transacted business in the Philippines, service
may be made on its resident agent designated in
accordance with law for that purpose, or, if there be no
such agent, on the government official designated by law
to that effect, or on any of its officers or agents within the
Philippines.
15State Prosecutors v. Muro, A.M. No. RTJ-92-876, 19 September
1994, 236 SCRA 505.
16 Wood v. Astleford, 412 N.W. 2d 753 (1987).
17 Trepanier v. Toledo & D. C. Ry, Co., 130 N.E. 558.
18 J. Carroll, Teleconferencing, CIX Dun’s Business Month, 1
(1982), pp. 130-34, cited in R. Rogan and G. Simons,
Teleconferencing, 22 Journal of Extensions 5, 20 (September
1984) available at http:// joe.org/joe/1984 September/a4 html.
(last visited 20 May 2005).
19 Ibid.
20R. Johansen, J. Vallee, and K. Spangler, Electronic Meetings:
Utopian Dreams and Complex Realities, The Futurist, XII (No. 5,
1978), 313-19, supra.
21J. Bartlett, Interesting Highlights of the Growing
Teleconferencing Boom, XVII Communication News 12 (1980),

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42; Sonneville, Teleconferencing Enters Its Growth Stage; Stu
Sutherland, Extension Teleconferencing in the 1980’s, LII
Extension Service Review 2 (1981), 12-16; L. Parker, M. Baird, and
M. Monson, Introduction to Teleconferencing (Madison:
University of Wisconsin-Extension, Center for Interactive
Programs, 1982); and Rogan and others, Audioconferencing,
supra.
22Johansen, Vallee, and Spangler, Electronic Meetings; Parker,
Baird, and Monson, Introduction to Teleconferencing; Rogan
and others, Audioconferencing; and Sonneville,
Teleconferencing Enters its Growth Stage, supra.
23 Ibid.
24The Court also approved the Rule on Examination of a child
witness which allows live-link television testimony in criminal
cases where the child is a victim or a witness (Section 25),
which took effect on December 15, 2000.
The early applications of videoconferencing in the States

in the United States courts primarily focused on video
arraignments and probable cause hearings. As courts
began to appreciate the costs savings and the
decreased security risks of the technology, other uses
became apparent. Videoconferencing is an effective
tool for parole interviews, juvenile detention hearings,
mental health hearings, domestic violence hearings,
pretrial conferences, remote witness testimony, and
depositions—to name a few. The technology will prove
even more valuable in an age of international terrorist
trials with witnesses from around the world.
Videoconferencing has become quite commonplace in
State Courts per the Report. The last comprehensive
report: "Use of Interactive Video for Court Proceedings:
Legal Status and Use Nationwide." Published in 1995, by
the National Institute of Corrections, is that
videoconferencing is used in 50 states in the United States
of America.
25 Rollo, p. 68.
26 Id. at 86.
27 Id. at 87.
28 Rollo, pp. 90-91.
29 Id. at 93.

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30 Rollo, p. 108.
EXPERTRAVEL & TOURS, INC. (ETI) vs. CA and KOREAN AIRLINES (KAL)
Facts:
KAL, through Atty. Aguinaldo, filed a complaintfor collection of sum

of money against ETI with the RTC. The verification and certification
against forum shopping was signed by Atty. Aguinaldo, who
indicated therein that he was the resident agent and legal counsel
of KAL and had caused the preparation of the complaint.
Aguinaldo has no authority to execute the said verification and
certificate of non-forum shopping and to file the complaint.
KAL opposed ETI’s motion. It alleged thatthe KAL’s board of directors,

in a teleconference, approved a resolution authorizing Atty.
Aguinaldo to execute the certificate of non-forum shopping and to
file the complaint. Accordingly, the RTC gave credence to the
claims of KAL and denied the motion to dismiss of ETI.
Thus, ETI filed a petition for certiorari and mandamus, assailing the
orders of the RTC. It contended that it was inappropriate for the RTC
to take judicial notice of the said teleconference without any prior
hearing. It also alleged that the teleconference and the resolution
adverted to by KAL was a mere fabrication.
The CA, on the other hand, dismissed the petition of ETI. Hence, ETI
filed a petition for review on certiorari.
In the said petition, ETI pointed out that there are no rulings on the
matter of teleconferencing as a means of conducting meetings of
board of directors for purposes of passing a resolution; until and after
of by the court. It asserts that safeguards must first be set up to
prevent any mischief on the public or to protect the general public

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from any possible fraud. It further proposes possible amendments to
the Corporation Code to give recognition to such manner of board
meetings to transact business for the corporation, or other related
corporate matters; until then, ETI asserts, teleconferencing cannot be
the subject of judicial notice.
ETI further averred that the supposed teleconferencing where Atty.

Aguinaldo was supposedly given such an authority is a farce,
considering that there was no mention of where it was held, whether
in this country or elsewhere. It insists that the Corporation Code
requires board resolutions of corporations to be submitted to the
SEC. Even assuming that there was such a teleconference, it would
be against the provisions of the Corporation Code not to have any
record thereof.
KAL, on the other hand, insisted that "technological advances in this

time and age are as commonplace as daybreak." Hence, the courts
may take judicial notice that the Philippine Long Distance Telephone
Company, Inc. had provided a record of corporate conferences
and meetings through FiberNet using fiber-optic transmission
technology, and that such technology facilitates voice and image
transmission with ease; this makes constant communication between
a foreign-based office and its Philippine-based branches faster and
easier, allowing for cost-cutting in terms of travel concerns. It points
out that even the E-Commerce Law has recognized this modern
technology. KAL posited that the courts are aware of this
development in technology; hence, may take judicial notice thereof
without need of hearings. Even if such hearing is required, the
requirement is nevertheless satisfied if a party is allowed to file
pleadings by way of comment or opposition thereto.
Issue:
Whether or not Atty. Aguinaldo has authority to execute the

verification and certificate of non-forum shopping as required by
Section 5, Rule 7 of the Rules of Court based on the alleged
teleconference among and between KAL’s BOD and Atty.
Aguinaldo.
Ruling:

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The Court ruled that that Atty. Aguinaldo has no authority to execute
the verification and certificate of non-forum shopping as required by
Section 5, Rule 7 of the Rules of Court. While it posited that the courts
may take judicial notice that business transactions may be made by
individuals through teleconferencing,it was more inclined to believe
that the alleged teleconference among and between KAL’s BOD
and Atty. Aguinaldo never took place, and that the resolution
allegedly approved by the KAL's BOD during the said
teleconference was a mere concoction purposefully foisted on the
RTC, the CA and this Court, to avert the dismissal of its complaint
against the ETI due to the circumstances attendant in the case (i.e.
no records of board resolutions approved during teleconferences
were kept).Hence, it granted the petition of ETI and reversed the
decision of the CA. It also ordered the RTC to dismiss KAL’s complaint
for collection of sum of money, without prejudice against ETI.
EXPERTRAVEL & TOURS, INC., petitioner,

vs.
COURT OF APPEALS and KOREAN AIRLINES, respondent.
G.R. No. 152392 May 26, 2005
FACTS:

the Republic of South Korea and licensed to do business in the
Philippines. Its general manager in the Philippines is Suk Kyoo Kim,
while its appointed counsel was Atty. Mario Aguinaldo and his law
firm.
On September 6, 1999, KAL, through Atty. Aguinaldo, filed a

Complaint in RTC for the collection of the principal amount etc.
against Expertravel and Tours, Inc. (ETI). Where the latter sought for
the dismissal of the case, however, private respondent filed the
verification and certification against forum shopping was signed by
Atty. Aguinaldo, who indicated therein that he was the resident
agent and legal counsel of KAL and had caused the preparation of
the complaint where He claimed that he had been authorized to file
the complaint through a resolution of the KAL Board of Directors
approved during a special meeting held on June 25, 1999. KAL also
contended that Atty. Aguinaldo was its resident agent and was

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registered as such with the Securities and Exchange Commission
(SEC). It was further alleged that Atty. Aguinaldo was also the
corporate secretary of KAL, showing that he was the lawyer of KAL.
The petitioner on the other hand, maintains that the RTC cannot take
judicial notice of the said teleconference without prior hearing, nor
any motion therefore. Finally, KAL submitted on March 6, 2000 an
Affidavit of even date, executed by its general manager Suk Kyoo
Kim, alleging that the board of directors conducted a special
teleconference on June 25, 1999, which he and Atty. Aguinaldo
attended. It was also averred that in that same teleconference, the
board of directors approved a resolution authorizing Atty. Aguinaldo
to execute the certificate of non-forum shopping and to file the
complaint. Suk Kyoo Kim also alleged, however, that the corporation
had no written copy of the aforesaid resolution.
But, the petitioner pointed out that there are no rulings on the matter
of teleconferencing as a means of conducting meetings of board of
directors for purposes of passing a resolution; until and after
of by the court. The RTC and CA dismiss the petition, hence this
appeal.
ISSUE: Whether or not teleconferencing is a valid means of holding its

corporate meetings.
HELD:
No. In this age of modern technology, the courts may take judicial
separated by hundreds of miles.

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A teleconference represents a unique alternative to face-to-face
(FTF) meetings. It was first introduced in the 1960’s with American
Telephone and Telegraph’s Picture phone. At that time, however, no
demand existed for the new technology. Travel costs were
reasonable and consumers were unwilling to pay the monthly
service charge for using the picture phone, which was regarded as
more of a novelty than as an actual means for everyday
communication. In time, people found it advantageous to hold
teleconferencing in the course of business and corporate
governance, because of the money saved.
In the Philippines, teleconferencing and videoconferencing of

members of board of directors of private corporations is a reality, in
light of Republic Act No. 8792. The Securities and Exchange
Commission issued SEC Memorandum Circular No. 15, on November
30, 2001, providing the guidelines to be complied with related to
such conferences. Thus, the Court agrees with the RTC that persons
in the Philippines may have a teleconference with a group of
persons in South Korea relating to business transactions or corporate
governance.
Petition Granted.
Expertravel & Tours Inc. vs. Court of Appeals, etc. G.R. No. 152392, 26
May 2005
Facts:

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the Republic of South Korea and has been granted license to do
business in the Philippines. On 6 September 1999, KAL, through its
legal counsel, Atty. Mario Aguinaldo filed a complaint against ETI
with the Regional Trial Court (RTC) of Manila, for the collection of sum
of money totaling PhP260,150.00 plus attorney's fees and exemplary
damages. The complaint was attached with verification and
certificate of non-forum shopping wherein indicated that Atty.
Aguinaldo is the agent and legal counsel of KAL and had caused
the preparation of the said complaint.
Aguinaldo was not authorized to execute the above-mentioned
verification and non-forum shopping as required by Section 5, Rule 7
of the Rules of Court. KAL, thereafter, opposed the motion
contending that Atty. Aguinaldo was its resident agent and was
registered as such with the Securities and Exchange Commission
(SEC). It was also alleged that Atty. Aguinaldo also served as the
company's corporate secretary.
During the hearing, Atty Aguinaldo claimed that he had been

authorized to file the complaint through the resolution approved by
the KAL Board of Directors during a special meeting held on June 25,
1999. Thereafter. KAL submitted an Affidavit executed by its General
Manager Suk Kyoo Kim, alleging that the board of directors
conducted a special teleconference which he and Atty. Aguinaldo
attended. It was also averred that in that Teleconference, the board
of directors approved a resolution authorizing Atty. Aguinaldo to
execute the certificate of non-forum shopping and to file the said
complaint. Furthermore, Su Kyoo Kim alleged that the
corporation had no written copy of the aforesaid resolution.
Trial Court issued an order denying the motion to dismiss, giving

credence to the claims of Atty. Aguinaldo and Su Kyoo Kim. ETI filed
a motion for reconsideration of the said order alleging that it is
inappropriate for the court to take judicial notice of the said
teleconference without any prior hearing.

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CA rendered judgment dismissing the petition and ruling that the
verification and certificate of non-forum shopping executed by Atty.
Aguinaldo was sufficient compliance with the Rules of Court.
Issue:
Is the petitioner correct in assailing that until and after

teleconferencing is recognized as a legitimate means of conducting
meetings, gathering quorum of board of directors, such cannot be
taken judicial notice of by the court.
Held:
It is settled that the requirement to file a certificate of non-forum

shopping is mandatory and that the failure to comply with this
requirement cannot be excused. The certification is a peculiar and
personal responsibility of the party, an assurance given to the court
or other tribunal that there are no other pending cases involving
basically the same parties, issues and causes of action. Hence, the
certification must be accomplished by the party himself because he
has actual knowledge of whether or not he has initiated similar
actions or proceedings in different courts or tribunals. Even his
counsel may be unaware of such facts. Hence, the requisite
certification executed by the plaintiff’s counsel will not suffice.
In a case where the plaintiff is a private corporation, the certification

may be signed, for and on behalf of the said corporation, by a
specifically authorized person, including its retained counsel, who
has personal knowledge of the facts required to be established by
the documents.

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Generally speaking, matters of judicial notice have three material
requisites:
(1) the matter must be one of common and general knowledge;
(2) it must be well and authoritatively settled and not doubtful or

uncertain; and
(3) it must be known to be within the limits of the jurisdiction of the

court.
The principal guide in determining what facts may be assumed to be

judicially known is that of notoriety. Hence, it can be said that
judicial notice is limited to facts evidenced by public records and
facts of general notoriety. Moreover, a judicially noticed fact must
be one not subject to a reasonable dispute in that it is either:
(1) generally known within the territorial jurisdiction of the trial court;
or
(2) capable of accurate and ready determination by resorting to

sources whose accuracy cannot reasonably be questionable.
In this age of modern technology, the courts may take judicial

separated by hundreds of miles.
This type of group communication may be used in a number of

ways, and have three basic types:
(1) video conferencing - television-like communication augmented

with sound;
(2) computer conferencing - printed communication through

keyboard terminals, and
(3) audio-conferencing-verbal communication via the telephone

with optional capacity for telewriting or telecopying.

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The Court agrees with the RTC that persons in the Philippines may
have a teleconference with a group of persons in South Korea
relating to business transactions or corporate governance.
The Court is, thus, more inclined to believe that the alleged
teleconference on June 25, 1999 never took place, and that the
resolution allegedly approved by the respondent’s Board of Directors
during the said teleconference was a mere concoction purposefully
foisted on the RTC, the CA and this Court, to avert the dismissal of its
complaint against the petitioner.
Petition granted.
Central Cooperative Exchange vs. Enciso (162 SCRA 706 [1988])
G.R. No. L-35603 June 28, 1988
CENTRAL COOPERATION EXCHANGE, INC., plaintiff-appellant,

vs.
NICOLAS T. ENCISO, and THE HONORABLE COURT OF APPEALS,
defendant-appellee.
PARAS, J.:
This is a petition for review of the decision of the Court of Appeals *

dated June 20, 1972, affirming the decision of the then Court of First
Instance of Manila, Branch XV, in Civil Case No. 4439, dismissing a
complaint by herein petitioner against herein private respondent to
recover a sum of money received by the latter from the corporation,
while he was serving as member of the Board of Directors of the
Exchange.

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As gathered from the records, the antecedent facts of this case are
as follows:
Petitioner Central Cooperative Exchange, Inc. is the National

Federation of Farmers' Cooperative Marked Association (FACOMA)
in the Philippines. Its single major stockholder is a government entity,
the Agricultural Credit and Cooperative Financing Administration
(ACCFA) now Agricultural Credit Administration (ACA), as
reorganized under the Land Reform Code. Respondent Nicolas T.
Enciso was then member of the Board of Governors of ACCFA and
concurrently a member of petitioner's Board of Directors from August
1, 1958 to January, 1960.
The ACCFA took over the management of the affairs of CCE by

virtue of a resolution of the latter's board of directors and ACCFA
removed the general manager of CCE and on January 22, 1960,
designated Eugenio V. Mendoza, one of ACCFA's staff officers, as
Officer-in-Charge of petitioner corporation (Petition; Rollo, pp. 2-3).
In various meetings, the Board of Directors of the CCE unanimously

adopted the following Resolutions:
(1) May 28, 1958 — Res. No. 41, granting a kilometrage

allowance of P35.00 to every CCE director who uses his
own car in attending Board Meeting (Exh. L, p. 79);
(2) July 8, 1958 — Res. No. 52, appropriating the amount of

P10,000.00 as discretionary fund of the Board of Directors
of the CCE (Exh. G, p. 107-G);
(3) July 10, 1958 — Res. No. 49, granting a commutable

allowance of P200.00 per month to each CCE director,
starting July 1, 1958, in lieu of the regular waiting time per
them and transportation expenses in Manila while
attending regular and special Board Meetings and
committee meetings (Exh. I, p. 115);
(4) July 24, 1958 — Res. No. 57, amending Resolution No.
49 (FY 1958) and granting to each Director a monthly
commutable allowance of P200.00 in lieu of waiting time
per them and commutable transportation allowance of
P20.00 for attending meetings in Manila (Exh- H, p. 124);
(5) June 11, 1959 — Res. No. 39, increasing the monthly
commutable allowance of each CCE Director from
P300.00 to P500.00 per month but cancelling the
authorized per diems and transportation expenses for
FACOMA visitations (Exh. F, p. 75); and

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(6) October 9, 1959 — Res. No. 87, appropriating the sum
of P10,000.00 as commutable discretionary fund of the
Board of Directors (Exh. J, p. 192)."
As shown by the payrolls and petty cash and check vouchers of the
CCE Nicolas T. Enciso, as director of said Exchange, received as
compensation in the form of commutable per diem, per them
Facoma visitations, kilometrage allowance, commutable
discretionary funds and representation expenses in the total amount
of P10,967.85 for the period 1958 to 1960 (CA-G.R. No. 32593-R; Rollo,
p. 19).
On October 22, 1960, CCE filed a complaint with prayer for a writ of
attachment verified by its Officer-in-Charge, against Nicolas T. Enciso
for the recovery of said amount, the same having been collected
and received by Enciso in violation of Section 8, Article V of CCE's By-
Laws, which reads:
Section 8. Compensation. — The compensation, if any,

and the per diems for attendance at meetings of the
members of the Board of Directors shall determined by
the members of any annual meeting or special meeting
of the Exchange called for the purpose." (Ibid.; Rollo, pp.
19-20).
and of the resolution adopted by the stockholders in their annual

meeting on January 31, 1956, that the "members of the board of
Directors attending the CCE (plaintiff) board meetings be entitled to
actual transportation expenses plus the per them of P30.00 and
actual expenses, while waiting." Upon plaintiffs (petitioner herein)
filing of a bond, the lower court issued an Order of Attachment
(Ibid.; Rollo, p. 20).
Otherwise stated petitioner claims it is the stockholders not the board

of directors who can fix the compensation per diem, and
allowances of the members of the Board of Directors.
In his answer, respondent stated that he was a director of petitioner

and that the amount of compensation and per diems of the
directors was fixed by stockholders in their annual meeting. As
affirmative defenses, he averred that: (1) plaintiff corporation has
neither the legal personality to institute the action; nor to question
the legality of the resolutions enacted by the Board of which he is a
member; (2) plaintiff corporation is guilty of laches; (3) that the
stockholders had ratified in their General Annual Meetings the acts
of the Board of Directors, including the collection of the amounts in
question; and (4) under the circumstances, CCE is under estoppel to
seek the refund of the amounts involved in the litigation (Ibid.; Rollo,
p. 20; Petition, Rollo, p. 4).
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After trial, the lower court rendered judgment in favor of defendant
(private respondent herein) and dismissed plaintiff s complaint as
well as defendant's counterclaim with costs against plaintiff (Record
On Appeal, p. 70).
On appeal to the Court of Appeals, the trial court's decision was

affirmed (Rollo, p. 26). Petitioner's motion for reconsideration of the
said decision was denied (Rollo, p. 40).
In the resolution of October 16, 1972, this Court gave due course to
the petition. The brief for the petitioner was filed on November 22,
1972 (Rollo, p. 37), while the brief for the private respondent was filed
on April 27, 1973 (Rollo, p. 53).
The petitioner raises the following issues:
THE LOWER COURT ERRED IN FINDING AND CONCLUDING THAT THE

PRESENT ACTION AS FILED CAN NOT BE DEEMED A CORPORATE ACT
OF APPELLANT CORPORATION AND THAT APPELLANT'S
STOCKHOLDERS HAD NOTHING TO DO WITH THE FILING OF THIS CASE.
II
THE LOWER COURT ERRED IN FINDING AND CONCLUDING THAT THE

VARIOUS RESOLUTIONS OF APPELLANT'S FORMER BOARD OF
DIRECTORS AUTHORIZING AND APPROPRIATING COMPENSATION
AND OR PER DIEMS OR ALLOWANCES FOR THEMSELVES (EXHS. "F", "G",
"H", "I", and "L") ARE NOT VIOLATIVE OF APPELLANT'S BY-LAWS AND THE
MANDATE OF THE STOCKHOLDERS.
III
THE LOWER COURT ERRED IN FINDING AND CONCLUDING THAT

APPELLANT IS UNDER ESTOPPEL TO QUESTION THE AFORESAID BOARD
RESOLUTIONS OR THE PAYMENTS MADE TO APPELLEE THEREUNDER.
IV
THE LOWER COURT ERRED IN FINDING THAT A PREVIOUS DEMAND

UPON APPELLEE IS PREREQUISITE FOR THE INSTITUTION OF THIS ACTION.
The main issue in this case is whether or not the said of directors of
the petitioner had the power and authority to adopt the resolutions
above-enumerated which appropriated finds of the corporation for
per diems, transportation allowance and discretionary funds for the
members of its Board of Directors.

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The petitioner contends that the resolutions in question enacted by
the Board of Directors are contrary to the By-Laws of the federation
and, therefore, not within the power of the board of directors to
enact as specifically ruled by this court in Central Cooperative
Exchange, Inc. vs. Concordio Tibe, Sr. and the Court of Appeals, G.
R. No. L-27972, June 30, 1970. The private respondent was a member
of the board of directors from August 1, 1958 up to the end of
January 1960 and participated in the enactment of the said
resolutions and received sums of money by virtue of the same.
It is further argued by the petitioner that the Court of Appeals erred

in holding that the questioned resolutions are merely voidable and
may be ratified by the stockholders because the said board
resolutions are illegal per se for the reason that: (1) the directors are
not entitled to compensation even without the express reservation of
the power to grant the same unto the stockholders; (2) the
resolutions were already declared contrary to the by-laws' and 'not
within the power of the board of directors to enact; and (3) the
board resolutions were enacted in violation of the express prohibition
in the by-laws they having been found to be "specifically withheld
from the board of directors, and reserved to the stockholders." The
exercise of such withheld power by the board renders the act
resulting therefrom illegal and void.
On the other hand, the private respondent maintains that the

questioned resolutions are all valid and legal, as resolved pursuant to
Section 8, Article V of the petitioner's By-Laws by its stockholders on
January 31, 1956, that "members of the Board of Directors attending
the CCE Board Meeting entitled to actual transportation expenses
plus the per diems of P30.00 and actual expenses while waiting." It
was inferred from this resolution that the stockholders intended to
allow the members" actual transportation expenses and actual
expenses while waiting, without limitations.
The private respondent also argued that the discretionary funds

cannot be considered as compensation because the meaning of
the term "compensation" as applied to officers is remunerations in
whatever form it may be given, whether it be in salaries and fees, or
both combined, whereas the amounts drawn as discretionary funds
are actually spent by the directors in carrying negotiations with third
persons which are necessary in managing the affairs of the
corporation.
Another point raised by the private respondent is the verification of

the complaint by the Officer-in-Charge which cannot be considered
as in compliance with the legal requirement, for the reason that the
Officer-in-Charge is not of the category of a General Manager who

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is the one authorized to use the name of the corporation in filing a
suit of this nature.
It is not disputed that during the term of private respondent as a

member of the Board of Directors, he collected sums of money by
virtue of the Resolutions in question.
In an earlier case, Central Cooperative Exchange, Inc. v. Tibe, Sr. (33

SCRA 596-597 [1970], the legality of the same resolutions, involving
the same corporation as petitioner and another Board Member, who
received the same allowances and benefits thereunder, under the
same circumstances and set of facts as the case at bar, was
resolved by this Court, holding that the questioned resolutions (Nos.
35, 52, 49, 57 and 87) are contrary to the By-Laws of the federation
and, therefore, not within the power of the board of directors to
enact. It will be noted that in interpreting the same Section 8 of the
By-Laws likewise invoked in the previous case as in the case at bar,
this Court held that the right of the stockholders to determine the
compensation of the Board of Directors was explicitly reserved and
even without said reservation, the directors are not entitled to
compensation. Moreover, this Court declared that the law is well
settled that directors of corporations presumptively serve without
compensation so that while the directors, in assigning themselves
additional duties acted within their power, they nonetheless acted in
excess of their authority by voting for themselves compensation for
such additional duties.
Laches was also ruled out by this Court in the same case the tribunal
holding that the board of directors under the By-Laws of the
Corporation, had the control of the affairs of the corporation and it is
not to be expected that the board would sue its members to
recover the sums of money voted by and for themselves. Thus, under
the circumstances, where the corporation was virtually immobilized
from commencing suit against its directors, laches does not begin to
attach against the corporation until the directors cease to be such.
(Ibid., pp. 597-598).
In resume, almost all the issues raised in the case at bar have already
been resolved in Central Cooperative Exchange, Inc. v. Tibe, Sr.
(supra) and there appears to be no logical reason why the ruling in
said case which has long become final, should not apply to the
instant case.
Concerning the point that the complaint was verified by the officer-
in-charge who is not of the category of a General Manager, it win
be noted that said officer-in-charge took over the functions and
duties of the deposed general manager. In general, the authority to
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supervise the business and affairs of the corporation includes the
authority to institute proceedings against all accountable persons in
order to protect and preserve the assets of the corporation and to
prevent their dissipation (In re Winston, 122 Fed. 187).
Even granting that the authority of the stockholders is necessary in

the institution of the suit, the lack of authority was corrected by
ratification or conformation of the stockholders as expressed in their
resolution of May 25, 1962, when a meeting was held with the
presence of a quorum (Brief for Petitioner, pp. 41-42).
PREMISES CONSIDERED, the decision under review is REVERSED and

SET ASIDE, and another one is hereby rendered ordering the
respondent to pay unto the petitioner the sum of P10,967.85 with
legal interests from the date of the filing of the complaint until fully
paid with costs against the respondent.
SO ORDERED.
Yap, C.J., Melencio-Herrera, Padilla and Sarmiento, JJ., concur.
Footnotes
* CA, Sixth Division, penned by Justice Andres Reyes, with

the concurrence of Justices Salvador V. Esguerra and Luis
B. Reyes.
Pamplona Plantation Company vs. Acosta (510 SCRA 249 [2006])
G.R. No. 153193 December 6, 2006
PAMPLONA PLANTATION COMPANY, petitioner,

vs.
RAMON ACOSTA, GREGORIA ARABE, RUFINO BACUBAC, JOSEPH
BARBA, VIRGINIA BARRERA, MARY ANN BELLO, LANDO BALORON,
ELBERTO BUQUIRAN, ANTONIO CANOLAS, HERMINIGILDO CANOLAS,
ROMAN CASUSI, GEOFFREY DENLAOSO, NOLI DENLAOSO, PEDRO
DENLAOSO, DANNY DINGLASA, ROSENDO DURON, MARIA
EMPERADO, MARIO EMPERADO, MELECIO EMPERADO, PEDRO
EMPERADO, PETER ESPARWA, MANUEL GARCIA, SAMUEL GARCIA,

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DARWIN GARNICA, JUANITA GIMOL, ANACLETA GUAN, LUIS GUAN,
FLORO GUEVARRA, LAUREANO LOPEZ, LORETO LUZON, PAQUITO
NAPAO, NILO ORTEGA, EMILIANO PANANGGANAN, FREDERICO
PANANGGANAN, JOSELO PANANGGANAN, SIMEON
PANANGGANAN, PABLO PAO. ANTONIO QUILESTINO, EUFEMIA
RABOTIN, LUISA REGALA, ROMEO REGALA, SALOME RAGALA, NERIO
REYES, CELSO RUFA, ABUNDIO SABION, ROLANDO SALASAYO, JIMMY
SALIN, PILARIO SALIN, SOFRONIO SOLAMILLO, JOSELITO TINGHIL,
ROMY TINGHIL, ABELLO TOROY, ADELAIDA TOROY, CRESENCIO
TOROY, ELPIDIA TOROY, JONATHAN TOROY, ERNESTO TORRES, FELIX
TORRES, GUILLERMO TORRES, NARCISO TORRES, NELSON TORRES,
ROSALIO TORRES, WILFREDO TORRES, CRISTOPHER YBANAY, LORETO
YBANAY and REYNALDO YBIAS, respondents.
DECISION
There were originally 66 complainants in the case before the Labor

Arbiter for underpayment, overtime pay, premium pay for rest day
and holiday, service incentive leave pay, damages, attorney's fees,
and 13th month pay. The complainants claimed that they were
regular rank and file employees of the Pamplona Plantation Co., Inc.
(petitioner) with different hiring periods, work designations, and
salary rates. Petitioner, however, denied this, alleging that some of
the complainants are seasonal employees, some are contractors,
others were hired under the pakyaw system, while the rest were hired
by the Pamplona Plantation Leisure Corporation, which has a
separate and distinct entity from it.
In a Decision dated September 30, 1998, the Labor Arbiter (LA) held
petitioner and its manager, Jose Luis Bondoc, liable for
underpayment as complainants were regular employees of
petitioner. They were also held guilty of illegal dismissal with regard to
complainants Joselito Tinghil and Pedro Emperado.
On appeal to the National Labor Relations Commission (NLRC), the

LA's Decision was reversed and another one was entered dismissing
all the complaints per Decision dated June 30, 2000. It was the
NLRC's finding that the complaint should have been directed
against the Pamplona Plantation Leisure Corporation since
complainants' individual affidavits contained the allegations that
their tasks pertained to their work "in the golf course."

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The Court of Appeals (CA),1 in turn, vacated and set aside the
NLRC's dismissal in its Decision dated November 26, 2001, and
reinstated the LA's Decision with the modification that the award of
wage differentials was limited to the following twenty-two (22)
persons, namely: Rolando Baloron, Samuel Garcia, Darwin Garnica,
Simeon Panangganan, Pablo Pao, Felix Torres, Manuel Garcia,
Paquito Napao, Celso Rufa, Joselito Tinghil, Elpidia Toroy, Ernesto
Torres, Laureano Lopez, Joseph Barba, Hermenigildo Cañolas,
Salome Regala, Guillermo Torres, Narcisa Torres, Nelson Torres, Loreto
Ybanay, Luis Guan, and Christopher Ybanay (respondents), while the
finding of illegal dismissal with regard to Pedro Emparado and the
award of attorney's fees were deleted.
Hence, the present petition for review under Rule 45 of the Rules of
Court based on the following grounds:
THE COURT OF APPEALS HAS DECIDED IN A WAY NOT IN

ACCORD WITH LAW AND ESTABLISHED JURISPRUDENCE,
CONTRARY TO THE ADMISSION OF PARTIES AND WITH GRAVE
ABUSE OF DISCRETION IN THE APPRECIATION OF FACTS:
1. In holding petitioner liable for the wage differentials of

22 respondents who themselves admit and allege in their
own Affidavits that their employees was another entity –
Pamplona Plantation Leisure Corporation, and not herein
Petitioner Company.
2. In affirming that respondent Joselito Tinghil was illegally

dismissed by Petitioner, when in fact, Joselito Tinghil, as
narrated by him in his own Affidavit, was working with
Pamplona Plantation Leisure Corporation, and not herein
Petitioner.
3. In even finding that Joselito Tinghil was illegally

dismissed in the first place, when there is no evidence to
support his allegation.
II
THE DECISION OF THE COURT OF APPEALS HOLDING

PETITIONER'S MANAGER PERSONALLY LIABLE FOR CORPORATE
ACTS IS NOT IN ACCORD WITH LAW.2
At the outset, it should be stated that under Rule 45 of the Rules of

Court, only questions of law may be raised, the reason being that this
Court is not a trier of facts, and it is not for this Court to reexamine
and reevaluate the evidence on record.3 Considering, however,

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that the CA and the Labor Arbiter came up with an opinion different
from that of the NLRC, the Court is now constrained to review the
evidence on record.4
Petitioner contests the CA's conclusion that the 22 respondents were

its employees. Petitioner insists that based on their affidavits,
respondents admitted that they were employees of the Pamplona
Plantation Leisure Corporation, hence, their complaint for illegal
dismissal should have been directed against it.
The Court disagrees. Petitioner is estopped from denying that

respondents worked for it. In the first place, it never raised this
defense in the proceedings before the Labor Arbiter. Notably, the
defense it raised pertained to the nature of respondents'
employment, i.e., whether they are seasonal employees,
contractors, or worked under the pakyaw system. Thus, in its Position
Paper, petitioner alleged that some of the respondents are coconut
filers and copra hookers or sakadors; some are seasonal employees
who worked as scoopers or lugiteros; some are contractors; and
some worked under the pakyaw system.5 In support of these
allegations, petitioner even presented the company's payroll,6 which
will allegedly prove its allegations.
By setting forth these defenses, petitioner, in effect, admitted that

respondents worked for it, albeit in different capacities. Such
allegations are negative pregnants – denials pregnant with the
admission of the substantial facts in the pleading responded to
which are not squarely denied,7 and amounts to an
acknowledgement that respondents were indeed employed by
petitioner.
On this score, the Court adopts the findings in Pamplona Plantation

Company, Inc. v. Tinghil,8 which involves the same petitioner in this
case and some of its workers. In that case, petitioner contended that
the case should have been dismissed because of the respondents'
failure to implead the Pamplona Plantation Leisure Corporation, Inc.
as an indispensable party, since as admitted in their respective
affidavits, it was their true and real employer. The Court, however,
rejected petitioner's contention and concluded that by piercing the
veil of corporate fiction, the two corporations – the Pamplona
Plantation Corporation, Inc. and the Pamplona Plantation Leisure
Corporation – are one and the same. Thus, the Court ruled:
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. A portion of
the plantation (also called Hacienda Pamplona) had actually
been converted into a golf course and other recreational

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facilities. The weekly payrolls issued by petitioner-company
bore the name "Pamplona Plantation Co., Inc." 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.
xxxx
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. 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 latter's work.
xxxx
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-à-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
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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.
Consequently, NLRC's 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 NLRC's 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.9
Consequently, petitioner cannot now deny that respondents are its

employees.
Petitioner also disputes the CA's finding that respondent Joselito

Tinghil was illegally dismissed. According to the CA, petitioner did not
at all controvert or dispute Tinghil's allegation that he was not told
not to report for work anymore due to his involvement in union
activities.10
The CA's finding finds sufficient basis from the records of this case. In
his Affidavit executed on October 9, 1997, Tinghil stated that some
time in May 3, 1997, he, together with other union officers and
company employees, were called personally by the project
manager, Lito Bundok,11 who expressed his "disgust" with their union
activities. They were then informed that they will not be allowed to
report for work anymore.12 Petitioner did not at all contest Tinghil's
allegations. Instead, it merely countered that Tinghil's narration in his
affidavit are vague.13
It is well-settled that the employer has the burden of proving that the
dismissal was for a valid and just cause. Failure to discharge this
burden of proof substantially means that the dismissal was not
justified and therefore, illegal.14 Given petitioner's failure to discharge

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this burden, the Court sustains the finding of illegal dismissal vis-à-vis
respondent Joselito Tinghil.
Lastly, petitioner believes that its manager, Jose Luis Bondoc, should
not have been held solidarily liable with the company for the wage
differentials awarded to respondents. Petitioner argues that Bondoc
is merely an employee of the company and not a corporate
director or officer who can be held personally liable therefor.
The rule is that officers of a corporation are not personally liable for
their official acts unless it is shown that they have exceeded their
authority. However, the legal fiction that a corporation has a
personality separate and distinct from stockholders and members
may be disregarded if it is used as a means to perpetuate fraud or
an illegal act or as a vehicle for the evasion of an existing obligation,
the circumvention of statutes, or to confuse legitimate issues.15
Moreover, a corporate officer is not personally liable for the money

claims of discharged corporate employees unless he acted with
evident malice and bad faith in terminating their employment.16
Under Section 25 of the Corporation Code, three officers are

specifically provided for which a corporation must have: president,
secretary, and treasurer. The law, however, does not limit corporate
officers to these three. Section 25 gives corporations the widest
latitude to provide for such other offices, as they may deem
necessary. The by-laws may and usually do provide for such other
officers, e.g., vice-president, cashier, auditor, and general
manager.17
In this case, there is no basis from which it may be deduced that

Bondoc, as manager of petitioner, is also a corporate officer such
that he may be held liable for the money claims awarded in favor of
respondents. Even assuming that he is a corporate officer, still, there
is no showing that he acted with evident malice and bad faith.
Bondoc may have signed and approved the payrolls; nevertheless, it
does not follow that he had a direct hand in determining the
amount of respondents' corresponding salaries and other benefits.
Bondoc, therefore, should not have been held liable together with
petitioner.
WHEREFORE, the petition is PARTIALLY GRANTED. The Court of Appeals

Decision dated November 26, 2001 is hereby MODIFIED in that Jose
Luis Bondoc is absolved of any personal liability as regards the
money claims awarded to respondents. In all other respects, the
Decision is AFFIRMED.
SO ORDERED.

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Panganiban, C.J. (Chairperson), Ynares-Santiago, Callejo, Sr., and
Chico-Nazario, JJ., concur.
Pamplona Plantation Company vs. Ramon Acosta
G.R. No. 153193, December 6, 2006
(Labor Law, Liability of Corporation Officers)
FACTS
This stems from a case before the Labor Arbiter for underpayment,
overtime pay, premium pay for rest day and holiday, service
incentive leave pay, damages, attorney’s fees, and 13th month pay.
The complainants claimed that they were regular rank and file
employees of petitioner Pamplona Plantation Co., Inc. with different
hiring periods, work designations, and salary rates.
Petitioner, however, denied this, alleging that some of the

complainants are seasonal employees, some are contractors, others
were hired under the pakyaw system, while the rest were hired by
the Pamplona Plantation Leisure Corporation, which has a separate
and distinct entity from it.
The Labor Arbiter (LA) held petitioner and Pamplona Plantation’s

manager, Jose Luis Bondoc, liable for underpayment as
complainants were regular employees of petitioner. They were also
held guilty of illegal dismissal with regard to two complainants.
The NLRC reversed the LA’s decision, dismissing all the complaints,
finding that the complaint should have been directed against the
Pamplona Plantation Leisure Corporation since complainants’
individual affidavits contained the allegations that their tasks
pertained to their work “in the golf course.”
The Court of Appeals (CA) set aside the NLRC’s dismissal and
reinstated the LA’s Decision with modification.
ISSUES
1) Whether or not Pamplona Plantation is liable for the wage

differentials of the worker-respondents who themselves admitted in

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their affidavits that their employer was another entity – Pamplona
Plantation Leisure Corporation?
2) Whether or not Pamplona Plantation’s manager is personally

liable for the money claims awarded to the workers?
RULING
Petition PARTIALLY GRANTED.
For the purpose of resolving the workers’ claims, Pamplona

Plantation and Pamplona Leisure are hereby deemed one and the
same entity. The CA is MODIFIED in that the manager of Pamplona
Plantation is absolved of any personal liability as regards the money
claims awarded to respondents.
In all other respects, the Decision is AFFIRMED.
Petitioner is estopped from denying that respondents worked for it. It

never raised this defense in the proceedings before the Labor
Arbiter. Notably, the defense it raised pertained to the nature of
respondents’ employment, i.e., whether they are seasonal
employees, contractors, or worked under the pakyaw system. Thus,
in its Position Paper, petitioner alleged that some of the respondents
are coconut filers and copra hookers or sakadors; some are seasonal
employees who worked as scoopers or lugiteros; some are
contractors; and some worked under the pakyaw system. In support
of these allegations, petitioner even presented the company’s
payroll.
By setting forth these defenses, petitioner, in effect, admitted that

respondents worked for it, albeit in different capacities. Such
allegations are negative pregnants – denials pregnant with the
admission of the substantial facts in the pleading responded to
which are not squarely denied, and amounts to an
acknowledgement that respondents were indeed employed by
petitioner.
Reiterating Pamplona Plantation Company, Inc. v. Tinghil, the Court

holds that by piercing the veil of corporate fiction, the two
corporations – the Pamplona Plantation Corporation, Inc. and the

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Pamplona Plantation Leisure Corporation – are one and the same.
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. 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.”
It is also a fact that respondents all received their pay from the same
person, Bondoc -- the managing director of the company. True,
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. 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. 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. Also, 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. Thus, petitioner cannot now deny that
respondents are its employees.
As to the issue on the dismissal of one particular worker, Joselito

Tinghil, it is well-settled that the employer has the burden of proving
that the dismissal was for a valid and just cause. Failure to discharge
this burden of proof substantially means that the dismissal was not
justified and therefore, illegal. Given petitioner’s failure to discharge
this burden, the Court sustains the finding of illegal dismissal vis-à-vis
respondent Joselito Tinghil.
Lastly, petitioner believes that its manager, Jose Luis Bondoc, should
not have been held solidarily liable with the company for the wage
differentials awarded to respondents. Petitioner argues that Bondoc
is merely an employee of the company and not a corporate
director or officer who can be held personally liable therefor.

suigeneris
The rule is that officers of a corporation are not personally liable for
their official acts unless it is shown that they have exceeded their
authority. However, the legal fiction that a corporation has a
personality separate and distinct from stockholders and members
may be disregarded if it is used as a means to perpetuate fraud or
an illegal act or as a vehicle for the evasion of an existing obligation,
the circumvention of statutes, or to confuse legitimate issues.
Moreover, assuming Bondoc is a corporate officer, a corporate
officer is not personally liable for the money claims of discharged
corporate employees unless he acted with evident malice and bad
faith in terminating their employment.
Kwok vs. Philippine Carpet Mfg. Corp. (457 SCRA 465 [2005])
G.R. No. 149252. April 28, 2005
DONALD KWOK, Petitioners,

vs.
PHILIPPINE CARPET MANUFACTURING CORPORATION, Respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review of the Decision1 of the Court of Appeals

(CA) in CA-G.R. SP No. 60232 dismissing Donald Kwok’s petition for
review on certiorari and affirming the majority Decision of the
National Labor Relations Commission (NLRC), as well as its resolution
in NLRC NCR Case No. 00-12-07454-96 dismissing the motion for
reconsideration of the said decision.
The Antecedents
In 1965, petitioner Donald Kwok and his father-in-law Patricio L. Lim,

along with some other stockholders, established a corporation, the
respondent Philippine Carpet Manufacturing Corporation (PCMC).
The petitioner became its general manager, executive vice-
president and chief operations officer. Lim, on the other hand, was
its president and chairman of the board of directors. When the
petitioner retired 36 years later or on October 31, 1996, he was
receiving a monthly salary of P160,000.00.2 He demanded the cash
equivalent of what he believed to be his accumulated vacation

suigeneris
and sick leave credits during the entire length of his service with the
respondent corporation, i.e., from November 16, 1965 to October 31,
1996, in the total amount of P7,080,546.00 plus interest.3 However, the
respondent corporation refused to accede to the petitioner’s
demands, claiming that the latter was not entitled thereto.4
The petitioner filed a complaint against the respondent corporation

for the payment of his accumulated vacation and sick leave credits
before the NLRC. He claimed that Lim made a verbal promise to
give him unlimited sick leave and vacation leave benefits and its
cash conversion upon his retirement or resignation without the need
for any application therefor. In addition, Lim also promised to grant
him other benefits, such as golf and country club membership; the
privilege to charge the respondent corporation’s account; 6% profit-
sharing in the net income of the respondent corporation (while Lim
got 4%); and other corporate perquisites. According to the
petitioner, all of these promises were complied with, except for the
grant of the cash equivalent of his accumulated vacation and sick
leave credits upon his retirement.5
The respondent corporation denied all these, claiming that upon the
petitioner’s retirement, he received the amount of P6,902,387.19
representing all the benefits due him. Despite this, the petitioner
again demanded P7,080,546.00, which demand was without factual
and legal basis. The respondent corporation asserted that the
chairman of its board of directors and its president/vice-president
had unlimited discretion in the use of their time, and had never been
required to file applications for vacation and sick leaves; as such, the
said officers were not entitled to vacation and sick leave benefits.
The respondent corporation, likewise, pointed out that even if the
petitioner was entitled to the said additional benefits, his claim had
already prescribed. It further averred that it had no policy to grant
vacation and sick leave credits to the petitioner.6
In his Affidavit7 dated May 19, 1998, Lim denied making any such
verbal promise to his son-in-law on the grant of unlimited vacation
and sick leave credits and the cash conversion thereof. Lim averred
that the petitioner had received vacation and sick leave benefits
from 1994 to 1996. Moreover, assuming that he did make such
promise to the petitioner, the same had not been confirmed or
approved via resolution of the respondent corporation’s board of
directors.
It was further pointed out that as per the Memorandum dated

November 6, 1981, only regular employees and managerial and
confidential employees falling under Category I were entitled to
vacation and sick leave credits. The petitioner, whose position did
not fall under Category I, was, thus, not entitled to the benefits under

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the said memorandum. The respondent corporation alleged that this
was admitted by the petitioner himself and affirmed by Raoul
Rodrigo, its incumbent executive vice-president and general
manager.
In a Decision8 dated November 27, 1998, the Labor Arbiter ruled in

favor of the petitioner. The fallo of the decision reads:
WHEREFORE, all the foregoing premises being considered, judgment

is hereby rendered ordering the respondent company to pay
complainant the sum of P7,080,546.00, plus ten percent (10%) thereof
as and for attorney’s fees.
SO ORDERED.9
Undaunted, the respondent corporation appealed the decision to

the NLRC, alleging that:
I. THE LABOR ARBITER ERRED IN CONCLUDING THAT KWOK WAS

COVERED BY THE NOVEMBER 6, 1981 MEMORANDUM ON VACATION
AND SICK LEAVE CREDITS.10
II. THE LABOR ARBITER ERRED IN CONCLUDING THAT IT WAS

DISCRIMINATORY NOT TO GRANT KWOK THESE BENEFITS.11
III. KWOK’S CLAIMS ARE BASELESS.12
IV. KWOK’S CLAIMS FOR BENEFITS ACCRUING FROM 1966 ARE

BARRED BY PRESCRIPTION.13
V. THERE IS NO BASIS FOR THE AWARD OF P7,080,546.00.14
The respondent corporation averred that based on the petitioner’s

memorandum, his admissions and the contract of employment, the
petitioner was not entitled to the cash conversion of his sick and
vacation leave credits. While the respondent corporation conceded
that the petitioner may have been entitled to unlimited sick and
vacation leave benefits during his employment, it maintained that
no such promise was made by Lim to convert the same; even
assuming that such verbal promise was made, the respondent
corporation was not bound thereby since the petitioner failed to
adduce the written conformity of its board of directors. The
respondent corporation insisted that the claims of the petitioner
were barred under Article 291 of the Labor Code.
For his part, the petitioner made the following averments in his
memorandum:
The non-performance by PCMC of this particular promise to convert

in cash all of his unused cash (sic) and sick leave credits was
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precipitated by the falling out of the marriage between Mr. Kwok
and his wife, the daughter of Mr. Lim. In fact, even while Mr. Kwok
was still the Executive Vice-President and General Manager of
PCMC, when the falling out of the said marriage became apparent,
the other benefits or perquisites which Mr. Kwok used to enjoy were
immediately curtailed by Mr. Lim to the prejudice of Mr. Kwok.15
On November 29, 1999, the NLRC, by majority vote, rendered

judgment granting the appeal, reversing and setting aside the
decision of the Labor Arbiter.16 The NLRC ordered the dismissal of the
complaint. Commissioner Angelita A. Gacutan filed a dissenting
opinion.17
Aggrieved, the petitioner filed a petition for review with the CA, on
the following grounds:
THE COMMISSION ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION

OR WITH GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR
EXCESS OF JURISDICTION WHEN IT DECLARED THAT THE VERBAL
PROMISE OF MR. LIM TO PETITIONER WAS UNENFORCEABLE.
II

EXCESS OF JURISDICTION WHEN IT RULED THAT THE VERBAL PROMISE
BY MR. LIM TO PETITIONER WAS NOT BINDING AS IT WAS NOT
APPROVED BY THE BOARD OF DIRECTORS.
III

EXCESS OF JURISDICTION WHEN IT IGNORED STRONG EVIDENCE THAT
PCMC CLOTHED MR. LIM WITH AWESOME POWERS TO GRANT
BENEFITS TO ITS EMPLOYEES INCLUDING PETITIONER AND RATIFIED THE
SAME BY ITS SILENCE AND WHEN IT IGNORED TOO EXISTING
JURISPRUDENCE ON THE MATTER.
IV

EXCESS OF JURISDICTION WHEN IT IGNORED STRONG AND CLEAR
EVIDENCE THAT IN PCMC THE GIVING OF BENEFITS TO PETITIONER,
THOUGH NOT IN WRITING, WAS A PREVALENT PRACTICE.
V
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EXCESS OF JURISDICTION WHEN IT RULED THAT THE MEMORANDUM
DATED APRIL 26, 1997 APPLICABLE TO MR. RAOUL RODRIGO WAS
ALSO APPLICABLE TO PETITIONER.18
On February 28, 2001, the CA rendered judgment affirming the

decision of the NLRC and dismissing the petition.19 The petitioner’s
motion for reconsideration thereof was denied by the appellate
court, per its Resolution20 dated July 17, 2001.
The petitioner, thus, filed the instant petition for review on certiorari
with this Court, assailing the decision and resolution of the CA on the
following claims:
The Hon. Court of Appeals, contrary to law, gravely erred and

disregarded established jurisprudence in ruling that petitioner has not
adduced sufficient evidence to support his claim that he was,
indeed, promised the cash conversion of his unused vacation and
sick leave credits upon retirement.21
II
The Hon. Court of Appeals gravely erred in ruling that even if private
respondent’s (sic) Mr. Lim did make him such promise, the same
cannot be enforced.22
III
The Hon. Court of Appeals gravely erred and disregarded clear

jurisprudence on the matter when it ruled that there is no showing
that private respondent, thru its board of directors either recognized,
approved or ratified the promise made by Mr. Lim to petitioner.23
As gleaned from his Memorandum, the petitioner posits that he had

adduced substantial evidence to prove that Lim, as president and
chairman of the respondent corporation’s board of directors, made
a verbal promise to give him the cash conversion of his
accumulated vacation and sick leave credits upon his retirement
(that is, benefits at par with the number of days to which the officer
next in rank to him was entitled). According to the petitioner, his
claim is fortified by the fact that his successor, Raoul Rodrigo, has
unlimited vacation and sick leave credits. The petitioner further
asserts that he would not have accepted the positions in the
respondent corporation without such benefit, especially since his
subordinates were also enjoying the same. He posits that he was
entitled to the said privilege because of his rank. He, likewise, claims

suigeneris
that, in contrast to the evidence he has presented, the respondent
corporation failed to adduce proof of its affirmative allegations.
The petitioner further argues that his complaint was not time-barred
since he filed it on December 5, 1996. Even if this were so, he is,
nevertheless, entitled to the cash value of his vacation and sick
leave credits for three years before his retirement. Moreover, the
evidence on record shows that officers belonging to Category I had
been granted the cash conversion of their earned leave credits after
the lapse of three years.
The respondent corporation, for its part, asserts that the petitioner
failed to adduce substantial evidence to the claims in his complaint.
Even if Lim had made such verbal promise to the petitioner, the
same is not binding on the respondent corporation absent its
conformity through board resolution. Moreover, the petitioner is not
covered by the Memorandum dated November 6, 1981 because he
had unlimited leave credits; hence, it cannot be gainsaid that he still
had unused leave credits to be converted. According to the
respondent corporation, the petitioner himself admitted that he was
not included in the Memorandum dated November 6, 1981; and
even assuming that he was covered by the said memorandum, the
fact that his complaint was filed only in 1996 precludes him from
claiming the cash conversion of such leave credits for the years 1966
to 1993.
The petition has no merit.
The threshold issue in this case is factual – whether or not the

petitioner is entitled, based on the documentary and testimonial
evidence on record, to the cash value of his vacation and sick leave
credits in the total amount of P7,080,546.00. The resolution of the
issue is riveted to our resolution of whether the petitioner’s mainly
testimonial evidence of an alleged verbal promise made by a
corporate officer to grant him the privilege of converting
accumulated vacation and sick leave credits after retirement or
separation from employment is entitled to probative weight.
Under Rule 45 of the Rules of Court, only questions of law may be

raised under a petition for review on certiorari. The Court, not being
a trier of facts, is not wont to reexamine and reevaluate the
evidence of the parties, whether testimonial or documentary.
Moreover, the findings of facts of the CA on appeal from the NLRC
are, more often than not, given conclusive effect by the Court. The
Court may delve into and resolve factual issues only in exceptional
circumstances, such as when the findings of facts of the Labor
Arbiter, on one hand, and those of the NLRC and the CA, on the
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other, are capricious and arbitrary; or when the CA has reached an
erroneous conclusion based on arbitrary findings of fact; and when
substantial justice so requires. In this case, however, the petitioner
failed to convince the Court that the factual findings of the CA
which affirmed the findings of the NLRC on appeal, as well as its
conclusions based on the said findings, are capricious and arbitrary.
While the petitioner was unequivocal in claiming that the

respondent corporation, through its president and chairman of the
board of directors, obliged itself, as a matter of policy, to grant him
the cash value of his vacation and sick leave credits upon his
retirement, he was burdened to prove his claim by substantial
evidence.24 The petitioner failed to discharge this burden.
We agree with the petitioner’s contention that for a contract to be

binding on the parties thereto, it need not be in writing unless the law
requires that such contract be in some form in order that it may be
valid or enforceable or that it be executed in a certain way, in which
case that requirement is absolute and independent.25 Indeed,
corporate policies need not be in writing. Contracts entered into by
a corporate officer or obligations or prestations assumed by such
officer for and in behalf of such corporation are binding on the said
corporation only if such officer acted within the scope of his
authority or if such officer exceeded the limits of his authority, the
corporation has ratified such contracts or obligations.
In the present case, the petitioner relied principally on his testimony

to prove that Lim made a verbal promise to give him vacation and
sick leave credits, as well as the privilege of converting the same into
cash upon retirement. The Court agrees that those who belong to
the upper corporate echelons would have more privileges.
However, the Court cannot presume the existence of such privileges
or benefits. The petitioner was burdened to prove not only the
existence of such benefits but also that he is entitled to the same,
especially considering that such privileges are not inherent to the
positions occupied by the petitioner in the respondent corporation,
son-in-law of its president or not.
In dismissing the petition before it, the CA disbelieved the petitioner’s

testimony and gave credence and probative weight to the
collective testimonies of the respondent corporation’s witnesses,
who were its employees and officers, including Lim, whom the
petitioner presented as a hostile witness. We agree with the
appellate court’s encompassing synthesis and analysis of the
evidence on record:
Except for his bare assertions, petitioner has not adduced sufficient
evidence to support his claim that he was, indeed, promised the

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cash conversion of his unused vacation and sick leaves upon
retirement. Petitioner harps on what he calls the prevalent practice
in PCMC of giving him benefits, such as the use of golf and country
club facilities, salary increases, the use of the company vehicle and
driver, and sharing in PCMC’s annual net income, without either a
written contract or a Board resolution to back it up. Respondent
PCMC denies all these, however. According to respondent,
petitioner’s share in the income of the company is actually part of
the consultancy fee which PCMC pays DK Management Services,
Inc., a firm owned by petitioner’s company. PCMC adds that the
yearly salary increases of corporate officers were always with the
prior approval of the Board.
Nevertheless, assuming that petitioner was, indeed, given the

benefits which he so claimed, it does not necessarily follow that
among those is the cash conversion of his accumulated leaves. It is a
basic rule in evidence that each party must prove his affirmative
allegation. Since the burden of proof lies with the party who asserts
an affirmative allegation, the plaintiff or complainant has to prove
his affirmative allegations in the complaint and the defendant or
respondent has to prove the affirmative allegations in his affirmative
defenses and counterclaim. Petitioner, in the case at bar, has failed
to discharge this burden.26
The CA made short shift of the claim of the petitioner that per
Memorandum dated November 6, 1981, he was not entitled to the
benefits of the company policy of commutation of leave credits.
Indeed, the company policy of conversion into equivalent cash of
unused vacation and sick leave credits applied only to its regular
employees. The petitioner failed to offer evidence to rebut the
testimony of Nel Gopez, Chief Accountant of the respondent, that
the petitioner was not among the regular employees covered by the
policy for the simple reason that he had unlimited vacation leave
benefits. As stated by the CA, the petitioner no less corroborated the
testimony of Gopez, thus:
ATTY. PIMENTEL
And, so you mention[ed] earlier that … the policy on vacation leave

benefits apply for category one employee(s) and rank-and-file
employee(s)?
WITNESS (Mr. Nel Gopez)
Yes.
ATTY. PIMENTEL
And who are considered category one employee(s)?

suigeneris
WITNESS
Category One employees are from the rank and of Senior Vice-
President and Assistant General Manager and below, up to the level
of department managers.
ATTY. PIMENTEL
How about the complainant, Mr. Kwok, does he falling (sic) to the
category one?
WITNESS
As far as I can remember, he is (sic) not belong to category one

employee.
ATTY. PIMENTEL
Therefore, he is not entitled to the lump sum benefit?
WITNESS
Yes, Ma’am.
ATTY. PIMENTEL
And would you know, Mr. Witness, why he is (sic) not given the
conversion of the vacation leave benefits at the time category one
employees sectors (sic) are given?
WITNESS
Because he has, as far as I can remember, he has unlimited

vacation leave."
This was corroborated by petitioner himself when he testified in this

wise:
ATTY. PIMENTEL
Mr. Witness, you occupied the position of Executive Vice-President

and General Manager. You agree with me that this position or this
office of Executive Vice-President and General Manager are not
covered by this policy.
WITNESS (Donald Kwok)
Yes, it is not covered by this policy.

suigeneris
ATTY. PIMENTEL
So this policy applies to persons below you and your father-in-law?
WITNESS
Yes, right.
ATTY. PIMENTEL
And this policy does not apply to you?
WITNESS
As far as I’m concerned, it does not apply for (sic) me.
In all respects, therefore, petitioner, by virtue of his position as

Executive Vice-President, is not covered by the November 6, 1981
Memorandum granting PCMC employees the conversion of their
unused vacation and sick leaves into cash.27
We have reviewed the records and found no evidence to controvert

the following findings of the CA and its ratiocinations on its resolution
of the petitioner’s submissions:
Second, even assuming that petitioner is included among the

"regular employees" of PCMC referred to in said memorandum, there
is no evidence that he complied with the cut-off dates for the filing
of the cash conversion of vacation and sick leaves. This being so, we
find merit in respondent’s argument that petitioner’s money claims
have already been barred by the three-year prescriptive period
under Article 291 of the Labor Code, as amended.
Third, and this is of primordial importance, there is no proof that

petitioner has filed vacation and sick leaves with PCMC’s personnel
department. Without a record of petitioner’s absences, there is no
way to determine the actual number of leave credits he is entitled
to. The P7,080,546.00 figure arrived at by petitioner supposedly
representing the cash equivalent of his earned sick and vacation
leaves is thus totally baseless.
And, fourth, even assuming that PCMC President Patricio Lim did
promise petitioner the cash conversion of his leaves, we agree with
respondent that this cannot bind the company in the absence of
any Board resolution to that effect. We must stress that the personal
act of the company president cannot bind the corporation. As
explicitly stated by the Supreme Court in People’s Aircargo and
Warehousing Co., Inc. v. Court of Appeals:

suigeneris
"The general rule is that, in the absence of authority from the board
of directors, no person, not even its officers, can validly bind a
corporation. A corporation is a juridical person, separate and distinct
from its stockholders and members, ‘having xxx powers, attributes
and properties expressly authorized by law or incident to its
existence.’
"… the power and the responsibility to decide whether the

corporation should enter into a contract that will bind the
corporation is lodged in the board, subject to the articles of
incorporation, by-laws, or relevant provisions of law."
Anent the third assigned error, petitioner maintains that the PCMC
Board of Directors has granted its President, Patricio Lim, awesome
powers to grant benefits to its employees, adding that the Board has
always given its consent to the way Lim ran the affairs of the
company especially on matters relating to the benefits that its
corporate officers enjoyed.
True, jurisprudence holds that the president of a corporation

possesses the power to enter into a contract for the corporation
when "the conduct on the part of both the president and
corporation [shows] that he had been in the habit of acting in similar
matters on behalf of the company and that the company had
authorized him so to act and had recognized, approved and ratified
his former and similar actions."
In the case at bar, however, there is no showing that PCMC had

either recognized, approved or ratified the cash conversion of
petitioner’s leave credits as purportedly promised to him by Lim. On
the contrary, PCMC has steadfastly maintained that "the Company,
through the Board, has long adopted the policy of granting its earlier
mentioned corporate officers unlimited leave benefits denying them
the privilege of converting their unused vacation or sick leave
benefits into their cash equivalent."
As to the last assigned error, petitioner faults the NLRC for holding as
applicable to petitioner, the April 26, 1997 Memorandum issued by
PCMC to Raoul Rodrigo, Donald Kwok’s successor as company
executive vice-president. The said memo granted Rodrigo unlimited
sick and vacation leave credits but disallowed the cash conversion
thereof. Before he became executive vice-president, Rodrigo was
senior vice-president and enjoyed the commutation of his unused
vacation and sick leaves.
We note that the April 26, 1997 memo was issued to Rodrigo when
petitioner was already retired from PCMC. While said memorandum
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was particularly directed to Rodrigo, however, this does not
necessarily mean that petitioner, as former executive vice-president,
was then not prohibited from converting his earned vacation and
sick leaves into cash since he was not issued a similar memo. On the
contrary, the memo simply affirms the long-standing company
practice of excluding PCMC’s top two positions, that of president
and executive vice-president, from the commutation of leaves. As
heretofore discussed, among the perks of those occupying these
posts is the privilege of having unlimited leaves, which is totally
incompatible with the concept of converting unused leave credits
into their cash equivalents.28
We are not convinced by the petitioner’s claim that Lim capriciously

deprived him of his entitlement to the cash conversion of his
accumulated vacation and sick leave credits simply because of his
estrangement from his wife, who happens to be Lim’s daughter. The
petitioner did not adduce any evidence to show that he appealed
to the respondent corporation’s board of directors for the
implementation of the said privilege which was allegedly granted to
him. Even if Lim was the president and chairman of the respondent
corporation’s board of directors, the rest of the membership of the
board could have overruled him and granted to the petitioner his
claim if, indeed, the latter was entitled thereto. Indeed, even the
petitioner admitted that, after his retirement, the board of directors
granted to him salary increase for two years prior to his retirement. If
the claim of the petitioner had been approved by the board of
directors, for sure, it would have approved the same despite his
falling out with the daughter of Lim.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of

merit. Costs against the petitioner.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Tinga, and Chico-Nazario, JJ.,

concur.
G.R. No. 149252. April 28, 2005]
FACTS:
Petitioner filed a complaint against the respondent corporation for

the recovery of accumulated vacation and sick leave credits before
the NLRC. Petitioner clung to the verbal contract with Mr. Lim, the
President of the respondent corporation and his father-in-law for his

suigeneris
claims. Petitioner obtained favorable judgment. In their appeal,
respondent averred that the position the petition held was not
entitled cash conversions of vacation and sick leave credits. The
decision of the Labor Arbiter was reversed. The Court of Appeals
affirmed the reversed decision.
ISSUE:
Whether or not the verbal contract in favor of petitioner is valid.
RULING:
NO. It is true that for a contract to be binding on the parties thereto,

it need not be in writing unless the law requires that such contract be
in some form in order that it may be valid or enforceable or that it be
executed in a certain way, in which case that requirement is
absolute and independent. (Art. 1356, NCC) But the court
disbelieved petitioner’s testimony and gave credence and
probative weight to the collective testimonies of the employees and
officers of the respondent corporation, including Mr. Lim, whom the
petitioner presented as a hostile witness. Even assuming that the
petitioner was entitled of such benefits, there was no record to show
the record of absences to arrive at the actual number of leave
credits. There was no conformity of such agreement with the Board
and if so, such claim was already barred by prescription under
Article 291 of the Labor Code.
Rovels Enterprises vs. Ocampo (392 SCRA 176 [2002])
G.R. No. 136821 October 17, 2002
ROVELS ENTERPRISES, INC., petitioner,

vs.
EMMANUEL B. OCAMPO, JOSE M. SILVA, SR., THE HEIRS OF EXPEDITO
LEVISTE, SR.,*
CONRADO CALALANG, and FRANCISCO CARREON, SR., respondents.
DECISION
Assailed in this petition for review on certiorari 1 is the Decision of the

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

Directors of TTTDC passed a Resolution on December 29, 1975
providing as follows:
"RESOLVED, as it is hereby resolved that payment for professional fees

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

Victoriano Leviste, Bienvenido Cruz, Jr., and Roberto Roxas. Roberto
Roxas is the President of TTTDC and stockholder of Rovels at the
same time. Noticeably, the signatures of the other two (2) TTTDC
directors – Jose Silva, Jr. and Emmanuel Ocampo – do not appear in
the subject Resolution despite their presence in the December 29,
1975 Board meeting.4
On February 23, 1976, Eduardo Santos, President of Rovels, on behalf

of TTTDC, filed with the SEC an application for exemption from
registration of TTTDC’s unissued shares of stock transferred to it
(Rovels) as payment for its services worth One Hundred Eight
Thousand Pesos (P108,000.00). This was done because under Section
4 (a) of the Revised Securities Act, no shares of stocks shall be
transferred unless first registered with the SEC or permitted to be
sold.5
On May 7, 1976, the SEC, in its Resolution No. 260,6 granted Eduardo
Santos’ application.
On March 1, 1976, the TTTDC Board of Directors passed another

Resolution7 repealing its Resolution of December 29, 1975, thus:
"RESOLVED, as it is hereby resolved, that the Resolution of December

29, 1975 authorizing the payment of creditors with unissued shares of
the corporation be as it is hereby repealed: Resolved further that the
matter as well as the amount of the creditors’ claims be given
adequate study and consideration by the Board." (emphasis added)
In view of the December 29, 1975 TTTDC Board Resolution transferring

to Rovels the said shares of stock as construction fee, TTTDC Directors

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Jose Silva, Jr. and Emmanuel Ocampo filed a complaint with the SEC
against Roberto Roxas, TTTDC President, and Eduardo Santos, Rovels’
President, docketed as SEC Case No. 1322. In their complaint, Silva
and Ocampo alleged that there was no meeting of the TTTDC’s
Board of Directors on December 29, 1975; that they did not authorize
the transfer of TTTDC’s shares of stock to Rovels; that they never
signed the alleged minutes of the meeting; and that the signatures
of the other two (2) Directors, Victoriano Leviste and Bienvenido
Cruz, Jr., as well as that of TTTDC’s Secretary Francisco Carreon, Jr.,
were obtained through fraud and misrepresentation. They also
alleged that the TTTDC Board Resolution dated December 29, 1975
was repealed by the March 1, 1976 Resolution. They thus prayed that
the transfer of TTTDC’s shares of stock to Rovels pursuant to
Resolution dated December 29, 1975 be annulled.
On March 17, 1979, SEC Hearing Officer Eugenio E. Reyes issued a

Decision8 in favor of Silva and Ocampo, the dispositive portion of
which reads:
"Considering that the (December 29, 1975) board resolution which

authorizes the corporation to pay its creditors with its unissued shares
of stock x x x had been expressly revoked or repealed on March 1,
1976 as earlier pointed out, Commission Resolution No. 260 (granting
Santos’ application for exemption from registration of the unissued
shares), when issued on May 7, 1976 x x x had lost its legal basis.
Consequently, the corresponding issuance of shares was without
authority of the board of directors."
xxx xxx xxx
"WHEREFORE, premises considered, this Commission finds and so

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

in its Decision dated September 2, 1982 in SEC-AC No. 049,9 affirmed
the Decision of the SEC Hearing Officer. This Court, in its Decision of
June 20, 1983 in G.R. No. 61863,10 likewise affirmed the Decision of

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the SEC en banc. The Decision of this Court became final and
executory on September 2, 1983.11
Subsequently, TTTDC, Jose Silva, Emmanuel Ocampo, Victoriano

Leviste, Francisco Carreon, Jr., and Expedito Leviste, Sr., another
stockholder of TTTDC, (the SILVA GROUP, now respondents), filed with
the SEC a petition against Eduardo Santos, Sylvia S. Veloso, Josefina
Carballo, Augusto del Rosario, Reynaldo Alcantara and Lauro
Sandoval (the SANTOS GROUP), docketed as SEC Case No. 3806.
(The SANTOS GROUP were nominees of Rovels who, by virtue of the
shares of stock issued pursuant to the December 29, 1975 Resolution,
proceeded to act as directors and officers of TTTDC). In their petition,
the SILVA GROUP prayed that they be declared the true and lawful
stockholders and incumbent directors and officers of TTTDC.
On July 6, 1993, SEC Hearing Officer Alberto P. Atas rendered a

Decision12 in favor of the SILVA GROUP, thus:
"WHEREFORE, judgment is hereby rendered in favor of the petitioners

(SILVA GROUP) and against the respondents (SANTOS GROUP), as
follows:
a. Declaring petitioners as the lawful stockholders, directors and

officers of Tagaytay Taal Tourist Development Corporation;
b. Declaring respondents, to be not stockholders of Tagaytay Taal

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

Taal Tourist Development Corporation;
d. The writ of preliminary injunction issued on November 6, 1990 is

hereby made permanent; and
e. Ordering the Records Division of this Commission to purge the

records of Tagaytay Taal Tourist Development Corporation of all
papers and documents filed by respondents purportedly in behalf of
Tagaytay Taal Tourist Development Corporation." (emphasis and
words in parentheses added)
The above Decision became final and executory on September 1,

199413 as no appeal was interposed by either the SILVA GROUP or
the SANTOS GROUP.
However, Rovels, to whom the TTTDC shares of stock (worth

P108,000.00) were transferred, claimed that it became aware of the
July 6, 1993 SEC Decision only in June of 1995. So on September 6,
1995, it filed a petition with the SEC,14 docketed as SEC Case No. 09-
95-5135, praying that it be declared the majority stockholder of

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TTTDC as against respondents Ocampo, Silva, Leviste, Sr., Calalang
and Carreon (belonging to the SILVA GROUP). The material
allegations of the petition state that: (1) TTTDC passed a Resolution
dated December 29, 1975 authorizing the transfer of its unissued
shares to Rovels as the latter’s construction fee;15 (2) Pursuant to that
Resolution, TTTDC shares of stock worth P692,000.00 were transferred
to Rovels;16 (3) While TTTDC, in its March 1, 1976 Resolution, repealed
the December 29, 1975 Resolution, such repeal does not bind Rovels
for lack of notice;17 (4) Several "interrelated cases" (SEC Case Nos.
1322 and 3806) were filed with the SEC involving the SILVA and
SANTOS GROUPS;18 (5) Rovels is not bound by the SEC Decisions since
it was not impleaded as a party in said cases.19
Forthwith, the SILVA GROUP filed a motion to dismiss20 the petition on

the following grounds: (1) Rovels has no cause of action since
TTTDC’s December 29, 1975 Board Resolution was repealed by its
March 1, 1976 Resolution;21 (2) the petition is barred by the prior SEC
Decisions in SEC Case No. 1322 declaring that the issuance of
TTTDC’s shares of stock to Rovels is valid, and the SEC Decision in
3806 declaring the SILVA GROUP as the lawful stockholders of
TTTDC;22 and (3) the petition is barred by estoppel, prescription and
laches since it was filed long after Rovels was notified of the repeal
of the December 29, 1975 TTTDC Resolution.23
In an Order dated April 22, 199624 in SEC Case No. 09-95-5135, SEC
Hearing Officer Manuel P. Perea dismissed Rovel’s petition on the
grounds of lack of cause of action, res judicata, estoppel, laches
and prescription. This Order was affirmed by the SEC en banc in its
Decision dated January 20, 199725 in SEC AC No. 560.
Upon a petition for review, docketed as CA-G.R. SP. No. 43260, the
Court of Appeals, in its Decision dated June 5, 1998,26 affirmed the
January 20, 1997 SEC en banc Decision. Rovels’ motion for
reconsideration was likewise denied.27
Hence, the instant petition for review on certiorari,28 alleging that the
Court of Appeals erred:
IN HOLDING THAT PETITIONER ROVELS HAS NO CAUSE OF ACTION

AGAINST PRIVATE RESPONDENTS; and
II
IN HOLDING THAT THE PETITION IN SEC CASE NO. 09-95-5135 IS

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

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The petition is unmeritorious.
On the first assigned error, we find that the Court of Appeals is

correct in affirming the dismissal of Rovels’ petition in SEC Case No.
09-955135 for lack of cause of action.
A cause of action is defined as the delict or wrongful act or omission

committed by a person in violation of the right of another.30 A cause
of action exists if the following elements are present: (1) a right in
favor of the plaintiff, (2) the correlative obligation of the defendant
to respect such right, and (3) the act or omission of the defendant in
violation of plaintiff’s right.31 The test is whether the material
allegations of the complaint, assuming them to be true, state
ultimate facts which constitute plaintiff’s cause of action, such that
plaintiff is entitled to a favorable judgment as a matter of law.32
The pertinent portions of Rovels petition filed with the SEC read:
xxx xxx xxx
"5. x x x. On December 29, 1975, TTTDC in a Resolution signed by

majority members of the Board of Directors resolved that TTTDC pay
its creditors through a ‘debt-to-equity swap;’
xxx xxx xxx
"9. x x x the relation between the Silva faction and the Santos faction
became adversarial. The Silva faction attempted to form an alleged
new board of directors and repealed the Board Resolution dated
December 29, 1975 Resolution regarding the ‘debt’ to equity swap.
Thus, it resolved:
‘RESOLVED, as it is hereby resolved, that the Resolution of December

29, 1975 authorizing the payment of creditors with unissued shares of
the corporation be as it is hereby repealed: Resolved further that the
matter as well as the amount of the creditor’s claims be given
adequate study and consideration by the Board. x x x’
"10. That what is clear from the above Resolution of March 1, 1976 is
the admission that indeed TTTDC owes certain amount of money
from its creditors. The creditors became stockholders of record as a
result of shares of stock issued in implementation of the ‘debt to
equity’ conversion. Corresponding shares of stock were issued and
signed by then president of the corporation Roberto Roxas and then
corporate secretary Francisco N. Carreon, Jr.
"Copy of said Certificate of Stocks are hereto attached and marked

as Annexes ‘D’ to ‘P’ and made an integral part hereof.
xxx xxx xxx

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

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

stockholder thru ‘debt to equity swap’ had been an innocent party
to such controversy between the aforesaid 2 ruling thereof, hence,
petitioner remains as is on a status quo basis as majority stockholder
of TTTDC.
xxx xxx xxx
"PRAYER
"WHEREFORE, premises considered, petitioner prays that this

Honorable Commission render judgment in favor of petitioner and
against respondents (SILVA GROUP):
xxx xxx xxx
"2. After due notice and hearing, re-declaring petitioner lawful

registered majority stockholder of TTTDC x x x;
"3. Ordering respondents to desist from sitting in the Board of

Directors of TTTDC as they are not lawful registered stockholders in
the books of the said corporation.
xxx xxx x x x33
A reading of the above petition (paragraph 5) shows that Rovels’

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

bound by the SEC Decision in SEC Case Nos. 1322 and 3806 and in
G.R. No. 61863 as it was "never a party in any of these cases." This
contention brings us to the issue of res judicata.
The requisites of res judicata,34 also known as the rule on bar by prior
judgment, are:
1) the former judgment must be final;
2) the court which rendered it had jurisdiction over the subject

matter and the parties;
3) the judgment must be on the merits; and
4) there must be between the first and the second actions,

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

must be noted that Eduardo Santos, President of Rovels, was one of
the respondents in both SEC Case Nos. 1322 and 3806. Clearly,
Rovels and Eduardo Santos, being its President, share an identity of
interests sufficient to make them privies-in-law, as correctly found by
the Court of Appeals in its assailed Decision, thus:
"In the case at bench, there can be no question that the rights
claimed by petitioner and its stockholders/directors/officers who
were parties in SEC Case Nos. 1322 and 3806 are identical in that
they are both based on the December 29, 1975 Resolution. Stated

suigeneris
differently, they shared an identity of interest from which flowed an
identity of relief sought, namely, to be declared owners of the stocks
of TTTDC, premised on the same December 29, 1975 Resolution. x x x.
This ‘identity of interest is sufficient to make them privies-in-law, one
to the other, and meets the requisite of substantial identity of
parties.’"35
It bears stressing that absolute identity of parties is not required for

the principle of res judicata, or the rule on bar by prior judgment, to
apply. Mere substantial identity of parties, or a community of
interests between a party in the first case and a party in the
subsequent case even if the latter was not impleaded in the first
case, is sufficient.36
Rovels cannot take refuge in the argument that, as a corporation, it

is imbued with personality separate and distinct from that of the
respondents in SEC Case Nos. 1322 and 3806. The legal fiction of
separate corporate existence is not at all times invincible and the
same may be pierced when employed as a means to perpetrate a
fraud, confuse legitimate issues, or used as a vehicle to promote
unfair objectives or to shield an otherwise blatant violation of the
prohibition against forum-shopping. While it is settled that the
piercing of the corporate veil has to be done with caution, this
corporate fiction may be disregarded when necessary in the interest
of justice.37
The doctrine of res judicata states that a final judgment on the merits
rendered by a court of competent jurisdiction is conclusive as to the
rights of the parties and their privies, and constitutes an absolute bar
to subsequent actions involving the same claim, demand or cause
of action.38 This is founded on public policy and necessity, which
makes it to the interest of the State that there should be an end to
litigations, and on the principle that an individual should not be
vexed twice for the same cause.39
Just recently, we emphatically declared in In Re: Petition Seeking for

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

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Finally, this Court sustains the Appellate Court’s finding that the filing
of Rovels petition in the instant SEC Case No. 09-95-5135 is barred by
estoppel, prescription and laches. There is no merit to Rovels’ claim
that it was only in June of 199541 when it became aware of the
repeal of the December 29, 1975 TTTDC Resolution and of the
consequent nullification of the transfer of its shares of stock.
It is undisputed that Eduardo Santos was present in the March 1, 1976

TTTDC Board meeting wherein the December 29, 1975 Resolution was
repealed. We hold that Eduardo Santos, being the President of
Rovels, is considered as its (Rovels’) agent. As such, his knowledge of
the repeal of the December 29, 1975 Resolution, under the theory of
imputed knowledge, is ascribed to his principal (Rovels).
It was only on September 6, 1995, or almost twenty (20) years from

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

Court of Appeals dated June 5, 1998 and its Resolution dated
December 21, 1998 in CA-G.R. SP. No. 43260, are AFFIRMED.
SO ORDERED.
Puno, (Chairman), Panganiban, Corona, and Carpio Morales, JJ.,

concur.
Footnotes
*Respondent Expedito Leviste, Sr. died on September 6, 1999

pending resolution of this case, and was substituted by his heirs,
suigeneris
namely, Maria Cristina Borbon-Leviste, Enrique B. Leviste,
Victoriano B. Leviste, Feliciano B. Leviste and Edgar John B.
Leviste (see Supreme Court Resolution dated June 28, 2000,
Rollo, p. 761).
1Pursuant to Rule 45 of the 1997 Rules of Civil Procedure, as
amended.
2Penned by then Court of Appeals Justice Consuelo Ynares-
Santiago, now Justice of this Court, and concurred in by
Justices Bernardo Ll. Salas, retired, and Candido V. Rivera;
Rollo, pp. 9-18.
3 Rollo, at 170.
4Minutes of the December 29, 1975 Board of Directors’
meeting, id., at 170-171.
5 Under Section 4 (a) of Batas Pambansa Blg. 178 (The Revised
Securities Act), "(n)o securities, except of a class exempt under
any of the provisions of Section 5 (t)hereof or unless sold in any
transaction exempt under any of the provisions of Section 6
(t)hereof, shall be sold or offered for sale or distributed to the
public within the Philippines unless such securities shall have
been registered or permitted to be sold x x x." As defined in
Section 2 (a) of B.P. Blg. 178, the term "securities" includes shares
of stocks (De Leon, The Corporation Code, Annotated, 1993
Ed., p. 750).
6 This SEC Resolution No. 260 resolved the petition filed by
Eduardo Santos on behalf of the TAGAYTAY-TAAL TOURIST
DEVELOPMENT CORPORATION, requesting that P108,000.00
worth of shares of its unissued capital stock which it proposes to
sell to the persons mentioned in its letter of February 23, 1976 by
way of offset of liabilities, be exempted from the registration
requirements of the Securities Act. The said Resolution states:
"x x x In view of the limited character of the offering to be

made on the securities and it appearing that liabilities
owing to them which is being applied to offset the
payment of P108,000.00, the Commission is of the opinion,
and so resolves, that the registration and/or licensing of
the securities herein sought to be exempted is not
necessary in the public interest or for the protection of the
purchasers thereof. Petition is, therefore, granted. x x x"
(Rollo, pp. 122-123)

suigeneris
Ilusorio vs. Ilusorio (540 SCRA 182 [2007])
G.R. No. 171659 December 13, 2007
MARIETTA K. ILUSORIO, Petitioner,

vs.
SYLVIA K. ILUSORIO, CRISTINA A. ILUSORIO, JOVITO CASTRO and FIVE
(5) JOHN DOES, Respondents.
DECISION
NACHURA, J.:
Before us on appeal, by way of a petition for review on certiorari

under Rule 45 of the Rules of Court, is the Decision 1 dated November
23, 2005 and the Resolution2 dated February 14, 2006, both of the
Court of Appeals.
The case arose from a Complaint-Affidavit3 filed by petitioner

Marietta K. Ilusorio (Marietta) for robbery, qualified trespass to
dwelling, and violation of Presidential Decree (P.D.) No. 1829 against
private respondents Sylvia K. Ilusorio (Sylvia), Cristina A. Ilusorio
(Cristina), Jovito Castro (Jovito), and five (5) John Does.
In the said Complaint-Affidavit, Marietta alleged that she, together

with Erlinda K. Ilusorio (Erlinda), Ramon K. Ilusorio, and Shereen K.
Ilusorio, owns and controls the majority of the shares of stock of
Lakeridge Corporation (Lakeridge), the registered owner of
Penthouse Unit 43-C (Penthouse Unit 43-C) of the Pacific Plaza
Condominium (Pacific Plaza) in Ayala Avenue, Makati City; that
Erlinda, Chairperson and President of Lakeridge, has, for the past
eight years, been the present and lawful occupant of Penthouse
Unit 43-C; that, sometime in October 1999, Erlinda left for the United
States of America, giving her (Marietta) full authority to take care of,
oversee, and secure Penthouse Unit 43-C through a letter to that
effect addressed to the management of the Pacific Plaza; that on
November 2, 1999, Sylvia, Christie Agcaoili-Ilusorio (referring to
Cristina), with several unidentified persons, with the consent of Jovito,
Chief Security of the Pacific Plaza, forcibly entered Penthouse Unit
43-C by breaking its door and locks and allegedly caused the loss of
documents and jewelry (this incident was subject of a robbery case
before the Office of the City Prosecutor of Makati City docketed as
I.S. No. 99-Y-37824); that on November 6, 1999, five (5) unidentified
persons, with Jovito’s permission, forcibly entered Penthouse Unit 43-
C by breaking its door and locks, replacing it with new ones, and
thus preventing her entrance; that upon learning of the latter
incident, she went to Penthouse Unit 43-C to verify, and, having seen

suigeneris
the door knob torn and one of the locks broken, sought the
assistance of the Makati Police; that during the on-site investigation
by the police, Jovito failed to cooperate and even concealed
information pertinent to the incident.
In their Counter-Affidavit,4 private respondents, while agreeing that

the registered owner of Penthouse Unit 43-C is Lakeridge
Development Corporation, denied that petitioner and the other
persons named in the Complaint-Affidavit own and control the
majority shares and that Erlinda is the chairperson and president of
Lakeridge. To buttress this allegation, they submitted copies of the
updated General Information Sheet5 filed with the Securities and
Exchange Commission (SEC), Secretary’s Certification6 dated
November 8, 1999, and SEC Certificate of Corporate
Filing/Information7 dated November 3, 1999, all showing the
stockholders, the officers, and the members of the board of directors
of Lakeridge. They also alleged that the authority given by Erlinda to
Marietta was without force and effect, being ultra vires, in the
absence of any board resolution to support it. They also noted that
the letter of authority,8 while dated October 7, 1999, was received
by the management of the Pacific Plaza only on November 3, 1999,
which was after the November 2, 1999 incident described in the
Complaint-Affidavit. They also submitted a copy of Lakeridge’s
letter9 dated October 20, 1999 to the Pacific Plaza Condominium
Association, Inc., received by the latter on October 29, 1999, stating
that Lakeridge had not authorized any lease or sale of Penthouse
Unit 43-C. They also averred that Marietta was not authorized by the
board of directors of Lakeridge to institute the criminal case and that
Erlinda’s residence was not at the Pacific Plaza but in Antipolo, Rizal.
More importantly, they alleged that there could not be robbery and
qualified trespass to dwelling because, as officers of Lakeridge, they
had the right to enter Penthouse Unit 43-C.
In his separate Counter-Affidavit10 dated January 17, 2000, Jovito

explained that the November 2, 1999 incident cited by Marietta in
her Complaint-Affidavit where she claimed that Penthouse Unit 43-C
was forced open by breaking the door and locks was really an act
of maintenance of the property upon written request made by Sylvia
as one of the legitimate unit owners per the records of Pacific Plaza.
He claimed that he was merely dragged to the family feud of the
Ilusorios.
In a Resolution11 dated February 1, 2000, Prosecutor II Edgardo G.

Hirang of the Office of the City Prosecutor of Makati City dismissed
the charges against private respondents for lack of probable cause.
He found that, according to the records of Pacific Plaza, Sylvia, who
was alleged to have ordered the opening of the door and the
replacement of the locks of Penthouse Unit 43-C on November 3,

suigeneris
1999, being among the legitimate owners of and who had on
several occasions visited the unit, had the authority to do so for the
effective maintenance of the unit. He also found that the charge
against Jovito had already become moot and academic
considering the dismissal of the charges for robbery and qualified
trespass to dwelling.
Marietta’s motion for reconsideration of the Resolution was denied in

an Order12 dated May 2, 2000.
Marietta elevated the case to the Department of Justice (DOJ) via a

petition for review. However, in a Resolution13 dated August 27, 2004,
then Acting DOJ Secretary Ma. Merceditas N. Gutierrez denied the
petition on the ground that there was no showing of any reversible
error on the part of the Office of the City Prosecutor of Makati City to
warrant the reversal of his dismissal of the criminal charges. The
motion for reconsideration of the Resolution dated August 27, 2004
was, likewise, denied in a Resolution14 dated February 11, 2005.
Marietta went to the Court of Appeals by means of a petition for

review on certiorari under Rule 65 of the Rules of Court claiming
grave abuse of discretion on the part of both the Office of the City
Prosecutor of Makati City and the DOJ in dismissing, for lack of
probable cause, the charges she lodged against private
respondents.
The Court of Appeals, in its Decision dated November 23, 2005,

denied the petition for lack of merit. Marietta moved to reconsider
the said Decision, but the motion was, likewise, denied in the
Resolution dated February 14, 2006. Hence, this petition.
Petitioner posits that this Court should grant the petition because –
The Public Respondents erred in upholding the resolution of the

Investigating Prosecutor Edgardo G. Hirang, which dismissed the
complaints for Robbery, Qualified Trespass to Dwelling, and Violation
of P.D. [1829], considering that:
A. The evidence on record sufficiently established probable

cause that [the] said crimes were committed and that the
private respondents were probably guilty thereof.
B. The petitioner, together with EKI (Erlinda), Ramon K. Ilusorio,

and Shereen K. Ilusorio, were the duly constituted officers of
LAKERIDGE and that the lawful occupant of Penthouse Unit 43-
C of Pacific Plaza Condominium was EKI, who in turn entrusted
the same to petitioner in her absence.

suigeneris
C. The self-serving assertions of private respondents that they
were representatives of LAKERIDGE did not authorize them to
break open the doors of Penthouse Unit 43-C of Pacific Plaza
Condominium and gain entry thereto.15
We disagree.
In essence, Marietta ascribes reversible error in the Office of the City

Prosecutor’s finding of lack of probable cause against private
respondents for robbery, qualified trespass to dwelling, and for
violation of P.D. No. 1829, which was uniformly affirmed by the DOJ
and the Court of Appeals.
Probable cause has been defined as the existence of such facts and
circumstances as would lead a person of ordinary caution and
prudence to entertain an honest and strong suspicion, that the
person charged is guilty of the crime for which he is sought to be
prosecuted. Being based merely on opinion and reasonable belief, it
does not import absolute certainty.16 A finding of probable cause
merely binds over the suspect to stand trial; it does not impose a
guilty verdict. However, it requires more than bare suspicion.17
The conduct of preliminary investigation for the purpose of

determining the existence of probable cause is executive in nature.
The right to prosecute crime is reposed in the executive department
of the government primarily responsible for the faithful execution of
the laws of the land. This right vests the government prosecutor with
a wide latitude of discretion on what and whom to charge upon
proper finding of probable cause, depending on a smorgasbord of
factors best appreciated by him. The preliminary investigation also
serves to secure the innocent against hasty, malicious, and
oppressive prosecution, and to protect him from an open
accusation of a crime, and the expense and anxiety of a public trial.
It likewise protects the State from useless and expensive trials, if
unwarranted.18
Thus, a prosecutor, by the nature of his office, is under no compulsion

to file a particular criminal information where he is convinced that
there is not enough evidence to support its averments, or that the
evidence at hand, to his mind, necessarily leads to a different
conclusion. While his findings are not absolute and are subject to
judicial review, this Court generally adheres to the policy of non-
interference in the conduct of preliminary investigations, particularly
when the said findings are well-supported by the facts as established
by the evidence on record.19
Findings of probable cause are essentially factual in nature.

Accordingly, in assailing said findings on the contention that the
prosecutor committed grave abuse of discretion, the petitioner
suigeneris
clearly raises issues anchored mainly on the propriety or impropriety
of the prosecutor’s appreciation of the facts. This Court is not duty
bound to scrutinize anew established facts in a petition for review for
we are not a trier of facts.20
In this case, we find no compelling reason to deviate from our policy

of non-interference with the investigating prosecutor’s findings of
absence of probable cause. It is admitted by both parties that the
registered owner of Penthouse Unit 43-C is Lakeridge. Aside from the
allegation of Marietta, there is no sufficient evidence on record that
Erlinda was indeed the lawful occupant of the unit. In fact, the letter
dated October 7, 1999, by which she claimed Erlinda gave her
authority to occupy, oversee, and secure Penthouse Unit 43-C, and
belatedly received by the management of the Pacific Plaza on
November 3, 1999, was signed by Erlinda "for LAKERIDGE" without the
appropriate resolution of Lakeridge’s board of directors to support it.
Likewise, Marietta is not armed with any board resolution authorizing
her to institute the criminal charges against the private respondents.
Furthermore, Sylvia and Cristina were able to establish by competent

evidence that they were then the Vice-President and the Assistant
Vice-President of Lakeridge, respectively. As such officers, they
would, ostensibly, have the right and authority to freely enter and
perform acts of maintenance of Penthouse Unit 43-C. The right could
include breaking open the door and replacing its locks, apparently
due to loss of the keys.
Be that as it may, we still take time out to examine the pertinent

provisions of the Revised Penal Code on robbery and qualified
trespass to dwelling, and the violation of P.D. No. 1829 referred to by
Marietta in her Complaint-Affidavit which read as follows:
Art. 293. Who are guilty of robbery.—Any person who, with intent to
gain, shall take any personal property belonging to another, by
means of violence against or intimidation of any person, or using
force upon anything shall be guilty of robbery.
Art. 299. Robbery in an inhabited house or public building or edifice

devoted to worship.—Any armed person who shall commit robbery
in an inhabited house or public building or edifice devoted to
religious worship, shall be punished by reclusion temporal, if the
value of the property taken shall exceed 250 pesos, and if –
(a) The malefactors shall enter the house or building in which

the robbery was committed, by any of the following means:
1. Through an opening not intended for entrance or

egress.

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2. By breaking any wall, roof, or floor, or breaking any door
or window.
3. By using false keys, picklocks, or similar tools.
4. By using any fictitious name or pretending the exercise

of public authority.
Or if –
(b) The robbery be committed under any of the following

circumstances:
1. By the breaking of doors, wardrobes, chests, or any

other kind of locked or sealed furniture or receptacle.
2. By taking such furniture or objects away to be broken or

forced open outside the place of robbery.
Art. 280. Qualified trespass to dwelling.—Any private person who shall

enter the dwelling of another against the latter’s will, shall be
punished by arresto mayor and a fine not exceeding 1,000 pesos.
If the offense be committed by means of violence or intimidation,

the penalty shall be prision correccional in its medium and maximum
periods and a fine not exceeding 1,000 pesos.
The provisions of this article shall not be applicable to any person

who shall enter another’s dwelling for the purpose of preventing
some serious harm to himself, the occupants of the dwelling or a
third person, nor shall it be applicable to any person who shall enter
a dwelling for the purpose of rendering some service to humanity or
justice, nor to anyone who shall enter cafes, taverns, inns, and other
public houses, while the same are open.
Presidential Decree No. 1829:
Section 1. The penalty of prision correccional in its maximum period,

or a fine ranging from 1,000 to 6,000 pesos, or both, shall be imposed
upon any person who knowingly or willfully obstructs, impedes,
frustrates or delays the apprehension of suspects and the
investigation and prosecution of criminal cases by committing any of
the following acts:
xxxx
(b) altering, destroying, suppressing, or concealing any paper,

record, document, or object, with intent to impair its verity,
authenticity, legibility, availability, as evidence in any
investigation of or official proceedings in, criminal cases, or to

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be used in the investigation of, or official proceedings in,
criminal cases;
(c) harboring or concealing, or facilitating the escape of, any

person he knows, or has reasonable ground to believe or
suspect, has committed any offense under existing penal laws
in order to prevent his arrest, prosecution, and
conviction.1âwphi1
We hold that the evidence adduced does not support a finding of

probable cause for the offenses defined in the provisions cited
above. Marietta failed to prove, by competent evidence, that: (1)
Penthouse Unit 43-C was the dwelling place of Erlinda; (2) she has
authority over the said unit; (3) Sylvia and Cristina had no authority to
enter the unit and conduct acts of maintenance thereon; and (4)
Sylvia and Cristina were armed when they effected entrance. Based
on these circumstances, the charges of robbery and qualified
trespass to dwelling must inevitably fail. Perforce, the charge against
Jovito for violation of P.D. No. 1829 should also be dismissed.
We reiterate that Marietta, as the complainant in the criminal

charges filed before the Office of the City Prosecutor of Makati City,
has the burden to prove the allegations in her Complaint-Affidavit by
convincing evidence to warrant the indictment of private
respondents. Unfortunately, she failed to discharge this burden. Thus,
we cannot fault the investigating prosecutor for dismissing the
criminal charges, especially after the dismissal was uniformly affirmed
in toto by the City Prosecutor, the Secretary of the DOJ, and the
Court of Appeals.
WHEREFORE, the petition is DENIED for lack of merit. The assailed

Decision of the Court of Appeals, dated November 23, 2005, and the
Resolution dated February 14, 2006 in CA-G.R. SP No. 89331, are
AFFIRMED.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA

Associate Justice
WE CONCUR:
Associate Justice
Chairperson
MA. ALICIA AUSTRIA-MARTINEZ MINITA V. CHICO-NAZARIO


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RUBEN T. REYES
Associate Justice
ATTESTATION
I attest that the conclusions in the above Decision were reached in

opinion of the Court’s Division.
Associate Justice
Chairperson, Third Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division
Chairperson's Attestation, I certify that the conclusions in the above
REYNATO S. PUNO
Chief Justice
Civil Service Commission vs. Javier (546 SCRA 485 [2008])
G.R. No. 173264 February 22, 2008
CIVIL SERVICE COMMISSION, petitioner,

vs.
NITA P. JAVIER, respondent.
DECISION

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Before the Court is a Petition for Review on Certiorari under Rule 45 of
the Rules of Court, seeking to reverse the Decision 1 of the Court of
Appeals (CA) dated September 29, 2005, as well as its Resolution of
June 5, 2006, in CA-G.R. SP No. 88568, which set aside the resolutions
and orders of the Civil Service Commission (CSC) invalidating the
appointment of respondent as Corporate Secretary of the Board of
Trustees of the Government Service and Insurance System (GSIS).
The facts are undisputed.
According to her service record,2 respondent was first employed as

Private Secretary in the GSIS, a government owned and controlled
corporation (GOCC), on February 23, 1960, on a "confidential" status.
On July 1, 1962, respondent was promoted to Tabulating Equipment
Operator with "permanent" status. The "permanent" status stayed
with respondent throughout her career. She spent her entire career
with GSIS, earning several more promotions, until on December 16,
1986, she was appointed Corporate Secretary of the Board of
Trustees of the corporation.
On July 16, 2001, a month shy of her 64th birthday,3 respondent opted
for early retirement and received the corresponding monetary
benefits.4
On April 3, 2002, GSIS President Winston F. Garcia, with the approval

of the Board of Trustees, reappointed respondent as Corporate
Secretary, the same position she left and retired from barely a year
earlier. Respondent was 64 years old at the time of her
reappointment.5 In its Resolution, the Board of Trustees classified her
appointment as "confidential in nature and the tenure of office is at
the pleasure of the Board."6
Petitioner alleges that respondent's reappointment on confidential

status was meant to illegally extend her service and circumvent the
laws on compulsory retirement.7 This is because under Republic Act
(R.A.) No. 8291, or the Government Service Insurance System Act of
1997, the compulsory retirement age for government employees is
65 years, thus:
Sec. 13. x x x
(b) Unless the service is extended by appropriate authorities,

retirement shall be compulsory for an employee at sixty-five
(65) years of age with at least fifteen (15) years of service:
Provided, That if he has less than fifteen (15) years of service, he
may be allowed to continue in the service in accordance with
existing civil service rules and regulations.

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Under the civil service regulations, those who are in primarily
confidential positions may serve even beyond the age of 65 years.
Rule XIII of the Revised Omnibus Rules on Appointments and Other
Personnel Actions, as amended, provides that:
Sec. 12. (a) No person who has reached the compulsory

retirement age of 65 years can be appointed to any position in
the government, subject only to the exception provided under
sub-section (b) hereof.
xxxx
b. A person who has already reached the compulsory

retirement age of 65 can still be appointed to a
coterminous/primarily confidential position in the government.
A person appointed to a coterminous/primarily confidential

position who reaches the age of 65 is considered automatically
extended in the service until the expiry date of his/her
appointment or until his/her services are earlier terminated.8
It is for these obvious reasons that respondent's appointment was

characterized as "confidential" by the GSIS.
On October 10, 2002, petitioner issued Resolution No. 021314,

invalidating the reappointment of respondent as Corporate
Secretary, on the ground that the
position is a permanent, career position and not primarily

confidential.9
On November 2, 2002, the CSC, in a letter of even date, through its

Chairperson Karina Constantino-David, informed GSIS of CSC's
invalidation of respondent's appointment, stating, thus:
Records show that Ms. Javier was formerly appointed as

Corporate Secretary in a "Permanent" capacity until her
retirement in July 16, 2001. The Plantilla of Positions shows that
said position is a career position. However, she was re-
employed as Corporate Secretary, a position now declared as
confidential by the Board of Trustees pursuant to Board
Resolution No. 94 dated April 3, 2002.
Since the position was not declared primarily confidential by

the Civil Service Commission or by any law, the appointment of
Ms. Javier as Corporate Secretary is hereby invalidated.10
Respondent and GSIS sought to reconsider the ruling of petitioner.

CSC replied that the position of Corporate Secretary is a permanent
(career) position, and not primarily confidential (non-career); thus, it
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was wrong to appoint respondent to this position since she no longer
complies with eligibility requirements for a permanent career status.
More importantly, as respondent by then has reached compulsory
retirement at age 65, respondent was no longer qualified for a
permanent career position.11 With the denial of respondent's plea for
reconsideration, she filed a Petition for Review with the Court of
Appeals.
On September 29, 2005, the CA rendered a Decision setting aside

the resolution of petitioner invalidating respondent's appointment.12
The CA ruled that in determining whether a position is primarily
confidential or otherwise, the nature of its functions, duties and
responsibilities must be looked into, and not just its formal
classification.13 Examining the functions, duties and responsibilities of
the GSIS Corporate Secretary, the CA concluded that indeed, such
a position is primarily confidential in nature.
Petitioner filed a motion for reconsideration, which was denied by

the CA on June 5, 2006.
Hence, herein petition.
The petition assails the CA Decision, contending that the position of

Corporate Secretary is a career position and not primarily
confidential in nature.14 Further, it adds that the power to declare
whether any position in government is primarily confidential, highly
technical or policy determining rests solely in petitioner by virtue of its
constitutional power as the central personnel agency of the
government.15
Respondent avers otherwise, maintaining that the position of

Corporate Secretary is confidential in nature and that it is within the
powers of the GSIS Board of Trustees to declare it so.16 She argues
that in determining the proper classification of a position, one should
be guided by the nature of the office or position, and not by its
formal designation.17
Thus, the Court is confronted with the following issues: whether the
courts may determine the proper classification of a position in
government; and whether the position of corporate secretary in a
GOCC is primarily confidential in nature.
The Court's Ruling
The courts may determine the proper

classification of a position in government.

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Under Executive Order No. 292, or the Administrative Code of 1987,
civil service positions are currently classified into either 1) career
service and 2) non-career service positions.18
Career positions are characterized by: (1) entrance based on merit

and fitness to be determined as far as practicable by competitive
examinations, or based on highly technical qualifications; (2)
opportunity for advancement to higher career positions; and (3)
security of tenure.19
In addition, the Administrative Code, under its Book V, sub-classifies

career positions according to "appointment status," divided into: 1)
permanent - which is issued to a person who meets all the
requirements for the positions to which he is being appointed,
including the appropriate eligibility prescribed, in accordance with
the provisions of law, rules and standards promulgated in pursuance
thereof; and 2) temporary - which is issued, in the absence of
appropriate eligibles and when it becomes necessary in the public
interest to fill a vacancy, to a person who meets all the requirements
for the position to which he is being appointed except the
appropriate civil service eligibility; provided, that such temporary
appointment shall not exceed twelve months, and the appointee
may be replaced sooner if a qualified civil service eligible becomes
available.20
Positions that do not fall under the career service are considered
non-career positions, which are characterized by: (1) entrance on
bases other than those of the usual tests of merit and fitness utilized
for the career service; and (2) tenure which is limited to a period
specified by law, or which is co-terminous with that of the appointing
authority or subject to his pleasure, or which is limited to the duration
of a particular project for which purpose employment was made.21
Examples of positions in the non-career service enumerated in the

Administrative Code are:
Sec. 9. Non-Career Service. - x x x
The Non-Career Service shall include:
(1) Elective officials and their personal or confidential staff;
(2) Secretaries and other officials of Cabinet rank who hold

their positions at the pleasure of the President and their
personal or confidential staff(s);
(3) Chairman and members of commissions and boards with

fixed terms of office and their personal or confidential staff;

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(4) Contractual personnel or those whose employment in the
government is in accordance with a special contract to
undertake a specific work or job, requiring special or technical
skills not available in the employing agency, to be
accomplished within a specific period, which in no case shall
exceed one year, and performs or accomplishes the specific
work or job, under his own responsibility with a minimum of
direction and supervision from the hiring agency; and
(5) Emergency and seasonal personnel. (Emphasis supplied)
A strict reading of the law reveals that primarily confidential positions

fall under the non-career service. It is also clear that, unlike career
positions, primarily confidential and other non-career positions do
not have security of tenure. The tenure of a confidential employee is
co-terminous with that of the appointing authority, or is at the latter's
pleasure. However, the confidential employee may be appointed or
remain in the position even beyond the compulsory retirement age
of 65 years.22
Stated differently, the instant petition raises the question of whether

the position of corporate secretary in a GOCC, currently classified by
the CSC as belonging to the permanent, career service, should be
classified as primarily confidential, i.e., belonging to the non-career
service. The current GSIS Board holds the affirmative view, which is
ardently opposed by petitioner. Petitioner maintains that it alone
can classify government positions, and that the determination it
made earlier, classifying the position of GOCC corporate secretary
as a permanent, career position, should be maintained.
At present, there is no law enacted by the legislature that defines or

sets definite criteria for determining primarily confidential positions in
the civil service. Neither is there a law that gives an enumeration of
positions classified as primarily confidential.
What is available is only petitioner's own classification of civil service

positions, as well as jurisprudence which describe or give examples
of confidential positions in government.
Thus, the corollary issue arises: should the Court be bound by a

classification of a position as confidential already made by an
agency or branch of government?
Jurisprudence establishes that the Court is not bound by the

classification of positions in the civil service made by the legislative or
executive branches, or even by a constitutional body like the
petitioner.23 The Court is expected to make its own determination as
to the nature of a particular position, such as whether it is a primarily
confidential position or not, without being bound by prior
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classifications made by other bodies.24 The findings of the other
branches of government are merely considered initial and not
conclusive to the Court.25 Moreover, it is well-established that in case
the findings of various agencies of government, such as the
petitioner and the CA in the instant case, are in conflict, the Court
must exercise its constitutional role as final arbiter of all justiciable
controversies and disputes.26
Piñero v. Hechanova,27 interpreting R.A. No. 2260, or the Civil Service

Act of 1959, emphasized how the legislature refrained from declaring
which positions in the bureaucracy are primarily confidential, policy
determining or highly technical in nature, and declared that such a
determination is better left to the judgment of the courts. The Court,
with the ponencia of Justice J.B.L. Reyes, expounded, thus:
The change from the original wording of the bill (expressly

declared by law x x x to be policy determining, etc.) to that
finally approved and enacted ("or which are policy
determining, etc. in nature") came about because of the
observations of Senator Tañada, that as originally worded the
proposed bill gave Congress power to declare by fiat of law a
certain position as primarily confidential or policy determining,
which should not be the case. The Senator urged that since the
Constitution speaks of positions which are "primarily
confidential, policy determining or highly technical in nature," it
is not within the power of Congress to declare what positions
are primarily confidential or policy determining. "It is the nature
alone of the position that determines whether it is policy
determining or primarily confidential." Hence, the Senator
further observed, the matter should be left to the "proper
implementation of the laws, depending upon the nature of the
position to be filled", and if the position is "highly confidential"
then the President and the Civil Service Commissioner must
implement the law.
To a question of Senator Tolentino, "But in positions that involved

both confidential matters and matters which are routine, x x x
who is going to determine whether it is primarily confidential?"
Senator Tañada replied:
"SENATOR TAÑADA: Well. at the first instance, it is the

appointing power that determines that: the nature of the
position. In case of conflict then it is the Court that
determines whether the position is primarily confidential or
not.
"I remember a case that has been decided by the

Supreme Court involving the position of a district engineer

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in Baguio, and there. precisely, the nature of the position
was in issue. It was the Supreme Court that passed upon
the nature of the position, and held that the President
could not transfer the district engineer in Baguio against
his consent."
Senator Tañada, therefore, proposed an amendment to

section 5 of the bill, deleting the words "to be" and inserting in
lieu thereof the words "Positions which are by their nature"
policy determining, etc., and deleting the last words "in nature".
Subsequently, Senator Padilla presented an amendment to the
Tañada amendment by adopting the very words of the
Constitution, i.e., "those which are policy determining, primarily
confidential and highly technical in nature". The Padilla
amendment was adopted, and it was this last wording with
which section 5 was passed and was enacted (Senate Journal,
May 10, 1959, Vol. 11, No. 32, pp. 679-681).
It is plain that, at least since the enactment of the 1959 Civil

Service Act (R. A. 2260), it is the nature of the position which
finally determines whether a position is primarily confidential,
policy determining or highly technical. Executive
pronouncements can be no more than initial determinations
that are not conclusive in case of conflict. And it must be so, or
else it would then lie within the discretion of title Chief Executive
to deny to any officer, by executive fiat, the protection of
section 4, Article XII, of the Constitution.28 (Emphasis and
underscoring supplied)
This doctrine in Piñero was reiterated in several succeeding cases.29
Presently, it is still the rule that executive and legislative identification

or classification of primarily confidential, policy-determining or highly
technical positions in government is no more than mere
declarations, and does not foreclose judicial review, especially in the
event of conflict. Far from what is merely declared by executive or
legislative fiat, it is the nature of the position which finally determines
whether it is primarily confidential, policy determining or highly
technical, and no department in government is better qualified to
make such an ultimate finding than the judicial branch.
Judicial review was also extended to determinations made by

petitioner. In Griño v. Civil Service Commission,30 the Court held:
The fact that the position of respondent Arandela as provincial

attorney has already been classified as one under the career
service and certified as permanent by the Civil Service
Commission cannot conceal or alter its highly confidential
nature. As in Cadiente where the position of the city legal
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officer was duly attested as permanent by the Civil Service
Commission before this Court declared that the same was
primarily confidential, this Court holds that the position of
respondent Arandela as the provincial attorney of Iloilo is also a
primarily confidential position. To rule otherwise would be
tantamount to classifying two positions with the same nature
and functions in two incompatible categories.31
The framers of the 1987 Constitution were of the same disposition.

Section 2 (2) Article IX (B) of the Constitution provides that:
Appointments in the civil service shall be made only according

to merit and fitness to be determined, as far as practicable,
and, except to positions which are policy-determining, primarily
confidential, or highly technical, by competitive examination.
The phrase "in nature" after the phrase "policy-determining, primarily

confidential, or highly technical" was deleted from the 1987
Constitution.32 However, the intent to lay in the courts the power to
determine the nature of a position is evident in the following
deliberation:
MR. FOZ. Which department of government has the power or

authority to determine whether a position is policy-determining
or primarily confidential or highly technical?
FR. BERNAS: The initial decision is made by the legislative body

or by the executive department, but the final decision is done
by the court. The Supreme Court has constantly held that
whether or not a position is policy-determining, primarily
confidential or highly technical, it is determined not by the title
but by the nature of the task that is entrusted to it. For instance,
we might have a case where a position is created requiring
that the holder of that position should be a member of the Bar
and the law classifies this position as highly technical. However,
the Supreme Court has said before that a position which
requires mere membership in the Bar is not a highly technical
position. Since the term 'highly technical' means something
beyond the ordinary requirements of the profession, it is always
a question of fact.
MR. FOZ. Does not Commissioner Bernas agree that the general
rule should be that the merit system or the competitive system
should be upheld?
FR. BERNAS. I agree that that it should be the general rule; that
is why we are putting this as an exception.

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MR. FOZ. The declaration that certain positions are policy-
determining, primarily confidential or highly technical has been
the source of practices which amount to the spoils system.
FR. BERNAS. The Supreme Court has always said that, but if the
law of the administrative agency says that a position is primarily
confidential when in fact it is not, we can always challenge that
in court. It is not enough that the law calls it primarily
confidential to make it such; it is the nature of the duties which
makes a position primarily confidential.
MR. FOZ. The effect of a declaration that a position is policy-

determining, primarily confidential or highly technical - as an
exception - is to take it away from the usual rules and provisions
of the Civil Service Law and to place it in a class by itself so that
it can avail itself of certain privileges not available to the
ordinary run of government employees and officers.
FR. BERNAS. As I have already said, this classification does not

do away with the requirement of merit and fitness. All it says is
that there are certain positions which should not be
determined by competitive examination.
For instance, I have just mentioned a position in the Atomic

Energy Commission. Shall we require a physicist to undergo a
competitive examination before appointment? Or a
confidential secretary or any position in policy-determining
administrative bodies, for that matter? There are other ways of
determining merit and fitness than competitive examination.
This is not a denial of the requirement of merit and fitness.33
(Emphasis supplied)
This explicit intent of the framers was recognized in Civil Service

Commission v. Salas,34 and Philippine Amusement and Gaming
Corporation v. Rilloraza,35 which leave no doubt that the question of
whether the position of Corporate Secretary of GSIS is confidential in
nature may be determined by the Court.
The position of corporate secretary in a government owned

and controlled corporation, currently classified as a permanent
career position, is primarily confidential in nature.
First, there is a need to examine how the term "primarily

confidential in nature" is described in jurisprudence. According
to Salas,36
Prior to the passage of the x x x Civil Service Act of 1959 (R.A.

No. 2260), there were two recognized instances when a
position may be considered primarily confidential: Firstly, when

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the President, upon recommendation of the Commissioner of
Civil Service, has declared the position to be primarily
confidential; and, secondly in the absence of such declaration,
when by the nature of the functions of the office there exists
"close intimacy" between the appointee and appointing power
which insures freedom of intercourse without embarrassment or
freedom from misgivings of betrayals of personal trust or
confidential matters of state.37 (Emphasis supplied)
However, Salas declared that since the enactment of R.A. No. 2260
and Piñero,38 it is the nature of the position which finally determines
whether a position is primarily confidential or not, without regard to
existing executive or legislative pronouncements either way, since
the latter will not bind the courts in case of conflict.
A position that is primarily confidential in nature is defined as early as

1950 in De los Santos v. Mallare,39 through the ponencia of Justice
Pedro Tuason, to wit:
x x x These positions (policy-determining, primarily confidential

and highly technical positions), involve the highest degree of
confidence, or are closely bound up with and dependent on
other positions to which they are subordinate, or are temporary
in nature. It may truly be said that the good of the service itself
demands that appointments coming under this category be
terminable at the will of the officer that makes them.
xxxx
Every appointment implies confidence, but much more than

ordinary confidence is reposed in the occupant of a position
that is primarily confidential. The latter phrase denotes not only
confidence in the aptitude of the appointee for the duties of the
office but primarily close intimacy which insures freedom of
[discussion, delegation and reporting] without embarrassment
or freedom from misgivings of betrayals of personal trust or
confidential matters of state. x x x40 (Emphasis supplied)
Since the definition in De los Santos came out, it has guided

numerous other cases.41 Thus, it still stands that a position is primarily
confidential when by the nature of the functions of the office there
exists "close intimacy" between the appointee and appointing
power which insures freedom of intercourse without embarrassment
or freedom from misgivings of betrayals of personal trust or
confidential matters of state.
In classifying a position as primarily confidential, its functions must not

be routinary, ordinary and day to day in character.42 A position is not
necessarily confidential though the one in office may sometimes
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handle confidential matters or documents.43 Only ordinary
confidence is required for all positions in the bureaucracy. But, as
held in De los Santos,[44] for someone holding a primarily
confidential position, more than ordinary confidence is required.
In Ingles v. Mutuc,45 the Court, through Chief Justice Roberto

Concepcion as ponente, stated:
Indeed, physicians handle confidential matters. Judges, fiscals

and court stenographers generally handle matters of similar
nature. The Presiding and Associate Justices of the Court of
Appeals sometimes investigate, by designation of the Supreme
Court, administrative complaints against judges of first instance,
which are confidential in nature. Officers of the Department of
Justice, likewise, investigate charges against municipal judges.
Assistant Solicitors in the Office of the Solicitor General often
investigate malpractice charges against members of the Bar.
All of these are "confidential" matters, but such fact does not
warrant the conclusion that the office or position of all
government physicians and all Judges, as well as the
aforementioned assistant solicitors and officers of the
Department of Justice are primarily confidential in character.46
(Emphasis supplied)
It is from De los Santos that the so-called "proximity rule" was derived.
A position is considered to be primarily confidential when there is a
primarily close intimacy between the appointing authority and the
appointee, which ensures the highest degree of trust and unfettered
communication and discussion on the most confidential of matters.47
This means that where the position occupied is already remote from
that of the appointing authority, the element of trust between them
is no longer predominant.48 On further interpretation in Griño, this was
clarified to mean that a confidential nature would be limited to
those positions not separated from the position of the appointing
authority by an intervening public officer, or series of public officers,
in the bureaucratic hierarchy.49
Consequently, brought upon by their remoteness to the position of

the appointing authority, the following were declared by the Court
to be not primarily confidential positions: City Engineer;50 Assistant
Secretary to the Mayor;51 members of the Customs Police Force or
Port Patrol;52 Special Assistant of the Governor of the Central Bank,
Export Department;53 Senior Executive Assistant, Clerk I and
Supervising Clerk I and Stenographer in the Office of the President;54
Management and Audit Analyst I of the Finance Ministry Intelligence
Bureau;55 Provincial Administrator;56 Internal Security Staff of the
Philippine Amusement and Gaming Corporation (PAGCOR);57
Casino Operations Manager;58 and Slot Machine Attendant.59 All

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positions were declared to be not primarily confidential despite
having been previously declared such either by their respective
appointing authorities or the legislature.
The following were declared in jurisprudence to be primarily

confidential positions: Chief Legal Counsel of the Philippine National
Bank;60 Confidential Agent of the Office of the Auditor, GSIS;61
Secretary of the Sangguniang Bayan;62 Secretary to the City Mayor;63
Senior Security and Security Guard in the Office of the Vice Mayor;64
Secretary to the Board of a government corporation;65 City Legal
Counsel, City Legal Officer or City Attorney;66 Provincial Attorney;67
Private Secretary;68 and Board Secretary II of the Philippine State
College of Aeronautics.69
In fine, a primarily confidential position is characterized by the close

proximity of the positions of the appointer and appointee as well as
the high degree of trust and confidence inherent in their relationship.
Ineluctably therefore, the position of Corporate Secretary of GSIS, or

any GOCC, for that matter, is a primarily confidential position. The
position is clearly in close proximity and intimacy with the appointing
power. It also calls for the highest degree of confidence between
the appointer and appointee.
In classifying the position of Corporate Secretary of GSIS as primarily
confidential, the Court took into consideration the proximity rule

together with the duties of the corporate secretary, enumerated as
follows:70
1. Performs all duties, and exercises the power, as defined and

enumerated in Section 4, Title IX, P.D. No. 1146;
2. Undertakes research into past Board resolutions, policies,

decisions, directives and other Board action, and relate these
to present matters under Board consideration;
3. Analyzes and evaluates the impact, effects and relevance of

matters under Board consideration on existing Board policies
and provide the individual Board members with these
information so as to guide or enlighten them in their Board
decision;
4. Records, documents and reproduces in sufficient number all

proceedings of Board meetings and disseminate relevant
Board decisions/information to those units concerned;

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5. Coordinates with all functional areas and units concerned
and monitors the manner of implementation of approved
Board resolutions, policies and directives;
6. Maintains a permanent, complete, systematic and secure

compilation of all previous minutes of Board meetings, together
with all their supporting documents;
7. Attends, testifies and produces in Court or in administrative

bodies duly certified copies of Board resolutions, whenever
required;
8. Undertakes the necessary physical preparations for

scheduled Board meetings;
9. Pays honoraria of the members of the Board who attend

Board meetings;
10. Takes custody of the corporate seal and safeguards against

unauthorized use; and
11. Performs such other functions as the Board may direct

and/or require.
The nature of the duties and functions attached to the position

points to its highly confidential character.71 The secretary reports
directly to the board of directors, without an intervening officer in
between them.72 In such an arrangement, the board expects from
the secretary nothing less than the highest degree of honesty,
integrity and loyalty, which is crucial to maintaining between them
"freedom of intercourse without embarrassment or freedom from
misgivings or betrayals of personal trust or confidential matters of
state."73
The responsibilities of the corporate secretary are not merely clerical

or routinary in nature. The work involves constant exposure to
sensitive policy matters and confidential deliberations that are not
always open to the public, as unscrupulous persons may use them to
harm the corporation. Board members must have the highest
confidence in the secretary to ensure that their honest sentiments
are always and fully expressed, in the interest of the corporation. In
this respect, the nature of the corporate secretary's work is akin to
that of a personal secretary of a public official, a position long
recognized to be primarily confidential in nature.74 The only
distinction is that the corporate secretary is secretary to the entire
board, composed of a number of persons, but who essentially act as
one body, while the private secretary works for only one person.
However, the degree of confidence involved is essentially the same.

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Not only do the tasks listed point to sensitive and confidential acts
that the corporate secretary must perform, they also include "such
other functions as the Board may direct and/or require," a clear
indication of a closely intimate relationship that exists between the
secretary and the board. In such a highly acquainted relation, great
trust and confidence between appointer and appointee is required.
The loss of such trust or confidence could easily result in the board's
termination of the secretary's services and ending of his term. This is
understandably justified, as the board could not be expected to
function freely with a suspicious officer in its midst. It is for these same
reasons that jurisprudence, as earlier cited, has consistently
characterized personal or private secretaries, and board secretaries,
as positions of a primarily confidential nature.75
The CA did not err in declaring that the position of Corporate

Secretary of GSIS is primarily confidential in nature and does not
belong to the career service.
The Court is aware that this decision has repercussions on the tenure
of other corporate secretaries in various GOCCs. The officers likely
assumed their positions on permanent career status, expecting
protection for their tenure and appointments, but are now re-
classified as primarily confidential appointees. Such concern is
unfounded, however, since the statutes themselves do not classify
the position of corporate secretary as permanent and career in
nature. Moreover, there is no absolute guarantee that it will not be
classified as confidential when a dispute arises. As earlier stated, the
Court, by legal tradition, has the power to make a final
determination as to which positions in government are primarily
confidential or otherwise. In the light of the instant controversy, the
Court's view is that the greater public interest is served if the position
of a corporate secretary is classified as primarily confidential in
nature.
Moreover, it is a basic tenet in the country's constitutional system that

"public office is a public trust,"76 and that there is no vested right in
public office, nor an absolute right to hold office.77 No proprietary
title attaches to a public office, as public service is not a property
right.78 Excepting constitutional offices which provide for special
immunity as regards salary and tenure, no one can be said to have
any vested right in an office.79 The rule is that offices in government,
except those created by the constitution, may be abolished,
altered, or created anytime by statute.80 And any issues on the
classification for a position in government may be brought to and
determined by the courts.81

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WHEREFORE, premises considered, the Petition is DENIED. The Decision
of the Court of Appeals dated September 29, 2005, in CA-G.R. SP No.
88568, as well as its Resolution of June 5, 2006 are hereby AFFIRMED in
toto.
No costs.
SO ORDERED.
MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice
LEONARDO A. CONSUELO YNARES-

QUISUMBING SANTIAGO
ANGELINA SANDOVAL- ANTONIO T. CARPIO

GUTIERREZ Associate Justice
Associate Justice
RENATO C. CORONA CONCHITA CARPIO

Associate Justice MORALES
Associate Justice
ADOLFO S. AZCUNA DANTE O. TINGA

MINITA V. CHICO- PRESBITERO J. VELASCO,

NAZARIO JR.
(No Part)
ANTONIO EDUARDO B.
NACHURA RUBEN T. REYES
TERESITA J. LEONARDO-DE CASTRO

Associate Justice

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CERTIFICATION

certified that the conclusions in the above Decision were reached in
opinion of the Court.
REYNATO S. PUNO
Chief Justice
Atrium Management Corp. vs. CA (353 SCRA 23 [2001])
G.R. No. 109491 February 28, 2001
ATRIUM MANAGEMENT CORPORATION, petitioner,

vs.
COURT OF APPEALS, E.T. HENRY AND CO., LOURDES VICTORIA M. DE
LEON, RAFAEL DE LEON, JR., AND HI-CEMENT CORPORATION,
respondents.
----------------------------------------
G.R. No. 121794 February 28, 2001
LOURDES M. DE LEON, petitioner,

vs.
COURT OF APPEALS, ATRIUM MANAGEMENT CORPORATION, AND HI-
CEMENT CORPORATION, respondents.
PARDO, J.:
What is before the Court are separate appeals from the decision of
the Court of Appeals,1 ruling that Hi-Cement Corporation is not liable
for four checks amounting to P2 million issued to E.T. Henry and Co.
and discounted to Atrium Management Corporation.
On January 3, 1983, Atrium Management Corporation filed with the

Regional Trial Court, Manila an action for collection of the proceeds
of four postdated checks in the total amount of P2 million. Hi-
Cement Corporation through its corporate signatories, petitioner
Lourdes M. de Leon,2 treasurer, and the late Antonio de las Alas,

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Chairman, issued checks in favor of E.T. Henry and Co. Inc., as
payee. E.T. Henry and Co., Inc., in turn, endorsed the four checks to
petitioner Atrium Management Corporation for valuable
consideration. Upon presentment for payment, the drawee bank
dishonored all four checks for the common reason "payment
stopped". Atrium, thus, instituted this action after its demand for
payment of the value of the checks was denied.3
After due proceedings, on July 20, 1989, the trial court rendered a
decision ordering Lourdes M. de Leon, her husband Rafael de Leon,
E.T. Henry and Co., Inc. and Hi-Cement Corporation to pay
petitioner Atrium, jointly and severally, the amount of P2 million
corresponding to the value of the four checks, plus interest and
attorney's fees.4
On appeal to the Court of Appeals, on March 17, 1993, the Court of

Appeals promulgated its decision modifying the decision of the trial
court, absolving Hi-Cement Corporation from liability and dismissing
the complaint as against it. The appellate court ruled that: (1)
Lourdes M. de Leon was not authorized to issue the subject checks in
favor of E.T. Henry, Inc.; (2) The issuance of the subject checks by
Lourdes M. de Leon and the late Antonio de las Alas constituted
ultra vires acts; and (3) The subject checks were not issued for
valuable consideration.5
At the trial, Atrium presented as its witness Carlos C. Syquia who

testified that in February 1981, Enrique Tan of E.T. Henry approached
Atrium for financial assistance, offering to discount four RCBC checks
in the total amount of P2 million, issued by Hi-Cement in favor of E.T.
Henry. Atrium agreed to discount the checks, provided it be allowed
to confirm with Hi-Cement the fact that the checks represented
payment for petroleum products which E.T. Henry delivered to Hi-
Cement. Carlos C. Syquia identified two letters, dated February 6,
1981 and February 9, 1981 issued by Hi-Cement through Lourdes M.
de Leon, as treasurer, confirming the issuance of the four checks in
favor of E.T. Henry in payment for petroleum products.6
Respondent Hi-Cement presented as witness Ms. Erlinda Yap who

testified that she was once a secretary to the treasurer of Hi-Cement,
Lourdes M. de Leon, and as such she was familiar with the four RCBC
checks as the postdated checks issued by Hi-Cement to E.T. Henry
upon instructions of Ms. de Leon. She testified that E.T. Henry offered
to give Hi-Cement a loan which the subject checks would secure as
collateral.7
On July 20, 1989, the Regional Trial Court, Manila, Branch 09

rendered a decision, the dispositive portion of which reads:

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"WHEREFORE, in view of the foregoing considerations, and
plaintiff having proved its cause of action by preponderance
of evidence, judgment is hereby rendered ordering all the
defendants except defendant Antonio de las Alas to pay
plaintiff jointly and severally the amount of TWO MILLION
(P2,000,000.00) PESOS with the legal rate of interest from the
filling of the complaint until fully paid, plus the sum of TWENTY
THOUSAND (P20,000.00) PESOS as and for attorney's fees and
the cost of suit."
All other claims are, for lack of merit dismissed.
SO ORDERED."8
In due time, both Lourdes M. de Leon and Hi-Cement appealed to

the Court of Appeals.9
Lourdes M. de Leon submitted that the trial court erred in ruling that
she was solidarilly liable with Hi-Cement for the amount of the check.
Also, that the trial court erred in ruling that Atrium was an ordinary
holder, not a holder in due course of the rediscounted checks.10
Hi-Cement on its part submitted that the trial court erred in ruling that
even if Hi-Cement did not authorize the issuance of the checks, it
could still be held liable for the checks. And assuming that the
checks were issued with its authorization, the same was without any
consideration, which is a defense against a holder in due course and
that the liability shall be borne alone by E.T. Henry.11
On March 17, 1993, the Court of Appeals promulgated its decision

modifying the ruling of the trial court, the dispositive portion of which
reads:
"Judgement is hereby rendered:
(1) dismissing the plaintiff's complaint as against defendants Hi-

Cement Corporation and Antonio De las Alas;
(2) ordering the defendants E.T. Henry and Co., Inc. and
Lourdes M. de Leon, jointly and severally to pay the plaintiff the
sum of TWO MILLION PESOS (P2,000,000.00) with interest at the
legal rate from the filling of the complaint until fully paid, plus
P20,000.00 for attorney's fees.
(3) Ordering the plaintiff and defendants E.T. Henry and Co.,
Inc. and Lourdes M. de Leon, jointly and severally to pay
defendant Hi-Cement Corporation, the sum of P20,000.00 as
and for attorney's fees.

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With cost in this instance against the appellee Atrium
Management Corporation and appellant Lourdes Victoria M.
de Leon.
So ordered."12
Hence, the recourse to this Court.13
The issues raised are the following:
In G. R. No. 109491 (Atrium, petitioner):
1. Whether the issuance of the questioned checks was an ultra

vires act;
2. Whether Atrium was not a holder in due course and for

value; and
3. Whether the Court of Appeals erred in dismissing the case

against Hi-Cement and ordering it to pay P20,000.00 as
attorney's fees.14
In G. R. No. 121794 (de Leon, petitioner):
1. Whether the Court of Appeals erred in holding petitioner

personally liable for the Hi-Cement checks issued to E.T. Henry;
2. Whether the Court of Appeals erred in ruling that Atrium is a

holder in due course;
3. Whether the Court of Appeals erred in ruling that petitioner

Lourdes M. de Leon as signatory of the checks was personally
liable for the value of the checks, which were declared to be
issued without consideration;
4. Whether the Court of Appeals erred in ordering petitioner to

pay Hi-Cement attorney's fees and costs.15
We affirm the decision of the Court of Appeals.
We first resolve the issue of whether the issuance of the checks was
an ultra vires act. The record reveals that Hi-Cement Corporation
issued the four (4) checks to extend financial assistance to E.T. Henry,
not as payment of the balance of the P30 million pesos cost of hydro
oil delivered by E.T. Henry to Hi-Cement. Why else would petitioner
de Leon ask for counterpart checks from E.T. Henry if the checks
were in payment for hydro oil delivered by E.T. Henry to Hi-Cement?
Hi-Cement, however, maintains that the checks were not issued for
consideration and that Lourdes and E.T. Henry engaged in a "kiting

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operation" to raise funds for E.T. Henry, who admittedly was in need
of financial assistance. The Court finds that there was no sufficient
evidence to show that such is the case. Lourdes M. de Leon is the
treasurer of the corporation and is authorized to sign checks for the
corporation. At the time of the issuance of the checks, there were
sufficient funds in the bank to cover payment of the amount of P2
million pesos.
It is, however, our view that there is basis to rule that the act of issuing
the checks was well within the ambit of a valid corporate act, for it
was for securing a loan to finance the activities of the corporation,
hence, not an ultra vires act.
"An ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and
therefore beyond the power conferred upon it by law"16 The term
"ultra vires" is "distinguished from an illegal act for the former is merely
voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated." 17
The next question to determine is whether Lourdes M. de Leon and

Antonio de las Alas were personally liable for the checks issued as
corporate officers and authorized signatories of the check.
"Personal liability of a corporate director, trustee or officer along

(although not necessarily) with the corporation may so validly
attach, as a rule, only when:
"1. He assents (a) to a patently unlawful act of the corporation,

or (b) for bad faith or gross negligence in directing its affairs, or
(c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
"2. He consents to the issuance of watered down stocks or who,

having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;
"3. He agrees to hold himself personally and solidarily liable with

the corporation; or
"4. He is made, by a specific provision of law, to personally

answer for his corporate action."18
In the case at bar, Lourdes M. de Leon and Antonio de las Alas as

treasurer and Chairman of Hi-Cement were authorized to issue the
checks. However, Ms. de Leon was negligent when she signed the
confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of
E.T. Henry for the rediscounting of the crossed checks issued in favor
of E.T. Henry. She was aware that the checks were strictly endorsed

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for deposit only to the payee's account and not to be further
negotiated. What is more, the confirmation letter contained a clause
that was not true, that is, "that the checks issued to E.T. Henry were in
payment of Hydro oil bought by Hi-Cement from E.T. Henry". Her
negligence resulted in damage to the corporation. Hence, Ms. de
Leon may be held personally liable therefor.1âwphi1.nêt
The next issue is whether or not petitioner Atrium was a holder of the
checks in due course. The Negotiable Instruments Law, Section 52
defines a holder in due course, thus:
"A holder in due course is a holder who has taken the

instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was

overdue, and without notice that it had been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no

notice of any infirmity in the instrument or defect in the
title of the person negotiating it."
In the instant case, the checks were crossed checks and specifically
indorsed for deposit to payee's account only. From the beginning,
Atrium was aware of the fact that the checks were all for deposit
only to payee's account, meaning E.T. Henry. Clearly, then, Atrium
could not be considered a holder in due course.
However, it does not follow as a legal proposition that simply

because petitioner Atrium was not a holder in due course for having
taken the instruments in question with notice that the same was for
deposit only to the account of payee E.T. Henry that it was
altogether precluded from recovering on the instrument. The
Negotiable Instruments Law does not provide that a holder not in
due course can not recover on the instrument.19
The disadvantage of Atrium in not being a holder in due course is

that the negotiable instrument is subject to defenses as if it were non-
negotiable.20 One such defense is absence or failure of
consideration.21
We need not rule on the other issues raised, as they merely follow as
a consequence of the foregoing resolutions.

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WHEREFORE, the petitions are hereby DENIED. The decision and
resolution of the Court of Appeals in CA-G. R. CV No. 26686, are
hereby AFFIRMED in toto.
No costs.
SO ORDERED.
Davide, Jr., Puno, Kapunan, and Ynares-Santiago, JJ., concur.
In 1981, Hi-Cement Corporation through Lourdes De Leon (its

Treasurer) and Antonio De Las Alas (its Chairman, now deceased)
issued four postdated checks to E.T. Henry and Co. The checks
amount to P2 million. The checks are crossed checks and are only
made payable to E.T. Henry’s account. However, E.T. Henry still
indorsed the checks to Atrium Management Corporation (AMC).
AMC then made sure that the checks were validly issued by
requesting E.T. Henry to get some confirmation from Atrium.
Interestingly, De Leon confirmed the checks and advised that the
checks are okay to be rediscounted by AMC notwithstanding the
fact that the checks are crossed checks payable to no other
accounts but that of E.T. Henry. So when AMC presented the check,
it was dishonored because Hi-Cement stopped payment. Eventually,
AMC sued Hi-Cement, E.T. Henry, and De Leon. The trial court ruled in
favor of AMC and made all the respondents liable.
On appeal, Hi-Cement averred that De Leon’s act in signing the

check was ultra vires hence De Leon should be personally liable for
the check. De Leon, on the other hand, insisted that the checks
were authorized by the corporation.
ISSUE: Whether or not De Leon’s act of signing the check constitutes

an ultra vires act hence making her personally liable.
HELD: No, the act is not ultra vires but De Leon is still personally liable.
The act is not ultra vires because the act of issuing the checks was
well within the ambit of a valid corporate act. De Leon as treasurer is
authorized to sign checks. When the checks were issued, Hi-Cement
has sufficient funds to cover the P2 million.
As a rule, there are four instances that will make a corporate

director, trustee or officer along (although not necessarily) with the
corporation personally liable to certain obligations. They are:
1. He assents (a) to a patently unlawful act of the corporation, or

(b) for bad faith or gross negligence in directing its affairs, or (c)
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for conflict of interest, resulting in damages to the corporation,
its stockholders or other persons;
2. He consents to the issuance of watered down stocks or who,

having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with

the corporation; or
4. He is made, by a specific provision of law, to personally answer

for his corporate action.
In the case at bar, De Leon is negligent. She was aware that the
checks were only payable to E.T. Henry’s account yet she sent a
confirmation to Atrium to the effect that the checks can be
negotiated to them (Atrium) by E.T. Henry. Therefore, she may be
held personally liable along with E.T. Henry (but not with Hi-Cement
where she is an officer).
Bank of P.I. vs. Casa Montessori Internationale (430 SCRA 261

[2004])
G.R. No. 149454 May 28, 2004
BANK OF THE PHILIPPINE ISLANDS, petitioner,

vs.
CASA MONTESSORI INTERNATIONALE LEONARDO T. YABUT,
respondents.
x ----------------------------- x
G.R. No. 149507 May 28, 2004
CASA MONTESSORI INTERNATIONALE, petitioner,

vs.
BANK OF THE PHILIPPINE ISLANDS, respondent.

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DECISION
PANGANIBAN, J.:
By the nature of its functions, a bank is required to take meticulous

care of the deposits of its clients, who have the right to expect high
standards of integrity and performance from it.
Among its obligations in furtherance thereof is knowing the

signatures of its clients. Depositors are not estopped from questioning
wrongful withdrawals, even if they have failed to question those
errors in the statements sent by the bank to them for verification.
The Case
Before us are two Petitions for Review1 under Rule 45 of the Rules of
Court, assailing the March 23, 2001 Decision 2 and the August 17, 2001
Resolution3 of the Court of Appeals (CA) in CA-GR CV No. 63561. The
decretal portion of the assailed Decision reads as follows:
"WHEREFORE, upon the premises, the decision appealed from is

AFFIRMED with the modification that defendant bank [Bank of
the Philippine Islands (BPI)] is held liable only for one-half of the
value of the forged checks in the amount of P547,115.00 after
deductions subject to REIMBURSEMENT from third party
defendant Yabut who is likewise ORDERED to pay the other half
to plaintiff corporation [Casa Montessori Internationale
(CASA)]."4
The assailed Resolution denied all the parties’ Motions for

Reconsideration.
The Facts
The facts of the case are narrated by the CA as follows:
"On November 8, 1982, plaintiff CASA Montessori International 5

opened Current Account No. 0291-0081-01 with defendant
BPI[,] with CASA’s President Ms. Ma. Carina C. Lebron as one of
its authorized signatories.
"In 1991, after conducting an investigation, plaintiff discovered

that nine (9) of its checks had been encashed by a certain
Sonny D. Santos since 1990 in the total amount of P782,000.00,
on the following dates and amounts:
‘Check No. Date Amount

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1. 839700 April 24, 1990 P 43,400.00
2. 839459 Nov. 2, 1990 110,500.00
3. 839609 Oct. 17, 1990 47,723.00
4. 839549 April 7, 1990 90,700.00
5. 839569 Sept. 23, 1990 52,277.00
6. 729149 Mar. 22, 1990 148,000.00
7. 729129 Mar. 16, 1990 51,015.00
8. 839684 Dec. 1, 1990 140,000.00
9. 729034 Mar. 2, 1990 98,985.00
Total -- P 782,600.006
"It turned out that ‘Sonny D. Santos’ with account at BPI’s

Greenbelt Branch [was] a fictitious name used by third party
defendant Leonardo T. Yabut who worked as external auditor
of CASA. Third party defendant voluntarily admitted that he
forged the signature of Ms. Lebron and encashed the checks.
"The PNP Crime Laboratory conducted an examination of the
nine (9) checks and concluded that the handwritings thereon
compared to the standard signature of Ms. Lebron were not
written by the latter.
"On March 4, 1991, plaintiff filed the herein Complaint for

Collection with Damages against defendant bank praying that
the latter be ordered to reinstate the amount of P782,500.007 in
the current and savings accounts of the plaintiff with interest at
6% per annum.
"On February 16, 1999, the RTC rendered the appealed

decision in favor of the plaintiff."8
Modifying the Decision of the Regional Trial Court (RTC), the CA

apportioned the loss between BPI and CASA. The appellate court
took into account CASA’s contributory negligence that resulted in

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the undetected forgery. It then ordered Leonardo T. Yabut to
reimburse BPI half the total amount claimed; and CASA, the other
half. It also disallowed attorney’s fees and moral and exemplary
damages.
Hence, these Petitions.9
Issues
In GR No. 149454, Petitioner BPI submits the following issues for our
consideration:
"I. The Honorable Court of Appeals erred in deciding this case

NOT in accord with the applicable decisions of this Honorable
Court to the effect that forgery cannot be presumed; that it
must be proved by clear, positive and convincing evidence;
and that the burden of proof lies on the party alleging the
forgery.
"II. The Honorable Court of Appeals erred in deciding this case

not in accord with applicable laws, in particular the Negotiable
Instruments Law (NIL) which precludes CASA, on account of its
own negligence, from asserting its forgery claim against BPI,
specially taking into account the absence of any negligence
on the part of BPI."10
In GR No. 149507, Petitioner CASA submits the following issues:
"1. The Honorable Court of Appeals erred when it ruled that

‘there is no showing that [BPI], although negligent, acted in
bad faith x x x’ thus denying the prayer for the award of
attorney’s fees, moral damages and exemplary damages to
[CASA]. The Honorable Court also erred when it did not order
[BPI] to pay interest on the amounts due to [CASA].
"2. The Honorable Court of Appeals erred when it declared that

[CASA] was likewise negligent in the case at bar, thus
warranting its conclusion that the loss in the amount of
P547,115.00 be ‘apportioned between [CASA] and [BPI] x x
x.’"11
These issues can be narrowed down to three. First, was there forgery
under the Negotiable Instruments Law (NIL)? Second, were any of
the parties negligent and therefore precluded from setting up
forgery as a defense? Third, should moral and exemplary damages,
attorney’s fees, and interest be awarded?

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The Petition in GR No. 149454 has no merit, while that in GR No.
149507 is partly meritorious.
First Issue:
Forged Signature Wholly Inoperative
Section 23 of the NIL provides:
"Section 23. Forged signature; effect of. -- When a signature is

forged or made without the authority of the person whose
signature it purports to be, it is wholly inoperative, and no right x
x x to enforce payment thereof against any party thereto, can
be acquired through or under such signature, unless the party
against whom it is sought to enforce such right is precluded
from setting up the forgery or want of authority."12
Under this provision, a forged signature is a real 13 or absolute

defense,14 and a person whose signature on a negotiable instrument
is forged is deemed to have never become a party thereto and to
have never consented to the contract that allegedly gave rise to it.15
The counterfeiting of any writing, consisting in the signing of

another’s name with intent to defraud, is forgery.16
In the present case, we hold that there was forgery of the drawer’s
signature on the check.
First, both the CA17 and the RTC18 found that Respondent Yabut
himself had voluntarily admitted, through an Affidavit, that he had
forged the drawer’s signature and encashed the checks.19 He never
refuted these findings.20 That he had been coerced into admission
was not corroborated by any evidence on record.21
Second, the appellate and the trial courts also ruled that the PNP
Crime Laboratory, after its examination of the said checks,22 had
concluded that the handwritings thereon -- compared to the
standard signature of the drawer -- were not hers.23 This conclusion
was the same as that in the Report24 that the PNP Crime Laboratory
had earlier issued to BPI -- the drawee bank -- upon the latter’s
request.
Indeed, we respect and affirm the RTC’s factual findings, especially

when affirmed by the CA, since these are supported by substantial
evidence on record.25
Voluntary Admission Not Violative of Constitutional Rights
The voluntary admission of Yabut did not violate his constitutional

rights (1) on custodial investigation, and (2) against self-incrimination.
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In the first place, he was not under custodial investigation.26 His
Affidavit was executed in private and before private individuals.27
The mantle of protection under Section 12 of Article III of the 1987
Constitution28 covers only the period "from the time a person is taken
into custody for investigation of his possible participation in the
commission of a crime or from the time he is singled out as a suspect
in the commission of a crime although not yet in custody." 29
Therefore, to fall within the ambit of Section 12, quoted above, there
must be an arrest or a deprivation of freedom, with "questions
propounded on him by the police authorities for the purpose of
eliciting admissions, confessions, or any information." 30 The said
constitutional provision does "not apply to spontaneous statements
made in a voluntary manner"31 whereby an individual orally admits
to authorship of a crime.32 "What the Constitution proscribes is the
compulsory or coercive disclosure of incriminating facts."33
Moreover, the right against self-incrimination34 under Section 17 of

Article III35 of the Constitution, which is ordinarily available only in
criminal prosecutions, extends to all other government proceedings -
- including civil actions, legislative investigations,36 and administrative
proceedings that possess a criminal or penal aspect37 -- but not to
private investigations done by private individuals. Even in such
government proceedings, this right may be waived,38 provided the
waiver is certain; unequivocal; and intelligently, understandingly and
willingly made.39
If in these government proceedings waiver is allowed, all the more is

it so in private investigations. It is of no moment that no criminal case
has yet been filed against Yabut. The filing thereof is entirely up to
the appropriate authorities or to the private individuals upon whom
damage has been caused. As we shall also explain later, it is not
mandatory for CASA -- the plaintiff below -- to implead Yabut in the
civil case before the lower court.
Under these two constitutional provisions, "[t]he Bill of Rights 40 does

not concern itself with the relation between a private individual and
another individual. It governs the relationship between the individual
and the State."41 Moreover, the Bill of Rights "is a charter of liberties
for the individual and a limitation upon the power of the [S]tate." 42
These rights43 are guaranteed to preclude the slightest coercion by
the State that may lead the accused "to admit something false, not
prevent him from freely and voluntarily telling the truth." 44
Yabut is not an accused here. Besides, his mere invocation of the

aforesaid rights "does not automatically entitle him to the
constitutional protection."45 When he freely and voluntarily
executed46 his Affidavit, the State was not even involved. Such

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Affidavit may therefore be admitted without violating his
constitutional rights while under custodial investigation and against
self-incrimination.
Clear, Positive and Convincing Examination and Evidence
The examination by the PNP, though inconclusive, was nevertheless

clear, positive and convincing.
Forgery "cannot be presumed."47 It must be established by clear,

positive and convincing evidence.48 Under the best evidence rule as
applied to documentary evidence like the checks in question, no
secondary or substitutionary evidence may inceptively be
introduced, as the original writing itself must be produced in court.49
But when, without bad faith on the part of the offeror, the original
checks have already been destroyed or cannot be produced in
court, secondary evidence may be produced.50 Without bad faith
on its part, CASA proved the loss or destruction of the original checks
through the Affidavit of the one person who knew of that fact51 --
Yabut. He clearly admitted to discarding the paid checks to cover
up his misdeed.52 In such a situation, secondary evidence like
microfilm copies may be introduced in court.
The drawer’s signatures on the microfilm copies were compared with

the standard signature. PNP Document Examiner II Josefina de la
Cruz testified on cross-examination that two different persons had
written them.53 Although no conclusive report could be issued in the
absence of the original checks,54 she affirmed that her findings were
90 percent conclusive.55 According to her, even if the microfilm
copies were the only basis of comparison, the differences were
evident.56 Besides, the RTC explained that although the Report was
inconclusive, no conclusive report could have been given by the
PNP, anyway, in the absence of the original checks.57 This
explanation is valid; otherwise, no such report can ever be relied
upon in court.
Even with respect to documentary evidence, the best evidence rule

applies only when the contents of a document -- such as the
drawer’s signature on a check -- is the subject of inquiry.58 As to
whether the document has been actually executed, this rule does
not apply; and testimonial as well as any other secondary evidence
is admissible.59 Carina Lebron herself, the drawer’s authorized
signatory, testified many times that she had never signed those
checks. Her testimonial evidence is admissible; the checks have not
been actually executed. The genuineness of her handwriting is
proved, not only through the court’s comparison of the questioned
handwritings and admittedly genuine specimens thereof,60 but
above all by her.

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The failure of CASA to produce the original checks neither gives rise
to the presumption of suppression of evidence61 nor creates an
unfavorable inference against it.62 Such failure merely authorizes the
introduction of secondary evidence63 in the form of microfilm copies.
Of no consequence is the fact that CASA did not present the
signature card containing the signatures with which those on the
checks were compared.64 Specimens of standard signatures are not
limited to such a card. Considering that it was not produced in
evidence, other documents that bear the drawer’s authentic
signature may be resorted to.65 Besides, that card was in the
possession of BPI -- the adverse party.
We have held that without the original document containing the

allegedly forged signature, one cannot make a definitive
comparison that would establish forgery;66 and that a comparison
based on a mere reproduction of the document under controversy
cannot produce reliable results.67 We have also said, however, that a
judge cannot merely rely on a handwriting expert’s testimony,68 but
should also exercise independent judgment in evaluating the
authenticity of a signature under scrutiny.69 In the present case, both
the RTC and the CA conducted independent examinations of the
evidence presented and arrived at reasonable and similar
conclusions. Not only did they admit secondary evidence; they also
appositely considered testimonial and other documentary evidence
in the form of the Affidavit.
The best evidence rule admits of exceptions and, as we have

discussed earlier, the first of these has been met.70 The result of
examining a questioned handwriting, even with the aid of experts
and scientific instruments, may be inconclusive;71 but it is a non
sequitur to say that such result is not clear, positive and convincing.
The preponderance of evidence required in this case has been
satisfied.72
Second Issue:
Negligence Attributable to BPI Alone
Having established the forgery of the drawer’s signature, BPI -- the

drawee -- erred in making payments by virtue thereof. The forged
signatures are wholly inoperative, and CASA -- the drawer whose
authorized signatures do not appear on the negotiable instruments --
cannot be held liable thereon. Neither is the latter precluded from
setting up forgery as a real defense.
Clear Negligence in Allowing Payment Under a Forged Signature
We have repeatedly emphasized that, since the banking business is

impressed with public interest, of paramount importance thereto is
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the trust and confidence of the public in general. Consequently, the
highest degree of diligence73 is expected,74 and high standards of
integrity and performance are even required, of it.75 By the nature of
its functions, a bank is "under obligation to treat the accounts of its
depositors with meticulous care,76 always having in mind the
fiduciary nature of their relationship."77
BPI contends that it has a signature verification procedure, in which

checks are honored only when the signatures therein are verified to
be the same with or similar to the specimen signatures on the
signature cards. Nonetheless, it still failed to detect the eight
instances of forgery. Its negligence consisted in the omission of that
degree of diligence required78 of a bank. It cannot now feign
ignorance, for very early on we have already ruled that a bank is
"bound to know the signatures of its customers; and if it pays a
forged check, it must be considered as making the payment out of
its own funds, and cannot ordinarily charge the amount so paid to
the account of the depositor whose name was forged." 79 In fact, BPI
was the same bank involved when we issued this ruling seventy years
ago.
Neither Waiver nor Estoppel Results from Failure to Report Error in

Bank Statement
The monthly statements issued by BPI to its clients contain a notice

worded as follows: "If no error is reported in ten (10) days, account
will be correct."80 Such notice cannot be considered a waiver, even
if CASA failed to report the error. Neither is it estopped from
questioning the mistake after the lapse of the ten-day period.
This notice is a simple confirmation81 or "circularization" -- in

accounting parlance -- that requests client-depositors to affirm the
accuracy of items recorded by the banks.82 Its purpose is to obtain
from the depositors a direct corroboration of the correctness of their
account balances with their respective banks.83 Internal or external
auditors of a bank use it as a basic audit procedure84 -- the results of
which its client-depositors are neither interested in nor privy to -- to
test the details of transactions and balances in the bank’s records.85
Evidential matter obtained from independent sources outside a
bank only serves to provide greater assurance of reliability86 than
that obtained solely within it for purposes of an audit of its own
financial statements, not those of its client-depositors.
Furthermore, there is always the audit risk that errors would not be
detected87 for various reasons. One, materiality is a consideration in
audit planning;88 and two, the information obtained from such a
substantive test is merely presumptive and cannot be the basis of a
valid waiver.89 BPI has no right to impose a condition unilaterally and

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thereafter consider failure to meet such condition a waiver. Neither
may CASA renounce a right90 it has never possessed.91
Every right has subjects -- active and passive. While the active
subject is entitled to demand its enforcement, the passive one is
duty-bound to suffer such enforcement.92
On the one hand, BPI could not have been an active subject,
because it could not have demanded from CASA a response to its
notice. Besides, the notice was a measly request worded as follows:
"Please examine x x x and report x x x."93 CASA, on the other hand,
could not have been a passive subject, either, because it had no
obligation to respond. It could -- as it did -- choose not to respond.
Estoppel precludes individuals from denying or asserting, by their

own deed or representation, anything contrary to that established as
the truth, in legal contemplation.94 Our rules on evidence even make
a juris et de jure presumption95 that whenever one has, by one’s own
act or omission, intentionally and deliberately led another to believe
a particular thing to be true and to act upon that belief, one cannot
-- in any litigation arising from such act or omission -- be permitted to
falsify that supposed truth.96
In the instant case, CASA never made any deed or representation

that misled BPI. The former’s omission, if any, may only be deemed
an innocent mistake oblivious to the procedures and consequences
of periodic audits. Since its conduct was due to such ignorance
founded upon an innocent mistake, estoppel will not arise.97 A
person who has no knowledge of or consent to a transaction may
not be estopped by it.98 "Estoppel cannot be sustained by mere
argument or doubtful inference x x x."99 CASA is not barred from
questioning BPI’s error even after the lapse of the period given in the
notice.
Loss Borne by Proximate Source of Negligence
For allowing payment100 on the checks to a wrongful and fictitious

payee, BPI -- the drawee bank -- becomes liable to its depositor-
drawer. Since the encashing bank is one of its branches,101 BPI can
easily go after it and hold it liable for reimbursement.102 It "may not
debit the drawer’s account103 and is not entitled to indemnification
from the drawer."104 In both law and equity, when one of two
innocent persons "must suffer by the wrongful act of a third person,
the loss must be borne by the one whose negligence was the
proximate cause of the loss or who put it into the power of the third
person to perpetrate the wrong."105
Proximate cause is determined by the facts of the case.106 "It is that

cause which, in natural and continuous sequence, unbroken by any
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efficient intervening cause, produces the injury, and without which
the result would not have occurred."107
Pursuant to its prime duty to ascertain well the genuineness of the

signatures of its client-depositors on checks being encashed, BPI is
"expected to use reasonable business prudence." 108 In the
performance of that obligation, it is bound by its internal banking
rules and regulations that form part of the contract it enters into with
its depositors.109
Unfortunately, it failed in that regard. First, Yabut was able to open a

bank account in one of its branches without privity;110 that is, without
the proper verification of his corresponding identification papers.
Second, BPI was unable to discover early on not only this irregularity,
but also the marked differences in the signatures on the checks and
those on the signature card. Third, despite the examination
procedures it conducted, the Central Verification Unit111 of the bank
even passed off these evidently different signatures as genuine.
Without exercising the required prudence on its part, BPI accepted
and encashed the eight checks presented to it. As a result, it
proximately contributed to the fraud and should be held primarily
liable112 for the "negligence of its officers or agents when acting
within the course and scope of their employment." 113 It must bear the
loss.
CASA Not Negligent in Its Financial Affairs
In this jurisdiction, the negligence of the party invoking forgery is

recognized as an exception114 to the general rule that a forged
signature is wholly inoperative.115 Contrary to BPI’s claim, however,
we do not find CASA negligent in handling its financial affairs. CASA,
we stress, is not precluded from setting up forgery as a real defense.
Role of Independent Auditor
The major purpose of an independent audit is to investigate and

determine objectively if the financial statements submitted for audit
by a corporation have been prepared in accordance with the
appropriate financial reporting practices116 of private entities. The
relationship that arises therefrom is both legal and moral.117 It begins
with the execution of the engagement letter118 that embodies the
terms and conditions of the audit and ends with the fulfilled
expectation of the auditor’s ethical119 and competent performance
in all aspects of the audit.120
The financial statements are representations of the client; but it is the

auditor who has the responsibility for the accuracy in the recording
of data that underlies their preparation, their form of presentation,
and the opinion121 expressed therein.122 The auditor does not assume
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the role of employee or of management in the client’s conduct of
operations123 and is never under the control or supervision 124 of the
client.
Yabut was an independent auditor125 hired by CASA. He handled its

monthly bank reconciliations and had access to all relevant
documents and checkbooks.126 In him was reposed the client’s127
trust and confidence128 that he would perform precisely those
functions and apply the appropriate procedures in accordance with
generally accepted auditing standards.129 Yet he did not meet these
expectations. Nothing could be more horrible to a client than to
discover later on that the person tasked to detect fraud was the
same one who perpetrated it.
Cash Balances Open to Manipulation
It is a non sequitur to say that the person who receives the monthly
bank statements, together with the cancelled checks and other
debit/credit memoranda, shall examine the contents and give
notice of any discrepancies within a reasonable time. Awareness is
not equipollent with discernment.
Besides, in the internal accounting control system prudently installed

by CASA,130 it was Yabut who should examine those documents in
order to prepare the bank reconciliations.131 He owned his working
papers,132 and his output consisted of his opinion as well as the
client’s financial statements and accompanying notes thereto.
CASA had every right to rely solely upon his output -- based on the
terms of the audit engagement -- and could thus be unwittingly
duped into believing that everything was in order. Besides, "[g]ood
faith is always presumed and it is the burden of the party claiming
otherwise to adduce clear and convincing evidence to the
contrary."133
Moreover, there was a time gap between the period covered by

the bank statement and the date of its actual receipt. Lebron
personally received the December 1990 bank statement only in
January 1991134 -- when she was also informed of the forgery for the
first time, after which she immediately requested a "stop payment
order." She cannot be faulted for the late detection of the forged
December check. After all, the bank account with BPI was not
personal but corporate, and she could not be expected to monitor
closely all its finances. A preschool teacher charged with molding
the minds of the youth cannot be burdened with the intricacies or
complexities of corporate existence.
There is also a cutoff period such that checks issued during a given
month, but not presented for payment within that period, will not be
reflected therein.135 An experienced auditor with intent to defraud
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can easily conceal any devious scheme from a client unwary of the
accounting processes involved by manipulating the cash balances
on record -- especially when bank transactions are numerous, large
and frequent. CASA could only be blamed, if at all, for its
unintelligent choice in the selection and appointment of an auditor -
- a fault that is not tantamount to negligence.
Negligence is not presumed, but proven by whoever alleges it.136 Its

mere existence "is not sufficient without proof that it, and no other
cause,"137 has given rise to damages.138 In addition, this fault is
common to, if not prevalent among, small and medium-sized
business entities, thus leading the Professional Regulation Commission
(PRC), through the Board of Accountancy (BOA), to require today
not only accreditation for the practice of public accountancy,139 but
also the registration of firms in the practice thereof. In fact, among
the attachments now required upon registration are the code of
good governance140 and a sworn statement on adequate and
effective training.141
The missing checks were certainly reported by the bookkeeper142 to

the accountant143 -- her immediate supervisor -- and by the latter to
the auditor. However, both the accountant and the auditor, for
reasons known only to them, assured the bookkeeper that there
were no irregularities.
The bookkeeper144 who had exclusive custody of the checkbooks145

did not have to go directly to CASA’s president or to BPI. Although
she rightfully reported the matter, neither an investigation was
conducted nor a resolution of it was arrived at, precisely because
the person at the top of the helm was the culprit. The vouchers,
invoices and check stubs in support of all check disbursements could
be concealed or fabricated -- even in collusion -- and management
would still have no way to verify its cash accountabilities.
Clearly then, Yabut was able to perpetrate the wrongful act through
no fault of CASA. If auditors may be held liable for breach of
contract and negligence,146 with all the more reason may they be
charged with the perpetration of fraud upon an unsuspecting client.
CASA had the discretion to pursue BPI alone under the NIL, by
reason of expediency or munificence or both. Money paid under a
mistake may rightfully be recovered,147 and under such terms as the
injured party may choose.
Third Issue:
Award of Monetary Claims
Moral Damages Denied

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We deny CASA’s claim for moral damages.
In the absence of a wrongful act or omission,148 or of fraud or bad

faith,149 moral damages cannot be awarded.150 The adverse result of
an action does not per se make the action wrongful, or the party
liable for it. One may err, but error alone is not a ground for granting
such damages.151 While no proof of pecuniary loss is necessary
therefor -- with the amount to be awarded left to the court’s
discretion152 -- the claimant must nonetheless satisfactorily prove the
existence of its factual basis153 and causal relation154 to the
claimant’s act or omission.155
Regrettably, in this case CASA was unable to identify the particular

instance -- enumerated in the Civil Code -- upon which its claim for
moral damages is predicated.156 Neither bad faith nor negligence so
gross that it amounts to malice157 can be imputed to BPI. Bad faith,
under the law, "does not simply connote bad judgment or
negligence;158 it imports a dishonest purpose or some moral obliquity
and conscious doing of a wrong, a breach of a known duty through
some motive or interest or ill will that partakes of the nature of
fraud."159
As a general rule, a corporation -- being an artificial person without

feelings, emotions and senses, and having existence only in legal
contemplation -- is not entitled to moral damages,160 because it
cannot experience physical suffering and mental anguish.161
However, for breach of the fiduciary duty required of a bank, a
corporate client may claim such damages when its good reputation
is besmirched by such breach, and social humiliation results
therefrom.162 CASA was unable to prove that BPI had debased the
good reputation of,163 and consequently caused incalculable
embarrassment to, the former. CASA’s mere allegation or supposition
thereof, without any sufficient evidence on record,164 is not enough.
Exemplary Damages Also Denied
We also deny CASA’s claim for exemplary damages.
Imposed by way of correction165 for the public good,166 exemplary

damages cannot be recovered as a matter of right.167 As we have
said earlier, there is no bad faith on the part of BPI for paying the
checks of CASA upon forged signatures. Therefore, the former
cannot be said to have acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner.168 The latter, having no right to
moral damages, cannot demand exemplary damages.169
Attorney’s Fees Granted

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Although it is a sound policy not to set a premium on the right to
litigate,170 we find that CASA is entitled to reasonable attorney’s fees
based on "factual, legal, and equitable justification." 171
When the act or omission of the defendant has compelled the

plaintiff to incur expenses to protect the latter’s interest,172 or where
the court deems it just and equitable,173 attorney’s fees may be
recovered. In the present case, BPI persistently denied the claim of
CASA under the NIL to recredit the latter’s account for the value of
the forged checks. This denial constrained CASA to incur expenses
and exert effort for more than ten years in order to protect its
corporate interest in its bank account. Besides, we have already
cautioned BPI on a similar act of negligence it had committed
seventy years ago, but it has remained unrelenting. Therefore, the
Court deems it just and equitable to grant ten percent (10%)174 of
the total value adjudged to CASA as attorney’s fees.
Interest Allowed
For the failure of BPI to pay CASA upon demand and for compelling
the latter to resort to the courts to obtain payment, legal interest
may be adjudicated at the discretion of the Court, the same to run
from the filing175 of the Complaint.176 Since a court judgment is not a
loan or a forbearance of recovery, the legal interest shall be at six
percent (6%) per annum.177 "If the obligation consists in the payment
of a sum of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the
payment of x x x legal interest, which is six percent per annum."178
The actual base for its computation shall be "on the amount finally
adjudged,"179 compounded180 annually to make up for the cost of
money181 already lost to CASA.
Moreover, the failure of the CA to award interest does not prevent us

from granting it upon damages awarded for breach of contract.182
Because BPI evidently breached its contract of deposit with CASA,
we award interest in addition to the total amount adjudged. Under
Section 196 of the NIL, any case not provided for shall be "governed
by the provisions of existing legislation or, in default thereof, by the
rules of the law merchant."183 Damages are not provided for in the
NIL. Thus, we resort to the Code of Commerce and the Civil Code.
Under Article 2 of the Code of Commerce, acts of commerce shall
be governed by its provisions and, "in their absence, by the usages
of commerce generally observed in each place; and in the
absence of both rules, by those of the civil law." 184 This law being
silent, we look at Article 18 of the Civil Code, which states: "In matters
which are governed by the Code of Commerce and special laws,
their deficiency shall be supplied" by its provisions. A perusal of these

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three statutes unmistakably shows that the award of interest under
our civil law is justified.
WHEREFORE, the Petition in GR No. 149454 is hereby DENIED, and that

in GR No. 149507 PARTLY GRANTED. The assailed Decision of the
Court of Appeals is AFFIRMED with modification: BPI is held liable for
P547,115, the total value of the forged checks less the amount
already recovered by CASA from Leonardo T. Yabut, plus interest at
the legal rate of six percent (6%) per annum -- compounded
annually, from the filing of the complaint until paid in full; and
attorney’s fees of ten percent (10%) thereof, subject to
reimbursement from Respondent Yabut for the entire amount,
excepting attorney’s fees. Let a copy of this Decision be furnished
the Board of Accountancy of the Professional Regulation
Commission for such action as it may deem appropriate against
Respondent Yabut. No costs.
SO ORDERED.
Davide, Jr.*, Ynares-Santiago**, Carpio, and Azcuna, JJ., concur.
Footnotes
* On official leave.
** Working Chairman.
1 GR No. 149454 rollo, pp. 20-40; GR No. 149507 rollo, pp. 3-20.
2Id., pp. 44-52 & 22-30. Penned by Justice Portia Aliño-
Hormachuelos, with the concurrence of Justices Fermin A.
Martin Jr. (Second Division chairman) and Mercedes Gozo-
Dadole (member).
3Id., pp. 54 & 32. Penned by Justice Portia Aliño-Hormachuelos,
with the concurrence of Justices Ramon A. Barcelona (Special
Former Second Division chairman) and Mercedes Gozo-Dadole
(member).
4Assailed CA Decision, pp. 8-9; GR No. 149454 rollo, pp. 51-52;
GR No. 149507 rollo, pp. 29-30.
5 This is also referred to in the records as Casa Montessori
Internationale or Casa Montessori International, Inc.
6 The amount was earlier stated in the CA Decision as P782,000.
7The total amount of the encashed checks was earlier
computed in the CA Decision to be P782,600.

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8Assailed CA Decision, pp. 2-4; GR No. 149454 rollo, pp. 45-47;
GR No. 149507 rollo, pp. 23-25. Citations omitted.
9These two cases were consolidated and deemed submitted
for decision on July 25, 2002, upon the Court’s receipt of BPI’s
Memorandum in GR No. 149454, which was signed by Atty.
Justino M. Marquez III. CASA’s Memorandum, signed by Atty.
Oscar F. Martinez, was filed on July 4, 2002; while Yabut’s
Memorandum, signed by Atty. Leny L. Mauricio, was filed on
June 25, 2002.
In GR No. 149507, a Manifestation (re: Memorandum) by

Yabut, also signed by Atty. Mauricio, was filed on June 25,
2002. BPI’s Memorandum, also signed by Atty. Marquez,
was filed on June 3, 2002; while CASA’s Memorandum,
also signed by Atty. Martinez, was filed on April 19, 2002.
10BPI’s Memorandum, p. 7; GR No. 149454 rollo, p. 140.
Boldface and upper case characters copied verbatim.
11 CASA’s Memorandum, p. 6; GR No. 149507 rollo, p. 83.
12Act No. 2031 took effect on June 2, 1911. Agbayani,
Commentaries and Jurisprudence on the Commercial Laws of
the Philippines, Vol I (1989 ed.), p. 191.
Campos and Lopez-Campos, Notes and Selected Cases on

13
Negotiable Instruments Law (5th ed., 1994), pp. 268-269.

14 Gempesaw v. CA, 218 SCRA 682, 689, February 9, 1993.
15 Associated Bank v. CA, 322 Phil. 677, 695, January 31, 1996.
16 Agbayani, supra, p. 191.
17Assailed CA Decision, p. 7; GR No. 149454 rollo, p. 50; GR No.
149507 rollo, p. 28.
18 RTC Decision, p. 4; GR No. 149454 rollo, p. 59.
19 Yabut’s Affidavit, pp. 1-2; GR No. 149454 records, pp. 323-324.
21Assailed CA Decision, p. 8; id., p. 51; GR No. 149507 rollo, p.
29.
22Questioned Document Report No. 291-91 dated November
25, 1991; GR No. 149454 records, p. 326.

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23Assailed CA Decision, p. 7; GR No. 149454 rollo, p. 50; GR No.
149507 rollo, p. 28. See also RTC Decision, p. 3; GR No. 149454
rollo, p. 58.
24Questioned Document Report No. 029-91 dated January 28,
1991, issued upon the request of BPI Vice President Amante S.
Bueno; GR No. 149454 records, p. 328.
25Francisco v. CA, 377 Phil. 368, 378, November 29, 1999. See
also Almeda v. CA, 336 Phil. 621, 629, March 13, 1997; Fuentes v.
CA, 335 Phil. 1163, 1169, February 26, 1997; and People v.
Magallano, 334 Phil. 276, 282, January 16, 1997.
26 Custodial investigation is defined as "any questioning initiated
by law enforcement officers after a person has been taken into
custody or otherwise deprived of his freedom of action in any
significant way." Sebastian Sr. v. Garchitorena, 343 SCRA 463,
470, October 18, 2000, per De Leon Jr., J. See also Navallo v.
Sandiganbayan, 234 SCRA 175, 183-184, July 18, 1994; People v.
Loveria, 187 SCRA 47, 61, July 2, 1990; and Miranda v. Arizona,
384 US 436, 444, 16 L. Ed. 2d 694, 706, June 13, 1966.
In the deliberations on the 1987 Constitution,

Commissioner Felicitas Aquino summed up the right as
extending to the period of "custodial interrogation,
temporary detention and preliminary technical custody."
Bernas, The Constitution of the Republic of the Philippines:
A Commentary, Vol. I (1st ed., 1987), p. 345; citing Record
of the Constitutional Commission: Proceedings and
Debates, Vol. I (1986), pp. 713-714, 716-717.
§12 of Article III of the Constitution provides for the rights

available to a person facing custodial investigation. Cruz,
Constitutional Law (1995 ed.), p. 292.
27 Yabut’s Affidavit, supra.
28"x x x [A]mong the rights of a person under custodial
investigation is the right to have competent and independent
counsel preferably of his own choice and if the person cannot
afford the services of counsel, that he must be provided with
one." Marcelo v. Sandiganbayan, 361 Phil. 772, 788, January 26,
1999, per Mendoza, J.
See also People v. Porio, 376 SCRA 596, 609-610, February

13, 2002; People v. Suela, 373 SCRA 163, 182, January 15,
2002; People v. Tulin, 416 Phil. 365, 382-383, August 30,
2001; People v. Continente, 339 SCRA 1, 17-18, 20-21, 26,
August 25, 2000; People v. Santocildes Jr., 378 Phil. 943,

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949-950, December 21, 1999; People v. Bermas, 365 Phil.
581, 593-596, April 21, 1999; People v. Santos, 347 Phil. 943,
949-950, December 22, 1997; People v. Andal, 344 Phil.
889, 911-912, September 25, 1997; People v. Fabro, 342
Phil. 708, 772, 726, August 11, 1997; People v. Deniega, 251
SCRA 626, 638-639, December 29, 1995; and People v.
Duero, 191 Phil. 679, 687-688, May 13, 1981.
29 People v. Felixminia, 379 SCRA 567, 575, March 20, 2002, per
curiam. See also People v. Bariquit, 341 SCRA 600, 618, October
2, 2000; People v. Bravo, 376 Phil. 931, 940, November 22, 1999;
People v. Andan, 336 Phil. 91, 102, March 3, 1997; and People v.
Marra, 236 SCRA 565, 573, September 20, 1994.
These rights are available if a person is in custody, even if

not yet a suspect; or if already the suspect, even if not yet
in custody. Bernas, supra.
30People v. Arondain, 418 Phil. 354, 367-368, September 27,
2001, per Ynares-Santiago, J. See also People v. Amestuzo, 413
Phil. 500, 508, July 12, 2001; People v. Valdez, 341 SCRA 25, 41-
42, September 25, 2000; People v. Labtan, 377 Phil. 967, 982,
984, December 8, 1999; People v. De la Cruz, 344 Phil. 653, 660-
661, September 17, 1997; People v. Del Rosario, 365 Phil. 292,
310, April 14, 1990; People v. Ayson, 175 SCRA 216, 231, July 7,
1989; and Gamboa v. Cruz, 162 SCRA 642, 648, June 27, 1988.
31People v. Dano, 339 SCRA 515, 528, September 1, 2000, per
Quisumbing, J. See also Aballe v. People, 183 SCRA 196, 205,
March 15, 1990; People v. Dy, 158 SCRA 111, 123-124, February
23, 1988; and People v. Taylaran, 195 Phil. 226, 233-234, October
23, 1981.
32 In fact, the exclusionary rule under §12, paragraph (2) of the
Bill of Rights, "applies only to admissions made in a criminal
investigation but not to those made in an administrative
investigation." Remolona v. CSC, 414 Phil. 590, 599, August 2,
2001, per Puno, J. See also Sebastian Sr. v. Garchitorena, supra;
Manuel v. N.C. Construction Supply, 346 Phil. 1014, 1024,
November 28, 1997; and Lumiqued v. Exevea, 346 Phil. 807, 822-
823, November 18, 1997.
33People v. Dano, supra. See People v. Ordoño, 390 Phil. 169,
183-184, June 29, 2000.
34This provision prohibits the "compulsory oral examination of
prisoners before the trial, or upon trial, for the purpose of
extorting unwilling confessions or declarations implicating them

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in the commission of a crime." Bernas, supra, pp. 422-423; citing
US v. Tan Teng, 23 Phil. 145, 152, September 7, 1912.
The kernel of this right is against testimonial compulsion

only. Cruz, supra, p. 283. See Regalado, Remedial Law
Compendium, Vol. II (7th rev. ed., 1995), p. 369.
35People v. Rondero, 378 Phil. 123, 139-140, December 9, 1999.
See People v. Bacor, 366 Phil. 197, 212, April 30, 1999.
36 Cruz, supra, p. 282.
37Secretary of Justice v. Lantion, 379 Phil. 165, 200, January 18,
2000; citing Pascual Jr. v. Board of Medical Examiners, 138 Phil.
361, 366, May 26, 1969, and Cabal v. Kapunan Jr., 116 Phil.
1361, 1366-1369, December 29, 1962. See Bernas, supra, p. 423.
38 Alvero v. Dizon, 76 Phil. 637, 645, May 4, 1946.
39 Cruz, supra, p. 286.
40The Bill of Rights in Article III of the Constitution is a statement
of an individual’s rights that are normally protected, except in
extreme cases of real public necessity, against impairment,
usurpation, or removal by any form of State action. Sinco,
Philippine Political Law: Principles and Concepts (10th ed.,
1954), p. 73.
41People v. Silvano, 381 SCRA 607, 616, April 29, 2002, per
Mendoza, J. See People v. Domantay, 366 Phil. 459, 474, May
11, 1999; People v. Maqueda, 312 Phil. 646, 675-676, March 22,
1995; People v. Marti, 193 SCRA 57, 67, January 18, 1991.
42Filoteo Jr. v. Sandiganbayan, 331 Phil. 531, 574, October 16,
1996, per Panganiban, J. See Bernas, supra, p. 33.
43A person suspected or accused of a crime is entitled to the
specific safeguards embodied in §§12 and 17 of the Bill of
Rights against arbitrary prosecution or punishment. Cruz, supra,
p. 274.
44People v. Vallejo, 382 SCRA 192, 216, May 9, 2002, per curiam;
citing People v. Andan, supra. See also People v. Ordoño,
supra; People v. Barlis, 231 SCRA 426, 441, March 24, 1994; and
People v. Layuso, 175 SCRA 47, 53, July 5, 1989.
45 Sinco, supra, p. 670.
46In the absence of coercion, paragraph 17 of Article 32 of the
Civil Code does not apply. It states:

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"Art. 32. Any x x x private individual x x x who directly or
indirectly x x x violates or in any manner impedes or
impairs any of the following rights and liberties of another
person shall be liable to the latter for damages:
"(17) Freedom from being compelled to be a witness

against one’s self, or from being forced to confess a
guilt x x x."
47American Express International, Inc. v. CA, 367 Phil. 333, 341,
June 8, 1999, per Bellosillo, J.; citing Tenio-Obsequio v. CA, 230
SCRA 550, 558, March 1, 1994. See Siasat v. IAC, 139 SCRA 238,
248, October 10, 1985.
48Metropolitan Bank & Trust Co. v. CA, 194 SCRA 169, 176,
February 18, 1991. See MWSS v. CA, 227 Phil. 18, 26, July 14,
1986.
49 Regalado, supra, p. 555.
50 §3(a) of Rule 130 of the Rules of Court.
51 De Vera v. Aguilar, 218 SCRA 602, 607, February 9, 1993.
52 Yabut’s Affidavit, p. 1; GR No. 149454 records, p. 323.
53 TSN, January 18, 1994, p. 13.
54 Id., p. 29.
55 Id., pp. 33-34.
56 Ibid.
58 §3 of Rule 130 of the Rules of Court.
59 Regalado, supra.
61 This adverse presumption does not arise when the suppression
is not willful. Regalado, supra, p. 639; citing People v. Navaja,
220 SCRA 624, 633, March 30, 1993.
62"x x x [T]he genuineness of a standard writing may be
established by any of the following: (1) by the admission of the
person sought to be charged with the disputed writing made at
or for the purposes of the trial, or by his testimony; (2) by
witnesses who saw the standards written or to whom or in
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whose hearing the person sought to be charged
acknowledged the writing thereof; (3) by evidence showing
that the reputed writer of the standard has acquiesced in or
recognized the same, or that it has been adopted and acted
upon by him in his business transactions or other concerns."
Security Bank & Trust Company v. Triumph Lumber and
Construction Corp., 361 Phil. 463, 478, January 21, 1999, per
Davide Jr., CJ, citing BA Finance Corp. v. CA, 161 SCRA 608,
618, May 28, 1988.
This is the normal process followed in verifying signatures for

64
purposes of making bank withdrawals.

65 Chiang Yia Min v. CA, 355 SCRA 608, 622-623, March 28, 2001.
66 Heirs of Gregorio v. CA, 360 Phil. 753, 763, December 29, 1998.
67 Ibid.
68 Id., p. 764.
69 Ibid.
70 §3(a) of Rule 130 of the Rules of Court.
73 The diligence required of banks is more than that of a pater
familias or good father of a family. Bank of the Philippine Islands
v. CA, 383 Phil. 538, 554, February 29, 2000. See Philippine Bank
of Commerce v. CA, 336 Phil. 667, 681, March 14, 1997.
74Philippine Commercial International Bank v. CA, 350 SCRA
446, 472, January 29, 2001.
§2 of Republic Act No. 8791, otherwise known as "The

75
General Banking Law of 2000."

76Westmont Bank v. Ong, 375 SCRA 212, 221, January 30, 2002;
citing Citytrust Banking Corp. v. IAC, 232 SCRA 559, 564, May 27,
1994.
Simex International (Manila), Inc. v. CA, 183 SCRA 360, 367,

77
March 19, 1990, per Cruz, J.

78 Article 1173 of the Civil Code.

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79San Carlos Milling Co., Ltd. v. Bank of the Philippine Islands, 59
Phil. 59, 66, December 11, 1933, per Hull, J.
80 BPI’s Memorandum, p. 14; GR No. 149454 rollo, p. 147.
81Aside from positive confirmations, there are also negative
ones that request debtors to respond to an auditor only if the
balance in an attached statement is incorrect. Ricchiute,
Auditing Concepts and Standards (rev. 2nd ed., 1991), p. 491.
82Santos, Basic Auditing: Theory and Concepts, Vol. I (1988), p.
111.
83Association of CPAs in Public Practice, Audit Manual (1985),
p. 49.
Confirmation of accounts payable balances is normally

84
applied to nearly every audit engagement. Holmes and Burns,

Auditing Standards and Procedures (9th ed., 1979), p. 675.
A bank deposit is in the nature of a simple loan or

mutuum, as provided for in Articles 1953 and 1980 of the
Civil Code. See De Leon, Comments and Cases on Credit
Transactions, 1995 ed., pp. 32-33; Integrated Realty Corp.
v. Philippine National Bank, 174 SCRA 295, 309, June 28,
1989; Serrano v. Central Bank of the Philippines, 96 SCRA
96, 102, February 14, 1980; and Central Bank of the
Philippines v. Morfe, 63 SCRA 114, 119, March 12, 1975.
In bank parlance, a bank deposit is an account payable

by the bank to its client-depositor.
85 Santos, supra, p. 102.
86 Association of CPAs in Public Practice, Audit Manual, supra.
87 Id., p. 57.
88 Id., p. 24.
89 "Waiver is defined as the relinquishment of a known right with
both knowledge of its existence and an intention to relinquish
it." Tolentino, Commentaries and Jurisprudence on the Civil
Code of the Philippines, Vol. I (1990), p. 29.
91 "The general rule of law is that a person may renounce any
right which the law gives x x x." The Manila Railroad Company

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v. The Attorney-General, 20 Phil. 523, 537, December 1, 1911,
per Moreland, J. See Tolentino, supra, p. 30.
92 Tolentino, supra, p. 28.
93 BPI’s Memorandum, p. 14; GR No. 149454 rollo, p. 147.
Tolentino, Commentaries and Jurisprudence on the Civil

94
Code of the Philippines, Vol. IV (1991), p. 656.

95Conclusive or absolute presumption. §2(a) of Rule 131 of the
Rules of Court.
96 Art. 1431 of the Civil Code also provides:
"Through estoppel an admission or representation is

rendered conclusive upon the person making it, and
cannot be denied or disproved as against the person
relying thereon."
97 Ramiro v. Graño, 54 Phil. 744, 750, March 31, 1930.
98 Lodovica v. CA, 65 SCRA 154, 158, July 18, 1975.
99 Kalalo v. Luz, 145 Phil. 152, 161, July 31, 1970, per Zaldivar, J.
Under Article 1231(1) of the Civil Code, payment is the

100
actual performance that extinguishes an obligation.
It implies not only an assent to the order of the drawer and

a recognition of the drawee’s obligation to pay the sum
therein, but also a compliance with such obligation.
Philippine National Bank v. CA, 134 Phil. 829, 833, October
29, 1968.
101 Greenbelt Branch. Assailed CA Decision, p. 3; GR No. 149454
rollo, p. 46; GR No. 149507 rollo, p. 24.
The Great Eastern Life Insurance Co. v. Hongkong &

102
Shanghai Banking Corp., 43 Phil. 678, 683, August 23, 1922.

103 Campos and Lopez-Campos, supra, pp. 286-287.
Associated Bank v. CA, 322 Phil. 677, 697, January 31, 1996,
104
per Romero, J.; citing The Great Eastern Life Insurance Co. v.
Hongkong & Shanghai Banking Corp., supra, and Banco de
Oro Savings and Mortgage Bank v. Equitable Banking Corp.,
157 SCRA 188, 198, January 20, 1988.

suigeneris
105 Philippine National Bank v. CA, supra, per Concepcion, CJ;
citing Blondeau v. Nano, 61 Phil. 625, 631-632, July 26, 1935. See
Philippine National Bank v. The National City Bank of New York,
63 Phil. 711, 723-726, October 31, 1936.
Sangco, Philippine Law on Torts and Damages, Vol. I (rev.

106
ed., 1993), p. 90.
Bataclán v. Medina, 109 Phil. 181, 185-186, October 22, 1957,

107
per Montemayor, J.
Philippine National Bank v. Quimpo, 158 SCRA 582, 585,

108
March 14, 1988, per Gancayco, J.

109 Gempesaw v. CA, supra, p. 696.
111As testified to on direct examination by Angelita Dandan,
senior manager of the BPI Muntinlupa Branch and formerly
connected with the BPI Forbes Park Branch. TSN, August 26,
1997, pp. 3-4, and 7.
112 "x x x [B]anks are expected to exercise the highest degree of
diligence in the selection and supervision of their employees."
BPI v. CA, 216 SCRA 51, 71, November 26, 1992, per Gutierrez Jr.,
J.
Philippine Commercial International Bank v. CA, supra, per

113
Quisumbing, J., p. 469.

115 BPI v. CA, supra, p. 65.
116 Holmes and Burns, supra, p. 1.
During the pendency of this case, an auditor had to

ascertain whether the financial statements were in
conformity with the Generally Accepted Accounting
Principles (GAAP). Valix and Peralta, Financial Accounting
(Vol. I, 1985 ed.), p. 8.
As of April 2004, the Accounting Standards Council (ASC)

of the Philippines has approved many Statements of
Financial Accounting Standards (SFAS) and has also
adopted several International Accounting Standards (IAS)
issued by the International Accounting Standards Council
(IASC). http://www.picpa.com.ph/press.htm, last visited
April 23, 2004, 12:05 p.m. PST.

suigeneris
118 Id., p. 206.
119Certified public accountants or CPAs adhere to a Code of
Professional Ethics, promulgated by the Board of Accountancy
(BOA) on March 15, 1978. In January 2004, a new Code of
Ethics for CPAs was approved by the Board of Directors of the
Philippine Institute of CPAs (PICPA), to be recommended for
adoption by the BOA and approval by the Professional
Regulation Commission (PRC) as part of the rules and
regulations of the BOA for the practice of the accountancy
profession in the Philippines.
http://www.picpa.com.ph/news/codeofethics2.pdf, last visited
April 23, 2004, 12:17 p.m. PST.
121 Santos, supra, pp. 11 & 168.
123 Ricchiute, supra, p. 48.
124 Santos, supra, pp. 52 & 76.
As testified to on cross-examination by Carina Lebron (TSN,

125
February 13, 1992, pp. 18-19). See Yabut’s Affidavit, p. 1; GR No.

149454 records, p. 323.
That Respondent Yabut is a CPA appears in CASA’s

pretrial Brief. GR No. 149454 records, p. 83.
126 Yabut’s Affidavit, supra.
127 Ricchiute, supra, p. 54.
128 Santos, supra, p. 6.
Commissioner of Internal Revenue v. TMX Sales, Inc., 205

129
SCRA 184, 191, January 15, 1992.
As of April 2004, many Generally Accepted Auditing

Standards (GAAS) have been replaced by International
Standards on Auditing (ISA).
130 A depositor has a duty to set up an accounting system that
is reasonably calculated to prevent any forgery or to render it
difficult to perpetrate. Gempesaw v. CA, supra, p. 690.

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131A bank reconciliation is an audit technique that verifies if the
cash balance appearing on a bank statement per bank
records is in agreement with that in the depositor’s records or
books of accounts. Meigs and Meigs, Accounting: The Basis for
Business Decisions, Part I (5th ed., 1981), p. 315.
132§24 of Presidential Decree (PD) No. 692, otherwise known as
"The Revised Accountancy Law."
133 Chiang Yia Min v. CA, supra, p. 624, per Gonzaga-Reyes, J.
134 GR No. 149454 records, p. 491.
135Cutoff bank statements do not represent all the transactions
in a given month. Ricchiute, supra, p. 498.
136Taylor v. The Manila Electric Railroad and Light Co., 16 Phil. 8,
28, March 22, 1910, per Carson, J.; citing Scævola in
Jurisprudencia del Código Civil, Vol. 6 (1902), pp. 551-552.
137Taylor v. The Manila Electric Railroad and Light Co., supra, p.
27, quoting the judgment of the Supreme Court of Spain on
June 12, 1900.
138Before there can be a judgment for damages, "negligence
must be affirmatively established by competent evidence." Sor
Consuelo Barceló v. The Manila Electric Railroad and Light Co.,
29 Phil. 351, 359, January 28, 1915, per Carson, J.
139 §27 of PD 692.
140Good governance has been defined as a "really strong
senior managerial control" exercised by the chief executive
officer or "CEO and one of his/her strongest direct reports."
Gerry Conroy, Good Governance and Good Management
Keys to Successful Project Management.
http://www.pwcglobal.com/Extweb/ncinthenews.nsf/docid/28
123C3F882E48B7CA256AFA007A33EA, last visited May 6, 2004,
1:12 p.m. PST.
"Accountability is a key requirement of good

governance." As such, it "cannot be enforced without
transparency and the rule of law."
http://www.unescap.org/huset/gg/governance.htm, last
visited May 6, 2004, 12:55 p.m. PST.
141http://www.picpa.com.ph, last visited May 4, 2004, 1:57 p.m.
PST.
142 Isidra Carandang. TSN, February 13, 1992, pp. 18-19.
suigeneris
143 Felipa Cabuyao. TSN, February 13, 1992, pp. 18-19.
Yabut admitted that he had recommended Cabuyao to

the position. Yabut’s Affidavit, supra.
144The job of a bookkeeper is so integrated with a corporation
that the regular recording of its business accounts and
transactions safeguards it from possible fraud, which is adverse
to its corporate interest. Pabon v. NLRC, 296 SCRA 7, 14,
September 24, 1998.
145 Yabut’s Affidavit, p. 1; GR No. 149454 records, p. 323.
146 Holmes and Burns, supra, pp. 84-86.
147Campos and Lopez-Campos, supra, p. 287; Agbayani,
supra, p. 211. Both cited Article 2154 of the Civil Code.
148 Ong Yiu v. CA, 91 SCRA 223, 229, June 29, 1979.
Suario v. Bank of the Philippine Islands, 176 SCRA 688, 696,

149
August 25, 1989; citing Guita v. CA, 139 SCRA 576, 580,
November 11, 1985.
150Rubio v. CA, 141 SCRA 488, 515-516, March 12, 1986; citing
R&B Surety & Insurance Co., Inc. v. IAC, 214 Phil. 649, 657, June
22, 1984.
Filinvest Credit Corp. v. Mendez, 152 SCRA 593, 601, July 31,
151
1987.
153 Silva v. Peralta, 110 Phil. 57, 64, November 25, 1960.
Dee Hua Liong Electrical Equipment Corp. v. Reyes, 230 Phil.

155
101, 107, November 25, 1986.
Guilatco v. City of Dagupan, 171 SCRA 382, 389, March 21,

156
1989; citing Bagumbayan Corp. v. IAC, 217 Phil. 421, 424,

September 30, 1984.
Soberano v. Manila Railroad Co., 124 Phil. 1330, 1337,

157
November 23, 1966; citing Fores v. Miranda, 105 Phil. 266, 274,
276, March 4, 1959 and Necesito v. Paras, 104 Phil. 75, 82-83,
June 30, 1958.

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Northwest Orient Airlines v. CA, 186 SCRA 440, 444, June 8,
158
1990; citing Sabena Belgian World Airlines v. CA, 171 SCRA 620,
629, March 31, 1989.
159Cathay Pacific Airways, Ltd. v. Vazquez, 399 SCRA 207, 220,
March 14, 2003, per Davide Jr., CJ; citing Francisco v. Ferrer Jr.,
353 SCRA 261, 265, February 28, 2001. See also Morris v. CA, 352
SCRA 428, 437, February 21, 2001; Magat Jr. v. CA, 337 SCRA
298, 307, August 4, 2000; and Tan v. Northwest Airlines, Inc., 383
Phil. 1026, 1032, March 3, 2000.
LBC Express, Inc. v. CA, 236 SCRA 602, 607, September 21,
160
1994. See Layda v. CA, 90 Phil. 724, 730, January 29, 1952.
162Morales, The Philippine General Banking Law (Annotated
2002), pp. 3-4; citing Simex International (Manila), Inc. v. CA,
supra, and Mambulao Lumber Co. v. Philippine National Bank,
130 Phil. 366, 391, January 30, 1968.
163 Sangco, supra, p. 989.
164Grapilon v. Municipal Council of Carigara, Leyte, 112 Phil. 24,
29, May 30, 1961.
166Ledesma v. CA, 160 SCRA 449, 456, April 15, 1988,
Prudenciado v. Alliance Transport System, Inc., 148 SCRA 440,
450, March 16, 1987; and Lopez v. Pan American World Airways,
123 Phil. 256, 267, March 30, 1966.
167De Leon v. CA, 165 SCRA 166, 176, August 31, 1988; Sweet
Lines, Inc. v. CA, 206 Phil. 663, 669, April 28, 1983; Octot v.
Ybañez, 197 Phil. 76, 82, January 18, 1982; and Ventanilla v.
Centeno, 110 Phil. 811, 816, January 28, 1961, citing Article 2233
of the Civil Code.
Article 2232 of the Civil Code. See Nadura v. Benguet

168
Consolidated, Inc., 116 Phil. 28, 32, August 24, 1962.

169 Estopa v. Piansay Jr., 109 Phil. 640, 642, September 30, 1960.
Firestone Tire & Rubber Co. of the Philippines v. Ines Chaves

170
& Co., Ltd., 124 Phil. 947, 950, October 19, 1966, citing Heirs of
Basilisa Justiva vs. Gustilo, 117 Phil. 71, 73, January 31, 1963. See
Tan Ti (alias Tan Tico) v. Alvear, 26 Phil. 566, 571, January 16,
1914.

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171Scott Consultants & Resource Development Corporation,
Inc. v. CA, 312 Phil. 466, 481, March 16, 1995, per Davide Jr., J.
(now CJ.).
172Article 2208 (2) of the Civil Code. See Rivera v. Litam & Co.,
Inc., 114 Phil. 1009, 1022, April 25, 1962; and Luneta Motor Co. v.
Baguio Bus Co., Inc., 108 Phil. 892, 898, June 30, 1960.
173Article 2208 (11) of the Civil Code. See Philippine National
Bank v. Utility Assurance & Surety Co., Inc., 177 SCRA 208, 219,
September 1, 1989; citing Plaridel Surety & Insurance Co., Inc. v.
P.L. Galang Machinery Co., Inc., 100 Phil. 679, 682, January 11,
1957. See also Apelario v. Ines Chavez & Co., Ltd., 113 Phil. 215,
217-218, October 16, 1961; and Guitarte v. Sabaco, 107 Phil.
437, 440, March 28, 1960.
174Jarencio, Torts and Damages in Philippine Law (4th ed., 1983),
p. 334; citing Pirovano v. The De la Rama Steamship Co., 96 Phil.
335, 367, December 29, 1954.
175When a claim is made judicially under Article 1169 of the
Civil Code.
176Philippine National Bank v. Utility Assurance & Surety Co.,
Inc., supra.
177 Cabral v. CA, 178 SCRA 90, 93, September 29, 1989.
179 Francisco v. CA, supra, p. 381, per Gonzaga-Reyes, J.
180In compounding interest, "x x x the amount of interest
earned for a certain period is added to the principal for the
next period. Interest for the subsequent period is computed on
the new amount, which includes both the principal and
accumulated interest." Smith and Skousen, Intermediate
Accounting, the 11th ed., 1992, p. 235.
"The payment (cost) for the use of money is interest." Id., p.

181
234.
183The law merchant refers to the body of law relating to
mercantile transactions and instruments of widespread use. Its
usage as adopted by the courts is the origin of the law
merchant on negotiable securities. Agbayani, supra, pp. 11-12.

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184A current account is a commercial transaction. In re
Liquidation of Mercantile Bank of China, Tan Tiong Tick v.
American Apothecaries Co., 65 Phil. 414, 419-420, March 31,
1938.
DIGEST
Facts: CASA Montessori International opened an account with BPI,

with CASA’s President as one of its authorized signatories. It
discovered that 9 of its checks had been encashed by a certain
Sonny D. Santos whose name turned out to be fictitious, and was
used by a certain Yabut, CASA’s external auditor. He voluntarily
admitted that he forged the signature and encashed the checks.
RTC granted the Complaint for Collection with Damages against BPI
ordering to reinstate the amount in the account, with interest. CA
took account of CASA’s contributory negligence and apportioned
the loss between CASA and BPI, and ordred Yabut to reimburse
both.
BPI contends that the monthly statements it issues to its clients

contain a notice worded as follows: “If no error is reported in 10 days,
account will be correct” and as such, it should be considered a
waiver.
Issue:Whether or not waiver or estoppel results from failure to report

the error in the bank statement
Held: Such notice cannot be considered a waiver, even if CASA

failed to report the error. Neither is it estopped from questioning the
mistake after the lapse of the ten-day period.
This notice is a simple confirmation or "circularization" -- in accounting

parlance -- that requests client-depositors to affirm the accuracy of
items recorded by the banks. Its purpose is to obtain from the
depositors a direct corroboration of the correctness of their account
balances with their respective banks.
Every right has subjects -- active and passive. While the active
subject is entitled to demand its enforcement, the passive one is
duty-bound to suffer such enforcement. On the one hand, BPI could
not have been an active subject, because it could not have
demanded from CASA a response to its notice. CASA, on the other
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hand, could not have been a passive subject, either, because it had
no obligation to respond. It could -- as it did -- choose not to
respond.
Estoppel precludes individuals from denying or asserting, by their

own deed or representation, anything contrary to that established as
the truth, in legal contemplation. Our rules on evidence even make
a juris et de jure presumption that whenever one has, by one’s own
act or omission, intentionally and deliberately led another to believe
a particular thing to be true and to act upon that belief, one cannot
-- in any litigation arising from such act or omission -- be permitted to
falsify that supposed truth.
In the instant case, CASA never made any deed or representation

that misled BPI. The former’s omission, if any, may only be deemed
an innocent mistake oblivious to the procedures and consequences
of periodic audits. Since its conduct was due to such ignorance
founded upon an innocent mistake, estoppel will not arise. A person
who has no knowledge of or consent to a transaction may not be
estopped by it. "Estoppel cannot be sustained by mere argument or
doubtful inference x x x." CASA is not barred from questioning BPI’s
error even after the lapse of the period given in the notice.
BPI VS. CASA MONTESSORI INTERNATIONAL
FACTS: On November 8, 1982, CASA Montessori International opened

Current AccouNT with BPI with CASA’s President Lebron as one of its
authorized signatories. In 1991, after conducting an investigation,
plaintiff discovered that nine of its checks had been encashed by a
certain Sonny D. Santos since 1990 in the total amount of
P782,000.00. It turned out that Santos with account at BPI Greenbelt
Branch was a fictitious name used by third party defendant
Leonardo T. Yabut who worked as external auditor of CASA. Third
party defendant voluntarily admitted that he forged the signature of
Lebron and encashed the checks. In 1991, plaintiff filed Complaint
for Collection with Damages against defendant bank praying that
the latter be ordered to reinstate the amount of P782,500.00 with
interest. RTC rendered decision in favor of the plaintiff. CA modified
decision holding CASA as contributory negligent hence ordered
Yabut to reimburse BPI half the total amount claimed and CASA, the

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other half. It also disallowed attorney’s fees and moral and
exemplary damages.
ISSUE: W/N moral and exemplary damages and attorney’s fees

should be awarded.
RULING: Moral and exemplary damages denied but atty.’s fees

granted.
In the absence of a wrongful act or omission, or of fraud or bad faith,
moral damages cannot be awarded. The adverse result of an action
does not per se make the action wrongful, or the party liable for
it.CASA was unable to identify the particular instance upon which its
claim for moral damages is predicated. Neither bad faith nor
negligence so gross that it amounts to malice can be imputed to BPI.
Imposed by way of correction for the public good, exemplary
damages cannot be recovered as a matter of right. There is no bad
faith on the part of BPI for paying the checks of CASA upon forged
signatures. Therefore, the former cannot be said to have acted in a
wanton, fraudulent, reckless, oppressive or malevolent manner. The
latter, having no right to moral damages, cannot demand
exemplary damages.
When the act or omission of the defendant has compelled the
plaintiff to incur expenses to protect the latter’s interest, or where the
court deems it just and equitable, attorney’s fees may be recovered.
In the present case, BPI persistently denied the claim of CASA under
the NIL to recredit the latter’s account for the value of the forged
checks. This denial constrained CASA to incur expenses and exert
effort for more than ten years in order to protect its corporate
interest in its bank account.
Gokongwei vs. SEC (89 SCRA 336 [1979])
G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner,

vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO,
JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO
BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO,
SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and
EDUARDO R. VISAYA, respondents.
De Santos, Balgos & Perez for petitioner.

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Angara, Abello, Concepcion, Regala, Cruz Law Offices for
respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel

Corporation.
R. T Capulong for respondent Eduardo R. Visaya.
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with

prayer for issuance of writ of preliminary injunction, arose out of two
cases filed by petitioner with the Securities and Exchange
Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San

Miguel Corporation, filed with the Securities and Exchange
Commission (SEC) a petition for "declaration of nullity of amended
by-laws, cancellation of certificate of filing of amended by- laws,
injunction and damages with prayer for a preliminary injunction"
against the majority of the members of the Board of Directors and
San Miguel Corporation as an unwilling petitioner. The petition,
entitled "John Gokongwei Jr. vs. Andres Soriano, Jr., Jose M. Soriano,
Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde,
Miguel Ortigas, Antonio Prieto and San Miguel Corporation", was
docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18,

1976, individual respondents amended by bylaws of the corporation,
basing their authority to do so on a resolution of the stockholders
adopted on March 13, 1961, when the outstanding capital stock of
respondent corporation was only P70,139.740.00, divided into
5,513,974 common shares at P10.00 per share and 150,000 preferred
shares at P100.00 per share. At the time of the amendment, the
outstanding and paid up shares totalled 30,127,047 with a total par
value of P301,270,430.00. It was contended that according to
section 22 of the Corporation Law and Article VIII of the by-laws of
the corporation, the power to amend, modify, repeal or adopt new
by-laws may be delegated to the Board of Directors only by the
affirmative vote of stockholders representing not less than 2/3 of the
subscribed and paid up capital stock of the corporation, which 2/3
should have been computed on the basis of the capitalization at the
time of the amendment. Since the amendment was based on the
1961 authorization, petitioner contended that the Board acted
without authority and in usurpation of the power of the stockholders.

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As a second cause of action, it was alleged that the authority
granted in 1961 had already been exercised in 1962 and 1963, after
which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of

the Board of Directors had changed since the authority was given in
1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the

questioned amendment, petitioner had all the qualifications to be a
director of respondent corporation, being a Substantial stockholder
thereof; that as a stockholder, petitioner had acquired rights
inherent in stock ownership, such as the rights to vote and to be
voted upon in the election of directors; and that in amending the
by-laws, respondents purposely provided for petitioner's
disqualification and deprived him of his vested right as afore-
mentioned hence the amended by-laws are null and void. 1
As additional causes of action, it was alleged that corporations have

no inherent power to disqualify a stockholder from being elected as
a director and, therefore, the questioned act is ultra vires and void;
that Andres M. Soriano, Jr. and/or Jose M. Soriano, while representing
other corporations, entered into contracts (specifically a
management contract) with respondent corporation, which was
allowed because the questioned amendment gave the Board itself
the prerogative of determining whether they or other persons are
engaged in competitive or antagonistic business; that the portion of
the amended bylaws which states that in determining whether or
not a person is engaged in competitive business, the Board may
consider such factors as business and family relationship, is
unreasonable and oppressive and, therefore, void; and that the
portion of the amended by-laws which requires that "all nominations
for election of directors ... shall be submitted in writing to the Board
of Directors at least five (5) working days before the date of the
Annual Meeting" is likewise unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null

and void and the certificate of filing thereof be cancelled, and that
individual respondents be made to pay damages, in specified
amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner

filed with the Securities and Exchange Commission an "Urgent
Motion for Production and Inspection of Documents", alleging that
the Secretary of respondent corporation refused to allow him to
inspect its records despite request made by petitioner for production
of certain documents enumerated in the request, and that
respondent corporation had been attempting to suppress

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information from its stockholders despite a negative reply by the SEC
to its query regarding their authority to do so. Among the documents
requested to be copied were (a) minutes of the stockholder's
meeting field on March 13, 1961, (b) copy of the management
contract between San Miguel Corporation and A. Soriano
Corporation (ANSCOR); (c) latest balance sheet of San Miguel
International, Inc.; (d) authority of the stockholders to invest the funds
of respondent corporation in San Miguel International, Inc.; and (e)
lists of salaries, allowances, bonuses, and other compensation, if any,
received by Andres M. Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was

opposed by respondents, alleging, among others that the motion
has no legal basis; that the demand is not based on good faith; that
the motion is premature since the materiality or relevance of the
evidence sought cannot be determined until the issues are joined,
that it fails to show good cause and constitutes continued
harrasment, and that some of the information sought are not part of
the records of the corporation and, therefore, privileged.
During the pendency of the motion for production, respondents San

Miguel Corporation, Enrique Conde, Miguel Ortigas and Antonio
Prieto filed their answer to the petition, denying the substantial
allegations therein and stating, by way of affirmative defenses that
"the action taken by the Board of Directors on September 18, 1976
resulting in the ... amendments is valid and legal because the power
to "amend, modify, repeal or adopt new By-laws" delegated to said
Board on March 13, 1961 and long prior thereto has never been
revoked of SMC"; that contrary to petitioner's claim, "the vote
requirement for a valid delegation of the power to amend, repeal or
adopt new by-laws is determined in relation to the total subscribed
capital stock at the time the delegation of said power is made, not
when the Board opts to exercise said delegated power"; that
petitioner has not availed of his intra-corporate remedy for the
nullification of the amendment, which is to secure its repeal by vote
of the stockholders representing a majority of the subscribed capital
stock at any regular or special meeting, as provided in Article VIII,
section I of the by-laws and section 22 of the Corporation law,
hence the, petition is premature; that petitioner is estopped from
questioning the amendments on the ground of lack of authority of
the Board. since he failed, to object to other amendments made on
the basis of the same 1961 authorization: that the power of the
corporation to amend its by-laws is broad, subject only to the
condition that the by-laws adopted should not be respondent
corporation inconsistent with any existing law; that respondent
corporation should not be precluded from adopting protective
measures to minimize or eliminate situations where its directors might
be tempted to put their personal interests over t I hat of the

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corporation; that the questioned amended by-laws is a matter of
internal policy and the judgment of the board should not be
interfered with: That the by-laws, as amended, are valid and binding
and are intended to prevent the possibility of violation of criminal
and civil laws prohibiting combinations in restraint of trade; and that
the petition states no cause of action. It was, therefore, prayed that
the petition be dismissed and that petitioner be ordered to pay
damages and attorney's fees to respondents. The application for writ
of preliminary injunction was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their

opposition to the petition, denying the material averments thereof
and stating, as part of their affirmative defenses, that in August 1972,
the Universal Robina Corporation (Robina), a corporation engaged
in business competitive to that of respondent corporation, began
acquiring shares therein. until September 1976 when its total holding
amounted to 622,987 shares: that in October 1972, the Consolidated
Foods Corporation (CFC) likewise began acquiring shares in
respondent (corporation. until its total holdings amounted to
P543,959.00 in September 1976; that on January 12, 1976, petitioner,
who is president and controlling shareholder of Robina and CFC
(both closed corporations) purchased 5,000 shares of stock of
respondent corporation, and thereafter, in behalf of himself, CFC
and Robina, "conducted malevolent and malicious publicity
campaign against SMC" to generate support from the stockholder
"in his effort to secure for himself and in representation of Robina and
CFC interests, a seat in the Board of Directors of SMC", that in the
stockholders' meeting of March 18, 1976, petitioner was rejected by
the stockholders in his bid to secure a seat in the Board of Directors
on the basic issue that petitioner was engaged in a competitive
business and his securing a seat would have subjected respondent
corporation to grave disadvantages; that "petitioner nevertheless
vowed to secure a seat in the Board of Directors at the next annual
meeting; that thereafter the Board of Directors amended the by-
laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary

damages, expenses of litigation and attorney's fees were presented
against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the

motion for production and inspection of documents was filed by all
the respondents. This was duly opposed by petitioner. At this
juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya
were allowed to intervene as oppositors and they accordingly filed
their oppositions-intervention to the petition.

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On December 29, 1976, the Securities and Exchange Commission
resolved the motion for production and inspection of documents by
issuing Order No. 26, Series of 1977, stating, in part as follows:
Considering the evidence submitted before the

Commission by the petitioner and respondents in the
above-entitled case, it is hereby ordered:
1. That respondents produce and permit the inspection,

copying and photographing, by or on behalf of the
petitioner-movant, John Gokongwei, Jr., of the minutes of
the stockholders' meeting of the respondent San Miguel
Corporation held on March 13, 1961, which are in the
possession, custody and control of the said corporation, it
appearing that the same is material and relevant to the
issues involved in the main case. Accordingly, the
respondents should allow petitioner-movant entry in the
principal office of the respondent Corporation, San Miguel
Corporation on January 14, 1977, at 9:30 o'clock in the
morning for purposes of enforcing the rights herein
granted; it being understood that the inspection, copying
and photographing of the said documents shall be
undertaken under the direct and strict supervision of this
Commission. Provided, however, that other documents
and/or papers not heretofore included are not covered
by this Order and any inspection thereof shall require the
prior permission of this Commission;
2. As to the Balance Sheet of San Miguel International, Inc.

as well as the list of salaries, allowances, bonuses,
compensation and/or remuneration received by
respondent Jose M. Soriano, Jr. and Andres Soriano from
San Miguel International, Inc. and/or its successors-in-
interest, the Petition to produce and inspect the same is
hereby DENIED, as petitioner-movant is not a stockholder
of San Miguel International, Inc. and has, therefore, no
inherent right to inspect said documents;
3. In view of the Manifestation of petitioner-movant dated

November 29, 1976, withdrawing his request to copy and
inspect the management contract between San Miguel
Corporation and A. Soriano Corporation and the renewal
and amendments thereof for the reason that he had
already obtained the same, the Commission takes note
thereof; and
4. Finally, the Commission holds in abeyance the

resolution on the matter of production and inspection of

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the authority of the stockholders of San Miguel
Corporation to invest the funds of respondent corporation
in San Miguel International, Inc., until after the hearing on
the merits of the principal issues in the above-entitled
case.
This Order is immediately executory upon its approval. 2
Dissatisfied with the foregoing Order, petitioner moved for its

reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be

heard, respondent corporation issued a notice of special
stockholders' meeting for the purpose of "ratification and
confirmation of the amendment to the By-laws", setting such
meeting for February 10, 1977. This prompted petitioner to ask
respondent Commission for a summary judgment insofar as the first
cause of action is concerned, for the alleged reason that by calling
a special stockholders' meeting for the aforesaid purpose, private
respondents admitted the invalidity of the amendments of
September 18, 1976. The motion for summary judgment was
opposed by private respondents. Pending action on the motion,
petitioner filed an "Urgent Motion for the Issuance of a Temporary
Restraining Order", praying that pending the determination of
petitioner's application for the issuance of a preliminary injunction
and/or petitioner's motion for summary judgment, a temporary
restraining order be issued, restraining respondents from holding the
special stockholder's meeting as scheduled. This motion was duly
opposed by respondents.
On February 10, 1977, respondent Commission issued an order

denying the motion for issuance of temporary restraining order. After
receipt of the order of denial, respondents conducted the special
stockholders' meeting wherein the amendments to the by-laws were
ratified. On February 14, 1977, petitioner filed a consolidated motion
for contempt and for nullification of the special stockholders'
meeting.
A motion for reconsideration of the order denying petitioner's motion

for summary judgment was filed by petitioner before respondent
Commission on March 10, 1977. Petitioner alleges that up to the time
of the filing of the instant petition, the said motion had not yet been
scheduled for hearing. Likewise, the motion for reconsideration of
the order granting in part and denying in part petitioner's motion for
production of record had not yet been resolved.
In view of the fact that the annul stockholders' meeting of

respondent corporation had been scheduled for May 10, 1977,
petitioner filed with respondent Commission a Manifestation stating
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that he intended to run for the position of director of respondent
corporation. Thereafter, respondents filed a Manifestation with
respondent Commission, submitting a Resolution of the Board of
Directors of respondent corporation disqualifying and precluding
petitioner from being a candidate for director unless he could submit
evidence on May 3, 1977 that he does not come within the
disqualifications specified in the amendment to the by-laws, subject
matter of SEC Case No. 1375. By reason thereof, petitioner filed a
manifestation and motion to resolve pending incidents in the case
and to issue a writ of injunction, alleging that private respondents
were seeking to nullify and render ineffectual the exercise of
jurisdiction by the respondent Commission, to petitioner's irreparable
damage and prejudice, Allegedly despite a subsequent
Manifestation to prod respondent Commission to act, petitioner was
not heard prior to the date of the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted

inability on the part of the SEC to act hence petitioner came to this
Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent

corporation has been investing corporate funds in other
corporations and businesses outside of the primary purpose clause of
the corporation, in violation of section 17 1/2 of the Corporation Law,
he filed with respondent Commission, on January 20, 1977, a petition
seeking to have private respondents Andres M. Soriano, Jr. and Jose
M. Soriano, as well as the respondent corporation declared guilty of
such violation, and ordered to account for such investments and to
answer for damages.
On February 4, 1977, motions to dismiss were filed by private

respondents, to which a consolidated motion to strike and to
declare individual respondents in default and an opposition ad
abundantiorem cautelam were filed by petitioner. Despite the fact
that said motions were filed as early as February 4, 1977, the
commission acted thereon only on April 25, 1977, when it denied
respondents' motion to dismiss and gave them two (2) days within
which to file their answer, and set the case for hearing on April 29
and May 3, 1977.
Respondents issued notices of the annual stockholders' meeting,

including in the Agenda thereof, the following:
6. Re-affirmation of the authorization to the Board of

Directors by the stockholders at the meeting on March 20,
1972 to invest corporate funds in other companies or
businesses or for purposes other than the main purpose for
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which the Corporation has been organized, and
ratification of the investments thereafter made pursuant
thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the
SEC an urgent motion for the issuance of a writ of preliminary
injunction to restrain private respondents from taking up Item 6 of the
Agenda at the annual stockholders' meeting, requesting that the
same be set for hearing on May 3, 1977, the date set for the second
hearing of the case on the merits. Respondent Commission,
however, cancelled the dates of hearing originally scheduled and
reset the same to May 16 and 17, 1977, or after the scheduled
annual stockholders' meeting. For the purpose of urging the
Commission to act, petitioner filed an urgent manifestation on May
3, 1977, but this notwithstanding, no action has been taken up to the
date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's

contention before this Court that respondent Commission gravely
abused its discretion when it failed to act with deliberate dispatch
on the motions of petitioner seeking to prevent illegal and/or
arbitrary impositions or limitations upon his rights as stockholder of
respondent corporation, and that respondent are acting
oppressively against petitioner, in gross derogation of petitioner's
rights to property and due process. He prayed that this Court direct
respondent SEC to act on collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining order

restraining private respondents from disqualifying or preventing
petitioner from running or from being voted as director of
respondent corporation and from submitting for ratification or
confirmation or from causing the ratification or confirmation of Item
6 of the Agenda of the annual stockholders' meeting on May 10,
1977, or from Making effective the amended by-laws of respondent
corporation, until further orders from this Court or until the Securities
and Ex-change Commission acts on the matters complained of in
the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging

that after a restraining order had been issued by this Court, or on
May 9, 1977, the respondent Commission served upon petitioner
copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying
petitioner's motion for reconsideration, with its supplement, of the
order of the Commission denying in part petitioner's motion for
production of documents, petitioner's motion for reconsideration of
the order denying the issuance of a temporary restraining order

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denying the issuance of a temporary restraining order, and
petitioner's consolidated motion to declare respondents in contempt
and to nullify the stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing
petitioner to run as a director of respondent corporation but stating
that he should not sit as such if elected, until such time that the
Commission has decided the validity of the bylaws in dispute, and
denying deferment of Item 6 of the Agenda for the annual
stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying
petitioner's motion for reconsideration of the order of respondent
Commission denying petitioner's motion for summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that

respondent Commission acted with indecent haste and without
circumspection in issuing the aforesaid orders to petitioner's
irreparable damage and injury; (2) that it acted without jurisdiction
and in violation of petitioner's right to due process when it decided
en banc an issue not raised before it and still pending before one of
its Commissioners, and without hearing petitioner thereon despite
petitioner's request to have the same calendared for hearing , and
(3) that the respondents acted oppressively against the petitioner in
violation of his rights as a stockholder, warranting immediate judicial
intervention.
It is prayed in the supplemental petition that the SEC orders

complained of be declared null and void and that respondent
Commission be ordered to allow petitioner to undertake discovery
proceedings relative to San Miguel International. Inc. and thereafter
to decide SEC Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M.
Soriano filed their comment, alleging that the petition is without merit
for the following reasons:
(1) that the petitioner the interest he represents are engaged in

business competitive and antagonistic to that of respondent San
Miguel Corporation, it appearing that the owns and controls a
greater portion of his SMC stock thru the Universal Robina
Corporation and the Consolidated Foods Corporation, which
corporations are engaged in business directly and substantially
competing with the allied businesses of respondent SMC and of
corporations in which SMC has substantial investments. Further, when
CFC and Robina had accumulated investments. Further, when CFC
and Robina had accumulated shares in SMC, the Board of Directors
of SMC realized the clear and present danger that competitors or
antagonistic parties may be elected directors and thereby have
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easy and direct access to SMC's business and trade secrets and
plans;
(2) that the amended by law were adopted to preserve and protect
respondent SMC from the clear and present danger that business
competitors, if allowed to become directors, will illegally and unfairly
utilize their direct access to its business secrets and plans for their
own private gain to the irreparable prejudice of respondent SMC,
and, ultimately, its stockholders. Further, it is asserted that
membership of a competitor in the Board of Directors is a blatant
disregard of no less that the Constitution and pertinent laws against
combinations in restraint of trade;
(3) that by laws are valid and binding since a corporation has the
inherent right and duty to preserve and protect itself by excluding
competitors and antogonistic parties, under the law of self-
preservation, and it should be allowed a wide latitude in the
selection of means to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos.
1375 and 1423 was due to petitioner's own acts or omissions, since he
failed to have the petition to suspend, pendente lite the amended
by-laws calendared for hearing. It was emphasized that it was only
on April 29, 1977 that petitioner calendared the aforesaid petition for
suspension (preliminary injunction) for hearing on May 3, 1977. The
instant petition being dated May 4, 1977, it is apparent that
respondent Commission was not given a chance to act "with
deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has
become moot and academic because respondent Commission has
acted on the pending incidents, complained of. It was, therefore,
prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his

comment, alleging that the petition has become moot and
academic for the reason, among others that the acts of private
respondent sought to be enjoined have reference to the annual
meeting of the stockholders of respondent San Miguel Corporation,
which was held on may 10, 1977; that in said meeting, in compliance
with the order of respondent Commission, petitioner was allowed to
run and be voted for as director; and that in the same meeting, Item
6 of the Agenda was discussed, voted upon, ratified and confirmed.
Further it was averred that the questions and issues raised by
petitioner are pending in the Securities and Exchange Commission
which has acquired jurisdiction over the case, and no hearing on the
merits has been had; hence the elevation of these issues before the
Supreme Court is premature.

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Petitioner filed a reply to the aforesaid comments, stating that the
petition presents justiciable questions for the determination of this
Court because (1) the respondent Commission acted without
circumspection, unfairly and oppresively against petitioner,
warranting the intervention of this Court; (2) a derivative suit, such as
the instant case, is not rendered academic by the act of a majority
of stockholders, such that the discussion, ratification and
confirmation of Item 6 of the Agenda of the annual stockholders'
meeting of May 10, 1977 did not render the case moot; that the
amendment to the bylaws which specifically bars petitioner from
being a director is void since it deprives him of his vested rights.
Respondent Commission, thru the Solicitor General, filed a separate

comment, alleging that after receiving a copy of the restraining
order issued by this Court and noting that the restraining order did
not foreclose action by it, the Commission en banc issued Orders
Nos. 449, 450 and 451 in SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that

Order No. 450 which denied deferment of Item 6 of the Agenda of
the annual stockholders' meeting of respondent corporation, took
into consideration an urgent manifestation filed with the Commission
by petitioner on May 3, 1977 which prayed, among others, that the
discussion of Item 6 of the Agenda be deferred. The reason given for
denial of deferment was that "such action is within the authority of
the corporation as well as falling within the sphere of stockholders'
right to know, deliberate upon and/or to express their wishes
regarding disposition of corporate funds considering that their
investments are the ones directly affected." It was alleged that the
main petition has, therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental

petition with prayer for preliminary injunction, alleging that the
actuations of respondent SEC tended to deprive him of his right to
due process, and "that all possible questions on the facts now
pending before the respondent Commission are now before this
Honorable Court which has the authority and the competence to
act on them as it may see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for

resolution;
(1) whether or not the provisions of the amended by-laws of

respondent corporation, disqualifying a competitor from nomination
or election to the Board of Directors are valid and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in

denying petitioner's request for an examination of the records of San

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Miguel International, Inc., a fully owned subsidiary of San Miguel
Corporation; and
(3) whether or not respondent SEC committed grave abuse of

discretion in allowing discussion of Item 6 of the Agenda of the
Annual Stockholders' Meeting on May 10, 1977, and the ratification
of the investment in a foreign corporation of the corporate funds,
allegedly in violation of section 17-1/2 of the Corporation Law.
Whether or not amended by-laws are valid is purely a legal question

which public interest requires to be resolved —
It is the position of the petitioner that "it is not necessary to remand

the case to respondent SEC for an appropriate ruling on the intrinsic
validity of the amended by-laws in compliance with the principle of
exhaustion of administrative remedies", considering that: first:
"whether or not the provisions of the amended by-laws are
intrinsically valid ... is purely a legal question. There is no factual
dispute as to what the provisions are and evidence is not necessary
to determine whether such amended by-laws are valid as framed
and approved ... "; second: "it is for the interest and guidance of the
public that an immediate and final ruling on the question be made
... "; third: "petitioner was denied due process by SEC" when
"Commissioner de Guzman had openly shown prejudice against
petitioner ... ", and "Commissioner Sulit ... approved the amended
by-laws ex-parte and obviously found the same intrinsically valid;
and finally: "to remand the case to SEC would only entail delay
rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray

that this Court resolve the legal issues raised by the parties in keeping
with the "cherished rules of procedure" that "a court should always
strive to settle the entire controversy in a single proceeding leaving
no root or branch to bear the seeds of future ligiation", citing
Gayong v. Gayos. 3 To the same effect is the prayer of San Miguel
Corporation that this Court resolve on the merits the validity of its
amended by laws and the rights and obligations of the parties
thereunder, otherwise "the time spent and effort exerted by the
parties concerned and, more importantly, by this Honorable Court,
would have been for naught because the main question will come
back to this Honorable Court for final resolution." Respondent
Eduardo R. Visaya submits a similar appeal.
It is only the Solicitor General who contends that the case should be
remanded to the SEC for hearing and decision of the issues involved,
invoking the latter's primary jurisdiction to hear and decide case
involving intra-corporate controversies.
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It is an accepted rule of procedure that the Supreme Court should
always strive to settle the entire controversy in a single proceeding,
leaving nor root or branch to bear the seeds of future litigation. 4
Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the
case on the merits instead of remanding it to the trial court for further
proceedings since the ends of justice would not be subserved by the
remand of the case. In Republic v. Security Credit and Acceptance
Corporation, et al., 6 this Court, finding that the main issue is one of
law, resolved to decide the case on the merits "because public
interest demands an early disposition of the case", and in Republic v.
Central Surety and Insurance Company, 7 this Court denied remand
of the third-party complaint to the trial court for further proceedings,
citing precedent where this Court, in similar situations resolved to
decide the cases on the merits, instead of remanding them to the
trial court where (a) the ends of justice would not be subserved by
the remand of the case; or (b) where public interest demand an
early disposition of the case; or (c) where the trial court had already
received all the evidence presented by both parties and the
Supreme Court is now in a position, based upon said evidence, to
decide the case on its merits. 8 It is settled that the doctrine of
primary jurisdiction has no application where only a question of law is
involved. 8a Because uniformity may be secured through review by a
single Supreme Court, questions of law may appropriately be
determined in the first instance by courts. 8b In the case at bar, there
are facts which cannot be denied, viz.: that the amended by-laws
were adopted by the Board of Directors of the San Miguel
Corporation in the exercise of the power delegated by the
stockholders ostensibly pursuant to section 22 of the Corporation
Law; that in a special meeting on February 10, 1977 held specially for
that purpose, the amended by-laws were ratified by more than 80%
of the stockholders of record; that the foreign investment in the
Hongkong Brewery and Distellery, a beer manufacturing company in
Hongkong, was made by the San Miguel Corporation in 1948; and
that in the stockholders' annual meeting held in 1972 and 1977, all
foreign investments and operations of San Miguel Corporation were
ratified by the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a

competitor from nomination or election to the Board of Directors of
SMC are valid and reasonable —
The validity or reasonableness of a by-law of a corporation in purely

a question of law. 9 Whether the by-law is in conflict with the law of
the land, or with the charter of the corporation, or is in a legal sense
unreasonable and therefore unlawful is a question of law. 10 This rule
is subject, however, to the limitation that where the reasonableness

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of a by-law is a mere matter of judgment, and one upon which
reasonable minds must necessarily differ, a court would not be
warranted in substituting its judgment instead of the judgment of
those who are authorized to make by-laws and who have exercised
their authority. 11
Petitioner claims that the amended by-laws are invalid and

unreasonable because they were tailored to suppress the minority
and prevent them from having representation in the Board", at the
same time depriving petitioner of his "vested right" to be voted for
and to vote for a person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M.

Soriano and San Miguel Corporation content that ex. conclusion of a
competitor from the Board is legitimate corporate purpose,
considering that being a competitor, petitioner cannot devote an
unselfish and undivided Loyalty to the corporation; that it is
essentially a preventive measure to assure stockholders of San
Miguel Corporation of reasonable protective from the unrestrained
self-interest of those charged with the promotion of the corporate
enterprise; that access to confidential information by a competitor
may result either in the promotion of the interest of the competitor at
the expense of the San Miguel Corporation, or the promotion of both
the interests of petitioner and respondent San Miguel Corporation,
which may, therefore, result in a combination or agreement in
violation of Article 186 of the Revised Penal Code by destroying free
competition to the detriment of the consuming public. It is further
argued that there is not vested right of any stockholder under
Philippine Law to be voted as director of a corporation. It is alleged
that petitioner, as of May 6, 1978, has exercised, personally or thru
two corporations owned or controlled by him, control over the
following shareholdings in San Miguel Corporation, vis.: (a) John
Gokongwei, Jr. — 6,325 shares; (b) Universal Robina Corporation —
738,647 shares; (c) CFC Corporation — 658,313 shares, or a total of
1,403,285 shares. Since the outstanding capital stock of San Miguel
Corporation, as of the present date, is represented by 33,139,749
shares with a par value of P10.00, the total shares owned or
controlled by petitioner represents 4.2344% of the total outstanding
capital stock of San Miguel Corporation. It is also contended that
petitioner is the president and substantial stockholder of Universal
Robina Corporation and CFC Corporation, both of which are
allegedly controlled by petitioner and members of his family. It is also
claimed that both the Universal Robina Corporation and the CFC
Corporation are engaged in businesses directly and substantially
competing with the alleged businesses of San Miguel Corporation,
and of corporations in which SMC has substantial investments.

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ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S
CORPORATIONS AND SAN MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of,

competition are enumerated in its Board the areas of competition
are enumerated in its Board Resolution dated April 28, 1978, thus:
Product Line Estimated Market Share Total

1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%

Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of

competition affecting SMC involved product sales of over P400
million or more than 20% of the P2 billion total product sales of SMC.
Significantly, the combined market shares of SMC and CFC-Robina
in layer pullets dressed chicken, poultry and hog feeds ice cream,
instant coffee and woven fabrics would result in a position of such
dominance as to affect the prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct

competition on product lines which, for SMC, represented sales
amounting to more than ?478 million. In addition, CFC-Robina was
directly competing in the sale of coffee with Filipro, a subsidiary of
SMC, which product line represented sales for SMC amounting to
more than P275 million. The CFC-Robina group (Robitex, excluding
Litton Mills recently acquired by petitioner) is purportedly also in
direct competition with Ramie Textile, Inc., subsidiary of SMC, in
product sales amounting to more than P95 million. The areas of
competition between SMC and CFC-Robina in 1977 represented,
therefore, for SMC, product sales of more than P849 million.
According to private respondents, at the Annual Stockholders'

Meeting of March 18, 1976, 9,894 stockholders, in person or by proxy,
owning 23,436,754 shares in SMC, or more than 90% of the total
outstanding shares of SMC, rejected petitioner's candidacy for the
Board of Directors because they "realized the grave dangers to the
corporation in the event a competitor gets a board seat in SMC." On
September 18, 1978, the Board of Directors of SMC, by "virtue of
powers delegated to it by the stockholders," approved the
amendment to ' he by-laws in question. At the meeting of February
10, 1977, these amendments were confirmed and ratified by 5,716
shareholders owning 24,283,945 shares, or more than 80% of the total
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outstanding shares. Only 12 shareholders, representing 7,005 shares,
opposed the confirmation and ratification. At the Annual
Stockholders' Meeting of May 10, 1977, 11,349 shareholders, owning
27,257.014 shares, or more than 90% of the outstanding shares,
rejected petitioner's candidacy, while 946 stockholders, representing
1,648,801 shares voted for him. On the May 9, 1978 Annual
Stockholders' Meeting, 12,480 shareholders, owning more than 30
million shares, or more than 90% of the total outstanding shares.
voted against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF

DIRECTORS EXPRESSLY CONFERRED BY LAW
Private respondents contend that the disputed amended by laws

were adopted by the Board of Directors of San Miguel Corporation
a-, a measure of self-defense to protect the corporation from the
clear and present danger that the election of a business competitor
to the Board may cause upon the corporation and the other
stockholders inseparable prejudice. Submitted for resolution,
therefore, is the issue — whether or not respondent San Miguel
Corporation could, as a measure of self- protection, disqualify a
competitor from nomination and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has the

inherent power to adopt by-laws 'for its internal government, and to
regulate the conduct and prescribe the rights and duties of its
members towards itself and among themselves in reference to the
management of its affairs. 12 At common law, the rule was "that the
power to make and adopt by-laws was inherent in every corporation
as one of its necessary and inseparable legal incidents. And it is
settled throughout the United States that in the absence of positive
legislative provisions limiting it, every private corporation has this
inherent power as one of its necessary and inseparable legal
incidents, independent of any specific enabling provision in its
charter or in general law, such power of self-government being
essential to enable the corporation to accomplish the purposes of its
creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a

corporation may prescribe in its by-laws "the qualifications, duties
and compensation of directors, officers and employees ... " This must
necessarily refer to a qualification in addition to that specified by
section 30 of the Corporation Law, which provides that "every
director must own in his right at least one share of the capital stock
of the stock corporation of which he is a director ... " In Government
v. El Hogar, 14 the Court sustained the validity of a provision in the
corporate by-law requiring that persons elected to the Board of
Directors must be holders of shares of the paid up value of P5,000.00,

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which shall be held as security for their action, on the ground that
section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors
and is "highly prudent and in conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the

knowledge that its affairs are dominated by a majority of the
stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act of
incorporation and lawfully enacted by-laws and not forbidden by
law." 15 To this extent, therefore, the stockholder may be considered
to have "parted with his personal right or privilege to regulate the
disposition of his property which he has invested in the capital stock
of the corporation, and surrendered it to the will of the majority of his
fellow incorporators. ... It cannot therefore be justly said that the
contract, express or implied, between the corporation and the
stockholders is infringed ... by any act of the former which is
authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may

amend its articles of incorporation by a vote or written assent of the
stockholders representing at least two-thirds of the subscribed
capital stock of the corporation If the amendment changes,
diminishes or restricts the rights of the existing shareholders then the
disenting minority has only one right, viz.: "to object thereto in writing
and demand payment for his share." Under section 22 of the same
law, the owners of the majority of the subscribed capital stock may
amend or repeal any by-law or adopt new by-laws. It cannot be
said, therefore, that petitioner has a vested right to be elected
director, in the face of the fact that the law at the time such right as
stockholder was acquired contained the prescription that the
corporate charter and the by-law shall be subject to amendment,
alteration and modification. 17
It being settled that the corporation has the power to provide for the
qualifications of its directors, the next question that must be
considered is whether the disqualification of a competitor from
being elected to the Board of Directors is a reasonable exercise of
corporate authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION

AND ITS SHAREHOLDERS
Although in the strict and technical sense, directors of a private

corporation are not regarded as trustees, there cannot be any
doubt that their character is that of a fiduciary insofar as the
corporation and the stockholders as a body are concerned. As
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agents entrusted with the management of the corporation for the
collective benefit of the stockholders, "they occupy a fiduciary
relation, and in this sense the relation is one of trust." 18 "The ordinary
trust relationship of directors of a corporation and stockholders",
according to Ashaman v. Miller, 19 "is not a matter of statutory or
technical law. It springs from the fact that directors have the control
and guidance of corporate affairs and property and hence of the
property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and are
ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the

standard of fiduciary obligation of the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust.

... He who is in such fiduciary position cannot serve himself
first and his cestuis second. ... He cannot manipulate the
affairs of his corporation to their detriment and in
disregard of the standards of common decency. He
cannot by the intervention of a corporate entity violate
the ancient precept against serving two masters ... He
cannot utilize his inside information and strategic position
for his own preferment. He cannot violate rules of fair play
by doing indirectly through the corporation what he could
not do so directly. He cannot violate rules of fair play by
doing indirectly though the corporation what he could
not do so directly. He cannot use his power for his
personal advantage and to the detriment of the
stockholders and creditors no matter how absolute in
terms that power may be and no matter how meticulous
he is to satisfy technical requirements. For that power is at
all times subject to the equitable limitation that it may not
be exercised for the aggrandizement, preference or
advantage of the fiduciary to the exclusion or detriment
of the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master,

without detriment to one of them. A judge cannot be
impartial if personally interested in the cause. No more
can a director. Human nature is too weak -for this. Take
whatever statute provision you please giving power to
stockholders to choose directors, and in none will you find
any express prohibition against a discretion to select
directors having the company's interest at heart, and it
would simply be going far to deny by mere implication
the existence of such a salutary power

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... If the by-law is to be held reasonable in disqualifying a stockholder
in a competing company from being a director, the same reasoning
would apply to disqualify the wife and immediate member of the
family of such stockholder, on account of the supposed interest of
the wife in her husband's affairs, and his suppose influence over her.
It is perhaps true that such stockholders ought not to be condemned
as selfish and dangerous to the best interest of the corporation until
tried and tested. So it is also true that we cannot condemn as selfish
and dangerous and unreasonable the action of the board in
passing the by-law. The strife over the matter of control in this
corporation as in many others is perhaps carried on not altogether in
the spirit of brotherly love and affection. The only test that we can
apply is as to whether or not the action of the Board is authorized
and sanctioned by law. ... . 22
These principles have been applied by this Court in previous cases. 23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A

STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR
IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION WITH THAT
OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher,

that corporations have the power to make by-laws declaring a
person employed in the service of a rival company to be ineligible
for the corporation's Board of Directors. ... (A)n amendment which
renders ineligible, or if elected, subjects to removal, a director if he
be also a director in a corporation whose business is in competition
with or is antagonistic to the other corporation is valid." 24 This is
based upon the principle that where the director is so employed in
the service of a rival company, he cannot serve both, but must
betray one or the other. Such an amendment "advances the benefit
of the corporation and is good." An exception exists in New Jersey,
where the Supreme Court held that the Corporation Law in New
Jersey prescribed the only qualification, and therefore the
corporation was not empowered to add additional qualifications. 25
This is the exact opposite of the situation in the Philippines because
as stated heretofore, section 21 of the Corporation Law expressly
provides that a corporation may make by-laws for the qualifications
of directors. Thus, it has been held that an officer of a corporation
cannot engage in a business in direct competition with that of the
corporation where he is a director by utilizing information he has
received as such officer, under "the established law that a director or
officer of a corporation may not enter into a competing enterprise
which cripples or injures the business of the corporation of which he is
an officer or director. 26

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It is also well established that corporate officers "are not permitted to
use their position of trust and confidence to further their private
interests." 27 In a case where directors of a corporation cancelled a
contract of the corporation for exclusive sale of a foreign firm's
products, and after establishing a rival business, the directors entered
into a new contract themselves with the foreign firm for exclusive
sale of its products, the court held that equity would regard the new
contract as an offshoot of the old contract and, therefore, for the
benefit of the corporation, as a "faultless fiduciary may not reap the
fruits of his misconduct to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition

by the courts that the fiduciary standards could not be upheld
where the fiduciary was acting for two entities with competing
interests. This doctrine rests fundamentally on the unfairness, in
particular circumstances, of an officer or director taking advantage
of an opportunity for his own personal profit when the interest of the
corporation justly calls for protection. 30
It is not denied that a member of the Board of Directors of the San

Miguel Corporation has access to sensitive and highly confidential
information, such as: (a) marketing strategies and pricing structure;
(b) budget for expansion and diversification; (c) research and
development; and (d) sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer

or director of San Miguel Corporation, who is also the officer or
owner of a competing corporation, from taking advantage of the
information which he acquires as director to promote his individual
or corporate interests to the prejudice of San Miguel Corporation
and its stockholders, that the questioned amendment of the by-laws
was made. Certainly, where two corporations are competitive in a
substantial sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his
corporation duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the
court sustained as valid and reasonable an amendment to the by-
laws of a bank, requiring that its directors should not be directors,
officers, employees, agents, nominees or attorneys of any other
banking corporation, affiliate or subsidiary thereof. Chief Judge
Parker, in McKee, explained the reasons of the court, thus:
... A bank director has access to a great deal of

information concerning the business and plans of a bank
which would likely be injurious to the bank if known to

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another bank, and it was reasonable and prudent to
enlarge this minimum disqualification to include any
director, officer, employee, agent, nominee, or attorney
of any other bank in California. The Ashkins case, supra,
specifically recognizes protection against rivals and others
who might acquire information which might be used
against the interests of the corporation as a legitimate
object of by-law protection. With respect to attorneys or
persons associated with a firm which is attorney for
another bank, in addition to the direct conflict or
potential conflict of interest, there is also the danger of
inadvertent leakage of confidential information through
casual office discussions or accessibility of files.
Defendant's directors determined that its welfare was best
protected if this opportunity for conflicting loyalties and
potential misuse and leakage of confidential information
was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by

the courts, as follows:
(1) A director shall not be directly or indirectly interested

as a stockholder in any other firm, company, or
association which competes with the subject corporation.
(2) A director shall not be the immediate member of the

family of any stockholder in any other firm, company, or
association which competes with the subject corporation,
(3) A director shall not be an officer, agent, employee,

attorney, or trustee in any other firm, company, or
association which compete with the subject corporation.
(4) A director shall be of good moral character as an

essential qualification to holding office.
(5) No person who is an attorney against the corporation

in a law suit is eligible for service on the board. (At p. 7.)
These are not based on theorical abstractions but on human

experience — that a person cannot serve two hostile masters
without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of

his taking unfair advantage of his position as director of San Miguel
Corporation, he would absent himself from meetings at which
confidential matters would be discussed, would not detract from the
validity and reasonableness of the by-laws here involved. Apart from
the impractical results that would ensue from such arrangement, it

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would be inconsistent with petitioner's primary motive in running for
board membership — which is to protect his investments in San
Miguel Corporation. More important, such a proposed norm of
conduct would be against all accepted principles underlying a
director's duty of fidelity to the corporation, for the policy of the law
is to encourage and enforce responsible corporate management.
As explained by Oleck: 31 "The law win not tolerate the passive
attitude of directors ... without active and conscientious
participation in the managerial functions of the company. As
directors, it is their duty to control and supervise the day to day
business activities of the company or to promulgate definite policies
and rules of guidance with a vigilant eye toward seeing to it that
these policies are carried out. It is only then that directors may be
said to have fulfilled their duty of fealty to the corporation."
Sound principles of corporate management counsel against sharing

sensitive information with a director whose fiduciary duty of loyalty
may well require that he disclose this information to a competitive
arrival. These dangers are enhanced considerably where the
common director such as the petitioner is a controlling stockholder
of two of the competing corporations. It would seem manifest that in
such situations, the director has an economic incentive to
appropriate for the benefit of his own corporation the corporate
plans and policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information

regarding marketing strategies and pricing policies of San Miguel
Corporation would subject the latter to a competitive disadvantage
and unjustly enrich the competitor, for advance knowledge by the
competitor of the strategies for the development of existing or new
markets of existing or new products could enable said competitor to
utilize such knowledge to his advantage. 32
There is another important consideration in determining whether or

not the amended by-laws are reasonable. The Constitution and the
law prohibit combinations in restraint of trade or unfair competition.
Thus, section 2 of Article XIV of the Constitution provides: "The State
shall regulate or prohibit private monopolies when the public interest
so requires. No combinations in restraint of trade or unfair
competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of

trade. —The penalty of prision correccional in its minimum
period or a fine ranging from two hundred to six thousand
pesos, or both, shall be imposed upon:

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1. Any person who shall enter into any contract or
agreement or shall take part in any conspiracy or
combination in the form of a trust or otherwise, in restraint
of trade or commerce or to prevent by artificial means
free competition in the market.
2. Any person who shag monopolize any merchandise or

object of trade or commerce, or shall combine with any
other person or persons to monopolize said merchandise
or object in order to alter the price thereof by spreading
false rumors or making use of any other artifice to restrain
free competition in the market.
3. Any person who, being a manufacturer, producer, or

processor of any merchandise or object of commerce or
an importer of any merchandise or object of commerce
from any foreign country, either as principal or agent,
wholesale or retailer, shall combine, conspire or agree in
any manner with any person likewise engaged in the
manufacture, production, processing, assembling or
importation of such merchandise or object of commerce
or with any other persons not so similarly engaged for the
purpose of making transactions prejudicial to lawful
commerce, or of increasing the market price in any part
of the Philippines, or any such merchandise or object of
commerce manufactured, produced, processed,
assembled in or imported into the Philippines, or of any
article in the manufacture of which such manufactured,
produced, processed, or imported merchandise or object
of commerce is used.
There are other legislation in this jurisdiction, which prohibit

monopolies and combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or

combinations in restraint of trade are aimed at raising levels of
competition by improving the consumers' effectiveness as the final
arbiter in free markets. These laws are designed to preserve free and
unfettered competition as the rule of trade. "It rests on the premise
that the unrestrained interaction of competitive forces will yield the
best allocation of our economic resources, the lowest prices and the
highest quality ... ." 34 they operate to forestall concentration of
economic power. 35 The law against monopolies and combinations
in restraint of trade is aimed at contracts and combinations that, by
reason of the inherent nature of the contemplated acts, prejudice
the public interest by unduly restraining competition or unduly
obstructing the course of trade. 36

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The terms "monopoly", "combination in restraint of trade" and "unfair
competition" appear to have a well defined meaning in other
jurisdictions. A "monopoly" embraces any combination the tendency
of which is to prevent competition in the broad and general sense,
or to control prices to the detriment of the public. 37 In short, it is the
concentration of business in the hands of a few. The material
consideration in determining its existence is not that prices are raised
and competition actually excluded, but that power exists to raise
prices or exclude competition when desired. 38 Further, it must be
considered that the Idea of monopoly is now understood to include
a condition produced by the mere act of individuals. Its dominant
thought is the notion of exclusiveness or unity, or the suppression of
competition by the qualification of interest or management, or it
may be thru agreement and concert of action. It is, in brief, unified
tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of

petitioner are not in accord with reality. The election of petitioner to
the Board of respondent Corporation can bring about an illegal
situation. This is because an express agreement is not necessary for
the existence of a combination or conspiracy in restraint of trade. 40
It is enough that a concert of action is contemplated and that the
defendants conformed to the arrangements, 41 and what is to be
considered is what the parties actually did and not the words they
used. For instance, the Clayton Act prohibits a person from serving at
the same time as a director in any two or more corporations, if such
corporations are, by virtue of their business and location of
operation, competitors so that the elimination of competition
between them would constitute violation of any provision of the anti-
trust laws. 42 There is here a statutory recognition of the anti-
competitive dangers which may arise when an individual
simultaneously acts as a director of two or more competing
corporations. A common director of two or more competing
corporations would have access to confidential sales, pricing and
marketing information and would be in a position to coordinate
policies or to aid one corporation at the expense of another, thereby
stifling competition. This situation has been aptly explained by
Travers, thus:
The argument for prohibiting competing corporations from

sharing even one director is that the interlock permits the
coordination of policies between nominally independent
firms to an extent that competition between them may
be completely eliminated. Indeed, if a director, for
example, is to be faithful to both corporations, some
accommodation must result. Suppose X is a director of
both Corporation A and Corporation B. X could hardly
vote for a policy by A that would injure B without violating

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his duty of loyalty to B at the same time he could hardly
abstain from voting without depriving A of his best
judgment. If the firms really do compete — in the sense of
vying for economic advantage at the expense of the
other — there can hardly be any reason for an interlock
between competitors other than the suppression of
competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U.

S. Congress on section 9 of the Clayton Act, it was established that:
"By means of the interlocking directorates one man or group of men
have been able to dominate and control a great number of
corporations ... to the detriment of the small ones dependent upon
them and to the injury of the public. 44
Shared information on cost accounting may lead to price fixing.

Certainly, shared information on production, orders, shipments,
capacity and inventories may lead to control of production for the
purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost

conditions of the products of San Miguel Corporation, the essence of
competition in a free market for the purpose of serving the lowest
priced goods to the consuming public would be frustrated, The
competitor could so manipulate the prices of his products or vary its
marketing strategies by region or by brand in order to get the most
out of the consumers. Where the two competing firms control a
substantial segment of the market this could lead to collusion and
combination in restraint of trade. Reason and experience point to
the inevitable conclusion that the inherent tendency of interlocking
directorates between companies that are related to each other as
competitors is to blunt the edge of rivalry between the corporations,
to seek out ways of compromising opposing interests, and thus
eliminate competition. As respondent SMC aptly observes,
knowledge by CFC-Robina of SMC's costs in various industries and
regions in the country win enable the former to practice price
discrimination. CFC-Robina can segment the entire consuming
population by geographical areas or income groups and change
varying prices in order to maximize profits from every market
segment. CFC-Robina could determine the most profitable volume
at which it could produce for every product line in which it
competes with SMC. Access to SMC pricing policy by CFC-Robina
would in effect destroy free competition and deprive the consuming
public of opportunity to buy goods of the highest possible quality at
the lowest prices.
Finally, considering that both Robina and SMC are, to a certain

extent, engaged in agriculture, then the election of petitioner to the

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Board of SMC may constitute a violation of the prohibition contained
in section 13(5) of the Corporation Law. Said section provides in part
that "any stockholder of more than one corporation organized for
the purpose of engaging in agriculture may hold his stock in such
corporations solely for investment and not for the purpose of bringing
about or attempting to bring about a combination to exercise
control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was

Intended to prevent the candidacy of petitioner for election to the
Board. If the by-law were to be applied in the case of one
stockholder but waived in the case of another, then it could be
reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by law, by its terms, applies to
all stockholders. The equal protection clause of the Constitution
requires only that the by-law operate equally upon all persons of a
class. Besides, before petitioner can be declared ineligible to run for
director, there must be hearing and evidence must be submitted to
bring his case within the ambit of the disqualification. Sound
principles of public policy and management, therefore, support the
view that a by-law which disqualifies a competition from election to
the Board of Directors of another corporation is valid and
reasonable.
In the absence of any legal prohibition or overriding public policy,

wide latitude may be accorded to the corporation in adopting
measures to protect legitimate corporation interests. Thus, "where the
reasonableness of a by-law is a mere matter of judgment, and upon
which reasonable minds must necessarily differ, a court would not be
warranted in substituting its judgment instead of the judgment of
those who are authorized to make by-laws and who have expressed
their authority. 45
Although it is asserted that the amended by-laws confer on the

present Board powers to perpetua themselves in power such fears
appear to be misplaced. This power, but is very nature, is subject to
certain well established limitations. One of these is inherent in the
very convert and definition of the terms "competition" and
"competitor". "Competition" implies a struggle for advantage
between two or more forces, each possessing, in substantially similar
if not Identical degree, certain characteristics essential to the
business sought. It means an independent endeavor of two or more
persons to obtain the business patronage of a third by offering more
advantageous terms as an inducement to secure trade. 46 The test
must be whether the business does in fact compete, not whether it is
capable of an indirect and highly unsubstantial duplication of an
isolated or non-characteristics activity. 47 It is, therefore, obvious that
not every person or entity engaged in business of the same kind is a

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competitor. Such factors as quantum and place of business, Identity
of products and area of competition should be taken into
consideration. It is, therefore, necessary to show that petitioner's
business covers a substantial portion of the same markets for similar
products to the extent of not less than 10% of respondent
corporation's market for competing products. While We here sustain
the validity of the amended by-laws, it does not follow as a
necessary consequence that petitioner is ipso facto disqualified.
Consonant with the requirement of due process, there must be due
hearing at which the petitioner must be given the fullest opportunity
to show that he is not covered by the disqualification. As trustees of
the corporation and of the stockholders, it is the responsibility of
directors to act with fairness to the stockholders. 48 Pursuant to this
obligation and to remove any suspicion that this power may be
utilized by the incumbent members of the Board to perpetuate
themselves in power, any decision of the Board to disqualify a
candidate for the Board of Directors should be reviewed by the
Securities behind Exchange Commission en banc and its decision
shall be final unless reversed by this Court on certiorari. 49 Indeed, it is
a settled principle that where the action of a Board of Directors is an
abuse of discretion, or forbidden by statute, or is against public
policy, or is ultra vires, or is a fraud upon minority stockholders or
creditors, or will result in waste, dissipation or misapplication of the
corporation assets, a court of equity has the power to grant
appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in

denying petitioner's request for an examination of the records of San
Miguel International Inc., a fully owned subsidiary of San Miguel
Corporation —
Respondent San Miguel Corporation stated in its memorandum that

petitioner's claim that he was denied inspection rights as stockholder
of SMC "was made in the teeth of undisputed facts that, over a
specific period, petitioner had been furnished numerous documents
and information," to wit: (1) a complete list of stockholders and their
stockholdings; (2) a complete list of proxies given by the stockholders
for use at the annual stockholders' meeting of May 18, 1975; (3) a
copy of the minutes of the stockholders' meeting of March 18,1976;
(4) a breakdown of SMC's P186.6 million investment in associated
companies and other companies as of December 31, 1975; (5) a
listing of the salaries, allowances, bonuses and other compensation
or remunerations received by the directors and corporate officers of
SMC; (6) a copy of the US $100 million Euro-Dollar Loan Agreement of
SMC; and (7) copies of the minutes of all meetings of the Board of

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Directors from January 1975 to May 1976, with deletions of sensitive
data, which deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in

writing on September 18, 1976; (1) that SMC's foreign investments are
handled by San Miguel International, Inc., incorporated in Bermuda
and wholly owned by SMC; this was SMC's first venture abroad,
having started in 1948 with an initial outlay of ?500,000.00,
augmented by a loan of Hongkong $6 million from a foreign bank
under the personal guaranty of SMC's former President, the late Col.
Andres Soriano; (2) that as of December 31, 1975, the estimated
value of SMI would amount to almost P400 million (3) that the total
cash dividends received by SMC from SMI since 1953 has amount to
US $ 9.4 million; and (4) that from 1972-1975, SMI did not declare cash
or stock dividends, all earnings having been used in line with a
program for the setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate

Secretary, enclosing photocopies of the afore-mentioned
documents. 51
Pursuant to the second paragraph of section 51 of the Corporation

Law, "(t)he record of all business transactions of the corporation and
minutes of any meeting shall be open to the inspection of any
director, member or stockholder of the corporation at reasonable
hours."
The stockholder's right of inspection of the corporation's books and

records is based upon their ownership of the assets and property of
the corporation. It is, therefore, an incident of ownership of the
corporate property, whether this ownership or interest be termed an
equitable ownership, a beneficial ownership, or a ownership. 52 This
right is predicated upon the necessity of self-protection. It is generally
held by majority of the courts that where the right is granted by
statute to the stockholder, it is given to him as such and must be
exercised by him with respect to his interest as a stockholder and for
some purpose germane thereto or in the interest of the corporation.
53 In other words, the inspection has to be germane to the
petitioner's interest as a stockholder, and has to be proper and

lawful in character and not inimical to the interest of the
corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the
right to examine the books of the corporation must be exercised in
good faith, for specific and honest purpose, and not to gratify
curiosity, or for specific and honest purpose, and not to gratify
curiosity, or for speculative or vexatious purposes. The weight of
judicial opinion appears to be, that on application for mandamus to
enforce the right, it is proper for the court to inquire into and consider
the stockholder's good faith and his purpose and motives in seeking

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inspection. 56 Thus, it was held that "the right given by statute is not
absolute and may be refused when the information is not sought in
good faith or is used to the detriment of the corporation." 57 But the
"impropriety of purpose such as will defeat enforcement must be set
up the corporation defensively if the Court is to take cognizance of it
as a qualification. In other words, the specific provisions take from
the stockholder the burden of showing propriety of purpose and
place upon the corporation the burden of showing impropriety of
purpose or motive. 58 It appears to be the general rule that
stockholders are entitled to full information as to the management of
the corporation and the manner of expenditure of its funds, and to
inspection to obtain such information, especially where it appears
that the company is being mismanaged or that it is being managed
for the personal benefit of officers or directors or certain of the
stockholders to the exclusion of others." 59
While the right of a stockholder to examine the books and records of

a corporation for a lawful purpose is a matter of law, the right of
such stockholder to examine the books and records of a wholly-
owned subsidiary of the corporation in which he is a stockholder is a
different thing.
Some state courts recognize the right under certain conditions, while
others do not. Thus, it has been held that where a corporation owns
approximately no property except the shares of stock of subsidiary
corporations which are merely agents or instrumentalities of the
holding company, the legal fiction of distinct corporate entities may
be disregarded and the books, papers and documents of all the
corporations may be required to be produced for examination, 60
and that a writ of mandamus, may be granted, as the records of the
subsidiary were, to all incontents and purposes, the records of the
parent even though subsidiary was not named as a party. 61
mandamus was likewise held proper to inspect both the subsidiary's
and the parent corporation's books upon proof of sufficient control
or dominion by the parent showing the relation of principal or agent
or something similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was

refused where the subsidiary corporation is a separate and distinct
corporation domiciled and with its books and records in another
jurisdiction, and is not legally subject to the control of the parent
company, although it owned a vast majority of the stock of the
subsidiary. 63 Likewise, inspection of the books of an allied
corporation by stockholder of the parent company which owns all
the stock of the subsidiary has been refused on the ground that the
stockholder was not within the class of "persons having an interest." 64

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In the Nash case, 65 The Supreme Court of New York held that the
contractual right of former stockholders to inspect books and
records of the corporation included the right to inspect corporation's
subsidiaries' books and records which were in corporation's
possession and control in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled

to inspect the records of a controlled subsidiary corporation which
used the same offices and had Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents"

before respondent SEC, petitioner contended that respondent
corporation "had been attempting to suppress information for the
stockholders" and that petitioner, "as stockholder of respondent
corporation, is entitled to copies of some documents which for some
reason or another, respondent corporation is very reluctant in
revealing to the petitioner notwithstanding the fact that no harm
would be caused thereby to the corporation." 67 There is no question
that stockholders are entitled to inspect the books and records of a
corporation in order to investigate the conduct of the management,
determine the financial condition of the corporation, and generally
take an account of the stewardship of the officers and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly

owned by respondent San Miguel Corporation and, therefore, under
its control, it would be more in accord with equity, good faith and
fair dealing to construe the statutory right of petitioner as stockholder
to inspect the books and records of the corporation as extending to
books and records of such wholly subsidiary which are in respondent
corporation's possession and control.
IV
Whether or not respondent SEC gravely abused its discretion in

allowing the stockholders of respondent corporation to ratify the
investment of corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that

respondent corporation invested corporate funds in SMI without prior
authority of the stockholders, thus violating section 17-1/2 of the
Corporation Law, and alleges that respondent SEC should have
investigated the charge, being a statutory offense, instead of
allowing ratification of the investment by the stockholders.
Respondent SEC's position is that submission of the investment to the

stockholders for ratification is a sound corporate practice and should
not be thwarted but encouraged.

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Section 17-1/2 of the Corporation Law allows a corporation to "invest
its funds in any other corporation or business or for any purpose other
than the main purpose for which it was organized" provided that its
Board of Directors has been so authorized by the affirmative vote of
stockholders holding shares entitling them to exercise at least two-
thirds of the voting power. If the investment is made in pursuance of
the corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is done solely for
investment and not to accomplish the purpose of its incorporation
that the vote of approval of the stockholders holding shares entitling
them to exercise at least two-thirds of the voting power is necessary.
69
As stated by respondent corporation, the purchase of beer

manufacturing facilities by SMC was an investment in the same
business stated as its main purpose in its Articles of Incorporation,
which is to manufacture and market beer. It appears that the
original investment was made in 1947-1948, when SMC, then San
Miguel Brewery, Inc., purchased a beer brewery in Hongkong
(Hongkong Brewery & Distillery, Ltd.) for the manufacture and
marketing of San Miguel beer thereat. Restructuring of the
investment was made in 1970-1971 thru the organization of SMI in
Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar

Central Co., Inc., supra, appears relevant. In said case, one of the
issues was the legality of an investment made by Manao Sugar
Central Co., Inc., without prior resolution approved by the affirmative
vote of 2/3 of the stockholders' voting power, in the Philippine Fiber
Processing Co., Inc., a company engaged in the manufacture of
sugar bags. The lower court said that "there is more logic in the stand
that if the investment is made in a corporation whose business is
important to the investing corporation and would aid it in its purpose,
to require authority of the stockholders would be to unduly curtail the
power of the Board of Directors." This Court affirmed the ruling of the
court a quo on the matter and, quoting Prof. Sulpicio S. Guevara,
said:
"j. Power to acquire or dispose of shares or securities. — A

private corporation, in order to accomplish is purpose as
stated in its articles of incorporation, and subject to the
limitations imposed by the Corporation Law, has the
power to acquire, hold, mortgage, pledge or dispose of
shares, bonds, securities, and other evidence of
indebtedness of any domestic or foreign corporation.
Such an act, if done in pursuance of the corporate
purpose, does not need the approval of stockholders; but
when the purchase of shares of another corporation is

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done solely for investment and not to accomplish the
purpose of its incorporation, the vote of approval of the
stockholders is necessary. In any case, the purchase of
such shares or securities must be subject to the limitations
established by the Corporations law; namely, (a) that no
agricultural or mining corporation shall be restricted to
own not more than 15% of the voting stock of nay
agricultural or mining corporation; and (c) that such
holdings shall be solely for investment and not for the
purpose of bringing about a monopoly in any line of
commerce of combination in restraint of trade." The
Philippine Corporation Law by Sulpicio S. Guevara, 1967
Ed., p. 89) (Emphasis supplied.)
40. Power to invest corporate funds. — A private

corporation has the power to invest its corporate funds "in
any other corporation or business, or for any purpose
other than the main purpose for which it was organized,
provide that 'its board of directors has been so authorized
in a resolution by the affirmative vote of stockholders
holding shares in the corporation entitling them to
exercise at least two-thirds of the voting power on such a
propose at a stockholders' meeting called for that
purpose,' and provided further, that no agricultural or
mining corporation shall in anywise be interested in any
other agricultural or mining corporation. When the
investment is necessary to accomplish its purpose or
purposes as stated in its articles of incorporation the
approval of the stockholders is not necessary."" (Id., p. 108)
(Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no

authority to make the assailed investment, there is no question that a
corporation, like an individual, may ratify and thereby render binding
upon it the originally unauthorized acts of its officers or other agents.
70 This is true because the questioned investment is neither contrary
to law, morals, public order or public policy. It is a corporate

transaction or contract which is within the corporate powers, but
which is defective from a supported failure to observe in its
execution the. requirement of the law that the investment must be
authorized by the affirmative vote of the stockholders holding two-
thirds of the voting power. This requirement is for the benefit of the
stockholders. The stockholders for whose benefit the requirement
was enacted may, therefore, ratify the investment and its ratification
by said stockholders obliterates any defect which it may have had
at the outset. "Mere ultra vires acts", said this Court in Pirovano, 71 "or
those which are not illegal and void ab initio, but are not merely
within the scope of the articles of incorporation, are merely voidable

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and may become binding and enforceable when ratified by the
stockholders.
Besides, the investment was for the purchase of beer manufacturing

and marketing facilities which is apparently relevant to the
corporate purpose. The mere fact that respondent corporation
submitted the assailed investment to the stockholders for ratification
at the annual meeting of May 10, 1977 cannot be construed as an
admission that respondent corporation had committed an ultra vires
act, considering the common practice of corporations of
periodically submitting for the gratification of their stockholders the
acts of their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
The Court voted unanimously to grant the petition insofar as it prays

that petitioner be allowed to examine the books and records of San
Miguel International, Inc., as specified by him.
On the matter of the validity of the amended by-laws of respondent

San Miguel Corporation, six (6) Justices, namely, Justices Barredo,
Makasiar, Antonio, Santos, Abad Santos and De Castro, voted to
sustain the validity per se of the amended by-laws in question and to
dismiss the petition without prejudice to the question of the actual
disqualification of petitioner John Gokongwei, Jr. to run and if
elected to sit as director of respondent San Miguel Corporation
being decided, after a new and proper hearing by the Board of
Directors of said corporation, whose decision shall be appealable to
the respondent Securities and Exchange Commission deliberating
and acting en banc and ultimately to this Court. Unless disqualified
in the manner herein provided, the prohibition in the afore-
mentioned amended by-laws shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando,

voted to declare the issue on the validity of the foreign investment of
respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the
amended by-laws, pending hearing by this Court on the applicability
of section 13(5) of the Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of subject

amendment to the by-laws but otherwise concurs in the result.
Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr.,

Fernandez and Guerrero filed a separate opinion, wherein they
voted against the validity of the questioned amended bylaws and
that this question should properly be resolved first by the SEC as the
agency of primary jurisdiction. They concur in the result that

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petitioner may be allowed to run for and sit as director of respondent
SMC in the scheduled May 6, 1979 election and subsequent
elections until disqualified after proper hearing by the respondent's
Board of Directors and petitioner's disqualification shall have been
sustained by respondent SEC en banc and ultimately by final
judgment of this Court.
In resume, subject to the qualifications aforestated judgment is

hereby rendered GRANTING the petition by allowing petitioner to
examine the books and records of San Miguel International, Inc. as
specified in the petition. The petition, insofar as it assails the validity of
the amended by- laws and the ratification of the foreign investment
of respondent corporation, for lack of necessary votes, is hereby
DISMISSED. No costs.
Makasiar, Santos Abad Santos and De Castro, JJ., concur.
Aquino, and Melencio Herrera JJ., took no part.
Separate Opinions
TEEHANKEE, CONCEPCION JR., FERNANDEZ and GUERRERO, JJ.,

concurring:
As correctly stated in the main opinion of Mr. Justice Antonio, the

Court is unanimous in its judgment granting the petitioner as
stockholder of respondent San Miguel Corporation the right to
inspect, examine and secure copies of the records of San Miguel
International, inc. (SMI), a wholly owned foreign subsidiary
corporation of respondent San Miguel Corporation. Respondent
commissions en banc Order No. 449, Series of 19 7 7, denying
petitioner's right of inspection for "not being a stockholder of San
Miguel International, Inc." has been accordingly set aside. It need be
only pointed out that:
a) The commission's reasoning grossly disregards the fact

that the stockholders of San Miguel Corporation are
likewise the owners of San Miguel International, Inc. as the
corporation's wholly owned foreign subsidiary and
therefore have every right to have access to its books and
records. otherwise, the directors and management of any
Philippine corporation by the simple device of organizing
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with the corporation's funds foreign subsidiaries would be
granted complete immunity from the stockholders'
scrutiny of its foreign operations and would have a
conduit for dissipating, if not misappropriating, the
corporation funds and assets by merely channeling them
into foreign subsidiaries' operations; and
b) Petitioner's right of examination herein recognized

refers to all books and records of the foreign subsidiary SMI
which are which are " in respondent corporation's
possession and control" 1, meaning to say regardless of
whether or not such books and records are physically
within the Philippines. all such books and records of SMI
are legally within respondent corporation's "possession
and control" and if nay books or records are kept abroad,
(e.g. in the foreign subsidiary's state of domicile, as is to be
expected), then the respondent corporation's board and
management are obliged under the Court's judgment to
bring and make them (or true copies thereof available
within the Philippines for petitioner's examination and
inspection.
II
On the other main issue of the Validity of respondent San Miguel

Corporation's amendment of its by-laws 2 whereby respondent
corporation's board of directors under its resolution dated April 29,
1977 declared petitioner ineligible to be nominated or to be voted
or to be elected as of the board of directors, the Court, composed
of 12 members (since Mme. Justice Ameurfina Melencio Herrera
inhibited herself from taking part herein, while Mr. Justice Ramon C.
Aquino upon submittal of the main opinion of Mr. Justice Antonio
decided not to take part), failed to reach a conclusive vote or, the
required majority of 8 votes to settle the issue one way or the other.
Six members of the Court, namely, Justices Barredo, Makasiar,

Antonio, Santos, Abad Santos and De Castro, considered the issue
purely legal and voted to sustain the validity per se of the
questioned amended by-laws but nevertheless voted that the
prohibition and disqualification therein provided shall not apply to
petitioner Gokongwei until and after he shall have been given a
new and proper hearing" by the corporation's board of directors and
the board's decision of disqualification she'll have been sustained on
appeal by respondent Securities and Exchange Commission and
ultimately by this Court.
The undersigned Justices do not consider the issue as purely legal in

the light of respondent commission's Order No. 451, Series of 1977,

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denying petitioner's "Motion for Summary Judgment" on the ground
that "the Commission en banc finds that there (are) unresolved and
genuine issues of fact" 3 as well as its position in this case to the
Solicitor General that the case at bar is "premature" and that the
administrative remedies before the commission should first be
availed of and exhausted. 4
We are of the opinion that the questioned amended by-laws, as

they are, (adopted after almost a century of respondent
corporation's existence as a public corporation with its shares freely
purchased and traded in the open market without restriction and
disqualification) which would bar petitioner from qualification,
nomination and election as director and worse, grant the board by
3/4 vote the arbitrary power to bar any stockholder from his right to
be elected as director by the simple expedient of declaring him to
be engaged in a "competitive or antagonistic business" or declaring
him as a "nominee" of the competitive or antagonistic" stockholder
are illegal, oppressive, arbitrary and unreasonable.
We consider the questioned amended by-laws as being specifically

tailored to discriminate against petitioner and depriving him in
violation of substantive due process of his vested substantial rights as
stockholder of respondent corporation. We further consider said
amended by-laws as violating specific provisions of the Corporation
Law which grant and recognize the right of a minority stockholder
like petitioner to be elected director by the process of cumulative
voting ordained by the Law (secs 21 and 30) and the right of a
minority director once elected not to be removed from office of
director except for cause by vote of the stockholders holding 2/3 of
the subscribed capital stock (sec. 31). If a minority stockholder could
be disqualified by such a by-laws amendment under the guise of
providing for "qualifications," these mandates of the Corporation Law
would have no meaning or purpose.
These vested and substantial rights granted stockholders under the

Corporation Law may not be diluted or defeated by the general
authority granted by the Corporation Law itself to corporations to
adopt their by-laws (in section 21) which deal principally with the
procedures governing their internal business. The by-laws of any
corporation must, be always within the character limits. What the
Corporation Law has granted stockholders may not be taken away
by the corporation's by-laws. The amendment is further an instrument
of oppressiveness and arbitrariness in that the incumbent directors
are thereby enabled to perpetuate themselves in office by the
simple expedient of disqualifying any unwelcome candidate, no
matter how many votes he may have.

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However, in view of the inconclusiveness of the vote, we sustain
respondent commission's stand as expressed in its Orders Nos. 450
and 451, Series of 1977 that there are unresolved and genuine issues
of fact" and that it has yet to rule on and finally decide the validity of
the disputed by-law provision", subject to appeal by either party to
this Court.
In view of prematurity of the proceedings here (as likewise expressed

by Mr. Justice Fernando), the case should as a consequence be
remanded to the Securities and Exchange Commission as the
agency of primary jurisdiction for a full hearing and reception of
evidence of all relevant facts (which should property be submitted
to the commission instead of the piecemeal documents submitted
as annexes to this Court which is not a trier of facts) concerning not
only the petitioner but the members of the board of directors of
respondent corporation as well, so that it may determine on the
basis thereof the issue of the legality of the questioned amended by-
laws, and assuming Chat it holds the same to be valid whether the
same are arbitrarily and unreasonably applied to petitioner vis a vis
other directors, who, petitioner claims, should in such event be
likewise disqualified from sitting in the board of directors by virtue of
conflict of interests or their being likewise engaged in competitive or
antagonistic business" with the corporation such as investment and
finance, coconut oil mills cement, milk and hotels. 5
It should be noted that while the petition may be dismissed in view of

the inconclusiveness of the vote and the Court's failure to affair, the
required 8-vote majority to resolve the issue, such as dismissal (for
lack of necessary votes) is of no doctrine value and does not in any
manner resolve the issue of the validity of the questioned amended
by-laws nor foreclose the same. The same should properly be
determined in a proper case in the first instance by the Securities
and Exchange Commission as the agency of primary jurisdiction, as
above indicated.
The Court is unanimous, therefore, in its judgment that petitioner

Gokongwei may run for the office of, and if elected, sit as, member
of the board of directors of respondent San Miguel Corporation as
stated in the dispositive portion of the main opinion of Mr. Justice
Antonio, to wit: Until and after petitioner has been given a "new and
proper hearing by the board of directors of said corporation, whose
decision shall be appealable Lo the respondent Securities and
Exchange Commission deliverating and acting en banc and
ultimately to this Court" and until ' disqualified in the manner herein
provided, the prohibition in the aforementioned amended by-laws
shall not apply to petitioner," In other words, until and after petitioner
shall have been given due process and proper hearing by the
respondent board of directors as to the question of his qualification

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or disqualification under the questioned amended by-laws
(assuming that the respondent Securities and Exchange C
commission ultimately upholds the validity of said by laws), and such
disqualification shall have been sustained by respondent Securities
and Exchange Commission and ultimately by final judgment of this
Court, petitioner is deemed eligible for all legal purposes and effects
to be nominated and voted and if elected to sit as a member of the
hoard of directors of respondent San Miguel Corporation.
In view of the Court's unanimous judgment on this point the portion

of respondent commission's Order No. 450, Series of 977 which
imposed "the condition that he [petitioner] cannot sit as board
member if elected until after the Commission shall have finally
decided the validity of the disputed by-law provision" has been
likewise accordingly set aside.
III
By way of recapitulation, so that the Court's decision and judgment

may be clear and not subject to ambiguity, we state the following.
1. With the votes of the six Justices concurring unqualifiedly in the

main opinion added to our four votes, plus the Chief Justice's vote
and that of Mr. Justice Fernando, the Court has by twelve (12) votes
unanimously rendered judgment granting petitioner's right to
examine and secure copies of the books and records of San Miguel
International, Inc. as a foreign subsidiary of respondent corporation
and respondent commission's Order No. 449, Series of 1977, to the
contrary is set aside:
2. With the same twelve (12) votes, the Court has also unanimously
rendered judgment declaring that until and after petitioner shall
have been given due process and proper hearing by the
respondent board of directors as to the question of his
disqualification under the questioned amended by- laws (assuming
that the respondent Securities and Exchange Commission ultimately
upholds the validity of said by laws), and such disqualification shall
have been sustained by respondent Securities and Exchange
Commission and ultimately by final judgment of this Court petitioner
is deemed eligible for all legal purposes and effect to be nominated
and voted and if elected to sit as a member of the board of
directors of respondent San Miguel Corporation. Accordingly,
respondent commission's Order No. 450, Series of 1977 to the
contrary has likewise been set aside; and
3. The Court's voting on the validity of respondent corporation's

amendment of the by-laws (sec. 2, Art. 111) is inconclusive without
the required majority of eight votes to settle the issue one way or the
other having been reached. No judgment is rendered by the Court
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thereon and the statements of the six Justices who have signed the
main opinion on the legality thereof have no binding effect, much
less doctrinal value.
The dismissal of the petition insofar as the question of the validity of

the disputed by-laws amendment is concerned is not by an
judgment with the required eight votes but simply by force of Rule
56, section II of the Rules of Court, the pertinent portion of which
provides that "where the court en banc is equally divided in opinion,
or the necessary majority cannot be had, the case shall be reheard,
and if on re-hearing no decision is reached, the action shall be
dismissed if originally commenced in the court ...." The end result is
that the Court has thereby dismissed the petition which prayed that
the Court bypass the commission and directly resolved the issue and
therefore the respondent commission may now proceed, as
announced in its Order No. 450, Series of 1977, to hear the case
before it and receive all relevant evidence bearing on the issue as
hereinabove indicated, and resolve the "unresolved and genuine
issues of fact" (as per Order No. 451, Series of 1977) and the issues of
legality of the disputed by-laws amendment.
Teehankee, Concepcion, Jr., and Fernandez, JJ., concur.
Guerrero, J., concurred.
TEEHANKEE, CONCEPCION JR.,
FERNANDEZ and GUERRERO, JJ., concurring:
This supplemental opinion is issued with reference to the advance

separate opinion of Mr. Justice Barredo issued by him as to "certain
misimpressions as to the import of the decision in this case" which
might be produced by our joint separate opinion of April 11, 1979
and "urgent(ly) to clarify (his) position in respect to the rights of the
parties resulting from the dismissal of the petition herein and the
outline of the procedure by which the disqualification of petitioner
Gokongwei can be made effective."
1. Mr. Justice Barredo's advances separate opinion "that as between

the parties herein, the issue of the validity of the challenged by-laws
is already settled" had, of course, no binding effect. The judgment of
the Court is found on pages 59-61 of the decision of April 11, 1979,
penned by Mr. Justice Antonio, wherein on the question of the
validity of the amended by-laws the Court's inconclusive voting is set
forth as follows:
Chief Justice Fred Ruiz Castro reserved his vote on the

validity of the amended by-laws, pending hearing by this

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Court on the applicability of section 13(5) of the
Corporation Law to petitioner.
Justice Fernando reserved his vote on the validity of

subject amendment to the by-laws but otherwise concurs
in the result.
Four (4) Justices, namely, Justices Teehankee,

Concepcion Jr., Fernandez and Guerrero filed a separate
opinion, wherein they voted against the validity of the
questioned amended by-laws and that this question
should properly be resolved first by the SEC as the agency
of primary jurisdiction ... 1
As stated in said judgment itself, for lack of the necessary votes, the
petition, insofar as it assails the validity of the questioned by-laws,
was dismissed.
2. Mr. Justice Barredo now contends contrary to the undersigned's

understanding, as stated on pages 8 and 9 of our joint separate
opinion of April 11, 1979 that the legal effect of the dismissal of the
petition on the question of validity of the amended by-laws for lack
of the necessary votes simply means that "the Court has thereby
dismissed the petition which prayed that the Court by-pass the
commission and directly resolve the issue and therefore the
respondent commission may now proceed, as announced in its
Order No. 450, Series of 1977, to hear the case before it and receive
all relevant evidence bearing on the issue as hereinabove indicated,
and resolve the 'unresolved and genuine issues of fact' (as per Order
No. 451, Series of 1977) and the issue of legality of the disputed by-
laws amendment," that such dismissal "has no other legal
consequence than that it is the law of the case as far as the parties
are concerned, albeit the majority of the opinion of six against four
Justices is not doctrinal in the sense that it cannot be cited as
necessarily a precedent for subsequent cases."
We hold on our part that the doctrine of the law of the case invoked
by Mr. Justice Barredo has no applicability for the following reasons:
a) Our jurisprudence is quite clear that this doctrine may be invoked

only where there has been a final and conclusive determination of
an issue in the first case later invoked as the law of the case.
Thus, in People vs. Olarte, 2 we held that
"Law of the case" has been defined as the opinion

delivered on a former appeal More specifically, it means
that whatever is once irrevocably established as the
controlling legal rule of decision between the same

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parties in the same case continues to he the law of the
case, whether correct on general principles or not, so long
as the facts on which such decision was predicated
continue to be the facts of the case before the court. ...
It need not be stated that the Supreme Court, being the

court of last resort, is the final arbiter of all legal questions
properly brought before it and that its decision in any
given case constitutes the law of that particular case.
Once its judgment becomes final it is binding on all inferior
courts, and hence beyond their power and authority to
alter or modify Kabigting vs. Acting Director of Prisons, G.
R. No. L-15548, October 30, 1962).
The decision of this Court on that appeal by the

government from the order of dismissal, holding that said
appeal did not place the appellants, including Absalon
Bignay, in double jeopardy, signed and concurred in by
six Justices as against three dissenters headed by the
Chief Justice, promulgated way back in the year 1952,
has long become the law of the case. It may be
erroneous, judged by the law on double jeopardy as
recently interpreted by this same Tribunal Even so, it may
not be disturbed and modified. Our recent interpretation
of the law may be applied to new cases, but certainly not
to an old one finally and conclusively determined. As
already stated, the majority opinion in that appeal is now
the law of the case. (People vs. Pinuila)
The doctrine of the law of the case, therefore, has no applicability

whatsoever herein insofar as the question of the validity or invalidity
of the amended by-laws is concerned. The Court's judgment of April
11, 1979 clearly shows that the voting on this question was
inconclusive with six against four Justices and two other Justices (the
Chief Justice and Mr. Justice Fernando) expressly reserving their
votes thereon, and Mr. Justice Aquino while taking no part in effect
likewise expressly reserved his vote thereon. No final and conclusive
determination could be reached on the issue and pursuant to the
provisions of Rule 56, section 11, since this special civil action
originally commenced in this Court, the action was simply dismissed
with the result that no law of the case was laid down insofar as the
issue of the validity or invalidity of the questioned by-laws is
concerned, and the relief sought herein by petitioner that this Court
by-pass the SEC which has yet to hear and determine the same issue
pending before it below and that this Court itself directly resolve the
said issue stands denied.

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b) The contention of Mr. Justice Barredo that the result of the dismiss
of the case was that "petitioner Gokongwei may not hereafter act
on the assumption that he can revive the issue of the validity
whether in the Securities and Exchange Commission, in this Court or
in any other forum, unless he proceeds on the basis of a factual
milieu different from the setting of this case Not even the Securities
and Exchange Commission may pass on such question anymore at
the instance of herein petitioner or anyone acting in his stead or on
his behalf, " appears to us to be untenable.
The Court through the decision of April 11, 1979, by the unanimous
votes of the twelve participating Justices headed by the Chief
Justice, ruled that petitioner Gokongwei was entitled to a "new and
proper hearing" by the SMC board of directors on the matter of his
disqualification under the questioned by-laws and that the board's
"decision shall be appealable to the respondent Securities and
Exchange Commission deliberating and acting en banc and
ultimately to this Court (and) unless disqualified in the manner herein
shall not apply to petitioner."
The entire Court, therefore, recognized that petitioner had not been
given procedural due process by the SMC board on the matter of his
disqualification and that he was entitled to a "new and proper
hearing". It stands to reason that in such hearing, petitioner could
raise not only questions of fact but questions of law, particularly
questions of law affecting the investing public and their right to
representation on the board as provided by law — not to mention
that as borne out by the fact that no restriction whatsoever appears
in the court's decision, it was never contemplated that petitioner was
to be limited to questions of fact and could not raise the
fundamental questions of law bearing on the invalidity of the
questioned amended by-laws at such hearing before the SMC
board. Furthermore, it was expressly provided unanimously in the
Court's decision that the SMC board's decision on the disqualification
of petitioner ("assuming the board of directors of San Miguel
Corporation should, after the proper hearing, disqualify him" as
qualified in Mr. Justice Barredo's own separate opinion, at page 2)
shall be appealable to respondent Securities and Exchange
Commission "deliberating and acting en banc and "untimately to this
Court." Again, the Court's judgment as set forth in its decision of April
11, 1979 contains nothing that would warrant the opinion now
expressed that respondent Securities and Exchange Commission
may not pass anymore on the question of the invalidity of the
amended by-laws. Certainly, it cannot be contended that the Court
in dismissing the petition for lack of necessary votes actually by-
passed the Securities and Exchange Commission and directly ruled
itself on the invalidity of the questioned by-laws when it itself could

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not reach a final and conclusive vote (a minimum of eight votes) on
the issue and three other Justices (the Chief Justice and Messrs.
Justices Fernando and Aquino) had expressly reserved their vote until
after further hearings (first before the Securities and Exchange
Commission and ultimately in this Court).
Such a view espoused by Mr. Justice Barredo could conceivably

result in an incongruous situation where supposedly under the law of
this case the questioned by-laws would be held valid as against
petitioner Gokongwei and yet the same may be stricken off as
invalid as to all other SMC shareholders in a proper case.
3. It need only be pointed out that Mr. Justice Barredo's advance

separate opinion can in no way affect or modify the judgment of this
Court as set forth in the decision of April 11, 1979 and discussed
hereinabove. The same bears the unqualified concurrence of only
three Justices out of the six Justices who originally voted for the
validity per se of the questioned by-laws, namely, Messrs. Justices
Antonio, Santos and De Castro. Messrs. Justices Fernando and
Makasiar did not concur therein but they instead concurred with the
limited concurrence of the Chief Justice touching on the law of the
case which guardedly held that the Court has not found merit in the
claim that the amended bylaws in question are invalid but without in
any manner foreclosing the issue and as a matter of fact and law,
without in any manner changing or modifying the above-quoted
vote of the Chief Justice as officially rendered in the decision of April
11, 1979, wherein he precisely "reserved (his) vote on the validity of
the amended by-laws."
4. A word on the separate opinion of Mr. Justice Pacifico de Castro

attached to the advance separate opinion of Mr. Justice Barredo.
Mr. Justice De Castro advances his interpretation as to a restrictive
construction of section 13(5) of the Philippine Corporation Law,
ignoring or disregarding the fact that during the Court's deliberations
it was brought out that this prohibitory provision was and is not raised
in issue in this case whether here or in the Securities and Exchange
Commission below (outside of a passing argument by Messrs.
Angara, Abello, Concepcion, Regala & Cruz, as counsels for
respondent Sorianos in their Memorandum of June 26, 1978 that
"(T)he disputed By-Laws does not prohibit petitioner from holding
onto, or even increasing his SMC investment; it only restricts any
shifting on the part of petitioner from passive investor to a director of
the company." 3
As a consequence, the Court abandoned the Idea of calling for

another hearing wherein the parties could properly raise and discuss
this question as a new issue and instead rendered the decision in
question, under which the question of section 13(5) could be raised

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at a new and proper hearing before the SMC board and in the
Securities and Exchange Commission and in due course before this
Court (but with the clear understanding that since both
corporations, the Robina and SMC are engaged in agriculture as
submitted by the Sorianos' counsel in their said memorandum, the
issue could be raised likewise against SMC and its other shareholders,
directors, if not against SMC itself. As expressly stated in the Chief
Justices reservation of his vote, the matter of the question of the
applicability of the said section 13(5) to petitioner would be heard
by this Court at the appropriate time after the proceedings below
(and necessarily the question of the validity of the amended by-laws
would be taken up anew and the Court would at that time be able
to reach a final and conclusive vote).
Mr. Justice De Castro's personal interpretation of the decision of April

11, 1979 that petitioner may be allowed to run for election despite
adverse decision of both the SMC board and the Securities and
Exchange Commission "only if he comes to this Court and obtains an
injunction against the enforcement of the decision disqualifying him"
is patently contradictory of his vote on the matter as expressly given
in the judgment in the Court's decision of April 11, 1979 (at page 59)
that petitioner could run and if elected, sit as director of the
respondent SMC and could be disqualified only after a "new and
decision shall be appealable to the respondent Securities and
ultimately to this Court. Unless-disqualified in the manner herein
Teehankee, Concepcion Jr., Fernandez and Guerrero, JJ., concur.
BARREDO, J., concurring:
I reserved the filing of a separate opinion in order to state my own

reasons for voting in favor of the validity of the amended by-laws in
question. Regrettably, I have not yet finished preparing the same. In
view, however, of the joint separate opinion of Justices Teehankee,
Concepcion Jr., Fernandez and Guerrero, the full text of which has
just come to my attention, and which I am afraid might produce
certain misimpressions as to the import of the decision in this case, I
consider it urgent to clarify my position in respect to the rights of the
outlining of the procedure by which the disqualification of petitioner
Gokongwei can be made effective, hence this advance separate
opinion.

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To start with, inasmuch as petitioner Gokongwei himself placed the
issue of the validity of said amended by-laws squarely before the
Court for resolution, because he feels, rightly or wrongly, he can no
longer have due process or justice from the Securities and Exchange
Commission, and the private respondents have joined with him in
that respect, the six votes cast by Justices Makasiar, Antonio, Santos,
Abad Santos, de Castro and this writer in favor of validity of the
amended by-laws in question, with only four members of this Court,
namely, Justices Teehankee, Concepcion Jr., Fernandez and
Guerrero opining otherwise, and with Chief Justice Castro and
Justice Fernando reserving their votes thereon, and Justices Aquino
and Melencio Herrera not voting, thereby resulting in the dismissal of
the petition "insofar as it assails the validity of the amended by- laws
... for lack of necessary votes", has no other legal consequence than
that it is the law of the case as far as the parties herein are
concerned, albeit the majority opinion of six against four Justices is
not doctrinal in the sense that it cannot be cited as necessarily a
precedent for subsequent cases. This means that petitioner
Gokongwei and the respondents, including the Securities and
Exchange Commission, are bound by the foregoing result, namely,
that the Court en banc has not found merit in the claim that the
amended by-laws in question are invalid. Indeed, it is one thing to
say that dismissal of the case is not doctrinal and entirely another
thing to maintain that such dismissal leaves the issue unsettled. It is
somewhat of a misreading and misconstruction of Section 11 of Rule
56, contrary to the well-known established norm observed by this
Court, to state that the dismissal of a petition for lack of the
necessary votes does not amount to a decision on the merits.
Unquestionably, the Court is deemed to find no merit in a petition in
two ways, namely, (1) when eight or more members vote expressly in
that sense and (2) when the required number of justices needed to
sustain the same cannot be had.
I reiterate, therefore, that as between the parties herein, the issue of

validity of the challenged by-laws is already settled. From which it
follows that the same are already enforceable-insofar as they are
concerned. Petitioner Gokongwei may not hereafter act on the
assumption that he can revive the issue of validity whether in the
Securities and Exchange Commission, in this Court or in any other
forum, unless he proceeds on the basis of a factual milieu different
from the setting of this case. Not even the Securities and Exchange
Commission may pass on such question anymore at the instance of
herein petitioner or anyone acting in his stead or on his behalf. The
vote of four justices to remand the case thereto cannot alter the
situation.
It is very clear that under the decision herein, the issue of validity is a
settled matter for the parties herein as the law of the case, and it is

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only the actual implementation of the impugned amended by-laws
in the particular case of petitioner that remains to be passed upon
by the Securities and Exchange Commission, and on appeal
therefrom to Us, assuming the board of directors of San Miguel
Corporation should, after the proper hearing, disqualify him.
To be sure, the record is replete with substantial indications, nay

admissions of petitioner himself, that he is a controlling stockholder of
corporations which are competitors of San Miguel Corporation. The
very substantial areas of such competition involving hundreds of
millions of pesos worth of businesses stand uncontroverted in the
records hereof. In fact, petitioner has even offered, if he should be
elected, as director, not to take part when the board takes up
matters affecting the corresponding areas of competition between
his corporation and San Miguel. Nonetheless, perhaps, it is best that
such evidence be formally offered at the hearing contemplated in
Our decision.
As to whether or not petitioner may sit in the board if he wins,

definitely, under the decision in this case, even if petitioner should
win, he will have to immediately leave his position or should be
ousted the moment this Court settles the issue of his actual
disqualification, either in a full blown decision or by denying the
petition for review of corresponding decision of the Securities and
Exchange Commission unfavorable to him. And, of course, as a
matter of principle, it is to be expected that the matter of his
disqualification should be resolved expeditiously and within the
shortest possible time, so as to avoid as much juridical injury as
possible, considering that the matter of the validity of the prohibition
against competitors embodied in the amended by-laws is already
unquestionable among the parties herein and to allow him to be in
the board for sometime would create an obviously anomalous and
legally incongruous situation that should not be tolerated. Thus, all
the parties concerned must act promptly and expeditiously.
Additionally, my reservation to explain my vote on the validity of the

amended by-laws still stands.
Castro, C.J., concurs in Justice Barredo's statement that the dismissal

(for lack of necessary votes) of the petition to the extent that "it
assails the validity of the amended by laws," is the law of the case at
bar, which means in effect that as far and only in so far as the parties
and the Securities and Exchange Commission are concerned, the
Court has not found merit in the claim that the amended by-laws in
question are invalid.
Antonio and Santos, JJ., concur.
DE CASTRO, J., concurring:

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As stated in the decision penned by Justice Antonio, I voted to
uphold the validity of the amendment to the by-laws in question.
What induced me to this view is the practical consideration easily
perceived in the following illustration: If a person becomes a
stockholder of a corporation and gets himself elected as a director,
and while he is such a director, he forms his own corporation
competitive or antagonistic to the corporation of which he is a
director, and becomes Chairman of the Board and President of his
own corporation, he may be removed from his position as director,
admittedly one of trust and confidence. If this is so, as seems
undisputably to be the case, a person already controlling, and also
the Chairman of the Board and President of, a corporation, may be
barred from becoming a member of the board of directors of a
competitive corporation. This is my view, even as I am for a restrictive
interpretation of Section 13(5) of the Philippine Corporation Law,
under which I would limit the scope of the provision to corporations
engaged in agriculture, but only as the word agriculture" refers to its
more stated meaning as distinguished from its general and broad
connotation. The term would then mean "farming" or raising the
natural products of the soil, such as by cultivation, in the manner as is
required by the Public Land Act in the acquisition of agricultural
land, such as by homestead, before the patent may be issued. It is
my opinion that under the public land statute, the development of a
certain portion of the land applied for as specified in the law as a
condition precedent before the applicant may obtain a patent, is
cultivation, not let us say, poultry raising or piggery, which may be
included in the term Is agriculture" in its broad sense. For under
Section 13(5) of the Philippine Corporation Law, construed not in the
strict way as I believe it should, because the provision is in
derogation of property rights, the petitioner in this case would be
disqualified from becoming an officer of either the San Miguel
Corporation or his own supposedly agricultural corporations. It is thus
beyond my comprehension why, feeling as though I am the only
member of the Court for a restricted interpretation of Section 13(5)
of Act 1459, doubt still seems to be in the minds of other members
giving the cited provision an unrestricted interpretation, as to the
validity of the amended by-laws in question, or even holding them
null and void.
I concur with the observation of Justice Barredo that despite that less
than six votes are for upholding the validity of the by-laws, their
validity is deemed upheld, as constituting the "law of the case." It
could not be otherwise, after the present petition is dismissed with
the relief sought to declare null and void the said by-laws being
denied in effect. A vicious circle would be created if, should
petitioner Gokongwei be barred or disqualified from running by the
Board of Directors of San Miguel Corporation and the Securities and
Exchange Commission sustain the Board, petitioner could come
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again to Us, raising the same question he has raised in the present
petition, unless the principle of the "law of the case" is applied.
Clarifying therefore, my position, I am of the opinion that with the

validity of the by-laws in question standing unimpaired it is now for
petitioner to show that he does not come within the disqualification
as therein provided, both to the Board and later to the Securities and
Exchange Commission, it being a foregone conclusion that, unless
petitioner disposes of his stockholdings in the so-called competitive
corporations, San Miguel Corporation would apply the by-laws
against him, His right, therefore, to run depends on what, on election
day, May 8, 1979, the ruling of the Board and/or the Securities and
Exchange Commission on his qualification to run would be, certainly,
not the final ruling of this Court in the event recourse thereto is made
by the party feeling aggrieved, as intimated in the "Joint Separate
Opinion" of Justices Teehankee, Concepcion, Jr., Fernandez and
Guerrero, that only after petitioner's "disqualification" has ultimately
been passed upon by this Court should petitioner, not be allowed to
run. Petitioner may be allowed to run, despite an adverse decision of
both the Board and the Securities and Exchange Commission, only if
he comes to this Court and obtain an injunction against the
enforcement of the decision disqualifying him. Without such
injunction being required, all that petitioner has to do is to take his
time in coming to this Court, and in so doing, he would in the
meantime, be allowed to run, and if he wins, to sit. This would,
however, be contrary to the doctrine that gives binding, if not
conclusive, effect of findings of facts of administrative bodies
exercising quasi-judicial functions upon appellate courts, which
should, accordingly, be enforced until reversed by this Tribunal.
Fernando and Makasiar, JJ., concurs.
Antonio and Santos, JJ., concur
DE CASTRO, J.: concurring:

admittedly one of trust case, a person already controlling, and also

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competitive corporation. This is my view, even as I am for restrictive
engaged in agriculture, but only as the word "agriculture" refers to its
more limited meaning as distinguished from its general and broad
natural products of the soil, such as by cultivation, in the manner as
in required by the Public Land Act in the acquisition of agricultural
cultivation, not let us say, poultry raising or peggery, whch may be
included in the term "agriculture" in its broad sense. For under Section
13(5) of the Philippine Corporation Law, construed not in the strict
way as I believe it should, because the provision is in derogation of
property rights, the petitioner in this case would be disqualified from
becoming an officer of either the San Miguel Corporation or his own
supposedly agricultural corporations. It is thus beyond my
comprehension why, feeling as though I am the only members of the
Court for a restricted interpretation of Section 13(5) of Act 1459,
doubt still seems to be in the minds of other members giving the
cited provision an unrestricted interpretation, as to the validity of the
amended by-laws in question, or even holding them null and void.
could not be otherwise, after the present petition is dimissed with the
relief sought to declare null and void the said by-laws being denied
in effect. A vicious circle would be created if, should petitioner
Gokongwei be barred or disqualified from running by the Board,
petitioner could come again to Us, raising the same question he has
raised in the present petition, unless the principle of the "law of the
case" is applied.

validity of the by-laws in question standing unimpaired, it is nowfor
petitioner to show that he does not come paired, it is now for
Exhange Commission, it being a foregone conclusion that, unless
against him. His right, therefore, to run depends on what, on election

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been passed upon by this Court should petitioner not be allowed to
run. Petitioner may be allowed to run, despite anadverse decision of
Separate Opinions

concurring:


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inspection.
II




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this Court.


above indicated.


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III




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concurring:


forth as follows:


in the result.
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was dismissed.




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R. No. L-15548, October 30, 1962).
"The decision of this Court on that appeal by the

the law of the case." (People vs. Pinuila)


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the company." 3
As a consequence, the Court abandoned the Idea of calling for

another hearing wherein the parties could properly raise and discuss
this question as a new issue and instead rendered the decision in
question, under which the question of section 13(5) could be raised
at a new and proper hearing before the SMC board and in the
Securities and Exchange Commission and in due course before this
Court (but with the clear understanding that since both
corporations, the Robina and SMC are engaged in agriculture as
submitted by the Sorianos' counsel in their said memorandum, the
issue could be raised likewise against SMC and its other shareholders,

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directors, if not against SMC itself. As expressly stated in the Chief
Justices reservation of his vote, the matter of the question of the
applicability of the said section 13(5) to petitioner would be heard
by this Court at the appropriate time after the proceedings below
(and necessarily the question of the validity of the amended by-laws
would be taken up anew and the Court would at that time be able
to reach a final and conclusive vote).
Mr. Justice De Castro's personal interpretation of the decision of April

11, 1979 that petitioner may be allowed to run for election despite
adverse decision of both the SMC board and the Securities and
Exchange Commission "only if he comes to this Court and obtains an
injunction against the enforcement of the decision disqualifying him"
is patently contradictory of his vote on the matter as expressly given
in the judgment in the Court's decision of April 11, 1979 (at page 59)
that petitioner could run and if elected, sit as director of the
respondent SMC and could be disqualified only after a "new and
decision shall be appealable to the respondent Securities and
ultimately to this Court. Unless-disqualified in the manner herein
Teehankee, Concepcion Jr., Fernandez and Guerrero, JJ., concur.
BARREDO, J., concurring:
I reserved the filing of a separate opinion in order to state my own

reasons for voting in favor of the validity of the amended by-laws in
question. Regrettably, I have not yet finished preparing the same. In
view, however, of the joint separate opinion of Justices Teehankee,
Concepcion Jr., Fernandez and Guerrero, the full text of which has
just come to my attention, and which I am afraid might produce
certain misimpressions as to the import of the decision in this case, I
consider it urgent to clarify my position in respect to the rights of the
outlining of the procedure by which the disqualification of petitioner
Gokongwei can be made effective, hence this advance separate
opinion.
To start with, inasmuch as petitioner Gokongwei himself placed the

issue of the validity of said amended by-laws squarely before the
Court for resolution, because he feels, rightly or wrongly, he can no
longer have due process or justice from the Securities and Exchange
Commission, and the private respondents have joined with him in
that respect, the six votes cast by Justices Makasiar, Antonio, Santos,
Abad Santos, de Castro and this writer in favor of validity of the

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amended by-laws in question, with only four members of this Court,
namely, Justices Teehankee, Concepcion Jr., Fernandez and
Guerrero opining otherwise, and with Chief Justice Castro and
Justice Fernando reserving their votes thereon, and Justices Aquino
and Melencio Herrera not voting, thereby resulting in the dismissal of
the petition "insofar as it assails the validity of the amended by- laws
... for lack of necessary votes", has no other legal consequence than
that it is the law of the case as far as the parties herein are
concerned, albeit the majority opinion of six against four Justices is
not doctrinal in the sense that it cannot be cited as necessarily a
precedent for subsequent cases. This means that petitioner
Gokongwei and the respondents, including the Securities and
Exchange Commission, are bound by the foregoing result, namely,
that the Court en banc has not found merit in the claim that the
amended by-laws in question are invalid. Indeed, it is one thing to
say that dismissal of the case is not doctrinal and entirely another
thing to maintain that such dismissal leaves the issue unsettled. It is
somewhat of a misreading and misconstruction of Section 11 of Rule
56, contrary to the well-known established norm observed by this
Court, to state that the dismissal of a petition for lack of the
necessary votes does not amount to a decision on the merits.
Unquestionably, the Court is deemed to find no merit in a petition in
two ways, namely, (1) when eight or more members vote expressly in
that sense and (2) when the required number of justices needed to
sustain the same cannot be had.
I reiterate, therefore, that as between the parties herein, the issue of

validity of the challenged by-laws is already settled. From which it
follows that the same are already enforceable-insofar as they are
concerned. Petitioner Gokongwei may not hereafter act on the
assumption that he can revive the issue of validity whether in the
Securities and Exchange Commission, in this Court or in any other
forum, unless he proceeds on the basis of a factual milieu different
from the setting of this case. Not even the Securities and Exchange
Commission may pass on such question anymore at the instance of
herein petitioner or anyone acting in his stead or on his behalf. The
vote of four justices to remand the case thereto cannot alter the
situation.
It is very clear that under the decision herein, the issue of validity is a
settled matter for the parties herein as the law of the case, and it is
only the actual implementation of the impugned amended by-laws
in the particular case of petitioner that remains to be passed upon
by the Securities and Exchange Commission, and on appeal
therefrom to Us, assuming the board of directors of San Miguel
Corporation should, after the proper hearing, disqualify him.

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To be sure, the record is replete with substantial indications, nay
admissions of petitioner himself, that he is a controlling stockholder of
corporations which are competitors of San Miguel Corporation. The
very substantial areas of such competition involving hundreds of
millions of pesos worth of businesses stand uncontroverted in the
records hereof. In fact, petitioner has even offered, if he should be
elected, as director, not to take part when the board takes up
matters affecting the corresponding areas of competition between
his corporation and San Miguel. Nonetheless, perhaps, it is best that
such evidence be formally offered at the hearing contemplated in
Our decision.
As to whether or not petitioner may sit in the board if he wins,

definitely, under the decision in this case, even if petitioner should
win, he will have to immediately leave his position or should be
ousted the moment this Court settles the issue of his actual
disqualification, either in a full blown decision or by denying the
petition for review of corresponding decision of the Securities and
Exchange Commission unfavorable to him. And, of course, as a
matter of principle, it is to be expected that the matter of his
disqualification should be resolved expeditiously and within the
shortest possible time, so as to avoid as much juridical injury as
possible, considering that the matter of the validity of the prohibition
against competitors embodied in the amended by-laws is already
unquestionable among the parties herein and to allow him to be in
the board for sometime would create an obviously anomalous and
legally incongruous situation that should not be tolerated. Thus, all
the parties concerned must act promptly and expeditiously.
Additionally, my reservation to explain my vote on the validity of the

amended by-laws still stands.
Castro, C.J., concurs in Justice Barredo's statement that the dismissal

(for lack of necessary votes) of the petition to the extent that "it
assails the validity of the amended by laws," is the law of the case at
bar, which means in effect that as far and only in so far as the parties
and the Securities and Exchange Commission are concerned, the
Court has not found merit in the claim that the amended by-laws in
question are invalid.
Antonio and Santos, JJ., concur.
DE CASTRO, J., concurring:

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admittedly one of trust and confidence. If this is so, as seems
undisputably to be the case, a person already controlling, and also
competitive corporation. This is my view, even as I am for a restrictive
engaged in agriculture, but only as the word agriculture" refers to its
more stated meaning as distinguished from its general and broad
natural products of the soil, such as by cultivation, in the manner as is
required by the Public Land Act in the acquisition of agricultural
cultivation, not let us say, poultry raising or piggery, which may be
included in the term Is agriculture" in its broad sense. For under
Section 13(5) of the Philippine Corporation Law, construed not in the
strict way as I believe it should, because the provision is in
derogation of property rights, the petitioner in this case would be
disqualified from becoming an officer of either the San Miguel
Corporation or his own supposedly agricultural corporations. It is thus
beyond my comprehension why, feeling as though I am the only
member of the Court for a restricted interpretation of Section 13(5)
of Act 1459, doubt still seems to be in the minds of other members
giving the cited provision an unrestricted interpretation, as to the
validity of the amended by-laws in question, or even holding them
null and void.
could not be otherwise, after the present petition is dismissed with
the relief sought to declare null and void the said by-laws being
denied in effect. A vicious circle would be created if, should
petitioner Gokongwei be barred or disqualified from running by the
Board of Directors of San Miguel Corporation and the Securities and
Exchange Commission sustain the Board, petitioner could come
again to Us, raising the same question he has raised in the present
petition, unless the principle of the "law of the case" is applied.

validity of the by-laws in question standing unimpaired it is now for

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Exchange Commission, it being a foregone conclusion that, unless
against him, His right, therefore, to run depends on what, on election
been passed upon by this Court should petitioner, not be allowed to
run. Petitioner may be allowed to run, despite an adverse decision of
Fernando and Makasiar, JJ., concurs.
Antonio and Santos, JJ., concur
# Separate Opinions

concurring:


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inspection.
II



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this Court.


above indicated.


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III



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concurring:


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forth as follows:


in the result.

was dismissed.


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R. No. L-15548, October 30, 1962).
"The decision of this Court on that appeal by the

the law of the case." (People vs. Pinuila)


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the company." 3
As a consequence, the Court abandoned the Idea of c
Facts: Petitioner, stockholder of San Miguel Corp. filed a petition

with the SEC for the declaration of nullity of the by-laws etc.
against the majority members of the BOD and San Miguel. It is
stated in the by-laws that the amendment or modification of the
by-laws may only be delegated to the BODs upon an affirmative
vote of stockholders representing not less than 2/3 of the
subscribed and paid uo capital stock of the corporation, which
2/3 could have been computed on the basis of the capitalization
at the time of the amendment. Petitioner contends that the
amendment was based on the 1961 authorization, the Board
acted without authority and in usurpation of the power of the
stockholders n amending the by-laws in 1976. He also contends
that the 1961 authorization was already used in 1962 and 1963. He
also contends that the amendment deprived him of his right to
vote and be voted upon as a stockholder (because it disqualified
competitors from nomination and election in the BOD of SMC),
thus the amended by-laws were null and void. While this was
pending, the corporation called for a stockholder’s meeting for
the ratification of the amendment to the by-laws. This prompted
petitioner to seek for summary judgment. This was denied by the
SEC. In another case filed by petitioner, he alleged that the
corporation had been using corporate funds in other corps and
businesses outside the primary purpose clause of the corporation
in violation of the Corporation Code.
Issue: Are amendments valid?
Held: The validity and reasonableness of a by-law is purely a

question of law. Whether the by-law is in conflict with the law of
the land, or with the charter of the corporation or is in legal sense
unreasonable and therefore unlawful is a question of law.
However, this is limited where the reasonableness of a by-law is a
mere matter of judgment, and one upon which reasonable minds
must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those who are
authorized to make by-laws and who have exercised authority.
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The Court held that a corporation has authority prescribed by law
to prescribe the qualifications of directors. It has the inherent
power to adopt by-laws for its internal government, and to
management of its affairs. A corporation, under the Corporation
law, may prescribe in its by-laws the qualifications, duties and
compensation of directors, officers, and employees. Any person
who buys stock in a corporation does so with the knowledge that
its affairs are dominated by a majority of the stockholders and he
impliedly contracts that the will of the majority shall govern in all
matters within the limits of the acts of incorporation and lawfully
enacted by-laws and not forbidden by law. Any corporation may
amend its by-laws by the owners of the majority of the subscribed
stock. It cannot thus be said that petitioners has the vested right,
as a stock holder, to be elected director, in the face of the fact
that the law at the time such stockholder's right was acquired
contained the prescription that the corporate charter and the by-
laws shall be subject to amendment, alteration and modification.
A Director stands in a fiduciary relation to the corporation and its
shareholders, which is characterized as a trust relationship. An
amendment to the corporate by-laws which renders a
stockholder ineligible to be director, if he be also director in a
corporation whose business is in competition with that of the other
corporation, has been sustained as valid. This is based upon the
principle that where the director is employed in the service of a
rival company, he cannot serve both, but must betray one or the
other. The amendment in this case serves to advance the benefit
of the corporation and is good. Corporate officers are also not
permitted to use their position of trust and confidence to further
their private needs, and the act done in furtherance of private
needs is deemed to be for the benefit of the corporation. This is
called the doctrine of corporate opportunity.
Gokongwei vs. SEC Case Digest
Gokongwei vs. Securities and Exchange Commission
[GR L-45911, 11 April 1979]
Facts: [SEC Case 1375] On 22 October 1976, John Gokongwei Jr., as

stockholder of San Miguel Corporation, filed with the Securities and
Exchange Commission (SEC) a petition for "declaration of nullity of
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amended by-laws, cancellation of certificate of filing of amended
by-laws, injunction and damages with prayer for a preliminary
injunction" against the majority of the members of the Board of
Directors and San Miguel Corporation as an unwilling petitioner. As a
first cause of action, Gokongwei alleged that on 18 September 1976,
Andres Soriano, Jr., Jose M. Soriano, Enrique Zobel, Antonio Roxas,
Emeterio Buñao, Walthrode B. Conde, Miguel Ortigas, and Antonio
Prieto amended by bylaws of the corporation, basing their authority
to do so on a resolution of the stockholders adopted on 13 March
1961, when the outstanding capital stock of the corporation was
only P70,139.740.00, divided into 5,513,974 common shares at P10.00
per share and 150,000 preferred shares at P100.00 per share. At the
time of the amendment, the outstanding and paid up shares
totalled 30,127,043, with a total par value of P301,270,430.00.
It was contended that according to section 22 of the Corporation

Law and Article VIII of the by-laws of the corporation, the power to
amend, modify, repeal or adopt new by-laws may be delegated to
the Board of Directors only by the affirmative vote of stockholders
representing not less than 2/3 of the subscribed and paid up capital
stock of the corporation, which 2/3 should have been computed on
the basis of the capitalization at the time of the amendment. Since
the amendment was based on the 1961 authorization, Gokongwei
contended that the Board acted without authority and in usurpation
of the power of the stockholders. As a second cause of action, it was
alleged that the authority granted in 1961 had already been
exercised in 1962 and 1963, after which the authority of the Board
ceased to exist. As a third cause of action, Gokongwei averred that
the membership of the Board of Directors had changed since the
authority was given in 1961, there being 6 new directors. As a fourth
cause of action, it was claimed that prior to the questioned
amendment, Gokogwei had all the qualifications to be a director of
the corporation, being a substantial stockholder thereof; that as a
stockholder, Gokongwei had acquired rights inherent in stock
ownership, such as the rights to vote and to be voted upon in the
election of directors; and that in amending the by-laws, Soriano, et.
al. purposely provided for Gokongwei's disqualification and deprived
him of his vested right as afore-mentioned, hence the amended by-
laws are null and void. As additional causes of action, it was alleged
that corporations have no inherent power to disqualify a stockholder

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from being elected as a director and, therefore, the questioned act
is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M.
Soriano, while representing other corporations, entered into
contracts (specifically a management contract) with the
corporation, which was avowed because the questioned
amendment gave the Board itself the prerogative of determining
whether they or other persons are engaged in competitive or
antagonistic business; that the portion of the amended by-laws
which states that in determining whether or not a person is engaged
in competitive business, the Board may consider such factors as
business and family relationship, is unreasonable and oppressive
and, therefore, void; and that the portion of the amended by-laws
which requires that "all nominations for election of directors shall be
submitted in writing to the Board of Directors at least five (5) working
days before the date of the Annual Meeting" is likewise
unreasonable and oppressive. It was, therefore, prayed that the
amended by-laws be declared null and void and the certificate of
filing thereof be cancelled, and that Soriano, et. al. be made to pay
damages, in specified amounts, to Gokongwei. On 28 October 1976,
in connection with the same case, Gokongwei filed with the
Securities and Exchange Commission an "Urgent Motion for
Production and Inspection of Documents", alleging that the
Secretary of the corporation refused to allow him to inspect its
records despite request made by Gokongwei for production of
certain documents enumerated in the request, and that the
corporation had been attempting to suppress information from its
stockholders despite a negative reply by the SEC to its query
regarding their authority to do so.
The motion was opposed by Soriano, et. al. The Corporation, Soriano,
et. al. filed their answer, and their opposition to the petition,
respectively. Meanwhile, on 10 December 1976, while the petition
was yet to be heard, the corporation issued a notice of special
stockholders' meeting for the purpose of "ratification and
confirmation of the amendment to the By-laws", setting such
meeting for 10 February 1977. This prompted Gokongwei to ask the
SEC for a summary judgment insofar as the first cause of action is
concerned, for the alleged reason that by calling a special
stockholders' meeting for the aforesaid purpose, Soriano, et. al.
admitted the invalidity of the amendments of 18 September 1976.

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The motion for summary judgment was opposed by Soriano, et. al.
Pending action on the motion, Gokongwei filed an "Urgent Motion
for the Issuance of a Temporary Restraining Order", praying that
pending the determination of Gokongwei's application for the
issuance of a preliminary injunction and or Gokongwei's motion for
summary judgment, a temporary restraining order be issued,
restraining Soriano, et. al. from holding the special stockholders'
meeting as scheduled. This motion was duly opposed by Soriano, et.
al. On 10 February 1977, Cremation issued an order denying the
motion for issuance of temporary restraining order. After receipt of
the order of denial, Soriano, et. al. conducted the special
stockholders' meeting wherein the amendments to the by-laws were
ratified. On 14 February 1977, Gokongwei filed a consolidated
motion for contempt and for nullification of the special stockholders'
meeting. A motion for reconsideration of the order denying
Gokongwei's motion for summary judgment was filed by Gokongwei
before the SEC on 10 March 1977.
[SEC Case 1423] Gokongwei alleged that, having discovered that

the corporation has been investing corporate funds in other
corporations and businesses outside of the primary purpose clause of
the corporation, in violation of section 17-1/2 of the Corporation
Law, he filed with SEC, on 20 January 1977, a petition seeking to
have Andres M. Soriano, Jr. and Jose M. Soriano, as well as the
corporation declared guilty of such violation, and ordered to
account for such investments and to answer for damages. On 4
February 1977, motions to dismiss were filed by Soriano, et. al., to
which a consolidated motion to strike and to declare Soriano, et. al.
in default and an opposition ad abundantiorem cautelam were filed
by Gokongwei. Despite the fact that said motions were filed as early
as 4 February 1977, the Commission acted thereon only on 25 April
1977, when it denied Soriano, et. al.'s motions to dismiss and gave
them two (2) days within which to file their answer, and set the case
for hearing on April 29 and May 3, 1977. Soriano, et. al. issued notices
of the annual stockholders' meeting, including in the Agenda
thereof, the "reaffirmation of the authorization to the Board of
Directors by the stockholders at the meeting on 20 March 1972 to
invest corporate funds in other companies or businesses or for
purposes other than the main purpose for which the Corporation has
been organized, and ratification of the investments thereafter made

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pursuant thereto." By reason of the foregoing, on 28 April 1977,
Gokongwei filed with the SEC an urgent motion for the issuance of a
writ of preliminary injunction to restrain Soriano, et. al. from taking up
Item 6 of the Agenda at the annual stockholders' meeting,
requesting that the same be set for hearing on 3 May 1977, the date
set for the second hearing of the case on the merits. The SEC,
however, cancelled the dates of hearing originally scheduled and
reset the same to May 16 and 17, 1977, or after the scheduled
annual stockholders' meeting. For the purpose of urging the
Commission to act, Gokongwei filed an urgent manifestation on 3
May 1977, but this notwithstanding, no action has been taken up to
the date of the filing of the instant petition.
Gokongwei filed a petition for petition for certiorari, mandamus and

injunction, with prayer for issuance of writ of preliminary injunction,
with the Supreme Court, alleging that there appears a deliberate
and concerted inability on the part of the SEC to act.
Issue:
1. Whether the corporation has the power to provide for the

(additional) qualifications of its directors.
2. Whether the disqualification of a competitor from being

elected to the Board of Directors is a reasonable exercise of
corporate authority.
3. Whether the SEC gravely abused its discretion in denying

Gokongwei's request for an examination of the records of San
Miguel International, Inc., a fully owned subsidiary of San Miguel
Corporation.
4. Whether the SEC gravely abused its discretion in allowing the

stockholders of San Miguel Corporation to ratify the investment
of corporate funds in a foreign corporation.
Held:
1. It is recognized by all authorities that "every corporation has the

inherent power to adopt by-laws 'for its internal government, and to

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management of its affairs.'" In this jurisdiction under section 21 of the
Corporation Law, a corporation may prescribe in its by-laws "the
qualifications, duties and compensation of directors, officers and
employees." This must necessarily refer to a qualification in addition
to that specified by section 30 of the Corporation Law, which
provides that "every director must own in his right at least one share
of the capital stock of the stock corporation of which he is a
director." Any person "who buys stock in a corporation does so with
the knowledge that its affairs are dominated by a majority of the
stockholders and that he impliedly contracts that the will of the
majority shall govern in all matters within the limits of the act of
incorporation and lawfully enacted by-laws and not forbidden by
law." To this extent, therefore, the stockholder may be considered to
have "parted with his personal right or privilege to regulate the
disposition of his property which he has invested in the capital stock
of the corporation, and surrendered it to the will of the majority of his
fellow incorporators. It can not therefore be justly said that the
contract, express or implied, between the corporation and the
stockholders is infringed by any act of the former which is authorized
by a majority." Pursuant to section 18 of the Corporation Law, any
corporation may amend its articles of incorporation by a vote or
written assent of the stockholders representing at least two-thirds of
the subscribed capital stock of the corporation. If the amendment
changes, diminishes or restricts the rights of the existing shareholders,
then the dissenting minority has only one right, viz.: "to object thereto
in writing and demand payment for his share." Under section 22 of
the same law, the owners of the majority of the subscribed capital
stock may amend or repeal any by-law or adopt new by-laws. It
cannot be said, therefore, that Gokongwei has a vested right to be
elected director, in the face of the fact that the law at the time such
right as stockholder was acquired contained the prescription that
the corporate charter and the by-law shall be subject to
amendment, alteration and modification.
2. Although in the strict and technical sense, directors of a private

corporation are not regarded as trustees, there cannot be any
doubt that their character is that of a fiduciary insofar as the
corporation and the stockholders as a body are concerned. As
agents entrusted with the management of the corporation for the

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collective benefit of the stockholders, "they occupy a fiduciary
relation, and in this sense the relation is one of trust." "The ordinary
trust relationship of directors of a corporation and stockholders is not
a matter of statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs and
property and hence of the property interests of the stockholders.
Equity recognizes that stockholders are the proprietors of the
corporate interests and are ultimately the only beneficiaries thereof."
A director is a fiduciary. Their powers are powers in trust. He who is in
such fiduciary position cannot serve himself first and his cestuis
second. He cannot manipulate the affairs of his corporation to their
detriment and in disregard of the standards of common decency.
He cannot by the intervention of a corporate entity violate the
ancient precept against serving two masters. He cannot utilize his
inside information and strategic position for his own preferment. He
cannot violate rules of fair play by doing indirectly through the
corporation what he could not do so directly. He cannot violate rules
of fair play by doing indirectly through the corporation what he
could not do so directly. He cannot use his power for his personal
advantage and to the detriment of the stockholders and creditors
no matter how absolute in terms that power may be and no matter
how meticulous he is to satisfy technical requirements. For that
power is at all times subject to the equitable limitation that it may not
be exercised for the aggrandizement, preference, or advantage of
the fiduciary to the exclusion or detriment of the cestuis. The doctrine
of "corporate opportunity" is precisely a recognition by the courts
that the fiduciary standards could not be upheld where the fiduciary
was acting for two entities with competing interests. This doctrine
rests fundamentally on the unfairness, in particular circumstances, of
an officer or director taking advantage of an opportunity for his own
personal profit when the interest of the corporation justly calls for
protection. It is not denied that a member of the Board of Directors
of the San Miguel Corporation has access to sensitive and highly
confidential information, such as: (a) marketing strategies and
pricing structure; (b) budget for expansion and diversification; (c)
research and development; and (d) sources of funding, availability
of personnel, proposals of mergers or tie-ups with other firms. It is
obviously to prevent the creation of an opportunity for an officer or
director of San Miguel Corporation, who is also the officer or owner
of a competing corporation, from taking advantage of the
information which he acquires as director to promote his individual

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or corporate interests to the prejudice of San Miguel Corporation
and its stockholders, that the questioned amendment of the by-laws
was made. Certainly, where two corporations are competitive in a
substantial sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his
corporation duties above his personal concerns. The offer and
assurance of Gokongwei that to avoid any possibility of his taking
unfair advantage of his position as director of San Miguel
Corporation, he would absent himself from meetings at which
confidential matters would be discussed, would not detract from the
validity and reasonableness of the by-laws involved. Apart from the
impractical results that would ensue from such arrangement, it
would be inconsistent with Gokongwei's primary motive in running for
board membership — which is to protect his investments in San
Miguel Corporation. More important, such a proposed norm of
conduct would be against all accepted principles underlying a
director's duty of fidelity to the corporation, for the policy of the law
is to encourage and enforce responsible corporate management.
3. Pursuant to the second paragraph of section 51 of the

Corporation Law, "(t)he record of all business transactions of the
corporation and minutes of any meeting shall be open to the
inspection of any director, member or stockholder of the corporation
at reasonable hours." The stockholder's right of inspection of the
corporation's books and records is based upon their ownership of the
assets and property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership or
interest be termed an equitable ownership, a beneficial ownership,
or a quasi-ownership. This right is predicated upon the necessity of
self-protection. It is generally held by majority of the courts that
where the right is granted by statute to the stockholder, it is given to
him as such and must be exercised by him with respect to his interest
as a stockholder and for some purpose germane thereto or in the
interest of the corporation. In other words, the inspection has to be
germane to the petitioner's interest as a stockholder, and has to be
proper and lawful in character and not inimical to the interest of the
corporation. The "general rule that stockholders are entitled to full
information as to the management of the corporation and the
manner of expenditure of its funds, and to inspection to obtain such

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information, especially where it appears that the company is being
mismanaged or that it is being managed for the personal benefit of
officers or directors or certain of the stockholders to the exclusion of
others." While the right of a stockholder to examine the books and
records of a corporation for a lawful purpose is a matter of law, the
right of such stockholder to examine the books and records of a
wholly-owned subsidiary of the corporation in which he is a
stockholder is a different thing. Stockholders are entitled to inspect
the books and records of a corporation in order to investigate the
conduct of the management, determine the financial condition of
the corporation, and generally take an account of the stewardship
of the officers and directors. herein, considering that the foreign
subsidiary is wholly owned by San Miguel Corporation and, therefore,
under Its control, it would be more in accord with equity, good faith
and fair dealing to construe the statutory right of petitioner as
stockholder to inspect the books and records of the corporation as
extending to books and records of such wholly owned subsidiary
which are in the corporation's possession and control.
4. Section 17-1/2 of the Corporation Law allows a corporation to

"invest its funds in any other corporation or business or for any
purpose other than the main purpose for which it was organized"
provided that its Board of Directors has been so authorized by the
affirmative vote of stockholders holding shares entitling them to
exercise at least two-thirds of the voting power. If the investment is
made in pursuance of the corporate purpose, it does not need the
approval of the stockholders. It is only when the purchase of shares is
done solely for investment and not to accomplish the purpose of its
incorporation that the vote of approval of the stockholders holding
shares entitling them to exercise at least two-thirds of the voting
power is necessary. As stated by the corporation, the purchase of
beer manufacturing facilities by SMC was an investment in the same
business stated as its main purpose in its Articles of Incorporation,
which is to manufacture and market beer. It appears that the
original investment was made in 1947-1948, when SMC, then San
Miguel Brewery, Inc., purchased a beer brewery in Hongkong
(Hongkong Brewery & Distillery, Ltd.) for the manufacture and
marketing of San Miguel beer thereat. Restructuring of the
investment was made in 1970-1971 thru the organization of SMI in
Bermuda as a tax free reorganization. Assuming arguendo that the

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Board of Directors of SMC had no authority to make the assailed
investment, there is no question that a corporation, like an individual,
may ratify and thereby render binding upon it the originally
unauthorized acts of its officers or other agents. This is true because
the questioned investment is neither contrary to law, morals, public
order or public policy. It is a corporate transaction or contract which
is within the corporate powers, but which is defective from a
purported failure to observe in its execution the requirement of the
law that the investment must be authorized by the affirmative vote
of the stockholders holding two-thirds of the voting power. This
requirement is for the benefit of the stockholders. The stockholders
for whose benefit the requirement was enacted may, therefore,
ratify the investment and its ratification by said stockholders
obliterates any defect which it may have had at the outset. Besides,
the investment was for the purchase of beer manufacturing and
marketing facilities which is apparently relevant to the corporate
purpose. The mere fact that the corporation submitted the assailed
investment to the stockholders for ratification at the annual meeting
of 10 May 1977 cannot be construed as an admission that the
corporation had committed an ultra vires act, considering the
common practice of corporations of periodically submitting for the
ratification of their stockholders the acts of their directors, officers
and managers.
Cebu Country Club vs. Elizagague (542 SCRA 65 [2008])
G.R. No. 160273 January 18, 2008
CEBU COUNTRY CLUB, INC., SABINO R. DAPAT, RUBEN D. ALMENDRAS,

JULIUS Z. NERI, DOUGLAS L. LUYM, CESAR T. LIBI, RAMONTITO* E.
GARCIA and JOSE B. SALA, petitioners,
vs.
RICARDO F. ELIZAGAQUE, respondent.
DECISION
For our resolution is the instant Petition for Review on Certiorari under
Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing

suigeneris
the Decision1 dated January 31, 2003 and Resolution dated October
2, 2003 of the Court of Appeals in CA-G.R. CV No. 71506.
The facts are:
Cebu Country Club, Inc. (CCCI), petitioner, is a domestic

corporation operating as a non-profit and non-stock private
membership club, having its principal place of business in Banilad,
Cebu City. Petitioners herein are members of its Board of Directors.
Sometime in 1987, San Miguel Corporation, a special company

proprietary member of CCCI, designated respondent Ricardo F.
Elizagaque, its Senior Vice President and Operations Manager for the
Visayas and Mindanao, as a special non-proprietary member. The
designation was thereafter approved by the CCCI’s Board of
Directors.
In 1996, respondent filed with CCCI an application for proprietary

membership. The application was indorsed by CCCI’s two (2)
proprietary members, namely: Edmundo T. Misa and Silvano Ludo.
As the price of a proprietary share was around the P5 million range,

Benito Unchuan, then president of CCCI, offered to sell respondent a
share for only P3.5 million. Respondent, however, purchased the
share of a certain Dr. Butalid for only P3 million. Consequently, on
September 6, 1996, CCCI issued Proprietary Ownership Certificate
No. 1446 to respondent.
During the meetings dated April 4, 1997 and May 30, 1997 of the
CCCI Board of Directors, action on respondent’s application for
proprietary membership was deferred. In another Board meeting
held on July 30, 1997, respondent’s application was voted upon.
Subsequently, or on August 1, 1997, respondent received a letter
from Julius Z. Neri, CCCI’s corporate secretary, informing him that the
Board disapproved his application for proprietary membership.
On August 6, 1997, Edmundo T. Misa, on behalf of respondent, wrote

CCCI a letter of reconsideration. As CCCI did not answer,
respondent, on October 7, 1997, wrote another letter of
reconsideration. Still, CCCI kept silent. On November 5, 1997,
respondent again sent CCCI a letter inquiring whether any member
of the Board objected to his application. Again, CCCI did not reply.
Consequently, on December 23, 1998, respondent filed with the

Regional Trial Court (RTC), Branch 71, Pasig City a complaint for
damages against petitioners, docketed as Civil Case No. 67190.
After trial, the RTC rendered its Decision dated February 14, 2001 in
favor of respondent, thus:

suigeneris
WHEREFORE, judgment is hereby rendered in favor of plaintiff:
1. Ordering defendants to pay, jointly and severally, plaintiff the

amount of P2,340,000.00 as actual or compensatory damages.

amount of P5,000,000.00 as moral damages.

amount of P1,000,000.00 as exemplary damages.

amount of P1,000,000.00 as and by way of attorney’s fees and
P80,000.00 as litigation expenses.
5. Costs of suit.
Counterclaims are hereby DISMISSED for lack of merit.
SO ORDERED.2
On appeal by petitioners, the Court of Appeals, in its Decision dated

January 31, 2003, affirmed the trial court’s Decision with
modification, thus:
WHEREFORE, premises considered, the assailed Decision dated

February 14, 2001 of the Regional Trial Court, Branch 71, Pasig
City in Civil Case No. 67190 is hereby AFFIRMED with
MODIFICATION as follows:
1. Ordering defendants-appellants to pay, jointly and severally,

plaintiff-appellee the amount of P2,000,000.00 as moral
damages;

plaintiff-appellee the amount of P1,000,000.00 as exemplary
damages;

plaintiff-appellee the mount of P500,000.00 as attorney’s fees
and P50,000.00 as litigation expenses; and
4. Costs of the suit.
The counterclaims are DISMISSED for lack of merit.
SO ORDERED.3
On March 3, 2003, petitioners filed a motion for reconsideration and

motion for leave to set the motion for oral arguments. In its

suigeneris
Resolution4 dated October 2, 2003, the appellate court denied the
motions for lack of merit.
Hence, the present petition.
The issue for our resolution is whether in disapproving respondent’s

application for proprietary membership with CCCI, petitioners are
liable to respondent for damages, and if so, whether their liability is
joint and several.
Petitioners contend, inter alia, that the Court of Appeals erred in

awarding exorbitant damages to respondent despite the lack of
evidence that they acted in bad faith in disapproving the latter’s
application; and in disregarding their defense of damnum absque
injuria.
For his part, respondent maintains that the petition lacks merit,
hence, should be denied.
CCCI’s Articles of Incorporation provide in part:
SEVENTH: That this is a non-stock corporation and membership

therein as well as the right of participation in its assets shall be
limited to qualified persons who are duly accredited owners of
Proprietary Ownership Certificates issued by the corporation in
accordance with its By-Laws.
Corollary, Section 3, Article 1 of CCCI’s Amended By-Laws provides:
SECTION 3. HOW MEMBERS ARE ELECTED – The procedure for

the admission of new members of the Club shall be as follows:
(a) Any proprietary member, seconded by another voting

proprietary member, shall submit to the Secretary a written
proposal for the admission of a candidate to the "Eligible-for-
Membership List";
(b) Such proposal shall be posted by the Secretary for a period

of thirty (30) days on the Club bulletin board during which time
any member may interpose objections to the admission of the
applicant by communicating the same to the Board of
Directors;
(c) After the expiration of the aforesaid thirty (30) days, if no

objections have been filed or if there are, the Board considers
the objections unmeritorious, the candidate shall be qualified
for inclusion in the "Eligible-for-Membership List";
(d) Once included in the "Eligible-for-Membership List" and after

the candidate shall have acquired in his name a valid POC
suigeneris
duly recorded in the books of the corporation as his own, he
shall become a Proprietary Member, upon a non-refundable
admission fee of P1,000.00, provided that admission fees will
only be collected once from any person.
On March 1, 1978, Section 3(c) was amended to read as follows:
(c) After the expiration of the aforesaid thirty (30) days, the
Board may, by unanimous vote of all directors present at a
regular or special meeting, approve the inclusion of the
candidate in the "Eligible-for-Membership List".
As shown by the records, the Board adopted a secret balloting

known as the "black ball system" of voting wherein each member will
drop a ball in the ballot box. A white ball represents conformity to
the admission of an applicant, while a black ball means disapproval.
Pursuant to Section 3(c), as amended, cited above, a unanimous
vote of the directors is required. When respondent’s application for
proprietary membership was voted upon during the Board meeting
on July 30, 1997, the ballot box contained one (1) black ball. Thus, for
lack of unanimity, his application was disapproved.
Obviously, the CCCI Board of Directors, under its Articles of

Incorporation, has the right to approve or disapprove an application
for proprietary membership. But such right should not be exercised
arbitrarily. Articles 19 and 21 of the Civil Code on the Chapter on
Human Relations provide restrictions, thus:
Article 19. Every person must, in the exercise of his rights and in
the performance of his duties, act with justice, give everyone
his due, and observe honesty and good faith.
Article 21. Any person who willfully causes loss or injury to

another in a manner that is contrary to morals, good customs or
public policy shall compensate the latter for the damage.
In GF Equity, Inc. v. Valenzona,5 we expounded Article 19 and

correlated it with Article 21, thus:
This article, known to contain what is commonly referred to as

the principle of abuse of rights, sets certain standards which
must be observed not only in the exercise of one's rights but
also in the performance of one's duties. These standards are
the following: to act with justice; to give everyone his due; and
to observe honesty and good faith. The law, therefore,
recognizes a primordial limitation on all rights; that in their
exercise, the norms of human conduct set forth in Article 19
must be observed. A right, though by itself legal because
recognized or granted by law as such, may nevertheless

suigeneris
become the source of some illegality. When a right is exercised
in a manner which does not conform with the norms enshrined
in Article 19 and results in damage to another, a legal wrong is
thereby committed for which the wrongdoer must be held
responsible. But while Article 19 lays down a rule of conduct for
the government of human relations and for the maintenance
of social order, it does not provide a remedy for its violation.
Generally, an action for damages under either Article 20 or
Article 21 would be proper. (Emphasis in the original)
In rejecting respondent’s application for proprietary membership, we

find that petitioners violated the rules governing human relations, the
basic principles to be observed for the rightful relationship between
human beings and for the stability of social order. The trial court and
the Court of Appeals aptly held that petitioners committed fraud
and evident bad faith in disapproving respondent’s applications. This
is contrary to morals, good custom or public policy. Hence,
petitioners are liable for damages pursuant to Article 19 in relation to
Article 21 of the same Code.
It bears stressing that the amendment to Section 3(c) of CCCI’s

Amended By-Laws requiring the unanimous vote of the directors
present at a special or regular meeting was not printed on the
application form respondent filled and submitted to CCCI. What was
printed thereon was the original provision of Section 3(c) which was
silent on the required number of votes needed for admission of an
applicant as a proprietary member.
Petitioners explained that the amendment was not printed on the

application form due to economic reasons. We find this excuse flimsy
and unconvincing. Such amendment, aside from being extremely
significant, was introduced way back in 1978 or almost twenty (20)
years before respondent filed his application. We cannot fathom
why such a prestigious and exclusive golf country club, like the
CCCI, whose members are all affluent, did not have enough money
to cause the printing of an updated application form.
It is thus clear that respondent was left groping in the dark

wondering why his application was disapproved. He was not even
informed that a unanimous vote of the Board members was
required. When he sent a letter for reconsideration and an inquiry
whether there was an objection to his application, petitioners
apparently ignored him. Certainly, respondent did not deserve this
kind of treatment. Having been designated by San Miguel
Corporation as a special non-proprietary member of CCCI, he
should have been treated by petitioners with courtesy and civility. At
the very least, they should have informed him why his application
was disapproved.

suigeneris
The exercise of a right, though legal by itself, must nonetheless be in
accordance with the proper norm. When the right is exercised
arbitrarily, unjustly or excessively and results in damage to another, a
legal wrong is committed for which the wrongdoer must be held
responsible.6 It bears reiterating that the trial court and the Court of
Appeals held that petitioners’ disapproval of respondent’s
application is characterized by bad faith.
As to petitioners’ reliance on the principle of damnum absque injuria

or damage without injury, suffice it to state that the same is
misplaced. In Amonoy v. Gutierrez,7 we held that this principle does
not apply when there is an abuse of a person’s right, as in this case.
As to the appellate court’s award to respondent of moral damages,

we find the same in order. Under Article 2219 of the New Civil Code,
moral damages may be recovered, among others, in acts and
actions referred to in Article 21. We believe respondent’s testimony
that he suffered mental anguish, social humiliation and wounded
feelings as a result of the arbitrary denial of his application. However,
the amount of P2,000,000.00 is excessive. While there is no hard-and-
fast rule in determining what would be a fair and reasonable
amount of moral damages, the same should not be palpably and
scandalously excessive. Moral damages are not intended to impose
a penalty to the wrongdoer, neither to enrich the claimant at the
expense of the defendant.8 Taking into consideration the attending
circumstances here, we hold that an award to respondent of
P50,000.00, instead of P2,000,000.00, as moral damages is
reasonable.
Anent the award of exemplary damages, Article 2229 allows it by

way of example or correction for the public good. Nonetheless,
since exemplary damages are imposed not to enrich one party or
impoverish another but to serve as a deterrent against or as a
negative incentive to curb socially deleterious actions,9 we reduce
the amount from P1,000,000.00 to P25,000.00 only.
On the matter of attorney’s fees and litigation expenses, Article 2208

of the same Code provides, among others, that attorney’s fees and
expenses of litigation may be recovered in cases when exemplary
damages are awarded and where the court deems it just and
equitable that attorney’s fees and expenses of litigation should be
recovered, as in this case. In any event, however, such award must
be reasonable, just and equitable. Thus, we reduce the amount of
attorney’s fees (P500,000.00) and litigation expenses (P50,000.00) to
P50,000.00 and P25,000.00, respectively.

suigeneris
Lastly, petitioners’ argument that they could not be held jointly and
severally liable for damages because only one (1) voted for the
disapproval of respondent’s application lacks merit.
Section 31 of the Corporation Code provides:
SEC. 31. Liability of directors, trustees or officers. — Directors or

trustees who willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or who are guilty of
gross negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors, or trustees shall be
liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and
other persons. (Emphasis ours)
WHEREFORE, we DENY the petition. The challenged Decision and

Resolution of the Court of Appeals in CA-G.R. CV No. 71506 are
AFFIRMED with modification in the sense that (a) the award of moral
damages is reduced from P2,000,000.00 to P50,000.00; (b) the award
of exemplary damages is reduced from P1,000,000.00 to P25,000.00;
and (c) the award of attorney’s fees and litigation expenses is
reduced from P500,000.00 and P50,000.00 to P50,000.00 and
P25,000.00, respectively.
SO ORDERED.
Puno, C.J., Chairperson, Corona, Azcuna, Leonardo-de Castro, JJ.,

concur.
Malayang Samahan ng Mga Manggagawa sa M. Greenfields vs.

Ramos (326 SCRA 428 [2000])
G.R. No. 113907 February 28, 2000
MALAYANG SAMAHAN NG MGA MANGGAGAWA SA M. GREENFIELD

(MSMG-UWP), ITS PRESIDENT BEDA MAGDALENA VILLANUEVA, MARIO
DAGANIO, DONATO GUERRERO, BELLA P. SANCHEZ, ELENA TOBIS,
RHODA TAMAYO, LIWAYWAY MALLILIN, ELOISA SANTOS, DOMINADOR
REBULLO, JOSE IRLAND, TEOFILA QUEJADA, VICENTE SAMONTINA,
FELICITAS DURIAN, ANTONIO POLDO, ANGELINA TUGNA, SALVADOR
PENALOSA, LUZVIMINDA TUBIG, ILUMINADA RIVERA, ROMULO
SUMILANG, NENITA BARBELONIA, LEVI BASILIA, RICARDO PALAGA,
MERCY ROBLES, LEODEGARIO GARIN, DOMINGO ECLARINAL,
MELCHOR GALLARDO, MARCELO GARIN, ROSALINA BAUTISTA, MARY

suigeneris
ANN TALIGATOS, ALEJANDRO SANTOS, ANTONIO FRAGA, LUZ
GAPULTOS, MAGDALENA URSUA, EUGENIO ORDAN, LIGAYA MANALO,
PEPITO DELA PAZ, PERLITA DIMAQUIAT, MYRNA VASQUEZ, FLORENTINA
SAMPAGA, ARACELI FRAGA, MAXIMINA FAUSTINO, MARINA TAN,
OLIGARIO LOMO, PRECILA EUSEBIO, SUSAN ABOGANO, CAROLINA
MANINANG, GINA GLIFONIA, OSCAR SOTTO, CELEDONA MALIGAYA,
EFREN VELASQUEZ, DELIA ANOVER, JOSEPHINE TALIMORO,
MAGDALENA TABOR, NARCISA SARMIENTO, SUSAN MACASIEB,
FELICIDAD SISON, PRICELA CARTA, MILA MACAHILIG, CORAZON
NUNALA, VISITACION ELAMBRE, ELIZABETH INOFRE, VIOLETA BARTE,
LUZVIMINDA VILLOSA, NORMA SALVADOR, ELIZABETH BOGATE,
MERLYN BALBOA, EUFRECINA SARMIENTO, SIMPLICIA SIMPLICIA
BORLEO, MATERNIDAD DAVID, LAILA JOP, POTENCIANA CULALA,
LUCIVITA NAVARRO, ROLANDO BOTIN, AMELITA MAGALONA, AGNES
CENA, NOLI BARTOLAY, DANTE AQUINO, HERMINIA RILLON, CANDIDA
APARIJADO, LYDIA JIMENEZ, ELIZABETH ANOCHE, ALDA MURO, TERESA
VILLANUEVA, TERESITA RECUENCO, ELIZA SERRANO, ESTELLA POLINAR,
GERTRUDES NUNEZ, FELIPE BADIOLA, ROSLYN FERNANDEZ, OSCAR
PAGUTA, NATIVIDAD BALIWAS, ELIZABETH BARCIBAL, CYNTHIA
ESTELLER, TEODORA SANTOS, ALICIA PILAR, MILA PATENO, GLORIA
CATRIZ, MILA MACAHILIG, ADELAIDA DE LEON, ROSENDO EDILO,
ARSENIA ESPIRITU, NUMERIANO CABRERA, CONCEPSION ARRIOLA,
PAULINA DIMAPASOK, ANGELA SANGCO, PRESILA ARIAS, ZENAIDA
NUNES, EDITHA IGNACIO, ROSA GUIRON, TERESITA CANETA, ALICIA
ARRO, TEOFILO RUWETAS, CARLING AGCAOILI, ROSA NOLASCO,
GERLIE PALALON, CLAUDIO DIRAS, LETICIA ALBOS, AURORA ALUBOG,
LOLITA ACALEN, GREGORIO ALIVIO, GUILLERMO ANICETA, ANGELIE
ANDRADA, SUSAN ANGELES, ISABELITA AURIN, MANUELA AVELINA,
CARLING AGCAOILI, TERESITA ALANO, LOLITA AURIN, EMMABETH
ARCIAGA, CRESENCIA ACUNA, LUZVIMINDA ABINES, FLORENCIA
ADALID, OLIVIA AGUSTIN, EVANGELINE ALCORAN, ROSALINA
ALFERES, LORNA AMANTE, FLORENTINA AMBITO, JULIETA AMANONCO,
CARMEN AMARILLO, JOSEFINA AMBAGAN, ZENAIDA ANAYA, MARIA
ANGLO, EDITHA ANTA ZO, MARY JANE ANTE, ANDREA AQUINO,
ROWENA ARABIT, MARIETA ARAGON, REBECCA ARCENA, LYDIA
ARCIDO, FERNANDO ARENAS, GREGORIO ARGUELLES, EDITHA
ARRIOLA, EMMA ATIENZA, EMMA ATIENZA, TEODY ATIENZA, ELIZABETH
AUSTRIA, DIOSA AZARES, SOLIDA AZAINA, MILAGROS BUAG, MARIA
BANADERA, EDNALYN BRAGA, OFELIA BITANGA, FREDISMINDA
BUGUIS, VIOLETA BALLESTEROS, ROSARIO BALLADJAY, BETTY BORIO,
ROMANA BAUTISTA, SUSARA BRAVO, LILIA BAHINGTING, ENIETA
BALDOZA, DAMIANA BANGCORE, HERMINIA BARIL, PETRONA
BARRIOS, MILAGROS BARRAMEDA, PERLA BAUTISTA, CLARITA
BAUTISTA, ROSALINA BAUTISTA, ADELINA BELGA, CONSOLACION
BENAS, MARIA BEREZO, MERCEDES BEREBER, VIOLETA BISCOCHO,
ERNESTO BRIONES, ALVINA BROSOTO, AGUSTINA BUNYI, CARMEN
BUGNOT, ERLINDA BUENAFLOR, LITA BAQUIN, CONSEJO BABOL,

suigeneris
CRISANTA BACOLOD, CELIA DE BACTAT, MAZIMA BAGA, ELENA
BALADAD, ROSARIO BALADJAY, AMALIA BALAGTAS, ANITA
BALAGTAS, MARIA BALAKIT, RUFINA BALATAN, REBECCA BALDERAMA,
AMELIA BALLESTER, BELEN BARQUIO, BERNANDITA BASILIDES, HELEN
BATO, HELEN BAUTISTA, ROMANA BAUTISTA, ALMEDA BAYTA, AVELINA
BELAYON, NORMA DE BELEN, THELMA DE BELEN, JOCELYN BELTRAN,
ELENA BENITEZ, VIRGINIA BERNARDINO, MERLINA BINUYAG, LINA
BINUYA, BLESILDA BISNAR, SHIRLEY BOLIVAR, CRESENTACION MEDLO,
JOCELYN BONIFACIO, AMELIA BORBE, AMALIA BOROMEO, ZENAIDA
BRAVO, RODRIGO BEULDA, TERESITA MENDEZ, ELENA CAMAN,
LALIANE CANDELARIA, MARRY CARUJANO, REVELINA CORANES,
MARITESS CABRERA, JUSTINA CLAZADA, APOLONIA DELA CRUZ,
VICTORIA CRUZ, JOSEFINA DELA CRUZ, MARITESS CATANGHAL, EDNA
CRUZ, LUCIA DE CASTRO, JOSIE CARIASO, OFELIA CERVANTES, MEDITA
CORTADO, AMALIA CASAJEROS, LUCINA CASTILIO, EMMA CARPIO,
ANACORITA CABALES, YOLANDA CAMO, MILA CAMAZUELA, ANITA
CANTO, ESTELA CANCERAN, FEMENCIA CANCIO, CYNTHIA CAPALAD,
MERLE CASTILLO, JESUSA CASTRO, CECILIA CASTILLO, SILVERITA
CASTRODES, VIVIAN CELLANO, NORMA CELINO, TERESITA CELSO,
GLORIA COLINA, EFIPANIA CONSTANTINO, SALVACION CONSULTA,
MEDITA CORTADO, AIDA CRUZ, MARISSA DELA CRUZ, EDITO
CORCILLES, JELYNE CRUZ, ROSA CORPOS, ROSITA CUGONA, ELSIE
CABELLES, EMMA CADUT, VICTORIA CALANZA, BARBARA CALATA,
IMELDA CALDERON, CRISTINA CALIDGUID, EMMALINDA CAMALON,
MARIA CAMERINO, CARMENCITA CAMPO, CONNIE CANEZO,
LOURDES CAPANANG, MA. MILAGROS CAPILI, MYRNA T. CAPIRAL,
FLOR SAMPAGA, SUSAN B. CARINO, ROSARIO CARIZON, VIRGINIA DEL
CARMEN, EMMA CARPIO, PRESCILA CARTA, FE CASERO, LUZ DE
CASTRO, ANNA CATARONGAN, JOSEFINA CASTISIMO, JOY MANALO,
EMMIE CAWALING, JOVITA CARA, MARINA CERBITO, MARY
CAREJANO, ESTELA R. CHAVEZ, CONCEPCION PARAJA, GINA
CLAUDIO, FLORDELIZA CORALES, EDITO CORCIELER, ROSA C. CORROS,
AMELIA CRUZ, JELYNE CRUZ, WILFREDO DELA CRUZ, REINA CUEVAS,
MARILOU DEJECES, JOSEPHINE DESACULA, EDITHA DEE, EDITHA DIAZ,
VIRGIE DOMONDON, CELSA DOROPAW, VIOLETA DUMELINA, MARIBEL
DIMATATAC, ELBERTO DAGANIO, LETECIA DAGOHOY, DINDO DALUZ,
ANGELITA DANTES, GLORIA DAYO, LUCIA DE CASTRO, CARLITA DE
GUZMAN, CARMEN DELA CRUZ, MERCY DE LEON, MARY DELOS REYES,
MARIETA DEPILO, MATILDE DIBLAS, JULIETA DIMAYUGA, TEODORA
DIMAYUGA, YOLANDA DOMDOM, LUCITA DONATO, NELMA DORADO,
RITA DORADO, SUSAN DUNTON, HERMINIA SAN ESTEBAN, AMALI
EUGENIO, OLIVIA EUSOYA, ERNESTO ESCOBIN, EVELYN ESCUREL, LYDIA
ESCOBIN, VICENTE E. ELOIDA. ELENA EGAR, GLORIA ERENO, NORMA
ESPIRIDION, ARSENIA ESPIRITU, AURORA ESTACIO, DEMETRIA
ESTONELO, MILAGROS FONSEGA, LYDIA FLORENTINO, JULIA FARABIER,
TRINIDAD FATALLA, IMELDA FLORES, JESSINA FRANCO, MA. CRISTINA
FRIJAS, ESPECTACION FERRER, BERDENA FLORES, LEONILA FRANCISCO,

suigeneris
BERNARDA FAUSTINO, DOLORES FACUNDO, CRETITA FAMILARAN,
EMELITA FIGUERAS, MA. VIRGINIA FLORENDO, AURORA FRANCISCO,
MA. JESUSA FRANCISCO, NENITA FUENTES, MARILOU GOLINGAN,
JUANITA GUERRERO, LYDIA GUEVARRA, SOCORRO GONZAGA,
PATRICIA GOMEO, ROSALINDA GALAPIN, CARMELITA GALVEZ, TERESA
GLE, SONIA GONZALES, PRIMITA GOMEZ, THERESA GALUA, JOSEFINA
GELUA, BRENDA GONZAGA, FLORA GALLARDO, LUCINDA GRACILLA,
VICTORIA GOZUM, NENITA GAMAO, EDNA GARCIA, DANILO GARCIA,
ROSARIO GIRAY, ARACELI GOMEZ, JOEMARIE GONZAGA, NELIA
GONZAGA, MARY GRANCE GOZON, CARMEN GONZALES, MERLITA
GREGORIO, HERMINIA GONZALES, CARLITA DE GUZMAN, MODESTA
GABRENTINA, EDITHA GADDI, SALVACIO GALIAS, MERLINDA GALIDO,
MELINDA GAMIT, JULIETA GARCIA, EMELITA GAVINO, CHARITO GILLIA,
GENERA GONEDA, CRESTITA GONZALES, FRANCISCA GUILING, JULIAN
HERNANDEZ, HERRADURA, SUSANA HIPOLITO, NERISSA HAZ, SUSAN
HERNAEZ, APOLONIA ISON, SUSAN IBARRA, LUDIVINA IGNACIO,
CHOLITA INFANTE, JULIETA ITURRIOS, ANITA IBO, MIRASOL INGALLA,
JULIO JARDINIANO, MERLITA JULAO, JULIETA JULIAN, MARIBETH DE
JOSE, JOSEPHINE JENER, IMELDA JATAP, JULIETA JAVIER, SALOME
JAVIER, VICTORIA JAVIER, SALVACION JOMOLO, EDNA JARNE, LYDIA
JIMENEZ, TERESITA DE JUAN, MARILYN LUARCA, ROSITA LOSITO,
ROSALINA LUMAYAG, LORNA LARGA, CRESTETA DE LEON, ZENAIDA
LEGASPI, ADELAIDA LEON, IMELDA DE LEON, MELITINA LUMABI, LYDIA
LUMABI, ASUNCION LUMACANG, REGINA LAPIADRIO, MELANIA
LUBUGUAN, EVANGELINE LACAP, PELAGIA LACSI, LORNA LAGUI,
VIRGIE LAITAN, VIRGINIA LEE, CRESTELITA DE LEON, FELICISIMA
LEONERO, DIOSA LOPE, ANGELITA LOPEZ, TERESITA LORICA, JUANITA
MENDIETA, JUANITA MARANQUEZ, JANET MALIFERO, INAS MORADOS,
MELANIE MANING, LUCENA MABANGLO, CLARITA MEJIA, IRENE
MENDOZA, LILIA MORTA, VIGINIA MARAY, CHARITO MASINAHON,
FILMA MALAYA, LILIA MORTA, VIRGINIA MARAY, CHARITO
MASINAHON, FILMA MALAYA, LILIA MORTA, ROSITA MATIBAG,
LORENZA MLINA, SABINA DEL MUNDO, EDITHA MUYCO, NARCISA
MABEZA, MA. FE MACATANGAY, CONCEPCION MAGDARAOG,
IMELDA MAHIYA, ELSA MALLARI, LIGAYA MANAHAN, SOLEDA
MANLAPAS, VIRGINIA MAPA, JOSEI MARCOS, LIBRADA MARQUEZ,
VIRGINIA MAZA, JULIANITA MENDIETA, EDILBERTA MENDOZA, IRENE
MERCADO, HELEN MEROY, CRISTINA MEJARES, CECILIA MILLET,
EMELITA MINON, JOSEPHINE MIRANA, PERLITA MIRANO, EVANGELINE
MISBAL, ELEANOR MORALES, TERESITA MORILLA, LYDIA NUDO, MYRIAM
NAVAL, CAROLINA NOLIA, ALICIA NUNEZ, MAGDALENA NAGUIDA,
ELSA NICOL, LILIA NACIONALES, MA. LIZA MABO, REMEDIOS NIEVES,
MARGARITA NUYLAN, TERESITA NIEVES, PORFERIA NARAG, RHODORA
NUCASA, CORAZON OCRAY, LILIA OLIMPO, VERONA OVERENCIA,
FERMIN OSENA, FLORENCIA OLIVAROS, SOLEDAD OBEAS, NARISSA
OLIVEROS, PELAGIA ORTEGA, SUSAN ORTEGA, CRISTINA PRENCIPE,
PURITA PENGSON, REBECCA PACERAN, EDNA PARINA, MARIETA

suigeneris
PINAT, EPIFANIA PAJERLAN, ROSALINA PASIBE, CECILIA DELA PAZ,
LORETA PENA, APOLONIA PALCONIT, FRANCISCO PAGUIO, LYDIA
PAMINTAHON, ELSIE PACALDO, TERESITA PADILLA, MYRNA PINEDA,
MERCEIDTA PEREZ, NOVENA PORLUCAS, TERESITA PODPOD,
ADORACION PORNOBI, ALICIA PERILLO, HELEN JOY PENDAL, LOURDES
PACHECO, LUZVIMINDA PAGALA, LORETA PAGAPULAN, FRANCISCO
PAGUIO, PRISCO PALACA, FLORA PAMINTUAN, NOEMI PARISALES,
JOSEPHINE PATRICIO, CRISTINA PE BENITO, ANGELA PECO, ANGELITA
PENA, ESTER PENONES, NORMA PEREZ, MAURA PERSEVERANCIA,
MARINA PETILLA, JOSIE PIA, ZULVILITA PIODO, REBECCA PACERAN,
CLARITA POLICARPIO, MAXIMO POTENTO, PORFIRIO POTENTO,
FLORDELIZA PUMARAS, FERNANDO QUEVEDO, JULIANA QUINDOZA,
CHARITO QUIROZ, CARMELITA ROSINO, RODELIA RAYONDOYON,
FLORENCIA RAGOS, REBECCA ROSALES, ROSALYN RIVERO,
FRANCISCO RUIZ, FRANCIA ROSERO, EMELY RUBIO, EDILBERTO RUIO,
JUANA RUBY, RAQUEL REYES, MERCY ROBLES, ESTELA RELANO, ROSITA
REYES NIMFA RENDON, EPIFANIO RAMIRO, MURIEL REALCO,
BERNARDITA RED, LEONITA RODIL, BENITA REBOLA, DELMA REGALARIO,
LENY REDILLAS, JULIETA DELA ROSA, FELICITAS DELA ROSA, SUSAN
RAFALLO, ELENA RONDINA, NORMA RACELIS, JOSEPHINE RAGEL,
ESPERANZA RAMIREZ, LUZVIMINDA RANADA, CRISTINA RAPINSAN,
JOCELYN RED, ORLANDO REYES, TERESITA REYES, ANGELITA ROBERTO,
DELIA ROCHA, EDLTRUDES ROMERO, MELECIA ROSALES, ZENAIDA
ROTAO, BELEN RUBIS, FE RUEDA, SYLVIA SONGCAYAWON, CRISTINA
SANANO, NERCISA SARMIENTO, HELEN SIBAL, ESTELITA SANTOS,
NORMA SILVESTRE, DARLITA SINGSON, EUFROCINA SARMIENTO,
MYRNA SAMSON, EMERLINA SADIA, LORNA SALAZAR, AVELINA
SALVADOR, NACIFORA SALAZAR, TITA SEUS, MARIFE SANTOS, GRACIA
SARMIENTO, ANGELITA SUMANGIL, ELIZABETH SICAT, MA. VICTORIA
SIDELA, ANALITA SALVADOR, MARITES SANTOS, VIRGINIA SANTOS,
THELMA SARONG, NILDA SAYAT, FANCITA SEGUNDO, FYNAIDA SAGUI,
EDITHA SALAZAR, EDNA SALZAR, EMMA SALENDARIO, SOLEDAD
SAMSON, EDNA SAN DIEGO, TERESITA SAN GABRIEL, GERTRUDES SAN
JOSE, EGLECERIA OSANCHEZ, ESTRELLA SANCHEZ, CECILIA DELOS
SANTOS, LUISA SEGOVIA, JOCELYN SENDING, ELENA SONGALIA,
FELICITAS SORIANO, OFELIA TIBAYAN, AIDA TIRNIDA, MONICA
TIBAYAN, CRISTETA TAMBARAN, GLORIA TACDA, NENVINA, FELINA
TEVES, ANTONINA DELA TORRE, MAXIMA TANILON, NENA TABAT,
ZOSIMA TOLOSA, MARITA TENOSO, IMELDA TANIO, LUZ TANIO,
EVANGELINE TAYO, JOSEFINA TINGTING, ARSENIA TISOY,
MAGDALENA TRAJANO, JOSEFINA UBALDE, GINA UMALI, IRMA
VALENZUELA, FELY VALDEZ, PAULINA VALEZ, ROSELITA VALLENTE,
LOURDES VELASCO, AIDA VILLA, FRANCISCA VILLARITO, ZENAIDA
VISMONTE, DELIA VILLAMIEL, NENITA VASQUEZ, JOCELYN VILLASIS,
FERMARGARITA VARGAS, CELIA VALLE, MILA CONCEPCION VIRAY,
DOMINGA VALDEZ, LUZVIMINDA VOCINA, MADELINE VIVERO, RUFINA
VELASCO, AUREA VIDALEON, GLORIA DEL VALLE, THELMA VALLOYAS,

suigeneris
CYNTHIA DELA VEGA, ADELA VILLAGOMEZ, TERESITA VINLUAN,
EUFEMIA VITAN, GLORIA VILLAFLORES, EDORACION VALDEZ,
ANGELITA VALDEZ, ILUMINADA VALENCI, MYRNA VASQUEZ, EVELNYN
VEJERAMO, TEODORA VELASQUEZ, EDAN VILLANUEVA, PURITA
VILLASENOR, SALVADOR WILSON, EMELINA YU, ADELFA YU, ANA
ABRIGUE, VIRGINIA ADOBAS, VICTORIA ANTIPUESTO, MERCEDITA
CASTILLO, JOCELYN CASTRO, CREMENIA DELA CRUZ, JOSEPHINE
IGNACIO, MELITA ILILANGOS, LIGAYA LUMAYAT, DELIA LUMBES,
ROSITA LIBRADO, DELIA LAGRAMADA, GEMMA MAGPANTAY, EMILY
MENDOZA, FIDELA PANGANIBAN, LEONOR RIZALDO, ILUMINDA
RIVERA, DIVINA SAMBAYAN, ELMERITA SOLAYAO, NANCY SAMALA,
JOSIE SUMARAN, LUZVIMINDA ABINES, ALMA ACOL, ROBERTO
ADRIATICO, GLORIA AGUINALDO, ROSARIO ALEYO, CRISTETA
ALEJANDRO, LILIA ALMOGUERA, CARMEN AMARILLO, TRINIDAD
ARDANIEL, CERINA AVENTAJADO, ZENAIDA AVAYA, LOLITA ARABIS,
MARIA ARSENIA, SOFIA AGUINALDO, SALVE ABAD, JOSEFINA
AMBANGAN EMILIA AQUINO, JOSEFINA AQUINO, JULIANA AUSAN,
AMERCIANA ACOSTA, CONCEPCION ALEROZA, DIANA ADOVOS, FELY
ADVINCULA, SEOMINTA ARIAS, JOSEPHINE ARCEDE, NORMA
AMISTOSO, PRESENTACION ALONOS, EMMA ATIENZA, LEONIDA
AQUINO, ANITA ARILLON, ADELAIDA ARELLANO, NORMA AMISTOSO,
JOSEPHINE ARCEDE, SEMIONITA ARIAS, JOSEFINA BANTUG, LOLITA
BARTE, HERMINIA BASCO, MARGARITA BOTARDO, RUFINO BUGNOT,
LOLITA BUSTILLO, ISABEL BALAKIT, ROSARIO BARRERO, TESSIE BALBOS,
NORMA BENISANO, GUILLERMA BRUGES, BERNADETTE BARTOLOME,
SHIRLEY BELMONTE, MERONA BELZA, AZUCENA BERNALES, JOSE
BASCO, NIMPHA BANTOG, BENILDA BUBAN, REGINA BUBAN, SALOME
BARRAMEDA, IRENE BISCO, FELICITAS BAUTISTA, VIOLETA BURA, LINA
BINUYA, BIBIANA BAARDE, ELSA BAES, ANASTACIA BELONZO, SONIA
BENOYO, ELIZABETH BACUNGAN, PATRICIA BARRAMEDA, ERLINDA
BARCELONA, EMMA BANICO, APOLONIA BUNAO, LUCITA BOLEA,
PACIFICA BARCELONA, EDITHA BASIJAN, RENITA BADAMA, ELENA
BALADAD, CRESENCIA BAJO, BERNADITA BASILID, MELINDA BEATO,
YOLANDA BATANES, EDITHA BORILLA, ANITA BAS, ELSA CALIPUNDAN,
MARIA CAMERINO,VIRGINIA CAMPOSANO, MILAGROS CAPILI,
CARINA CARINO, EUFEMIA CASIHAN, NENITA CASTRO, FLORENCIA
CASUBUAN, GIRLIE CENTENO, MARIANITA CHIQUITO, IMELDA DELA
CRUZ, TEODOSIA GONG, TEOFILA CARACOL, TERESITA CANTA, IRENEA
CUNANAN, JULITA CANDILOSAS, VIOLETA CIERES, MILAGROS DELA
CRUZ, FLOREPES CAPULONG, CARMENCITA CAMPO, MARILYN
CARILLO, RUTH DELA CRUZ, RITA CIJAS, LYDIA CASTOR, VIRGIE
CALUBAD, EMELITA CABERA, CRISTETA CRUZ, ERLINDA COGADAS,
IMELDA CALDERON, SUSIE LUZ CEZAR, ESTELA CHAVEZ, NORMA
CABRERA, ELDA DAGATAN, LEONISA DIMACUNA, ERNA DUGTONG,
FLORDELISA DIGMA, VIRGILIO DADIOS, LOLITA DAGTA, ADELAIDA
DORADO, CELSA DATUMANONG, VIRGINIA DOCTOLERO, EDNA SAN
DIEGO, JULIETA DANG, JULIETA DORANTINAO, LOLITA DAGANO,

suigeneris
JUDITH DIAZ, MARIA ENICANE, MARITA ESCARDE, ENRIMITA ESMAYOR,
ROSARIO EPIRITU, REMEDIOS EMBOLTORIO, IRENE ESTUITA, TERESITA
ERESE, ERMELINDA ELEZO, MARIA ESTAREJA, MERLITA ESQUERRA,
YOLANDA FELICITAS, FRUTO FRANCIA, MARTHA FRUTO, LILIA FLORES,
SALVACION FORTALESA, JUDITH FAJARDO, SUSANA FERNANDO,
EDWIN FRANCISCO, NENITA GREGORY, ROSA CAMILO, MARIVIC
GERRARDO, CHARITA GOREMBALEM, NORMA GRANDE, DOLORES
GUTIERREZ, CHARLIE GARCIA, LUZ GALVEZ, ADELAIDA GAMILLA, LUZ
GAPULTOS, ERLINDA GARCIA, HELEN GARCIA, ERLINDA GAUDIA,
FRANCISCA GUILING, MINTA HERRERA, ASUNCION HONOA, JUAN
HERNANDEZ, LUCERIA ANNA MAE HERNANDEZ, JULIANA HERNANDEZ,
EDITHA IGNACIO, ANITA INOCENCIO, EULALIA INSORIO, ESTELITA
IRLANDA, MILAGROS IGNACIO, LINDA JABONILLO, ADELIMA JAEL,
ROWENA JARABJO, ROBERT JAVILINAR, CLARITA JOSE, CARMENCITA
JUNDEZ, SOFIA LALUCIS, GLORIA LABITORIA, ANGELITA LODES,
ERLINDA LATOGA, EVELYN LEGASPI, ROMEO LIMCHOCO, JESUS LARA,
ESTRELLA DE LUNA, LORETA LAREZA, JOSEPHINE ALSCO, MERCY DE
LEON, CONSOLACION LIBAO, MARILYN LIWAG, TERESITA LIZAZO, LILIA
MACAPAGAL, SALVACION MACAREZA, AMALIA MADO, TERESITA
MADRIAGA, JOVITA MAGNAYE, JEAN MALABAD, FRANCISCA
MENDOZA, NELCITA MANGANTANG, TERESITA NELLA, GENEROZA
MERCADO, CRISTETA MOJANA, BERNARDA MONGADO, LYDIA
MIRANDA, ELISA MADRILEJOS, LOIDA MAGSINO, AMELIA MALTO,
JULITA MAHIBA, MYRNA MAYORES, LUISA MARAIG, FLORENCIA
MARAIG, EMMA MONZON, IMELDA MAGDANGAN, VICTORIA MARTIN,
NOEMI MANGUILLO, BASILIZA MEDINA, VICTORIO MERCADO, ESTELA
MAYPA, EMILIA MENDOZA, LINA MAGPANTAY, FELICIANA MANLOLO,
ELENA MANACOP, WILMA MORENO, JUANA MENDOZA, EVELYN DEL
MUNDO, ROSIE MATUTINA, MATILDE MANALO, TERESITA MENDEZ,
FELIPINA MAGONCIA, MARIA MANZANO, LIGAYA MANALO, LETICIA
MARCHA, MARINA MANDIGMA, LETICIA MANDASOC, PRESCILLA
MARTINEZ, JULIA MENDOZA, PACITA MAGALLANES, ANGELINA
MARJES, SHIRLEY MELIGRITO, IRENE MERCADO, ELISA MAATUBANG,
MARCELINA NICOLAS, AGUSTINA NICOLAS, ROSA NOLASCO, WILMA
NILAYE, VIOLETA ORACION, ANGELA OSTAYA, JUANITA OSAYOS,
MAGDALENA OCAMPO, MARDIANA OCTA, ROSELA OPAO, LIBRADA
OCAMPO, YOLANDA OLIVER, MARCIA ORLANDA, PAGDUNAN, RITA
PABILONA, MYRA PALACA, BETHLEHEM PALINES, GINA PALIGAR,
NORMA PALIGAR, DELMA PEREZ, CLAUDIA PRADO, JULIE PUTONG,
LUDIVINA PAGSALINGAN, MERLYN PANALIGAN, VIOLETA
PANAMBITAN, NOREN PAR, ERLINDA PARAGAS, MILA PARINO,
REBECCA PENAFLOR, IMELDA PENAMORA, JERMICILLIN PERALTA,
REBECCA PIAPES, EDITHA PILAR, MAROBETH PILLADO, DIOSCORO
PIMENTEL, AURORA LAS PINAS, EVANGELINA PINON, MA. NITA
PONDOC, MA. MERCEDES PODPOD, ANGELITO PANDEZ, LIGAYA
PIGTAIN, LEONILA QUIAMBAO, ELENA QUINO, MARITESS QUIJANO,
CHOLITA REBUENO, LOLITA REYES, JOCELYN RAMOS, ROSITA RAMIREZ,

suigeneris
ELINORA RAMOS, ISABEL RAMOS, ANNABELLE RESURRECCION, EMMA
REYES, ALILY ROXAS, MARY GRACE DELOS REYES, JOCELYN DEL
ROSARIO, JOSEFINA RABUSA, ANGELITA ROTAIRO, SAMCETA ROSETA,
EDERLINA RUIZ, ZENAIDA ROSARIO, BENITA REBOLA, ROSITA REVILLA,
ROSITA SANTOS, ROWENA SALAZAR, EMILYN SARMIENTO, ANA SENIS,
ELOISA SANTOS, NARCISA SONGLIAD, ELMA SONGALIA, AMPARA
SABIO, JESSIE SANCHEZ, VIVIAN SAMILO, GLORIA SUMALINOG,
ROSALINA DELOS SANTOS, MARIETA SOMBRERO, HELEN SERRETARIO,
TEODORO SULIT, BELLA SONGUINES, LINDA SARANTAN, ESTELLA
SALABAR, MILAGROS SISON, GLORIA TALIDAGA, CECILIA TEODORO,
ROMILLA TUAZON, AMELITA TABULAO, MACARIA TORRES, LUTGARDA
TUSI, ESTELLA TORREJOS, VICTORIA TAN, MERLITA DELA VEGA, WEVINA
ORENCIA, REMEDIOS BALECHA, TERESITA TIBAR, LACHICA LEONORA,
JULITA YBUT, JOSEFINA ZABALA, WINNIE ZALDARIAGA, BENHUR
ANTENERO, MARCELINA ANTENERO, ANTONINA ALAPAN, EDITHA
ANTOZO, ROWENA ARABIT, ANDRA AQUINO, TERESITA ANGULO,
MARIA ANGLO, MYRNA ALBOS, ELENITA AUSTRIA, ANNA ABRIGUE,
VIRGINIA ADOBAS, VICTORIA ANTIPUESTO, REMEDIOS BOLECHE,
MACARIA BARRIOS, THELMA BELEN, ESTELLA BARRETTO, JOCELYN
CHAVEZ, VIRGINIA CAPISTRANO, BENEDICTA CINCO, YOLLY
CATPANG, REINA CUEVAS, VICTORIA CALANZA, FE CASERO, ROBERTA
CATALBAS, LOURDES CAPANANG, CLEMENCIA CRUZ, JOCELYN
COSTO, MERCEDITA CASTILLO, EDITHA DEE, LUCITA DONATO NORMA
ESPIRIDION, LORETA FERNANDEZ, AURORA FRANCISCO, VILMA
FAJARDO, MODESTA GABRENTINA, TERESITA GABRIEL, SALVACION
GAMBOA, JOSEPHINE IGNACIO, SUSAN IBARRA, ESPERANZA JABSON,
OSCAR JAMBARO, ROSANNA JARDIN, CORAZON JALOCON, ZENAIDA
LEGASPI, DELLA LAGRAMADA, ROSITA LIBRANDO, LIGAYA LUMAYOT,
DELIA LUMBIS, LEONORA LANCHICA, RELAGIA LACSI, JOSEFINA
LUMBO, VIOLETA DE LUNA, EVELYN MADRID, TERESITA MORILLA,
GEMMA MAGPANTAY, EMILY MENDOZA, IRENEA MEDINA, NARCISA
MABEZA, ROSANNA MEDINA, DELIA MARTINEZ, ROSARIO MAG-ISA,
EDITHA MENDOZA, EDILBERTA MENDOZA, FIDELA PANGANIBAN,
OFELIA PANGANIBAN, AZUCENA POSTGO, LOURDES PACHECO, LILIA
PADILLA, MARISSA PEREZ, FLORDELIZA PUMARES, LUZ REYES, NORMA
RACELIS, LEONOR RIZALDO, JOSIE SUMASAR, NANCY SAMALA,
EMERLITA SOLAYAO, MERCEDITA SAMANIEGO, BLANDINA SIMBULAN,
JOCELYN SENDING, LUISITA TABERRERO, TERESITA TIBAR, ESTERLINA
VALDEZ, GLORIA VEJERANO, ILUMINADA VALENCIA, MERLITA DELA
VEGA, VIRGIE LAITAN, JULIET VILLARAMA, LUISISTA OCAMPO, NARIO
ANDRES, ANSELMA TULFO, GLORIA MATEO, FLANIA MENDOZA,
CONNIE CANGO, EDITHA SALAZAR, MYRNA DELOS SANTOS, TERESITA
SERGIO, CHARITO GILLA, FLORENTINA HERNAEZ, BERNARDINO
VIRGINIA, AMPO ANACORITA, SYLVIA POASADAS, ESTRELLA ESPIRITU,
CONCORDIA LUZURIAGA, MARINA CERBITO, EMMA REYES, NOEMI
PENISALES, CLARITA POLICARPIO, BELEN BANGUIO, HERMINIA
ADVINCULA, LILIA MORTA, REGINA LAPIDARIO, LORNA LARGA,

suigeneris
TERESITA VINLUAN, MARITA TENOSO, NILDS SAYAT, THELMA SARONG,
DELMA REGALIS, SUSAN RAFAULO, ELENA RONDINA, MYRNA PIENDA,
VIOLETA DUMELINA, FLORENCIA ADALID, FILMA MELAYA, ERLINDA DE
BAUTISTA, MATILDE DE BLAS, DOLORES FACUNDO, REBECCA LEDAMA,
MA. FE MACATANGAY, EMELITA MINON, NORMA PAGUIO, ELIZA
VASQUEZ, GLORIA VILLARINO, MA. JESUS FRANCISCO, TERESITA
GURPIDO, LIGAYA MANALO, FE PINEDA, MIRIAM OCMAR, LUISA
SEGOVIA, TEODY ATIENZA, SOLEDA AZCURE, CARMEN DELA CRUZ,
DMETRIA ESTONELO, MA. FLORIDA LOAZNO, IMELDA MAHIYA,
EDILBERTA MENDOZA, SYLVIA POSADAS, SUSANA ORTEGA, JOSEPHINE
D. TALIMORO, TERESITA LORECA, ARSENIA TISOY, LIGAYA MANALO,
TERESITA GURPIO, FE PINEDA, and MARIA JESUS FRANCISCO,
petitioners,
vs.
HON. CRESENCIO J. RAMOS, NATIONAL LABOR RELATIONS
COMMISSION, M. GREENFIELD (B), INC., SAUL TAWIL, CARLOS T.
JAVELOSA, RENATO C. PUANGCO, WINCEL LIGOT, MARCIANO
HALOG, GODOFREDO PACENO, SR., GERVACIO CASILLANO,
LORENZO ITAOC, ATTY. GODOFREDO PACENO, JR., MARGARITO
CABRERA, GAUDENCIO RACHO, SANTIAGO IBANEZ, AND RODRIGO
AGUILING, respondents.
PURISIMA, J.:
At bar is a Petition for Certiorari under Rule 65 of the Revised Rules of

Court to annul the decision of the National Labor Relations
Commission in an unfair labor practice case instituted by a local
union against its employer company and the officers of its national
federation.
The petitioner, Malayang Samahan ng mga Manggagawa sa M.

Greenfield, Inc., (B) (MSMG), hereinafter referred to as the "local
union", is an affiliate of the private respondent, United Lumber and
General Workers of the Philippines (ULGWP), referred to as the
"federation". The collective bargaining agreement between MSMG
and M. Greenfield, Inc., names the parties as follows:
This agreement made and entered into by and between:
M. GREENFIELD, INC. (B) a corporation duly organized in

accordance with the laws of the Republic of the Philippines
with office address at Km. 14, Merville Road, Parañaque, Metro
Manila, represented in this act by its General manager, Mr.
Carlos T. Javelosa, hereinafter referred to as the Company;
-and-
MALAYANG SAMAHAN NG MGA MANGGAGAWA SA M.

GREENFIELD (B) (MSMG)/UNITED LUMBER AND GENERAL
suigeneris
WORKERS OF THE PHILIPPINES (ULGWP), a legitimate labor
organization with address at Suite 404, Trinity Building, T. M.
Kalaw Street, Manila, represented in this act by a Negotiating
Committee headed by its National President, Mr. Godofredo
Paceno, Sr., referred to in this Agreement as the UNION.1
The CBA includes, among others, the following pertinent provisions:
Art. II-Union Security
Sec. 1. Coverage and Scope. All employees who are covered

by this Agreement and presently members of the UNION shall
remain members of the UNION for the duration of this
Agreement as a condition precedent to continued
employment with the COMPANY.
xxx xxx xxx
Sec. 4. Dismissal. Any such employee mentioned in Section 2

hereof, who fails to maintain his membership in the UNION for
non-payment of UNION dues, for resignation and for violation of
UNION's Constitution and By-Laws and any new employee as
defined in Section 2 of this Article shall upon written notice of
such failure to join or to maintain membership in the UNION and
upon written recommendation to the COMPANY by the UNION,
be dismissed from the employment by the COMPANY;
provided, however, that the UNION shall hold the COMPANY
free and blameless from any and all liabilities that may arise
should the dismissed employee question, in any manner, his
dismissal; provided, further that the matter of the employee's
dismissal under this Article may be submitted as a grievance
under Article XIII and, provided, finally, that no such written
recommendation shall be made upon the COMPANY nor shall
COMPANY be compelled to act upon any such
recommendation within the period of sixty (60) days prior to the
expiry date of this Agreement conformably to law.
Art. IX
Sec. 4. Program Fund — The Company shall provide the

amount of P10,000.00 a month for a continuing labor education
program which shall be remitted to the Federation . . .2
On September 12, 1986, a local union election was held under the
auspices of the ULGWP wherein the herein petitioner, Beda
Magdalena Villanueva, and the other union officers were
proclaimed as winners. Minutes of the said election were duly filed
with the Bureau of Labor Relations on September 29, 1986.

suigeneris
On March 21, 1987, a Petition for Impeachment was filed with the
national federation ULGWP by the defeated candidates in the
aforementioned election.
On June 16, 1987, the federation conducted an audit of the local

union funds. The investigation did not yield any unfavorable result
and the local union officers were cleared of the charges of anomaly
in the custody, handling and disposition of the union
funds.1âwphi1.nêt
The 14 defeated candidates filed a Petition for

Impeachment/Expulsion of the local union officers with the DOLE
NCR on November 5, 1987, docketed as NCR-OD-M-11-780-87.
However, the same was dismissed on March 2, 1988, by Med-Arbiter
Renato Parungo for failure to substantiate the charges and to
present evidence in support of the allegations.
On April 17, 1988, the local union held a general membership

meeting at the Caruncho Complex in Pasig. Several union members
failed to attend the meeting, prompting the Executive Board to
create a committee tasked to investigate the non-attendance of
several union members in the said assembly, pursuant to Sections 4
and 5, Article V of the Constitution and By-Laws of the union, which
read:
Seksyon 4. Ang mga kinukusang hindi pagdalo o hindi

paglahok sa lahat ng hakbangin ng unyon ng sinumang kasapi
o pinuno ay maaaring maging sanhi ng pagtitiwalag o
pagpapataw ng multa ng hindi hihigit sa P50.00 sa bawat araw
na nagkulang.
Seksyon 5. Ang sinumang dadalo na aalis ng hindi pa

natatapos ang pulong ay ituturing na pagliban at
maparusahan itong alinsunod sa Article V, Seksyong 4 ng
Saligang Batas na ito. Sino mang kasapi o pisyales na mahuli
and dating sa takdang oras ng di lalampas sa isang oras ay
magmumulta ng P25.00 at babawasin sa sahod sa
pamamagitan ng salary deduction at higit sa isang oras ng
pagdating ng huli ay ituturing na pagliban.3
On June 27, 1988, the local union wrote respondent company a

letter requesting it to deduct the union fines from the wages/salaries
of those union members who failed to attend the general
membership meeting. A portion of the said letter stated:
xxx xxx xxx
In connection with Section 4 Article II of our existing Collective

Bargaining Agreement, please deduct the amount of P50.00

suigeneris
from each of the union members named in said annexes on
the payroll of July 2-8, 1988 as fine for their failure to attend said
general membership meeting.4
In a Memorandum dated July 3, 1988, the Secretary General of the

national federation, Godofredo Paceño, Jr. disapproved the
resolution of the local union imposing the P50.00 fine. The union
officers protested such action by the Federation in a Reply dated
July 4, 1988.
On July 11, 1988, the Federation wrote respondent company a letter

advising the latter not to deduct the fifty-peso fine from the salaries
of the union members requesting that:
. . . any and all future representations by MSMG affecting a

number of members be first cleared from the federation before
corresponding action by the Company.5
The following day, respondent company sent a reply to petitioner

union's request in a letter, stating that it cannot deduct fines from the
employees' salary without going against certain laws. The company
suggested that the union refer the matter to the proper government
office for resolution in order to avoid placing the company in the
middle of the issue.
The imposition of P50.00 fine became the subject of bitter

disagreement between the Federation and the local union
culminating in the latter's declaration of general autonomy from the
former through Resolution No. 10 passed by the local executive
board and ratified by the general membership on July 16, 1988.
In retaliation, the national federation asked respondent company to

stop the remittance of the local union's share in the education funds
effective August 1988. This was objected to by the local union which
demanded that the education fund be remitted to it in full.
The company was thus constrained to file a Complaint for

Interpleader with a Petition for Declaratory Relief with the Med-
Arbitration Branch of the Department of Labor and Employment,
docketed as Case No. OD-M-8-435-88. This was resolved on October
28, 1988, by Med-Arbiter Anastacio Bactin in an Order, disposing
thus:
WHEREFORE, premises considered, it is hereby ordered:
1. That the United Lumber and General Workers of the

Philippines (ULGWP) through its local union officers shall
administer the collective bargaining agreement (CBA).

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2. That petitioner company shall remit the P10,000.00 monthly
labor education program fund to the ULGWP subject to the
condition that it shall use the said amount for its intended
purpose.
3. That the Treasurer of the MSMG shall be authorized to collect

from the 356 union members the amount of P50.00 as penalty
for their failure to attend the general membership assembly on
April 17, 1988.
However, if the MSMG Officers could present the individual

written authorizations of the 356 union members, then the
company is obliged to deduct from the salaries of the 356
union members the P50.00 fine.6
On appeal, Director Pura-Ferrer Calleja issued a Resolution dated

February 7, 1989, which modified in part the earlier disposition, to wit:
WHEREFORE, premises considered, the appealed portion is

hereby modified to the extent that the company should remit
the amount of five thousand pesos (P5,000.00) of the P10,000.00
monthly labor education program fund to ULGWP and the
other P5,000.00 to MSMG, both unions to use the same for its
intended purpose.7
Meanwhile, on September 2, 1988, several local unions (Top Form, M.

Greenfield, Grosby, Triumph International, General Milling, and
Vander Hons chapters) filed a Petition for Audit and Examination of
the federation and education funds of ULGWP which was granted
by Med-Arbiter Rasidali Abdullah on December 25, 1988 in an Order
which directed the audit and examination of the books of account
of ULGWP.
On September 30, 1988, the officials of ULGWP called a Special

National Executive Board Meeting at Nasipit, Agusan del Norte
where a Resolution was passed placing the MSMG under trusteeship
and appointing respondent Cesar Clarete as administrator.
On October 27, 1988, the said administrator wrote the respondent

company informing the latter of its designation of a certain Alfredo
Kalingking as local union president and "disauthorizing" the
incumbent union officers from representing the employees. This
action by the national federation was protested by the petitioners in
a letter to respondent company dated November 11, 1988.
On November 13, 1988, the petitioner union officers received

identical letters from the administrator requiring them to explain
within 72 hours why they should not be removed from their office
and expelled from union membership.

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On November 26, 1988, petitioners replied:
(a) Questioning the validity of the alleged National Executive

Board Resolution placing their union under trusteeship;
(b) Justifying the action of their union in declaring a general

autonomy from ULGWP due to the latter's inability to give
proper educational, organizational and legal services to its
affiliates and the pendency of the audit of the federation
funds;
(c) Advising that their union did not commit any act of
disloyalty as it has remained an affiliate of ULGWP;
(d) Giving ULGWP a period of five (5) days to cease and desist
from further committing acts of coercion, intimidation and
harassment.8
However, as early as November 21, 1988, the officers were expelled

from the ULGWP. The termination letter read:
Effective today, November 21, 1988, you are hereby expelled

from UNITED LUMBER AND GENERAL WORKERS OF THE
PHILIPPINES (ULGWP) for committing acts of disloyalty and/or
acts inimical to the interest and violative to the Constitution
and by-laws of your federation.
You failed and/or refused to offer an explanation inspite of the

time granted to you.
Since you are no longer a member of good standing, ULGWP is

constrained to recommend for your termination from your
employment, and provided in Article II Section 4, known as
UNION SECURITY, in the Collective Bargaining agreement.9
On the same day, the federation advised respondent company of

the expulsion of the 30 union officers and demanded their
separation from employment pursuant to the Union Security Clause
in their collective bargaining agreement. This demand was
reiterated twice, through letters dated February 21 and March 4,
1989, respectively, to respondent company.
Thereafter, the Federation filed a Notice of Strike with the National

Conciliation and Mediation Board to compel the company to effect
the immediate termination of the expelled union officers.
On March 7, 1989, under the pressure of a threatened strike,

respondent company terminated the 30 union officers from
employment, serving them identical copies of the termination letter
reproduced below:
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We received a demand letter dated 21 November 1988 from
the United Lumber and General Workers of the Philippines
(ULGWP) demanding for your dismissal from employment
pursuant to the provisions of Article II, Section 4 of the existing
Collective Bargaining Agreement (CBA). In the said demand
letter, ULGWP informed us that as of November 21, 1988, you
were expelled from the said federation "for committing acts of
disloyalty and/or acts inimical to the interest of ULGWP and
violative to its Constitution and By-laws particularly Article V,
Section 6, 9, and 12, Article XIII, Section 8.
In subsequent letters dated 21 February and 4 March 1989, the

ULGWP reiterated its demand for your dismissal, pointing out
that notwithstanding your expulsion from the federation, you
have continued in your employment with the company in
violation of Sec. 1 and 4 of Article II of our CBA, and of existing
provisions of law.
In view thereof, we are left with no alternative but to comply

with the provisions of the Union Security Clause of our CBA.
Accordingly, we hereby serve notice upon you that we are
dismissing you from your employment with M. Greenfield, Inc.,
pursuant to Sections 1 and 4, Article II of the CBA effective
immediately.10
On that same day, the expelled union officers assigned in the first
shift were physically or bodily brought out of the company premises
by the company's security guards. Likewise, those assigned to the
second shift were not allowed to report for work. This provoked some
of the members of the local union to demonstrate their protest for
the dismissal of the said union officers. Some union members left their
work posts and walked out of the company premises.
On the other hand, the Federation, having achieved its objective,

withdrew the Notice of Strike filed with the NCMB.
On March 8, 1989, the petitioners filed a Notice of Strike with the

NCMB, DOLE, Manila, docketed as Case No. NCMB-NCR-NS-03-216-
89, alleging the following grounds for the strike:
(a) Discrimination
(b) Interference in union activities
(c) Mass dismissal of union officers and shop stewards
(d) Threats, coercion and intimidation
(e) Union busting

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The following day, March 9, 1989, a strike vote referendum was
conducted and out of 2, 103 union members who cast their votes,
2,086 members voted to declare a strike.
On March 10, 1989, the thirty (30) dismissed union officers filed an
urgent petition, docketed as Case No. NCMB-NCR-NS-03-216-89, with
the Office of the Secretary of the Department of Labor and
Employment praying for the suspension of the effects of their
termination from employment. However, the petition was dismissed
by then Secretary Franklin Drilon on April 11, 1989, the pertinent
portion of which stated as follows:
At this point in time, it is clear that the dispute at M. Greenfield

is purely an intra-union matter. No mass lay-off is evident as the
terminations have been limited to those allegedly leading the
secessionist group leaving MSMG-ULGWP to form a union under
the KMU. . . .
xxx xxx xxx
WHEREFORE, finding no sufficient jurisdiction to warrant the

exercise of our extraordinary authority under Article 277 (b) of
the Labor Code, as amended, the instant Petition is hereby
DISMISSED for lack of merit.
SO ORDERED.11
On March 13 and 14, 1989, a total of 78 union shop stewards were

placed under preventive suspension by respondent company. This
prompted the union members to again stage a walk-out and
resulted in the official declaration of strike at around 3:30 in the
afternoon of March 14, 1989. The strike was attended with violence,
force and intimidation on both sides resulting to physical injuries to
several employees, both striking and non-striking, and damage to
company properties.
The employees who participated in the strike and allegedly figured

in the violent incident were placed under preventive suspension by
respondent company. The company also sent return-to-work notices
to the home addresses of the striking employees thrice successively,
on March 27, April 8 and April 31, 1989, respectively. However,
respondent company admitted that only 261 employees were
eventually accepted back to work. Those who did not respond to
the return-to-work notice were sent termination letters dated May 17,
1989, reproduced below:
M. Greenfield Inc., (B)
Km. 14, Merville Rd., Parañaque, M.M.

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May 17, 1989
xxx xxx xxx
On March 14, 1989, without justifiable cause and without due

notice, you left your work assignment at the prejudice of the
Company's operations. On March 27, April 11, and April 21,
1989, we sent you notices to report to the Company. Inspite of
your receipt of said notices, we have not heard from you up to
this date.
Accordingly, for your failure to report, it is construed that you

have effectively abandoned your employment and the
Company is, therefore, constrained to dismiss you for said
cause.
Very truly yours,
M. GREENFIELD, INC., (B)
By:
WENZEL STEPHEN LIGOT

Asst. HRD Manager12
On August 7, 1989, the petitioners filed a verified complaint with the

Arbitration Branch, National Capital Region, DOLE, Manila, docketed
as Case No. NCR-00-09-04199-89, charging private respondents of
unfair labor practice which consists of union busting, illegal dismissal,
illegal suspension, interference in union activities, discrimination,
threats, intimidation, coercion, violence, and oppression.
After the filing of the complaint, the lease contracts on the

respondent company's office and factory at Merville Subdivision,
Parañaque expired and were not renewed. Upon demand of the
owners of the premises, the company was compelled to vacate its
office and factory.
Thereafter, the company transferred its administration and

account/client servicing department at AFP-RSBS Industrial Park in
Taguig, Metro Manila. For failure to find a suitable place in Metro
Manila for relocation of its factory and manufacturing operations,
the company was constrained to move the said departments to
Tacloban, Leyte. Hence, on April 16, 1990, respondent company
accordingly notified its employees of a temporary shutdown in
operations. Employees who were interested in relocating to
Tacloban were advised to enlist on or before April 23, 1990.
The complaint for unfair labor practice was assigned to Labor Arbiter
Manuel Asuncion but was thereafter reassigned to Labor Arbiter
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Cresencio Ramos when respondents moved to inhibit him from
acting on the case.
On December 15, 1992, finding the termination to be valid in

compliance with the union security clause of the collective
bargaining agreement, Labor Arbiter Cresencio Ramos dismissed the
complaint.
Petitioners then appealed to the NLRC. During its pendency,

Commissioner Romeo Putong retired from the service, leaving only
two commissioners, Commissioner Vicente Veloso III and Hon.
Chairman Bartolome Carale in the First Division. When Commissioner
Veloso inhibited himself from the case, Commissioner Joaquin
Tanodra of the Third Division was temporarily designated to sit in the
First Division for the proper disposition of the case.
The First Division affirmed the Labor Arbiter's disposition. With the
denial of their motion for reconsideration on January 28, 1994,
petitioners elevated the case to this Court, attributing grave abuse
of discretion to public respondent NLRC in:
I. UPHOLDING THE DISMISSAL OF THE UNION OFFICERS BY

RESPONDENT COMPANY AS VALID;
II. HOLDING THAT THE STRIKE STAGED BY THE PETITIONERS AS

ILLEGAL;
III. HOLDING THAT THE PETITIONER EMPLOYEES WERE DEEMED TO

HAVE ABANDONED THEIR WORK AND HENCE, VALIDLY
DISMISSED BY RESPONDENT COMPANY; AND
IV. NOT FINDING RESPONDENT COMPANY AND RESPONDENT

FEDERATION OFFICERS GUILTY OF ACTS OF UNFAIR LABOR
PRACTICE.
Notwithstanding the several issues raised by the petitioners and

respondents in the voluminous pleadings presented before the NLRC
and this Court, they revolve around and proceed from the issue of
whether or not respondent company was justified in dismissing
petitioner employees merely upon the labor federation's demand for
the enforcement of the union security clause embodied in their
collective bargaining agreement.
Before delving into the main issue, the procedural flaw pointed out
by the petitioners should first be resolved.
Petitioners contend that the decision rendered by the First Division of

the NLRC is not valid because Commissioner Tanodra, who is from
the Third Division, did not have any lawful authority to sit, much less

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write the ponencia, on a case pending before the First Division. It is
claimed that a commissioner from one division of the NLRC cannot
be assigned or temporarily designated to another division because
each division is assigned a particular territorial jurisdiction. Thus, the
decision rendered did not have any legal effect at all for being
irregularly issued.
Petitioners' argument is misplaced. Article 213 of the Labor Code in

enumerating the powers of the Chairman of the National Labor
Relations Commission provides that:
The concurrence of two (2) Commissioners of a division shall be

necessary for the pronouncement of a judgment or resolution.
Whenever the required membership in a division is not
complete and the concurrence of two (2) commissioners to
arrive at a judgment or resolution cannot be obtained, the
Chairman shall designate such number of additional
Commissioners from the other divisions as may be necessary.
It must be remembered that during the pendency of the case in the

First Division of the NLRC, one of the three commissioners,
Commissioner Romeo Putong, retired, leaving Chairman Bartolome
Carale and Commissioner Vicente Veloso III. Subsequently,
Commissioner Veloso inhibited himself from the case because the
counsel for the petitioners was his former classmate in law school.
The First Division was thus left with only one commissioner. Since the
law requires the concurrence of two commissioners to arrive at a
judgment or resolution, the Commission was constrained to
temporarily designate a commissioner from another division to
complete the First Division. There is nothing irregular at all in such a
temporary designation for the law empowers the Chairman to make
temporary assignments whenever the required concurrence is not
met. The law does not say that a commissioner from the first division
cannot be temporarily assigned to the second or third division to fill
the gap or vice versa. The territorial divisions do not confer exclusive
jurisdiction to each division and are merely designed for
administrative efficiency.
Going into the merits of the case, the court finds that the Complaint
for unfair labor practice filed by the petitioners against respondent
company which charges union busting, illegal dismissal, illegal
suspension, interference in union activities, discrimination, threats,
intimidation, coercion, violence, and oppression actually proceeds
from one main issue which is the termination of several employees by
respondent company upon the demand of the labor federation
pursuant to the union security clause embodied in their collective
bargaining agreement.

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Petitioners contend that their dismissal from work was effected in an
arbitrary, hasty, capricious and illegal manner because it was
undertaken by the respondent company without any prior
administrative investigation; that, had respondent company
conducted prior independent investigation it would have found that
their expulsion from the union was unlawful similarly for lack of prior
administrative investigation; that the federation cannot recommend
the dismissal of the union officers because it was not a principal
party to the collective bargaining agreement between the
company and the union; that public respondents acted with grave
abuse of discretion when they declared petitioners' dismissals as
valid and the union strike as illegal and in not declaring that
respondents were guilty of unfair labor practice.
Private respondents, on the other hand, maintain that the thirty

dismissed employees who were former officers of the federation
have no cause of action against the company, the termination of
their employment having been made upon the demand of the
federation pursuant to the union security clause of the CBA; the
expelled officers of the local union were accorded due process of
law prior to their expulsion from their federation; that the strike
conducted by the petitioners was illegal for noncompliance with the
requirements; that the employees who participated in the illegal
strike and in the commission of violence thereof were validly
terminated from work; that petitioners were deemed to have
abandoned their employment when they did not respond to the
three return to work notices sent to them; that petitioner labor union
has no legal personality to file and prosecute the case for and on
behalf of the individual employees as the right to do so is personal to
the latter; and that, the officers of respondent company cannot be
liable because as mere corporate officers, they acted within the
scope of their authority.
Public respondent, through the Labor Arbiter, ruled that the

dismissed union officers were validly and legally terminated because
the dismissal was effected in compliance with the union security
clause of the CBA which is the law between the parties. And this was
affirmed by the Commission on appeal. Moreover, the Labor Arbiter
declared that notwithstanding the lack of a prior administrative
investigation by respondent company, under the union security
clause provision in the CBA, the company cannot look into the
legality or illegality of the recommendation to dismiss by the union
nd the obligation to dismiss is ministerial on the part of the
company.13
This ruling of the NLRC is erroneous. Although this Court has ruled that
union security clauses embodied in the collective bargaining
agreement may be validly enforced and that dismissals pursuant

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thereto may likewise be valid, this does not erode the fundamental
requirement of due process. The reason behind the enforcement of
union security clauses which is the sanctity and inviolability of
contracts14 cannot override one's right to due process.
In the case of Cariño vs. National Labor Relations Commission,15 this

Court pronounced that while the company, under a maintenance
of membership provision of the collective bargaining agreement, is
bound to dismiss any employee expelled by the union for disloyalty
upon its written request, this undertaking should not be done hastily
and summarily. The company acts in bad faith in dismissing a worker
without giving him the benefit of a hearing.
The power to dismiss is a normal prerogative of the employer.

However, this is not without limitation. The employer is bound to
exercise caution in terminating the services of his employees
especially so when it is made upon the request of a labor union
pursuant to the Collective Bargaining Agreement, . . . Dismissals
must not be arbitrary and capricious. Due process must be
observed in dismissing an employee because it affects not only
his position but also his means of livelihood. Employers should
respect and protect the rights of their employees, which
include the right to labor.
In the case under scrutiny, petitioner union officers were expelled by

the federation for allegedly committing acts of disloyalty and/or
inimical to the interest of ULGWP and in violation of its Constitution
and By-laws. Upon demand of the federation, the company
terminated the petitioners without conducting a separate and
independent investigation. Respondent company did not inquire
into the cause of the expulsion and whether or not the federation
had sufficient grounds to effect the same. Relying merely upon the
federation's allegations, respondent company terminated petitioners
from employment when a separate inquiry could have revealed if
the federation had acted arbitrarily and capriciously in expelling the
union officers. Respondent company's allegation that petitioners
were accorded due process is belied by the termination letters
received by the petitioners which state that the dismissal shall be
immediately effective.
As held in the aforecited case of Cariño, "the right of an employee

to be informed of the charges against him and to reasonable
opportunity to present his side in a controversy with either the
company or his own union is not wiped away by a union security
clause or a union shop clause in a collective bargaining agreement.
An employee is entitled to be protected not only from a company
which disregards his rights but also from his own union the leadership

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of which could yield to the temptation of swift and arbitrary
expulsion from membership and mere dismissal from his job.
While respondent company may validly dismiss the employees

expelled by the union for disloyalty under the union security clause of
the collective bargaining agreement upon the recommendation by
the union, this dismissal should not be done hastily and summarily
thereby eroding the employees' right to due process, self-
organization and security of tenure. The enforcement of union
security clauses is authorized by law provided such enforcement is
not characterized by arbitrariness, and always with due process.16
Even on the assumption that the federation had valid grounds to
expel the union officers, due process requires that these union
officers be accorded a separate hearing by respondent company.
In its decision, public respondent also declared that if complainants

(herein petitioners) have any recourse in law, their right of action is
against the federation and not against the company or its officers,
relying on the findings of the Labor Secretary that the issue of
expulsion of petitioner union officers by the federation is a purely
intra-union matter.
Again, such a contention is untenable. While it is true that the issue of

expulsion of the local union officers is originally between the local
union and the federation, hence, intra-union in character, the issue
was later on converted into a termination dispute when the
company dismissed the petitioners from work without the benefit of a
separate notice and hearing. As a matter of fact, the records reveal
that the termination was effective on the same day that the
termination notice was served on the petitioners.
In the case of Liberty Cotton Mills Workers Union vs. Liberty Cotton
Mills, Inc.17, the Court held the company liable for the payment of
backwages for having acted in bad faith in effecting the dismissal of
the employees.
. . . Bad faith on the part of the respondent company may be

gleaned from the fact that the petitioner workers were
dismissed hastily and summarily. At best, it was guilty of a
tortious act, for which it must assume solidary liability, since it
apparently chose to summarily dismiss the workers at the
union's instance secure in the union's contractual undertaking
that the union would hold it "free from any liability" arising from
such dismissal.
Thus, notwithstanding the fact that the dismissal was at the instance
of the federation and that it undertook to hold the company free
from any liability resulting from such a dismissal, the company may

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still be held liable if it was remiss in its duty to accord the would-be
dismissed employees their right to be heard on the matter.
Anent petitioners contention that the federation was not a principal

party to the collective bargaining agreement between the
company and the union, suffice it to say that the matter was already
ruled upon in the Interpleader case filed by respondent company.
Med-Arbiter Anastacio Bactin thus ruled:
After a careful examination of the facts and evidences

presented by the parties, this Officer hereby renders its decision
as follows:
1.) It appears on record that in Collective Bargaining

Agreement (CBA) which took effect on July 1, 1986, the
contracting parties are M. Greenfield, Inc. (B) and Malayang
Samahan ng Mga Manggagawa sa M. Greenfield, Inc. (B)
(MSMG)/United Lumber and General Workers of the Philippines
(ULGWP). However, MSMG was not yet registered labor
organization at the time of the signing of the CBA. Hence, the
union referred to in the CBA is the ULGWP.18
Likewise on appeal, Director Pura Ferrer-Calleja put the issue to rest

as follows:
It is undisputed that ULGWP is the certified sole and exclusive

collective bargaining agent of all the regular rank-and-file
workers of the company, M. Greenfield, Inc. (pages 31-32 of
the records).
It has been established also that the company and ULGWP

signed a 3-year collective bargaining agreement effective July
1, 1986 up to June 30, 1989.19
Although the issue of whether or not the federation had reasonable

grounds to expel the petitioner union officers is properly within the
original and exclusive jurisdiction of the Bureau of Labor Relations,
being an intra-union conflict, this Court deems it justifiable that such
issue be nonetheless ruled upon, as the Labor Arbiter did, for to
remand the same to the Bureau of Labor Relations would be to
intolerably delay the case.
The Labor Arbiter found that petitioner union officers were justifiably
expelled from the federation for committing acts of disloyalty when it
"undertook to disaffiliate from the federation by charging ULGWP
with failure to provide any legal, educational or organizational
support to the local. . . . and declared autonomy, wherein they
prohibit the federation from interfering in any internal and external
affairs of the local union."20

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It is well-settled that findings of facts of the NLRC are entitled to great
respect and are generally binding on this Court, but it is equally well-
settled that the Court will not uphold erroneous conclusions of the
NLRC as when the Court finds insufficient or insubstantial evidence
on record to support those factual findings. The same holds true
when it is perceived that far too much is concluded, inferred or
deduced from the bare or incomplete facts appearing of record.21
In its decision, the Labor Arbiter declared that the act of disaffiliation
and declaration of autonomy by the local union was part of its "plan
to take over the respondent federation." This is purely conjecture and
speculation on the part of public respondent, totally unsupported by
the evidence.
A local union has the right to disaffiliate from its mother union or
declare its autonomy. A local union, being a separate and voluntary
association, is free to serve the interests of all its members including
the freedom to disaffiliate or declare its autonomy from the
federation to which it belongs when circumstances warrant, in
accordance with the constitutional guarantee of freedom of
association.22
The purpose of affiliation by a local union with a mother union or a

federation.
. . . is to increase by collective action the bargaining power in

respect of the terms and conditions of labor. Yet the locals
remained the basic units of association, free to serve their own
and the common interest of all, subject to the restraints
imposed by the Constitution and By-Laws of the Association,
and free also to renounce the affiliation for mutual welfare
upon the terms laid down in the agreement which brought it
into existence.23
Thus, a local union which has affiliated itself with a federation is free
to sever such affiliation anytime and such disaffiliation cannot be
considered disloyalty. In the absence of specific provisions in the
federation's constitution prohibiting disaffiliation or the declaration of
autonomy of a local union, a local may dissociate with its parent
union.24
The evidence on hand does not show that there is such a provision in
ULGWP's constitution. Respondents' reliance upon Article V, Section
6, of the federation's constitution is not right because said section, in
fact, bolsters the petitioner union's claim of its right to declare
autonomy:

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Sec. 6. The autonomy of a local union affiliated with ULGWP
shall be respected insofar as it pertains to its internal affairs,
except as provided elsewhere in this Constitution.
There is no disloyalty to speak of, neither is there any violation of the

federation's constitution because there is nothing in the said
constitution which specifically prohibits disaffiliation or declaration of
autonomy. Hence, there cannot be any valid dismissal because
Article II, Section 4 of the union security clause in the CBA limits the
dismissal to only three (3) grounds, to wit: failure to maintain
membership in the union (1) for non-payment of union dues, (2) for
resignation; and (3) for violation of the union's Constitution and By-
Laws.
To support the finding of disloyalty, the Labor Arbiter gave weight to

the fact that on February 26, 1989, the petitioners declared as
vacant all the responsible positions of ULGWP, filled these vacancies
through an election and filed a petition for the registration of UWP as
a national federation. It should be pointed out, however, that these
occurred after the federation had already expelled the union
officers. The expulsion was effective November 21, 1988. Therefore,
the act of establishing a different federation, entirely separate from
the federation which expelled them, is but a normal retaliatory
reaction to their expulsion.
With regard to the issue of the legality or illegality of the strike, the
Labor Arbiter held that the strike was illegal for the following reasons:
(1) it was based on an intra-union dispute which cannot properly be
the subject of a strike, the right to strike being limited to cases of
bargaining deadlocks and unfair labor practice (2) it was made in
violation of the "no strike, no lock-out" clause in the CBA, and (3) it
was attended with violence, force and intimidation upon the
persons of the company officials, other employees reporting for work
and third persons having legitimate business with the company,
resulting to serious physical injuries to several employees and
damage to company property.
On the submission that the strike was illegal for being grounded on a
non-strikeable issue, that is, the intra-union conflict between the
federation and the local union, it bears reiterating that when
respondent company dismissed the union officers, the issue was
transformed into a termination dispute and brought respondent
company into the picture. Petitioners believed in good faith that in
dismissing them upon request by the federation, respondent
company was guilty of unfair labor practice in that it violated the
petitioner's right to self-organization. The strike was staged to protest
respondent company's act of dismissing the union officers. Even if

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the allegations of unfair labor practice are subsequently found out
to be untrue, the presumption of legality of the strike prevails.25
Another reason why the Labor Arbiter declared the strike illegal is
due to the existence of a no strike no lockout provision in the CBA.
Again, such a ruling is erroneous. A no strike, no lock out provision
can only be invoked when the strike is economic in nature, i.e. to
force wage or other concessions from the employer which he is not
required by law to grant.26 Such a provision cannot be used to assail
the legality of a strike which is grounded on unfair labor practice, as
was the honest belief of herein petitioners. Again, whether or not
there was indeed unfair labor practice does not affect the strike.
On the allegation of violence committed in the course of the strike, it

must be remembered that the Labor Arbiter and the Commission
found that "the parties are agreed that there were violent incidents .
. . resulting to injuries to both sides, the union and management." 27
The evidence on record show that the violence cannot be
attributed to the striking employees alone for the company itself
employed hired men to pacify the strikers. With violence committed
on both sides, the management and the employees, such violence
cannot be a ground for declaring the strike as illegal.
With respect to the dismissal of individual petitioners, the Labor

Arbiter declared that their refusal to heed respondent's recall to work
notice is a clear indication that they were no longer interested in
continuing their employment and is deemed abandonment. It is
admitted that three return to work notices were sent by respondent
company to the striking employees on March 27, April 11, and April
21, 1989 and that 261 employees who responded to the notice were
admitted back to work.
However, jurisprudence holds that for abandonment of work to exist,

it is essential (1) that the employee must have failed to report for
work or must have been absent without valid or justifiable reason;
and (2) that there must have been a clear intention to sever the
employer-employee relationship manifested by some overt acts.28
Deliberate and unjustified refusal on the part of the employee to go
back to his work post amd resume his employment must be
established. Absence must be accompanied by overt acts
unerringly pointing to the fact that the employee simply does not
want to work anymore.29 And the burden of proof to show that there
was unjustified refusal to go back to work rests on the employer.
In the present case, respondents failed to prove that there was a

clear intention on the part of the striking employees to sever their
employer-employee relationship. Although admittedly the company
sent three return to work notices to them, it has not been

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substantially proven that these notices were actually sent and
received by the employees. As a matter of fact, some employees
deny that they ever received such notices. Others alleged that they
were refused entry to the company premises by the security guards
and were advised to secure a clearance from ULGWP and to sign a
waiver. Some employees who responded to the notice were
allegedly told to wait for further notice from respondent company as
there was lack of work.
Furthermore, this Court has ruled that an employee who took steps
to protest his lay-off cannot be said to have abandoned his work.30
The filing of a complaint for illegal dismissal is inconsistent with the
allegation of abandonment. In the case under consideration, the
petitioners did, in fact, file a complaint when they were refused
reinstatement by respondent company.
Anent public respondent's finding that there was no unfair labor

practice on the part of respondent company and federation
officers, the Court sustains the same. As earlier discussed, union
security clauses in collective bargaining agreements, if freely and
voluntarily entered into, are valid and binding. Corollary, dismissals
pursuant to union security clauses are valid and legal subject only to
the requirement of due process, that is, notice and hearing prior to
dismissal. Thus, the dismissal of an employee by the company
pursuant to a labor union's demand in accordance with a union
security agreement does not constitute unfair labor practice.31
However, the dismissal was invalidated in this case because of

respondent company's failure to accord petitioners with due
process, that is, notice and hearing prior to their termination. Also,
said dismissal was invalidated because the reason relied upon by
respondent Federation was not valid. Nonetheless, the dismissal still
does not constitute unfair labor practice.
Lastly, the Court is of the opinion, and so holds, that respondent

company officials cannot be held personally liable for damages on
account of the employees' dismissal because the employer
corporation has a personality separate and distinct from its officers
who merely acted as its agents.
It has come to the attention of this Court that the 30-day prior notice
requirement for the dismissal of employees has been repeatedly
violated and the sanction imposed for such violation enunciated in
Wenphil Corporation vs. NLRC32 has become an ineffective
deterrent. Thus, the Court recently promulgated a decision to
reinforce and make more effective the requirement of notice and
hearing, a procedure that must be observed before termination of
employment can be legally effected.

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In Ruben Serrano vs. NLRC and Isetann Department Store (G.R. No.
117040, January 27, 2000), the Court ruled that an employee who is
dismissed, whether or not for just or authorized cause but without
prior notice of his termination, is entitled to full backwages from the
time he was terminated until the decision in his case becomes final,
when the dismissal was for cause; and in case the dismissal was
without just or valid cause, the backwages shall be computed from
the time of his dismissal until his actual reinstatement. In the case at
bar, where the requirement of notice and hearing was not complied
with, the aforecited doctrine laid down in the Serrano case applies.
WHEREFORE, the Petition is GRANTED; the decision of the National

Labor Relations Commission in Case No. NCR-00-09-04199-89 is
REVERSED and SET ASIDE; and the respondent company is hereby
ordered to immediately reinstate the petitioners to their respective
positions. Should reinstatement be not feasible, respondent
company shall pay separation pay of one month salary for every
year of service. Since petitioners were terminated without the
requisite written notice at least 30 days prior to their termination,
following the recent ruling in the case of Ruben Serrano vs. National
Labor Relations Commission and Isetann Department Store, the
respondent company is hereby ordered to pay full backwages to
petitioner-employees while the Federation is also ordered to pay full
backwages to petitioner-union officers who were dismissed upon its
instigation. Since the dismissal of petitioners was without cause,
backwages shall be computed from the time the herein petitioner
employees and union officers were dismissed until their actual
reinstatement. Should reinstatement be not feasible, their
backwages shall be computed from the time petitioners were
terminated until the finality of this decision. Costs against the
respondent company.1âwphi1.nêt
SO ORDERED.
Gonzaga-Reyes, J., concur.

Melo. J., in the result.
Vitug, J., I reiterate my separate opinion in Seranno vs. NLRC (G.R.
No. 114070, 27 Jan. 2000).
Panganiban, J., I reiterate my Separate Opinion in Seranno vs. NLRC.
G.R. No. 117040 Jan 27, 2000.
FACTS:
Petitioner MSMS, (local union) is an affiliate of ULGWP (federation). A

local union election was held under the action of the federation. The
defeated candidates filed a petition for impeachment. The local
union held a general membership meeting. Several union members
failed to attend the meeting. The local union requested the
company to deduct the union fines from the wage of those union
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members who failed to attend the general membership meeting.
The Secretary General of the federation disapproved the resolution
imposing the Php50 fine. The company then
sent a reply to petitioner’s request stating it cannot deduct
fines without going against certain laws. The imposition of the fine
became the subject of a bitter disagreement between the
Federation and the local
union culminating to the latter’s declarati
on of general autonomy from the former. The federation asked the

company to stop the remittance of the
local union’s share in the education funds. The company led a

complaint of
interpleader with the DOLE. The federation called a meeting placing

the local union under trusteeship and appointing an administrator.
Petitioner union officers received letters from the administrator
requiring them to explain why they should not be removed from the
office and expelled from union membership. The officers were
expelled from the federation. The federation advised the company
of the expulsion of the 30 union officers and demanded their
separation pursuant to the Union Security Clause in the CBA. The
Federation filed a notice of strike with the NCMB to compel the
company to effect the immediate termination of the expelled union
officers. Under the pressure of a strike, the company terminated the
30 union officers from employment. The petitioners filed a notice of
strike on the grounds of discrimination; interference; mass dismissal of
union officers and shop stewards; threats, coercion and intimidation ;
and union busting. The petitioners prayed for the suspension of the
effects of their termination. Secretary Drilon dismissed the petition
stating it was an intra-union matter. Later, 78 union shop stewards
were placed under preventive suspension. The union members
staged a walk-out and officially declared a strike that afternoon. The
strike was attended by violence.
ISSUES:
1. Whether or not the company was illegal dismissal. 2. Whether or

not the strike was illegal.
3. Whether or not petitioners can be deemed to have abandoned

their work.

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HELD:
1. Yes. The charges against respondent company proceeds from

onemain issue
the termination of several employees upon the demand of the

federation pursuant to the union security clause. Although the union
security clause may be validly enforced, such must comply with due
process. In this case, petitioner union officers were expelled for
allegedly committing acts of disloyalty to the federation. The
company did not inquire into the cause of the expulsion and merely
relied upon the
federation’s allegations. The issue is not a purely intra
-union matter as it was later on converted into a termination dispute

when the company dismissed the petitioners from work without the
benefit of a separate notice and hearing. Although it started as an
intra-union dispute within the exclusive jurisdiction of the BLR, to
remand the same to the BLR would intolerably delay the case and
the Labor Arbiter could rule upon it. As to the act of disaffiliation by
the local union; it is settled that a local union has the right to
disaffiliate from its mother union in the absence of
specific provisions in the federation’s constitution prohibiting such.

There
was
no such provision in federation ULGWP’s constitution.
2. No. As to the legally of the strike; it was based on the termination

dispute and petitioners believed in good faith in dismissing them, the
company was guilty of ULP. A no-strike, no lockout provision in the
CBA can only be invoked when the strike is economic. As to the
violence, the parties agreed that the violence was not attributed to
the striking employees alone as the company itself hired men to
pacify the strikers. Such violence cannot be a ground for declaring
the strike illegal. 3. As to the dismissal of the petitioners; respondents
failed to prove that
there was abandonment absent any proof of petitioner’s intention to

sever
the employee-employer relationship

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DISMISSAL PURSUANT TO A UNION SECURITY CLAUSE
A company may validly dismiss employees expelled by the

union for disloyalty under the union security clause of the CBA upon
recommendation by the union. However, such dismissal should not
be done hastily and summarily thereby eroding the EEs’ right to due
process, self-organization and security of tenure. Even on the
assumption that the union had valid grounds to expel the union
officers, due process requires that they be accorded a separate
hearing by the company.
Even if there is a stipulation in the union security clause

whereby the union undertook the company free from any liability
resulting from such a dismissal, the company may be held liable if it
was remiss in its duty to accord the employees their right to be heard
on the matter. (Malayang Samahan ng mga Manggagawa sa M.
Greenfield v. Ramos, 28 February 2000) Dismissal, even under a
union security clause, must always be effected only after prior notice
and hearing. (Ferrer v. NLRC, 5 July 1993)
Case Digest on Malayang Samahan ng mga Manggagawa sa M.

Greenfield Case Digest on MSMG0UWP- Labor Law v. Ramos, G.R.
No. 113907, February 28, 2000- Labor Law
Q: The LA ordered petitioner to pay respondents the sum of P655,

866.41. Petitioner appealed to the NLRC with a motion for the
reduction of the supersedeas to P100,000 and thereafter posted a
cash bond of P100,000. The NLRC dismissed the appeal for
insufficiency of the bond. Petitioner said the Star Angel doctrine
should apply where the appeal may be perfected after that period
upon posting of a cash or surety bond. However, the NLRC
disagreed stating that in this case, the petitioner did not file a motion
for reduction of bond within the period but instead posted a bond in
an amount not equivalent to the monetary award. Was the motion
for the reduction of the bond filed in time?
A: Yes. That petitioner did file a motion within the period is supported
by the following:
1. The motion for reduction was stamped with the “received”

rubber stamp marker of the NLRC and indicated the date of
filing as 6.7.96.

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2. Both the motion and the appeal memorandum were sent to
respondents in one envelope and sent by registered mail under
Reg. Receipt 3576.
3. The same person notarized both the motion and the appeal on
the same date.
On the last page of their comments, respondents stated that “the

motion for reduction should be founded on meritorious
grounds.” This was found by the SC to be an implied admittance of
the receipt of the motion. Besides, respondents could just as well
have stated in their comments that no motion was filed.
National Power Corp. vs. CA (273 SCRA 419 [1997])
G.R. No. 113103 June 13, 1997
NATIONAL POWER CORPORATION, THE NATIONAL POWER

CORPORATION BOARD OF DIRECTORS, CONRADO D. DEL ROSARIO
and MARCELINO ILAO, petitioners,
vs.
THE HON. COURT OF APPEALS, HON. TOMAS V. TADEO, JR., in his
capacity as Presiding Judge, Regional Trial Court of Quezon City,
Branch 105 and GROWTH LINK, INC., respondents.
GROWTH LINK, INC., petitioner, vs. COURT OF APPEALS and NATIONAL

POWER CORPORATION, respondents.
Raising the sole issue of the illegality of the award of an exorbitant

and unconscionable amount as attorney's fees granted 1 by the
Regional Trial Court 2 in a Petition for Mandamus with Preliminary
Mandatory Injunction and Damages 3 and affirmed by the Court of
Appeals 4 in its Decisions 5 in CA-G.R. SP No. 26898, entitled, "Growth
Link, Inc. v. National Power Corporation, et al.," therein respondents-
appellants National Power Corporation (NPC), the NPC Board of
Directors, Conrado D. del Rosario and Marcelino Ilao, petition this
court to reverse said Decision "insofar as the award of attorney's fees
is concerned." 6

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Growth Link, Inc. (hereafter, Growth Link), which is the petitioner-
appellee in CA-G.R. SP No. 26898, for its part, comes before us with a
separate Petition in challenge of the same Decision which we are
asked to completely reverse, Growth Link praying 7 instead for the
affirmance in toto of the trial court decision. Growth Link's Petition is
docketed as G.R. No. 116000.
In a Resolution 8 dated September 28, 1994, we granted the Motion

for Consolidation filed by Growth Link and forthwith ordered the
consolidation of G.R. Nos. 113103 and 116000.
We proceed from the following premises:
The facts of the case as summarized by the trial court are

as follows:
1. [Growth Link] is a duly registered domestic corporation

while . . . NPC is a duly organized government corporate
entity while the individual [petitioners] are officers and/or
members of the NPC Board of Directors, except that
[petitioners] Conrado Del Rosario and Crispin T. Ubaldo
are no longer connected with . . . NPC;
(ON THE FIRST CAUSE OF ACTION):
2. That on October 23, 1984, [Growth Link] was duly

awarded Purchase Order (PO) No. 086653 to suply (sic)
NPC, subject to certain terms therein expressed, two (2)
pieces Pielstick Piston Skirt specified under Code No.
02.005.0171.00, Plate No. 6.02.005.04 at the total price of
P230,000.00;
3. That subject Piston Skirts were actually delivered to and

received by the NPC Manila (RWSS) Warehouwe (sic) on
January 16, 1985, subjected to actual visual inspection
and were found conforming to technical specifications
per PO, hence were accepted and approved for
payment;
4. That said Piston Skirts were later shipped by NPC to the

end-user, the General Santos Diesel Plant (GSDP), which
acknowledged delivery thereof as of January 29, 1985;
5. That under date 24 May 1985, four (4) months from

delivery, the following findings/observations were
allegedly reported found in said Piston Skirts, namely: (a)
damage[d]/used O-rings; (b) scratches on mid-span; (c)
scratches on top and bottom portion of skirts; (d) carbon
residue/deposit on top grove of piston skirts;

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6. That the amount of P16,879.50 was deducted by NPC
from [Growth Link's] other receivables thru PNB Check No.
102690 per NPC Credit Memo No. 030910;
7. That under date 6 March 1986, [Growth Link] was in

receipt of a letter from the then NPC President, Hon. G. Y.
Itchon, formally demanding immediate replacements of
the Piston Skirts, otherwise, NPC will be contrained (sic) to
demand the refund of P227,470 as purchase costs of the
items and P23,051 as cost of delivery . . . plus applicable
interest charges reckoned from date of receipt of NPC
payment, meanwhile said amounts are withheld from
[Growth Link's] outstanding receivables from NPC,
pending replacements with the warning that a repetition
of similar delivery or any subsequent infraction shall
amount to immediate cancellation of [Growth Link's]
accreditation with the NPC and prosecution of
appropriate legal action;
8. That as direct consequence of the pressures aforecited

and despite the actual investigation findings on the
rejected items by the foreign principal's authorized
representative . . . [Growth Link] was eventually
constrained to replace, as [it] actually did replace the
questioned piston skirts, and the rejected items shipped
back to Japan for evaluation/analysis;
ON THE SECOND CAUSE OF ACTION:
9. That under date 23 February 1984, [NPC] ordered thru

[Growth Link], under Indent Order (I.O.) No. 07600, Pielstick
Engine Pistol Rings for the Panay Diesel Power Plant (PDPP-
Dingle) per Inquiry No. F2C84-3/26-1053TR, PR No. 07381,
worth FOB Y1.87 M;
10 That subject piston rings were shipped from Japan

direct to consignee, the NPC, and were accepted and
received by the end-user, PDPP-Dingle Panay, on May 30,
1985;
11. That under date 3 June 1986, almost a year later, Mr.
Romeo A. Perlado, NPC VP-Visayas Region, addressed a
Memo to Ms. C.V. Daplas, NPC Manager, Procurement
Division, [that the Pielstick Engine Piston Rings for PDPP-
Dingle Panay under] Indent Order No. N-07600 did not
reach its normal expected life of 12,000 RH and [that Ms.
Daplas is] to . . . check and verify who was the supplier of
these materials and . . . request them to replace their

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materials, if not . . . [to] put on record that . . . this supplier
[gave] a bad supply of materials;
12. That upon the intercession of [Growth Link], the foreign

supplier of said indented piston rings telexed NPC to send
thru [Growth Link] all damaged rings/circumstantial data
for manufacturer's analysis/evaluation with further info
that other NPC orders supplied by Fuji includes [sic] the
same items per IO 7395, 7501 and 7694;
13. That acting upon the foreign supplier's telex message

aforecited, Ms. Cecilia V. Daplas, the NPC Manager,
Procurement Division, Diliman, Quezon City, in a
Memorandum dated 11 July 1986, to the NPC VP Visayas
Region, requested [for] two sets of these rings, one of
which will be sent to the manufacturer and the other for
an analysis by an independent party in the Philippines
with the further request that the rings to be sent . . . should
bear the markings of the manufacturer in order to avoid
any room for doubt or denials that the damaged rings are
their manufacture[d] [products];
14. That in his report . . . dated April 6, 1987, Naciano T.

Caballero, Manager, CMTS Department, addressed to Mr.
J.C. Guaderrama, Manager, Materials Management
Department, NPC, re: PDPP-I Pielstick Piston Rings, stated:
1. Our inspections failed to produce the

rejected pieces as there are no available
damaged piston rings at the plant to be
presented to Procurement per memo of Ms.
Cecilia V. Daplas, Manager, Procurement
Division dated 11 July 1986 addressed to VP-
VRC . . . forwarded to this office for proper
action;
2. Operating indicators and maintenance data

fail to completely show evidence that will
substantiate earlier reports of premature
damage.
15. That six (6) months later herein petitioner was in receipt
of a letter dated October 16, 1987 from NPC VP-
Administrator, Ms. P. A. Segovia (Ms. Segovia was among
those previously furnished the Caballero Report dated
April 6, 1987, to the effect that the 4 pieces of the
damaged rings are now available for release with the
demand that all rejected piston ring[s] be now

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completely replaced by genuine parts manufactured by
S.E.M.T. — licensed manufacturer);
ON [THE] THIRD CAUSE OF ACTION:
16. That under date 14 June 1986, [Growth Link] was

awarded Purchase Order (PO) No. 095435 to deliver four
(4) pieces of Right Hand Exhaust Valve Body, Part No.
02.015.0226.00; Plate No. 02.015.11 and another four (4)
pieces of Left Hand Exhaust Valve Body, Part No.
02.015.0117.00; Plate No. 02.015.12 at the NPC Old Bldg.
Port Area, Manila;
17. That upon delivery at the NPC Old Warehouse, Port

Area, Manila on October 13, 1986 subject Valve Body
were forthwith immediately rejected by the Quality
Assurance Group on ground that they are manufactured
by Fuji Diesel Co., Ltd., which is not a licensee of S.E.M.T.
Pielstick [and] that only Pielstick engine spare parts
coming from the manufacturer or its licensees shall be
accepted;
18. That the rejected exhaust valve body items still remain
at the NPC Warehouse, Port Area, Manila;
ON THE FOURTH CAUSE OF ACTION:
19. The existence of the memo of NPC's General Counsel .

. . of January 28, 1987 . . . is admitted;
ON THE FIFTH CAUSE OF ACTION:
20. Under date 12 October 1987 [Growth Link] was in

receipt of a leter (sic) dated 1 October 1987 from the . . .
then NPC President C. D. Del Rosario, that NPC is
constrained to refrain transacting business with [Growth
Link and] further alleging [that] certain subsequent
deliveries by petitioner were either rejected or found with
missing items as additional infractions, thus:
a. the 72 pieces of Screws covered by IO No.

M-08354-AA allegedly did not conform with the
dimensions of the original part;
b. the shipment consisting of washer, nut and

screw for Pielstick Engine covered by IO No. M-
07692 dated April 24, 1984 [had] four (4) missing
items out of the eight (8) items ordered;

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c. BBC Turbocharger spares covered by PO No.
096345 dated October 9, 1985 and PO No.
096626 dated November 10, 1985 [were]
rejected on March 10, 1987 by the Quality
Assurance Dept. on grounds that the items
delivered were found to be manufactured by
IHI, Japan which although a BBC licensee, was
not specified manufacturer on [Growth Link's]
bid offer;
d. Pielstick Engine spares covered by IO No. N-

08186 dated July 20, 1985 shipped direct from
Japan arrived at Aplaya, reported[ly] short-
shipped . . .
21. The existence of the Reply communication and

[Growth Link's] motion for reconsideration is admitted;
22. [Growth Link] was pre-qualified as an NPC supplier in

1982.
The following facts have also been shown:
1. Since 1982 when, as admitted, [Growth Link]

was pre-qualified as NPC supplier, up to the
time in 1987 when . . . NPC refused to do
business with petitioner, the latter had
numerous sales through public biddings with a
total value of over P60 million . . .
2. [Growth Link] was the lowest bidder and the

most advantageous bidder in several other
biddings . . . but NPC did not issue the awards.
3. As a matter [of ] procedure, NPC dealt only

with accredited suppliers and NPC recognized
[Growth Link] as duly accredited. . . .
4. At the start in 1982 [Growth Link] complied

with the accreditation requirements of NPC by
submitting voluminous documents like the
articles of incorporation of GLI, corporate
profile, appointment of [Growth Link] as
exclusive supplier and distributor of spare parts
by foreign manufacturers . . ., suppliers'
warranties . . . catalogues, company profile
and other information about foreign suppliers . .
. And, more importantly, it did not anymore
undergo the same process ad (sic) subsequent

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biddings [that Growth Link] participated in. So
that the accreditation was a continuing one
and not on a per transaction basis.
5. On February 13, 1987 NPC announced its

decision to stop transacting business with
[Growth Link] . . . and was blacklisted due to
violation of the conditions of the contract. . . .
6. The grounds for the cancellation of [Growth

Link's] accreditation . . . are three, namely:
a). that [Growth Link] supplied second hand

piston skirts;
b). that piston rings supplied by it did not reach

the required running hours;
c). that [Growth Link] supplied exhaust valve

bodies manufactured by Fuji Diesel Ltd. which
was not licensed by SEMT.
7. [Growth Link] refuted the charges in several

letters . . . and was asking for opportunity to be
heard at a formal hearing on [the] request for
reconsideration but same was not acted upon
by NPC.
8. [NPC's] witness Alejandro admitted that he

knew of instances of switching cargoes in the
Port Area of Manila (tsn, Oct. 16, 1990, p. 23).
9. On October 23, 1984, [Growth Link] was

awarded by NPC Purchase Order No. 088653 to
supply NPC two (2) pieces of Pielstick Skirt
specified under Code No. 02.005.017.00, Plate
No. 6.02.005.04 at the total price of P230,000.00
. . . These items were manufactured in Japan
by Fuji Diesel Ltd.
10. From Japan these were shipped to the

Philippines on board Everett Orient Line vessel .
. . and Bureau of Customs tagged the shipment
as brand new. . . .
11. Subject piston skirts were actually delivered

to and received by NPC Manila (RWSS)
Warehouse on January 16, 1985 and subjected
to actual visual inspection and were found

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conforming to technical specifications per PO,
hence, were accepted and approved for
payment. . . .
12. Having complied with all the terms and

conditions in the PO, [Growth Link was] paid by
. . . NPC for said piston skirts.
13. The piston skirts were shipped by NPC to

end-user, the General Santos Diesel Plant
(GSDP) and the latter rejected the items in view
of the findings made on May 24, 1985 of a)
damaged/used O-rings; b) scratches on mid-
span; c) scratches on top and bottom portion
of skirts; d) carbon residue/deposit on top
grove of piston skirts . . . .
14. On June 18, 1985 [Growth Link] notified

foreign supplier (Fuji Diesel) of the findings of
the end-user . . . Fuji sent to the Philippines its
own investigator to conduct
inspection/investigation and on August 6, 1985
said Fuji investigator submitted his findings on
the rejected piston skirts as follows:
1. The rejected/inspected items were not the

ones supplied by us for [the] following reasons:
a) Identification marks engraved on

the rejected items are different from
the standard markings of FUJI DIESEL
LTD. — the company [that]
manufactured the items . . . supplied
against [NPC's] subject order.
b) The items supplied by Fuji were

part of a production batch made up
of 16 items. Each of the 16 items was
engraved with the assigned number
within the series 65511 to 65526.
xxx xxx xxx
2. On the photographs taken of the rejected

items, [the] following were observed:
a) Reamer bolts that were part of

the Fuji supplied items were missing.

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b) Fuji did not supply nuts that were
part of the reject.
c) The presence of rust on the upper

portion of the item indicates that the
item is not new. . . .
15. Azuma Kako Co., Ltd., a third party surveyor, after

careful analysis, found that the rejected items were
second hand and not manufactured in Japan. . . .
16. On May 14, 1986 Fuji Diesel Co., Ltd., issued a

certification that (a) the two (2) pieces of Pielstick Piston
Skirts covered by PO 086653 were brand new parts
manufactured by our company; but (b) the two (2)
pieces of Piston Skirt recently returned had been identified
as products of other than [Fuji] company.
17. NPC's witness Mangosing in his report . . . noted that

the defects he found on the piston skirts delivered by
[Growth Link] were slight dents and scratches. The items . .
. received at Gen. Santos had serious defects . . . and
[were] obviously second hand. . . . .
18. In his report . . . NPC's Agcaoili stated:
. . . Closer scrutiny on the piston skirt thru the

uncovered and wide spaces between the
crating materials showed that there were no
signs of damages and/or unusual imperfections
except for slight dents on the periphery of the
piston pin hole. This was considered insignificant
and will not in any way affect the soundness of
the item.
19. NPC's Mangosing confirmed Agcaoili's findings in a

separate report, thus:
. . . The two pieces of piston skirt inspected

were packed in a single Palo China crate. The
description of the delivery was written on a
piece of plywood specifying the corresponding
Code No. and Plate No. which is similar to that
in the P.O. The piston skirts were covered with
plastic material The bolts and nuts which are
included in the delivery were similarly wrapped
with plastic material and musking [sic] tape
which is place (sic) in one of the piston skirts.

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. . . The piston skirt was provided with a wax
protective coating. A look through the open
and uncovered spaces between the piston skirt
and the crating material show[s] that the wax
protective coating is thoroughly applied.
However, scratches and dents were noted on
the pheriphery [sic] of the piston pin holes.
20. [Growth Link's] foreign suppliers, Fuji and I & N

International, are highly respected and prominent
companies . . .
21. NPC's Osilla in his report dated September 10, 1985 . . .

stated: further verification revealed that the rejected
items by GSDP were not the one[s] supplied by the
principal of Growth Link Inc.
22. As to the Pielstick Piston Rings ordered by NPC from

petitioner on February 23, 1984 under I.O. 07600 for the
Panay Diesel Power Plant (PDPP), same were shipped
from Japan direct to consignee [sic], the NPC, and were
accepted and received by the end-user, PDPP, on May
30, 1985. On June 3, 1986, or almost a year later, Romeo
A. Perlado, NPC VP-Visayas Region, addressed a Memo to
Ms. C. V. Daplas, NPC Manager, Procurement Division,
Diliman, Quezon City, that the purchased piston rings
covered by I.O. No. N-07600 did not reach its normal
expected life of 12,000 RH . . . .
23. [Growth Link's] foreign supplier of the piston rings, upon

intercession of [Growth Link], telexed NPC to send thru [it]
all damaged rings/circumstantial data for manufacturer's
analysis/evaluation . . . .
24. Engr. Naciancino T. Caballero, NPC Manager, CMTS

Dept. Visayas Regional Office, in a communication dated
April 6, 1987 to Mr. Guadarrama, NPC Manager, Materials
Management Dept. stated that: our inspection failed to
produce the rejected pieces as there are no available
damaged piston rings at the plant to be presented to
Procurement per Memo of Ms. Daplas and that operating
indicators and maintenance data fail to completely show
evidence that will substantiate reports of premature
damage . . . .
25. The alleged piston rings remained with . . . NPC . . . for

reason that NPC refuses to issue the authorization to
obtain possession of subject item with complete

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description/identification/marking for manufacturer['s]
purposes.
26. As to the exhaust valve bodies, which were delivered

to NPC Old Warehouse, Port Area, Manila, on October 13,
1986, these were rejected by NPC Quality Assurance
group on ground that they are manufactured by Fuji
Diesel Co., Ltd., which is not a licensee of S.E.M.T. Pielstick
[and] that only Pielstick engine spare parts coming from
the manufacturer or its licensees shall be accepted. But
[Growth Link] did not accept the return of the rejected
items for reason [that] there was nothing in the PO . . .
which excluded Fuji as manufacturer of the particular
items. It only required a certificate of compliance from
[the] manufacturer upon delivery which was complied
with and for reason that the manufacturer was not
specified to be S.E.M.T. or any of its licensees.
27. Petitioner submitted to NPC prequalification

documents of its supplier Fuji . . . which included a
statement of capital-production-sales tie up with Niigata
Engineering Co., Ltd. which is a licensee of SEMT for PC
type engines . . . These also show that Fuji was a licensee
of SEMT for PA type engines.
28. NPC, from 1982 to 1986, had already issued 24 orders

to Fuji valued at P28,000,000.00. . . .
[Growth Link] filed [a] petition for mandamus with

preliminary injunction and damages with the trial court on
February 8, 1988. In an order dated February 15, 1988, the
trial court required the [NPC] and other respondents
[therein] to file their Comment and/or Answer. . . .
At the hearing on February 24, 1988, the [NPC and other]

respondents [therein] and/or counsel failed to appear but
upon motion of . . . Growth Link's counsel, the latter was
allowed to present its evidence ex parte insofar as the
issuance of the writ is concerned. Thereafter, or on March
4, 1988, the court granted the issuance of the writ, subject
to the filing by petitioner of a surety bond in the amount of
P2,245,821.53 . . . However, said order of March 4, 1988
was set aside in an order dated April 18, 1988 for the
reason that [the] . . . one who received the summons . . .
[was] not authorized to receive summons for the
corporation nor the individual defendants [therein] . . .
[T]he trial court acquired jurisdiction over [them] only
upon their voluntary appearance in court on March 18,

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1988. . . . When [Growth Link] filed the bond . . . the same
was approved by the Court and the writ of preliminary
mandatory injunction was issued:
. . . directing the . . . NPC or its duly authorized

representatives to honor, comply and/or abide
with the said Purchase Orders and/or Indent
Orders mentioned in the petition as well as to
refrain, cease and desist from cancelling the
standing accreditation of [Growth Link] with
[NPC] and allow the former to participate in
any bidding or award like any other accredited
suppliers . . .
xxx xxx xxx
The trial court resolved Growth Link's application for

preliminary mandatory injunction in an order dated June
3, 1988 declaring, among others, that:
[T]here is pending [a] motion for

reconsideration dated October 20, 1987 filed
by [Growth Link] with [NPC] . . . [which denied
Growth Link's] request for reconsideration
without even investigating . . . The [NPC]
condemned [Growth Link] as a blacklisted
bidder and supplier without hearing and thus
deprived [it] of its rights without due process. . .
.
xxx xxx xxx
and ordering that:
. . . [NPC], during the pendency of said motion

for reconsideration and while the same is
unresolved finally by the Court, to temporarily
LIFT the suspension of petitioner as duly
accredited NPC supplier, CANCEL its name
from [NPC's] blacklist, and ALLOW [Growth Link]
to participate and/or submit its bid proposals at
NPC biddings, upon the same bond of
P2,245,821.53 previously filed by [Growth Link] . .
..
xxx xxx xxx
Napocor's motion for reconsideration of the aforecited

order was denied on September 27, 1988.

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xxx xxx xxx
After trial on the merits, the court a quo rendered the

decision dated September 10, 1991 in favor of petitioner
Growth Link, Inc. 9
The trial court found the NPC guilty of gross evident bad faith in its
dealings with Growth Link as its duly accredited supplier.
Consequently, it ordered the NPC and its officers and members of
the Board of Directors, to jointly and severally pay Growth Link the
following amounts:
a) P230,000.00 representing the cost of the replaced

piston skirts under P.O. No. 086653 plus 12% interest thereto
[sic] per annum from April 9, 1986 until fully paid;
b) P16,870.00 [which was] the amount deducted by [NPC]

from [Growth Link]'s outstanding collectibles, plus 12%
interest thereto [sic] per annum from November 18, 1985
until fully paid;
c) P144,000.00 for payment of items delivered under P.O.

No. 095435 plus 12% interest thereto [sic] per annum from
November 13, 1986 until fully paid;
d) P27,650.00 for payment of items delivered under P.O.

April 4, 1987 until fully paid;
e) P182,070.00 for payment of items delivered under P.O.

April 4, 1987 until fully paid;
f) P176,356.00 representing unrealized commission on the

cancelled Indent Order No. 08114 dated May 24, 1985
plus 12% interest thereto [sic] per annum from November,
1985 until fully paid;
g) P1,249,745.00 representing unrealized commission on

the Foreign Inquiry Nos. F2c84-3/5-1027 and 1028Tr for
Pielstick Engine Spares, plus 12% interest thereto [sic] per
annum from September, 1986 until fully paid;
h) P6,216,583.00 representing unrealized commissions on

various items bidded where [Growth Link] was the lowest
bidder but which was not awarded by NPC to it, plus 12%
interest thereto [sic] per annum from July, 1986 until fully
paid;

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i) P1,419,853.00 representing unpaid commission from the
disregarded lowest bid of [Growth Link's] principal on NPC
Foreign Inquiry Nos. FPS85-11/26-12AA, FPS85-11/26-121AA
and FPS85-11/6-005AA, plus 12% interest thereto [sic] per
annum from October, 1987 until fully paid;
j) P2,000,000.00 for compensatory damage[s] suffered by

petitioner due to loss of business relationship and standing
here and abroad;
k) P1,500,000.00 for moral and exemplary damages

suffered by [Growth Link];
l) P30,000.00 plus 30% of the principal amount

recoverable, as and for attorney's fees;
m) P40,000.00 as litigation expenses (premiums paid on

the injunction bond, etc.); and
n) Costs of suit. 10
Refusing to concede its solidary liability for the aforegoing amounts,

the NPC, and its officers and members of its Board of Directors
appealed the trial court's decision to the Court of Appeals and
sought its reversal on the basis of the following assignment of errors:
THE LOWER COURT GRAVELY ERRED IN FINDING NAPOCOR

GUILTY OF GROSS EVIDENT BAD FAITH;
II
THE LOWER COURT ERRED IN APPLYING ART. 1571 OF THE

CIVIL CODE;
III
THE LOWER COURT ERRED IN FINDING THAT NAPOCOR

BREACHED ITS WRIT OF PRELIMINARY INJUNCTION;
IV
THE LOWER COURT ERRED IN AWARDING THE ENTIRE

AMOUNT OF DAMAGES, MORE OR LESS, PESOS P13.2
MILLION, AS PRAYED FOR BY GROWTH LINK;

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THE LOWER COURT ERRED IN HOLDING NAPOCOR JOINTLY
AND SEVERALLY LIABLE WITH ITS OFFICERS. 11
The respondent Court of Appeals rejected the first three assigned

errors and in effect affirmed the trial court's findings of gross evident
bad faith on the part of NPC. The Court of Appeals reasoned:
. . . We find that the trial court based its conclusions of

gross evident bad faith in Napocor's dealings with
[Growth Link] on the following:
1. The writ of preliminary mandatory injunction dated

September 28, 1988 which directed NPC, among other
things, to refrain, cease or desist from cancelling the
standing accreditation of [Growth Link] with the [NPC]
and allow the former to participate in any bidding or
award like any other accredited suppliers, was honored
by NPC more in its breach than in its compliance. NPC
continued to disallow [Growth Link] to participate in any
bidding.
xxx xxx xxx
2. The question of warranty for hidden defects or implied

warranty on the quality or fitness of the items delivered by
petitioner and received by NPC could have been
avoided had NPC complied with the requirement of law .
...
NPC never filed any action against [Growth Link] within

the six months period from the delivery of the piston skirts,
piston rings, and others despite the fact that it was in
possession, control, and disposition of the items . . . and
[Growth Link] could not do anything to prevent switching,
damaging, and/or pilferage as the items are in the full
possession and control of NPC. Thus [Growth Link] was left
at the mercy of NPC who [sic] arbitrarily withheld
payment or deducted payment from other items unless
the items which NPC concluded as defective be
replaced by [Growth Link].
3. Due process was denied by NPC to [Growth Link]. NPC

just received with deaf ears and closed eyes, the several
letters of explanation of [Growth Link], and the latter's
request for reconsideration and/or investigation was
simply wastebasketed. And yet there was strong ground
[for Growth Link's] request considering that the items
alleged to be defective were not the same items
delivered or shipped by [Growth Link's] foreign supplier
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direct to NPC or NPC's end-user. But NPC condemned
[Growth Link] as a blacklisted bidder and supplier without
hearing and deprived [Growth Link) of its rights without
due process.
Additionally, We find the action of Napocor in requiring

[Growth Link] to replace the two (2) pielstick piston skirts . .
. unjustified. . . . [T]he pielstick skirts when delivered on
January 16, 1985 were inspected by the Quality Assurance
Group of Napocor itself composed of Engrs. A.C.
Mangosing, Jr. and Roberto Agcaoili whose report stated
that said piston skirts were subjected to "actual visual
inspection and were found conforming to technical
specifications per P.O." On the basis of such findings, the
piston skirts were accepted and approved for payment
and on February 25, 1985, Napocor paid Growth Link the
net amount of P227,470.00 . . . .
In the fact-finding report and verification of the delivery of

the pielstick piston skirts, We note with significance the
findings of R. E. Agcaoili, Chief Engineer, Inspection/Test of
Napocor as approved by L. F. Osilla, Manager of Napocor
Assurance Group Utility Operations, that the delivered
items are definitely piston skirts intended for Pielstick Diesel
engine for Gen. Santos Plant; both items (in one crate)
appeared new; they were adequately provided with
protective wax coating and further preserved with
pellucid plastic sheet wrappers; closer scrutiny on the
piston skirt . . . showed that there were no signs of
damages and/or unusual imperfection except for slight
dents on the pheriphery [sic] of the piston pin hole which
was considered insignificant and will not in any way affect
the soundness of the item. . . . When these pielstick piston
skirts arrived at the Gen. Santos Diesel Plant and re-
inspected . . . the inspection report of Mr. Padilla stated
that the delivered items were second hand and with
damages, hence, they were rejected by the end-user
and reshipped to Manila . . . .
During the negotiations with Napocor, Mr. Teodoro Miguel

of Growth Link committed to replace the rejected items . .
. otherwise, Growth Link would be required to refund the
amount of P227,470.00. On top of that, Napocor
deducted the sum of P16,870.50 from [Growth Link's]
outstanding collectibles as evidenced by PNB Check No.
102690 per NPC Credit Memo No. 030910.

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. . . [Growth Link] was [also] made to answer for an
alleged discrepancy in the Pielstick Engine Piston Rings for
the Panay Diesel Power Plant (PDPP-Dingle) which . . . was
shipped from Japan direct to Napocor and accepted
and received by the end-user on May 30, 1985 but was
questioned after a year later on June 3, 1986 by Mr.
Romeo Perlado, NPC VP-Visayas Region claiming that
said piston rings "did not reach its normal expected life of
12,000 RH" and requested that they be replaced,
otherwise, they will put on record that its supplier has a
bad supply
of materials. [Growth Link] was treated similarly by
Napocor with regard to . . . (4) pieces of Right Hand
Exhaust Valve Body which, upon delivery to NPC's old
warehouse at Port Area, Manila on October 13, 1986,
were immediately rejected by the Quality Assurance
Group on the ground that they were manufactured by
Fuji Diesel Co., Ltd., which is not a licensee of S.E.M.T.
The above instances are in addition to the grounds

mentioned by the trial court as constitutive of the pressure
imposed by Napocor upon [Growth Link]. Because of the
admission of Napocor's witness, A.C. Mangosing, Jr. that
he knew of instances of switching cargoes in the Port of
Manila . . . We cannot fault [Growth Link] for entertaining
the idea that there was a switching of the brand new
pielsticks with old ones considering the lapse of time
between the delivery and the rejection . . . coupled with
the fact that when they were originally landed and
inspected, the same were found by Napocor's own
engineers to be brand new . . . We, therefore, agree and
affirm the lower court's findings that Napocor's gross
evident bad faith was reflected in the aforecited actions
taken against [Growth Link].
Moreover, We find no merit in Napocor's contention that

the trial court erred in applying Art. 1571 of the Civil Code.
. . . . . . We cannot accept this argument especially
considering that the facts clearly show that the pielsticks
piston skirts in question when delivered to Napocor were
inspected, accepted and certified to by Napocor's
representatives as brand new and in accordance with its
P.O. No. 086653. As a matter of fact, that shipment was
recommended for payment and was actually paid for by
Napocor. Moreover, the manufacturer's certificate of
authenticity and warranty cited by Napocor that allows a
rejected item to be returned for repair and replacement
provides that the "claims (of defect) must be reported

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within a reasonable period from the date of delivery"
precisely to prevent a substitution of the thing delivered . .
..
On the question of the lower court's findings that the

Napocor breached its writ of preliminary injunction,
another factor upon which the lower court based its
finding that Napocor committed gross evident bad faith,
We only have to cite by reference that portion of the
decision appealed from . . . . Additionally, on the basis of
the facts established, it can readily be seen that Napocor
virtually dragged its feet to thwart the effectivity of the
writ of preliminary mandatory injunction issued by the
lower court.
But while the respondent appellate court affirmed the trial court's
finding of gross evident bad faith on the part of NPC, it reversed the
trial court insofar as it found NPC liable for amounts claimed by
Growth Link to be unrealized commissions properly accruing to them
had the NPC recognized them as the lowest and most
advantageous bidder under several foreign inquiries. The Court of
Appeals ruled:
An invitation to bid is not an offer which, if accepted,

matures into a contract. In the language of Article 1326 of
the Civil Code, "advertisements for bidders are simply
invitations to make proposals, and the advertiser is not
bound to accept the highest or lowest bidder, unless the
contrary appears." The reservation in the Invitation to Bid,
of the advertiser's right "to reject any and all bids" is one of
the terms and conditions therein which the bidder has
accepted (Surigao Mineral Reservation Board vs. Cloribel,
24 SCRA 491) and such reservation does not make it
obligatory for a government agency to award its contract
to the lowest bidder (C & C Commercial Corp. vs. Menor,
120 SCRA 112).
Under the guidance of the aforecited authorities, We find

no justification for the award given by the trial court to
[Growth Link] in paragraphs "g", "h", and "i" of the decision
appealed from, which supposedly represent commissions
unrealized by [Growth Link] on the basis of mere Foreign
Inquiries for the reason that unlike Purchase or Indent
Orders which are the result of approved bids and,
therefore, give the winning bidder a vested right to its
earnings and commissions arising therefrom, [Foreign
Inquiries] as mere invitations to make offers or proposals,
do not, by itself, produce a contract that would ensure

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earnings and/or commissions for the bidder. Hence, the
amounts awarded by the trial court merely on the basis of
[Growth Link's] various unapproved bids are too
speculative and uncertain to justify the awards. 12
As to the awards for compensatory, moral and exemplary damages,

the respondent Court of Appeals found valid basis therefor under
the circumstances of these consolidated cases, but respondent
appellate court was no less struck by the enormity of the amounts
awarded by the trial court as damages. Thus it reduced the same in
this wise:
. . . [W]hile we affirm the findings and conclusion of the

trial court as valid basis of the award for damages, We
find the awards of P2,000,000.00 and P1,500,000.00 for
compensatory damages and for moral and exemplary
damages, respectively, to be too huge, under the
circumstances of this case that calls for this court's duty to
tone down petitioner's fantastic claims (Baluyot vs. Lopez,
51 O.G. #2, p. 784). They are, therefore, hereby reduced
to P1,000,000.00 for compensatory damages and to
P500,000.00 for moral and exemplary damages.
Likewise finding NPC's objection to the trial court's finding of solidary

liability to be justified, considering that the officers and members of
the Board of Directors of NPC were sued in their official capacities,
the respondent Court of Appeals held:
Finally, We find that the lower court erred in holding the

individual respondents "jointly and severally" liable with
Napocor. It is significant to point out that both the original
Petition and Amended Petition for Mandamus filed by
[Growth Link], contain identical allegations in identifying
the individual respondents in this case, thus:
2. Respondent, NATIONAL POWER CORPORATION . . . ;

Respondents-Members of the NPC Board of Directors;
HON. EDGARDO B. ESPIRITU . . . is being sued in his official
capacity as Chairman of the NPC Board of Directors;
HON. ERNESTO M. ABOITIZ . . . is being sued in his official
capacity as the Vice-Chairman of the NPC Board of
Directors and President of the Respondent firm; HON.
JUANITO N. FERRER, HON. NESTOR M. NOGUERRA, HON.
CRISPIN T. UBALDO and HON. DOMINGO R. VIDANES . . .
are being sued in their official capacities as Members of
the NPC Board of Directors . . . ; Respondent, HON.
CONRADO D. DEL ROSARIO . . . is being sued in his former
official capacities as Vice-Chairman of the NPC Board

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and President of Respondent firm . . . ; and Respondent,
MARCELINO ILAO . . . is being sued in his official capacity
as NPC vice-President-General Counsel . . . .
xxx xxx xxx
While the Amended Petition added the words "or

respondents" to its prayer that the trial court order
respondent corporation to pay the amounts claimed
therein, there is no allegation whatsoever that would
justify the imposition of a "joint and several" liability with
(Napocor) of the individual respondents who, as officers
of Napocor, were being sued in their respective official
capacities. Neither did petitioner show, much less claim,
any circumstance which would necessitate the piercing
of Napocor's corporate veil so as to make the individual
respondents personally liable for Napocor's obligations. 13
From the Decision of the Court of Appeals, both Growth Link and the
NPC and its officers and members of the Board of Directors invoke
this court's review powers: Growth Link prays for the restoration of the
amounts awarded by the trial court as unrealized commissions in
bids where it was the lowest and most advantageous bidder but
which were disregarded in the face of NPC's unilateral and arbitrary
blacklisting of Growth Link, for the upgrading of the amounts
granted as compensatory, moral and exemplary damages to their
original amounts as awarded by the trial court and for the
reinstatement of the finding of solidary liability among NPC and its
officers and members of the Board of Directors; while NPC prays only
for the reduction of the amount granted as and by way of attorney's
fees, which prayer, we should point out, is significantly premised on
the acceptance of all the other findings and conclusions of the
Court of Appeals, including its affirmance of the trial court's finding of
gross evident bad faith on the part of NPC.
We find the instant consolidated petitions to be both wanting in

merit.
G.R. No. 113103
A cursory review of the above errors raised by the NPC before the
Court of Appeals, shows that the NPC never assigned the issue of the
exorbitant amount awarded to Growth Link as and by way of
attorney's fees, as an error on appeal. Thus, insofar as the amount of
the attorney's fees granted by the trial court is concerned, the same
must be deemed no longer open to modification, much less,
reduction, the person supposedly aggrieved thereby having
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resonantly been silent on this issue in its appeal before the
respondent court.
At any rate, this court, in at least two (2) occasions, has allowed an
award of 20% 14 to 25% 15 of the total indebtedness involved in the
litigation. In fact, the NPC cites these cases in its Petition.
In this case, Growth Link prayed for and was awarded by the trial
court, the amount of P30,000.00 and 30% of the amount
recoverable, as and by way of attorney's fees. While said amount
may itself be huge by ordinary standards, we believe that the same
is warranted when tested against the criteria that serve as
reglementary guide for the courts to determine the proper amount
of attorney's fees due the winning party.
Thus, we agree with Growth Link when it pleads that:
We take the citations as an implied admission by [the

NPC] that an award of 25% of the obligation, is not in itself
gargantuan, exorbitant and unconscionable. The matter
of 5% differential will not make it so, if we consider the
complexities of the instant case, the determination, now
conclusive, that [the NPC] acted with gross and evident
bad faith, in blacklisting private respondent . . . .
The determination of amount of attorney's fees largely

depends on the court's discretion. So long as it has sound
basis, it will not be interfered with. . . .
Here the lower court was further guided by the complex

nature of this case, involving as it did several causes of
action each of which proved difficult to establish, and
made more so by petitioner's sustained albeit unjustified,
resistance. . . .
Thus this suit was a compelled recourse against arbitrary

and capricious conduct and the denial of the
rudimentary requirements of due process. 16
Anent the claim of NPC that the decision of the trial court does not
contain any discussion of the basis for the award of attorney's fees,
suffice it to say that the trial court undisputedly awarded exemplary
damages, which award is itself a legal justification, under Article 2208
17 of the Civil Code, for the award of attorney's fees.
II
G.R. No. 116000

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First. Growth Link insists that the decision of the trial court should be
deemed final and executory insofar as NPC's officers and members
of the Board of Directors are concerned, because they did not
appeal the trial court's decision. Growth Link specifically cites the
Notice of Appeal filed by the NPC to be personal only to the NPC.
This submission, however, is, in the first place, belied by the caption
of the Notice of Appeal in question, which states, "NATIONAL POWER
CORPORATION, ET AL., Respondents." This same caption can be
found in NPC's Motion for Reconsideration. Significantly, Growth Link's
Opposition to the Motion for Reconsideration made reference to the
NPC officers and members of the Board of Directors, in its arguments.
At any rate, technicalities that defeat substantial justice are, by this
court's policy, an unpreferred basis to deprive parties of their
statutory right to appeal a decision that is fatally flawed in certain
respects.
In the second place, the finding of solidary liability among the NPC
and its officers and members of the Board of Directors, is patently
baseless. The decision of the trial court contains no such allegation,
finding or conclusion regarding particular acts committed by said
officers and members of the Board of Directors that show them to
have been individually guilty of unmistakable malice, bad faith, or ill-
motive in their personal dealings with Growth Link. In fact, it was only
in the dispositive portion of the decision of the court a quo that
solidary liability as such was first mentioned.
NPC's officers and members of the Board of Directors were sued

merely as nominal parties in their official capacities as such. They
were impleaded by Growth Link not in their personal capacities as
individuals but in their official capacities as officers and members of
the Board of Directors through whom the NPC conducts business
and undertakes its operations pursuant to its avowed corporate
purposes. Therefore, as a bonafide government corporation, NPC
should alone be liable for its corporate acts as duly authorized by its
officers and directors. 18
This is so, because a corporation "is invested by law with a

separate personality, separate and distinct from that of
the persons composing it as well as from any other legal
entity to which it may be related." (Tan Boon Bee & Co.,
Inc. v. Jarencio, 163 SCRA 205 [1988] citing Yutivo and
Sons Hardware Company v. Court of Tax Appeals, 1 SCRA
160 [1961]; Emilio Cano Enterprises, Inc. v. Court of
Industrial Relations, 13 SCRA 290 [1965]). A corporation is
an artificial person and can transact its business only
through its officers and agents. Necessarily, somebody has
to act for it. The separate personality of the corporation

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may be disregarded, or the veil of corporate fiction
pierced and the individual stockholders may be
personally liable to obligations of the corporation only
when the corporation is used "as a cloak or cover for
fraud or illegality, or to work an injustice, or where
necessary to achieve equity or when necessary for the
protection of creditors." (Sulo ng Bayan, Inc. v. Araneta,
Inc., 72 SCRA 347 [1976] . . . ). 19
We repeat, there was nothing in Growth Link's petition nor in the

mass of evidence proffered, before the court a quo that established
the factual or legal basis to hold the officers and members of the
Board of Directors of the NPC jointly and severally liable with the NPC
for the damages suffered by Growth Link because of acts of gross
evident bad faith on the part of the NPC as a corporate entity
acting through its officers and directors. The records even bear out
that every single offense taken by the NPC against Growth Link arose
from a corporate decision and was executed as a corporate act.
Thus, the trial court gravely erred in holding said officers and directors
to be jointly and severally liable with the NPC for the damages
suffered by Growth Link but caused by the NPC alone as a
corporate entity.
Second. Growth Link takes exception to the reduction made by the

respondent Court of Appeals of the award for compensatory, moral
and exemplary damages. It submits that "the damages awarded by
the lower court are not even adequate compensation for the injuries
visited upon petitioner by the precipitate and irresponsible conduct
of private respondent" and that the amounts as determined by the
trial court were "even conservative in view of the demonstrated
income-potential of petitioner."
We empathize with Growth Link, especially with its owner-president,

Teodoro Miguel, whose sincere testimony as to the irreparable
damage wrought on his business and personal reputation by NPC's
act of blacklisting his company, does call for some reparation in the
form of substantial damages.
However, substantial damages do not translate into excessive

damages. It is well-settled that the award of damages as well as
attorney's fees lies upon the discretion of the court in the context of
the facts and circumstances of each
case, 20 and this judicial discretion is largely addressed towards
tempering any tendency to award excessive damages so much so
that it stands vulnerable to and actually magnetizes, attacks as to its
being a result of passion, prejudice or corruption.

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Two million pesos (P2,000,000.00) as compensatory damages and
one and a half million pesos (P1,500,000.00) as moral and exemplary
damages, are too much. While NPC may be accountable for lost
profits that Growth Link may have gained from its dealings with the
NPC itself, NPC cannot be made to bear the burden of answering
for what other profits that Growth Link may have earned from other
contracts with other companies. NPC may have accredited Growth
Link as a supplier, but it did not thereby become Growth Link's insurer
for all and any profitable contracts that Growth Link may obtain.
Thus, we find the reduction of the awards of damages by the
respondent Court of Appeals, to be warranted under the facts and
circumstances of the instant case.
Third. Growth Link contests the deletion by the respondent Court of

Appeals of the awards made by the trial court for unrealized
commissions from bids disregarded by the NPC albeit Growth Link
was the lowest and most advantageous bidder, on the ground that
the said amounts were "too speculative and uncertain". Growth Link
cites two (2) reasons: first, that the NPC admitted its liability for such
unrealized commissions in its Answer; and second, that the basis for
the unrealized commissions was not necessarily contract but quasi-
delict.
We disagree.
Growth Link insists that because the NPC allegedly, in its Answer,
failed to deny the claims for unrealized commissions as laid out in
Growth Link's petition, it had, in effect, admitted the existence and
merit of such claims. Growth Link apparently relied on the general
rule that non-denial of allegations in the complaint results in
admissions thereof. This rule, however, is, just like any other rule, not
absolute and correspondingly admits of exceptions.
. . . [I]n spite of the presence of judicial admissions in a

party's pleading, the trial court is still given leeway to
consider other evidence presented. This rule should apply
with more reason when the parties had agreed to submit
an issue for resolution of the trial court on the basis of the
evidence presented. 21
Statements made in an Answer are merely statements of fact

which the party filing it expects to prove, but they are not
evidence. With more reason, statements made in the
complaint, or in this case, in the Petition for Mandamus with
Preliminary Mandatory Injunction and Damages, which are not
directly refuted in the Answer, are deemed admissions but
neither are they evidence that will prevail over documentary
proofs.

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Assuming arguendo that the NPC did not deny the claims for
unrealized commissions as alleged by Growth Link in its mandamus
petition with damages, and that consequently these claims have
been transmuted into judicial admissions, these admissions cannot
still prevail over the rules and regulations governing the bidding for
NPC contracts, which necessarily and inherently include the
reservation by the NPC of its right to reject any or all bids. By its own
assertion, Growth Link has been a regular bidder for NPC contracts. It
cannot deny, much less pretend ignorance of, the reserved
discretion of the NPC to accept or reject any bid. Neither could
Growth Link have forgotten the well-settled rule that this discretion is
of such wide latitude that the courts will not generally interfere with
the exercise thereof by the government, unless it is apparent that it is
used as a shield to a fraudulent award 22 or an unfairness or injustice
is clearly shown. 23
We thus quote, with approval, the following postulations of the

Solicitor General, in behalf of the NPC:
Clearly, it is not NAPOCOR's ministerial duty to make an

automatic award to [Growth Link] even if it was the lowest
bidder. As aforesaid, NAPOCOR reserved the "right to
reject the bid of any bidder." Thus, [Growth Link] has no
cause of action . . . . . . Mandamus will not lie to compel
the acceptance of the bid of an unsuccessful bidder
(Borromeo vs. City of Manila, et al., 62 Phil. 512 [1935]).
By participating in the public bidding, after NAPOCOR

was ordered to cease from cancelling [Growth Link's]
accreditation and to allow the latter to participate in any
bidding, [Growth Link] submitted itself to the conditions
laid down by NAPOCOR, among which is the reservation
of its right to reject any and all bids to be made therein. . .
.
Furthermore, Sec. 393 of the National Accounting and

Auditing Manual provides:
Sec. 393. Reservation of rights to reject any or all bids. —

The contract will be awarded to the contractor whose
proposal appears to be the most advantageous to the
Government, but the right shall be reserved to reject any
or all bids, to waive any informality in the bids received,
and to accept or reject any items of any bid unless such
bid is qualified by specific limitations; also to disregard the
bid of any failing bidder, known as such to the agency
head or director, or any bid which is obviously
unbalanced or below what the work can be done for. The

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right shall also be reserved to reject the bid of a bidder
who has previously failed to perform properly or complete
on time contracts of a similar nature, or a bid of a bidder
who is not in a position to perform the contract. . . .
In fine, NAPOCOR has the right to reject any and all bids,
not only of [Growth Link] but of all other bidders, as well, if
warranted. 24
And then there is Growth Link's submission that its claims for
unrealized commissions are made proceeding not from facts
founded on contract but from facts establishing NPC's culpability
under quasi-delict.
We, however, find no allegation in Growth Link's petition, no factual

finding in the decision of the trial court and no error assigned before
the Court of Appeals, as to anything about NPC's liability for
unrealized commissions based on quasi-delict. We are hardly
surprised, however, by this change of theory at this belated stage of
the proceedings, because Growth Link indeed has no perfected
contract whatsoever to show in order to prove that its claims for
unrealized commissions are anything more than an attempt to
collect on mere proposal-bids that may have been the lowest and
most advantageous in their class but nonetheless remain subject to
the explicit reservation by the NPC of its prerogative to reject any or
all bids.
All told, we find the Decision of the Court of Appeals in CA-G.R SP

No. 26898 to have been rendered in accordance with the
applicable law and jurisprudence.
WHEREFORE, the instant consolidated petitions are HEREBY DISMISSED

for lack of merit.
SO ORDERED.
Bellosillo, Vitug and Kapunan, JJ., concur.
Padilla, J., is on leave.
Security Bank vs. Cuenca (341 SCRA 781, 804 [2000])

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G.R. No. 138544 October 3, 2000
SECURITY BANK AND TRUST COMPANY, Inc., petitioner,

vs.
RODOLFO M. CUENCA, respondent.
DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly

construed against the creditor, and every doubt is resolved in favor
of the solidary debtor. The fundamental rules of fair play require the
creditor to obtain the consent of the surety to any material alteration
in the principal loan agreement, or at least to notify it thereof.
Hence, petitioner bank cannot hold herein respondent liable for
loans obtained in excess of the amount or beyond the period
stipulated in the original agreement, absent any clear stipulation
showing that the latter waived his right to be notified thereof, or to
give consent thereto. This is especially true where, as in this case,
respondent was no longer the principal officer or major stockholder
of the corporate debtor at the time the later obligations were
incurred. He was thus no longer in a position to compel the debtor to
pay the creditor and had no more reason to bind himself anew to
the subsequent obligations.
The Case
This is the main principle used in denying the present Petition for
Review under Rule 45 of the Rules of Court. Petitioner assails the
December 22, 1998 Decision1 of the Court of Appeals (CA) in CA-GR
CV No. 56203, the dispositive portion of which reads as follows:
"WHEREFORE, the judgment appealed from is hereby amended in

the sense that defendant-appellant Rodolfo M. Cuenca [herein
respondent] is RELEASED from liability to pay any amount stated in
the judgment.
"Furthermore, [Respondent] Rodolfo M. Cuenca’s counterclaim is

hereby DISMISSED for lack of merit.
"In all other respect[s], the decision appealed from is AFFIRMED."2
Also challenged is the April 14, 1999 CA Resolution,3 which denied


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Modified by the CA was the March 6, 1997 Decision4 of the Regional
Trial Court (RTC) of Makati City (Branch 66) in Civil Case No. 93-1925,
which disposed as follows:
"WHEREFORE, judgment is hereby rendered ordering defendants Sta.

Ines Melale Corporation and Rodolfo M. Cuenca to pay, jointly and
severally, plaintiff Security Bank & Trust Company the sum of
P39,129,124.73 representing the balance of the loan as of May 10,
1994 plus 12% interest per annum until fully paid, and the sum of
P100,000.00 as attorney’s fees and litigation expenses and to pay the
costs.
SO ORDERED."
The Facts
The facts are narrated by the Court of Appeals as follows:5
"The antecedent material and relevant facts are that defendant-

appellant Sta. Ines Melale (‘Sta. Ines’) is a corporation engaged in
logging operations. It was a holder of a Timber License Agreement
issued by the Department of Environment and Natural Resources
(‘DENR’).
"On 10 November 1980, [Petitioner] Security Bank and Trust Co.

granted appellant Sta. Ines Melale Corporation [SIMC] a credit line
in the amount of [e]ight [m]llion [p]esos (P8,000,000.00) to assist the
latter in meeting the additional capitalization requirements of its
logging operations.
"The Credit Approval Memorandum expressly stated that the P8M

Credit Loan Facility shall be effective until 30 November 1981:
‘JOINT CONDITIONS:
‘1. Against Chattel Mortgage on logging trucks and/or inventories

(except logs) valued at 200% of the lines plus JSS of Rodolfo M.
Cuenca.
‘2. Submission of an appropriate Board Resolution authorizing the

borrowings, indicating therein the company’s duly authorized
signatory/ies;
‘3. Reasonable/compensating deposit balances in current account

shall be maintained at all times; in this connection, a Makati account
shall be opened prior to availment on lines;
‘4. Lines shall expire on November 30, 1981; and

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‘5. The bank reserves the right to amend any of the aforementioned
terms and conditions upon written notice to the Borrower.’ (Emphasis
supplied.)
"To secure the payment of the amounts drawn by appellant SIMC

from the above-mentioned credit line, SIMC executed a Chattel
Mortgage dated 23 December 1980 (Exhibit ‘A’) over some of its
machinery and equipment in favor of [Petitioner] SBTC. As additional
security for the payment of the loan, [Respondent] Rodolfo M.
Cuenca executed an Indemnity Agreement dated 17 December
1980 (Exhibit ‘B’) in favor of [Petitioner] SBTC whereby he solidarily
bound himself with SIMC as follows:
xxx xxx xxx
‘Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and

severally with the client (SIMC) in favor of the bank for the payment,
upon demand and without the benefit of excussion of whatever
amount x x x the client may be indebted to the bank x x x by virtue
of aforesaid credit accommodation(s) including the substitutions,
renewals, extensions, increases, amendments, conversions and
revivals of the aforesaid credit accommodation(s) x x x .’ (Emphasis
supplied).
"On 26 November 1981, four (4) days prior to the expiration of the
period of effectivity of the P8M-Credit Loan Facility, appellant SIMC
made a first drawdown from its credit line with [Petitioner] SBTC in the
amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00). To cover said drawdown, SIMC duly executed
promissory Note No. TD/TLS-3599-81 for said amount (Exhibit ‘C’).
"Sometime in 1985, [Respondent] Cuenca resigned as President and

Chairman of the Board of Directors of defendant-appellant Sta. Ines.
Subsequently, the shareholdings of [Respondent] Cuenca in
defendant-appellant Sta. Ines were sold at a public auction relative
to Civil Case No. 18021 entitled ‘Adolfo A. Angala vs. Universal
Holdings, Inc. and Rodolfo M. Cuenca’. Said shares were bought by
Adolfo Angala who was the highest bidder during the public
auction.
"Subsequently, appellant SIMC repeatedly availed of its credit line

and obtained six (6) other loan[s] from [Petitioner] SBTC in the
aggregate amount of [s]ix [m]illion [t]hree [h]undred [s]ixty-[n]ine
[t]housand [n]ineteen and 50/100 [p]esos (P6,369,019.50).
Accordingly, SIMC executed Promissory Notes Nos. DLS/74/760/85,
DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86, and
DLS/74/47/86 to cover the amounts of the abovementioned
additional loans against the credit line.

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"Appellant SIMC, however, encountered difficulty6 in making the
amortization payments on its loans and requested [Petitioner] SBTC
for a complete restructuring of its indebtedness. SBTC
accommodated appellant SIMC’s request and signified its approval
in a letter dated 18 February 1988 (Exhibit ‘G’) wherein SBTC and
defendant-appellant Sta. Ines, without notice to or the prior consent
of [Respondent] Cuenca, agreed to restructure the past due
obligations of defendant-appellant Sta. Ines. [Petitioner] Security
Bank agreed to extend to defendant-appellant Sta. Ines the
following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred

[t]housand [p]esos (P8,800,000.00), to be applied to liquidate the
principal portion of defendant-appellant Sta. Ines[‘] total
outstanding indebtedness to [Petitioner] Security Bank (cf. P. 1 of
Exhibit ‘G’, Expediente, at Vol. II, p. 336; Exhibit ‘5-B-Cuenca’,
Expediente, et Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred

[t]housand [p]esos (P3,400,000.00), to be applied to liquidate the
past due interest and penalty portion of the indebtedness of
defendant-appellant Sta. Ines to [Petitioner] Security Bank (cf. Exhibit
‘G’, Expediente, at Vol. II, p. 336; Exhibit ‘5-B-Cuenca’, Expediente,
at Vol. II, p. 33 to 34).’
"It should be pointed out that in restructuring defendant-appellant

Sta. Ines’ obligations to [Petitioner] Security Bank, Promissory Note
No. TD-TLS-3599-81 in the amount of [s]ix [m]illion [o]ne [h]undred
[t]housand [p]esos (P6,100,000.00), which was the only loan incurred
prior to the expiration of the P8M-Credit Loan Facility on 30
November 1981 and the only one covered by the Indemnity
Agreement dated 19 December 1980 (Exhibit ‘3-Cuenca’,
Expediente, at Vol. II, p. 331), was not segregated from, but was
instead lumped together with, the other loans, i.e., Promissory Notes
Nos. DLS/74/12/86, DLS/74/28/86 and DLS/74/47/86 (Exhibits ‘D’, ‘E’,
and ‘F’, Expediente, at Vol. II, pp. 333 to 335) obtained by
defendant-appellant Sta. Ines which were not secured by said
Indemnity Agreement.
"Pursuant to the agreement to restructure its past due obligations to

[Petitioner] Security Bank, defendant-appellant Sta. Ines thus
executed the following promissory notes, both dated 09 March 1988
in favor of [Petitioner] Security Bank:
PROMISSORY NOTE NO. AMOUNT
RL/74/596/88 P8,800,000.00

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RL/74/597/88 P3,400,000.00
TOTAL P12,200,000.00
(Exhibits ‘H’ and ‘I’, Expediente, at Vol. II, pp. 338 to 343).
"To formalize their agreement to restructure the loan obligations of

defendant-appellant Sta. Ines, [Petitioner] Security Bank and
defendant-appellant Sta. Ines executed a Loan Agreement dated
31 October 1989 (Exhibit ‘5-Cuenca’, Expediente, at Vol. I, pp. 33 to
41). Section 1.01 of the said Loan Agreement dated 31 October 1989
provides:
‘1.01 Amount - The Lender agrees to grant loan to the Borrower in

the aggregate amount of TWELVE MILLION TWO HUNDRED
THOUSAND PESOS (P12,200,000.00), Philippines [c]urrency (the
‘Loan’). The loan shall be released in two (2) tranches of
P8,800,000.00 for the first tranche (the ‘First Loan’) and P3,400,000.00
for the second tranche (the ‘Second Loan’) to be applied in the
manner and for the purpose stipulated hereinbelow.
‘1.02. Purpose - The First Loan shall be applied to liquidate the

principal portion of the Borrower’s present total outstanding
indebtedness to the Lender (the ‘indebtedness’) while the Second
Loan shall be applied to liquidate the past due interest and penalty
portion of the Indebtedness.’ (Underscoring supplied.) (cf. p. 1 of
Exhibit ‘5-Cuenca’, Expediente, at Vol. I, p. 33)
"From 08 April 1988 to 02 December 1988, defendant-appellant Sta.

Ines made further payments to [Petitioner] Security Bank in the
amount of [o]ne [m]illion [s]even [h]undred [f]ifty-[s]even [t]housand
[p]esos (P1,757,000.00) (Exhibits ‘8’, ‘9-P-SIMC’ up to ‘9-GG-SIMC’,
Expediente, at Vol. II, pp. 38, 70 to 165)
"Appellant SIMC defaulted in the payment of its restructured loan

obligations to [Petitioner] SBTC despite demands made upon
appellant SIMC and CUENCA, the last of which were made through
separate letters dated 5 June 1991 (Exhibit ‘K’) and 27 June 1991
(Exhibit ‘L’), respectively.
"Appellants individually and collectively refused to pay the

[Petitioner] SBTC. Thus, SBTC filed a complaint for collection of sum of
money on 14 June 1993, resulting after trial on the merits in a decision
by the court a quo, x x x from which [Respondent] Cuenca
appealed."

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In releasing Respondent Cuenca from liability, the CA ruled that the

1989 Loan Agreement had novated the 1980 credit
accommodation earlier granted by the bank to Sta. Ines.
Accordingly, such novation extinguished the Indemnity Agreement,
by which Cuenca, who was then the Board chairman and president
of Sta. Ines, had bound himself solidarily liable for the payment of the
loans secured by that credit accommodation. It noted that the 1989
Loan Agreement had been executed without notice to, much less
consent from, Cuenca who at the time was no longer a stockholder
of the corporation.
The appellate court also noted that the Credit Approval

Memorandum had specified that the credit accommodation was
for a total amount of P8 million, and that its expiry date was
November 30, 1981. Hence, it ruled that Cuenca was liable only for
loans obtained prior to November 30, 1981, and only for an amount
not exceeding P8 million.
It further held that the restructuring of Sta. Ines’ obligation under the
1989 Loan Agreement was tantamount to a grant of an extension of
time to the debtor without the consent of the surety. Under Article
2079 of the Civil Code, such extension extinguished the surety.
The CA also opined that the surety was entitled to notice, in case the
bank and Sta. Ines decided to materially alter or modify the principal
obligation after the expiry date of the credit accommodation.
Hence, this recourse to this Court.7
The Issues
In its Memorandum, petitioner submits the following for our

consideration:8
"A. Whether or not the Honorable Court of Appeals erred in releasing

Respondent Cuenca from liability as surety under the Indemnity
Agreement for the payment of the principal amount of twelve million
two hundred thousand pesos (P12,200,000.00) under Promissory Note
No. RL/74/596/88 dated 9 March 1988 and Promissory Note No.
RL/74/597/88 dated 9 March 1988, plus stipulated interests, penalties
and other charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in

ruling that Respondent Cuenca’s liability under the
Indemnity Agreement covered only availments on SIMC’s
credit line to the extent of eight million pesos

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(P8,000,000.00) and made on or before 30 November
1981;
ii. Whether or not the Honorable Court of Appeals erred in

ruling that the restructuring of SIMC’s indebtedness under
the P8 million credit accommodation was tantamount to
an extension granted to SIMC without Respondent
Cuenca’s consent, thus extinguishing his liability under the
Indemnity Agreement pursuant to Article 2079 of the Civil
Code;
iii. Whether or not the Honorable Court of appeals erred in

ruling that the restructuring of SIMC’s indebtedness under
the P8 million credit accommodation constituted a
novation of the principal obligation, thus extinguishing
Respondent Cuenca’s liability under the indemnity
agreement;
B. Whether or not Respondent Cuenca’s liability under the Indemnity

Agreement was extinguished by the payments made by SIMC;
C. Whether or not petitioner’s Motion for Reconsideration was pro-

forma;
D. Whether or not service of the Petition by registered mail sufficiently

complied with Section 11, Rule 13 of the 1997 Rules of Civil
Procedure."
Distilling the foregoing, the Court will resolve the following issues: (a)
whether the 1989 Loan Agreement novated the original credit
accommodation and Cuenca’s liability under the Indemnity
Agreement; and (b) whether Cuenca waived his right to be notified
of and to give consent to any substitution, renewal, extension,
increase, amendment, conversion or revival of the said credit
accommodation. As preliminary matters, the procedural questions
raised by respondent will also be addressed.
Preliminary Matters: Procedural Questions
Motion for Reconsideration Not Pro Forma
Respondent contends that petitioner’s Motion for Reconsideration of

the CA Decision, in merely rehashing the arguments already passed
upon by the appellate court, was pro forma; that as such, it did not
toll the period for filing the present Petition for Review.9
Consequently, the Petition was filed out of time.10
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We disagree. A motion for reconsideration is not pro forma just
because it reiterated the arguments earlier passed upon and
rejected by the appellate court. The Court has explained that a
movant may raise the same arguments, precisely to convince the
court that its ruling was erroneous.11
Moreover, there is no clear showing of intent on the part of petitioner

to delay the proceedings. In Marikina Valley Development
Corporation v. Flojo, 12 the Court explained that a pro forma motion
had no other purpose than to gain time and to delay or impede the
proceedings. Hence, "where the circumstances of a case do not
show an intent on the part of the movant merely to delay the
proceedings, our Court has refused to characterize the motion as
simply pro forma." It held:
"We note finally that because the doctrine relating to pro forma
motions for reconsideration impacts upon the reality and substance
of the statutory right of appeal, that doctrine should be applied
reasonably, rather than literally. The right to appeal, where it exists, is
an important and valuable right. Public policy would be better
served by according the appellate court an effective opportunity to
review the decision of the trial court on the merits, rather than by
aborting the right to appeal by a literal application of the
procedural rules relating to pro forma motions for reconsideration."
Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:
"SEC. 11. Priorities in modes of service and filing. -- Whenever

practicable, the service and filing of pleadings and other papers
shall be done personally. Except with respect to papers emanating
from the court, a resort to other modes must be accompanied by a
written explanation why the service or filing was not done personally.
A violation of this Rule may be cause to consider the paper as not
filed."
Respondent maintains that the present Petition for Review does not
contain a sufficient written explanation why it was served by
registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort 13

that the aforecited rule was mandatory, and that "only when
personal service or filing is not practicable may resort to other modes
be had, which must then be accompanied by a written explanation
as to why personal service or filing was not practicable to begin
with."

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In this case, the Petition does state that it was served on the
respective counsels of Sta. Ines and Cuenca "by registered mail in
lieu of personal service due to limitations in time and distance." 14 This
explanation sufficiently shows that personal service was not
practicable. In any event, we find no adequate reason to reject the
contention of petitioner and thereby deprive it of the opportunity to
fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article

1292 of the Civil Code, which reads as follows:
"ART. 1292. In order that an obligation may be extinguished by

another which substitute the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new
obligations be on every point incompatible with each other."
Novation of a contract is never presumed. It has been held that "[i]n

the absence of an express agreement, novation takes place only
when the old and the new obligations are incompatible on every
point."15 Indeed, the following requisites must be established: (1)
there is a previous valid obligation; (2) the parties concerned agree
to a new contract; (3) the old contract is extinguished; and (4) there
is a valid new contract.16
Petitioner contends that there was no absolute incompatibility

between the old and the new obligations, and that the latter did not
extinguish the earlier one. It further argues that the 1989 Agreement
did not change the original loan in respect to the parties involved or
the obligations incurred. It adds that the terms of the 1989 Contract
were "not more onerous."17 Since the original credit accomodation
was not extinguished, it concludes that Cuenca is still liable under
the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are

present in this case. The 1989 Loan Agreement extinguished the
obligation18 obtained under the 1980 credit accomodation. This is
evident from its explicit provision to "liquidate" the principal and the
interest of the earlier indebtedness, as the following shows:
"1.02. Purpose. The First Loan shall be applied to liquidate the

principal portion of the Borrower’s present total outstanding
Indebtedness to the Lender (the "Indebtedness") while the Second
Loan shall be applied to liquidate the past due interest and penalty
portion of the Indebtedness."19 (Italics supplied.)

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The testimony of an officer20 of the bank that the proceeds of the
1989 Loan Agreement were used "to pay-off" the original
indebtedness serves to strengthen this ruling.21
Furthermore, several incompatibilities between the 1989 Agreement

and the 1980 original obligation demonstrate that the two cannot
coexist. While the 1980 credit accommodation had stipulated that
the amount of loan was not to exceed P8 million,22 the 1989
Agreement provided that the loan was P12.2 million. The periods for
payment were also different.
Likewise, the later contract contained conditions, "positive

covenants" and "negative covenants" not found in the earlier
obligation. As an example of a positive covenant, Sta. Ines
undertook "from time to time and upon request by the Lender, [to]
perform such further acts and/or execute and deliver such
additional documents and writings as may be necessary or proper to
effectively carry out the provisions and purposes of this Loan
Agreement."23 Likewise, SIMC agreed that it would not create any
mortgage or encumbrance on any asset owned or hereafter
acquired, nor would it participate in any merger or consolidation.24
Since the 1989 Loan Agreement had extinguished the original credit
accommodation, the Indemnity Agreement, an accessory
obligation, was necessarily extinguished also, pursuant to Article 1296
of the Civil Code, which provides:
"ART. 1296. When the principal obligation is extinguished in

consequence of a novation, accessory obligations may subsist only
insofar as they may benefit third persons who did not give their
consent."
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal
or extension of the P8 million original accommodation; it was not a
novation.25
This argument must be rejected. To begin with, the 1989 Loan

Agreement expressly stipulated that its purpose was to "liquidate,"
not to renew or extend, the outstanding indebtedness. Moreover,
respondent did not sign or consent to the 1989 Loan Agreement,
which had allegedly extended the original P8 million credit facility.
Hence, his obligation as a surety should be deemed extinguished,
pursuant to Article 2079 of the Civil Code, which specifically states
that "[a]n extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty. x x x." In an
earlier case,26 the Court explained the rationale of this provision in
this wise:
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"The theory behind Article 2079 is that an extension of time given to
the principal debtor by the creditor without the surety’s consent
would deprive the surety of his right to pay the creditor and to be
immediately subrogated to the creditor’s remedies against the
principal debtor upon the maturity date. The surety is said to be
entitled to protect himself against the contingency of the principal
debtor or the indemnitors becoming insolvent during the extended
period."
Binding Nature of the Credit Approval Memorandum
As noted earlier, the appellate court relied on the provisions of the

Credit Approval Memorandum in holding that the credit
accommodation was only for P8 million, and that it was for a period
of one year ending on November 30, 1981. Petitioner objects to the
appellate court’s reliance on that document, contending that it was
not a binding agreement because it was not signed by the parties. It
adds that it was merely for its internal use.
We disagree. It was petitioner itself which presented the said

document to prove the accommodation. Attached to the
Complaint as Annex A was a copy thereof "evidencing the
accommodation."27 Moreover, in its Petition before this Court, it
alluded to the Credit Approval Memorandum in this wise:
"4.1 On 10 November 1980, Sta. Ines Melale Corporation ("SIMC") was

granted by the Bank a credit line in the aggregate amount of Eight
Million Pesos (P8,000,000.00) to assist SIMC in meeting the additional
capitalization requirements for its logging operations. For this
purpose, the Bank issued a Credit Approval Memorandum dated 10
November 1980."
Clearly, respondent is estopped from denying the terms and

conditions of the P8 million credit accommodation as contained in
the very document it presented to the courts. Indeed, it cannot take
advantage of that document by agreeing to be bound only by
those portions that are favorable to it, while denying those that are
disadvantageous.
Second Issue: Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent

Cuenca "impliedly gave his consent to any modification of the credit
accommodation or otherwise waived his right to be notified of, or to
give consent to, the same."28 Respondent’s consent or waiver
thereof is allegedly found in the Indemnity Agreement, in which he
held himself liable for the "credit accommodation including [its]
substitutions, renewals, extensions, increases, amendments,
conversions and revival." It explains that the novation of the original
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credit accommodation by the 1989 Loan Agreement is merely its
"renewal," which "connotes cessation of an old contract and birth of
another one x x x."29
At the outset, we should emphasize that an essential alteration in the

terms of the Loan Agreement without the consent of the surety
extinguishes the latter’s obligation. As the Court held in National
Bank v. Veraguth, 30 "[i]t is fundamental in the law of suretyship that
any agreement between the creditor and the principal debtor
which essentially varies the terms of the principal contract, without
the consent of the surety, will release the surety from liability."
In this case, petitioner’s assertion - that respondent consented to the

alterations in the credit accommodation -- finds no support in the
text of the Indemnity Agreement, which is reproduced hereunder:
"Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines
Malale Forest Products Corp., Alco Bldg., 391 Buendia Avenue Ext.,
Makati Metro Manila for and in consideration of the credit
accommodation in the total amount of eight million pesos
(P8,000,000.00) granted by the SECURITY BANK AND TRUST
COMPANY, a commercial bank duly organized and existing under
and by virtue of the laws of the Philippine, 6778 Ayala Avenue,
Makati, Metro Manila hereinafter referred to as the BANK in favor of
STA. INES MELALE FOREST PRODUCTS CORP., x x x ---- hereinafter
referred to as the CLIENT, with the stipulated interests and charges
thereon, evidenced by that/those certain PROMISSORY NOTE[(S)],
made, executed and delivered by the CLIENT in favor of the BANK
hereby bind(s) himself/themselves jointly and severally with the
CLIENT in favor of the BANK for the payment , upon demand and
without benefit of excussion of whatever amount or amounts the
CLIENT may be indebted to the BANK under and by virtue of
aforesaid credit accommodation(s) including the substitutions,
renewals, extensions, increases, amendment, conversions and
revivals of the aforesaid credit accommodation(s), as well as of the
amount or amounts of such other obligations that the CLIENT may
owe the BANK, whether direct or indirect, principal or secondary, as
appears in the accounts, books and records of the BANK, plus
interest and expenses arising from any agreement or agreements
that may have heretofore been made, or may hereafter be
executed by and between the parties thereto, including the
substitutions, renewals, extensions, increases, amendments,
conversions and revivals of the aforesaid credit accommodation(s),
and further bind(s) himself/themselves with the CLIENT in favor of the
BANK for the faithful compliance of all the terms and conditions
contained in the aforesaid credit accommodation(s), all of which
are incorporated herein and made part hereof by reference."

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While respondent held himself liable for the credit accommodation
or any modification thereof, such clause should be understood in the
context of the P8 million limit and the November 30, 1981 term. It did
not give the bank or Sta. Ines any license to modify the nature and
scope of the original credit accommodation, without informing or
getting the consent of respondent who was solidarily liable. Taking
the bank’s submission to the extreme, respondent (or his successors)
would be liable for loans even amounting to, say, P100 billion
obtained 100 years after the expiration of the credit
accommodation, on the ground that he consented to all alterations
and extensions thereof.
Indeed, it has been held that a contract of surety "cannot extend to

more than what is stipulated. It is strictly construed against the
creditor, every doubt being resolved against enlarging the liability of
the surety."31 Likewise, the Court has ruled that "it is a well-settled
legal principle that if there is any doubt on the terms and conditions
of the surety agreement, the doubt should be resolved in favor of
the surety x x x. Ambiguous contracts are construed against the
party who caused the ambiguity."32 In the absence of an
unequivocal provision that respondent waived his right to be notified
of or to give consent to any alteration of the credit accommodation,
we cannot sustain petitioner’s view that there was such a waiver.
It should also be observed that the Credit Approval Memorandum

clearly shows that the bank did not have absolute authority to
unilaterally change the terms of the loan accommodation. Indeed,
it may do so only upon notice to the borrower, pursuant to this
condition:
"5. The Bank reserves the right to amend any of the aforementioned
terms and conditions upon written notice to the Borrower." 33
We reject petitioner’s submission that only Sta. Ines as the borrower,

not respondent, was entitled to be notified of any modification in the
original loan accommodation.34 Following the bank’s reasoning,
such modification would not be valid as to Sta. Ines if no notice were
given; but would still be valid as to respondent to whom no notice
need be given. The latter’s liability would thus be more burdensome
than that of the former. Such untenable theory is contrary to the
principle that a surety cannot assume an obligation more onerous
than that of the principal.35
The present controversy must be distinguished from Philamgen v.

Mutuc,36 in which the Court sustained a stipulation whereby the
surety consented to be bound not only for the specified period, "but
to any extension thereafter made, an extension x x x that could be
had without his having to be notified."

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In that case, the surety agreement contained this unequivocal
stipulation: "It is hereby further agreed that in case of any extension
of renewal of the bond, we equally bind ourselves to the Company
under the same terms and conditions as herein provided without the
necessity of executing another indemnity agreement for the purpose
and that we hereby equally waive our right to be notified of any
renewal or extension of the bond which may be granted under this
indemnity agreement."
In the present case, there is no such express stipulation.1âwphi1 At

most, the alleged basis of respondent’s waiver is vague and
uncertain. It confers no clear authorization on the bank or Sta. Ines to
modify or extend the original obligation without the consent of the
surety or notice thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature of a

continuing surety, petitioner maintains that there was no need for
respondent to execute another surety contract to secure the 1989
Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a

continuing surety does not authorize the bank to extend the scope
of the principal obligation inordinately.37 In Dino v. CA,38 the Court
held that "a continuing guaranty is one which covers all transactions,
including those arising in the future, which are within the description
or contemplation of the contract of guaranty, until the expiration or
termination thereof."
To repeat, in the present case, the Indemnity Agreement was

subject to the two limitations of the credit accommodation: (1) that
the obligation should not exceed P8 million, and (2) that the
accommodation should expire not later than November 30, 1981.
Hence, it was a continuing surety only in regard to loans obtained on
or before the aforementioned expiry date and not exceeding the
total of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1
million obtained on November 26, 1991. It did not secure the
subsequent loans, purportedly under the 1980 credit
accommodation, that were obtained in 1986. Certainly, he could
not have guaranteed the 1989 Loan Agreement, which was
executed after November 30, 1981 and which exceeded the
stipulated P8 million ceiling.
Petitioner, however, cites the Dino ruling in which the Court found
the surety liable for the loan obtained after the payment of the
original one, which was covered by a continuing surety agreement.
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At the risk of being repetitious, we hold that in Dino, the surety
Agreement specifically provided that "each suretyship is a
continuing one which shall remain in full force and effect until this
bank is notified of its revocation." Since the bank had not been
notified of such revocation, the surety was held liable even for the
subsequent obligations of the principal borrower.
No similar provision is found in the present case. On the contrary,

respondent’s liability was confined to the 1980 credit
accommodation, the amount and the expiry date of which were set
down in the Credit Approval Memorandum.
Special Nature of the JSS
It is a common banking practice to require the JSS ("joint and

solidary signature") of a major stockholder or corporate officer, as an
additional security for loans granted to corporations. There are at
least two reasons for this. First, in case of default, the creditor’s
recourse, which is normally limited to the corporate properties under
the veil of separate corporate personality, would extend to the
personal assets of the surety. Second, such surety would be
compelled to ensure that the loan would be used for the purpose
agreed upon, and that it would be paid by the corporation.
Following this practice, it was therefore logical and reasonable for

the bank to have required the JSS of respondent, who was the
chairman and president of Sta. Ines in 1980 when the credit
accommodation was granted. There was no reason or logic,
however, for the bank or Sta. Ines to assume that he would still agree
to act as surety in the 1989 Loan Agreement, because at that time,
he was no longer an officer or a stockholder of the debtor-
corporation. Verily, he was not in a position then to ensure the
payment of the obligation. Neither did he have any reason to bind
himself further to a bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the
surety of respondent, without even informing him, smacks of
negligence on the part of the bank and bad faith on that of the
principal debtor. Since that Loan Agreement constituted a new
indebtedness, the old loan having been already liquidated, the spirit
of fair play should have impelled Sta. Ines to ask somebody else to
act as a surety for the new loan.
In the same vein, a little prudence should have impelled the bank to
insist on the JSS of one who was in a position to ensure the payment
of the loan. Even a perfunctory attempt at credit investigation would
have revealed that respondent was no longer connected with the
corporation at the time. As it is, the bank is now relying on an unclear
Indemnity Agreement in order to collect an obligation that could
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have been secured by a fairly obtained surety. For its defeat in this
litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by

novation the obligation under the 1980 P8 million credit
accommodation. Hence, the Indemnity Agreement, which had
been an accessory to the 1980 credit accommodation, was also
extinguished. Furthermore, we reject petitioner’s submission that
respondent waived his right to be notified of, or to give consent to,
any modification or extension of the 1980 credit accommodation.
In this light, we find no more need to resolve the issue of whether the
loan obtained before the expiry date of the credit accommodation
has been paid.
WHEREFORE, the Petition is DENIED and the assailed Decision

SO ORDERED.
Melo, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.
Footnotes
1Written by Justice Jorge S. Imperial (Division chairman), with
the concurrence of Justices Hector L. Hofileña and Omar U.
Amin (members).
2 CA Decision, pp. 32-33; rollo, pp. 52-53.
3Rollo, p. 56. Penned by Justice Amin with the concurrence of
Justices Hofilena and Marina L. Buzon.
4Written by Judge Eriberto U. Rosario Jr. (now a member of the
Court of Appeals)
6According to the RTC, Sta. Ines’ Timber License Agreement,
which was supposed to expire on July 15, 1998, was suspended
by the Department of Environment and Natural Resources on
December 6, 1989 and eventually cancelled on May 4, 1990.
(RTC Decision, p. 3; rollo, p. 12.)
7 This case was deemed submitted for decision on May 8, 2000,
upon receipt by this Court of respondent’s Reply Memorandum
signed by Attys. Elvira C. Oquendo and Vissia Concepcion C.
Calderon of Carpio Villaraza & Cruz. Filed earlier on March 3,

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2000, was petitioner’s Memorandum, signed by Attys. Menardo
I. Guevarra, Adrian Ferdinand S. Sugay and Ma. Jazmin B.
Banal of De Borja Medialdea Bello Guevarra & Gerodias.
8Petitioner’s Memorandum, pp. 9-10; rollo, pp. 320-321. All in
upper case in the original.
9 §2, Rule 37 of the Rules of Court, provides that "[a] pro forma
motion for new trial or reconsideration shall not toll the
reglementary period of appeal."
10 Respondent’s Memorandum, pp. 114-115; rollo, pp. 480-481.
11 See Guerra Enterprises v. CFI, 32 SCRA 314, April 17, 1970.
12 251 SCRA 87, December 8, 1995, per Feliciano, J.
13 293 SCRA 661, August 5, 1998, per Davide, J. (now CJ).
14 Petition for Review, p. 29; rollo, p. 92.
15 Lim Tay v. CA, 293 SCRA 364, August 5, 1998, per Panganiban,
J.
Cruz v. CA, 293 SCRA 239, July 27, 1998; citing Vitug,
16
Compendium of Civil Law and Jurisprudence, 1993 ed., p. 528.

18As will be shown later, only one loan was obtained before the
expiry date of the 1980 credit accommodation.
19 Rollo, p. 125.
20Carmen Comia, former manager of the bank’s Loans and
Discounts Department.
21Respondent’s Memorandum, pp. 67-68; rollo, pp. 433-434;
citing TSN, June 17, 1994, pp. 21, 90, 95-96.
22 Credit Approval Memorandum, p. 1; rollo, p. 109.
23 1989 Loan Agreement, p. 4; rollo, p. 128.
24 Ibid.
25 Petitioner’s Memorandum, p. 28; rollo, p. 339.
26Cochingyan v. R & B Surety and Insurance Co., 151 SCRA 339,
352, June 30, 1987, per Feliciano, J.

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27 Complaint, p. 2; rollo, p. 135.
30 50 Phil. 253, 257, April 1, 1927, per Villamor, J.
31Aguenza v. CA, 271 SCRA 1, April 7, 1997, per Hermosisima, J.
See also Zenith Insurance v. CA, 119 SCRA 485, December 29,
1982.
32 Garcia v. CA, 258 SCRA 446, 456, July 5, 1996, per Melo, J.
33 Credit Approval Memorandum, p. 2; rollo, p. 110.
35 Article 2054, Civil Code.
36 61 SCRA 22, 26, November 13, 1974, per Fernando, J.
37In Atok Finance Corp. v. CA, 222 SCRA 232, 245, May 18,
1993, per Feliciano, J., the Court explained the nature of a
continuing surety in this wise:
"Comprehensive or continuing surety agreements are in

fact quite commonplace in present day financial and
commercial practice. A bank or financing company
which anticipates entering into a series of credit
transactions with a particular company, commonly
requires the projected principal debtor to execute a
continuing surety agreement along with its sureties. By
executing such an agreement, the principal places itself
in a position to enter into the projected series of
transactions with its creditor; with such suretyship
agreement, there would be no need to execute a
separate surety contract or bond for each financing or
credit accommodation extended to the principal debtor."
38216 SCRA 9, November 26, 1992, per Davide, J. (now CJ). See
also Fortune Motors v. CA, 267 SCRA 653, February 7, 1997.
A.C. Ransom Labor Union vs. NLRC (142 SCRA 269 [1986])

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G.R. No. L-69494 June 10, 1986
A.C. RANSOM LABOR UNION-CCLU, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION, First Division, A.C.
RANSOM (PHILS.) CORPORATION, RUBEN HERNANDEZ, MAXIMO C.
HERNANDEZ, JR., PORFIRIO R. VALENCIA, LAURA H. CORNEJO,
FRANCISCO HERNANDEZ, CELESTINO C. HERNANDEZ & MA. ROSARIO
HERNANDEZ, respondents.
MELENCIO-HERRERA, J.:
The facts relevant to this case may be related as follows:
1. Respondent A. C. Ransom (Philippines) Corporation (RANSOM, for

short) was established in 1933 by Maximo C. Hernandez, Sr. It was a
"family" corporation, the stockholders of which were/are members of
the Hernandez family. It has a compound in Las Pinas Rizal, where it
has been engaged in the manufacture mainly of ink and articles
associated with ink.
2. On June 6, 1961, employees of RANSOM, most of them being

members of petitioner Labor UNION, went on strike and established a
picket line which, however, was lifted on June 21st with most of the
strikers returning and being allowed to resume their work by RANSOM
Twenty-two (22) strikers were refused reinstatement by the Company.
3. During 1969, the same Hernandez family organized another

corporation, Rosario Industrial Corporation (ROSARIO, for short)
which also engaged, in the RANSOM Compound, in the business of
manufacture of ink and products associated with ink.
4. The strike became the subject of Cases Nos. 2848 — ULP and 2880
— ULP of the Court of Industrial Relations which, on December 19,
1972, ordered RANSOM "its officers and agents to reinstate the 22
strikers with back wages from July 25, 1969.
5. On April 2, 1973, RANSOM filed an application for clearance to

close or cease operations effective May 1, 1973, which was granted
by the Ministry of Labor and Employment in its Order of June 7, 1973,
without prejudice to the right of employees to seek redress of
grievance, if any. Although it has stopped operations, RANSOM has
continued its personality as a corporation. For practical purposes,
reinstatement of the 22 strikers has been precluded. As a matter of
fact, reinstatement is not an issue in this case.

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6. Back wages of the 22 strikers were subsequently computed at
P164,984.00, probably in early 1974. The exact date is not reflected in
the record.
7. Up to September 9, 1976, petitioner UNION had filed about ten

(10) motions for execution against RANSOM; but all of them could
not be implemented, presumably for failure to find leviable assets of
RANSOM; although it appears that, in 1975, RANSOM had sold
machineries and equipment for P28million to Revelations
Manufacturing Corporation.
8. Directly related to this case is the last Motion for Execution, dated
December 18, 1978, filed by petitioner UNION wherein it asked that
officers and agents of RANSOM be held personally liable for
payment of the back wages. That Motion was granted by Labor
Arbiter, Tito F. Genilo, on March 11, 1980 (The GENILO ORDER),
wherein he expressly authorized a Writ of Execution to be issued for
P164,984.00 (the back wages) against RANSOM and seven officers
and directors of the Company who are the named individual
respondents herein. RANSOM took an appeal to NLRC which
affirmed the GENILO ORDER, except as modified in the body of its
decision of July 31, 1984.
9. In RANSOM's appeal to the NLRC, two issues were raised:
(a) One of the issues was:
THE DECISION OF THE INDUSTRIAL RELATIONS COURT

HAVING BECOME FINAL AND EXECUTORY IN 1973, IS IT
ENFORCEABLE BY A WRIT OF EXECUTION ISSUED IN 1980 OR
MORE THAN FIVE YEARS AFTER THE FINALITY OF THE
DECISION SOUGHT TO BE ENFORCED?
The corresponding ruling made by NLRC was:
Perforce respondent's theory that execution proceedings

must stop after the lapse of five (5) years and that a
motion to revive need be filed, must fail. Suffice it to state
also that the statute of limitations has been devised to
operate primarily against those who sleep on their rights,
not against those who assert their right but fail for causes
beyond their control. The above recital of facts
contradicts respondent's contention that the CIR decision
of August 19, 1972 had remained dormant to require a
motion to revive.
(b) The second issue raised was:

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IS THE JUDGMENT AGAINST A CORPORATION TO REINSTATE
ITS DISMISSED EMPLOYEES WITH BACKWAGES,
ENFORCEABLE AGAINST ITS OFFICERS AND AGENTS IN THEIR
INDIVIDUAL, PRIVATE AND PERSONAL CAPACITIES WHO
WERE NOT PARTIES IN THE CASE WHERE THE JUDGMENT
WAS RENDERED;
The NLRC ruling was:
As to the liability of the respondent's officers and agents,

we agree with the contention of the respondent-
appellant that there is nothing in the Order dated May 11,
1986 that would justify the holding of the individual officers
and agents of respondent in their personal capacity. As a
general rule, officers of the corporation are not liable
personally for the official acts unless they have exceeded
the scope of their authority. In the absence of evidence
showing that the officers mentioned in the Order of the
Labor Arbiter dated March 11, 1980 have exceeded their
authority, the writ of execution can not be enforced
against them, especially so since they were not given a
chance to be heard.
RANSOM and the seven individual respondents in this case have not
appealed from the ruling of the NLRC that Section 6, Rule 39, is not
invocable by them in regards to the execution of the decision of
December 19, 1972. Hence, the issue can no longer be raised herein.
Even if the said section were applicable, the 5-year period therein
mentioned may not have expired by December 18, 1978 because
the period should be counted only from the time the back wages
were determined, which could have been in early 1974.
We now come to the NLRC's decision upholding non-personal

liabilities of the individual respondents herein for back wages of the
22 strikers.
(a) Article 265 of the labor Code, in part. expressly provides:
Any worker whose employment has been terminated as a

consequence of an unlawful lockout shall be entitled to
reinstatement with fill back wages.
Article 273 of the Code provides that:
Any person violating any of the provisions of Article 265 of

this Code shall be punished by a fine of not exceeding
five hundred pesos and/or imprisonment for not less than
one (1) day nor more than six (6) months.

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(b) How can the foregoing provisions be implemented when the
employer is a corporation? The answer is found in Article 212 (c) of
the Labor Code which provides:
(c) 'Employer includes any person acting in the interest of

an employer directly or indirectly. The term shall not
include any labor organization or any of its officers or
agents except when acting as employer.
The foregoing was culled from Section 2 of RA 602, the Minimum

Wage Law. Since RANSOM is an artificial person, it must have an
officer who can be presumed to be the employer, being the "person
acting in the interest of (the) employer" RANSOM. The corporation,
only in the technical sense, is the employer.
The responsible officer of an employer corporation can be held

personally, not to say even criminally, liable for non-payment of back
wages. That is the policy of the law. In the Minimum Wage Law,
Section 15(b) provided:
(b) If any violation of his Act is committed by a

corporation, trust, partnership or association, the manager
or in his default, the person acting as such when the
violation took place, shall be responsible. In the case of a
government corporation, the managing head shall be
made responsible, except when shown that the violation
was due to an act or commission of some other person,
over whom he has no control, in which case the latter
shall be held responsible.
In PD 525, where a corporation fails to pay the emergency

allowance therein provided, the prescribed penalty "shall be
imposed upon the guilty officer or officers" of the corporation.
(c) If the policy of the law were otherwise, the corporation employer
can have devious ways for evading payment of back wages. in the
instant case, it would appear that RANSOM, in 1969, foreseeing the
possibility or probability of payment of back wages to the 22 strikers,
organized ROSARIO to replace RANSOM, with the latter to be
eventually phased out if the 22 strikers win their case. RANSOM
actually ceased operation on May 1, 1973, after the December 19,
1972 Decision of the Court of Industrial Relations was promulgated
against RANSOM.
(d) The record does not clearly Identify "the officer or officers" of
RANSOM directly responsible for failure to pay the back wages of the
22 strikers. In the absence of definite proof in that regard, we believe
it should be presumed that the responsible officer is the President of
the corporation who can be deemed the chief operation officer
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thereof. Thus, in RA 602, criminal responsibility is with the "Manager" or
in his default, the person acting as such. In RANSOM, the President
appears to be the Manager.
(e) Considering that non-payment of the back wages of the 22

strikers has been a continuing situation, it is our opinion What the
personal liability of the RANSOM President, at the time the back
wages were ordered to be paid should also be a continuing joint
and several personal liabilities of all who x-ray have thereafter
succeeded to the office of president; otherwise, the 22 strikers may
be deprived of their rights by the election of a president without
leviable assets.
WHEREFORE, the questioned Decision of the National Labor Relations

Commission is SET ASIDE, and the Order of Labor Arbiter Tito F. Genilo
of March 11, 1980 is reinstated with the modification that personal
liability for the back wages due the 22 strikers shall be limited to
Ruben Hernandez, who was President of RANSOM in 1974, jointly and
severally with other Presidents of the same corporation who had
been elected as such after 1972 or up to the time the corporate life
was terminated.
SO ORDERED.
Abad Santos (Chairman), Yap, Cruz and Paras, * , JJ., concur.
Narvasa, J., took no part.
AC Ransom Labor Union v. NLRC
Facts: AC Ransom Labor Union is claiming unfair labor practice

against AC Ransom. The CIR
and the Labor Arbiter ruled in favor of the labor union stating that
the strike was legal and
justified thereby requiring the company to pay for backwages and

to immediately reinstate the
members of the union which the NLRC reversed the decision. Hence
the special civil action of
certiorari filed by the Union moving for the Officers of AC Ransom

and ROSARIO Company to
be held liable because although RANSOM had assumed a posture

of suffering from business
reverse, its officers and principal stockholders had organized a new

corporation, the Rosario

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Industrial Corporation (thereinafter called ROSARIO), using the same
equipment, personnel,
business stocks and the same place of business. AC Ransom used as

a defense the clearance
given by SEC to cease to operate due to financial difficulties in order

to lessen the award given
by the court. It also declared that ROSARIO is a distinct and separate

corporation, which was
organized long before these instant cases were decided adversely

against RANSOM.
Issue #1: Whether or not ROSARIO Company should be held liable for
the claims of AC
Ransom Labor Union?
Issue #2: Whether or not the officers and directors of AC Ransom

should be held liable for
backwages?
Held: The questioned Decision of the National Labor Relations

Commission is SET ASIDE, and
the Order of Labor Arbiter Tito F. Genilo of March 11, 1980 is

reinstated with the modification
that Rosario Industrial Corporation and its officers and agents are
hereby held jointly and
severally liable with the surviving private respondents for the

payment of the backwages due the
22 union members.
Rosario Industrial Corporation is hereby ordered to reinstate the 22

union members or, if this is
not possible, to award them separation pay equivalent at least to

one (1) month pay or to one
(1) month salary for every year of service actually rendered by them
with A.C. Ransom (Phils).
Corporation, whichever is higher.
Rosario Company is held liable because the organization of a "run-

away corporation,"

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ROSARIO, in 1969 at the time the unfair labor practice case was
pending before the CIR by the
same persons who were the officers and stockholders of RANSOM,

engaged in the same line of
business as RANSOM, producing the same line of products,

occupying the same compound,
using the same machineries, buildings, laboratory, bodega and sales

and accounts departments
used by RANSOM, and which is still in existence. Both corporations

were closed corporations
owned and managed by members of the same family. Its

organization proved to be a
convenient instrument to avoid payment of backwages and the

reinstatement of the 22 workers.
This is another instance where the fiction of separate and distinct

corporate entities should be
disregarded.
It is very obvious that the second corporation seeks the protective

shield of a corporate
fiction whose veil in the present case could, and should, be pierced
as it was deliberately and
maliciously designed to evade its financial obligation to its

employees.... When a 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 or persons, or, in

the case of two corporations,
will merge them into one.
As to the officers and agents
The inclusion of the officers and agents was but proper since a
corporation, as an
artificial being, can act only through them.

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Carag vs. NLRC (520 SCRA 28 [2007]) – contrary ruling to A.C.
Ransom Doctrine
G.R. No. 147590 April 2, 2007
ANTONIO C. CARAG, Petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION, ISABEL G. PANGANIBAN-
ORTIGUERRA, as Executive Labor Arbiter, NAFLU, and MARIVELES
APPAREL CORPORATION LABOR UNION, Respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari1 assailing the Decision dated

29 February 20002 and the Resolution dated 27 March 20013 of the
Court of Appeals (appellate court) in CA-G.R. SP Nos. 54404-06. The
appellate court affirmed the decision dated 17 June 1994 4 of Labor
Arbiter Isabel Panganiban-Ortiguerra (Arbiter Ortiguerra) in RAB-III-08-
5198-93 and the resolution dated 5 January 19955 of the National
Labor Relations Commission (NLRC) in NLRC CA No. L-007731-94.
Arbiter Ortiguerra held that Mariveles Apparel Corporation (MAC),

MAC's Chairman of the Board Antonio Carag (Carag), and MAC's
President Armando David (David) (collectively, respondents) are
guilty of illegal closure and are solidarily liable for the separation pay
of MAC's rank and file employees. The NLRC denied the motion to
reduce bond filed by MAC and Carag.
The Facts
National Federation of Labor Unions (NAFLU) and Mariveles Apparel

Corporation Labor Union (MACLU) (collectively, complainants), on
behalf of all of MAC's rank and file employees, filed a complaint
against MAC for illegal dismissal brought about by its illegal closure
of business. In their complaint dated 12 August 1993, complainants
alleged the following:
2. Complainant NAFLU is the sole and exclusive bargaining

agent representing all rank and file employees of [MAC]. That
there is an existing valid Collective Bargaining Agreement
(CBA) executed by the parties and that at the time of the
cause of action herein below discussed happened there was
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no labor dispute between the Union and Management except
cases pending in courts filed by one against the other.
3. That on July 8, 1993, without notice of any kind filed in

accordance with pertinent provisions of the Labor Code,
[MAC], for reasons known only by herself [sic] ceased
operations with the intention of completely closing its shop or
factory. Such intentions [sic] was manifested in a letter,
allegedly claimed by [MAC] as its notice filed only on the same
day that the operations closed.
4. That at the time of closure, employees who have rendered

one to two weeks work were not paid their corresponding
salaries/wages, which remain unpaid until time [sic] of this
writing.
5. That there are other benefits than those above-mentioned

which have been unpaid by [MAC] at the time it decided to
cease operations, benefits gained by the workers both by and
under the CBA and by operations [sic] of law.
6. That the closure made by [MAC] in the manner and style

done is perce [sic] illegal, and had caused tremendous
prejudice to all of the employees, who suffered both mental
and financial anguish and who in view thereof merits [sic]
award of all damages (actual, exemplary and moral), [illegible]
to set [an] example to firms who in the future will [illegible] the
idea of simply prematurely closing without complying [with] the
basic requirement of Notice of Closure.6 (Emphasis supplied)
Upon receipt of the records of the case, Arbiter Ortiguerra

summoned the parties to explore options for possible settlement. The
non-appearance of respondents prompted Arbiter Ortiguerra to
declare the case submitted for resolution "based on the extant
pleadings."
In their position paper dated 3 January 1994, complainants moved

to implead Carag and David, as follows:
x x x x In the present case, it is unfortunate for respondents that the

records and evidence clearly demonstrate that the individual
complainants are entitled to the reliefs prayed for in their complaint.
However, any favorable judgment the Honorable Labor Arbiter may
render in favor of herein complainants will go to naught should the
Office fails [sic] to appreciate the glaring fact that the respondents
[sic] corporation is no longer existing as it suddenly stopped business
operation since [sic] 8 July 1993. Under this given circumstance, the
complainants have no option left but to implead Atty. ANTONIO
CARAG, in his official capacity as Chairman of the Board along with
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MR. ARMANDO DAVID as President. Both are also owners of the
respondent corporation with office address at 10th Floor, Gamon
Centre, Alfaro Street, Salcedo Village[,] Makati[,] Metro Manila
although they may be collectively served with summons and other
legal processes through counsel of record Atty. Joshua Pastores of
8th Floor, Hanston Bldg., Emerald Avenue, Ortigas[,] Pasig, Metro
Manila. This inclusion of individual respondents as party respondents
in the present case is to guarantee the satisfaction of any judgment
award on the basis of Article 212(c) of the Philippine Labor Code, as
amended, which says:
"Employer includes any person acting in the interest of an employer,

directly or indirectly. It does not, however, include any labor
organization or any of its officers or agents except when acting as
employer."
The provision was culled from Section 2, Republic Act 602, the
Minimum Wage Act. If the employer is an artificial person, it must
have an officer who can be presumed to be the employer, being
"the person acting in the interest of the employer." The corporation is
the employer, only in the technical sense. (A.C. Ransom Labor Union
CCLU VS. NLRC, G.R. 69494, June 10, 1986). Where the employer-
corporation, AS IN THE PRESENT CASE, is no longer existing and
unable to satisfy the judgment in favor of the employee, the officer
should be held liable for acting on behalf of the corporation. (Gudez
vs. NLRC, G.R. 83023, March 22, 1990). Also in the recent celebrated
case of Camelcraft Corporation vs. NLRC, G.R. 90634-35 (June 6,
1990), Carmen contends that she is not liable for the acts of the
company, assuming it had [acted] illegally, because Camelcraft in a
distinct and separate entity with a legal personality of its own. She
claims that she is only an agent of the company carrying out the
decisions of its board of directors, "We do not agree," said the
Supreme Court. "She is, in fact and legal effect, the corporation,
being not only its president and general manager but also its owner."
The responsible officer of an employer can be held personally liable
not to say even criminally liable for nonpayment of backwages. This
is the policy of the law. If it were otherwise, corporate employers
would have devious ways to evade paying backwages. (A.C.
Ransom Labor Union-CCLU V. NLRC, G.R. 69494, June 10, 1986). If no
definite proof exists as to who is the responsible officer, the president
of the corporation who can be deemed to be its chief operation
officer shall be presumed to be the responsible officer. In Republic
Act 602, for example, criminal responsibility is with the "manager" or
in his default, the person acting as such (Ibid.)7 (Emphasis supplied)
Atty. Joshua L. Pastores (Atty. Pastores), as counsel for respondents,

submitted a position paper dated 21 February 1994 and stated that
complainants should not have impleaded Carag and David

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because MAC is actually owned by a consortium of banks. Carag
and David own shares in MAC only to qualify them to serve as MAC's
officers.
Without any further proceedings, Arbiter Ortiguerra rendered her

Decision dated 17 June 1994 granting the motion to implead Carag
and David. In the same Decision, Arbiter Ortiguerra declared Carag
and David solidarily liable with MAC to complainants.
The Ruling of the Labor Arbiter
In her Decision dated 17 June 1994, Arbiter Ortiguerra ruled as

follows:
This is a complaint for illegal dismissal brought about by the illegal

closure and cessation of business filed by NAFLU and Mariveles
Apparel Corporation Labor Union for and in behalf of all rank and file
employees against respondents Mariveles Apparel Corporation,
Antonio Carag and Armando David [who are] its owners, Chairman
of the Board and President, respectively.
This case was originally raffled to the sala of Labor Arbiter Adolfo V.
Creencia. When the latter went on sick leave, his cases were re-
raffled and the instant case was assigned to the sala of the
undersigned. Upon receipt of the record of the case, the parties
were summoned for them to be able to explore options for
settlement. The respondents however did not appear prompting this
Office to submit the case for resolution based on extant pleadings,
thus this decision.
The complainants claim that on July 8, 1993 without notice of any

kind the company ceased its operation as a prelude to a final
closing of the firm. The complainants allege that up to the present
the company has remained closed.
The complainants bewail that at the time of the closure, employees

who have rendered one to two weeks of work were not given their
salaries and the same have remained unpaid.
The complainants aver that respondent company prior to its closure

did not even bother to serve written notice to employees and to the
Department of Labor and Employment at least one month before
the intended date of closure. The respondents did not even establish
that its closure was done in good faith. Moreover, the respondents
did not pay the affected employees separation pay, the amount of
which is provided in the existing Collective Bargaining Agreement
between the complainants and the respondents.

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The complainants pray that they be allowed to implead Atty.
Antonio Carag and Mr. Armando David[,] owners and responsible
officer[s] of respondent company to assure the satisfaction of the
judgment, should a decision favorable to them be rendered. In
support of their claims, the complainants invoked the ruling laid
down by the Supreme Court in the case of A.C. Ransom Labor Union
CCLU vs. NLRC, G.R. No. 69494, June 10, 1986 where it was held that
[a] corporate officer can be held liable for acting on behalf of the
corporation when the latter is no longer in existence and there are
valid claims of workers that must be satisfied.
The complainants pray for the declaration of the illegality of the

closure of respondents' business. Consequently, their reinstatement
must be ordered and their backwages must be paid. Should
reinstatement be not feasible, the complainants pray that they be
paid their separation pay in accordance with the computation
provided for in the CBA. Computations of separation pay due to
individual complainants were adduced in evidence (Annexes "C" to
"C-44", Complainants' Position Paper). The complainants also pray for
the award to them of attorney's fee[s].
The respondents on the other hand by way of controversion

maintain that the present complaint was filed prematurely. The
respondents deny having totally closed and insist that respondent
company is only on a temporary shut-down occasioned by the
pending labor unrest. There being no permanent closure any claim
for separation pay must not be given due course.
Respondents opposed the impleader of Atty. Antonio C. Carag and

Mr. Armando David saying that they are not the owners of Mariveles
Apparel Corporation and they are only minority stockholders holding
qualifying shares. Piercing the veil of corporate fiction cannot be
done in the present case for such remedy can only be availed of in
case of closed or family owned corporations.
Respondents pray for the dismissal of the present complaint and the
denial of complainants' motion to implead Atty. Antonio C. Carag
and Mr. Armando David as party respondents.
This Office is now called upon to resolve the following issues:
1. Whether or not the respondents are guilty of illegal closure;
2. Whether or not individual respondents could be held

personally liable; and
3. Whether or not the complainants are entitled to an award of

attorney's fees.

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After a judicious and impartial consideration of the record, this
Office is of the firm belief that the complainants must prevail.
The respondents described the cessation of operations in its premises

as a temporary shut-down. While such posturing may have been
initially true, it is not so anymore. The cessation of operations has
clearly exceeded the six months period fixed in Article 286 of the
Labor Code. The temporary shutdown has ripened into a closure or
cessation of operations for causes not due to serious business losses
or financial reverses. Consequently, the respondents must pay the
displaced employees separation pay in accordance with the
computation prescribed in the CBA, to wit, one month pay for every
year of service. It must be stressed that respondents did not
controvert the verity of the CBA provided computation.
The complainants claim that Atty. Antonio Carag and Mr. Armando
David should be held jointly and severally liable with respondent
corporation. This bid is premised on the belief that the impleader of
the aforesaid officers will guarantee payment of whatever may be
adjudged in complainants' favor by virtue of this case. It is a basic
principle in law that corporations have personality distinct and
separate from the stockholders. This concept is known as corporate
fiction. Normally, officers acting for and in behalf of a corporation
are not held personally liable for the obligation of the corporation. In
instances where corporate officers dismissed employees in bad faith
or wantonly violate labor standard laws or when the company had
already ceased operations and there is no way by which a
judgment in favor of employees could be satisfied, corporate
officers can be held jointly and severally liable with the company.
This Office after a careful consideration of the factual backdrop of
the case is inclined to grant complainants' prayer for the impleader
of Atty. Antonio Carag and Mr. Armando David, to assure that valid
claims of employees would not be defeated by the closure of
respondent company.
The complainants pray for the award to them of moral and

exemplary damages, suffice it to state that they failed to establish
their entitlement to aforesaid reliefs when they did not adduce
persuasive evidence on the matter.
The claim for attorney's fee[s] will be as it is hereby resolved in

complainants' favor. As a consequence of the illegal closure of
respondent company, the complainants were compelled to litigate
to secure benefits due them under pertinent laws. For this purpose,
they secured the services of a counsel to assist them in the course of
the litigation. It is but just and proper to order the respondents who
are responsible for the closure and subsequent filing of the case to
pay attorney's fee[s].

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WHEREFORE, premises considered, judgment is hereby rendered
declaring respondents jointly and severally guilty of illegal closure
and they are hereby ordered as follows:
1. To pay complainants separation pay computed on the basis

of one (1) month for every year of service, a fraction of six (6)
months to be considered as one (1) year in the total amount of
P49,101,621.00; and
2. To pay complainants attorney's fee in an amount equivalent

to 10% of the judgment award.
The claims for moral, actual and exemplary damages are dismissed
for lack of evidence.
SO ORDERED.8 (Emphasis supplied)
MAC, Carag, and David, through Atty. Pastores, filed their

Memorandum before the NLRC on 26 August 1994. Carag, through a
separate counsel, filed an appeal dated 30 August 1994 before the
NLRC. Carag reiterated the arguments in respondents' position
paper filed before Arbiter Ortiguerra, stating that:
2.1 While Atty. Antonio C. Carag is the Chairman of the Board

of MAC and Mr. Armando David is the President, they are not
the owners of MAC;
2.2 MAC is owned by a consortium of banks, as stockholders,

and Atty. Antonio C. Carag and Mr. Armando David are only
minority stockholders of the corporation, owning only qualifying
shares;
2.3 MAC is not a family[-]owned corporation, that in case of a

close [sic] corporation, piercing the corporate veil its [sic]
possible to hold the stockholders liable for the corporation's
liabilities;
2.4 MAC is a corporation with a distinct and separate

personality from that of the stockholders; piercing the
corporate veil to hold the stockholders liable for corporate
liabilities is only true [for] close corporations (family
corporations); this is not the prevailing situation in MAC;
2.5 Atty. Antonio Carag and Mr. Armando David are

professional managers and the extension of shares to them are
just qualifying shares to enable them to occupy subject
position.9
Respondents also filed separate motions to reduce bond.

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The Ruling of the NLRC
In a Resolution promulgated on 5 January 1995, the NLRC Third

Division denied the motions to reduce bond. The NLRC stated that to
grant a reduction of bond on the ground that the appeal is
meritorious would be tantamount to ruling on the merits of the
appeal. The dispositive portion of the Resolution of the NLRC Third
Division reads, thus:
PREMISES CONSIDERED, Motions to Reduce Bond for both

respondents are hereby DISMISSED for lack of merit. Respondents are
directed to post cash or surety bond in the amount of forty eight
million one hundred one thousand six hundred twenty one pesos
(P48,101,621.00) within an unextendible period of fifteen (15) days
from receipt hereof.
No further Motions for Reconsideration shall be entertained.
SO ORDERED.10
Respondents filed separate petitions for certiorari before this Court

under Rule 65 of the 1964 Rules of Court. Carag filed his petition,
docketed as G.R. No. 118820, on 13 February 1995. In the meantime,
we granted MAC's prayer for the issuance of a temporary restraining
order to enjoin the NLRC from enforcing Arbiter Ortiguerra's Decision.
On 31 May 1995, we granted complainants' motion for consolidation
of G.R. No. 118820 with G.R. No. 118839 (MAC v. NLRC, et al.) and
G.R. No. 118880 (David v. Arbiter Ortiguerra, et al.). On 12 July 1999,
after all the parties had filed their memoranda, we referred the
consolidated cases to the appellate court in accordance with our
decision in St. Martin Funeral Home v. NLRC.11 Respondents filed
separate petitions before the appellate court.
The Ruling of the Appellate Court
On 29 February 2000, the appellate court issued a joint decision on

the separate petitions. The appellate court identified two issues as
essential: (1) whether Arbiter Ortiguerra properly held Carag and
David, in their capacities as corporate officers, jointly and severally
liable with MAC for the money claims of the employees; and (2)
whether the NLRC abused its discretion in denying the separate
motions to reduce bond filed by MAC and Carag.
The appellate court held that the absence of a formal hearing

before the Labor Arbiter is not a cause for Carag and David to
impute grave abuse of discretion. The appellate court found that
Carag and David, as the most ranking officers of MAC, had a direct
hand at the time in the illegal dismissal of MAC's employees. The
failure of Carag and David to observe the notice requirement in

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closing the company shows malice and bad faith, which justifies their
solidary liability with MAC. The appellate court also found that the
circumstances of the present case do not warrant a reduction of the
appeal bond. Thus:
IN VIEW WHEREOF, the petitions are DISMISSED. The decision of Labor

Arbiter Isabel Panganiban-Ortiguerra dated June 17, 1994, and the
Resolution dated January 5, 1995, issued by the National Labor
Relations Commission are hereby AFFIRMED. As a consequence of
dismissal, the temporary restraining order issued on March 2, 1995, by
the Third Division of the Supreme Court is LIFTED. Costs against
petitioners.
SO ORDERED.12 (Emphasis in the original)
The appellate court denied respondents' separate motions for

reconsideration.13
In a resolution dated 20 June 2001, this Court's First Division denied

the petition for Carag's failure to show sufficiently that the appellate
court committed any reversible error to warrant the exercise of our
discretionary appellate jurisdiction. Carag filed a motion for
reconsideration of our resolution denying his petition. In a resolution
dated 13 August 2001, this Court's First Division denied Carag's
reconsideration with finality.
Despite our 13 August 2001 resolution, Carag filed a second motion

for reconsideration with an omnibus motion for leave to file a second
motion for reconsideration. This Court's First Division referred the
motion to the Court En Banc. In a resolution dated 25 June 2002, the
Court En Banc resolved to grant the omnibus motion for leave to file
a second motion for reconsideration, reinstated the petition, and
required respondents to comment on the petition. On 25 November
2003, the Court En Banc resolved to suspend the rules to allow the
second motion for reconsideration. This Court's First Division referred
the petition to the Court En Banc on 14 July 2004, and the Court En
Banc accepted the referral on 15 March 2005.
The Issues
Carag questions the appellate court's decision of 29 February 2000

by raising the following issues before this Court:
1. Has petitioner Carag's right to due process been blatantly

violated by holding him personally liable for over P50 million of
the corporation's liability, merely as board chairman and solely
on the basis of the motion to implead him in midstream of the
proceedings as additional respondent, without affording him
the right to present evidence and in violation of the accepted

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procedure prescribed by Rule V of the NLRC Rules of
Procedure, as to render the ruling null and void?
2. Assuming, arguendo, that he had been accorded due

process, is the decision holding him solidarily liable supported
by evidence when the only pleadings (not evidence) before
the Labor Arbiter and that of the Court of Appeals are the
labor union's motion to implead him as respondent and his
opposition thereto, without position papers, without evidence
submitted, and without hearing on the issue of personal liability,
and even when bad faith or malice, as the only legal basis for
personal liability, was expressly found absent and wanting by
[the] Labor Arbiter, as to render said decision null and void?
3. Did the NLRC commit grave abuse of discretion in denying

petitioner's motion to reduce appeal bond?14
We find the petition meritorious.
On Denial of Due Process to Carag and David
Carag asserts that Arbiter Ortiguerra rendered her Decision of 17

June 1994 without issuing summons on him, without requiring him to
submit his position paper, without setting any hearing, without giving
him notice to present his evidence, and without informing him that
the case had been submitted for decision - in violation of Sections
2,15 3,16 4,17 5(b),18 and 11(c) 19 of Rule V of The New Rules of
Procedure of the NLRC.20
It is clear from the narration in Arbiter Ortiguerra's Decision that she

only summoned complainants and MAC, and not Carag, to a
conference for possible settlement. In her Decision, Arbiter Ortiguerra
stated that she scheduled the conference "upon receipt of the
record of the case." At the time of the conference, complainants
had not yet submitted their position paper which contained the
motion to implead Carag. Complainants could not have submitted
their position paper before the conference since procedurally the
Arbiter directs the submission of position papers only after the
conference.21 Complainants submitted their position paper only on
10 January 1994, five months after filing the complaint. In short, at the
time of the conference, Carag was not yet a party to the case. Thus,
Arbiter Ortiguerra could not have possibly summoned Carag to the
conference.
Carag vigorously denied receiving summons to the conference, and

complainants have not produced any order of Arbiter Ortiguerra
summoning Carag to the conference. A thorough search of the

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records of this case fails to show any order of Arbiter Ortiguerra
directing Carag to attend the conference. Clearly, Arbiter Ortiguerra
did not summon Carag to the conference.
When MAC failed to appear at the conference, Arbiter Ortiguerra

declared the case submitted for resolution. In her Decision, Arbiter
Ortiguerra granted complainants' motion to implead Carag and at
the same time, in the same Decision, found Carag personally liable
for the debts of MAC consisting of P49,101,621 in separation pay to
complainants. Arbiter Ortiguerra never issued summons to Carag,
never called him to a conference for possible settlement, never
required him to submit a position paper, never set the case for
hearing, never notified him to present his evidence, and never
informed him that the case was submitted for decision - all in
violation of Sections 2, 3, 4, 5(b), and 11(c) of Rule V of The New
Rules of Procedure of the NLRC.
Indisputably, there was utter absence of due process to Carag at

the arbitration level. The procedure adopted by Arbiter Ortiguerra
completely prevented Carag from explaining his side and presenting
his evidence. This alone renders Arbiter Ortiguerra's Decision a nullity
insofar as Carag is concerned. While labor arbiters are not required
to conduct a formal hearing or trial, they have no license to
dispense with the basic requirements of due process such as
affording respondents the opportunity to be heard. In Habana v.
NLRC,22 we held:
The sole issue to be resolved is whether private respondents OMANFIL

and HYUNDAI were denied due process when the Labor Arbiter
decided the case solely on the basis of the position paper and
supporting documents submitted in evidence by Habana and De
Guzman.
We rule in the affirmative. The manner in which this case was

decided by the Labor Arbiter left much to be desired in terms of
respect for the right of private respondents to due process -
First, there was only one conciliatory conference held in this

case. This was on 10 May 1996. During the conference, the
parties did not discuss at all the possibility of amicable
settlement due to petitioner's stubborn insistence that private
respondents be declared in default.
Second, the parties agreed to submit their respective motions -

petitioner's motion to declare respondents in default and
private respondents' motion for bill of particulars - for the
consideration of the Labor Arbiter. The Labor Arbitration
Associate, one Ms. Gloria Vivar, then informed the parties that

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they would be notified of the action of the Labor Arbiter on the
pending motions.
xxx
Third, since the conference on 10 May 1996 no order or notice

as to what action was taken by the Labor Arbiter in disposing
the pending motions was ever received by private
respondents. They were not declared in default by the Labor
Arbiter nor was petitioner required to submit a bill of particulars.
Fourth, neither was there any order or notice requiring private

respondents to file their position paper, nor an order informing
the parties that the case was already submitted for decision.
What private respondents received was the assailed decision
adverse to them.
It is clear from the foregoing that there was an utter absence of

opportunity to be heard at the arbitration level, as the procedure
adopted by the Labor Arbiter virtually prevented private
respondents from explaining matters fully and presenting their side of
the controversy. They had no chance whatsoever to at least
acquaint the Labor Arbiter with whatever defenses they might have
to the charge that they illegally dismissed petitioner. In fact, private
respondents presented their position paper and documentary
evidence only for the first time on appeal to the NLRC.
The essence of due process is that a party be afforded a reasonable

opportunity to be heard and to submit any evidence he may have
in support of his defense. Where, as in this case, sufficient opportunity
to be heard either through oral arguments or position paper and
other pleadings is not accorded a party to a case, there is
undoubtedly a denial of due process.
It is true that Labor Arbiters are not bound by strict rules of evidence
and of procedure. The manner by which Arbiters dispose of cases
before them is concededly a matter of discretion. However, that
discretion must be exercised regularly, legally and within the
confines of due process. They are mandated to use every
reasonable means to ascertain the facts of each case, speedily,
objectively and without regard to technicalities of law or procedure,
all in the interest of justice and for the purpose of accuracy and
correctness in adjudicating the monetary awards.
In this case, Carag was in a far worse situation. Here, Carag was not
issued summons, not accorded a conciliatory conference, not
ordered to submit a position paper, not accorded a hearing, not
given an opportunity to present his evidence, and not notified that
the case was submitted for resolution. Thus, we hold that Arbiter
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Ortiguerra's Decision is void as against Carag for utter absence of
due process. It was error for the NLRC and the Court of Appeals to
uphold Arbiter Ortiguerra's decision as against Carag.
On the Liability of Directors for Corporate Debts
This case also raises this issue: when is a director personally liable for
the debts of the corporation? The rule is that a director is not
personally liable for the debts of the corporation, which has a
separate legal personality of its own. Section 31 of the Corporation
Code lays down the exceptions to the rule, as follows:
Liability of directors, trustees or officers. - Directors or trustees who

wilfully and knowingly vote for or assent to patently unlawful acts of
the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members
and other persons.
xxxx
Section 31 makes a director personally liable for corporate debts if

he wilfully and knowingly votes for or assents to patently unlawful
acts of the corporation. Section 31 also makes a director personally
liable if he is guilty of gross negligence or bad faith in directing the
affairs of the corporation.
Complainants did not allege in their complaint that Carag wilfully

and knowingly voted for or assented to any patently unlawful act of
MAC. Complainants did not present any evidence showing that
Carag wilfully and knowingly voted for or assented to any patently
unlawful act of MAC. Neither did Arbiter Ortiguerra make any finding
to this effect in her Decision.
Complainants did not also allege that Carag is guilty of gross

negligence or bad faith in directing the affairs of MAC.
Complainants did not present any evidence showing that Carag is
guilty of gross negligence or bad faith in directing the affairs of MAC.
Neither did Arbiter Ortiguerra make any finding to this effect in her
Decision.
Arbiter Ortiguerra stated in her Decision that:
In instances where corporate officers dismissed employees in bad

faith or wantonly violate labor standard laws or when the company
had already ceased operations and there is no way by which a

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judgment in favor of employees could be satisfied, corporate
officers can be held jointly and severally liable with the company.23
After stating what she believed is the law on the matter, Arbiter
Ortiguerra stopped there and did not make any finding that Carag is
guilty of bad faith or of wanton violation of labor standard laws.
Arbiter Ortiguerra did not specify what act of bad faith Carag
committed, or what particular labor standard laws he violated.
To hold a director personally liable for debts of the corporation, and

thus pierce the veil of corporate fiction, the bad faith or wrongdoing
of the director must be established clearly and convincingly.24 Bad
faith is never presumed.25 Bad faith does not connote bad judgment
or negligence. Bad faith imports a dishonest purpose. Bad faith
means breach of a known duty through some ill motive or interest.
Bad faith partakes of the nature of fraud.26 In Businessday
Information Systems and Services, Inc. v. NLRC,27 we held:
There is merit in the contention of petitioner Raul Locsin that the

complaint against him should be dismissed. A corporate officer is not
personally liable for the money claims of discharged corporate
employees unless he acted with evident malice and bad faith in
terminating their employment. There is no evidence in this case that
Locsin acted in bad faith or with malice in carrying out the
retrenchment and eventual closure of the company (Garcia vs.
NLRC, 153 SCRA 640), hence, he may not be held personally and
solidarily liable with the company for the satisfaction of the judgment
in favor of the retrenched employees.
Neither does bad faith arise automatically just because a

corporation fails to comply with the notice requirement of labor laws
on company closure or dismissal of employees. The failure to give
notice is not an unlawful act because the law does not define such
failure as unlawful. Such failure to give notice is a violation of
procedural due process but does not amount to an unlawful or
criminal act. Such procedural defect is called illegal dismissal
because it fails to comply with mandatory procedural requirements,
but it is not illegal in the sense that it constitutes an unlawful or
criminal act.
For a wrongdoing to make a director personally liable for debts of

the corporation, the wrongdoing approved or assented to by the
director must be a patently unlawful act. Mere failure to comply with
the notice requirement of labor laws on company closure or
dismissal of employees does not amount to a patently unlawful act.
Patently unlawful acts are those declared unlawful by law which
imposes penalties for commission of such unlawful acts. There must
be a law declaring the act unlawful and penalizing the act.

suigeneris
An example of a patently unlawful act is violation of Article 287 of
the Labor Code, which states that "[V]iolation of this provision is
hereby declared unlawful and subject to the penal provisions
provided under Article 288 of this Code." Likewise, Article 288 of the
Labor Code on Penal Provisions and Liabilities, provides that "any
violation of the provision of this Code declared unlawful or penal in
nature shall be punished with a fine of not less than One Thousand
Pesos (P1,000.00) nor more than Ten Thousand Pesos (P10,000.00), or
imprisonment of not less than three months nor more than three
years, or both such fine and imprisonment at the discretion of the
court."
In this case, Article 28328 of the Labor Code, requiring a one-month

prior notice to employees and the Department of Labor and
Employment before any permanent closure of a company, does not
state that non-compliance with the notice is an unlawful act
punishable under the Code. There is no provision in any other Article
of the Labor Code declaring failure to give such notice an unlawful
act and providing for its penalty.
Complainants did not allege or prove, and Arbiter Ortiguerra did not
make any finding, that Carag approved or assented to any patently
unlawful act to which the law attaches a penalty for its commission.
On this score alone, Carag cannot be held personally liable for the
separation pay of complainants.
This leaves us with Arbiter Ortiguerra's assertion that "when the

company had already ceased operations and there is no way by
which a judgment in favor of employees could be satisfied,
corporate officers can be held jointly and severally liable with the
company." This assertion echoes the complainants' claim that Carag
is personally liable for MAC's debts to complainants "on the basis of
Article 212(e) of the Labor Code, as amended," which says:
'Employer' includes any person acting in the interest of an employer,

directly or indirectly. The term shall not include any labor
employer. (Emphasis supplied)
Indeed, complainants seek to hold Carag personally liable for the

debts of MAC based solely on Article 212(e) of the Labor Code. This
is the specific legal ground cited by complainants, and used by
Arbiter Ortiguerra, in holding Carag personally liable for the debts of
MAC.
We have already ruled in McLeod v. NLRC29 and Spouses Santos v.

NLRC30 that Article 212(e) of the Labor Code, by itself, does not
make a corporate officer personally liable for the debts of the
corporation. The governing law on personal liability of directors for
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debts of the corporation is still Section 31 of the Corporation Code.
Thus, we explained in McLeod:
Personal liability of corporate directors, trustees or officers attaches

only when (1) they assent to a patently unlawful act of the
corporation, or when they are guilty of bad faith or gross negligence
in directing its affairs, or when there is a conflict of interest resulting in
damages to the corporation, its stockholders or other persons; (2)
they consent to the issuance of watered down stocks or when,
having knowledge of such issuance, do not forthwith file with the
corporate secretary their written objection; (3) they agree to hold
themselves personally and solidarily liable with the corporation; or (4)
they are made by specific provision of law personally answerable for
their corporate action.
http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/
Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm -
xxx
The ruling in A.C. Ransom Labor Union-CCLU v.

NLRC,http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_C
OURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.ht
m - which the Court of Appeals cited, does not apply to this case.
We quote pertinent portions of the ruling, thus:
(a) Article 265 of the Labor Code, in part, expressly provides:
"Any worker whose employment has been terminated as a

consequence of an unlawful lockout shall be entitled to
reinstatement with full backwages."
Article 273 of the Code provides that:
"Any person violating any of the provisions of Article 265 of this Code
shall be punished by a fine of not exceeding five hundred pesos
and/or imprisonment for not less than one (1) day nor more than six
(6) months."
(b) How can the foregoing provisions be implemented when the

employer is a corporation? The answer is found in Article 212 (c) of
the Labor Code which provides:
"(c) 'Employer' includes any person acting in the interest of an

employer, directly or indirectly. The term shall not include any labor
employer."
The foregoing was culled from Section 2 of RA 602, the Minimum

Wage Law. Since RANSOM is an artificial person, it must have an

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officer who can be presumed to be the employer, being the "person
acting in the interest of (the) employer" RANSOM. The corporation,
only in the technical sense, is the employer.
The responsible officer of an employer corporation can be held

personally, not to say even criminally, liable for non-payment of back
wages. That is the policy of the law.
xxxx
(c) If the policy of the law were otherwise, the corporation employer
can have devious ways for evading payment of back wages. In the
instant case, it would appear that RANSOM, in 1969, foreseeing the
possibility or probability of payment of back wages to the 22 strikers,
organized ROSARIO to replace RANSOM, with the latter to be
eventually phased out if the 22 strikers win their case. RANSOM
actually ceased operations on May 1, 1973, after the December 19,
1972 Decision of the Court of Industrial Relations was promulgated
against RANSOM.
(Emphasis supplied)
Clearly, in A.C. Ransom, RANSOM, through its President, organized

ROSARIO to evade payment of backwages to the 22 strikers. This
situation, or anything similar showing malice or bad faith on the part
of Patricio, does not obtain in the present case. In Santos v. NLRC,
the Court held, thus:
It is true, there were various cases when corporate officers were

themselves held by the Court to be personally accountable for the
payment of wages and money claims to its employees. In A.C.
Ransom Labor Union-CCLU vs. NLRC, for instance, the Court ruled
that under the Minimum Wage Law, the responsible officer of an
employer corporation could be held personally liable for
nonpayment of backwages for "(i)f the policy of the law were
otherwise, the corporation employer (would) have devious ways for
evading payment of backwages." In the absence of a clear
identification of the officer directly responsible for failure to pay the
backwages, the Court considered the President of the corporation
as such officer. The case was cited in Chua vs. NLRC in holding
personally liable the vice-president of the company, being the
highest and most ranking official of the corporation next to the
President who was dismissed for the latter's claim for unpaid wages.
A review of the above exceptional cases would readily disclose the

attendance of facts and circumstances that could rightly sanction
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personal liability on the part of the company officer. In A.C. Ransom,
the corporate entity was a family corporation and execution against
it could not be implemented because of the disposition posthaste of
its leviable assets evidently in order to evade its just and due
obligations. The doctrine of "piercing the veil of corporate fiction"
was thus clearly appropriate. Chua likewise involved another family
corporation, and this time the conflict was between two brothers
occupying the highest ranking positions in the company. There were
incontrovertible facts which pointed to extreme personal animosity
that resulted, evidently in bad faith, in the easing out from the
company of one of the brothers by the other.
The basic rule is still that which can be deduced from the Court's
pronouncement in Sunio vs. National Labor Relations Commission,
thus:
We come now to the personal liability of petitioner, Sunio, who was

made jointly and severally responsible with petitioner company and
CIPI for the payment of the backwages of private respondents. This is
reversible error. The Assistant Regional Director's Decision failed to
disclose the reason why he was made personally liable.
Respondents, however, alleged as grounds thereof, his being the
owner of one-half (½) interest of said corporation, and his alleged
arbitrary dismissal of private respondents.
Petitioner Sunio was impleaded in the Complaint in his capacity as

General Manager of petitioner corporation. There appears to be no
evidence on record that he acted maliciously or in bad faith in
terminating the services of private respondents. His act, therefore,
was within the scope of his authority and was a corporate act.
It is basic that a corporation is invested by law with a personality

separate and distinct from those of the persons composing it as well
as from that of any other legal entity to which it may be related.
Mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate
personality. Petitioner Sunio, therefore, should not have been made
personally answerable for the payment of private respondents' back
salaries.http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_
COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.
htm -
Thus, the rule is still that the doctrine of piercing the corporate veil
applies only when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime. In the
absence of malice, bad faith, or a specific provision of law making a
corporate officer liable, such corporate officer cannot be made

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personally liable for corporate liabilities. Neither Article 212[e] nor
Article 273 (now 272) of the Labor Code expressly makes any
corporate officer personally liable for the debts of the corporation.
As this Court ruled in H.L. Carlos Construction, Inc. v. Marina
Properties
Corporation:http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPR
EME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/14
6667.htm -
We concur with the CA that these two respondents are not liable.
Section 31 of the Corporation Code (Batas Pambansa Blg. 68)
provides:
"Section 31. Liability of directors, trustees or officers. - Directors or

trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross
negligence or bad faith ... shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders and other persons."
The personal liability of corporate officers validly attaches only when

(a) they assent to a patently unlawful act of the corporation; or (b)
they are guilty of bad faith or gross negligence in directing its affairs;
or (c) they incur conflict of interest, resulting in damages to the
corporation, its stockholders or other persons.31 (Boldfacing in the
original; boldfacing with underscoring supplied)
Thus, it was error for Arbiter Ortiguerra, the NLRC, and the Court of
Appeals to hold Carag personally liable for the separation pay owed
by MAC to complainants based alone on Article 212(e) of the Labor
Code. Article 212(e) does not state that corporate officers are
personally liable for the unpaid salaries or separation pay of
employees of the corporation. The liability of corporate officers for
corporate debts remains governed by Section 31 of the Corporation
Code.
WHEREFORE, we GRANT the petition. We SET ASIDE the Decision

dated 29 February 2000 and the Resolution dated 27 March 2001 of
the Court of Appeals in CA-G.R. SP Nos. 54404-06 insofar as petitioner
Antonio Carag is concerned.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:

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REYNATO S. PUNO
Chief Justice
CONSUELO YNARES-
SANTIAGO
Associate Justice
Asscociate Justice
ANGELINA SANDOVAL- MA. ALICIA AUSTRIA-

GUTIERREZ MARTINEZ
CONCHITA CARPIO
RENATO C. CORONA
MORALES
Associate Justice
Asscociate Justice
ROMEO J. CALLEJO, SR. ADOLFO S. AZCUNA

DANTE O. TINGA MINITA V. CHICO-NAZARIO

CANCIO C. GARCIA PRESBITERO J. VELASCO, JR.

ANTONIO EDUARDO B. NACHURA

Associate Justice
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify that the
conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the
Court.
REYNATO S. PUNO
Chief Justice
Footnotes
1 Under Rule 45 of the 1997 Rules of Civil Procedure.
suigeneris
2Rollo, pp. 66-87. Penned by Associate Justice Teodoro P.
Regino, with Associate Justices Conchita Carpio Morales (now
Associate Justice of this Court) and Jose L. Sabio, Jr.,
concurring.
3Id. at 89-90. Penned by Associate Justice Teodoro P. Regino,
with Associate Justices Conchita Carpio Morales (now
Associate Justice of this Court ) and Jose L. Sabio, Jr.,
concurring.
4 Id. at 169-175.
5 Id. at 201-204.
6 Id. at 149-150.
7 Id. at 153-155.
8 Id. at 169-175.
9 Id. at 193-194.
10 Id. at 203.
11 356 Phil. 811 (1998).
12 Rollo, p. 86.
13 Id. at 89-90.
14 Id. at 15.
15 Section 2. Mandatory Conference/Conciliation. - Within two
(2) days from receipt of an assigned case, the Labor Arbiter
shall summon the parties to a conference for the purpose of
amicably settling the case upon a fair compromise or
determining the real parties in interest, defining and simplifying
the issues in the case, entering into admissions and/or
stipulations of facts, and threshing out all other preliminary
matters. The notice or summons shall specify the date, time and
place of the preliminary conference/pretrial and shall be
accompanied by a copy of the complaint.
Should the parties arrive at any agreement as to the

whole or any part of the dispute, the same shall be
reduced to writing and signed by the parties and their
respective counsels, if any before the Labor Arbiter. The
settlement shall be approved by the Labor Arbiter after
being satisfied that it was voluntarily entered into by the

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parties and after having explained to them the terms and
consequences thereof.
A compromise agreement entered into by the parties not

in the presence of the Labor Arbiter before whom the
case is pending shall be approved by him if, after
confronting the parties, particularly the complainants, he
is satisfied that they understand the terms and conditions
of the settlement and that it was entered into freely and
voluntarily by them and the agreement is not contrary to
law, morals, and public policies.
A compromise agreement duly entered into in

accordance with this Section shall be final and binding
upon the parties and the Order approving it shall have
the effect of a judgment rendered by the Labor Arbiter in
the final disposition of the case.
The number of conferences shall not exceed three (3)

settings and shall be terminated within thirty (30) calendar
days from the date of the first conference.
16Section 3. Submission of Position Papers/Memorandum. -
Should the parties fail to agree upon an amicable settlement,
either in whole or in part, during the conferences, the Labor
Arbiter shall issue an order stating therein the matters taken up
and agreed upon during the conferences and directing the
parties to simultaneously file their respective verified position
papers.
These verified position papers shall cover only those claims

and causes of action raised in the complaint excluding
those that may have been amicably settled, and shall be
accompanied by all supporting documents including the
affidavits of their respective witnesses which shall take the
place of the latter's direct testimony. The parties shall
thereafter not be allowed to allege facts, or present
evidence to prove facts, not referred to and any cause or
causes of action not included in the complaint or position
papers, affidavits and other documents. Unless otherwise
requested in writing by both parties, the Labor Arbiter shall
direct both parties to submit simultaneously their position
papers/memorandum with the supporting documents
and affidavits within fifteen (15) calendar days from the
date of the last conference, with proof of having
furnished each other with copies thereof.
17Section 4. Determination of Necessity of Hearing. -
Immediately after the submission by the parties of their position
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papers/memorandum, the Labor Arbiter shall motu proprio
determine whether there is need for a formal trial or hearing. At
this stage, he may, at his discretion and for the purpose of
making such determination, ask clarificatory questions to further
elicit facts or information, including but not limited to the
subpoena of relevant documentary evidence, if any, from any
party or witness.
18 Section 5. Period to Decide Case. - x x x x
xxxx
b) If the Labor Arbiter finds no necessity of further hearing

after the parties have submitted their position papers and
supporting documents, he shall issue and Order to that
effect and shall inform the parties, stating the reasons
therefor. In any event, he shall render his decision in the
case within the same period provided in paragraph (a)
hereof.
Section 11. Non-appearance of Parties at

19
Conference/Hearings. - x x x x
xxxx
c) In case of two (2) successive unjustified non-

appearances by the respondent during his turn to present
evidence, despite due notice, the case shall be
considered submitted for decision on the basis of the
evidence so far presented.
Promulgated on 31 August 1990 and took effect on 9

20
October 1990.
21 Section 3, Rule V of The New Rules of Procedure of the NLRC.
22 372 Phil. 873, 877-879 (1999).
23 Rollo, p. 173.
24 McLeod v. NLRC, G.R. No. 146667, 23 January 2007, citing Lim
v. Court of Appeals, 380 Phil. 60 (2000) and Del Rosario v. NLRC,
G.R. No. 85416, 24 July 1990, 187 SCRA 777.
25 Id.
26 Id.
27 G.R. No. 103575, 5 April 1993, 221 SCRA 9, 14.

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28 Art. 283. Closure of Establishment and Reduction of Personnel.
- The employer may also terminate the employment of any
employee due to the installation of labor-saving devices,
redundancy, retrenchment to prevent losses or the closing or
cessation of operation of the establishment or undertaking
unless the closing is for the purpose of circumventing the
provisions of this Title, by serving a written notice on the workers
and the Ministry of Labor and Employment at least one (1)
month before the intended date thereof. In case of termination
due to the installation of labor saving devices or redundancy,
the worker affected thereby shall be entitled to a separation
pay equivalent to at least his one (1) month pay or to at least
one (1) month pay for every year of service, whichever is
higher. In case of retrenchment to prevent losses and in cases
of closures or cessation of operations of establishment or
undertaking not due to serious business losses or financial
reverses, the separation pay shall be equivalent to one (1)
month pay or at least one-half (1/2) month pay for every year
of service, whichever is higher. A fraction of at least six (6)
months shall be considered as one (1) whole year.
29 See note 24.
30 354 Phil. 918 (1998).
31 McLeod v. NLRC, supra note 24.
ANTONIO CARAG VS NLRC ET. AL.
G.R NO. 147590, APRIL 2, 2007
FACTS:
National Federation of Labor Unions (NAFLU) and Mariveles Apparel

Corporation Labor
Union (MACLU), on behalf of all of MAC’s rank and file employees,

filed a complaint against
MAC for illegal dismissal brought about by its illegal closure of

business. They included in their
complaint Mariveles Apparel Corporation’s Chairman of the Board

Antonio Carag in order to be

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solidarily liable for the illegal dismissal and illegal closure of business.
According to the Labor
Union of MAC, the Corporation suddenly closed its business without

following the notice as laid
down in the Labor Law of the Philippines. The Labor Arbiter decided
in favor of the Labor Union
and held that Antonio Carag being the owner of the corporation be
solidarily liable for the
payment of separation pay and backwages of the rank and file

employees. Antonio Carag
questioned the decision of the Labor Arbiter and alleged that the
Corporation and its officers
have separate and distinct personality and the latter cannot be held
liable solidarily in cases of
payment of damages.
Issue:
Whether or not Antonio Carag be held solidarily liable for the

payment of the illegally
dismissed employees.
Held:
The Supreme Court held that the rule is that a director is not
personally liable for the
debts of the corporation, which has a separate legal personality of

its own. Section 31 of the
Corporation Code lays down the exceptions to the rule, as follows:
Liability of directors, trustees or officers. - Directors or trustees
who wilfully and knowingly vote for or assent to patently unlawful

acts of
the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors or

trustees

suigeneris
shall be liable jointly and severally for all damages resulting
therefrom
suffered by the corporation, its stockholders or members and other
persons.
xxxx
Section 31 makes a director personally liable for corporate debts if

he wilfully and knowingly
votes for or assents to patently unlawful acts of the corporation.

Section 31 also makes a
director personally liable if he is guilty of gross negligence or bad

faith in directing the
affairs of the corporation.
Complainants did not allege in their complaint that Carag wilfully

and knowingly voted for
or assented to any patently unlawful act of MAC. Complainants did

not present any evidence
showing that Carag wilfully and knowingly voted for or assented to

any patently unlawful act of
MAC. Neither did Arbiter Ortiguerra make any finding to this effect in
her Decision.
For a wrongdoing to make a director personally liable for debts of

the corporation, the
wrongdoing approved or assented to by the director must be a

patently unlawful act. Mere
failure to comply with the notice requirement of labor laws on

company closure or dismissal of
employees does not amount to a patently unlawful act. Patently

unlawful acts are
those declared unlawful by law which imposes penalties for

commission of such unlawful
acts. There must be a law declaring the act unlawful and penalizing
the act.

suigeneris
Wherefore, Antonio Carag is not liable to the debt of the
Corporation as to the illegally
dismissed employees of MAC
Yao Ka Sin Trading vs. CA (209 SCRA 763 [1992])
G.R. No. L-53820 June 15, 1992
YAO KA SIN TRADING, owned and operated by YAO KA SIN,

petitioner,
vs.
HONORABLE COURT OF APPEALS and PRIME WHITE CEMENT
CORPORATION, represented by its President-Chairman,
CONSTANCIO B. MALAGNA, respondents.
DAVIDE, JR., J.:
Assailed in this petition for review is the decision of the respondent

Court of Appeals in C.A.-G.R. No. 61072-R, 1 promulgated on 21
December 1979, reversing the decision 2 of the then Court of First
Instance (now Regional Trial Court) of Leyte dated 20 November
1975 in Civil Case No. 5064 entitled "Yao Ka Sin Trading versus Prime
White Cement Corporation."
The root of this controversy is the undated letter-offer of Constancio

B. Maglana, President and Chairman of the Board of private
respondent Prime White Cement Corporation, hereinafter referred to
as PWCC, to Yao Ka Sin Trading, hereinafter referred to as YKS, which
describes itself as "a business concern of single proprietorship," 3 and
is represented by its manager, Mr. Henry Yao; the letter reads as
follows:
PRIME WHITE CEMENT CORPORATION

602 Cardinal Life Building
Herran Street, Manila
Yao Ka Sin
Tacloban City
Gentlemen:

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We have the pleasure to submit hereby our firm offer to
you under the following quotations, terms, and conditions,
to wit:
1). Commodity — Prime White Cement
2). Price — At your option: a) P24.30 per 94 lbs.

bag net, FOB Cebu City; and b) P23.30 per 94
lbs. bag net, FOB Asturias Cebu.
3). Quality — As fully specified in certificate No.

224-73 by Bureau of Public Works, Republic of
the Philippines.
4). Quantity — Forty-five Thousand (45,000)

bags at 94 lbs. net per bag withdrawable in
guaranteed monthly quantity of Fifteen
Thousand (15,000) bags minimum effective
from June, 1973 to August 1973.
5). Delivery Schedule — Shipment be made

within four (4) days upon receipt of your
shipping instruction.
6). Bag/Container — a) All be made of

Standard Kraft (water resistant paper, 4 ply,
with bursting strength of 220 pounds, and b)
Breakage allowance — additional four percent
(4%) over the quantity of each shipment.
7). Terms of Payment — Down payment of

PESOS: TWO HUNDRED FORTY THREE THOUSAND
(P243,000.00) payable on the signing of this
contract and the balance to be paid upon
presentation of corresponding shipping
documents.
It is understood that in the event of a delay in our

shipment, you hold the option to discount any price
differential resulting from a lower market price vis-a-vis the
contract price. In addition, grant (sic) you the option to
extend this contract until the complete delivery of Forty
Five Thousand (45,000) bags of 94 lbs. each is made by us.
You are also hereby granted the option to renew this
contract under the same price, terms and conditions.
Please countersign on the space provided for below as

your acknowledgement and confirmation of the above
transaction. Thank You.

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Very truly yours,
PRIME WHITE
CEMENT
CORPORATION
BY: (SGD)
CONSTANCIO
B. MAGLANA
President &
Chairman
CONFORME:
YAO KA SIN TRADING

BY: (SGD) HENRY YAO
WITNESSES:
(SGD) T. CATINDIG (SGD) ERNESTO LIM
RECEIVED from Mr. Henry Yao of Yao Ka Sin Trading, in

pursuance of the above offer, the sum of Pesos: TWO
HUNDRED FORTY THREE THOUSAND ONLY (P243,000.00) in
the form of Producers' Bank of the Philippines Check No.
C-153576 dated June 7, 1973.
PRIME WHITE
CEMENT
CORPORATION
BY:
(SGD)
CONSTANCIO
B. MAGLANA
President &
Chairman 4
This letter-offer, hereinafter referred to as Exhibit "A", was prepared,

typed and signed on 7 June 1973 in the office of Mr. Teodoro
Catindig, Senior Vice-President of the Consolidated Bank and Trust
Corporation (Solid Bank). 5
The principal issue raised in this case is whether or not the aforesaid
letter-offer, as accepted by YKS, is a contract that binds the PWCC.
The trial court rule in favor of the petitioner, but the respondent Court
held otherwise.
The records disclose the following material operative facts:

suigeneris
In its meeting in Cebu City on 30 June 1973, or twenty-three (23) days
after the signing of Exhibit "A", the Board of Directors of PWCC
disapproved the same; the rejection is evidenced by the following
Minutes (Exhibit "10"):
the 10,000 bags of white cement sold to Yao Ka Sin

Trading is sold not because of the alledged letter-contract
adhered to by them, but must be understood as a new
and separate contract, and has in no way to do with the
letter-offer which they (sic) as consummated is by this
resolution totally disapproved and is unacceptable to the
corporation.
On 5 July 1973, PWCC wrote a letter (Exhibit "1") to YKS informing it of

the disapproval of Exhibit "A". Pursuant, however, to its decision with
respect to the 10,000 bags of cement, it is issued the corresponding
Delivery Order (Exhibit "4") and Official Receipt No. 0394 (Exhibit "5")
for the payment of the same in the amount of P243,000.00 This is the
same amount received and acknowledged by Maglana in Exhibit
"A".
YKS accepted without protest both the Delivery and Official

Receipts.
While YKS denied having received a copy of Exhibit "1", it was

established that the original thereof was shown to Mr. Henry Yao;
since no one would sign a receipt for it, the original was left at the
latter's office and this fact was duly noted in Exhibit "1" (Exhibit "l-A").
On 4 August 1973, PWCC wrote a letter (Exhibit "2") to YKS in answer

to the latter's 4 August 1973 letter stating that it is "withdrawing or
taking delivery of not less than 10,000 bags of white cement on
August 6-7, 1973 at Asturias, Cebu, thru M/V Taurus." In said reply,
PWCC reminded YKS of its (PWCC's) 5 July 1973 letter (Exhibit "1") and
told the latter that PWCC "only committed to you and which you
correspondingly paid 10,000 bags of white cement of which 4,150
bags were already delivered to you as of August 11, 1973. 6
Unfortunately, no copy of the said 4 August 1973 letter of YKS was
presented in evidence.
On 21 August 1973, PWCC wrote another letter (Exhibit "3") 7 to YKS in

reply to the latter's letter of 15 August 1973. Enclosed in the reply was
a copy of Exhibit "2". While the records reveal that YKS received this
reply also on 21 August 1973 (Exhibit "3" "A"), 8 it still denied having
received it. Likewise, no copy of the so-called 15 August 1973 letter
was presented in evidence.

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On 10 September 1973, YKS, through Henry Yao, wrote a letter 9 to
PWCC as a follow-up to the letter of 15 August 1973; YKS insisted on
the delivery of 45,030 bags of white cement. 10
On 12 September 1973, Henry Yao sent a letter (Exhibit "G") to PWCC

calling the latter's attention to the statement of delivery dated 24
August 1973, particularly the price change from P23.30 to P24.30 per
94 lbs. bag net FOB Asturias, Cebu. 11
On 2 November 1973, YKS sent a telegram (Exhibit "C") 12 to PWCC

insisting on the full compliance with the terms of Exhibit "A" and
informing the latter that it is exercising the option therein stipulated.
On 3 November 1973, YKS sent to PWCC a letter (Exhibit "D") as a

follow-up to the 2 November 1973 telegram, but this was returned to
sender as unclaimed. 13
As of 7 December 1973, PWCC had delivered only 9,775 bags of

white cement.
On 9 February 1974, YKS wrote PWCC a letter (Exhibit "H") requesting,

for the last time, compliance by the latter with its obligation under
Exhibit "A". 14
On 27 February 1974, PWCC sent an answer (Exhibit "7") to the

aforementioned letter of 9 February 1974; PWCC reiterated the
unenforceability of Exhibit "A". 15
On 4 March 1974, YKS filed with the then Court of First Instance of
Leyte a complaint for Specific Performance with Damages against
PWCC. The complaint 16 was based on Exhibit "A" and was docketed
as Civil Case No. 5064.
In its Answer with Counterclaim 17 filed on 1 July 1974, PWCC denied

under oath the material averments in the complaint and alleged
that: (a) YKS "has no legal personality to sue having no legal
personality even by fiction to represent itself;" (b) Mr. Maglana, its
President and Chairman, was lured into signing Exhibit "A"; (c) such
signing was subject to the condition that Exhibit "A" be approved by
the Board of Directors of PWCC, as corporate commitments are
made through it; (d) the latter disapproved it, hence Exhibit "A" was
never consummated and is not enforceable against PWCC; (e) it
agreed to sell 10,000 bags of white cement, not under Exhibit "A", but
under a separate contract prepared by the Board; (f) the rejection
by the Board of Exhibit "A" was made known to YKS through various
letters sent to it, copies of which were attached to the Answer as
Annexes 1, 2 and 3; 18 (g) YKS knew, per Delivery Order 19 and Official
Receipt 20 issued by PWCC, that only 10;000 bags were sold to it
without any terms or conditions, at P24.30 per bag FOB Asturias,

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Cebu; (h) YKS is solely to blame for the failure to take complete
delivery of 10,000 bags for it did not send its boat or truck to PWCC's
plant; and (i) YKS has, therefore, no cause of action.
In its Counterclaim, PWCC asks for moral damages in the amount of

not less than P10,000.00, exemplary damages in the sum of
P500,000.00 and attorney's fees in the sum of P10,000.00.
On 24 July 1974, YKS filed its Answer to the Counterclaim. 21
Issues having been joined, the trial court conducted a pre-trial. 22 On

that occasion, the parties admitted that according to the By-Laws of
PWCC, the Chairman of the Board, who is also the President of the
corporation, "has the power to execute and sign, for and in behalf of
the corporation, all contracts or agreements which the corporation
enters into," subject to the qualification that "all the president's
actuations, prior to and after he had signed and executed said
contracts, shall be given to the board of directors of defendant
Corporation." Furthermore, it was likewise stated for the record "that
the corporation is a semi-subsidiary of the government because of
the NIDC participation in the same, and that all contracts of the
corporation should meet the approval of the NIDC and/or the PNB
Board because of an exposure and financial involvement of around
P10 million therein. 23
During the trial, PWCC presented evidence to prove that Exhibit "A" is
not binding upon it because Mr. Maglana was not authorized to
make the offer and sign the contract in behalf of the corporation.
Per its By-Laws (Exhibit "8"), only the Board of Directors has the power
. . . (7) To enter into (sic) agreement or contract of any kind with any
person in the name and for and in behalf of the corporation through
its President, subject only to the declared objects and purpose of the
corporation and the existing provisions of law. 24 Among the powers
of the President is "to operate and conduct the business of the
corporation according to his own judgment and discretion,
whenever the same is not expressly limited by such orders, directives
or resolutions." 25 Per standard practice of the corporation, contracts
should first pass through the marketing and intelligence unit before
they are finalized. Because of its interest in the PWCC, the NIDC,
through its comptroller, goes over contracts involving funds of and
white cement produced by the PWCC. Finally, among the duties of
its legal counsel is to review proposed contracts before they are
submitted to the Board. While the president. may be tasked with the
preparation of a contract, it must first pass through the legal counsel
and the comptroller of the corporation. 26

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On 20 November 1975, after trial on the merits, the court handed
down its decision in favor of herein petitioner, the dispositive portion
of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby

rendered:
(1) Ordering defendant: to complete the

delivery of 45,000 bags of prime white cement
at 94 lbs. net per bag at the price agreed, with
a breakage allowance of empty bags at 4%
over the quantity agreed;
(2) Ordering defendant to pay P50,000.00, as

moral damages; P5,000.00 as exemplary
damages; P3,000.00 as attorney's fees; and the
costs of these proceedings.
SO ORDERED. 27
In disregarding PWCC's theory, the trial court interpreted the

provision of the By-Laws — granting its Board of Directors the power
to enter into an agreement or contract of any kind with any person
through the President, — to mean that the latter may enter into such
contract or agreement at any time and that the same is not subject
to the ratification of the board of directors but "subject only to the
declared objects and purpose of the corporation and existing laws."
It then concluded:
It is obvious therefore, that it is not the whole membership

of the board of directors who actually enters into any
contract with any person in the name and for and in
behalf of the corporation, but only its president. It is
likewise crystal clear that this automatic representation of
the board by the president is limited only by the "declared
objects and purpose of the corporation and existing
provisions of law." 28
It likewise interpreted the provision on the power of the president to

"operate and conduct the business of the corporation according to
the orders, directives or resolutions of the board of directors and
according to his own judgment and discretion whenever the same is
not expressly limited by such orders, directives and resolutions," to
mean that the president can operate and conduct the business of
the corporation according to his own judgment and discretion as
long as it is not expressly limited by the orders, directives or resolutions
of the board of directors. 29 The trial court found no evidence that
the board had set a prior limitation upon the exercise of such
judgment and discretion; it further ruled that the By-Laws, does not
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require that Exhibit "A" be approved by the Board of Directors. Finally,
in the light of the Chairman's power to "execute and sign for and in
behalf of the corporation all contracts or agreements which the
corporation may enter into" (Exhibit "I-1"), it concluded that Mr.
Maglana merely followed the By-Laws "presumably both as president
and chairman of the board thereof." 30 Hence, Exhibit "A" was validly
entered into by Maglana and thus binds the corporation.
The trial court, however, ruled that the option to sell is not valid
because it is not supported by any consideration distinct from the
price; it was exercised before compliance with the original contract
by PWCC; and the repudiation of the original contract by PWCC
was deemed a withdrawal of the option before acceptance by the
petitioner.
Both parties appealed from the said decision to the respondent

Court of Appeals before which petitioner presented the following
Assignment of Errors:
THE TRIAL COURT ERRED IN HOLDING THAT THE OPTION TO

RENEW THE CONTRACT OF SALE IS NOT ENFORCEABLE
BECAUSE THE OPTION WAS MADE EVEN BEFORE THE
COMPLIANCE OF (sic) THE ORIGINAL CONTRACT BY
DEFENDANT AND THAT DEFENDANT'S PROMISE TO SELL IS
NOT SUPPORTED BY ANY CONSIDERATION DISTINCT FROM
THE PRICE.
II
THE TRIAL COURT ERRED IN NOT AWARDING TO THE

PLAINTIFF ACTUAL DAMAGES, SUFFICIENT EXEMPLARY
DAMAGES AND ATTORNEY'S FEES AS ALLEGED IN THE
COMPLAINT AND PROVEN DURING THE TRIAL." 31
while the private respondent cited the following errors:
THE TRIAL COURT ERRED IN HOLDING THAT EXHIBIT "A" IS A

VALID CONTRACT OR PLAINTIFF CAN CLAIM THAT THE
PROPOSED LETTER-CONTRACT, EXHIBIT "A" IS LEGALLY
ENFORCEABLE, AS THE SAME IS A MERE UNACCEPTED
PROPOSAL, NOT HAVING BEEN PREVIOUSLY AUTHORIZED
TO BE ENTERED INTO OR LATER ON RATIFIED BY THE
DEFENDANTS BOARD OF DIRECTORS; IN FACT EXHIBIT "A"
WAS TOTALLY REJECTED AND DISAPPROVED IN TOTO BY
THE DEFENDANT'S BOARD OF DIRECTORS IN CLEAR, PLAIN

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LANGUAGE AND DULY INFORMED AND TRANSMITTED TO
PLAINTIFF.
II
THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF CAN

LEGALLY UTILIZE THE COURTS AS THE FORUM TO GIVE LIFE
AND VALIDITY TO A TOTALLY UNENFORCEABLE OR NON-
EXISTING CONTRACT.
III
THE TRIAL COURT ERRED IN ALLOWING YAO KA SIN TO

IMPUGN AND CONTRADICT HIS VERY OWN ACTUATIONS
AND REPUDIATE HIS ACCEPTANCE AND RECEIPTS OF
BENEFITS FROM THE COUNTER-OFFER OF DEFENDANT FOR
10,000 BAGS OF CEMENT ONLY, UNDER THE PRICE, TERMS
AND CONDITIONS TOTALLY FOREIGN TO AND WHOLLY
DIFFERENT FROM THOSE WHICH APPEAR IN EXHIBIT "A".
IV
THE TRIAL COURT ERRED IN DISMISSING DEFENDANT'S

COUNTER-CLAIMS AS THE SAME ARE DULY SUPPORTED BY
CLEAR AND INDUBITABLE EVIDENCE. 32
In its decision 33 promulgated on 21 December 1979, the respondent

Court reversed the decision of the trial court, thus:
WHEREFORE, the judgment appealed from is REVERSED

and set aside, Plaintiff's complaint is dismissed with costs.
Plaintiff is ordered to pay defendant corporation
P25,000.00 exemplary damages, and P10,000.00 attorney's
fees.
SO ORDERED.
Such conclusion is based on its findings, to wit:
Before resolving the issue, it is helpful to bring out some

preliminary facts. First, the defendant corporation is
supervised and principally financed by the National
Investment and Development Corporation (NIDC), a
subsidiary investment of the Philippine National Bank
(PNB), with cash financial exposure of some
P10,000,000.00. PNB is a government financial institution
whose Board is chairmaned (sic) by the Minister of
National Defense. This fact is very material to the issue of
whether defendant corporations president can bind the
corporation with his own act.
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Second, for failure to deny under oath the following
actionable documents in support of defendant's
counterclaim:
1. The resolution contained in defendant's letter

to plaintiff dated July 5, 1973, on the 10,000
bags of white cement delivered to plaintiff was
not by reason of the letter contract, Exhibit "A",
which was totally disapproved by defendant
corporation's board of directors, clearly stating
that "If within ten (10) days from date hereof,
we will not hear from you but you will withdraw
cement at P24.30 per bag from our plant, then
we will deposit your check of P243,000.00
dated June 7, 1973 issued by the Producers
Bank of the Philippines, per instruction of the
Board." (Annex "I" to defendant's Answer).
2. Letter of defendant to plaintiff dated August

4, 1973 that defendant "only committed to you
and which you accordingly paid 10,000 bags
of white cement of which 4,150 bags were
already delivered to you as of August 1, 1973"
(Annex "2" of defendant's Answer).
3. Letter dated August 21, 1973 to plaintiff

reiterating defendant's letter of August 4, 1973
(Annex "3" to defendant's Answer).
4. Letter to stores dated August 21, 1973,
5. Receipt from plaintiff (sic) P243,000.00 in

payment of 10,000 bags of white cement at
P24.30 per bag (Annex "5", to defendant's
Answer).
plaintiff is deemed to have admitted, not only the due

execution and genuiness (sic) of said documents, (Rule 8
Sec. 8, Rules of Court) but also the allegations therein
(Rule 9, Sec. 1, Rules of Court). All of the foregoing
documents tend to prove that the letter-offer, Exhibit "A",
was rejected by defendant corporation's Board of
Directors and plaintiff was duly notified thereof and that
the P243,000.00 check was considered by both parties as
payment of the 10,000 bags of cement under a separate
transaction. As proof of which plaintiff did not complain
nor protest until February 9, 1974, when he threatened
legal action.

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Third, Maglana's signing the letter-offer prepared for him in
the Solidbank was made clearly upon the condition that it
was subject to the approval of the board of directors of
defendant corporation. We find consistency herein
because according to the Corporation Law, and the By-
Laws of defendant corporation, all corporate
commitments and business are conducted by, and
contracts entered into through, the express authority of
the Board of Directors (Sec. 28. Corp. Law, Exh "I" or "8").
Fourth, What Henry Yao and Maglana agreed upon as

embodied in Exhibit "A", insofar as defendant corporation
is concerned, was an unauthorized contract (Arts. 1317
and 1403 (1), Civil Code). And because Maglana was not
authorized by the Board of Directors of defendant
corporation nor was his, actuation ratified by the Board,
the agreement is unenforceable (Art. 1403 (1), Civil Code;
Raquiza et al. vs. Lilles et al., 13 CA Rep. 343; Gana vs.
Archbishop of Manila, 43 O-G. 3224).
While it may be true that Maglana is President of

defendant corporation nowhere in the Articles of
Incorporation nor in the By-Laws of said corporation was
he empowered to enter into any contract all by himself
and bind the corporation without first securing the
authority and consent of the Board of Directors. Whatever
authority Maglana may have must be derived from the
Board of Directors of defendant corporation. A corporate
officers power as an agent must be sought from the law,
the articles of incorporation and the By-Laws or from a
resolution of the Board (Vicente vs. Geraldez, 52 SCRA
227, Board of Liquidators vs. Kalaw, 20 SCRA 987).
It clearly results from the foregoing that the judgment

appealed from is untenable. Having no cause of action
against defendant corporation, plaintiff is not entitled to
any relief. We see no justification, therefore, for the court a
quo's awards in its favor. . . . 34
Its motion for reconsideration having been denied by the

respondent Court in its resolution 35 dated 15 April 1980, petitioner
filed the instant petition based on the following grounds:
1. That the contract (Exh. "A") entered into by the

President and Chairman of the Board of Directors
Constancio B. Maglana in behalf of the respondent
corporation binds the said corporation.

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2. That the contract (Exh. "A") was never novated nor
superceded (sic) by a subsequent contract.
3. That the option to renew the contract as contained in

Exhibit "A" is enforceable.
4. That Sec. 8, Rule 8 of the Rules of Court only applies

when the adverse party appear (sic) to be a party to the
instrument but not to one who is not a party to the
instrument and Sec. 1, Rule 9 of the said Rules with regards
(sic) to denying under oath refers only to allegations of
usury. 36
We gave due course 37 to the petition after private respondent filed

its Comment 38 and required the parties to submit simultaneously
their Memoranda, which the parties subsequently complied with. 39
Before going any further, this Court must first resolve an issue which,
although raised in the Answer of private respondent, was neither
pursued in its appeal before the respondent Court nor in its
Comment and Memorandum in this case. It also eluded the
attention of the trial court and the respondent Court. The issue,
which is of paramount importance, concerns the lack of capacity of
plaintiff/petitioner to sue. In the caption of both the complaint and
the instant petition, the plaintiff and the petitioner, respectively, is:
YAO KA SIN TRADING,

owned and operated by
YAO KA SIN. 40
and is described in the body thereof as "a business concern of single

proprietorship owned and operated by Yao Ka Sin." 41 In the body of
the petition, it is described as "a single proprietorship business
concern." 42 It also appears that, as gathered from the decision of
the trial court, no Yao Ka Sin testified. Instead, one Henry Yao took
the witness stand and testified that he is the "manager of Yao Ka Sin
Trading" and "it was in representation of the plaintiff" that he signed
Exhibit "A" 43 Under Section 1, Rule 3 of the Rules of Court, only natural
or juridical persons or entities authorized by law may be parties in a
civil action. In Juasing Hardware vs. Mendoza, 44 this Court held that
a single proprietorship is neither a natural person nor a juridical
person under Article 44 of the Civil Code; it is not an entity authorized
by law to bring suit in court:
The law merely recognizes the existence of a sole

proprietorship as a form of business organization
conducted for profit by a single individual, and requires
the proprietor or owner thereof to secure licenses and
permits, register the business name, and pair taxes to the
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national government. It does not vest juridical or legal
personality upon the sole proprietorship nor empower it to
file or defend an action in court. 45
Accordingly, the proper party plaintiff/petitioner should be YAO KA

SIN. 46
The complaint then should have been amended to implead Yao Ka

Sin as plaintiff in substitution of Yao Ka Sin Trading. However, it is now
too late in the history of this case to dismiss this petition and, in effect,
nullify all proceedings had before the trial court and the respondent
Court on the sole ground of petitioner's lack of capacity to sue.
Considering that private respondent did not pursue this issue before
the respondent Court and this Court; that, as We held in Juasing, the
defect is merely formal and not substantial, and an amendment to
cure such defect is expressly authorized by Section 4, Rule 10 of the
Rules of Court which provides that "[a] defect in the designation of
the parties may be summarily corrected at any stage of the action
provided no prejudice is caused thereby to the adverse party;" and
that "[a] sole proprietorship does not, of coarse, possess any juridical
personality separate and apart from the personality of the owner of
the enterprise and the personality of the persons acting in the name
of such proprietorship," 47 We hold and declare that Yao Ka Sin
should be deemed as the plaintiff in Civil Case No. 5064 and the
petitioner in the instant case. As this Court stated nearly eighty (80)
years ago in Alonso vs. Villamor: 48
No one has been misled by the error in the name of the

party plaintiff. If we should by reason of this error send this
case back for amendment and new trial, there would be
on the retrial the same complaint, the same answer, the
same defense, the same interests, the same witnesses,
and the same evidence. The name of the plaintiff would
constitute the only difference between the old trial and
the new. In our judgment there is not enough in a name
to justify such action.
And now to the merits of the petition.
The respondent Court correctly ruled that Exhibit "A" is not binding
upon the private respondent. Mr. Maglana, its President and
Chairman, was not empowered to execute it. Petitioner, on the
other hand, maintains that it is a valid contract because the
Maglana has the power to enter into contracts for the corporation
as implied from the following provisions of the By-Laws of private
respondent:
a) The power of the Board of Directors to . . . enter into

(sic) agreement or contract of any kind with any person in
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the name and for and in behalf of the corporation
through its President, subject only to the declared objects
and purpose of the corporation and the existing provisions
of law. (Exhibit "8-A"); and
b) The power of the Chairman of the Board of Directors to

"execute and sign, for and in behalf of the corporation, all
contracts or agreements which the corporation may
enter into" (Exhibit "I-1").
And even admitting, for the sake of argument, that Mr. Maglana
was not so authorized under the By-Laws, the private respondent,
pursuant to the doctrine laid down by this Court in Francisco vs.
Government Service Insurance
System 49 and Board of Liquidators vs. Kalaw, 50 is still bound by his
act for clothing him with apparent authority.
Since a corporation, such as the private respondent, can act only

through its officers and agents, "all acts within the powers of said
corporation may be performed by agents of its selection; and,
except so far as limitations or restrictions may be imposed by special
charter, by-law, or statutory provisions, the same general principles
of law which govern the relation of agency for a natural person
govern the officer or agent of a corporation, of whatever status or
rank, in respect to his power to act for the corporation; and agents
when once appointed, or members acting in their stead, are subject
to the same rules, liabilities and incapacities as are agents of
individuals and private persons." 51 Moreover, " . . . a corporate
officer or agent may represent and bind the corporation in
transactions with third persons to the extent that 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. 52
While there can be no question that Mr. Maglana was an officer —

the President and Chairman — of private respondent corporation at
the time he signed Exhibit "A", the above provisions of said private
respondent's By-Laws do not in any way confer upon the President
the authority to enter into contracts for the corporation
independently, of the Board of Directors. That power is exclusively
lodged in the latter. Nevertheless, to expedite or facilitate the
execution of the contract, only the President — and not all the

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members of the Board, or so much thereof as are required for the
act — shall sign it for the corporation. This is the import of the words
through the president in Exhibit "8-A" and the clear intent of the
power of the chairman "to execute and sign for and in behalf of the
corporation all contracts and agreements which the corporation
may enter into" in Exhibit "I-1". Both powers presuppose a prior act of
the corporation exercised through the Board of Directors. No greater
power can be implied from such express, but limited, delegated
authority. Neither can it be logically claimed that any power greater
than that expressly conferred is inherent in Mr. Maglana's position as
president and chairman of the corporation.
Although there is authority "that if the president is given general

control and supervision over the affairs of the corporation, it will be
presumed that he has authority to make contract and do acts within
the course of its ordinary business," 53 We find such inapplicable in this
case. We note that the private corporation has a general manager
who, under its By-Laws has, inter alia, the following powers: "(a) to
have the active and direct management of the business and
operation of the corporation, conducting the same accordingly to
the order, directives or resolutions of the Board of Directors or of the
president." It goes without saying then that Mr. Maglana did not
have a direct and active and in the management of the business
and operations of the corporation. Besides, no evidence was
adduced to show that Mr. Maglana had, in the past, entered into
contracts similar to that of Exhibit "A" either with the petitioner or with
other parties.
Petitioner's last refuge then is his alternative proposition, namely, that

private respondent had clothed Mr. Maglana with the apparent
power to act for it and had caused persons dealing with it to believe
that he was conferred with such power. The rule is of course settled
that "[a]lthough an officer or agent acts without, or in excess of, his
actual authority if he acts within the scope of an apparent authority
with which the corporation has clothed him by holding him out or
permitting him to appear as having such authority, the corporation is
bound thereby in favor of a person who deals with him in good faith
in reliance on such apparent authority, as where an officer is
allowed to exercise a particular authority with respect to the
business, or a particular branch of it, continuously and publicly, for a
considerable time." 54 Also, "if a private corporation intentionally or
negligently clothes its officers or agents with apparent power to
perform acts for it, the corporation will be estopped to deny that
such apparent authority in real, as to innocent third persons dealing
in good faith with such officers or agents." 55 This "apparent authority
may result from (1) the general manner, by which the corporation
holds out an officer or agent as having power to act or, in other
words, the apparent authority with which it clothes him to act in

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general or (2) acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, whether within or without
the scope of his ordinary powers. 56
It was incumbent upon the petitioner to prove that indeed the

private respondent had clothed Mr. Maglana with the apparent
power to execute Exhibit "A" or any similar contract. This could have
been easily done by evidence of similar acts executed either in its
favor or in favor of other parties. Petitioner miserably failed to do
that. Upon the other hand, private respondent's evidence
overwhelmingly shows that no contract can be signed by the
president without first being approved by the Board of Directors;
such approval may only be given after the contract passes through,
at least, the comptroller, who is the NIDC representative, and the
legal counsel.
The cases then of Francisco vs. GSIS and Board of Liquidators vs.
Kalaw are hopelessly unavailing to the petitioner. In said cases, this
Court found sufficient evidence, based on the conduct and
actuations of the corporations concerned, of apparent authority
conferred upon the officer involved which bound the corporations
on the basis of ratification. In the first case, it was established that the
offer of compromise made by plaintiff in the letter, Exhibit "A", was
validly accepted by the GSIS. The terms of the trial offer were clear,
and over the signature of defendant's general manager Rodolfo
Andal, plaintiff was informed telegraphically that her proposal had
been accepted. It was sent by the GSIS Board Secretary and
defendant did not disown the same. Moreover, in a letter remitting
the payment of P30,000 advanced by her father, plaintiff quoted
verbatim the telegram of acceptance. This was in itself notice to the
corporation of the terms of the allegedly unauthorized telegram.
Notwithstanding this notice, GSIS pocketed the amount and kept
silent about the telegram. This Court then ruled that:
This silence, taken together with the unconditional

acceptance of three other subsequent remittances from
plaintiff, constitutes in itself a binding ratification of the
original agreement (Civil Code, Art. 1393).
Art. 1393. Ratification may be effected

expressly or tactly it is understood that there is a
tacit ratification if, with knowledge of the
reason which renders the contract voidable
and such reason having ceased, the person
who has a right to invoke it should execute an
act which necessarily implies an intention to
waive his right

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In the second case, this Court found:
In the case at bar, the practice of the corporation has

been to allow its general manager to negotiate and
execute contracts in its copra trading activities for and in
NACOCO's behalf without prior board approval. If the by-
laws were to be literally followed, the board should give its
stamp of prior approval on all corporate contracts. But
that board itself, by its acts and through acquiescence,
practically laid aside the by-laws requirement of prior
approval.
Under the given circumstances, the Kalaw contracts are

valid corporate acts.
The inevitable conclusion then is that Exhibit "A" is an unenforceable

contract under Article 1317 of the Civil Code which provides as
follows:
Art. 1317. No one may contract in the name of another

without being authorized by the latter, or unless he has by
law a right to represent him.
A contract entered into in the name of another by one

who has no authority or legal representation, or who has
acted beyond his powers, shall be unenforceable, unless
it is ratified, expressly or impliedly, by the person on whose
behalf it, has been execrated, before it is revoked by the
other contracting party.
The second ground is based on a wrong premise. It assumes,

contrary to Our conclusion above, that Exhibit "A" is a valid contract
binding upon the private respondent. It was effectively disapproved
and rejected by the Board of Directors which, at the same time,
considered the amount of P243,000.00 received Mr. Maglana as
payment for 10,000 bags of white cement, treated as an entirely
different contract, and forthwith notified petitioner of its decision that
"If within ten (10) days from date hereof we will not hear from you but
you will withdraw cement at P24.30 per bag from our plant, then we
will deposit your check of P243,000.00 dated June 7, 1973 issued by
the Producers Bank of the Philippines, per instruction of the Board." 57
Petitioner received the copy of this notification and thereafter
accepted without any protest the Delivery Receipt covering the
10,000 bags and the Official Receipt for the P243,000.00. The
respondent Court thus correctly ruled that petitioner had in fact
agreed to a new transaction involving only 10,000 bags of white
cement.

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The third ground must likewise fail. Exhibit "A" being unenforceable,
the option to renew it would have no leg to stand on. The river
cannot rise higher than its source. In any event, the option granted
in. this case is without any consideration Article 1324 of the Civil
Code expressly provides that:
When the offerer has allowed the offeree a certain period

to accept, the offer may be withdrawn at any time
before acceptance by communicating such withdrawal,
except when the option is founded upon a consideration,
as something paid or promised.
while Article 1749 of the same Code provides:
A promise to buy and sell a determinate thing for a price

certain is reciprocally demandable.
An accepted unilateral promise to buy or to sell a

determinate thing for a price certain is binding upon the
promissor if the promise is supported by a consideration
distinct from the price.
Accordingly, even if it were accepted, it can not validly bind the

private respondent. 58
The fourth ground is, however, meritorious.
Section 8, Rule 8 of the Rules of Court provides:
Sec. 8. How to contest genuineness of such documents —

When an action or defense is founded upon a written
instrument, copied in or attached in the corresponding
pleading as provided in the preceding section, the
genuineness and due execution of the instrument shall be
deemed admitted unless the adverse party, under oath,
specifically denies them, and sets forth what he claims to
be the facts; but this provision does not apply when the
adverse party does not appear, to be a party to the
instrument or when compliance with an order for an
inspection of the original instrument is refused.
It is clear that the petitioner is not a party to any of the documents

attached to the private respondent's Answer. Thus, the above
quoted rule is not applicable. 59 While the respondent Court, erred in
holding otherwise, the challenged decision must, nevertheless, stand
in view of the above disquisitions on the first to the third grounds of
the petition.

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WHEREFORE, judgment is hereby rendered AFFIRMING the decision
of respondent Court of Appeals in C.A. G.R. No. 61072-R
promulgated on 21 December 1979.
Cost against the petitioner.
Gutierrez, Jr., Feliciano, Bidin and Romero, JJ., concur.
209 SCRA 763 – Business Organization – Corporation Law – Liability of

Officers – Apparent Authority
In 1973, Constancio Maglana, president of Prime White Cement

Corporation, sent an offer letter to Yao Ka Sin Trading. The offer
states that Prime White is willing to sell 45,000 bags of cement at
P24.30 per bag. The offer letter was received by Yao Ka Sin’s
manager, Henry Yao. Yao accepted the letter and pursuant to the
letter, he sent a check in the amount of P243,000.00 equivalent to
the value of 10,000 bags of cement. However, the Board of Directors
of Prime White rejected the offer letter sent by Maglana but it
considered Yao’s acceptance letter as a new contract offer hence
the Board sent a letter to Yao telling him that Prime White is instead
willing to sell only 10,000 bags to Yao Ka Sin and that he has ten days
to reply; that if no reply is made by Yao then they will consider it as
an acceptance and that thereafter Prime White shall deposit the
P243k check in its account and then deliver the cements to Yao Ka
Sin. Henry Yao never replied.
Later, Yao Ka Sin sued Prime White to compel the latter to comply
with what Yao Ka Sin considered as the true contract, i.e., 45,000
bags at P24.30 per bag. Prime White in its defense averred that
although Maglana is empowered to sign contracts in behalf of Prime
White, such contracts are still subject to approval by Prime White’s
Board, and then it still requires further approval by the National
Investment and Development Corporation (NIDC), a government
owned and controlled corporation because Prime White is a
subsidiary of NIDC.
Henry Yao asserts that the letter from Maglana is a binding contract
because it was made under the apparent authority of Maglana. The
trial court ruled in favor of Yao Ka Sin. The Court of Appeals reversed
the trial court.
ISSUE: Whether or not the president of a corporation is clothed with

apparent authority to enter into binding contracts with third persons
without the authority of the Board.

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HELD: No. The Board may enter into contracts through the president.
The president may only enter into contracts upon authority of the
Board. Hence, any agreement signed by the president is subject to
approval by the Board. Unlike a general manager (like the case of
Francisco vs GSIS), the president has no apparent authority to enter
into binding contracts with third persons. Further, if indeed the by-
laws of Prime White did provide Maglana with apparent authority,
this was not proven by Yao Ka Sin.
As a rule, apparent authority may result from (1) the general manner,
by which the corporation holds out an officer or agent as having
power to act or, in other words, the apparent authority with which it
clothes him to act in general or (2) acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof,
whether within or without the scope of his ordinary powers. These are
not present in this case.
Also, the subsequent letter by Prime White to Yao Ka Sin is binding

because Yao Ka Sin’s failure to respond constitutes an acceptance,
per stated in the letter itself – which was not contested by Henry Yao
during trial.
DBP vs. CA (363 SCRA 307 [2001])
G.R. No. 126200 August 16, 2001
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
HONORABLE COURT OF APPEALS and REMINGTON INDUSTRIAL SALES
CORPORATION, respondents.
KAPUNAN, J.:
Before the Court is a petition for review on certiorari under Rule 45 of

the Rules of Court, seeking a review of the Decision of the Court of
Appeals dated October 6, 1995 and the Resolution of the same
court dated August 29, 1996.

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Marinduque Mining-Industrial Corporation (Marinduque Mining), a
corporation engaged in the manufacture of pure and refined nickel,
nickel and cobalt in mixed sulfides; copper ore/concentrates,
cement and pyrite conc., obtained from the Philippine National
Bank (PNB) various loan accommodations. To secure the loans,
Marinduque Mining executed on October 9, 1978 a Deed of Real
Estate Mortgage and Chattel Mortgage in favor of PNB. The
mortgage covered all of Marinduque Mining's real properties,
located at Surigao del Norte, Sipalay, Negros Occidental, and at
Antipolo, Rizal, including the improvements thereon. As of November
20, 1980, the loans extended by PNB amounted to P4 Billion,
exclusive of interest and charges.1
On July 13, 1981, Marinduque Mining executed in favor of PNB and

the Development Bank of the Philippines (DBP) a second Mortgage
Trust Agreement. In said agreement, Marinduque Mining mortgaged
to PNB and DBP all its real properties located at Surigao del Norte,
Sipalay, Negros Occidental, and Antipolo, Rizal, including the
improvements thereon. The mortgage also covered all of
Marinduque Mining's chattels, as well as assets of whatever kind,
nature and description which Marinduque Mining may subsequently
acquire in substitution or replenishment or in addition to the
properties covered by the previous Deed of Real and Chattel
Mortgage dated October 7, 1978. Apparently, Marinduque Mining
had also obtained loans totaling P2 Billion from DBP, exclusive of
interest and charges.2
On April 27, 1984, Marinduque Mining executed in favor of PNB and

DBP an Amendment to Mortgage Trust Agreement by virtue of which
Marinduque Mining mortgaged in favor of PNB and DBP all other real
and personal properties and other real rights subsequently acquired
by Marinduque Mining.3
For failure of Marinduque Mining to settle its loan obligations, PNB

and DBP instituted sometime on July and August 1984 extrajudicial
foreclosure proceedings over the mortgaged properties.
The events following the foreclosure are narrated by DBP in its

petition, as follows:
In the ensuing public auction sale conducted on August 31,

1984, PNB and DBP emerged and were declared the highest
bidders over the foreclosed real properties, buildings, mining
claims, leasehold rights together with the improvements
thereon as well as machineries [sic] and equipments [sic] of
MMIC located at Nonoc Nickel Refinery Plant at Surigao del
Norte for a bid price of P14,238,048,150.00 [and] [o]ver the
foreclosed chattels of MMIC located at Nonoc Refinery Plant at

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Surigao del Norte, PNB and DBP as highest bidders, bidded for
P170,577,610.00 (Exhs. "5" to "5-A", "6", "7" to "7-AA-" PNB/DBP).
For the foreclosed real properties together with all the buildings,
major machineries & equipment and other improvements of
MMIC located at Antipolo, Rizal, likewise held on August 31,
1984, were sold to PNB and DBP as highest bidders in the sum of
P1,107,167,950.00 (Exhs. "10" to "10-X"-PNB/ DBP).
At the auction sale conducted on September 7, 1984[,] over

the foreclosed real properties, buildings, &
machineries/equipment of MMIC located at Sipalay, Negros
Occidental were sold to PNB and DBP, as highest bidders, in the
amount of P2,383,534,000.00 and P543,040.000.00 respectively
(Exhs. "8" to "8-BB", "9" to "90-GGGGGG"-PNB/DBP).
Finally, at the public auction sale conducted on September 18,

1984 on the foreclosed personal properties of MMIC, the same
were sold to PNB and DBP as the highest bidder in the sum of
P678,772,000.00 (Exhs. "11" and "12-QQQQQ"-PNB).
PNB and DBP thereafter thru a Deed of Transfer dated August

31, 1984, purposely, in order to ensure the continued operation
of the Nickel refinery plant and to prevent the deterioration of
the assets foreclosed, assigned and transferred to Nonoc
Mining and Industrial Corporation all their rights, interest and
participation over the foreclosed properties of MMIC located
at Nonoc Island, Surigao del Norte for an initial consideration of
P14,361,000,000.00 (Exh. "13"-PNB).
Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB

and DBP assigned and transferred in favor of Maricalum Mining
Corp. all its rights, interest and participation over the foreclosed
properties of MMIC at Sipalay, Negros Occidental for an initial
consideration of P325,800,000.00 (Exh. "14"-PNB/DBP).
On February 27, 1987, PNB and DBP, pursuant to Proclamation

No. 50 as amended, again assigned, transferred and conveyed
to the National Government thru [sic] the Asset Privatization
Trust (APT) all its existing rights and interest over the assets of
MMIC, earlier assigned to Nonoc Mining and Industrial
Corporation, Maricalum Mining Corporation and Island
Cement Corporation (Exh. "15" & "15-A" PNB/DBP).4
In the meantime, between July 16, 1982 to October 4, 1983,

Marinduque Mining purchased and caused to be delivered
construction materials and other merchandise from Remington
Industrial Sales Corporation (Remington) worth P921,755.95. The
purchases remained unpaid as of August 1, 1984 when Remington
filed a complaint for a sum of money and damages against
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Marinduque Mining for the value of the unpaid construction
materials and other merchandise purchased by Marinduque Mining,
as well as interest, attorney's fees and the costs of suit.
On September 7, 1984, Remington's original complaint was

amended to include PNB and DBP as co-defendants in view of the
foreclosure by the latter of the real and chattel mortgages on the
real and personal properties, chattels, mining claims, machinery,
equipment and other assets of Marinduque Mining.5
On September 13, 1984, Remington filed a second amended

complaint to include as additional defendant, the Nonoc Mining
and Industrial Corporation (Nonoc Mining). Nonoc Mining is the
assignee of all real and personal properties, chattels, machinery,
equipment and all other assets of Marinduque Mining at its Nonoc
Nickel Factory in Surigao del Norte.6
On March 26, 1986, Remington filed a third amended complaint

including the Maricalum Mining Corporation (Maricalum Mining) and
Island Cement Corporation (Island Cement) as co-defendants.
Remington asserted that Marinduque Mining, PNB, DBP, Nonoc
Mining, Maricalum Mining and Island Cement must be treated in law
as one and the same entity by disregarding the veil of corporate
fiction since:
1. Co-defendants NMIC, Maricalum and Island Cement which

are newly created entities are practically owned wholly by
defendants PNB and DBP, and managed by their officers, aside
from the fact that the aforesaid co-defendants NMIC,
Maricalum and Island Cement were organized in such a hurry
and in such suspicious circumstances by co-defendants PNB
and DBP after the supposed extrajudicial foreclosure of MMIC's
assets as to make their supposed projects assets, machineries
and equipment which were originally owned by co-defendant
MMIC beyond the reach of creditors of the latter.
2. The personnel, key officers and rank-and-file workers and

employees of co-defendants NMIC, Maricalum and Island
Cement creations of co-defendants PNB and DBP were the
personnel of co-defendant MMIC such that . . . practically
there has only been a change of name for all legal purpose
and intents
3. The places of business not to mention the mining claims and

project premises of co-defendants NMIC, Maricalum and Island
Cement likewise used to be the places of business, mining
claims and project premises of co-defendant MMIC as to make
the aforesaid co-defendants NMIC, Maricalum and Island

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Cement mere adjuncts and subsidiaries of co-defendants PNB
and DBP, and subject to their control and management.
On top of everything, co-defendants PNB, DBP NMIC,

Maricalum and Island Cement being all corporations created
by the government in the pursuit of business ventures should not
be allowed to ignore, x x x or obliterate with impunity nay
illegally, the financial obligations of x x x MMIC whose
operations co-defendants PNB and DBP had highly financed
before the alleged extrajudicial foreclosure of defendant
MMIC's assets, machineries and equipment to the extent that
major policies of co-defendant MMIC were being decided
upon by co-defendants PNB and DBP as major financiers who
were represented in its board of directors forming part of the
majority thereof which through the alleged extrajudicial
foreclosure culminated in a complete take-over by co-
defendants PNB and DBP bringing about the organization of
their co-defendants NMIC, Maricalum and Island Cement to
which were transferred all the assets, machineries and pieces
of equipment of co-defendant MMIC used in its nickel mining
project in Surigao del Norte, copper mining operation in
Sipalay, Negros Occidental and cement factory in Antipolo,
Rizal to the prejudice of creditors of co-defendant MMIC such
as plaintiff Remington Industrial Sales Corporation whose
stockholders, officers and rank-and-file workers in the legitimate
pursuit of its business activities, invested considerable time,
sweat and private money to supply, among others, co-
defendant MMIC with some of its vital needs for its operation,
which co-defendant MMIC during the time of the transactions
material to this case became x x x co-defendants PNB and
DBP's instrumentality, business conduit, alter ego, agency (sic),
subsidiary or auxiliary corporation, by virtue of which it
becomes doubly necessary to disregard the corporation fiction
that co-defendants PNB, DBP, MMIC, NMIC, Maricalum and
Island Cement, six (6) distinct and separate entities, when in
fact and in law, they should be treated as one and the same
at least as far as plaintiff's transactions with co-defendant
MMIC are concerned, so as not to defeat public convenience,
justify wrong, subvert justice, protect fraud or confuse
legitimate issues involving creditors such as plaintiff, a fact
which all defendants were as (sic) still are aware of during all
the time material to the transactions subject of this case.7
On April 3, 1989, Remington filed a motion for leave to file a fourth

amended complaint impleading the Asset Privatization Trust (APT) as
co-defendant. Said fourth amended complaint was admitted by the
lower court in its Order dated April 29, 1989.

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On April 10, 1990, the Regional Trial Court (RTC) rendered a decision
in favor of Remington, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the

plaintiff, ordering the defendants Marinduque Mining &
Industrial Corporation, Philippine National Bank, Development
Bank of the Philippines, Nonoc Mining and Industrial
Corporation, Maricalum Mining Corporation, Island Cement
Corporation and Asset Privatization Trust to pay, jointly and
severally, the sum of P920,755.95, representing the principal
obligation, including the stipulated interest as of June 22, 1984,
plus ten percent (10%) surcharge per annum by way of
penalty, until the amount is fully paid; the sum equivalent to
10% of the amount due as and for attorney's fees; and to pay
the costs.8
Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island

Cement and APT, the Court of Appeals, in its Decision dated
October 6, 1995, affirmed the decision of the RTC. Petitioner filed a
Motion for Reconsideration, which was denied in the Resolution
dated August 29, 1996.
Hence, this petition, DBP maintaining that Remington has no cause

of action against it or PNB, nor against their transferees, Nonoc
Mining, Island Cement, Maricalum Mining, and the APT.
On the other hand, private respondent Remington submits that the

transfer of the properties was made in fraud of creditors. The
presence of fraud, according to Remington, warrants the piercing of
the corporate veil such that Marinduque Mining and its transferees
could be considered as one and the same corporation. The
transferees, therefore, are also liable for the value of Marinduque
Mining's purchases.
In Yutivo Sons Hardware vs. Court of Tax Appeals,9 cited by the Court
of Appeals in its decision,10 this Court declared:
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 corporations 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 case of two corporations, merge
them into one". (Koppel [Phils.], Inc., vs. Yatco, 71 Phil. 496,
citing 1 Fletcher Encyclopedia of Corporation, Permanent Ed.,
pp. 135-136; U.S. vs. Milwaukee Refrigeration Transit Co., 142
Fed., 247, 255 per Sanborn, J.). x x x.

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In accordance with the foregoing rule, this Court has disregarded
the separate personality of the corporation where the corporate
entity was used to escape liability to third parties.11 In this case,
however, we do not find any fraud on the part of Marinduque
Mining and its transferees to warrant the piercing of the corporate
veil.
It bears stressing that PNB and DBP are mandated to foreclose on

the mortgage when the past due account had incurred arrearages
of more than 20% of the total outstanding obligation. Section 1 of
Presidential Decree No. 385 (The Law on Mandatory Foreclosure)
provides:
It shall be mandatory for government financial institutions, after

the lapse of sixty (60) days from the issuance of this decree, to
foreclose the collateral and/or securities for any loan, credit
accommodation, and/or guarantees granted by them
whenever the arrearages on such account, including accrued
interest and other charges, amount to at least twenty percent
(20%) of the total outstanding obligations, including interest
and other charges, as appearing in the books of account
and/or related records of the financial institution concerned.
This shall be without prejudice to the exercise by the
government financial institution of such rights and/or remedies
available to them under their respective contracts with their
debtors, including the right to foreclose on loans, credits,
accommodations and/or guarantees on which the arrearages
are less than twenty (20%) percent.
Thus, PNB and DBP did not only have a right, but the duty under said
law, to foreclose upon the subject properties. The banks had no
choice but to obey the statutory command.
The import of this mandate was lost on the Court of Appeals, which
reasoned that under Article 19 of the Civil Code, "Every person must,
in the exercise of his rights and in the performance of his duties, act
with justice, give everyone his due, and observe honesty and good
faith." The appellate court, however, did not point to any fact
evidencing bad faith on the part of the Marinduque Mining and its
transferees. Indeed, it skirted the issue entirely by holding that the
question of actual fraudulent intent on the part of the interlocking
directors of DBP and Marinduque Mining was irrelevant because:
As aptly stated by the appellee in its brief, "x x x where the

corporations have directors and officers in common, there may
be circumstances under which their interest as officers in one
company may disqualify them in equity from representing both
corporations in transactions between the two. Thus, where one

suigeneris
corporation was 'insolvent and indebted to another, it has
been held that the directors of the creditor corporation were
disqualified, by reason of self-interest, from acting as directors
of the debtor corporation in the authorization of a mortgage or
deed of trust to the former to secure such indebtedness x x x"
(page 105 of the Appellee's Brief). In the same manner that "x x
x when the corporation is insolvent, its directors who are its
creditors can not secure to themselves any advantage or
preference over other creditors. They can not thus take
advantage of their fiduciary relation and deal directly with
themselves, to the injury of others in equal right. If they do,
equity will set aside the transaction at the suit of creditors of the
corporation or their representatives, without reference to the
question of any actual fraudulent intent on the part of the
directors, for the right of the creditors does not depend upon
fraud in fact, but upon the violation of the fiduciary relation to
the directors." x x x (page 106 of the Appellee's Brief)
We also concede that "x x x directors of insolvent corporation,

who are creditors of the company, can not secure to
themselves any preference or advantage over other creditors
in the payment of their claims. It is not good morals or good
law. The governing body of officers thereof are charged with
the duty of conducting its affairs strictly in the interest of its
existing creditors, and it would be a breach of such trust for
them to undertake to give any one of its members any
advantage over any other creditors in securing the payment of
his debts in preference to all others. When validity of these
mortgages, to secure debts upon which the directors were
indorsers, was questioned by other creditors of the corporation,
they should have been classed as instruments rendered void by
the legal principle which prevents directors of an insolvent
corporation from giving themselves a preference over outside
creditors. x x x" (page 106-107 of the Appellee's Brief.)12
The Court of Appeals made reference to two principles in

corporation law. The first pertains to transactions between
corporations with interlocking directors resulting in the prejudice to
one of the corporations. This rule does not apply in this case,
however, since the corporation allegedly prejudiced (Remington) is
a third party, not one of the corporations with interlocking directors
(Marinduque Mining and DBP).
The second principle invoked by respondent court involves "directors

x x x who are creditors" which is also inapplicable herein. Here, the
creditor of Marinduque Mining is DBP, not the directors of
Marinduque Mining.

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Neither do we discern any bad faith on the part of DBP by its
creation of Nonoc Mining, Maricalum and Island Cement. As
Remington itself concedes, DBP is not authorized by its charter to
engage in the mining business.13 The creation of the three
corporations was necessary to manage and operate the assets
acquired in the foreclosure sale lest they deteriorate from non-use
and lose their value. In the absence of any entity willing to purchase
these assets from the bank, what else would it do with these
properties in the meantime? Sound business practice required that
they be utilized for the purposes for which they were intended.
Remington also asserted in its third amended complaint that the use
of Nonoc Mining, Maricalum and Island Cement of the premises of
Marinduque Mining and the hiring of the latter's officers and
personnel also constitute badges of bad faith.
Assuming that the premises of Marinduque Mining were not among

those acquired by DBP in the foreclosure sale, convenience and
practicality dictated that the corporations so created occupy the
premises where these assets were found instead of relocating them.
No doubt, many of these assets are heavy equipment and it may
have been impossible to move them. The same reasons of
convenience and practicality, not to mention efficiency, justified the
hiring by Nonoc Mining, Maricalum and Island Cement of
Marinduque Mining's personnel to manage and operate the
properties and to maintain the continuity of the mining operations.
To reiterate, the doctrine of piercing the veil of corporate fiction

applies only when such corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime.14 To
disregard the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established. It cannot
be presumed.15 In this case, the Court finds that Remington failed to
discharge its burden of proving bad faith on the part of Marinduque
Mining and its transferees in the mortgage and foreclosure of the
subject properties to justify the piercing of the corporate veil.
The Court of Appeals also held that there exists in Remington's favor
a "lien" on the unpaid purchases of Marinduque Mining, and as
transferee of these purchases, DBP should be held liable for the
value thereof.
In the absence of liquidation proceedings, however, the claim of

Remington cannot be enforced against DBP. Article 2241 of the Civil
Code provides:
ARTICLE 2241. With reference to specific movable property of

the debtor, the following claims or liens shall be preferred:

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xxx xxx xxx
(3) Claims for the unpaid price of movables sold, on said

movables, so long as they are in the possession of the debtor,
up to the value of the same; and if the movable has been
resold by the debtor and the price is still unpaid, the lien may
be enforced on the price; this right is not lost by the
immobilization of the thing by destination, provided it has not
lost its form, substance and identity, neither is the right lost by
the sale of the thing together with other property for a lump
sum, when the price thereof can be determined proportionally;
(4) Credits guaranteed with a pledge so long as the things

pledged are in the hands of the creditor, or those guaranteed
by a chattel mortgage, upon the things pledged or
mortgaged, up to the value thereof;
xxx xxx xxx
In Barretto vs. Villanueva,16 the Court had occasion to construe

Article 2242, governing claims or liens over specific immovable
property. The facts that gave rise to the case were summarized by
this Court in its resolution as follows:
x x x Rosario Cruzado sold all her right, title, and interest and
that of her children in the house and lot herein involved to Pura
L. Villanueva for P19,000.00. The purchaser paid P1,500 in
advance, and executed a promissory note for the balance of
P17,500.00. However, the buyer could only pay P5,500 on
account of the note, for which reason the vendor obtained
judgment for the unpaid balance. In the meantime, the buyer
Villanueva was able to secure a clean certificate of title (No.
32626), and mortgaged the property to appellant Magdalena
C. Barretto, married to Jose C. Baretto, to secure a loan of
P30,000.03, said mortgage having been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of

Barretto. The latter foreclosed the mortgage in her favor,
obtained judgment, and upon its becoming final asked for
execution on 31 July 1958. On 14 August 1958, Cruzado filed a
motion for recognition for her "vendor's lien" in the amount of
P12,000.00, plus legal interest, invoking Articles 2242, 2243, and
2249 of the new Civil Code. After hearing, the court below
ordered the "lien" annotated on the back of Certificate of Title
No. 32526, with the proviso that in case of sale under the
foreclosure decree the vendor's lien and the mortgage credit
of appellant Barretto should be paid pro rata from the
proceeds. Our original decision affirmed this order of the Court
of First Instance of Manila.
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In its decision upholding the order of the lower court, the Court
ratiocinated thus:
Article 2242 of the new Civil Code enumerates the claims,

mortgages and liens that constitute an encumbrance on
specific immovable property, and among them are:
"(2) For the unpaid price of real property sold, upon the
immovable sold"; and
"(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or
more credits with respect to the same specific real property or
real rights, they shall be satisfied pro-rata, after the payment of
the taxes and assessments upon the immovable property or
real rights."
Application of the above-quoted provisions to the case at bar

would mean that the herein appellee Rosario Cruzado as an
unpaid vendor of the property in question has the right to share
pro-rata with the appellants the proceeds of the foreclosure
sale.
xxx xxx xxx
As to the point made that the articles of the Civil Code on

concurrence and preference of credits are applicable only to
the insolvent debtor, suffice it to say that nothing in the law
shows any such limitation. If we are to interpret this portion of
the Code as intended only for insolvency cases, then other
creditor-debtor relationships where there are concurrence of
credits would be left without any rules to govern them, and it
would render purposeless the special laws on insolvency.17
Upon motion by appellants, however, the Court reconsidered its

decision. Justice J.B.L. Reyes, speaking for the Court, explained the
reasons for the reversal:
A. The previous decision failed to take fully into account the

radical changes introduced by the Civil Code of the Philippines
into the system of priorities among creditors ordained by the
Civil Code of 1889.
Pursuant to the former Code, conflicts among creditors entitled

to preference as to specific real property under Article 1923
were to be resolved according to an order of priorities
established by Article 1927, whereby one class of creditors
could exclude the creditors of lower order until the claims of

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the former were fully satisfied out of the proceeds of the sale of
the real property subject of the preference, and could even
exhaust proceeds if necessary.
Under the system of the Civil Code of the Philippines, however,

only taxes enjoy a similar absolute preference. All the remaining
thirteen classes of preferred creditors under Article 2242 enjoy
no priority among themselves, but must be paid pro rata, i.e., in
proportion to the amount of the respective credits. Thus, Article
2249 provides:
"If there are two or more credits with respect to the same
specific real property or real rights, they shall be satisfied pro
rata, after the payment of the taxes and assessments upon the
immovable property or real rights."
But in order to make this prorating fully effective, the preferred

creditors enumerated in Nos. 2 to 14 of Article 2242 (or such of
them as have credits outstanding) must necessarily be
convened, and the import of their claims ascertained. It is thus
apparent that the full application of Articles 2249 and 2242
demands that there must be first some proceeding where the
claims of all the preferred creditors may be bindingly
adjudicated, such as insolvency, the settlement of decedent's
estate under Rule 87 of the Rules of Court, or other liquidation
proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that
—
"The claims or credits enumerated in the two preceding articles

shall be considered as mortgages or pledges of real or personal
property, or liens within the purview of legal provisions
governing insolvency x x x (Italics supplied).
And the rule is further clarified in the Report of the Code

Commission, as follows
"The question as to whether the Civil Code and the Insolvency

Law can be harmonized is settled by this Article (2243). The
preferences named in Articles 2261 and 2262 (now 2241 and
2242) are to be enforced in accordance with the Insolvency
Law." (Italics supplied)
Thus, it becomes evident that one preferred creditor's third-

party claim to the proceeds of a foreclosure sale (as in the
case now before us) is not the proceeding contemplated by
law for the enforcement of preferences under Article 2242,
unless the claimant were enforcing a credit for taxes that enjoy

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absolute priority. If none of the claims is for taxes, a dispute
between two creditors will not enable the Court to ascertain
the pro rata dividend corresponding to each, because the
rights of the other creditors likewise enjoying preference under
Article 2242 can not be ascertained. Wherefore, the order of
the Court of First Instance of Manila now appealed from,
decreeing that the proceeds of the foreclosure sale be
apportioned only between appellant and appellee, is
incorrect, and must be reversed. [Emphasis supplied]
The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon.
Lantin, Jr., etc., et al.,18 and in two cases both entitled Development
Bank of the Philippines vs. NLRC.19
Although Barretto involved specific immovable property, the ruling

therein should apply equally in this case where specific movable
property is involved. As the extrajudicial foreclosure instituted by PNB
and DBP is not the liquidation proceeding contemplated by the Civil
Code, Remington cannot claim its pro rata share from DBP.
WHEREFORE, the petition is GRANTED. The decision of the Court of

Appeals dated October 6, 1995 and its Resolution promulgated on
August 29, 1996 is REVERSED and SET ASIDE. The original complaint
filed in the Regional Trial Court in CV Case No. 84-25858 is hereby
DISMISSED.
SO ORDERED.
Davide, Jr., C .J ., Puno, Pardo and Ynares-Santiago, JJ ., concur.
BPI Leasing Corp. vs. CA (416 SCRA 4 [2003])
G.R. No. 127624 November 18, 2003
BPI LEASING CORPORATION, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, COURT OF TAX APPEAL AND
COMMISSIONER OF INTERNAL REVENUE, respondents.
AZCUNA, J.:
The present petition for review on certiorari assails the decision1 of

the Court of Appeals in CA-G.R. SP No. 38223 and its subsequent
resolution2 denying the motion for reconsideration. The assailed

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decision and resolution affirmed the decision of the Court of Tax
Appeals (CTA) which denied petitioner BPI Leasing Corporation’s
(BLC) claim for tax refund in CTA Case No. 4252.
The facts are not disputed.
BLC is a corporation engaged in the business of leasing properties.3

For the calendar year 1986, BLC paid the Commissioner of Internal
Revenue (CIR) a total of P1,139,041.49 representing 4% "contractor’s
percentage tax" then imposed by Section 205 of the National
Internal Revenue Code (NIRC), based on its gross rentals from
equipment leasing for the said year amounting to P27,783,725.42.4
On November 10, 1986, the CIR issued Revenue Regulation 19-86.

Section 6.2 thereof provided that finance and leasing companies
registered under Republic Act 5980 shall be subject to gross receipt
tax of 5%-3%-1% on actual income earned. This means that
companies registered under Republic Act 5980, such as BLC, are not
liable for "contractor’s percentage tax" under Section 205 but are,
instead, subject to "gross receipts tax" under Section 260 (now
Section 122) of the NIRC. Since BLC had earlier paid the
aforementioned "contractor’s percentage tax," it re-computed its
tax liabilities under the "gross receipts tax" and arrived at the amount
of P361,924.44.
On April 11, 1988, BLC filed a claim for a refund with the CIR for the
amount of P777,117.05, representing the difference between the
P1,139,041.49 it had paid as "contractor’s percentage tax" and
P361,924.44 it should have paid for "gross receipts tax." 5 Four days
later, to stop the running of the prescriptive period for refunds,
petitioner filed a petition for review with the CTA.6
In a decision dated May 13, 1994,7 the CTA dismissed the petition
and denied BLC’s claim of refund. The CTA held that Revenue
Regulation 19-86, as amended, may only be applied prospectively
such that it only covers all leases written on or after January 1, 1987,
as stated under Section 7 of said revenue regulation:
Section 7. Effectivity – These regulations shall take effect on

January 1, 1987 and shall be applicable to all leases written on
or after the said date.
The CTA ruled that, since BLC’s rental income was all received prior
to 1986, it follows that this was derived from lease transactions prior
to January 1, 1987, and hence, not covered by the revenue
regulation.
A motion for reconsideration of the CTA’s decision was filed, but was
denied in a resolution dated July 26, 1995.8 BLC then appealed the

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case to the Court of Appeals, which issued the aforementioned
assailed decision and resolution.9 Hence, the present petition.
In seeking to reverse the denial of its claim for tax refund, BLC submits
that the Court of Appeals and the CTA erred in not ruling that
Revenue Regulation 19-86 may be applied retroactively so as to
allow BLC’s claim for a refund of P777,117.05.
Respondents, on the other hand, maintain that the provision on the

date of effectivity of Revenue Regulation 19-86 is clear and
unequivocal, leaving no room for interpretation on its prospective
application. In addition, respondents argue that the petition should
be dismissed on the ground that the Verification/Certification of
Non-Forum Shopping was signed by the counsel of record and not
by BLC, through a duly authorized representative, in violation of
Supreme Court Circular 28-91.
In a resolution dated March 29, 2000,10 the petition was given due
course and the Court required the parties to file their respective
Memoranda. Upon submission of the Memoranda, the issues in this
case were delineated, as follows:11
WHETHER THE INSTANT PETITION FOR REVIEW ON CERTIORARI

SUBSTANTIALLY COMPLIES WITH SUPREME COURT CIRCULAR 28-
91.
WHETHER REVENUE REGULATION 19-86, AS AMENDED, IS

LEGISLATIVE OR INTERPRETATIVE IN NATURE.
WHETHER REVENUE REGULATION 19-86, AS AMENDED, IS

PROSPECTIVE OR RETROACTIVE IN ITS APPLICATION.
WHETHER PETITIONER, AS FOUND BY THE COURT OF APPEALS,

FAILED TO MEET THE QUANTUM OF EVIDENCE REQUIRED IN
REFUND CASES.
WHETHER PETITIONER, AS FOUND BY THE COURT OF APPEALS, IS

ESTOPPED FROM CLAIMING ITS PRESENT REFUND.
As to the first issue, the Court agrees with respondents’ contention

that the petition should be dismissed outright for failure to comply
with Supreme Court Circular 28-91, now incorporated as Section 2 of
Rule 42 of the Rules of Court. The records plainly show, and this has
not been denied by BLC, that the certification was executed by
counsel who has not been shown to have specific authority to sign
the same for BLC.
In BA Savings Bank v. Sia,12 it was held that the certificate of non-

forum shopping may be signed, for and on behalf of a corporation,

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by a specifically authorized lawyer who has personal knowledge of
the facts required to be disclosed in such document. This ruling,
however, does not mean that any lawyer, acting on behalf of the
corporation he is representing, may routinely sign a certification of
non-forum shopping. The Court emphasizes that the lawyer must be
"specifically authorized" in order validly to sign the certification.
Corporations have no powers except those expressly conferred

upon them by the Corporation Code and those that are implied by
or are incidental to its existence. These powers are exercised through
their board of directors and/or duly authorized officers and agents.
Hence, physical acts, like the signing of documents, can be
performed only by natural persons duly authorized for the purpose
by corporate bylaws or by specific act of the board of directors.13
The records are bereft of the authority of BLC’s counsel to institute

the present petition and to sign the certification of non-forum
shopping. While said counsel may be the counsel of record for BLC,
the representation does not vest upon him the authority to execute
the certification on behalf of his client. There must be a resolution
issued by the board of directors that specifically authorizes him to
institute the petition and execute the certification, for it is only then
that his actions can be legally binding upon BLC.
BLC however insists that there was substantial compliance with SC

Circular No. 28-91 because the verification/certification was issued
by a counsel who had full personal knowledge that no other petition
or action has been filed or is pending before any other tribunal.
According to BLC, said counsel’s law firm has handled this case from
the very beginning and could very well attest and/or certify to the
absence of an instituted or pending case involving the same or
similar issues.
The argument of substantial compliance deserves no merit, given

the Court’s ruling in Mendigorin v. Cabantog:14
…The CA held that there was substantial compliance with the

Rules of Court, citing Dimagiba vs. Montalvo, Jr. [202 SCRA 641]
to the effect that a lawyer who assumes responsibility for a
client's cause has the duty to know the entire history of the
case, especially if any litigation is commenced. This view,
however, no longer holds authoritative value in the light of
Digital Microwave Corporation vs. CA [328 SCRA 286], where it
was held that the reason the certification against forum
shopping is required to be accomplished by petitioner himself is
that only the petitioner himself has actual knowledge of
whether or not he has initiated similar actions or proceedings in
other courts or tribunals. Even counsel of record may be

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unaware of such fact. To our mind, this view is more in accord
with the intent and purpose of Revised Circular No. 28-91.
Clearly, therefore, the present petition lacks the proper certification

as strictly required by jurisprudence and the Rules of Court.
Even if the Court were to ignore the aforesaid procedural infirmity, a

perusal of the arguments raised in the petition indicates that a
resolution on the merits would nevertheless yield the same outcome.
BLC attempts to convince the Court that Revenue Regulation 19-86

is legislative rather than interpretative in character and hence,
should retroact to the date of effectivity of the law it seeks to
interpret.
Administrative issuances may be distinguished according to their

nature and substance: legislative and interpretative. A legislative rule
is in the matter of subordinate legislation, designed to implement a
primary legislation by providing the details thereof. An interpretative
rule, on the other hand, is designed to provide guidelines to the law
which the administrative agency is in charge of enforcing.15
The Court finds the questioned revenue regulation to be legislative in

nature. Section 1 of Revenue Regulation 19-86 plainly states that it
was promulgated pursuant to Section 277 of the NIRC. Section 277
(now Section 244) is an express grant of authority to the Secretary of
Finance to promulgate all needful rules and regulations for the
effective enforcement of the provisions of the NIRC. In Paper
Industries Corporation of the Philippines v. Court of Appeals,16 the
Court recognized that the application of Section 277 calls for none
other than the exercise of quasi-legislative or rule-making authority.
Verily, it cannot be disputed that Revenue Regulation 19-86 was
issued pursuant to the rule-making power of the Secretary of
Finance, thus making it legislative, and not interpretative as alleged
by BLC.
BLC further posits that, assuming the revenue regulation is legislative

in nature, it is invalid for want of due process as no prior notice,
publication and public hearing attended the issuance thereof. To
support its view, BLC cited CIR v. Fortune Tobacco, et al.,17 wherein
the Court nullified a revenue memorandum circular which
reclassified certain cigarettes and subjected them to a higher tax
rate, holding it invalid for lack of notice, publication and public
hearing.
The doctrine enunciated in Fortune Tobacco, and reiterated in CIR v.

Michel J. Lhuillier Pawnshop, Inc.,18 is that when an administrative rule
goes beyond merely providing for the means that can facilitate or
render less cumbersome the implementation of the law and
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substantially increases the burden of those governed, it behooves
the agency to accord at least to those directly affected a chance
to be heard and, thereafter, to be duly informed, before the
issuance is given the force and effect of law. In Lhuillier and Fortune
Tobacco, the Court invalidated the revenue memoranda
concerned because the same increased the tax liabilities of the
affected taxpayers without affording them due process. In this case,
Revenue Regulation 19-86 would be beneficial to the taxpayers as
they are subjected to lesser taxes. Petitioner, in fact, is invoking
Revenue Regulation 19-86 as the very basis of its claim for refund. If it
were invalid, then petitioner all the more has no right to a refund.
After upholding the validity of Revenue Regulation 19-86, the Court

now resolves whether its application should be prospective or
retroactive.
The principle is well entrenched that statutes, including

administrative rules and regulations, operate prospectively only,
unless the legislative intent to the contrary is manifest by express
terms or by necessary implication.19 In the present case, there is no
indication that the revenue regulation may operate retroactively.
Furthermore, there is an express provision stating that it "shall take
effect on January 1, 1987," and that it "shall be applicable to all
leases written on or after the said date." Being clear on its
prospective application, it must be given its literal meaning and
applied without further interpretation.20 Thus, BLC is not in a position
to invoke the provisions of Revenue Regulation 19-86 for lease rentals
it received prior to January 1, 1987.
It is also apt to add that tax refunds are in the nature of tax
exemptions. As such, these are regarded as in derogation of
sovereign authority and are to be strictly construed against the
person or entity claiming the exemption. The burden of proof is upon
him who claims the exemption and he must be able to justify his
claim by the clearest grant under Constitutional or statutory law, and
he cannot be permitted to rely upon vague implications.21 Nothing
that BLC has raised justifies a tax refund.
It is not necessary to rule on the remaining issues.
WHEREFORE, the petition for review is hereby DENIED, and the

assailed decision and resolution of the Court of Appeals are
AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Davide, Jr., C.J., Panganiban, Ynares-Santiago, and Carpio, JJ.,

concur.

suigeneris
BPI LEASING CORP. V. CA AND CIR
FACTS:
For the calendar year 1986, BPI Leasing Corporation, Inc. (BLC)
paid the Commissioner of Internal Revenue (CIR) a
total of P1,139,041.49 representing 4% "contractor’s percentage

tax" then imposed by Section 205 of the National
Internal Revenue Code (NIRC), based on its gross rentals from

equipment leasing for the said year amounting to
P27,783,725.42.
On November 10, 1986, the CIR issued RR 19-86. Section 6.2

thereof provided that finance and leasing companies
registered under Republic Act 5980 shall be subject to gross

receipt tax of 5%-3%-1% on actual income earned. This
means that companies registered under Republic Act 5980, such

as BLC, are not liable for "contractor’s percentage
tax" under Section 205 but are, instead, subject to "gross receipts
tax" under Section 260 (now Section 122) of the
NIRC. Since BLC had earlier paid the aforementioned

"contractor’s percentage tax," it re-computed its tax liabilities

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under the "gross receipts tax" and arrived at the amount of
P361,924.44. BLC filed a claim for a refund with the CIR
for the amount of P777,117.05, representing the difference

between the P1,139,041.49 it had paid as "contractor’s
percentage tax" and P361,924.44 it should have paid for "gross

receipts tax."
The CTA dismissed the petition and denied BLC’s claim of refund
and held that RR 19-86, may only be applied
prospectively such that it only covers all leases written on or after

January 1, 1987. The CTA ruled that, since BLC’s
rental income was all received prior to 1986, it follows that this was
derived from lease transactions prior to
January 1, 1987, and hence, not covered by the RR.
A motion for reconsideration of the CTA’s decision was filed, but

was denied. BLC then appealed the case to the
Court of Appeals. BLC submits that the Court of Appeals and the
CTA erred in not ruling that RR 19-86 may be
applied retroactively so as to allow BLC’s claim for a refund of

P777,117.05.
Respondents, on the other hand, maintain that the provision on

the date of effectivity of RR 19-86 is clear and

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unequivocal, leaving no room for interpretation on its prospective
application.
ISSUES:
WON RR 19-86 is legislative or interpretative in nature.
WON RR 19-86 is prospective or retroactive in nature.
WON BPI failed to meet the quantum of evidence required in

refund cases.
RULE:
1ST ISSUE – BLC attempts to convince the Court that RR 19-86 is

legislative rather than interpretative in
character and hence, should retroact to the date of effectivity of

the law it seeks to interpret. A legislative
rule is in the matter of subordinate legislation, designed to

implement a primary legislation by providing
the details thereof. An interpretative rule, on the other hand, is

designed to provide guidelines to the law
which the administrative agency is in charge of enforcing. The

Court finds the questioned RR to be
legislative in nature. Section 1 of RR 19-86 plainly states that it was

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promulgated pursuant to Section 277
of the NIRC (now Section 244), an express grant of authority to the

Secretary of Finance to promulgate all
needful rules and regulations for the effective enforcement of the

provisions of the NIRC. Verily, it cannot
be disputed that RR 19-86 was issued pursuant to the rule-making

power of the Secretary of Finance, thus
making it legislative, and not interpretative as alleged by BLC.
BLC further posits that, it is invalid for want of due process as no

prior notice, publication and public
hearing attended the issuance thereof. To support its view, BLC

cited CIR v. Fortune Tobacco, et
al., wherein the Court nullified a revenue memorandum circular

which reclassified certain cigarettes and
subjected them to a higher tax rate, holding it invalid for lack of

notice, publication and public hearing. In
this case, RR 19-86 would be beneficial to the taxpayers as they

are subjected to lesser taxes. Petitioner,
in fact, is invoking RR 19-86 as the very basis of its claim for refund.
If it were invalid, then petitioner all
the more has no right to a refund.

suigeneris
2ND ISSUE – The Court now resolves whether its application should
be prospective or retroactive. Statutes,
including administrative rules and regulations, operate

prospectively only, unless the legislative intent to
the contrary is manifest by express terms or by necessary

implication. In the present case, there is no
indication that the RR may operate retroactively. Furthermore,

there is an express provision stating that it
"shall take effect on January 1, 1987," and that it "shall be

applicable to all leases written on or after the
said date." Thus, BLC is not in a position to invoke the provisions of

RR 19-86 for lease rentals it received
prior to January 1, 1987.
3RD ISSUE – Tax refunds are in the nature of tax exemptions. As

such, these are to be strictly construed
against the person or entity claiming the exemption. The burden

of proof is upon him who claims the
exemption and he must be able to justify his claim by the clearest

grant under Constitutional or statutory
law, and he cannot be permitted to rely upon vague implications.

Nothing that BLC has raised justifies a

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tax refund.
WHEREFORE, the petition for review is hereby DENIED, and the

assailed decision and resolution of the
Court of Appeals are AFFIRMED. No pronouncement as to costs.
SO ORDERED.
PRINCIPLES INVOLVED: Legislative or Interpretive nature of Statute
Prospective or Retroactive effect of Ordinances
Omictin vs. CA (512 SCRA 70 [2007])
G.R. No.148004 January 22, 2007
VINCENT E. OMICTIN, Petitioner,

vs.
HON. COURT OF APPEALS (Special Twelfth Division) and GEORGE I.
LAGOS, Respondents.
DECISION
AZCUNA, J.:
This is a petition for certiorari1 with prayer for a writ of preliminary

injunction seeking the nullification of the decision rendered by the

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Court of Appeals (CA) on June 30, 2000, and its resolution, dated
March 5, 2001 in CA-G.R. SP No. 55834 entitled "George I. Lagos v.
Hon. Reinato G. Quilala, Presiding Judge of RTC, Br. 57, Makati, Hon.
Elizabeth Tayo Chua, Asst. City Prosecutor, Makati City, and Vincent
E. Omictin."
In its assailed decision, the CA declared the existence of a

prejudicial question and ordered the suspension of the criminal
proceedings initiated by petitioner Vincent E. Omictin on behalf of
Saag Phils., Inc. against private respondent George I. Lagos, in view
of a pending case before the Securities and Exchange Commission
(SEC) filed by the latter against the former, Saag Pte. (S) Ltd.,
Nicholas Ng, Janifer Yeo and Alex Y. Tan.
Petitioner Vincent E. Omictin, Operations Manager Ad Interim of

Saag Phils., Inc., filed a complaint for two counts of estafa with the
Office of the City Prosecutor of Makati against private respondent
George I. Lagos. He alleged that private respondent, despite
repeated demands, refused to return the two company vehicles
entrusted to him when he was still the president of Saag Phils., Inc..
On February 26, 1999, public prosecutor Alex G. Bagaoisan

recommended the indictment of private respondent, and on the
same day, respondent was charged with the crime of estafa under
Article 315, par. 1(b) of the Revised Penal Code before the Regional
Trial Court (RTC), Branch 57 of Makati City. The case was docketed
as Criminal Case No. 99-633, entitled "People of the Philippines v.
George I. Lagos."
On June 4, 1999, private respondent filed a motion to recuse praying

that Presiding Judge Reinato G. Quilala inhibit himself from hearing
the case based on the following grounds:
a) In an order, dated May 28, 1999, the presiding judge

summarily denied respondent’s motion: 1) to defer issuance of
the warrant of arrest; and 2) to order reinvestigation.
b) Immediately before the issuance of the above-mentioned

order, the presiding judge and Atty. Alex Y. Tan, SAAG
Philippines, Inc.’s Ad Interim President, were seen together. 2
On June 24, 1999, private respondent filed a motion to suspend

proceedings on the basis of a prejudicial question because of a
pending petition with the Securities and Exchange Commission (SEC)
involving the same parties.

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It appears that on January 7, 1999, private respondent filed SEC
Case No. 01-99-6185 for the declaration of nullity of the respective
appointments of Alex Y. Tan and petitioner as President Ad Interim
and Operations Manager Ad Interim of Saag Phils., Inc., declaration
of dividends, recovery of share in the profits, involuntary dissolution
and the appointment of a receiver, recovery of damages and an
application for a temporary restraining order (TRO) and injunction
against Saag (S) Pte. Ltd., Nicholas Ng, Janifer Yeo, Tan and
petitioner. 3
In the action before the SEC, private respondent averred that Saag
(S) Pte. Ltd. is a foreign corporation organized and existing under the
laws of Singapore, and is fully owned by Saag Corporation (Bhd). On
July 1, 1994, he was appointed as Area Sales Manager in the
Philippines by Thiang Shiang Hiang, Manager of Saag (S) Pte. Ltd.
Pursuant to his appointment, respondent was authorized to organize
a local joint venture corporation to be known as Saag Philippines,
Inc. for the wholesale trade and service of industrial products for oil,
gas and power industries in the Philippines.
On September 9, 1994, Saag Philippines, Inc. was incorporated with

Saag (S) Pte. Ltd. as the majority stockholder. Private respondent was
appointed to the board of directors, along with Rommel I. Lagos,
Jose E. Geronimo, Gan Ching Lai and Thiang Shiang Hiang, and was
elected president of the domestic corporation.
Later, due to intra-corporate disputes, Gan and Thiang resigned and

divested their shares in Saag Corporation (Bhd), thereby resulting in a
change in the controlling interest in Saag (S) Pte. Ltd.
Barely three months after, or on June 23, 1998, private respondent

resigned his post as president of Saag Phils., Inc. while still retaining his
position as a director of the company.4 According to private
respondent, the joint venture agreement (JVA) between him or
Saag Phils., Inc. and Saag (S) Pte. Ltd. provided that should the
controlling interest in the latter company, or its parent company
Saag Corp. (Bhd), be acquired by any other person or entity without
his prior consent, he has the option either to require the other
stockholders to purchase his shares or to terminate the JVA and
dissolve Saag Phils., Inc. altogether. Thus, pursuant to this provision,
since private respondent did not give his consent as regards the
transfer of shares made by Gan and Thiang, he made several
requests to Nicholas Ng, who replaced Gan as director, and Janifer
Yeo, Executive Director of Saag (S) Pte. Ltd., to call for a board
meeting in order to discuss the following: a) implementation of the
board resolution declaring dividends; b) acquisition of private
respondent’s shares by Saag (S) Pte. Ltd.; c) dissolution of Saag Phils.,
Inc.; and d) the termination of the JVA.

suigeneris
Ng and Yeo failed to appear, however, in the scheduled board
meetings. Instead, on September 30, 1998 they issued a letter
appointing Alex Y. Tan as President Ad Interim of Saag Phils., Inc. Tan,
in turn, appointed petitioner Omictin as the company’s Operations
Manager Ad Interim.
Citing as a reason the absence of a board resolution authorizing the

continued operations of Saag Phils., Inc., private respondent
retained his possession of the office equipment of the company in a
fiduciary capacity as director of the corporation pending its
dissolution and/or the resolution of the intra-corporate dispute. He
likewise changed the locks of the offices of the company allegedly
to prevent Tan and petitioner from seizing company property.
Private respondent stressed that Tan’s appointment was invalid

because it was in derogation of the company by-laws requiring that
the president must be chosen from among the directors, and
elected by the affirmative vote of a majority of all the members of
the board of directors.5 As Tan’s appointment did not have the
acquiescence of the board of directors, petitioner’s appointment by
the former is likewise allegedly invalid. Thus, neither has the power or
the authority to represent or act for Saag Phils., Inc. in any
transaction or action before the SEC or any court of justice.
The trial court, in an order dated September 8, 1999, denied

respondent’s motion to suspend proceedings and motion to recuse.
His motion for reconsideration having been denied by the trial court
in its order issued on October 29, 1999, respondent filed with the CA
the petition for certiorari[6] assailing the aforesaid orders.
On June 30, 2000, the CA rendered its challenged decision. The

pertinent portion reads:
In a case for estafa, a valid demand made by an offended party is

one of the essential elements. It appears from the records that the
delay of delivery of the motor vehicles by petitioner to Saag
Corporation is by reason of petitioner’s contention that the demand
made by Omictin and Atty. Tan to him to return the subject vehicles
is not a valid demand. As earlier mentioned, petitioner filed a case
with the SEC questioning therein private respondents’ appointment.
If the SEC should rule that the dissolution of Saag Phils. is proper, or
that the appointments of private respondents are invalid, the
criminal case will eventually be dismissed due to the absence of one
of the essential elements of the crime of estafa.

suigeneris
Based on the foregoing, it is clear that a prejudicial question exists
which calls for the suspension of the criminal proceedings before the
lower court.
WHEREFORE, in view of the foregoing, the assailed Order of

September 8, 1999 and October 29, 1999, are hereby MODIFIED. The
motion to suspend proceedings is hereby GRANTED and respondent
court is hereby enjoined from hearing Criminal Case No. 99-633,
entitled "People of the Philippines v. George I. Lagos," until the
termination of the case with the Securities and Exchange
Commission. The denial of the motion to recuse is hereby AFFIRMED.
SO ORDERED.7
Incidentally, on January 18, 2001, the SEC case8 was transferred to

the Regional Trial Court (RTC) of Mandaluyong City, Branch 214,
pursuant to A.M. No. 00-11-03-SC9 implementing the Securities and
Regulation Code (Republic Act No. 8799)10 enacted on July 19, 2000,
vesting in the RTCs jurisdiction over intra-corporate disputes.11
Meanwhile, on March 5, 2001, the CA, addressing petitioner’s motion

for reconsideration of the aforementioned decision, issued its
assailed resolution:
Considering that the petition for review on certiorari of the 30 June

2000 decision of this Court, filed by the Office of the Solicitor General
before the Supreme Court has already TERMINATED on November
20, 2000 and a corresponding entry of judgment has already been
issued by the High Court, that the same is final and executory, the
private respondent’s motion for reconsideration of the decision 30
June 2000 before this Court is NOTED for being moot and academic.
SO ORDERED.12
Hence, this petition raises the following issues:
RESPONDENT COURT OF APPEALS COMMITTED GRAVE ABUSE OF

DISCRETION AMOUNTING TO LACK OF JURISDICTION -
A) WHEN IT DECREED THAT A PREJUDICIAL QUESTION EXISTS IN THE SEC

CASE FILED BY PRIVATE RESPONDENT AGAINST SAAG (S) PTE. LTD., A
FOREIGN CORPORATION, ALTHOUGH THE PRIVATE COMPLAINANT IN
THE CRIMINAL CASE FOR ESTAFA (WHERE PRIVATE RESPONDENT IS THE
ACCUSED THEREIN) IS ACTUALLY SAAG PHILIPPINES, INC. A DOMESTIC
CORPORATION WITH A SEPARATE JURIDICAL PERSONALITY OF ITS
OWN AND WHICH IS NOT EVEN A PARTY IN THE SEC CASE; AND,

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B) WHEN IT ORDERED THE SUSPENSION OF THE PROCEEDINGS IN
CRIMINAL CASE NO. 99-633 AGAINST PRIVATE RESPONDENT.
II
THIS PETITION FOR CERTIORARI IS THE ONLY PLAIN, SPEEDY AND

ADEQUATE REMEDY IN THE PREMISES.
In support of the above, petitioner argues, as follows:
1. The action before the SEC and the criminal case before the
trial court do not involve any prejudicial question.13 SEC Case
No. 01-99-6185 mainly involves the dissolution of Saag (S) Pte.
Ltd., the appointment of a receiver, the distribution of profits,
and the authority of petitioner and Tan to represent Saag Phils.,
Inc. The entity which is being sued is Saag (S) Pte. Ltd., a foreign
corporation over which the SEC has yet to acquire jurisdiction.
Hence, any decision that may be rendered in the SEC case will
neither be determinative of the innocence or guilt of the
accused nor bind Saag Phils., Inc. because the same was not
made a party to the action even if the former is its holding
corporation;
2. Saag Phils., Inc. has a separate corporate existence and is to

be treated as a separate entity from its holding or parent
company, Saag (S) Pte. Ltd. The mere fact that one or more
corporations are owned or controlled by the same or single
stockholder is not a sufficient ground for disregarding separate
corporate personalities;
3. Private respondent’s petition with the SEC seeks affirmative

relief against Saag (S) Pte. Ltd. for the enforcement or
application of the alleged terms of the joint venture agreement
(JVA) that he purportedly entered into with the foreign
corporation while he was still its Area Sales Manager in the
Philippines. The foreign corporation is not licensed to do
business in the Philippines, thus, a party to a contract with a
foreign corporation doing business in the Philippines without a
license is not entitled to relief from the latter; and
4. There is no pending civil or administrative case in SEC against

Saag Phils., Inc. that warrants the application of a prejudicial
question and the consequent suspension of the criminal action
it has instituted against private respondent. If any, the action
before the SEC was merely a ploy to delay the resolution of the
criminal case and eventually frustrate the outcome of the
estafa case.

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In sum, the main issue is whether or not a prejudicial question exists to
warrant the suspension of the criminal proceedings pending the
resolution of the intra-corporate controversy that was originally filed
with the SEC.
A prejudicial question is defined as that which arises in a case, the

resolution of which is a logical antecedent of the issue involved
therein and the cognizance of which pertains to another tribunal.14
Here, the case which was lodged originally before the SEC and
which is now pending before the RTC of Mandaluyong City by virtue
of Republic Act No. 8799 involves facts that are intimately related to
those upon which the criminal prosecution is based.
Ultimately, the resolution of the issues raised in the intra-corporate

dispute will determine the guilt or innocence of private respondent in
the crime of estafa filed against him by petitioner before the RTC of
Makati. As correctly stated by the CA, one of the elements of the
crime of estafa with abuse of confidence under Article 315, par. 1(b)
of the Revised Penal Code is a demand made by the offended
party to the offender:
The elements of estafa with abuse of confidence under subdivision

No. 1, par. (b) of Art. 315 are as follows:
1. That money, goods, or other personal property be received

by the offender in trust, or on commission, or for administration,
or under any other obligation involving the duty to make
delivery of, or to return the same;
2. That there be misrepresentation or conversion of such money

or property by the offender, or denial on his part of such
receipt;
3. That such misappropriation or conversion or denial is to the

prejudice of another; and
4. That there is a demand made by the offended party to the

offender.15
Logically, under the circumstances, since the alleged offended

party is Saag Phils., Inc., the validity of the demand for the delivery of
the subject vehicles rests upon the authority of the person making
such a demand on the company’s behalf. Private respondent is
challenging petitioner’s authority to act for Saag Phils., Inc. in the
corporate case pending before the RTC of Mandaluyong, Branch
214. Taken in this light, if the supposed authority of petitioner is found
to be defective, it is as if no demand was ever made, hence, the
prosecution for estafa cannot prosper. Moreover, the mere failure to
return the thing received for safekeeping or on commission, or for

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administration, or under any other obligation involving the duty to
deliver or to return the same or deliver the value thereof to the
owner could only give rise to a civil action and does not constitute
the crime of estafa. This is because the crime is committed by
misappropriating or converting money or goods received by the
offender under a lawful transaction. As stated in the case of United
States v. Bleibel:16
The crime of estafa is not committed by the failure to return the

things received for sale on commission, or to deliver their value, but,
as this class of crime is defined by law, by misappropriating or
converting the money or goods received on commission. Delay in
the fulfillment of a commission or in the delivery of the sum on such
account received only involves civil liability. So long as the money
that a person is under obligation to deliver is not demanded of him,
and he fails to deliver it for having wrongfully disposed of it, there is
no estafa, whatever be the cause of the debt.
Likewise, by analogy, the doctrine of primary jurisdiction may be

applied in this case. The issues raised by petitioner particularly the
status of Saag Phils., Inc. vis-à-vis Saag (S) Pte. Ltd., as well as the
question regarding the supposed authority of the latter to make a
demand on behalf of the company, are proper subjects for the
determination of the tribunal hearing the intra-corporate case which
in this case is the RTC of Mandaluyong, Branch 214. These issues
would have been referred to the expertise of the SEC in accordance
with the doctrine of primary jurisdiction had the case not been
transferred to the RTC of Mandaluyong.
Strictly speaking, the objective of the doctrine of primary jurisdiction

is to guide a court in determining whether it should refrain from
exercising its jurisdiction until after an administrative agency has
determined some question or some aspect of some question arising
in the proceeding before the court.17 The court cannot or will not
determine a controversy involving a question which is within the
jurisdiction of the administrative tribunal prior to resolving the same,
where the question demands the exercise of sound administrative
discretion requiring special knowledge, experience and services in
determining technical and intricate matters of fact.18
While the above doctrine refers specifically to an administrative

tribunal, the Court believes that the circumstances in the instant
case do not proscribe the application of the doctrine, as the role of
an administrative tribunal such as the SEC in determining technical
and intricate matters of special competence has been taken on by
specially designated RTCs by virtue of Republic Act No. 8799.19
Hence, the RTC of Mandaluyong where the intra-corporate case is
pending has the primary jurisdiction to determine the issues under

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contention relating to the status of the domestic corporation, Saag
Phils., Inc., vis-à-vis Saag Pte. Ltd.; and the authority of petitioner to
act on behalf of the domestic corporation, the determination of
which will have a direct bearing on the criminal case. The law
recognizes that, in place of the SEC, the regular courts now have the
legal competence to decide intra-corporate disputes.20
In view of the foregoing, the Court finds no substantial basis in

petitioner’s contention that the CA committed grave abuse of
discretion amounting to lack or excess of jurisdiction. Absent a
showing of a despotic, whimsical and arbitrary exercise of power by
the CA, the petition must fail.
WHEREFORE, the petition is DISMISSED. The decision and resolution of

the Court of Appeals in CA-G.R. SP No. 55834, dated June 30, 2000
and March 5, 2001, respectively, are AFFIRMED.
No costs.
SO ORDERED.
ADOLFO S. AZCUNA
Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice

CANCIO C. GARCIA
Associate Justice
CERTIFICATION

certified that the conclusions in the above Decision had been
REYNATO S. PUNO
Chief Justice
Footnotes
1 Under Rule 65 of the Rules of Court.
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2 Rollo, p. 42.
3 Id. at 51.
4 Id. at 55.
5 Id. at 59.
7 Id. at 48.
8 Now docketed as SEC Case No. MC-01-024.
9"Resolution Designating Certain Branches of Regional Trial
Courts to Try and Decide Cases Formerly Cognizable by the
Securities and Exchange Commission," promulgated on
November 21, 2000.
10Amended Section 5 of Presidential Decree No. 902-A which
granted extensive powers to the Securities and Exchange
Commission (SEC), a quasi-judicial body charged with the
enforcement of all laws affecting corporations.
11SECTION 1. Cases covered. – These Rules shall govern the
procedure to be observed in civil cases involving the following:
(1) Devices or schemes employed by, or any act of, the

board of directors, business associates, officers or partners,
amounting to fraud or misrepresentation which may be
detrimental to the interest of the public and/or of the
stockholders, partners or members of any corporation,
partnership, or association;
(2) Controversies arising out of intra-corporate,

partnership, or association relations, between and among
stockholders, members, or associates; and between, any
or all of them and the corporation, partnership, or
association of which they are stockholders, members, or
associates, respectively;
(3) Controversies in the election or appointment of

directors, trustees, officers or managers of corporations,
partnerships, or associations;
(4) Derivative suits; and
(5) Inspection of corporate books (Interim Rules of

Procedure for Intra-Corporate Controversies, effective
April 1, 2001).

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12 Rollo, p. 50.
13Section 7, Rule 111 of the Rules of Court provides the
elements of a prejudicial question, which are: a) the previously
instituted civil action involves an issue similar or intimately
related to the issue raised in the subsequent criminal action;
and b) the resolution of such issue determines whether or not
the criminal action may proceed.
14 People v. Consing, Jr., 443 Phil. 454 (2003).
15 Pangilinan v. Court of Appeals, G.R. No. 117363, December
17, 1999, 321 SCRA 51, citing Reyes, Revised Penal Code, Book
II, 1993.
16 34 Phil. 227 (1916).
17Quintos, Jr. v. National Stud Farm, No. L-37052, November 29,
1973, 54 SCRA 210.
18Pambujan Sur United Mine Workers v. Samar Mining Co., Inc.,
94 Phil. 932 (1954).
19Section 9 of the Interim Rules of Procedure Governing Intra-
Corporate Controversies states: "All cases filed under these
Rules shall be tried by judges designated by the Supreme court
to hear and decide cases transferred from the Securities and
Exchange Commission to the Regional Trial Courts and filed
directly with said courts pursuant to Republic Act No. 8799,
otherwise known as the Securities and Regulation Code."
20Fabia v. Court of Appeals, G.R. No. 132684, September 11,
2002, 437 SCRA 389.
Woodchild Holdings vs. Roxas Electric (436 SCRA 235 [2004])
G.R. No. 140667 August 12, 2004
WOODCHILD HOLDINGS, INC., petitioner,

vs.
ROXAS ELECTRIC AND CONSTRUCTION COMPANY, INC., respondent.
DECISION

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CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court

of Appeals in CA-G.R. CV No. 56125 reversing the Decision2 of the
Regional Trial Court of Makati, Branch 57, which ruled in favor of the
petitioner.
The Antecedents
The respondent Roxas Electric and Construction Company, Inc.

(RECCI), formerly the Roxas Electric and Construction Company, was
the
owner of two parcels of land, identified as Lot No. 491-A-3-B-1

covered by Transfer Certificate of Title (TCT) No. 78085 and Lot No.
491-A-3-B-2 covered by TCT No. 78086. A portion of Lot No. 491-A-3-B-
1 which abutted Lot No. 491-A-3-B-2 was a dirt road accessing to the
Sumulong Highway, Antipolo, Rizal.
At a special meeting on May 17, 1991, the respondent's Board of

Directors approved a resolution authorizing the corporation, through
its president, Roberto B. Roxas, to sell Lot No. 491-A-3-B-2 covered by
TCT No. 78086, with an area of 7,213 square meters, at a price and
under such terms and conditions which he deemed most reasonable
and advantageous to the corporation; and to execute, sign and
deliver the pertinent sales documents and receive the proceeds of
the sale for and on behalf of the company.3
Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot No. 491-
A-3-B-2 covered by TCT No. 78086 on which it planned to construct
its warehouse building, and a portion of the adjoining lot, Lot No.
491-A-3-B-1, so that its 45-foot container van would be able to readily
enter or leave the property. In a Letter to Roxas dated June 21, 1991,
WHI President Jonathan Y. Dy offered to buy Lot No. 491-A-3-B-2
under stated terms and conditions for P1,000 per square meter or at
the price of P7,213,000.4 One of the terms incorporated in Dy's offer
was the following provision:
5. This Offer to Purchase is made on the representation and

warranty of the OWNER/SELLER, that he holds a good and
registrable title to the property, which shall be conveyed CLEAR
and FREE of all liens and encumbrances, and that the area of
7,213 square meters of the subject property already includes
the area on which the right of way traverses from the main lot
(area) towards the exit to the Sumulong Highway as shown in
the location plan furnished by the Owner/Seller to the buyer.
Furthermore, in the event that the right of way is insufficient for
the buyer's purposes (example: entry of a 45-foot container),
the seller agrees to sell additional square meter from his current
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adjacent property to allow the buyer to full access and full use
of the property.5
Roxas indicated his acceptance of the offer on page 2 of the deed.

Less than a month later or on July 1, 1991, Roxas, as President of
RECCI, as vendor, and Dy, as President of WHI, as vendee, executed
a contract to sell in which RECCI bound and obliged itself to sell to
Dy Lot No. 491-A-3-B-2 covered by TCT No. 78086 for P7,213,000.6 On
September 5, 1991, a Deed of Absolute Sale7 in favor of WHI was
issued, under which Lot No. 491-A-3-B-2 covered by TCT No. 78086
was sold for P5,000,000, receipt of which was acknowledged by
Roxas under the following terms and conditions:
The Vendor agree (sic), as it hereby agrees and binds itself to

give Vendee the beneficial use of and a right of way from
Sumulong Highway to the property herein conveyed consists of
25 square meters wide to be used as the latter's egress from
and ingress to and an additional 25 square meters in the corner
of Lot No. 491-A-3-B-1, as turning and/or maneuvering area for
Vendee's vehicles.
The Vendor agrees that in the event that the right of way is
insufficient for the Vendee's use (ex entry of a 45-foot
container) the Vendor agrees to sell additional square meters
from its current adjacent property to allow the Vendee full
access and full use of the property.
The Vendor hereby undertakes and agrees, at its account, to

defend the title of the Vendee to the parcel of land and
improvements herein conveyed, against all claims of any and
all persons or entities, and that the Vendor hereby warrants the
right of the Vendee to possess and own the said parcel of land
and improvements thereon and will defend the Vendee
against all present and future claims and/or action in relation
thereto, judicial and/or administrative. In particular, the Vendor
shall eject all existing squatters and occupants of the premises
within two (2) weeks from the signing hereof. In case of failure
on the part of the Vendor to eject all occupants and squatters
within the two-week period or breach of any of the stipulations,
covenants and terms and conditions herein provided and that
of contract to sell dated 1 July 1991, the Vendee shall have the
right to cancel the sale and demand reimbursement for all
payments made to the Vendor with interest thereon at 36% per
annum.8
On September 10, 1991, the Wimbeco Builder's, Inc. (WBI) submitted

its quotation for P8,649,000 to WHI for the construction of the
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warehouse building on a portion of the property with an area of
5,088 square meters.9 WBI proposed to start the project on October
1, 1991 and to turn over the building to WHI on February 29, 1992.10
In a Letter dated September 16, 1991, Ponderosa Leather Goods

Company, Inc. confirmed its lease agreement with WHI of a 5,000-
square-meter portion of the warehouse yet to be constructed at the
rental rate of P65 per square meter. Ponderosa emphasized the
need for the warehouse to be ready for occupancy before April 1,
1992.11 WHI accepted the offer. However, WBI failed to commence
the construction of the warehouse in October 1, 1991 as planned
because of the presence of squatters in the property and suggested
a renegotiation of the contract after the squatters shall have been
evicted.12 Subsequently, the squatters were evicted from the
property.
On March 31, 1992, WHI and WBI executed a Letter-Contract for the
construction of the warehouse building for P11,804,160.13 The
contractor started construction in April 1992 even before the building
officials of Antipolo City issued a building permit on May 28, 1992.
After the warehouse was finished, WHI issued on March 21, 1993 a
certificate of occupancy by the building official. Earlier, or on March
18, 1993, WHI, as lessor, and Ponderosa, as lessee, executed a
contract of lease over a portion of the property for a monthly rental
of P300,000 for a period of three years from March 1, 1993 up to
February 28, 1996.14
In the meantime, WHI complained to Roberto Roxas that the

vehicles of RECCI were parked on a portion of the property over
which WHI had been granted a right of way. Roxas promised to look
into the matter. Dy and Roxas discussed the need of the WHI to buy
a 500-square-meter portion of Lot No. 491-A-3-B-1 covered by TCT
No. 78085 as provided for in the deed of absolute sale. However,
Roxas died soon thereafter. On April 15, 1992, the WHI wrote the
RECCI, reiterating its verbal requests to purchase a portion of the
said lot as provided for in the deed of absolute sale, and
complained about the latter's failure to eject the squatters within the
three-month period agreed upon in the said deed.
The WHI demanded that the RECCI sell a portion of Lot No. 491-A-3-
B-1 covered by TCT No. 78085 for its beneficial use within 72 hours
from notice thereof, otherwise the appropriate action would be filed
against it. RECCI rejected the demand of WHI. WHI reiterated its
demand in a Letter dated May 29, 1992. There was no response from
RECCI.

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On June 17, 1992, the WHI filed a complaint against the RECCI with
the Regional Trial Court of Makati, for specific performance and
damages, and alleged, inter alia, the following in its complaint:
5. The "current adjacent property" referred to in the

aforequoted paragraph of the Deed of Absolute Sale pertains
to the property covered by Transfer Certificate of Title No. N-
78085 of the Registry of Deeds of Antipolo, Rizal, registered in
the name of herein defendant Roxas Electric.
6. Defendant Roxas Electric in patent violation of the express

and valid terms of the Deed of Absolute Sale unjustifiably
refused to deliver to Woodchild Holdings the stipulated
beneficial use and right of way consisting of 25 square meters
and 55 square meters to the prejudice of the plaintiff.
7. Similarly, in as much as the 25 square meters and 55 square

meters alloted to Woodchild Holdings for its beneficial use is
inadequate as turning and/or maneuvering area of its 45-foot
container van, Woodchild Holdings manifested its intention
pursuant to para. 5 of the Deed of Sale to purchase additional
square meters from Roxas Electric to allow it full access and use
of the purchased property, however, Roxas Electric refused
and failed to merit Woodchild Holdings' request contrary to
defendant Roxas Electric's obligation under the Deed of
Absolute Sale (Annex "A").
8. Moreover, defendant, likewise, failed to eject all existing

squatters and occupants of the premises within the stipulated
time frame and as a consequence thereof, plaintiff's planned
construction has been considerably delayed for seven (7)
months due to the squatters who continue to trespass and
obstruct the subject property, thereby Woodchild Holdings
incurred substantial losses amounting to P3,560,000.00
occasioned by the increased cost of construction materials
and labor.
9. Owing further to Roxas Electric's deliberate refusal to comply

with its obligation under Annex "A," Woodchild Holdings
suffered unrealized income of P300,000.00 a month or
P2,100,000.00 supposed income from rentals of the subject
property for seven (7) months.
10. On April 15, 1992, Woodchild Holdings made a final

demand to Roxas Electric to comply with its obligations and
warranties under the Deed of Absolute Sale but
notwithstanding such demand, defendant Roxas Electric
refused and failed and continue to refuse and fail to heed
plaintiff's demand for compliance.
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Copy of the demand letter dated April 15, 1992 is hereto
attached as Annex "B" and made an integral part hereof.
11. Finally, on 29 May 1991, Woodchild Holdings made a letter

request addressed to Roxas Electric to particularly annotate on
Transfer Certificate of Title No. N-78085 the agreement under
Annex "A" with respect to the beneficial use and right of way,
however, Roxas Electric unjustifiably ignored and disregarded
the same.
Copy of the letter request dated 29 May 1992 is hereto

attached as Annex "C" and made an integral part hereof.
12. By reason of Roxas Electric's continuous refusal and failure to

comply with Woodchild Holdings' valid demand for
compliance under Annex "A," the latter was constrained to
litigate, thereby incurring damages as and by way of attorney's
fees in the amount of P100,000.00 plus costs of suit and
expenses of litigation.15
The WHI prayed that, after due proceedings, judgment be rendered

in its favor, thus:
WHEREFORE, it is respectfully prayed that judgment be

rendered in favor of Woodchild Holdings and ordering Roxas
Electric the following:
a) to deliver to Woodchild Holdings the beneficial use of the

stipulated 25 square meters and 55 square meters;
b) to sell to Woodchild Holdings additional 25 and 100 square

meters to allow it full access and use of the purchased property
pursuant to para. 5 of the Deed of Absolute Sale;
c) to cause annotation on Transfer Certificate of Title No. N-

78085 the beneficial use and right of way granted to
Woodchild Holdings under the Deed of Absolute Sale;
d) to pay Woodchild Holdings the amount of P5,660,000.00,

representing actual damages and unrealized income;
e) to pay attorney's fees in the amount of P100,000.00; and
f) to pay the costs of suit.
Other reliefs just and equitable are prayed for.16
In its answer to the complaint, the RECCI alleged that it never

authorized its former president, Roberto Roxas, to grant the
beneficial use of any portion of Lot No. 491-A-3-B-1, nor agreed to

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sell any portion thereof or create a lien or burden thereon. It alleged
that, under the Resolution approved on May 17, 1991, it merely
authorized Roxas to sell Lot No. 491-A-3-B-2 covered by TCT No.
78086. As such, the grant of a right of way and the agreement to sell
a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 in the said
deed are ultra vires. The RECCI further alleged that the provision
therein that it would sell a portion of Lot No. 491-A-3-B-1 to the WHI
lacked the essential elements of a binding contract.17
In its amended answer to the complaint, the RECCI alleged that the
delay in the construction of its warehouse building was due to the
failure of the WHI's contractor to secure a building permit thereon.18
During the trial, Dy testified that he told Roxas that the petitioner was
buying a portion of Lot No. 491-A-3-B-1 consisting of an area of 500
square meters, for the price of P1,000 per square meter.
On November 11, 1996, the trial court rendered judgment in favor of

the WHI, the decretal portion of which reads:
WHEREFORE, judgment is hereby rendered directing defendant:
(1) To allow plaintiff the beneficial use of the existing right of

way plus the stipulated 25 sq. m. and 55 sq. m.;
(2) To sell to plaintiff an additional area of 500 sq. m. priced at

P1,000 per sq. m. to allow said plaintiff full access and use of
the purchased property pursuant to Par. 5 of their Deed of
Absolute Sale;
(3) To cause annotation on TCT No. N-78085 the beneficial use

and right of way granted by their Deed of Absolute Sale;
(4) To pay plaintiff the amount of P5,568,000 representing

actual damages and plaintiff's unrealized income;
(5) To pay plaintiff P100,000 representing attorney's fees; and
To pay the costs of suit.
SO ORDERED.19
The trial court ruled that the RECCI was estopped from disowning the
apparent authority of Roxas under the May 17, 1991 Resolution of its
Board of Directors. The court reasoned that to do so would prejudice
the WHI which transacted with Roxas in good faith, believing that he
had the authority to bind the WHI relating to the easement of right of
way, as well as the right to purchase a portion of Lot No. 491-A-3-B-1
covered by TCT No. 78085.

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The RECCI appealed the decision to the CA, which rendered a
decision on November 9, 1999 reversing that of the trial court, and
ordering the dismissal of the complaint. The CA ruled that, under the
resolution of the Board of Directors of the RECCI, Roxas was merely
authorized to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086, but
not to grant right of way in favor of the WHI over a portion of Lot No.
491-A-3-B-1, or to grant an option to the petitioner to buy a portion
thereof. The appellate court also ruled that the grant of a right of
way and an option to the respondent were so lopsided in favor of
the respondent because the latter was authorized to fix the location
as well as the price of the portion of its property to be sold to the
respondent. Hence, such provisions contained in the deed of
absolute sale were not binding on the RECCI. The appellate court
ruled that the delay in the construction of WHI's warehouse was due
to its fault.
The Present Petition
The petitioner now comes to this Court asserting that:
I.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF

ABSOLUTE SALE (EXH. "C") IS ULTRA VIRES.
II.
THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE

RULING OF THE COURT A QUO ALLOWING THE PLAINTIFF-
APPELLEE THE BENEFICIAL USE OF THE EXISTING RIGHT OF WAY
PLUS THE STIPULATED 25 SQUARE METERS AND 55 SQUARE
METERS BECAUSE THESE ARE VALID STIPULATIONS AGREED BY
BOTH PARTIES TO THE DEED OF ABSOLUTE SALE (EXH. "C").
III.
THERE IS NO FACTUAL PROOF OR EVIDENCE FOR THE COURT OF

APPEALS TO RULE THAT THE STIPULATIONS OF THE DEED OF
ABSOLUTE SALE (EXH. "C") WERE DISADVANTAGEOUS TO THE
APPELLEE, NOR WAS APPELLEE DEPRIVED OF ITS PROPERTY
WITHOUT DUE PROCESS.
IV.
IN FACT, IT WAS WOODCHILD WHO WAS DEPRIVED OF

PROPERTY WITHOUT DUE PROCESS BY THE ASSAILED DECISION.
V.

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THE DELAY IN THE CONSTRUCTION WAS DUE TO THE FAILURE OF
THE APPELLANT TO EVICT THE SQUATTERS ON THE LAND AS
AGREED IN THE DEED OF ABSOLUTE SALE (EXH. "C").
VI.
THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE

RULING OF THE COURT A QUO DIRECTING THE DEFENDANT TO
PAY THE PLAINTIFF THE AMOUNT OF P5,568,000.00 REPRESENTING
ACTUAL DAMAGES AND PLAINTIFF'S UNREALIZED INCOME AS
WELL AS ATTORNEY'S FEES.20
The threshold issues for resolution are the following: (a) whether the
respondent is bound by the provisions in the deed of absolute sale
granting to the petitioner beneficial use and a right of way over a
portion of Lot
No. 491-A-3-B-1 accessing to the Sumulong Highway and granting

the option to the petitioner to buy a portion thereof, and, if so,
whether such agreement is enforceable against the respondent; (b)
whether the respondent failed to eject the squatters on its property
within two weeks from the execution of the deed of absolute sale;
and, (c) whether the respondent is liable to the petitioner for
damages.
On the first issue, the petitioner avers that, under its Resolution of May
17, 1991, the respondent authorized Roxas, then its president, to
grant a right of way over a portion of Lot No. 491-A-3-B-1 in favor of
the petitioner, and an option for the respondent to buy a portion of
the said property. The petitioner contends that when the respondent
sold Lot No. 491-A-3-B-2 covered by TCT No. 78086, it (respondent)
was well aware of its obligation to provide the petitioner with a
means of ingress to or egress from the property to the Sumulong
Highway, since the latter had no adequate outlet to the public
highway. The petitioner asserts that it agreed to buy the property
covered by TCT No. 78085 because of the grant by the respondent
of a right of way and an option in its favor to buy a portion of the
property covered by TCT No. 78085. It contends that the respondent
never objected to Roxas' acceptance of its offer to purchase the
property and the terms and conditions therein; the respondent even
allowed Roxas to execute the deed of absolute sale in its behalf. The
petitioner asserts that the respondent even received the purchase
price of the property without any objection to the terms and
conditions of the said deed of sale. The petitioner claims that it
acted in good faith, and contends that after having been benefited
by the said sale, the respondent is estopped from assailing its terms
and conditions. The petitioner notes that the respondent's Board of
Directors never approved any resolution rejecting the deed of

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absolute sale executed by Roxas for and in its behalf. As such, the
respondent is obliged to sell a portion of Lot No. 491-A-3-B-1 covered
by TCT No. 78085 with an area of 500 square meters at the price of
P1,000 per square meter, based on its evidence and Articles 649 and
651 of the New Civil Code.
For its part, the respondent posits that Roxas was not so authorized
under the May 17, 1991 Resolution of its Board of Directors to impose
a burden or to grant a right of way in favor of the petitioner on Lot
No. 491-A-3-B-1, much less convey a portion thereof to the petitioner.
Hence, the respondent was not bound by such provisions contained
in the deed of absolute sale. Besides, the respondent contends, the
petitioner cannot enforce its right to buy a portion of the said
property since there was no agreement in the deed of absolute sale
on the price thereof as well as the specific portion and area to be
purchased by the petitioner.
We agree with the respondent.
In San Juan Structural and Steel Fabricators, Inc. v. Court of

Appeals,21 we held that:
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 corporation's board of directors.
Section 23 of BP 68, otherwise known as the Corporation Code
of the Philippines, provides:
"SEC. 23. The Board of Directors or Trustees. – Unless

(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 by-laws 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, by-laws, or relevant
provisions of law. …22

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Generally, the acts of the corporate officers within the scope of their
authority are binding on the corporation. However, under Article
1910 of the New Civil Code, acts done by such officers beyond the
scope of their authority cannot bind the corporation unless it has
ratified such acts expressly or tacitly, or is estopped from denying
them:
Art. 1910. The principal must comply with all the obligations
which the agent may have contracted within the scope of his
authority.
As for any obligation wherein the agent has exceeded his

power, the principal is not bound except when he ratifies it
expressly or tacitly.
Thus, contracts entered into by corporate officers beyond the

scope of authority are unenforceable against the corporation
unless ratified by the corporation.23
In BA Finance Corporation v. Court of Appeals,24 we also ruled that

persons dealing with an assumed agency, 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.
In this case, the respondent denied authorizing its then president

Roberto B. Roxas to sell a portion of Lot No. 491-A-3-B-1 covered by
TCT No. 78085, and to create a lien or burden thereon. The petitioner
was thus burdened to prove that the respondent so authorized
Roxas to sell the same and to create a lien thereon.
Central to the issue at hand is the May 17, 1991 Resolution of the
Board of Directors of the respondent, which is worded as follows:
RESOLVED, as it is hereby resolved, that the corporation, thru

the President, sell to any interested buyer, its 7,213-sq.-meter
property at the Sumulong Highway, Antipolo, Rizal, covered by
Transfer Certificate of Title No. N-78086, at a price and on terms
and conditions which he deems most reasonable and
advantageous to the corporation;
FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS, President of

the corporation, be, as he is hereby authorized to execute, sign
and deliver the pertinent sales documents and receive the
proceeds of sale for and on behalf of the company.25

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Evidently, Roxas was not specifically authorized under the said
resolution to grant a right of way in favor of the petitioner on a
portion of Lot No. 491-A-3-B-1 or to agree to sell to the petitioner a
portion thereof. The authority of Roxas, under the resolution, to sell
Lot No. 491-A-3-B-2 covered by TCT No. 78086 did not include the
authority to sell a portion of the adjacent lot, Lot No. 491-A-3-B-1, or
to create or convey real rights thereon. Neither may such authority
be implied from the authority granted to Roxas to sell Lot No. 491-A-
3-B-2 to the petitioner "on such terms and conditions which he
deems most reasonable and advantageous." Under paragraph 12,
Article 1878 of the New Civil Code, a special power of attorney is
required to convey real rights over immovable property.26 Article
1358 of the New Civil Code requires that contracts which have for
their object the creation of real rights over immovable property must
appear in a public document.27 The petitioner cannot feign
ignorance of the need for Roxas to have been specifically
authorized in writing by the Board of Directors to be able to validly
grant a right of way and agree to sell a portion of Lot No. 491-A-3-B-
1. The rule is that if the act of the agent is one which requires
authority in writing, those dealing with him are charged with notice
of that fact.28
Powers of attorney are generally construed strictly and courts will not
infer or presume broad powers from deeds which do not sufficiently
include property or subject under which the agent is to deal.29 The
general rule is that the power of attorney must be pursued within
legal strictures, and the agent can neither go beyond it; nor beside
it. The act done must be legally identical with that authorized to be
done.30 In sum, then, the consent of the respondent to the assailed
provisions in the deed of absolute sale was not obtained; hence, the
assailed provisions are not binding on it.
We reject the petitioner's submission that, in allowing Roxas to

execute the contract to sell and the deed of absolute sale and
failing to reject or disapprove the same, the respondent thereby
gave him apparent authority to grant a right of way over Lot No.
491-A-3-B-1 and to grant an option for the respondent to sell a
portion thereof to the petitioner. Absent estoppel or ratification,
apparent authority cannot remedy the lack of the written power
required under the statement of frauds.31 In addition, the petitioner's
fallacy is its wrong assumption of the unproved premise that the
respondent had full knowledge of all the terms and conditions
contained in the deed of absolute sale when Roxas executed it.
It bears stressing that apparent authority is based on estoppel and

can arise from two instances: first, the principal may knowingly
permit the agent to so hold himself out as having such authority, and
in this way, the principal becomes estopped to claim that the agent

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does not have such authority; second, the principal may so clothe
the agent with the indicia of authority as to lead a reasonably
prudent person to believe that he actually has such authority.32
There can be no apparent authority of an agent without acts or
conduct on the part of the principal and such acts or conduct of
the principal must have been known and relied upon in good faith
and as a result of the exercise of reasonable prudence by a third
person as claimant and such must have produced a change of
position to its detriment. The apparent power of an agent is to be
determined by the acts of the principal and not by the acts of the
agent.33
For the principle of apparent authority to apply, the petitioner was

burdened to prove the following: (a) the acts of the respondent
justifying belief in the agency by the petitioner; (b) knowledge
thereof by the respondent which is sought to be held; and, (c)
reliance thereon by the petitioner consistent with ordinary care and
prudence.34 In this case, there is no evidence on record of specific
acts made by the respondent35 showing or indicating that it had full
knowledge of any representations made by Roxas to the petitioner
that the respondent had authorized him to grant to the respondent
an option to buy a portion of Lot No. 491-A-3-B-1 covered by TCT No.
78085, or to create a burden or lien thereon, or that the respondent
allowed him to do so.
The petitioner's contention that by receiving and retaining the

P5,000,000 purchase price of Lot No. 491-A-3-B-2, the respondent
effectively and impliedly ratified the grant of a right of way on the
adjacent lot, Lot No. 491-A-3-B-1, and to grant to the petitioner an
option to sell a portion thereof, is barren of merit. It bears stressing
that the respondent sold Lot No. 491-A-3-B-2 to the petitioner, and
the latter had taken possession of the property. As such, the
respondent had the right to retain the P5,000,000, the purchase price
of the property it had sold to the petitioner. For an act of the
principal to be considered as an implied ratification of an
unauthorized act of an agent, such act must be inconsistent with
any other hypothesis than that he approved and intended to adopt
what had been done in his name.36 Ratification is based on waiver –
the intentional relinquishment of a known right. Ratification cannot
be inferred from acts that a principal has a right to do independently
of the unauthorized act of the agent. Moreover, if a writing is
required to grant an authority to do a particular act, ratification of
that act must also be in writing.37 Since the respondent had not
ratified the unauthorized acts of Roxas, the same are
unenforceable.38 Hence, by the respondent's retention of the
amount, it cannot thereby be implied that it had ratified the
unauthorized acts of its agent, Roberto Roxas.

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On the last issue, the petitioner contends that the CA erred in
dismissing its complaint for damages against the respondent on its
finding that the delay in the construction of its warehouse was due
to its (petitioner's) fault. The petitioner asserts that the CA should
have affirmed the ruling of the trial court that the respondent failed
to cause the eviction of the squatters from the property on or before
September 29, 1991; hence, was liable for P5,660,000. The
respondent, for its part, asserts that the delay in the construction of
the petitioner's warehouse was due to its late filing of an application
for a building permit, only on May 28, 1992.
The petitioner's contention is meritorious. The respondent does not

deny that it failed to cause the eviction of the squatters on or before
September 29, 1991. Indeed, the respondent does not deny the fact
that when the petitioner wrote the respondent demanding that the
latter cause the eviction of the squatters on April 15, 1992, the latter
were still in the premises. It was only after receiving the said letter in
April 1992 that the respondent caused the eviction of the squatters,
which thus cleared the way for the petitioner's contractor to
commence the construction of its warehouse and secure the
appropriate building permit therefor.
The petitioner could not be expected to file its application for a

building permit before April 1992 because the squatters were still
occupying the property. Because of the respondent's failure to
cause their eviction as agreed upon, the petitioner's contractor
failed to commence the construction of the warehouse in October
1991 for the agreed price of P8,649,000. In the meantime, costs of
construction materials spiraled. Under the construction contract
entered into between the petitioner and the contractor, the
petitioner was obliged to pay P11,804,160,39 including the additional
work costing P1,441,500, or a net increase of P1,712,980.40 The
respondent is liable for the difference between the original cost of
construction and the increase thereon, conformably to Article 1170
of the New Civil Code, which reads:
Art. 1170. Those who in the performance of their obligations are

guilty of fraud, negligence, or delay and those who in any
manner contravene the tenor thereof, are liable for damages.
The petitioner, likewise, lost the amount of P3,900,000 by way of

unearned income from the lease of the property to the Ponderosa
Leather Goods Company. The respondent is, thus, liable to the
petitioner for the said amount, under Articles 2200 and 2201 of the
New Civil Code:

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Art. 2200. Indemnification for damages shall comprehend not
only the value of the loss suffered, but also that of the profits
which the obligee failed to obtain.
Art. 2201. In contracts and quasi-contracts, the damages for

which the obligor who acted in good faith is liable shall be
those that are the natural and probable consequences of the
breach of the obligation, and which the parties have foreseen
or could have reasonably foreseen at the time the obligation
was constituted.
In case of fraud, bad faith, malice or wanton attitude, the

obligor shall be responsible for all damages which may be
reasonably attributed to the non-performance of the
obligation.
In sum, we affirm the trial court's award of damages and attorney's

fees to the petitioner.
IN LIGHT OF ALL THE FOREGOING, judgment is hereby rendered

AFFIRMING the assailed Decision of the Court of Appeals WITH
MODIFICATION. The respondent is ordered to pay to the petitioner
the amount of P5,612,980 by way of actual damages and P100,000
by way of attorney's fees. No costs.
SO ORDERED.
Puno, J., Chairman, Austria-Martinez, Tinga, and Chico-Nazario, JJ.,

concur.
Footnotes
1Penned by Associate Justice Salome A. Montoya, with
Associate Justices Conrado M. Vasquez, Jr. and Teodoro P.
Regino, concurring.
2 Penned by Judge Francisco X. Velez.
3 Exhibit "L," Records, p. 213.
4 Exhibit "M," Id. at 214.
5 Ibid.
6 Exhibit "N," Id. at 216.
7 Exhibit "C," Id. at 192-195.
8 Id. at 193-194.
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9 Exhibit "D," Id. at 196.
10 Exhibit "D-1," Id. at 197.
11 Exhibit "G," Id. at 201.
12 Exhibit "E," Id. at 198.
13 Exhibit "F," Id. at 199.
14 Exhibit "H," Id. at 202-206.
15 Records, pp. 2-4.
16 Id. at 4-5.
17 Id. at 24-25.
18 Id. at 247.
19 Id. at 482.
20 Rollo, pp. 22-23.
21 296 SCRA 631 (1998).
22 Id. at 644-645.
23Art. 1403. The following contracts are unenforceable, unless
they are ratified:
(1) Those entered into in the name of another person by one

who has been given no authority or legal representation, or
who has acted beyond his powers.
24 211 SCRA 112 (1992).
25 Records, p. 213.
26Art. 1878. Special powers of attorney are necessary in the
following cases:
(5) To enter into any contract by which the ownership of

an immovable is transmitted or acquired either
gratuitously or for a valuable consideration;
(12) To create or convey real rights over immovable

property;
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…
(14) To ratify or recognize obligations contracted before

the agency;
(15) Any other act of strict dominion.

27 Art. 1358. The following must appear in a public document:
(1) Acts and contracts which have for their object the
creation, transmission, modification or extinguishment of
real rights over immovable property; sales of real property
or of an interest therein are governed by articles 1403, No.
2, and 1405;
(3) The power to administer property, or any other power

which has for its object an act appearing or which should
appear in a public document, or should prejudice a third
person;
(4) The cession of actions or rights proceeding from an act

appearing in a public document.
Woodchild Holdings Inc. vs Roxas Electric and Construction

(GR No 140667, Aug 12, 2004, Callejo)
The doctrine of apparent authority was not applicable in this case

because the president of the company was given a specific
authority by virtue of a board resolution to sell a particular land. Any
actions of the president outside such vested authority shall not bind
the corporation with third party.
Spouses David and Coordinated Group, Inc. vs

CIAC and Spouses Quiambao
(GR No 159795, July 30, 2004, Puno)
Facts:

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The spouses Quiambao engaged the services of the petitioner for
the construction of a five-storey building. In the performance of the
project, the petitioner allegedly deviated from the original plan
without the approval of Spouses Quiambao. The latter therefore
decided to rescind the contract and hired the services of another
contractor. When a definitive finding that indeed there was
deviation on the structural plan, Quiambao sued for damages
impleading the officers of the construction company, among them
Engr. David, who is also an officer of the Company. The officer
contended that he cannot be made personally liable for what
appears to be a corporate act by virtue of the doctrine of corporate
entity.
Issue:
Whether or not Engr. David is personally liable to the Spouses
Quiambao.
Held:
The SC held that an exception to the doctrine of corporate entity is
when there is bad faith in the performance of the duty of the officer.
In the instant case, bad faith was proven when Engr. David
categorically admitted that the company deviated from the original
structural plan in order to lower the cost of construction. By his act,
Engr. David violated Sec 31 of the Corporation Code which provides
that directors or trustees who are guilty of gross negligence or bad
faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such
directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons. Therefore, the SC
deemed that equity demand that he should be liable to Spouses
Quiambao.
Yasuma vs. Heirs of Cecilio S. De Villa (499 SCRA 466 [2006])
G.R. No. 150350 August 22, 2006
KOJI YASUMA, Petitioner,

vs.

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HEIRS OF CECILIO S. DE VILLA and EAST CORDILLERA MINING
CORPORATION, Respondents.
DECISION
CORONA, J.:
This is a petition for review on certiorari1 of a decision2 of the Court of

Appeals (CA) dated October 18, 2001 in CA-G.R. CV No. 61755.
The antecedent facts follow.
On September 15, 1988, October 21, 1988 and December 5, 1988,

Cecilio S. de Villa obtained loans from petitioner Koji Yasuma in the
amounts of P1,100,000, P100,000 and P100,000, respectively, for the
total amount of P1.3 million. These loans were evidenced by three
promissory notes signed by de Villa as borrower. The last promissory
note in the amount of P1,300,000 cancelled the first two notes.
The loans were initially secured by three separate real estate

mortgages on a parcel of land with Transfer Certificate of Title No.
176575 in the name of respondent East Cordillera Mining
Corporation. The deeds of mortgage were executed on the dates
the loans were obtained, signed by de Villa as president of
respondent corporation. The third real estate mortgage later
cancelled the first two.3
For failure of de Villa to pay, petitioner filed a collection suit in the

Regional Trial Court of Makati City, Branch 148 (RTC-Br. 148) against
de Villa and respondent corporation.4 The RTC-Br. 148 declared de
Villa and respondent corporation in default and resolved the case in
favor of petitioner. On appeal, however, the judgment of RTC-Br. 148
was annulled on the ground of improper service of summons.5 Thus,
the case was remanded for retrial.
During the pendency of the case in the RTC-Br. 148, de Villa died.
Petitioner consequently amended the complaint and impleaded
the heirs of de Villa as defendants.6
After the case was re-heard, the RTC of Makati City, Branch 139
(RTC-Br. 139) rendered judgment on November 13, 1998 in favor of
petitioner and against respondent corporation. It ordered
respondent corporation to pay petitioner P1.3 million plus legal
interest, attorney’s fees, liquidated damages and costs of suit. The
complaint was dismissed against respondent heirs.7
On appeal, the CA reversed and set aside the decision of RTC-Br.

139. It held that the loan was personal to de Villa and that the

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mortgage was null and void for lack of authority from the
corporation.
Petitioner is now before this Court with the following assignment of

errors:
1. THE [CA], WITH ALL DUE RESPECT, COMMITTED PALPABLE AND

REVERSIBLE ERROR OF LAW WHEN IT DECLARED THAT THE
CORPORATION DID NOT RATIFY THE ACT OF ITS PRESIDENT IN
OBTAINING LOANS FROM PETITIONER DESPITE ITS ADMISSION THAT IT
RECEIVED THE MONEY OF THE PETITIONER.

REVERSIBLE ERROR OF LAW WHEN IT TOTALLY DISREGARDED THE
ADMITTED FACTS AND ISSUES AGREED UPON BY THE PARTIES AND
APPROVED BY THE TRIAL COURT DURING THE PRE-TRIAL.

REVERSIBLE ERROR OF LAW WHEN IT SET ASIDE THE REAL ESTATE
MORTGAGE AND THE AWARD OF ATTORNEY’S FEES, 10% LIQUIDATED
DAMAGES AND THE COSTS OF SUIT.

REVERSIBLE ERROR OF LAW WHEN IT SET ASIDE THE AWARD OF
INTEREST BY WAY OF DAMAGES IN FAVOR OF PETITIONER.8
The issues to be resolved are the following:
1) whether the loans were personal liabilities of de Villa or debts of

respondent corporation and
2) whether the mortgage on respondent corporation’s property was

null and void for having been executed without its authority.
We begin with a brief study of some well-settled legal doctrines

relevant to the disposition of this case.
Personal or Corporate Liability?
A corporation is a juridical person, separate and distinct from its

stockholders. Being a juridical entity, a corporation may act through
its board of directors, as provided in Section 23 of the Corporation
Code of the Philippines:9
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 …

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xxx xxx xxx
The corporation can also act through its corporate officers who may
be authorized either expressly by the by-laws or board resolutions or
impliedly such as by general practice or policy or as are implied from
express powers.10 The general principles of agency govern the
relation between the corporation and its officers or agents.11 When
authorized, their acts can bind the corporation. Conversely, when
unauthorized, their acts cannot bind it.
However, the corporation may ratify the unauthorized act of its

corporate officer.12 Ratification means that the principal voluntarily
adopts, confirms and gives sanction to some unauthorized act of its
agent on its behalf. It is this voluntary choice, knowingly made, which
amounts to a ratification of what was theretofore unauthorized and
becomes the authorized act of the party so making the ratification.13
The substance of the doctrine is confirmation after conduct,
amounting to a substitute for a prior authority.14 Ratification can be
made either expressly or impliedly. Implied ratification may take
various forms — like silence or acquiescence, acts showing approval
or adoption of the act, or acceptance and retention of benefits
flowing therefrom.15
The power to borrow money is one of those cases where corporate

officers as agents of the corporation need a special power of
attorney.16 In the case at bar, no special power of attorney
conferring authority on de Villa was ever presented. The promissory
notes evidencing the loans were signed by de Villa (who was the
president of respondent corporation) as borrower without indicating
in what capacity he was signing them. In fact, there was no mention
at all of respondent corporation. On their face, they appeared to be
personal loans of de Villa.
Petitioner, however, contends that respondent corporation’s

admission that it received the total amount of P1.3 million was
effectively a ratification of the act of its former president.17 It appears
that, in the pre-trial order dated March 4, 1997 issued by RTC-Br. 139,
respondent corporation indeed admitted the following:
xxx xxx xxx
3. Defendants ADMIT that the total amount of P1.3 Million subject

matter of the Promissory Notes was RECEIVED by the Defendant-
Corporation;18 (emphasis supplied)
xxx xxx xxx
In its answer, respondent corporation stated:

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7. The sum of money which [petitioner] sought to recover form herein
[respondents] is not really a loan but his investment to the mining
project of [respondent] corporation which unfortunately did not
succeed due to the delays caused by typhoons and bad rainy
season in the Benguet mountains causing landslides in the mining
and milling site during the latter part of 1988, and the killer
earthquake of 1990 which destroyed the mining area. As investment
to a losing business venture, he is not entitled to claim payment
neither could he treat it as a loan.19
The CA held that this admission was not tantamount to ratification

because what respondent corporation admitted was that the
money was in fact received as an investment. It concluded that:
… even if the [respondent corporation] received the money, it

cannot be held responsible for not knowing the preceding
transaction between the [p]resident and the [petitioner] as in fact
there was a misrepresentation made to the [respondent
corporation], to the effect that the money was an investment and
not a loan. The alleged investment is actually a personal loan of
Cecilio de Villa.20
Petitioner’s contention has no merit. There was no showing that

respondent corporation ever authorized de Villa to obtain the loans
on its behalf. The notes did not show that de Villa acted on behalf of
the corporation. Actually, the corporation would not have figured in
the transaction at all had it not been for its admission that it received
the amount of P1.3 million. As could be gleaned from the promissory
notes, it was a stranger to the transaction.
Thus, we conclude that petitioner himself did not consider the

corporation to be his debtor for if he really knew that de Villa was
obtaining the loan on behalf of the corporation, then why did he
allow the notes to reflect only the personal liability of de Villa?21 Even
the demand letters of petitioner were personally addressed to de
Villa and not to respondent corporation.22 Undoubtedly, petitioner
dealt with de Villa purely in his personal capacity.
Respondent corporation could not have ratified the act of de Villa

because there was no proof that it knew that he took out a loan on
its behalf. As stated earlier, ratification is a voluntary choice that is
knowingly made. The corporation could not have ratified an act it
had no knowledge of:
xxx xxx xxx
Ordinarily, the principal must have full knowledge at the time of

ratification of all the material facts and circumstances relating to the
unauthorized act of the person who assumed to act as agent. Thus,
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if material facts were suppressed or unknown, there can be no valid
ratification …. 23
The fact that the corporation admitted receiving the proceeds of

the loan did not amount to ratification of the loan. It accepted the
amount from de Villa, its president at that time, in good faith. Good
faith is always presumed.24 Petitioner did not show that the
corporation acted in bad faith.
It follows that respondent corporation was not liable for the

subsequent loss of the money which it accepted as an investment. It
could not be faulted for not knowing that it was the proceeds of a
loan obtained by de Villa. It was under no obligation to check the
source of the investments which went into its coffers. As long as the
investment was used for legitimate corporate purposes, the investor
bore the risk of loss.
Therefore, on the first issue, the loan was personal to de Villa. There
was no basis to hold the corporation liable since there was no
authority, express, implied or apparent, given to de Villa to borrow
money from petitioner. Neither was there any subsequent ratification
of his act.
Was the Mortgage Valid or Void?
Petitioner insists that the mortgage executed by de Villa, as president

of the corporation, was ratified by the latter since the mortgage was
an accessory contract of the loan.25 We disagree.
A special power of attorney is necessary to create or convey real

rights over immovable property.26 Furthermore, the special power of
attorney must appear in a public document.27 In the absence of a
special power of attorney in favor of de Villa as president of the
corporation, no valid mortgage could have been executed by
him.28 Since the mortgage was void, it could not be ratified.
Petitioner cannot blame anyone but himself. He did not check if the
person he was dealing with had the authority to mortgage the
property being offered as collateral.
Given that the loan and mortgage were not binding on respondent
corporation, the latter cannot be held liable for interest, attorney’s
fees and liquidated damages arising from the loan.
Personal Liability of De Villa
The liability arising from the loan was the sole indebtedness of de
Villa (or of his estate after his death). Petitioner vigorously sought to
make respondent corporation liable but exerted no effort at all to

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argue for the liability of respondent heirs. The trial court correctly
dismissed the case against the latter. Petitioner’s remedy now is to
file a money claim in the settlement proceedings of de Villa’s estate,
if not too late, as indicated in
Rule 8629 of the Rules of Court.
WHEREFORE, the petition is hereby DENIED. The October 18, 2001

decision of the Court of Appeals in CA-G.R. CV No. 61755 is
AFFIRMED.
Costs against petitioner.
SO ORDERED.
RENATO C. CORONA
Associate Justice
WE CONCUR:
REYNATO S. PUNO
Associate Justice
Chairperson
(on official business) ADOLFO S. AZCUNA

ANGELINA SANDOVAL-GUTIERREZ
Associate Justice
Associate Justice
CANCIO C. GARCIA
Associate Justice
ATTESTATION

REYNATO S. PUNO
Associate Justice
Chairperson, Second Division
CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division
decision had been reached in consultation before the case was

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Chief Justice
Footnotes
* On official business.
2Penned by Associate Justice Eloy R. Bello, Jr. and concurred in
by Associate Justices Perlita J. Tria-Tirona (retired) and Amelita
G. Tolentino of the Special Eighth Division of the Court of
Appeals; rollo, pp. 34-46.
3 Id., pp. 35-36.
4 Docketed as Civil Case No. 90-1837.
5 Rollo, pp. 13, 35.
6 Id., p. 35.
7 Id., p. 34.
8 Id., p. 15.
9 Batas Pambansa Blg. 68.
10Rural Bank of Milaor (Camarines Sur) v. Ocfemia, 381 Phil. 911
(2000), concurring opinion of J. Vitug.
San Juan Structural and Steel Fabricators, Inc. v. Court of

11
Appeals, 357 Phil. 631 (1998), citations omitted.

12The acts of an agent beyond the scope of his authority do
not bind the principal unless the latter ratifies the same
expressly or impliedly (see Arts. 1898 and 1910 of the Civil
Code). See also Safic Alcan & Cie v. Imperial Vegetable Oil.
Co., Inc., G.R. No. 126751, 28 March 2001, 355 SCRA 559, 568.
13Maglucot-Aw v. Maglucot, 385 Phil. 720 (2000), citing
Hampshire County Trust Co. of North Hampton, Mass., et al. v.
Stevenson, et al., 150 N.E. 726.
14Manila Memorial Park Cemetery, Inc. v. Linsangan, G.R. No.
151319, 22 November 2004, 443 SCRA 377, 394.

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15Metropolitan Waterworks and Sewerage System (MWSS) v.
Court of Appeals, G.R. Nos. 126000 and 128520, 7 October
1998, 297 SCRA 287, 307, citing Prime White Cement
Corporation v. Intermediate Appellate Court, G.R. No. 68555,
19 March 1993, 220 SCRA 103.
16Aguenza v. Metropolitan Bank & Trust Co., 337 Phil. 448 (1997),
citing Art. 1878 (7), Civil Code of the Philippines.
17 Rollo, p. 16.
18 Pre-Trial Order, id., p. 50.
19 Rollo, p. 54.
20 Id., p. 42.
21 This is why the instant case is different from de Asis & Co., Inc.
v. Court of Appeals (G.R. No. L-61549, 27 May 1985, 136 SCRA
599) which petitioner insists is squarely in point. In de Asis, there
was no promissory note to evidence the loan but the creditor
knew all along that the debtor was the corporation and not its
president. In fact, she deposited the amount of the loan
directly in the account of the corporation.
22 Rollo, p. 175.
23 Supra at note 14, p. 394.
24Rivera v. Santiago, et al., G.R. No. 146501, 28 August 2003, 410
SCRA 113, 123-124, citing Seno v. Mangubat, 2 December 1987,
158 SCRA 113, 127.
25 Rollo, pp. 23 and 192.
26 Art. 1878 (12), Civil Code of the Philippines.
27 Id., Art. 1358 (1).
28See Apex Investment and Financing Corporation v.
Intermediate Appellate Court, G.R. No. L-69723, 18 October
1988, 166 SCRA 458; Metropolitan Bank & Trust Company v.
Quilts & All, Inc., G.R. No. 91436, 24 May 1993, 222 SCRA 486,
492, dissenting opinion of J. Davide.
29 Sec. 5. Claims which must be filed under the notice. If not
filed, barred; exceptions. — All claims for money against the
decedent, arising from contract, express or implied, whether
the same be due, not due, or contingent, all claims for funeral
expenses and expenses for the last sickness of the decedent,

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and judgment for money against the decedent, must be filed
within the time limited in the notice; otherwise they are barred
forever, except that they may be set forth as counterclaims in
any action that the executor or administrator may bring against
the claimants . . .
National Power Corp. vs. Alonzo-Legasto (443 SCRA 342 [2004])
G.R. No. 148318 November 22, 2004
NATIONAL POWER CORPORATION, petitioner,

vs.
HON. ROSE MARIE ALONZO-LEGASTO, as Presiding Judge, RTC of
Quezon City, Branch 99, JOSE MARTINEZ, Deputy Sheriff, RTC of
Quezon City, CARMELO V. SISON, Chairman, Arbitration Board, and
FIRST UNITED CONSTRUCTORS CORPORATION, respondents.
DECISION
TINGA, J.:
National Power Corporation (NPC) filed the instant Petition for

Review1 dated July 19, 2001, assailing the Decision 2 of the Court of
Appeals dated May 28, 2001 which affirmed with modification the
Order3 and Writ of Execution4 respectively dated May 22, 2000 and
June 9, 2000 issued by the Regional Trial Court. In its assailed
Decision, the appellate court declared respondent First United
Constructors Corporation (FUCC) entitled to just compensation for
blasting works it undertook in relation to a contract for the
construction of power facilities it entered into with petitioner. The
Court of Appeals, however, deleted the award for attorney's fees
having found no basis therefor.
The facts culled from the Decision of the Court of Appeals are
undisputed:
On April 14, 1992, NPC and FUCC entered into a contract for
the construction of power facilities (civil works) – Schedule 1 –
1x20 MW Bacon-Manito II Modular Geothermal Power Plant
(Cawayan area) and Schedule 1A – 1x20 MW Bacon-Manito II

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Modular Geothermal Power Plant (Botong area) in Bacon,
Sorsogon (BACMAN II). The total contract price for the two
schedules is P108,493,966.30, broken down as follows:
SCHEDULE
1 – Cawayan P
area 52,081,421.00
1A – Botong P
area 56,412,545.30
P
108,493,966.30
Appended with the Contract is the contract price schedule

which was submitted by the respondent FUCC during the
bidding. The price for grading excavation was P76.00 per cubic
meter.
Construction activities commenced in August 1992. In the latter

part of September 1992 and after excavating 5.0 meters above
the plant elevation, FUCC requested NPC that it be allowed to
blast to the design grade of 495 meters above sea level as its
dozers and rippers could no longer excavate. It further
requested that it be paid P1,346.00 per cubic meter similar to
the rate of NPC's project in Palinpinon.
While blasting commenced on October 6, 1992, NPC and

FUCC were discussing the propriety of an extra work order and
if such is in order, at what price should FUCC be paid.
Sometime in March 1993, NPC Vice President for Engineering

Construction, Hector Campos, created a task force to review
FUCC's blasting works. The technical task force recommended
that FUCC be paid P458.07 per cubic meter as such being the
price agreed upon by FUCC.
The matter was further referred to the Department of Public

[W]orks and Highways (DPWH), which in a letter dated May 19,
1993, recommended the price range of P500.00 to P600.00 per
cubic meter as reasonable. It further opined that the price of
P983.75 per cubic meter proposed by Lauro R. Umali, Project
Manager of BACMAN II was high. A copy of the DPWH letter is
attached as Annex "C", FUCC's Exhibit EEE-Arbitration.

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In a letter dated June 28, 1993, FUCC formally informed NPC
that it is accepting the proposed price of P458.07 per cubic
meter. A copy of the said letter is attached as Annex "D",
FUCC's Exhibit L Arbitration.
In the meantime, by March 1993, the works in Botong area

were in considerable delay. By May 1993, civil works in Botong
were kept at a minimum until on November 1, 1993, the entire
operation in the area completely ceased and FUCC
abandoned the project.
Several written and verbal warnings were given by NPC to

FUCC. On March 14, 1994, NPC's Board of Directors passed
Resolution No. 94-63 approving the recommendation of
President Francisco L. Viray to take over the contract. President
Viray's recommendation to take over the project was
compelled by the need to stave-off huge pecuniary and non-
monetary losses, namely:
(a) Generation loss estimated to be at

P26,546,400/month;
(b) Payment of steam penalties to PNOC-EDC the

amount estimated to be at P10,206,048.00/month;
(c) Payment of liquidated damages due to the

standby of electromechanical contractor;
(d) Loss of guaranteed protection (warranties) of all

delivered plant equipment and accessories as
Mitsubishi Corporation, electromechanical
contractor, will not be liable after six months of
delivery.
To prevent NPC from taking over the project, on March 28,

1994, FUCC filed an action for Specific Performance and
Damages with Preliminary Injunction and Temporary Restraining
Order before Branch 99, Regional Trial Court, Quezon City.
Under paragraph 19 of its Complaint, FUCC admitted that it

agreed to pay the price of P458.07 per cubic meter.
On April 5, 1994, Judge de Guzman issued a temporary

restraining order and on April 21, 1994, the trial court resolved to
grant the application for issuance of a writ of preliminary
injunction.
On July 7, 1994, NPC filed a Petition for Certiorari with Prayer for
Temporary Restraining Order and Preliminary Injunction before

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the First Division of the Court of Appeals asserting that no
injunction may issue against any government projects pursuant
to Presidential Decree 1818.
On July 8, 1994, the Court of Appeals through then Associate

Justice Bernardo Pardo issued a temporary restraining order
and on October 20, 1994, the said court rendered a Decision
granting NPC's Petition for Certiorari and setting aside the lower
court's Order dated April 21, 1994 and the Writ of Preliminary
Injunction dated May 5, 1994.
However, notwithstanding the dissolution by the Court of

Appeals of the said injunction, on July 15, 1995, FUCC filed a
Complaint before the Office of the Ombudsman against
several NPC employees for alleged violation of Republic Act
No. 3019, otherwise known as the Anti-Graft and Corrupt
Practices Act. Together with the complaint was an Urgent Ex-
Parte Motion for the issuance of a cease and [d]esist [o]rder to
restrain NPC and other NPC officials involved in the BACMAN II
project from canceling and/or from taking over FUCC's
contract for civil works of said project.
Then on November 16, 1994, FUCC filed before the Supreme

Court a Petition for Review assailing the Decision of the Court of
[A]ppeals dated October 20, 1994. In its Comment, NPC raised
the issue that FUCC resorted to forum shopping as it applied for
a cease and desist order before the National Ombudsman
despite the dissolution of the injunction by the Court of
Appeals.
Pending the petition filed by FUCC before the Supreme Court,

on April 20, 1995 the NPC and FUCC entered into a
Compromise Agreement.
Under the Compromise Agreement, the parties agreed on the

following:
1. Defendant shall process and pay the undisputed

unpaid billings of Plaintiff in connection with the entire
project fifteen (15) days after a reconciliation of accounts
by both Plaintiff and Defendant or thirty (30) days from the
date of approval of this Compromise Agreement by the
Court whichever comes first. Both parties agree to submit
and include those accounts which could not be
reconciled among the issues to be arbitrated as
hereunder provided;
2. Plaintiff accepts and acknowledges that Defendant

shall have the right to proceed with the works by re-
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bidding or negotiating the project immediately upon the
signing of herein Compromise Agreement;
3. This Compromise Agreement shall serve as the

Supplemental Agreement for payment of plaintiff's
blasting works at the Botong site;
4. Upon approval of this Compromise Agreement by the

Court or Plaintiff's receipt of payment of this undisputed
unpaid billings from Defendant whichever comes first, the
parties shall immediately file a Joint Manifestation and
Motion for the withdrawal of the following Plaintiff's
petition from the Supreme Court, Plaintiff's Complaint from
the National Ombudsman, the Complaint and Amended
Complaint from the RTC, Br. 99 of Quezon City;
5. Upon final resolution of the Arbitration, as hereunder

prescribed, the parties shall immediately execute the
proper documents mutually terminating Plaintiff's contract
for the civil works of the BACMAN II Project (Contract No.
Sp90DLM-918 (I & A);
6. Such mutual termination of Plaintiff's contract shall have

the following effects and/or consequences: (a) the
construction works of Plaintiff at the Kawayan and Bolong
sites, at its present stage of completion, shall be accepted
and/or deemed to have been accepted by defendant;
(b) Plaintiff shall have no more obligation to Defendant in
respect of the BACMAN II Project except as provided in
clause (e) below; (c) Defendant shall release all retention
moneys of plaintiff within a maximum period of thirty (30)
days from the date of final Resolution of the Arbitration;
(d) no retention money shall thenceforth be withheld by
Defendant in its payment to Plaintiff under this
Compromise Agreement, and (e) Plaintiff shall put up a
one-year guaranty bond for its completed civil works at
the Kawayan site, retroactive to the date of actual use of
the plant by defendant;
7. Plaintiff's blasting works claims and other unresolved

claims, as well as the claims of damages of both parties
shall be settled through a two stage process to wit:
STAGE 1
7.1 Plaintiff and Defendant shall execute and sign

this Compromise Agreement which they will submit
for approval by this Court. Under this Compromise
Agreement both parties agree that:
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xxx xxx
STAGE 2
7.1 The parties shall submit for arbitration to settle: (a)

the price of blasting, (b) both parties' claims for
damages, delays, interests, and (c) all other
unresolved claims of both parties, including the
exact volume of blasted rocks;
7.2 The arbitration shall be through a three-member

commission to be appointed by the Honorable
Court. Each party shall nominate one member. The
Chairman of the Arbitration Board shall be [a] person
mutually acceptable to both parties, preferably from
the academe;
7.3 The parties shall likewise agree upon the terms

under which the arbitrable issues shall be referred to
the Arbitration Board. The terms of reference shall
form part of the Compromise Agreement and shall
be submitted by the parties to the Honorable Court
within a period of seven (7) days from the signing of
the Compromise Agreement;
7.4 The Arbitration Board shall have a non-extendible

period of three (3) months within which to complete
the arbitration process and submit its Decision to the
Honorable Court;
7.5 The parties agree that the Decision of the

Arbitration Board shall be final and executory;
7.6 By virtue of this Compromise Agreement, except

as herein provided, the parties shall mutually waive,
forgo and dismiss all of their other claims and/or
counterclaim in this case. Plaintiff and defendant
warrant that after approval by the Court of this
Compromise Agreement neither party shall file
Criminal or Administrative cases or suits against each
other or its Board or member of its officials on
grounds arising from the case.
The Compromise Agreement was subsequently approved by

the Court on May 24, 1995.
The case was subsequently referred by the parties to the

arbitration board pursuant to their Compromise Agreement. On

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December 9, 1999 the Arbitration Board rendered its ruling the
dispositive portion of which states:
WHEREFORE, claimant is hereby declared entitled to an award

of P118,681,328.28 as just compensation for blasting works, plus
ten percent (10%) thereof for attorney's fees and expenses of
litigation.
Considering that payment in the total amount of P36,550,000.00

had previously been made, respondent is hereby ordered to
pay claimant the remaining sum of P82,131,328.28 for attorney's
fees and expenses of litigation.
Pursuant to the Compromise Agreement approved by this

Honorable Court, the parties have agreed that the decision of
the Arbitration Board shall be final and executory.
SO ORDERED.
On December 10, 1999 plaintiff FUCC filed a Motion for

Execution while defendant NPC filed a Motion to Vacate
Award by the Arbitration Board on December 20, 1999.
On May 22, 2000 Presiding Judge Rose Marie Alonzo Legasto

issued an order the dispositive portion of which states:
"WHEREFORE, the Arbitration Award issued by the Arbitration

Board is hereby APPROVED and the Motion for Execution filed
by plaintiff hereby GRANTED. The Motion to Vacate Award filed
by defendant is hereby DENIED for lack of merit.
Accordingly, let a writ of execution be issued to enforce the

Arbitration Award.
SO ORDERED."5 (Bracketed words supplied)
NPC went to the Court of Appeals on the lone issue of whether

respondent judge acted with grave abuse of discretion in issuing the
Order dated May 22, 2000 and directing the issuance of a Writ of
Execution.
In its assailed Decision, the appellate court declared that the court a
quo did not commit grave abuse of discretion considering that the
Arbitration Board acted pursuant to its powers under the
Compromise Agreement and that its award has factual and legal
bases.
The Court of Appeals gave primacy to the court-approved

Compromise Agreement entered into by the parties and concluded

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that they intended the decision of the arbitration panel to be final
and executory. Said the court:
For one, what the price agreed to be submitted for arbitration

are pure issues of fact (i.e., the price of blasting; both parties'
claims for damages, delay, interests and all other unresolved
claims of both parties, including the exact volume of blasted
rocks). Also, the manner by which the Arbitration Board was
formed and the terms under which the arbitrable issues were
referred to said Board are specified in the agreement. Clearly,
the parties had left to the Arbitration Board the final
adjudication of their remaining claims and waived their right to
question said Decision of the Board. Hence, they agreed in
clear and unequivocal terms in the Compromise Agreement
that said Decision would be immediately final and executory.
Plaintiff relied upon this stipulation in complying with its various
obligations under the agreement. To allow defendant to now
go back on its word and start questioning the Decision would
be grossly unfair considering that the latter was also a party to
the Compromise Agreement entered into part of which dealt
with the creation of the Arbitration Board.6
The appellate court likewise held that petitioner failed to present

evidence to prove its claim of bias and partiality on the part of the
Chairman of the Arbitration Board, Mr. Carmelo V. Sison (Mr. Sison).
Further, the Court of Appeals found that blasting is not part of the
unit price for grading and structural excavation provided for in the
contract for the BACMAN II Project, and that there was no perfected
contract between the parties for an extra work order for blasting.
Nonetheless, since FUCC relied on the representation of petitioner's
officials that the extra work order would be submitted to its Board of
Directors for approval and that the blasting works would be paid, the
Court of Appeals ruled that FUCC is entitled to just compensation on
grounds of equity and promissory estoppel.
Anent the issue of just compensation, the appellate court took into
account the estimate prepared by a certain Mr. Lauro R. Umali (Mr.
Umali), Project Manager of the BACMAN II Project, which itemized
the various costs involved in blasting works and came up with
P1,310.82 per cubic meter, consisting of the direct cost for drilling,
blasting excavation, stockpiling and hauling, and a 30% mark up for
overhead, contractor's tax and contingencies. This estimate was
later changed to P983.75 per cubic meter to which FUCC agreed.
The Court of Appeals, however, held that just compensation should
cover only the direct costs plus 10% for overhead expenses. Thus, it
declared that the amount of P763.007 per cubic meter is sufficient.
Since the total volume of blasted rocks as computed by Dr.

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Benjamin Buensuceso, Jr.8 of the U.P. College of Engineering is
97,032.16 cubic meters, FUCC is entitled to the amount of
P74,035,503.50 as just compensation.
Although the Court of Appeals adjudged FUCC entitled to interest,9

the dispositive portion of the assailed Decision 10 did not provide for
the payment of interest. Moreover, the award of attorney's fees was
deleted as there was no legal and factual ground for its imposition.
Petitioner, represented by the Office of the Solicitor General in the

instant Petition, rehashes its submissions before the Court of Appeals.
It claims that the appellate court failed to pass upon the following
issues:
1. The Chairman of the Arbitration Board showed extreme bias

in prejudging the case.
2. The Chairman of the Arbitration Board greatly exceeded his

powers when he mediated for settlement in the court of
arbitration proceedings.
3. The Chairman of the Arbitration Board committed serious

irregularity in hastily convening the Board in two days, which
thereafter released its report.
4. The Arbitration Board Committed manifest injustice

prejudicial to petitioner based on the following:
a. It rendered an award based on equity despite the

mandatory provision of the law.
b. The Board's decision to justify that equity applies herein

despite the fact that FUCC never submitted its own actual
costs for blasting and PHESCO, INC., the succeeding
contractor, did not employ blasting but used ordinary
excavation method at P75.59 per cubic meter which is
approximately the same unit price of plaintiff (FUCC).
c. It gravely erred when the Board claimed that an award

of just compensation must be given to respondent FUCC
for what it has actually spent and yet instead of using as
basis P458.07 which is the price agreed upon by FUCC, it
chose an estimate made by an NPC employee.
d. It gravely erred when it relied heavily on the purported

letter of NPC Project Manager Lauro R. Umali, when the
same has not been identified nor were the handwritten
entries in Annex ii established to be made by him.

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5. The Arbitration Board gravely erred in computing interest at
12% and from the time of plaintiff's extrajudicial claim despite
the fact that herein case is an action for specific performance
and not for payment of loan or forbearance of money, and
despite the fact that it has resolved that there was no
perfected contract and there was no bad faith on the part of
defendant.
6. On June 25, 2000, NPC discovered the Sub-Contract

Agreement of FUCC with a unit price of only P430/per cubic
meter.11 [Emphasis in the original]
Specifically, petitioner asserts that Mr. Sison exhibited bias and

prejudgment when he exhorted it to pay FUCC for the blasting works
after concluding that the latter was allowed to blast. Moreover, Mr.
Sison allegedly attempted to mediate the conflict between the
parties in violation of Section 20,12 paragraph 2 of Republic Act No.
876 (R.A. 876) otherwise known as the Arbitration Law. Petitioner also
questions the abrupt manner by which the decision of the Arbitration
Board was released.
Petitioner avers that FUCC's claim for blasting works was not
approved by authorized officials in accordance with Presidential
Decree No. 1594 (P.D. 1594) and its implementing rules which
specifically require the approval of the extra work by authorized
officials before an extra work order may be issued in favor of the
contractor. Thus, it should not be held liable for the claim. If at all,
only the erring officials should be held liable. Further, FUCC did not
present evidence to prove the actual expenses it incurred for the
blasting works. What the Arbitration Board relied upon was the
memorandum of Mr. Umali which was neither identified or
authenticated during the arbitration proceedings nor marked as
evidence for FUCC. Moreover, the figures indicated in Mr. Umali's
memorandum were allegedly mere estimates and were
recommendatory at most.
Petitioner likewise claims that its succeeding contractor, Phesco, Inc.

(Phesco), was able to excavate the same rock formation without
blasting.
Finally, it asserts that the award of P763.00 per cubic meter has no
factual and legal basis as the sub-contract between FUCC and its
blasting sub-contractor, Dynamic Blasting Specialists of the
Philippines (Dynamic), was only P430.00 per cubic meter.
In its Comment13 dated October 15, 2001, FUCC points out that
petitioner's arguments are exactly the same as the ones it raised
before the Arbitration Board, the trial court and the Court of
Appeals. Moreover, in the Compromise Agreement between the
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parties, petitioner committed to abide by the decision of the
Arbitration Board. It should not now be allowed to question the
decision.
FUCC likewise notes that Atty. Jose G. Samonte (Atty. Samonte), one
of the members of the Arbitration Board, was nominated by
petitioner itself. If there was any irregularity in its proceedings such as
the bias and prejudgment petitioner imputes upon Mr. Sison, Atty.
Samonte would have complained. As it is, Atty. Samonte concurred
in the decision of the Arbitration Board and dissented only as to the
award of attorney's fees.
As regards the issue of interest, FUCC claims that the case involves
forbearance of money and not a claim for damages for breach of
an obligation in which case interest on the amount of damages
awarded may be imposed at the rate of six percent (6%) per
annum.
Finally, FUCC asserts that its sub-contract agreement with Dynamic is

not newly-discovered evidence. Petitioner's lawyers allegedly had a
copy of the sub-contract in their possession. In any event, the unit
price of P430.00 per cubic meter appearing in the sub-contract
represents only a fraction of the costs incurred by FUCC for the
blasting works.
Petitioner filed a Reply14 dated March 18, 2002 reiterating its earlier
submissions.
The parties in the present case mutually agreed to submit to

arbitration the settlement of the price of blasting, the parties' claims
for damages, delay and interests and all other unresolved claims
including the exact volume of blasted rocks.15 They further mutually
agreed that the decision of the Arbitration Board shall be final and
immediately executory.16
A stipulation submitting an ongoing dispute to arbitration is valid. As

a rule, the arbitrator's award cannot be set aside for mere errors of
judgment either as to the law or as to the facts. Courts are generally
without power to amend or overrule merely because of
disagreement with matters of law or facts determined by the
arbitrators. They will not review the findings of law and fact
contained in an award, and will not undertake to substitute their
judgment for that of the arbitrators. A contrary rule would make an
arbitration award the commencement, not the end, of litigation.
Errors of law and fact, or an erroneous decision on matters submitted
to the judgment of the arbitrators, are insufficient to invalidate an
award fairly and honestly made. Judicial review of an arbitration
award is, thus, more limited than judicial review of a trial.17

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However, an arbitration award is not absolute and without
exceptions. Where the conditions described in Articles 2038, 2039
and 2040 of the Civil Code18 applicable to both compromises and
arbitrations are obtaining, the arbitrators' award may be annulled or
rescinded.19 Additionally, judicial review of an arbitration award is
warranted when the complaining party has presented proof of the
existence of any of the grounds for vacating, modifying or correcting
an award outlined under Sections 24 and 25 of R.A. 876, viz:
Section 24. Grounds for vacating an award. — In any of the

following cases, the court must make an order vacating the
award upon the petition of any party to the controversy when
such party proves affirmatively that in the arbitration
proceedings:
(a) The award was procured by corruption, fraud, or other

undue means; or
(b) That there was evident partiality or corruption in the

arbitrators or any of them; or
(c) That the arbitrators were guilty of misconduct in

refusing to postpone the hearing upon sufficient cause
shown, or in refusing to hear evidence pertinent and
material to the controversy; that one or more of the
arbitrators was disqualified to act as such under section
nine hereof, and willfully refrained from disclosing such
disqualifications or of any other misbehavior by which the
rights of any party have been materially prejudiced; or
(d) That the arbitrators exceeded their powers, or so

imperfectly executed them, that a mutual, final and
definite award upon the subject matter submitted to
them was not made.
When an award is vacated, the court, in its discretion, may

direct a new hearing either before the same arbitrators or
before a new arbitrator or arbitrators to be chosen in the
manner provided in the submission or contract for the selection
of the original arbitrator or arbitrators, and any provision limiting
the time in which the arbitrators may make a decision shall be
deemed applicable to the new arbitration to commence from
the date of the court's order.
Where the court vacates an award, costs not exceeding fifty

pesos and disbursements may be awarded to the prevailing
party and the payment thereof may be enforced in like
manner as the payment of costs upon the motion in an action.

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Section 25. Grounds for modifying or correcting an award. — In
any one of the following cases, the court must make an order
modifying or correcting the award, upon the application of
any party to the controversy which was arbitrated:
(a) Where there was an evident miscalculation of figures,

or an evident mistake in the description of any person,
thing or property referred to in the award; or
(b) Where the arbitrators have awarded upon a matter

not submitted to them, not affecting the merits of the
decision upon the matter submitted; or
(c) Where the award is imperfect in a matter of form not

affecting the merits of the controversy, and if it had been
a commissioner's report, the defect could have been
amended or disregarded by the court.
The order may modify and correct the award so as to effect

the intent thereof and promote justice between the parties.
In this case, petitioner does not specify which of the foregoing

grounds it relies upon for judicial review. Petitioner avers that "if and
when the factual circumstances referred to in the provisions
aforementioned are present, judicial review of the award is
warranted."20 From its presentation of issues, however, it appears that
the alleged evident partiality of Mr. Sison is singled out as a ground
to vacate the board's decision.
We note, however, that the Court of Appeals found that petitioner

did not present any proof to back up its claim of evident partiality on
the part of Mr. Sison. Its averments to the effect that Mr. Sison was
biased and had prejudged the case do not suffice to establish
evident partiality. Neither does the fact that a party was
disadvantaged by the decision of the arbitration committee prove
evident partiality.21
According to the appellate court, "[p]etitioner was never deprived

of the right to present evidence nor was there any showing that the
Board showed signs of any bias in favor of FUCC. As correctly found
by the trial court, this Court cannot find its way to support petitioner's
contention that there was evident partiality in the assailed Award of
the Arbitrator in favor of the respondent because the conclusion of
the Board, which the Court found to be well-founded, is fully
supported by substantial evidence."22
There is no reason to depart from this conclusion.

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However, we take exception to the arbitrators' determination that
based on promissory estoppel per se or alone, FUCC is entitled to just
compensation for blasting works for the reasons discussed
hereunder.
Section 9 of P.D. No. 1594, entitled Prescribing Policies, Guidelines,

Rules and Regulations for Government Infrastructure Contracts,
provides:
SECTION 9. Change Order and Extra Work Order.—A change

order or extra work order may be issued only for works
necessary for the completion of the project and, therefore,
shall be within the general scope of the contract as bid[ded]
and awarded. All change orders and extra work orders shall be
subject to the approval of the Minister of Public Works,
Transportation and Communications, the Minister of Public
Highways, or the Minister of Energy, as the case may be.
The pertinent portions of the Implementing Rules and Regulations of

P.D. 1594 provide:
CI - Contract Implementation:
These Provisions Refer to Activities During Project Construction,

i.e., After Contract Award Until Completion, Except as May
Otherwise be Specifically Referred to Provisions Under Section II.
IB - Instructions to Bidders.
CI 1 - Variation Orders - Change Order/Extra Work

Order/Supplemental Agreement
4. An Extra Work Order may be issued by the implementing

official to cover the introduction of new work items after the
same has been found to strictly comply with Section CI-1-1 and
approved by the appropriate official if the amount of the Extra
Work Order is within the limits of the former's authority to
approve original contracts and under the following conditions:
a. Where there are additional works needed and necessary for

the completion, improvement or protection of the project
which were not included as items of work in the original
contract.
b. Where there are subsurface or latent physical conditions at

the site differing materially from those indicated in the contract.
c. Where there are duly unknown physical conditions at the site

of an unusual nature differing materially from those ordinarily

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encountered and generally recognized as inherent in the work
or character provided for in the contract.
d. Where there are duly approved construction drawings or

any instruction issued by the implementing office/agency
during the term of contract which involve extra cost.
6. A separate Supplemental Agreement may be entered into

for all Change Orders and Extra Work Orders if the aggregate
amount exceeds 25% of the escalated original contract price.
All change orders/extra work orders beyond 100% of the
escalated original contract cost shall be subject to public
bidding except where the works involved are inseparable from
the original scope of the project in which case negotiation with
the incumbent contractor may be allowed, subject to
approval by the appropriate authorities.
7. Any Variation Order (Change Order, Extra Work Order or

Supplemental Agreement) shall be subject to the escalation
formula used to adjust the original contract price less the cost
of mobilization. In claiming for any Variation Order, the
contractor shall, within seven (7) calendar days after such work
has been commenced or after the circumstances leading to
such condition(s) leading to the extra cost, and within 28
calendar days deliver a written communication giving full and
detailed particulars of any extra cost in order that it may be
investigated at that time. Failure to provide either of such
notices in the time stipulated shall constitute a waiver by the
contractor for any claim. The preparation and submission of
Change Orders, Extra Work Orders or Supplemental
Agreements are as follows:
a. If the Project Engineer believes that a Change Order, Extra

Work Order or Supplemental Agreement should be issued, he
shall prepare the proposed Order or Supplemental Agreement
accompanied with the notices submitted by the contractor,
the plans therefore, his computations as to the quantities of the
additional works involved per item indicating the specific
stations where such works are needed, the date of his
inspections and investigations thereon, and the log book
thereof, and a detailed estimate of the unit cost of such items
of work, together with his justifications for the need of such
Change Order, Extra Work Order or Supplemental Agreement,
and shall submit the same to the Regional Director of
office/agency/corporation concerned.

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b. The Regional Director concerned, upon receipt of the
proposed Change Order, Extra Work Order or Supplemental
Agreement shall immediately instruct the technical staff of the
Region to conduct an on-the-spot investigation to verify the
need for the work to be prosecuted. A report of such
verification shall be submitted directly to the Regional Director
concerned.
c. The Regional Director concerned after being satisfied that

such Change Order, Extra Work Order or Supplemental
Agreement is justified and necessary, shall review the estimated
quantities and prices and forward the proposal with the
supporting documentation to the head of
office/agency/corporation for consideration.
d. If, after review of the plans, quantities and estimated unit

cost of the items of work involved, the proper
office/agency/corporation committee empowered to review
and evaluate Change Orders, Extra Work Orders or
Supplemental Agreements recommends approval thereof, the
head of office/agency/corporation, believing the Change
Order, Extra Work Order or Supplemental Agreement to be in
order, shall approve the same. The limits of approving authority
for any individual, and the aggregate of, Change Orders, Extra
Work Orders or Supplemental Agreements for any project of
the head of office/agency/corporation shall not be greater
than those granted for an original project.
CI 3 - Conditions under which Contractor is to Start Work under

Variation Orders and Receive Payments
1. Under no circumstances shall a contractor proceed to

commence work under any Change Order, Extra Work Order or
Supplemental Agreement unless it has been approved by the
Secretary or his duly authorized representative. Exceptions to
the preceding rule are the following:
a. The Regional Director, or its equivalent position in

agencies/offices/corporations without plantilla position for the
same, may, subject to the availability of funds, authorize the
immediate start of work under any Change or Extra Work Order
under any or all of the following conditions:
(1) In the event of an emergency where the prosecution of the

work is urgent to avoid detriment to public service, or damage
to life and/or property; and/or
(2) When time is of the essence; provided, however, that such

approval is valid on work done up to the point where the
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cumulative increase in value of work on the project which has
not yet been duly fully approved does not exceed five percent
(5%) of the adjusted original contract price, or P500,000
whichever is less; provided, further, that immediately after the
start of work, the corresponding Change/Extra Work Order shall
be prepared and submitted for approval in accordance with
the above rules herein set. Payments for works satisfactorily
accomplished on any Change/Extra Work Order may be made
only after approval of the same by the Secretary or his duly
authorized representative.
b. For a Change/Extra Work Order involving a cumulative

amount exceeding five percent (5%) of the original contract
price or original adjusted contract price no work thereon may
be commenced unless said Change/Extra Work Order has
been approved by the Secretary or his duly authorized
representative. [Emphasis supplied]
It is petitioner's submission, and FUCC does not deny, that the claim
for payment of blasting works in Botong alone was approximately
P170,000,000.00, a figure which far exceeds the original contract
price of P80,000,000.00 for two (2) project sites. Under the foregoing
implementing rules, for an extra work order which exceeds 5% of the
original contract price, no blasting work may be commenced
without the approval of the Secretary or his duly authorized
representative. Moreover, the procedure for the preparation and
approval of the extra work order outlined under Contract
Implementation (CI) 1(7) above should have been complied with.
Accordingly, petitioner's officials should not have authorized the
commencement of blasting works nor should FUCC have
proceeded with the same.
The following events, culled from the decision of the Arbitration

Board and the assailed Decision, are made the bases for the finding
of promissory estoppel on the part of petitioner:
1. After claimant [respondent herein] encountered what it

claimed to be massive hard rock formation (Testimony of
witness Dumaliang, TSN, 28 October 1996, pp. 41-42; Testimony
of witness Lataquin, 28 November 1996, pp. 2-3; 20-23; Exh. "JJJ"
and sub-markings) and informed respondent [petitioner herein]
about it, respondent's own geologists went to the Botong site to
investigate and confirmed the rock formation and
recommended blasting (Cf. Memorandum of Mr. Petronilo E.
Pana, Acting Manager of the Geoscience Services
Department and the report of the geologists who conducted
the site investigation; Exhs. "F" and "F-1").

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2. Claimant asked for clearance to blast the rock formation to
the design grade (Letter dated 28 September 1992; Exh. "UU").
The engineers of respondent at the project site advised
claimant to proceed with its suggested method of extraction
(Order/Instruction given by Mr. Reuel R. Declaro and Mr. Francis
A. Paderna dated 29 September 1992; Exh. "C").
3. Claimant requested that the intended blasting works be

confirmed as extra work order by responsible officials of
respondent directly involved in the BACMAN II Project (i.e., then
BACMAN II Project Manager, Mr. Lauro R. Umali and Mr.
Angelito G. Senga, Section Chief, Civil Engineering Design of
respondent's Design Department which bidded the project).
These officials issued verbal instructions to the effect: (a) that
claimant could blast the rock formation down to the design
grade of 495 masl; (b) that said blasting works would be an
extra work order; and (c) that claimant would be paid for said
blasting works using the price per cubic meter for similar
blasting works at Palinpinon, or at P1,346.00 per cubic meter.
4. Claimant sent two (2) confirmatory letters to respondent,

both addressed to its President, one dated 30 September 1992,
and sent through Mr. Angelito Senga, Chief Civil Design –
Thermal, the other dated 02 October 1992, and sent through
Mr. Lauro R. Umali, Project Manager–BacMan II (Exhs. "D" and
"E"; Testimony of witness Dumaliang, TSN, 28 October 1996, pp.
43-49). The identical letters read:
We wish to confirm your instruction for us to proceed with the

blasting of the Botong Plant site to the design grade pending
issuance of the relevant variation order. This is to avoid delay in
the implementation of this critical project due to the urgent
need to blast rocks on the plant site.
We are confirming further your statement that the said blasting

works is an extra work order and that we will be paid using the
price established in your Palinpinon contract with Phesco.
Thank you for your timely action and we look forward to the
immediate issuance of the extra work order.
We are now mobilizing equipment and manpower for the said

work and hope to start blasting next week.
5. Respondent received the letters but did not reply thereto nor
countermand the earlier instructions given to claimant to
proceed with the blasting works. The due execution and
authenticity of these letters (Exhs. "D-1" and "E-1") and the fact

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of receipt (Exhs. "D-2" and "E-2") were duly proved by claimant
(Testimony of witness Dumaliang, TSN, 28 October 1996, 43-49).
6. In mid-October 1992, three (3) Vice-Presidents of respondent

visited the project site and were informed of claimant's blasting
activities. While respondent claims that one of the Vice-
Presidents, Mr. Rodrigo Falcon, raised objections to claimant's
blasting works as an extra work order, they instructed claimant
to speed up the works because of the power crisis then
hounding the country. Stipulation no. 24 of the Joint Stipulation
of Facts of the parties which reads: "24. In mid-October 1992,
three (3) Vice-Presidents of respondent, namely: Mr. Hector N.
Campos, Sr., of Engineering Construction, Mr. C.A. Pastoral of
Engineering Design, and Mr. Rodrigo P. Falcon, visited the
project site and were likewise apprised of claimant's blasting
activities. They never complained about the blasting works,
much less ordered its cessation. In fact, no official of
respondent ever ordered that the blasting works be stopped."
7. After visiting Botong, Mr. Hector N. Campos, Sr., then Vice

President of Engineering Construction, instructed Mr. Fernando
A. Magallanes then Manager of the Luzon Engineering Projects
Department, to evaluate claimant's blasting works and to
submit his recommendations on the proper price therefor. In a
memorandum dated 17 November 1992 (Exh. "G" and sub-
markings), Mr. Magallanes confirmed that claimant's blasting
works was an extra work order and recommended that it be
paid at the price for similar blasting works at Palinpinon, or at
P1,346.00 per cubic meter. Mr. Campos concurred with the
findings and recommendations of Mr. Magallanes and
instructed Mr. Lauro R. Umali, then Project Manager of BacMan
II, to implement the same as shown by his instructions scribbled
on the memorandum.
8. Mr. Umali and the project team prepared proposed Extra

Work Order No. 2 – Blasting (Exh. "DDD" – Memorandum of Mr.
Umali to Mr. Campos dated 20 January 1993 forwarding
proposed Extra Work Order No. 2), recommending a price of
P983.75 per cubic meter for claimant's blasting works. Claimant
agreed to this price (Testimony of witness Dumaliang, 7
November 1996, p. 48).
9. On 19 February 1993, claimant brought the matter of its

unpaid blasting works to the attention of the then NPC
Chairman [also Secretary of the Department of Energy then]
Delfin L. Lazaro during a meeting with the multi-sectoral task
force monitoring the implementation of power plant projects,
who asked then NPC President Pablo B. Malixi what he was

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doing about the problem. President Malixi thereafter convened
respondent's vice-presidents and ordered them to quickly
document the variation order and pay claimant. The vice-
president, and specifically Mr. Campos, pledged that the
variation order for claimant's blasting works would be submitted
for the approval of the NPC Board during the first week of
March 1993. Claimant thereafter sent respondent a letter
dated 22 February 1993 (Ex. "K") to confirm this pledge
(Testimony of witness Dumaliang, 7 November 1996, pp. 28-30).
10. Mr. Campos created a task force (i.e., the Technical Task
Force on the Study and Review of Extra Work Order No. 2; Exh.
"FFF") to review claimant's blasting works. After several meetings
with the task force, claimant agreed to the lower price of
P458.07 per cubic meter, in exchange for quick payment
(Testimony of witness Dumaliang, 7 November 1996, p. 30).
11. However, no variation order was issued and no payment

came, although it appears from two (2) radiograms sent by Mr.
Campos to Mr. Paderna at the project site that the variation
order was being processed and that payment to claimant was
forthcoming (Exhs. "AAA" and "BBB").
12. Respondent asked the Department of Public Works and

Highways (DPWH) about the standard prices for blasting in the
projects of the DPWH. The DPWH officially replied to
respondent's query in a letter dated 19 May 1993 but the task
force still failed to seek Board approval for claimant's variation
order. The task force eventually recommended that the issue of
grading excavation and structural excavation and the unit
prices therefor be brought into voluntary arbitration (Testimony
of witness Dumaliang, 7 November 1996, pp. 30-57).
13. Claimant thereafter saw Mr. Francisco L. Viray, the new NPC
President, who proposed that claimant accept the price of
P458.07 per cubic meter for its blasting works with the balance
of its claim to be the subject of arbitration. Claimant accepted
the offer and sent the letter dated 28 September 1993 (Exh. "O")
to formalize said acceptance. However, no variation order was
issued and the promised payment never came. (Testimony of
witness Dumaliang, 7 November 1996, p. 58).
14. After some time, claimant met Mr. Viray on 19 October 1993
at the project site, and with some NPC officers in attendance,
particularly Mr. Gilberto A. Pastoral, Vice-President for
Engineering Design, who was instructed by Mr. Viray to prepare
the necessary memorandum (i.e., that claimant would be paid
P458.07 per cubic meter with the balance of its claim to be the

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subject of arbitration) for the approval of the NPC Board.
Claimant formalized what transpired during this meeting in its
letter to Mr. Pastoral dated 22 October 1993 (Exhibit "R"). But no
action was taken by Mr. Pastoral and no variation order was
issued by respondent (Testimony of witness Dumaliang, 7
November 1996, pp. 57-58).23 [Emphasis supplied and
bracketed words]
Promissory estoppel "may arise from the making of a promise, even

though without consideration, if it was intended that the promise
should be relied upon and in fact it was relied upon, and if a refusal
to enforce it would be virtually to sanction the perpetration of fraud
or would result in other injustice."24 Promissory estoppel presupposes
the existence of a promise on the part of one against whom
estoppel is claimed. The promise must be plain and unambiguous
and sufficiently specific so that the court can understand the
obligation assumed and enforce the promise according to its
terms.25
In the present case, the foregoing events clearly evince that the
promise that the blasting works would be paid was predicated on
the approval of the extra work order by petitioner's Board. Even
FUCC acknowledged that the blasting works should be an extra
work order and requested that the extra work order be confirmed as
such and approved by the appropriate officials. Notably, even as
the extra work order allegedly promised to it was not yet
forthcoming, FUCC commenced blasting.
The alleged promise to pay was therefore conditional and up to this

point, promissory estoppel cannot be established as the basis of
petitioner's liability especially in light of P.D. 1594 and its
implementing rules of which both parties are presumed to have
knowledge. In Mendoza v. Court of Appeals, supra, we ruled that
"[a] cause of action for promissory estoppel does not lie where an
alleged oral promise was conditional, so that reliance upon it was
not reasonable. It does not operate to create liability where it does
not otherwise exist."
Petitioner's argument that it is not bound by the acts of its officials

who acted beyond the scope of their authority in allowing the
blasting works is correct. Petitioner is a government agency with a
juridical personality separate and distinct from the government. It is
not a mere agency of the government but a corporate entity
performing proprietary functions. It has its own assets and liabilities
and exercises corporate powers, including the power to enter into all
contracts, through its Board of Directors.

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In this case, petitioner's officials exceeded the scope of their
authority when they authorized FUCC to commence blasting works
without an extra work order properly approved in accordance with
P.D. 1594. Their acts cannot bind petitioner unless it has ratified such
acts or is estopped from disclaiming them.26
However, the Compromise Agreement entered into by the parties,

petitioner being represented by its President, Mr. Guido Alfredo A.
Delgado, acting pursuant to its Board Resolution No. 95-54 dated
April 3, 1995, is a confirmatory act signifying petitioner's ratification of
all the prior acts of its officers. Significantly, the parties agreed that
"[t]his Compromise Agreement shall serve as the Supplemental
Agreement for the payment of plaintiff's blasting works at the Botong
site"27 in accordance with CI 1(6) afore-quoted. In other words, it is
primarily by the force of this Compromise Agreement that the Court
is constrained to declare FUCC entitled to payment for the blasting
works it undertook.
Moreover, since the blasting works were already rendered by FUCC

and accepted by petitioner and in the absence of proof that the
blasting was done gratuitously, it is but equitable that petitioner
should make compensation therefor, pursuant to the principle that
no one should be permitted to enrich himself at the expense of
another.28
This brings us to the issue of just compensation.
The parties proposed in the terms of reference jointly submitted to

the Arbitration Board that should FUCC be adjudged entitled to just
compensation for its blasting works, the price therefor should be
determined based on the payment for blasting works in similar
projects of FUCC and the amount it paid to its blasting
subcontractor.29 They agreed further that "the price of the blasting at
the Botong site . . . shall range from Defendant's position of P76.00
per cubic meter as per contract to a maximum of P1,144.00" 30
Petitioner contends that the Arbitration Board, trial court and the
appellate court unduly relied on the memorandum of Mr. Umali
which was allegedly not marked as an exhibit. We note, however,
that this memorandum actually forms part of the record of the case
as Exhibit "DDD."31 Moreover, both the Arbitration Board and the
Court of Appeals found that Mr. Umali's proposal is the best
evidence on record as it is supported by detailed cost estimates that
will serve as basis to determine just compensation.
While the Arbitration Board found that FUCC did not present
evidence showing the amount it paid to its blasting sub-contractor, it
did present testimony to the effect that it incurred other costs and
expenses on top of the actual blasting cost. Hence, the amount of
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P430.00 per cubic meter indicated in FUCC's Contract of Agreement
with Dynamic is not controlling.
Moreover, FUCC presented evidence showing that in two (2) other

projects where blasting works were undertaken, petitioner paid the
contractors P1,346 per cubic meter for blasting and disposal of solid
rocks in the Palinpinon project and P1,144.51 per cubic meter for
rock excavation in the Hermosa Balintawak project. Besides, while
petitioner claims that in a contract with Wilper Construction for the
construction of the Tayabas sub-station, the price agreed for blasting
was only P96.13, petitioner itself did not present evidence in support
of this claim.32
Parenthetically, the point raised by petitioner that its subsequent

contractor, Phesco, did not undertake blasting works in excavating
the same rock formation is extraneous and irrelevant. The fact is that
petitioner allowed FUCC to blast and undertook to pay for the
blasting works.
At this point, we hearken to the rule that the findings of the

Arbitration Board, affirmed by the trial court and the Court of
Appeals and supported as they are by substantial evidence, should
be accorded not only respect but finality.33 Accordingly, the amount
of P763.00 per cubic meter fixed by the Arbitration Board and
affirmed by the appellate court as just compensation should stand.
As regards the issue of interest, while the appellate court declared in

the body of its Decision "that interest which would represent the cost
of the money spent be imposed on the money actually spent by
claimant for the blasting works,"34 there is no pronouncement as to
the payment of interest in the dispositive portion of the Decision
even as it specifically deleted the award of attorney's fees.
Despite its knowledge of the appellate court's omission, FUCC did

not file a motion for reconsideration or appeal from its Decision. In
failing to do so, FUCC allowed the Decision to become final as to it.
In Edwards v. Arce,35 we ruled that in a case decided by a court, the

true judgment of legal effect is that entered by the clerk of said
court pursuant to the dispositive part of its decision. The only portion
of the decision that may be the subject of execution is that which is
ordained or decreed in the dispositive portion. Whatever may be
found in the body of the decision can only be considered as part of
the reasons or conclusions of the court and serve only as guides to
determine the ratio decidendi.36
Even so, the Court allows a judgment which had become final and
executory to be clarified when there is an ambiguity caused by an
omission or mistake in the dispositive portion of the decision.37 In
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Reinsurance Company of the Orient, Inc. v. Court of Appeals,38 we
held:
In Republic Surety and Insurance Company, Inc. v.

Intermediate Appellate Court, the Court applying the above
doctrine said:
"xxx We clarify, in other words, what we did affirm. What is

involved here is not what is ordinarily regarded as a clerical
error in the dispositive part of the decision of the Court of First
Instance, which type of error is perhaps best typified by an error
in arithmetical computation. At the same time, what is involved
here is not a correction of an erroneous judgment or dispositive
portion of a judgment. What we believe is involved here is in
the nature of an inadvertent omission on the part of the Court
of First Instance (which should have been noticed by private
respondent's counsel who had prepared the complaint), of
what might be described as a logical follow-through of
something set forth both in the body of the decision and in the
dispositive portion thereof: the inevitable follow-through, or
translation into, operational or behavioral terms, of the
annulment of the Deed of Sale with Assumption of Mortgage,
from which petitioners' title or claim of title embodied in TCT
133153 flows." (Italics supplied)39
In this case, the omission of the award of interest was obviously

inadvertent. Correction is therefore in order. However, we do not
agree with the Arbitration Board that the interest should be
computed at 12%. Since the case does not involve a loan or
forbearance of money, goods or credit and court judgments
thereon, the interest due shall be computed at 6% per annum
computed from the time the claim was made in 1992 as determined
by the Arbitration Board and in accordance with Articles 2209 and
1169 of the Civil Code. The actual base for the computation of legal
interest shall be on the amount finally adjudged.40 Further, when the
judgment awarding a sum of money becomes final and executory,
the rate of legal interest shall be 12% per annum from such finality
until its satisfaction, this interim period being deemed to be by then
an equivalent to a forbearance of credit.41
WHEREFORE, the petition is GRANTED in part. The appealed decision

is MODIFIED in that the amount of P74,035,503.50 shall earn legal
interest of six percent (6%) from 1992. A twelve percent (12%) interest,
in lieu of six percent (6%), shall be imposed on such amount upon
finality of this decision until the payment thereof.
SO ORDERED.

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Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario,
JJ., concur.
Footnotes
1 Rollo, pp. 9-56.
2Id. at 58-87; Penned by Associate Justice Eugenio S. Labitoria
and concurred in by Associate Justices Eloy R. Bello, Jr. and
Perlita J. Tria-Tirona.
3 Id. at 88-92.
4 Id. at 93.
5 Id. at 59-67.
6 Id. at 71-72.
7Representing direct costs of P693.65 and 10% mark up for
overhead of P69.36.
8The technical consultant engaged by both parties to
compute the volume of blasted rocks.
9 Rollo, p. 83.
10 Id. at 86-87. The dispositive portion reads:
"WHEREFORE, the petition is hereby DENIED for lack of

merit. The order dated May 22, 2000 and Writ of Execution
dated June 9, 2000 of Regional Trial Court-National
Capital Judicial Region, Branch 99, Quezon City are
hereby AFFIRMED with the modification that private
respondent is entitled to P74,035,503.50 (i.e. 97,032.16
cubic meters P763.00 per cubit meter) as per
computation of Dr. Benjamin Buensuceso, [Jr.] (technical
person engaged by both parties for said computation)
and the award of attorney's fee is deleted.
SO ORDERED."
11 Supra note 1 at 33-35.
12 Sec. 20. – Form of contents of award.
………

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In the event that the parties to an arbitration have, during
the course of such arbitration, settled their dispute, they
may request of the arbitrators that such settlement be
embodied in an award which shall be signed by the
arbitrators. No arbitrator shall act as a mediator in any
proceeding in which he is acting as arbitrator; and all
negotiation towards settlement of the dispute must take
place without the presence of the arbitrators.
13 Supra note 1 at 249-272.
14 Id. at 310-320.
15Id. at 19; par. 7.1 of the Compromise Agreement; also at
Rollo, p. 112.
16Id. at 20; par. 7.5 of the Compromise Agreement; also at
Rollo, p. 112.
17Asset Privatization Trust v. Court of Appeals, 360 Phil. 768
(1998), citations omitted.
18 Art. 2038. A compromise in which there is mistake, fraud,
violence, intimidation, undue influence, or falsity of documents
is subject to the provisions of Article 1330 of this Code.
However, one of the parties cannot set up a mistake of fact as

against the other if the latter, by virtue of the compromise, has
withdrawn from a litigation already commenced.
Art. 2039. When the parties compromise generally on all

differences which they might have with each other, the
discovery of documents referring to one or more but not
to all of the questions settled shall not itself be a cause for
annulment or rescission of the compromise, unless said
documents have been concealed by one of the parties.
But the compromise may be annulled or rescinded if it

refers only to one thing to which one of the parties has no
right, as shown by the newly-discovered documents.
Art. 2040. If after a litigation has been decided by a final

judgment, a compromise should be agreed upon, either
or both parties being unaware of the existence of the final
judgment, the compromise may be rescinded.
Ignorance of a judgment which may be revoked or set

aside is not a valid ground for attacking a compromise.

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People’s Aircargo vs. CA (297 SCRA 170 [1998])
G.R. No. 117847 October 7, 1998
PEOPLE'S AIRCARGO AND WAREHOUSING CO. INC., petitioner,

vs.
COURT OF APPEALS and STEFANI SAÑO, respondents.
PANGANIBAN, J.:
Contracts entered into by a corporate president without express

prior board approval bind the corporation, when such officer's
apparent authority is estabished and when these contracts are
ratified by the corporation.
The Case
This principle is stressed by the Court in rejecting the Petition for

Review of the February 28, 1994 Decision and the October 28, 1994
Resolution of the Court of Appeals in CA-GR CV No. 30670.
In a collection case 1 filed by Stefani Saño against People's Aircargo

and Warehousing Co., Inc., the Regional Trial Court (RTC) of Pasay
City, Branch 110, rendered a Decision 2 dated October 26, 1990, the
dispositive portion of which reads: 3
WHEREFORE, in light of all the foregoing, Judgment is

hereby rendered, ordering [petitioner] to pay [private
respondent] the amount of sixty thousand (P60,000.00)
pesos representing payment of [private respondents]
services in preparing the manual of operations and in the
conduct of a seminar for [petitioner]. The Counterclaim is
hereby dismissed.
Aggrieved by what he considered a minuscule award of P60,000,

private respondent appealed to the Court of Appeals 4 (CA) which,
in its Decision promulgated February 28, 1994, granted his prayer for
P400,000, as follows: 5
WHEREFORE, PREMISES CONSIDERED, the appealed

judgment is hereby MODIFIED in that [petitioner] is
ordered to pay [private respondent] the amount of four
hundred thousand pesos (P400,000.00) representing
payment of [private respondent's] services in preparing

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the manual of operations and in the conduct of a seminar
for [petitioner].
As no new ground was raised by petitioner, reconsideration of the

above-mentioned Decision was denied in the Resolution
promulgated on October 28, 1994.
The Facts
Petitioner is a domestic corporation, which was organized in the

middle of 1986 to operate a customs bonded warehouse at the old
Manila International Airport in Pasay City. 6
To obtain a license for the corporation from the Bureau of Customs,

Antonio Punsalan Jr., the corporation president, solicited a proposal
from private respondent for the preparation of a feasibility study. 7
Private respondent submitted a letter-proposal dated October 17,
1986 ("First Contract" hereafter) to Punsalan, which is reproduced
hereunder: 8
Dear Mr. Punsalan:
With reference to your request for professional

engineering consultancy services for your proposed MIA
Warehousing Project may we offer the following outputs
and the corresponding rate and terms of agreement:
======================================
=
Project Feasibility Study consisting of
Market Study
Technical Study
Financial Feasibility Study
Preparation of pertinent documentation

requirements for the application
_____________________________________________
The above services will be provided for a fee of [p]esos

350,000.00 payable according to the following schedule:
==============================================
=======
Fifty percent (50%) upon confirmation of the agreement

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Twenty-five percent (25%) 15 days after the confirmation
of the agreement
Twenty-five percent (25%) upon submission of the

specified outputs
The outputs will be completed and submitted within 30

days upon confirmation of the agreement and receipt by
us of the first fifty percent payment.
---------------------------------------------------------------------------------
Thank you.
Yours truly, CONFORME:
(S)STEFANI C. SAÑO (S)ANTONIO C. PUNSALAN, JR.
(T)STEFANI C. SAÑO (T)ANTONIO C. PUNSALAN, JR.
Consultant for President, PAIRCARGO
Industrial Engineering
Initially, Cheng Yong, the majority stockholder of petitioner, objected

to private respondent's offer, as another company priced a similar
proposal at only P15,000. 9 However, Punsalan preferred private
respondent's service because of the latter's membership in the task
force, which was supervising the transition of the Bureau of Customs
from the Marcos government to the Aquino administration. 10
On October 17, 1986, pertitioner, through Punsalan, sent private

respondent a letter, confirming their agreement as follows:
Dear Mr. Saño:
With regard to the services offered by your company in

your letter dated 13 October 1986, for the preparation of
the necessary study and documentations to support our
Application for Authority to Operate a public Customs
Bonded Warehouse located at the old MIA Compound in
Pasay City, please be informed that our company is willing
to hire your services and will pay the amount of THREE
HUNDRED FIFTY THOUSAND PESOS (P350,000.00) as follows:
P100,000.00 — uppon signing of the agreement;
150,000.00 — on or before October 31, 1986, with the

favorable Recommendation of the CBW on our
application.

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100,000.00 — upon receipt of the study in final form.
Very
truly
yours
,
(S)A
NTO
NIO
C.
PUNS
ALA
N
(T)A
NTO
NIO
C.
PUNS
ALA
N
CONFORME & RECEIVED from PAIRCARGO, the
amount of ONE HUNDRED THOUSAND PESOS
(P100,000.00), this 17th day of October, 1986
as 1st Installment payment of the service agreement
dated October 13, 1986.
(S)STEFANI C. SAÑO
(T)STEFANI C. SAÑO
Accordingly, private respondent prepared a feasibility study for

petitioner which eventually paid him the balance of the contract
price, although not according to the schedule agreed upon. 11
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On December 4, 1986, upon Punsalan's request, private respondent
sent petitioner another letter-proposal ("Second Contract"
hereafter), which reads:
People's Air Cargo & Warehousing Co., Inc.
Old MIA Compound, Metro Manila
Attention: Mr. ANTONIO PUN[S]ALAN, JR.
President
Dear Mr. Pun[s]alan:
This is to formalize our proposal for consultancy services to

your company the scope of which is defined in the
attached service description.
The total service you have decided to avail . . . would be

available upon signing of the conforme below and would
come [in] the amount of FOUR HUNDRED THOUSAND
PESOS (P400,000.00) payable at the schedule defined as
follows (with the balance covered by post-dated
cheques):
Downpayment upon signing conforme

P80,000.00
15 January 1987 53,333.00
30 January 1987 53,333.00
15 February 1987 53,333.00
28 February 1987 53,333.00
15 March1987 53,333.00
30 March 1987 53,333.00
With is package, you are assured of the highest service

quality as our performance record shows we always
deliver no less.
Thank you very much.
Yours truly,
(S)STEFANI C. SAÑO
(T)STEFANI C. SAÑO

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Industrial Engineering Consultant
CONFORME:
(S)ANTONIO C. PUNSALAN JR.
(T)PAIRCARGO CO. INC.
During the trial, the lower court observed that the Second Contract
bore, at the lower right portion of the letter, the following notations in
pencil:
1. Operations Manual
2. Seminar/workshop for your employees
P400,000 — package deal
50% upon completion of seminar/workshop
50% upon approval by the Commissioner
The Manual has already been approved by the

Commissioner but payment has not yet been made.
The lower left corner of the letter also contained the following
notations:
1st letter — 4 Dec. 1986
2nd letter — 15 June 1987 with
"Hinanakit".
On January 10, 1987, Andy Villaceren, vice president of petitioner,

received the operations manual prepared by private respondent. 12
Petitioner submitted said operations manual to the Bureau of
Customs is connection with the former's application to operate a
bonded warehouse; thereafter, in May 1987, the Bureau issued to it a
license to operate, enabling it to become one of the three public
bonded warehouses at the international airport. 13 Private
respondent also conducted, in the third week of January 1987 in the
warehouse of petitioner, a three-day training seminar for the latter's
employees. 14
On March 25, 1987, private respondent joined the Bureau of Customs

as special assistant to then Commissioner Alex Padilla, a position he
held until he became technical assitant to then Commissioner
Miriam Defensor-Santiago on March 7, 1988. 15 Meanwhile, Punsalan

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sold his shares in petitioner-corporation and resigned as its president
in 1987. 16
On February 9, 1988, private respondent filed a collection suit

against petitioner. He allege that he had prepared an operations
manual for petitioner, conducted a seminar-workshop for its
employees and delivered to it a computer program; but that,
despite demand, petitioner refused to pay him for his services.
Petitioner, in its answer, denied that private respondent had

prepared an operations manual and a computer program or
conducted a seminar-workshop for its employees. It further alleged
that the letter-agreement was signed by Punsalan without authority,
"in collusion with [private respondent] in order to unlawfully get some
money from [petitioner]," and despite his knowledge that a group of
employees of the company had been commissioned by the board
of directors to prepare an operations manual. 17
The trial court declared the Second Contract unenforceable or

simulated. However, since private respondent had actually
prepared the operations manual and conducted a training seminar
for petitioner and its employees, the trial court awarded P60,000 to
the former, on the ground that no one should be unjustly enriched at
the expense of another (Article 2142, Civil Code). The trial court
determined the amount "in light of the evidence presented by
defendant on the usual charges made by a leading consultancy
firm on similar services." 18
The Ruling of the Court of Appeals
To Respondent Court, the pivotal issue of private respondent's

appeal was the enforceability of the Second Contract. It noted that
petitioner did not appeal the Decision of the trial court, implying that
it had agreed to pay the P60,000 award. If the contract was valid
and enforceable, then petitioner should be held liable for the full
amount stated therein, not P60,000 as held by the lower court.
Rejecting the finding of the trial court that the December 4, 1986
contract was simulated or unenforceable, the CA ruled in favor of its
validity and enforceability. According to the Court of Appeals, the
evidence on record shows that the president of petititoner-
corporation had entered into the First Contract, which was similar to
the Second Contract. Thus, petitioner had clothed its president with
apparent authority to enter into the disputed agreement. As it had
also become the practice of the petitioner-corporation to allow its
president to negotiate and execute contracts necessary to secure its
license as a customs bonded warehouse without prior board
approval, the board itself, by its acts and through acquiescence,
practically laid aside the normal requirement of prior express
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approval. The Second Contract was declared valid and binding on
the petitioner, which was held liable to private respondent in the full
amount of P400,000.
Disagreeing with the CA, petitioner lodged this petition before us. 19
The Issues
Instead of alleging reversible errors, petitioner imputes "grave abuse

of discretion" to the Court of Appeals, viz.: 20
I. . . . [I]n ruling that the subject letter-agreement for

services was binding on the corporation simply because it
was entered into by its president[;]
II. . . . [I]n ruling that the subject letter-agreement for

services was binding on the corporation notwithstanding
the lack of any board authority since it was the purported
"practice" to allow the president to enter into contracts of
said nature (citing one previous instance of a similar
contract)[;] and
III. . . . [I]n ruling that the subject letter-agreement for

services was a valid contract and not merely simulated.
The Court will overlook the lapse of petitioner in alleging grave abuse
of discretion as its ground for seeking reversal of the assailed
Decision. Although the Rules of Court specify "reversible errors" as
grounds for a petition for review under Rule 45, the Court will lay
aside for the nonce this procedural lapse and consider the
allegations of "grave abuse" as statements of reversible errors of law.
Petitioner does not contest its liability; it merely disputes the amount
of such accountability. Hence, the resolution of this petition rests on
the sole issue of the enforceability and validity of the Second
Contract, more specifically: (1) whether the president of the
petitioner-corporation had apparent authority to bind petitioner to
the Second Contract; and (2) whether the said contract was valid
and not merely simulated.
The Court's Ruling
The petition is not meritorious.
First Issue:
Apparent Authority of a Corporate President

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Petitioner argues that the disputed contract is unenforceable,
because Punsalan, its president, was not authorized by its board of
directors to enter into said contract.
The general rule is that, in the absence of authority from the board of
directors, no person, not even its officers, can validly bind a
corporation. 21 A corporation is a juridical person, separate and
distinct from its stockholders and members, "having . . . powers,
attributes and properties expressly authorized by law or incident to its
existence." 22
Being a juridical entity, a corporation may board of directors, which

exercises almost all corporate powers, lays down all corporate
business policies and is responsible for the efficiency of
management, 23 as provided in Section 23 of the Corporation Code
of the Philippines:
Sec. 23. The Board of Directors or Trustees. — Unless

directors or trustees . . . .
Under this provision, the power and the responsibility to decide

whether the corporation should enter into a contract that will bind
the corporation is lodged in the board, subject to the articles of
incorporaration, bylaws, or relevant provisions of law. 24 Howeever,
just as a natural person may authorize another to do certain acts for
and on his behalf, the board of directors may validly delegate some
of its functions and powers to officers, committees or agents. The
authority of such individuals to bind the corporation is generally
derived from law, corporate bylaws or authorization from the board,
either expressly or impliedly by habit, custom or acquiescence in the
general course of business, viz.: 25
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.

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Accordingly, the appellate court ruled in this case that the authority
to act for and to bind a corporation may be presumed from acts of
recognition in other instances, wherein the power was in fact
exercised without any objection from its board or shareholders.
Petitioner had previously allowed its president to enter into the First
Contract with private respondent without a board resolution
expressly authorizing him; thus, it had clothed its president with
apparent authority to execute the subject contract.
Petitioner rebuts, arguing that a single isolated agreement prior to

the subject contract does not constitute corporate practice, which
Webster defines as "frequent or custmary action." It cites Board of
Liquidators v. Kalaw, 26 in which the practice of NACOCO allowing its
general manager to negotiate and execute contract in its copra
trading activities for and on its behalf, without prior board approval,
was inferred from sixty contract — not one, as in present case —
previously entered into by the corporation without such board
resolution.
Petitioner's argument is not persuasive. Apparent authority is derived

not merely from practice. Its existence may be ascertained through
(1) the general manner in which the corporation holds out an officer
or agent as having the power to act or, in other words, the apparent
authority to act in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or beyond the
scope of his ordinary powers. 27 It requires presentation of evidence
of similar act(s) executed either in its favor or in favor of other parties.
28 It is not the quantity of similar acts which establishes apparent
authority, but the vesting of a corporale officer with the power to

bind the corporation.
In the case at bar, petitioner, through its president Antonio Punsalan

Jr., entered into the First Contract without first securing board
approval. Despite such lack of board approval, petitioner did not
object to or repudiate said contract, thus "clothing" its president with
the power to bind the corporation. The grant of apparent authority
to Punsalan is evident in the testimony of Yong — senior vice
president, treasurer and major stockholder of petitioner. Testifying on
the First Contract, he said: 29
A: Mr. [Punsalan] told me that he prefer[s] Mr.

Saño because Mr. Saño is very influential with
the Collector of Customs[s]. Because the
Collector of Custom[s] will be the one to
approve our project study and I objected to
that, sir. And I said it [was an exorbitant] price.

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And Mr. Punsalan he is the [p]resident, so he
[gets] his way.
Q: And so did the company eventually pay this

P350,000.00 to Mr. Saño?
A: Yes, sir.
The First Contract was consummated, implemented and paid

without a hitch.
Hence, private respondent should not be faulted for believing that

Punsalan's conformity to the contract in dispute was also binding on
petitioner. It is familiar doctrine that if a corporation knowingly
permits one of its officers, or any other agent, to act within the scope
of an apparent authority, it holds him out to the public as possessing
the power to do those acts; and thus, the corporation will, as against
anyone who has in good faith dealt with it through such agent, be
estopped from denying the agent's authority. 30
Furthermore, private respondent prepared an operations manual

and conducted a seminar for the employees of petitioner in
accordance with their contract. Petitioner accepted the operations
manual, submitted it to the Bureau of Customs and allowed the
seminar for its employees. As a result of its aforementioned actions,
petitioner was given by the Bureau of Customs a license to operate
a bonded warehouse. Granting arguendo then that the Second
Contract was outside the usual powers of the president, petitioner's
ratification of said contract and acceptance of benefits have made
it binding, nonetheless. The enforceability of contracts under Article
1403(2) is ratified "by the acceptance of benefits under them" under
Article 1405.
Inasmuch as a corporate president is often given general supervision

and control over corporate operations, the strict rule that said officer
has no inherent power to act for the corporation is slowly giving way
to the realization that such officer has certain limited powers in the
transaction of the usual and ordinary business of the corporation. 31
In the absence of a charter or bylaw provision to the contrary, the
president is presumed to have the authority to act within the domain
of the general objectives of its business and within the scope of his or
her usual duties. 32
Hence, it has been held in other jurisdictions that the president of a

corporation possesses the power to enter into a contract for the
corporation, when the "conduct on the part of both the president
and the corporation [shows] that he had been in the habit of acting
in similar matters on behalf of the company and that the company
had authorized him so to act and had recognized, approved and
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ratified his former and similar actions." 33 Furthermore, a party dealing
with the president of a corporation is entitled to assume that he has
the authority to enter, on behalf of the corporation, into contracts
that are within the scope of the powers of said corporation and that
do not violate any statute or rule on public policy. 34
Second Issue:
Alleged Simulation of the First Contract
As an alternative position, petitioner seeks to pare down its liabilities

by limiting its exposure from P400,000 to only P60,000, the amount
awarded by the RTC. Petitioner capitalizes on the "badges of fraud"
cited by the trial court in declaring said contract either simulated or
unenforceable, viz.:
. . . The October 1986 transaction with [private

respondent] involved P350,000. The same was embodied
in a letter which bore therein not only the conformity of
[petitioner's] then President Punsalan but also drew a
letter-confirmation from the latter for, indeed, he was
clothed with authority to enter into the contract after the
same was brought to the attention and consideration of
[petitioner]. Not only that, a [down payment] was made.
In the alleged agreement of December 4, 1986 subject of
the present case, the amount is even bigger - P400,000.00.
Yet, the alleged letter-agreement drew no letter of
confirmation. And no [down payment] and postdated
checks were given. Until the filing of the present case in
February 1988, no written demand for payment was sent
to [petitioner]. [Private respondent's] claim that he sent
one in writing, and one was sent by his counsel who
manifested that "[h]e was looking for a copy in [his] files"
fails in light of his failure to present any such copy. These
and the following considerations, to wit:
1) Despite the fact that no [down payment] and/or

postdated checks [partial payments] (as purportedly
stipulated in the alleged contract) [was given, private
respondent] went ahead with the services[;]
2) [There was a delay in the filing of the present suit, more

than a year after [private respondent] allegedly
completed his services or eight months after the alleged
last verbal demand for payment made on Punsalan in
June 1987;
3) Does not Punsalan's writing allegedly in June 1987 on

the alleged letter-agreement of "your employees[,]" when
it should have been "our employees", as he was then still
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connected with [petitioner], indicate that the letter-
agreement was signed by Punsalan when he was no
longer connected with [petitioner] or, as claimed by
[petitioner], that Punsalan signed it without [petitioner's]
authority and must have been done "in collusion with
plaintiff in order to unlawfully get some money from
[petitioner]?
4) If, as [private respondent] claims, the letter was

returned by Punsalan after affixing thereon his conformity,
how come . . . when Punsalan allegedly visited [private
respondent] in his office at the Bureau of Customs, in June
1987, Punsalan "brought" (again?) the letter (with the
pencil [notation] at the left bottom portion allegedly
already written)?
5) How come . . . [private respondent] did not even keep

a copy of the alleged service contract allegedly
attached to the letter-agreement?
6) Was not the letter-agreement a mere draft, it bearing

the corrections made by Punsalan of his name (the letter
"n" is inserted before the last letter "o" in Antonio) and of
the spelling of his family name (Punsalan, not Punzalan)?
7) Why was not Punsalan impleaded in the case?
The issue of whether the contract is simulated or real is factual in

nature, and the Court eschews factual examinanon in a petition for
review under Rule 45 of the Rules of Court. 35 This rule, however,
admits of exceptions, one of which is a conflict between the factual
findings of the lower and of the appellate courts 36 as in the case at
bar.
After judicious deliberation, the Court agrees with the appellate

court that the alleged "badges of fraud" mentioned earlier have not
affected in any manner the perfection thereof. First, the lack of
payment (whether down, partial or full payment), even after
completion of private respondent's obligations, imports only a defect
in the performance of the contract on the part of petitioner.
Second, the delay in the filing of action was not fatal to private
respondent's cause. Despite the lapse of one year after private
respondent completed his services or eight months after the alleged
last demand for payment in June 1987, the action was still filed within
the allowable period, considering that an action based on a written
contract prescribes only after ten years from the time the right of
action accrues. 37 Third, a misspelling in the contract does not
establish vitiation of consent, cause or object of the contract. Fourth,
a confirmation letter is not an essential element of a contract,
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neither is it necessary to perfect one. Fifth, private respondent's
failure to implead the corporate president does not establish
collusion between them. Petitioner could have easily filed a third-
party claim against Punsalan if it believed that it had recourse
against the latter. Lastly, the mere fact that the contract price was
six times the alleged going rate does not invalidate it. 38 In short,
these "badges" do not establish simulation of said contract.
A fictitious and simulated agreement lacks consent which is essential

to a valid and enforceable contract. 39 A contract is simulated if the
parties do not intend to be bound at all (absolutely simulated), 40 or if
the parties conceal their true agreement (relatively simulated). 41 In
the case at bar, petitioner received from private respondent a letter-
offer containing the terms of the former, including a stipulation of the
consideration for the latter's services. Punsalan's conformity, as well
as the receipt and use of the operations manual, shows petitioner's
consent to or, at the very least, ratification of the contract. To
repeat, petitioner even submitted the manual to the Bureau of
Customs and allowed private respondent to conduct the seminar for
its employees. Private respondent heard no objection from the
petitioner, until he claimed payment for the services he had
rendered.
Contemporaneous and subsequent acts are also principal factors in

the determination of the will of the contracting parties. 42 The
circumstances outlined above do not establish any intention to
simulate the contract in dispute. On the contrary, the legal
presumption is always on the validity of contracts. A corporation, by
accepting benefits of a transaction entered into without authority,
has ratified the agreement and is, therefore, bound by it. 43
WHEREFORE, the petition is hereby DENIED and the assailed Decision

SO ORDERED.
Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.
Footnotes
1 Docketed as Civil Case No. 5550-P.
2 Penned by Judge Conchita Carpio-Moralas (now a

justice of the Court of Appeals).
3 RTC Decision, p. 12; rollo, p. 27.
4 Seventeenth Division, composed of JJ. Ricardo P.

Galvez (now solicitor general of the Republic), ponente;

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with the concurrence of Alfredo L. Benipayo, chairman;
and Eubolo G. Vezola, member.
6 Petition, p. 2; rollo, p. 3.
7 TSN, June 13, 988, p. 4.
8 Records, p. 38.
9 TSN, September 27, 1988, pp. 7-8.
10 Ibid., p. 6.
11 TSN, June l3, 1988, pp. 6 & 10.
12 Records, p. 45; and TSN, June 13, 1988, p. 17.
13 TSN, June 14, 1988, p. 26.
14 TSN, June 13, 1988, p. 18; TSN, June 14, 1988, pp. 5-12.
15 TSN, June 13, 1988, p. 3.
16 TSN, September 27, 1988, pp. 5 & 21.
17 Records, pp. 7-8.
18 RTC Decision, p. 12; rollo, p. 27.
19 This case was deemed submitted for decision upon

receipt by the Court of the private respondent's
Memorandum on April 29, 1998.
20 Rollo, p. 104.
21 Premium Marble Resources, Inc v. Court of Appeals,

264 SCRA 11, 17, November 4, 1996.
22 Sec. 2, Corporation Code.
23 Campos, The Corporation Code: Comments, Notes

and Selected Cases, Vol. 1, 1990 ed., p. 340.
24 Yao Ka Sin Trading v. Court of Appeals, 209 SCRA 763,

781, June 15, 1992; citing 19 CJS 455.
25 Ibid., pp. 751-782; citing 19 CJS 456, per Davide, Jr, J.
26 20 SCRA 987, 1005, August 14, 1967, per Sanchez, J.

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27 Yao Ka Sin Trading v. Court of Appeals, supra, p. 783.
28 Ibid., p. 784.
29 TSN, September 27, 1988, p. 8.
30 Francisco v. Government Service Insurance System, 7

SCRA 577, 583, March 30, 1963; Maharlika Publishing
Corporation v. Tagle, 142 SCRA 553, 566, July 9, 1986.
31 Western Amenrican Life Ins. Co. v. Hicks, 217 SE 2d 323,

324, May 19, 1975; and Cooper v. G.E. Construction Co.,
158 SE 2d 305, 308, October 30, 1967.
32 19 AmJur 2d 595; citing Pegram-West, Inc. v. Winston

Mut. Life Ins. Co., 56 SE 2d 607, 612, December 14, 1949;
Cushman v. Cloverland Coal & Mining Co., 84 NE 759, 760,
May 15, 1908; Ceedeer v. H.M. Loud & Son's Lumber Co.,
49 NW 575, 575, July 28, 1891, Memorial Hospital Asso. v.
Pacific Grape, 50 ALR 2d 442, 445, November 29, 1955;
Lloyd & Co. v. Matthews & Rice, 79 NE 172, 173,
December 5, 1906, and National State Bank v. Vigo
County National Bank, 40 NE 799, 800, May 28, 1895.
33 Greenspan's Sons Iron & Steel Co. v. Pecos Valley Gas

Co., 156 A 350-353, June 1, 1931.
34 Vulcan Corporation v. Cobden Machine Works, 84 NE

2d 173, 176, January 17, 1949.
35 Engineering & Machinery Corporation v. Court of

Appeals, 252 SCRA 156, 162, January 24, 1996; Catapusan
v. Court of Appeals, 264 SCRA 534, 539, November 21,
1996; First Philippine Intenational Bank v. Court of Appeals,
252 SCRA 259, January 24, 1996; and Inland Trailways, Inc.
v. Court of Appeals, 255 SCRA 178, 182, March 18, 1996.
36 Quebral v. Court of Appeals, 252 SCRA 353, 364,

January 25, 1996; Republic v. Court of Appeals, 258 SCRA
223, 242, July 5, 1996; Cuizon v. Court of Appeals, 260
SCRA 645, August 22, 1996; and Lustan v. Court of
Appeals, 266 SCRA 663, 670, January 27, 1997.
37 Art. 1143(1), Civil Code.
38 Art. 1355. Except in cases specified by law, lesion or

inadequacy of cause shall not invalidate a contract,
unless there has been fraud, mistake or undue influence."
39 Cuizon v. CA, supra, p. 665.

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40 Art. 1345, Civil Code; Heirs of Placido Miranda v. Court
of Appeals, 255 SCRA 368, 375, March 29, 1996.
41 Art. 1345, Civil Code; Pangadil v. Court of First Instance,

116 SCRA 347, 354, August 31, 1982.
42 Art. 1371, Civil Code; Rapanut v. Court of Appeals, 243

SCRS 323, 326 July 14, 1995; and Cuizon v. Ca, supra, p.
662.
43 Snyder v. Freeman, 266 SE 2d 593, 599-600, June 3,

1980; Terminal Freezers, Inc. v. Roberts Frozen Foods, 354
NE 2d 904, 909, October 12, 1976.
People’s Aircargo and Warehousing Co., Inc. vs. CA [297 SCRA 170
(Oct 7 1998)]
Power of Board of Directors to Bind Corporation
Facts: People’s Aircargo is a domestic corporation organized to

operate a customs bonded warehouse. To obtain a license for the
corporation from the Bureau of Customs, Punsalan, its President,
solicited a proposal from Sano for the preparation of a feasibility
study. Sano submitted a letter proposal to Punsalan of the terms and
conditions of the contract, amounting to P350,000.00. Punsalan sent
a letter to Sano confirming to their agreement. Accordingly, Sano
prepared the feasibility study. Sano was paid in full.
Thereafter, a 2nd contract was entered into for consultancy
services. Hence, the Bureau of Customs issued a license to People’s
Aircargo. Sano was not paid for this 2nd contract. Hence, he filed a
collection case against the corporation. Meanwhile, Punsalan sold
his shares in People’s Aircargo andresigned as president.
People’s Aircargo denied that there were consultancy services
rendered by Sano. It alleged that the 2nd contract entered into
between him and Punsalan was without authority.
RTC adjudged in favor of Sano. CA affirmed. Hence, this petition.
Issue: Whether or not the Punsalan had apparent authority to bind

People’s Aircargo to the 2nd contract.
Held: Yes. The general rule is that, in the absence of authority from
the BoD, no person, not even its officers, can validly bind a
corporation. A corporation is a juridical person, separate and
distinct from its stockholders and members, having powers, attributes
and properties expressly authrized by law or incident to its
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existence. Being a juridical entity, a corporation may act through its
BoD, which exercises almost all corporate powers, lays down all
corporate business policies and is responsible for the efficiency of
management as is under Sec. 23 of the Corporation Code.
The power and responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is lodged
in the board, subject to AoI, by laws, or relevant provisions of
law. However, just as a natural person may authorize another to do
certain acts for and on his behalf, the BoD may validly delegate
some of its functions and powers to officers, committees or
agents. The authority of such individuals to bind the corporation is
generally derived from law, corporate by laws or authorization from
the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business.
In the case at bar, since the corporation had previously allowed
Punsalan to enter into the first contract with Sano without a board
resolution expressly authorizing him, thus, it had clothed its president
with apparent authority to execute the subject 2nd contract.
If a corporation knowingly permits one of its officers, or any other
agent, to act within the scope of an apparent authority, it holds him
out to the public as possessing the power to do those acts, and thus,
the corporation will, as against anyone who has in good faith dealt
with it through such agent, be estopped from denying the agent’s
authority.
Facts: Petitioner is a domestic corporation organized in 1986 to

operate a customs bonded warehouse at the old Manila
International Airport (MIA). To obtain a license from the Bureau of
Customs, Antonio Punsalan, Jr., the corporation president, solicited a
proposal from private respondent Stefani Sano for the preparation of
a feasibility study. Sano submitted a letter proposal dated October
17, 1986 (First Contract) to Punsalan regarding his request for
professional engineering consultancy services which services are
offered in the amount of P350,000.00. Initially, Cheng Yang, the
majority stockholder of petitioner, objected to said offer as another
company can provide for the same service at a lower price.
However, Punsalan preferred Sano’s services because of latter’s
membership in the task force, which task force was supervising the
transition of the Bureau from the Marcos to the Aquino government.
Petitioner, through Punsalan, thereafter confirmed the contract.

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On December 4, 1986, upon Punsalan’s request, private respondent
sent petitioner another letter-proposal (Second Contract) which
offers the same service already at P400,000.00 instead of the
previous P350,000.00 offer. On January 10, 1987, Andy Villaceren,
vice-president of petitioner, received the operations manual
prepared by Sano and which manual operations was submitted by
petitioner to the Bureau in compliance for its application to operate
a bonded warehouse. Thereafter, in May 1987, the Bureau issued to
it a license to operate. Private respondent also conducted in the
third week of January 1987 in the warehouse of petitioner, a three-
day training seminar for the petitioner’s employees.
On February 9, 1988, private respondent filed a collection suit

against petitioner. He alleged that he had prepared an operations
manual for petitioner, conducted a seminar-workshop for its
employees and delivered to it a computer program but that despite
demand, petitioner refused to pay him for his services. Petitioner, on
its part, denied that Sano had prepared such manual operations
and at the same time alleged that the letter-agreement was signed
by Punsalan without authority and as such unenforceable. It alleges
that the disputed contract was not authorized by its board of
directors.
Issue: Whether or not the Second Contract signed by Punsalan is

enforceable and binding against petitioner.
Held: Yes, the Second Contract is binding and enforceable. The

general rule is that, in the absence of authority from the board of
directors, no person, not even its officers, can validly bind a
corporation. A corporation is a juridical person, separate and distinct
from its stockholders and members having xxx powers, attributes and
properties expressly authorized by law or incident to its existence.
Being a juridical entity, a corporation may act through its board of
directors, which exercises almost all corporate powers, lays down all
corporate business policies and is responsible for the efficiency of
management, as provided in Section 23 of the Corporation Code.
However, it is familiar doctrine that if a corporation knowingly permits

one of its officers, or any other agent, to act within the scope of an
apparent authority, it holds him out to the public as possessing the
power to do those acts and thus, the corporation witll, as against
anyone who has in good faith dealt with it through such agent, be

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estopped from denying the agent’s authority. Thus private
respondent shall not be faulted for believing that Punsalan’s
conformity to the contract in dispute was also binding on petitioner.
In the case at bar, petitioner, through its president Antonio Punsalan
Jr., entered into the First Contract without first securing board
approval. Despite such lack of board approval, petitioner did not
object to or repudiate said contract, thus "clothing" its president with
the power to bind the corporation. The grant of apparent authority
to Punsalan is evident in the testimony of Yong — senior vice
president, treasurer and major stockholder of petitioner. Furthermore,
private respondent prepared an operations manual and conducted
a seminar for the employees of petitioner in accordance with their
contract. Petitioner accepted the operations manual, submitted it to
the Bureau of Customs and allowed the seminar for its employees. As
a result of its aforementioned actions, petitioner was given by the
Bureau of Customs a license to operate a bonded warehouse.
Granting arguendo then that the Second Contract was outside the
usual powers of the president, petitioner's ratification of said contract
and acceptance of benefits have made it binding, nonetheless. The
enforceability of contracts under Article 1403(2) is ratified "by the
acceptance of benefits under them" under Article 1405.
Lapu lapu Foundation vs. CA (421 SCRA 328 [2004])
G.R. No. 126006 January 29, 2004
LAPULAPU FOUNDATION, INC. and ELIAS Q. TAN, Petitioners,

vs.
COURT OF APPEALS (Seventeenth Division) and ALLIED BANKING
CORP., Respondents.
DECISION
CALLEJO, SR., J.:
Before the Court is the petition for review on certiorari filed by the
Lapulapu Foundation, Inc. and Elias Q. Tan seeking to reverse and
set aside the Decision1 dated June 26, 1996 of the Court of Appeals
(CA) in CA-G.R. CV No. 37162 ordering the petitioners, jointly and
solidarily, to pay the respondent Allied Banking Corporation the
amount of P493,566.61 plus interests and other charges. Likewise,
sought to be reversed and set aside is the appellate court’s

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Resolution dated August 19, 1996 denying the petitioners’ motion for
reconsideration.
The case stemmed from the following facts:
Sometime in 1977, petitioner Elias Q. Tan, then President of the co-

petitioner Lapulapu Foundation, Inc., obtained four loans from the
respondent Allied Banking Corporation covered by four promissory
notes in the amounts of P100,000 each. The details of the promissory
notes are as follows:
P/N No. Date of P/N Maturity Date Amount as of 1/23/79
BD No. 504 Nov. 7, 1977 Feb. 5, 1978 P123,377.76
BD No. 621 Nov. 28, 1977 Mar. 28, 1978 P123,411.10
BD No. 716 Dec. 12, 1977 Apr. 11, 1978 P122,322.21
BD No. 839 Jan. 5, 1978 May 5, 1978 P120,455.542
As of January 23, 1979, the entire obligation amounted to

P493,566.61 and despite demands made on them by the respondent
Bank, the petitioners failed to pay the same. The respondent Bank
was constrained to file with the Regional Trial Court of Cebu City,
Branch 15, a complaint seeking payment by the petitioners, jointly
and solidarily, of the sum of P493,566.61 representing their loan
obligation, exclusive of interests, penalty charges, attorney’s fees
and costs.
In its answer to the complaint, the petitioner Foundation denied

incurring indebtedness from the respondent Bank alleging that the
loans were obtained by petitioner Tan in his personal capacity, for his
own use and benefit and on the strength of the personal information
he furnished the respondent Bank. The petitioner Foundation
maintained that it never authorized petitioner Tan to co-sign in his
capacity as its President any promissory note and that the
respondent Bank fully knew that the loans contracted were made in
petitioner Tan’s personal capacity and for his own use and that the
petitioner Foundation never benefited, directly or indirectly,
therefrom. The petitioner Foundation then interposed a cross-claim
against petitioner Tan alleging that he, having exceeded his
authority, should be solely liable for said loans, and a counterclaim
against the respondent Bank for damages and attorney’s fees.

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For his part, petitioner Tan admitted that he contracted the loans
from the respondent Bank in his personal capacity. The parties,
however, agreed that the loans were to be paid from the proceeds
of petitioner Tan’s shares of common stocks in the Lapulapu
Industries Corporation, a real estate firm. The loans were covered by
promissory notes which were automatically renewable ("rolled-over")
every year at an amount including unpaid interests, until such time
as petitioner Tan was able to pay the same from the proceeds of his
aforesaid shares.
According to petitioner Tan, the respondent Bank’s employee

required him to affix two signatures on every promissory note,
assuring him that the loan documents would be filled out in
accordance with their agreement. However, after he signed and
delivered the loan documents to the respondent Bank, these were
filled out in a manner not in accord with their agreement, such that
the petitioner Foundation was included as party thereto. Further,
prior to its filing of the complaint, the respondent Bank made no
demand on him.
After due trial, the court a quo rendered judgment the dispositive
WHEREFORE, in view of the foregoing evidences [sic], arguments and

considerations, this court hereby finds the preponderance of
evidence in favor of the plaintiff and hereby renders judgment as
follows:
"1. Requiring the defendants Elias Q. Tan and Lapulapu

Foundation, Inc. [the petitioners herein] to pay jointly and
solidarily to the plaintiff Allied Banking Corporation [the
respondent herein] the amount of P493,566.61 as principal
obligation for the four promissory notes, including all other
charges included in the same, with interest at 14% per annum,
computed from January 24, 1979, until the same are fully paid,
plus 2% service charges and 1% monthly penalty charges.

Foundation, Inc., to pay jointly and solidarily, attorney’s fees in
the equivalent amount of 25% of the total amount due from
the defendants on the promissory notes, including all charges;

Foundation, Inc., to pay jointly and solidarily litigation expenses
of P1,000.00 plus costs of the suit."3
On appeal, the CA affirmed with modification the judgment of the

court a quo by deleting the award of attorney’s fees in favor of the
respondent Bank for being without basis.
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The appellate court disbelieved petitioner Tan’s claim that the loans
were his personal loans as the promissory notes evidencing them
showed upon their faces that these were obligations of the
petitioner Foundation, as contracted by petitioner Tan himself in his
"official and personal character." Applying the parol evidence rule,
the CA likewise rejected petitioner Tan’s assertion that there was an
unwritten agreement between him and the respondent Bank that he
would pay the loans from the proceeds of his shares of stocks in the
Lapulapu Industries Corp.
Further, the CA found that demand had been made by the

respondent Bank on the petitioners prior to the filing of the complaint
a quo. It noted that the two letters of demand dated January 3,
19794 and January 30, 19795 asking settlement of the obligation were
sent by the respondent Bank. These were received by the petitioners
as shown by the registry return cards6 presented during trial in the
court a quo.
Finally, like the court a quo, the CA applied the doctrine of piercing
the veil of corporate entity in holding the petitioners jointly and
solidarily liable. The evidence showed that petitioner Tan had
represented himself as the President of the petitioner Foundation,
opened savings and current accounts in its behalf, and signed the
loan documents for and in behalf of the latter. The CA, likewise,
found that the petitioner Foundation had allowed petitioner Tan to
act as though he had the authority to contract the loans in its
behalf. On the other hand, petitioner Tan could not escape liability
as he had used the petitioner Foundation for his benefit.
Aggrieved, the petitioners now come to the Court alleging that:
I. THE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT THE

LOANS SUBJECT MATTER OF THE INSTANT PETITION ARE ALREADY
DUE AND DEMANDABLE DESPITE ABSENCE OF PRIOR DEMAND.
II. THE COURT OF APPEALS GRAVELY ERRED IN APPLYING THE

PAROL EVIDENCE RULE AND THE DOCTRINE OF PIERCING THE
VEIL OF CORPORATE ENTITY AS BASIS FOR ADJUDGING JOINT
AND SOLIDARY LIABILITY ON THE PART OF PETITIONERS ELIAS Q.
TAN AND LAPULAPU FOUNDATION, INC.7
The petitioners assail the appellate court’s finding that the loans had
become due and demandable in view of the two demand letters
sent to them by the respondent Bank. The petitioners insist that there
was no prior demand as they vigorously deny receiving those letters.
According to petitioner Tan, the signatures on the registry return
cards were not his.

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The petitioners’ denial of receipt of the demand letters was rightfully
given scant consideration by the CA as it held:
Exhibits "R" and "S" are two letters of demand, respectively dated
January 3, 1979 and January 30, 1979, asking settlement of the
obligations covered by the promissory notes. The first letter was
written by Ben Tio Peng Seng, Vice-President of the bank, and
addressed to Lapulapu Foundation, Inc., attention of Mr. Elias Q. Tan,
President, while the second was a final demand written by the
appellee’s counsel, addressed to both defendants-appellants, and
giving them five (5) days from receipt within which to settle or judicial
action would be instituted against them. Both letters were duly
received by the defendants, as shown by the registry return cards,
marked as Exhibits "R-2" and "S-1," respectively. The allegation of Tan
that he does not know who signed the said registry return receipts
merits scant consideration, for there is no showing that the addresses
thereon were wrong. Hence, the disputable presumption "that a
letter duly directed and mailed was received in the regular course of
mail" (per par. V, Section 3, Rule 131 of the Revised Rules on
Evidence) still holds.8
There is no dispute that the promissory notes had already matured.

However, the petitioners insist that the loans had not become due
and demandable as they deny receipt of the respondent Bank’s
demand letters. When presented the registry return cards during the
trial, petitioner Tan claimed that he did not recognize the signatures
thereon. The petitioners’ allegation and denial are self-serving. They
cannot prevail over the registry return cards which constitute
documentary evidence and which enjoy the presumption that,
absent clear and convincing evidence to the contrary, these were
regularly issued by the postal officials in the performance of their
official duty and that they acted in good faith.9 Further, as the CA
correctly opined, mails are presumed to have been properly
delivered and received by the addressee "in the regular course of
the mail."10 As the CA noted, there is no showing that the addresses
on the registry return cards were wrong. It is the petitioners’ burden
to overcome the presumptions by sufficient evidence, and other
than their barefaced denial, the petitioners failed to support their
claim that they did not receive the demand letters; therefore, no
prior demand was made on them by the respondent Bank.
Having established that the loans had become due and

demandable, the Court shall now resolve the issue of whether the
CA correctly held the petitioners jointly and solidarily liable therefor.
In disclaiming any liability for the loans, the petitioner Foundation

maintains that these were contracted by petitioner Tan in his
personal capacity and that it did not benefit therefrom. On the other

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hand, while admitting that the loans were his personal obligation,
petitioner Tan avers that he had an unwritten agreement with the
respondent Bank that these loans would be renewed on a year-to-
year basis and paid from the proceeds of his shares of stock in the
Lapulapu Industries Corp.
These contentions are untenable.
The Court particularly finds as incredulous petitioner Tan’s allegation

that he was made to sign blank loan documents and that the
phrase "IN MY OFFICIAL/PERSONAL CAPACITY" was superimposed by
the respondent Bank’s employee despite petitioner Tan’s
protestation. The Court is hard pressed to believe that a businessman
of petitioner Tan’s stature could have been so careless as to sign
blank loan documents.
In contrast, as found by the CA, the promissory notes11 clearly

showed upon their faces that they are the obligation of the
petitioner Foundation, as contracted by petitioner Tan "in his official
and personal capacity."12 Moreover, the application for credit
accommodation,13 the signature cards of the two accounts in the
name of petitioner Foundation,14 as well as New Current Account
Record,15 all accompanying the promissory notes, were signed by
petitioner Tan for and in the name of the petitioner Foundation.16
These documentary evidence unequivocally and categorically
establish that the loans were solidarily contracted by the petitioner
Foundation and petitioner Tan.
As a corollary, the parol evidence rule likewise constrains this Court

to reject petitioner Tan’s claim regarding the purported unwritten
agreement between him and the respondent Bank on the payment
of the obligation. Section 9, Rule 130 of the of the Revised Rules of
Court provides that "[w]hen the terms of an agreement have been
reduced to writing, it is to be considered as containing all the terms
agreed upon and there can be, between the parties and their
successors-in-interest, no evidence of such terms other than the
contents of the written agreement."17
In this case, the promissory notes are the law between the petitioners
and the respondent Bank. These promissory notes contained
maturity dates as follows: February 5, 1978, March 28, 1978, April 11,
1978 and May 5, 1978, respectively. That these notes were to be paid
on these dates is clear and explicit. Nowhere was it stated therein
that they would be renewed on a year-to-year basis or "rolled-over"
annually until paid from the proceeds of petitioner Tan’s shares in the
Lapulapu Industries Corp. Accordingly, this purported unwritten
agreement could not be made to vary or contradict the terms and
conditions in the promissory notes.

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Evidence of a prior or contemporaneous verbal agreement is
generally not admissible to vary, contradict or defeat the operation
of a valid contract.18 While parol evidence is admissible to explain
the meaning of written contracts, it cannot serve the purpose of
incorporating into the contract additional contemporaneous
conditions which are not mentioned at all in writing, unless there has
been fraud or mistake.19 No such allegation had been made by the
petitioners in this case.
Finally, the appellate court did not err in holding the petitioners jointly
and solidarily liable as it applied the doctrine of piercing the veil of
corporate entity. The petitioner Foundation asserts that it has a
personality separate and distinct from that of its President, petitioner
Tan, and that it cannot be held solidarily liable for the loans of the
latter.1âwphi1
The Court agrees with the CA that the petitioners cannot hide
behind the corporate veil under the following circumstances:
The evidence shows that Tan has been representing himself as the
President of Lapulapu Foundation, Inc. He opened a savings
account and a current account in the names of the corporation,
and signed the application form as well as the necessary specimen
signature cards (Exhibits "A," "B" and "C") twice, for himself and for the
foundation. He submitted a notarized Secretary’s Certificate (Exhibit
"G") from the corporation, attesting that he has been authorized,
inter alia, to sign for and in behalf of the Lapulapu Foundation any
and all checks, drafts or other orders with respect to the bank; to
transact business with the Bank, negotiate loans, agreements,
obligations, promissory notes and other commercial documents; and
to initially obtain a loan for P100,000.00 from any bank (Exhibits "G-1"
and "G-2"). Under these circumstances, the defendant corporation is
liable for the transactions entered into by Tan on its behalf.20
Per its Secretary’s Certificate, the petitioner Foundation had given its
President, petitioner Tan, ostensible and apparent authority to inter
alia deal with the respondent Bank. Accordingly, the petitioner
Foundation is estopped from questioning petitioner Tan’s authority to
obtain the subject loans from the respondent Bank. It is a familiar
doctrine that if a corporation knowingly permits one of its officers, or
any other agent, to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to do those acts;
and thus, the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from denying the
agent’s authority.21

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In fine, there is no cogent reason to deviate from the CA’s ruling that
the petitioners are jointly and solidarily liable for the loans contracted
with the respondent Bank.
WHEREFORE, premises considered, the petition is DENIED and the

Decision dated June 26, 1996 and Resolution dated August 19, 1996
of the Court of Appeals in CA-G.R. CV No. 37162 are AFFIRMED in
toto.
SO ORDERED.
Puno, (Chairman) Quisumbing, Austria-Martinez, and Tinga, JJ.,

concur.
Footnotes
1Penned by Associate Justice Delilah Vidallon-Magtolis with
Associate Justices Quirino D. Abad Santos and Artemio G.
Tuquero concurring.
2 Rollo, p. 24.
3 Id. at 25.
4 Exhibit "R."
5 Exhibit "S."
6 Exhibits "R-2" and "S-1."
7 Rollo, p. 14.
8 Id. at 30.
9 Gold Line Transit, Inc. v. Ramos, 363 SCRA 262 (2001).
10 Section 3(V), Rule 131 of the Revised Rules of Court.
11 Exhibits "H" to "L."
12 Rollo, p. 26.
13 Exhibit "D."
14 Exhibits "A" and "B."
15 Exhibit "C."
16 Ibid.

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17 The provision reads in full:
Sec. 9. Evidence of written agreements. – When the terms

of an agreement have been reduced to writing, it is
considered as containing all the terms agreed upon and
there can be, between the parties and their successors-in-
interest, no evidence of such terms other than the
contents of the written agreement.
However, a party may present evidence to modify,

explain or add to the terms of the written agreement if he
puts in issue in his pleadings:
(a) An intrinsic ambiguity, mistake or imperfection in the

written agreement;
(b) The failure of the written agreement to express the true

intent and agreement of the parties thereto;
(C) The validity of the written agreement; or
(d) The existence of other terms agreed to by the parties

or their successors-in-interest after the execution of the
written agreement.
The term "agreement" includes wills.
Facts: Elias Q. Tan, then President Lapulapu Foundation, Inc.,

obtained four loans from Allied Banking Corporation covered by
four promissory notes in the amounts of P100, 000 each. When the
entire obligation became due, it was not paid despite demands
by the bank. The Bank filed with the RTC a complaint seeking
payment by Lapulapu Foundation and Elias Tan, jointly and
solidarily, of the sum representing their loan obligation, exclusive of
interests, penalty charges, attorney’s fees and costs.
The Foundation denied incurring indebtedness from the Bank

alleging that Tan obtained the loans in his personal capacity, for
his own use and benefit and on the strength of the personal
information he furnished the Bank. The Foundation maintained
that it never authorized petitioner Tan to co-sign in his capacity as
its President any promissory note and that the Bank fully knew that
the loans contracted were made in Tan’s personal capacity and
for his own use and that the Foundation never benefited, directly
or indirectly, there from.

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For his part, Tan admitted that he contracted the loans from the
Bank in his personal capacity. The parties, however, agreed that
the loans were to be paid from the proceeds of Tan’s shares of
common stocks in the Lapulapu Industries Corporation, a real
estate firm. The loans were covered by promissory notes which
were automatically renewable (“rolled-over”) every year at an
amount including unpaid interests, until such time as petitioner Tan
was able to pay the same from the proceeds of his aforesaid
shares.
Issue: May the Foundation correctly raise as a defense that it did

not authorize Tan to obtain the loans involved and therefore it
may not be held solidarily liable for them?
Held: NO. The Court agrees with the CA that the petitioners
cannot hide behind the corporate veil under the following
circumstances:
The evidence shows that Tan has been representing himself as the
President of Lapulapu Foundation, Inc. He opened a savings
account and a current account in the names of the corporation,
and signed the application form as well as the necessary
specimen signature cards twice, for himself and for the
foundation. He submitted a notarized Secretary’s Certificate from
the corporation, attesting that he has been authorized, inter alia,
to sign for and in behalf of the Lapulapu Foundation any and all
checks, drafts or other orders with respect to the bank; to transact
business with the Bank, negotiate loans, agreements, obligations,
promissory notes and other commercial documents; and to
initially obtain a loan for P100, 000.00 from any bank. Under these
circumstances, the Foundation is liable for the transactions
entered into by Tan on its behalf.
Per its Secretary’s Certificate, the Foundation had given Tan

ostensible and apparent authority to inter alia deal with the Bank.
Accordingly, the petitioner Foundation is estopped from
questioning Tan’s authority to obtain the subject loans from the
Bank. It is a familiar doctrine that if a corporation knowingly
permits one of its officers, or any other agent, to act within the
scope of an apparent authority, it holds him out to the public as
possessing the power to do those acts; and thus, the corporation
will, as against anyone who has in good faith dealt with it through
such agent, be estopped from denying the agent’s authority.

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Lapu-Lapu Foundation vs CA Case Digest
Lapu-Lapu Foundation vs. Court of Appeals
[GR 126006, 29 January 2004]
Facts: Sometime in 1977, Elias Q. Tan, then President of Lapulapu

Foundation, Inc., obtained four loans from Allied Banking
Corporation covered by four promissory notes in the amounts of
P100,000 each. As of 23 January 1979, the entire obligation
amounted to P493,566.61 and despite demands made on them by
the Bank, Tan and the foundation failed to pay the same. The Bank
was constrained to file with the Regional Trial Court of Cebu City,
Branch 15, a complaint seeking payment by Tan and the
foundation, jointly and solidarily, of the sum of P493,566.61
representing their loan obligation, exclusive of interests, penalty
charges, attorney’s fees and costs. In its answer to the complaint,
the Foundation denied incurring indebtedness from the Bank
alleging that the loans were obtained by Tan in his personal
capacity, for his own use and benefit and on the strength of the
personal information he furnished the Bank. The Foundation
maintained that it never authorized Tan to co-sign in his capacity as
its President any promissory note and that the Bank fully knew that
the loans contracted were made in Tan’s personal capacity and for
his own use and that the Foundation never benefited, directly or
indirectly, therefrom.
The Foundation then interposed a cross-claim against Tan alleging

that he, having exceeded his authority, should be solely liable for
said loans, and a counterclaim against the Bank for damages and
attorney’s fees. For his part, Tan admitted that he contracted the
loans from the Bank in his personal capacity. The parties, however,
agreed that the loans were to be paid from the proceeds of Tan’s
shares of common stocks in the Lapulapu Industries Corporation, a
real estate firm. The loans were covered by promissory notes which
were automatically renewable (“rolled-over”) every year at an
amount including unpaid interests, until such time as Tan was able to
pay the same from the proceeds of his aforesaid shares. According
to Tan, the Bank’s employee required him to affix two signatures on
every promissory note, assuring him that the loan documents would
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be filled out in accordance with their agreement. However, after he
signed and delivered the loan documents to the Bank, these were
filled out in a manner not in accord with their agreement, such that
the Foundation was included as party thereto. Further, prior to its
filing of the complaint, the Bank made no demand on him.
After due trial, the court rendered judgment (1) requiring Tan and
the Foundation to pay jointly and solidarily to the Bank the amount
of P493,566.61 as principal obligation for the four promissory notes,
including all other charges included in the same, with interest at 14%
per annum, computed from 24 January 1979, until the same are fully
paid, plus 2% service charges and 1% monthly penalty charges; (2)
requiring Tan and the Foundation to pay jointly and solidarily,
attorney’s fees in the equivalent amount of 25% of the total amount
due from them on the promissory notes, including all charges; and
(3) requiring Tan and the Foundation to pay jointly and solidarily
litigation expenses of P1,000.00 plus costs of the suit. On appeal, the
CA affirmed with modification the judgment of the court a quo by
deleting the award of attorney’s fees in favor of the Bank for being
without basis. Tan and the foundation filed the petition for review on
certiorari.
Issue:
1. Whether Tan and the foundation should be held jointly and

solidarily liable.
2. Whether the foundation gave Tan an apparent authority to

deal with the Bank.
Held:
1. The appellate court did not err in holding Tan and the foundation
jointly and solidarily liable as it applied the doctrine of piercing the
veil of corporate entity. Tan and the foundation cannot hide behind
the corporate veil under the following circumstances: "The evidence
shows that Tan has been representing himself as the President of
Lapulapu Foundation, Inc. He opened a savings account and a
current account in the names of the corporation, and signed the

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application form as well as the necessary specimen signature cards
twice, for himself and for the foundation. He submitted a notarized
Secretary’s Certificate from the corporation, attesting that he has
been authorized, inter alia, to sign for and in behalf of the Lapulapu
Foundation any and all checks, drafts or other orders with respect to
the bank; to transact business with the Bank, negotiate loans,
agreements, obligations, promissory notes and other commercial
documents; and to initially obtain a loan for P100,000.00 from any
bank. Under these circumstances, the foundation is liable for the
transactions entered into by Tan on its behalf.
2. Per its Secretary’s Certificate, the Foundation had given its

President, Tan, ostensible and apparent authority to inter alia deal
with the Bank. Accordingly, the Foundation is estopped from
questioning Tan’s authority to obtain the subject loans from the
respondent Bank. It is a familiar doctrine that if a corporation
knowingly permits one of its officers, or any other agent, to act within
the scope of an apparent authority, it holds him out to the public as
possessing the power to do those acts; and thus, the corporation will,
as against anyone who has in good faith dealt with it through such
agent, be estopped from denying the agent’s authority
Francisco vs. GSIS (7 SCRA 577 [1963])
G.R. No. L-18287 March 30, 1963
TRINIDAD J. FRANCISCO, plaintiff-appellee,

vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.
-----------------------------
G.R. No. L-18155 March 30, 1963

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TRINIDAD J. FRANCISCO, plaintiff-appellant,
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellee.
Vicente J. Francisco for plaintiff-appellee.

The Government Corporate Counsel for defendant-appellant.
REYES, J.B.L., J.:
Appeal by the Government Service Insurance System from the

decision of the Court of First Instance of Rizal (Hon. Angel H. Mojica,
presiding), in its Civil Case No. 2088-P, entitled "Trinidad J. Francisco,
plaintiff, vs. Government Service Insurance System, defendant", the
dispositive part of which reads as follows:
WHEREFORE, judgment is hereby rendered: (a) Declaring null

and void the consolidation in the name of the defendant,
Government Service Insurance System, of the title of the VIC-
MARI Compound; said title shall be restored to the plaintiff; and
all payments made by the plaintiff, after her offer had been
accepted by the defendant, must be credited as amortizations
on her loan; and (b) Ordering the defendant to abide by the
terms of the contract created by plaintiff's offer and it's
unconditional acceptance, with costs against the defendant.
The plaintiff, Trinidad J. Francisco, likewise appealed separately (L-

18155), because the trial court did not award the P535,000.00
damages and attorney's fees she claimed. Both appeals are,
therefore, jointly treated in this decision.
The following facts are admitted by the parties: On 10 October 1956,

the plaintiff, Trinidad J. Francisco, in consideration of a loan in the
amount of P400,000.00, out of which the sum of P336,100.00 was
released to her, mortgaged in favor of the defendant, Government
Service Insurance System (hereinafter referred to as the System) a
parcel of land containing an area of 18,232 square meters, with
twenty-one (21) bungalows, known as Vic-Mari Compound, located
at Baesa, Quezon City, payable within ten (10) years in monthly
installments of P3,902.41, and with interest of 7% per annum
compounded monthly.
On 6 January 1959, the System extrajudicially foreclosed the

mortgage on the ground that up to that date the plaintiff-mortgagor
was in arrears on her monthly installments in the amount of
P52,000.00. Payments made by the plaintiff at the time of foreclosure
amounted to P130,000.00. The System itself was the buyer of the
property in the foreclosure sale.

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On 20 February 1959, the plaintiff's father, Atty. Vicente J. Francisco,
sent a letter to the general manager of the defendant corporation,
Mr. Rodolfo P. Andal, the material portion of which recited as follows:
Yesterday, I was finally able to collect what the Government

owed me and I now propose to pay said amount of P30,000 to
the GSIS if it would agree that after such payment the
foreclosure of my daughter's mortgage would be set aside. I
am aware that the amount of P30,000 which I offer to pay will
not cover the total arrearage of P52,000 but as regards the
balance, I propose this arrangement: for the GSIS to take over
the administration of the mortgaged property and to collect
the monthly installments, amounting to about P5,000, due on
the unpaid purchase price of more than 31 lots and houses
therein and the monthly installments collected shall be applied
to the payment of Miss Francisco's arrearage until the same is
fully covered. It is requested, however, that from the amount of
the monthly installments collected, the sum of P350.00 be
deducted for necessary expenses, such as to pay the security
guard, the street-caretaker, the Meralco Bill for the street lights
and sundry items.
It will be noted that the collectible income each month from

the mortgaged property, which as I said consists of installments
amounting to about P5,000, is more than enough to cover the
monthly amortization on Miss Francisco's loan. Indeed, had she
not encountered difficulties, due to unforeseen circumstances,
in collecting the said installments, she could have paid the
amortizations as they fell due and there would have been
really no need for the GSIS to resort to foreclosure.
The proposed administration by the GSIS of the mortgaged

property will continue even after Miss Francisco's account shall
have been kept up to date. However, once the arrears shall
have been paid, whatever amount of the monthly installments
collected in excess of the amortization due on the loan will be
turned over to Miss Francisco.
I make the foregoing proposal to show Francisco's sincere

desire to work out any fair arrangement for the settlement of
her obligation. I trust that the GSIS, under the broadminded
policies of your administration, would give it serious
consideration.
Sincerely,.
s/ Vicente J. Francisco
t/ VICENTE J. FRANCISCO

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On the same date, 20 February 1959, Atty. Francisco received
the following telegram:.
VICENTE FRANCISCO
SAMANILLO BLDG. ESCOLTA.
GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION

OF FORECLOSED PROPERTY OF YOUR DAUGHTER
ANDAL"
On 28 February 1959, Atty. Francisco remitted to the System, through

Andal, a check for P30,000.00, with an accompanying letter, which
reads:
I am sending you herewith BPI Check No. B-299484 for Thirty

Thousand Pesos (P30,000.00) in accordance with my letter of
February 20th and your reply thereto of the same date, which
reads:
GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION OF

FORECLOSED PROPERTY OF YOUR DAUGHTER
xxx xxx xxx
The defendant received the amount of P30,000.00, and issued

therefor its official receipt No. 1209874, dated 4 March 1959. It did
not, however, take over the administration of the compound. In the
meantime, the plaintiff received the monthly payments of some of
the occupants thereat; then on 4 March 1960, she remitted, through
her father, the amount of P44,121.29, representing the total monthly
installments that she received from the occupants for the period
from March to December 1959 and January to February 1960, minus
expenses and real estate taxes. The defendant also received this
amount, and issued the corresponding official receipt.
Remittances, all accompanied by letters, corresponding to the

months of March, April, May, and June, 1960 and totalling P24,604.81
were also sent by the plaintiff to the defendant from time to time, all
of which were received and duly receipted for.
Then the System sent three (3) letters, one dated 29 January 1960,
which was signed by its assistant general manager, and the other
two letters, dated 19 and 26 February 1960, respectively, which were
signed by Andal, asking the plaintiff for a proposal for the payment
of her indebtedness, since according to the System the one-year
period for redemption had expired.
In reply, Atty. Francisco sent a letter, dated 11 March 1960,

protesting against the System's request for proposal of payment and
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inviting its attention to the concluded contract generated by his
offer of 20 February 1959, and its acceptance by telegram of the
same date, the compliance of the terms of the offer already
commenced by the plaintiff, and the misapplication by the System
of the remittances she had made, and requesting the proper
corrections.
By letter, dated 31 May 1960, the defendant countered the

preceding protest that, by all means, the plaintiff should pay
attorney's fees of P35,644.14, publication expenses, filing fee of
P301.00, and surcharge of P23.64 for the foreclosure work done; that
the telegram should be disregarded in view of its failure to express
the contents of the board resolution due to the error of its minor
employees in couching the correct wording of the telegram. A copy
of the excerpts of the resolution of the Board of Directors (No. 380,
February 20, 1959) was attached to the letter, showing the approval
of Francisco's offer —
... subject to the condition that Mr. Vicente J. Francisco shall

pay all expenses incurred by the GSIS in the foreclosure of the
mortgage.
Inasmuch as, according to the defendant, the remittances

previously made by Atty. Francisco were allegedly not sufficient to
pay off her daughter's arrears, including attorney's fees incurred by
the defendant in foreclosing the mortgage, and the one-year period
for redemption has expired, said defendant, on 5 July 1960,
consolidated the title to the compound in its name, and gave notice
thereof to the plaintiff on 26 July 1960 and to each occupant of the
compound.
Hence, the plaintiff instituted the present suit, for specific

performance and damages. The defendant answered, pleading
that the binding acceptance of Francisco's offer was the resolution
of the Board, and that Andal's telegram, being erroneous, should be
disregarded. After trial, the court below found that the offer of Atty.
Francisco, dated 20 February 1959, made on behalf of his daughter,
had been unqualifiedly accepted, and was binding, and rendered
judgment as noted at the start of this opinion.
The defendant-appellant corporation assigns six (6) errors allegedly

committed by the lower court, all of which, however, are resolvable
on the single issue as to whether or not the telegram generated a
contract that is valid and binding upon the parties.
Wherefore, the parties respectfully pray that the foregoing stipulation

of facts be admitted and approved by this Honorable Court, without
prejudice to the parties adducing other evidence to prove their
case not covered by this stipulation of facts. 1äwphï1.ñët
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We find no reason for altering the conclusion reached by the court
below that the offer of compromise made by plaintiff in the letter,
Exhibit "A", had been validly accepted, and was binding on the
defendant. The terms of the offer were clear, and over the signature
of defendant's general manager, Rodolfo Andal, plaintiff was
informed telegraphically that her proposal had been accepted.
There was nothing in the telegram that hinted at any anomaly, or
gave ground to suspect its veracity, and the plaintiff, therefore, can
not be blamed for relying upon it. There is no denying that the
telegram was within Andal's apparent authority, but the defense is
that he did not sign it, but that it was sent by the Board Secretary in
his name and without his knowledge. Assuming this to be true, how
was appellee to know it? Corporate transactions would speedily
come to a standstill were every person dealing with a corporation
held duty-bound to disbelieve every act of its responsible officers, no
matter how regular they should appear on their face. This Court has
observed in Ramirez vs. Orientalist Co., 38 Phil. 634, 654-655, that —
In passing upon the liability of a corporation in cases of this kind

it is always well to keep in mind the situation as it presents itself
to the third party with whom the contract is made. Naturally he
can have little or no information as to what occurs in corporate
meetings; and he must necessarily rely upon the external
manifestations of corporate consent. The integrity of
commercial transactions can only be maintained by holding
the corporation strictly to the liability fixed upon it by its agents
in accordance with law; and we would be sorry to announce a
doctrine which would permit the property of a man in the city
of Paris to be whisked out of his hands and carried into a
remote quarter of the earth without recourse against the
corporation whose name and authority had been used in the
manner disclosed in this case. As already observed, it is familiar
doctrine that if a corporation knowingly permits one of its
officers, or any other agent, to do acts within the scope of an
apparent authority, and thus holds him out to the public as
possessing power to do those acts, the corporation will, as
against any one who has in good faith dealt with the
corporation through such agent, be estopped from denying his
authority; and where it is said "if the corporation permits" this
means the same as "if the thing is permitted by the directing
power of the corporation."
It has also been decided that —
A very large part of the business of the country is carried on by

corporations. It certainly is not the practice of persons dealing
with officers or agents who assume to act for such entities to
insist on being shown the resolution of the board of directors

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authorizing the particular officer or agent to transact the
particular business which he assumes to conduct. A person who
knows that the officer or agent of the corporation habitually
transacts certain kinds of business for such corporation under
circumstances which necessarily show knowledge on the part
of those charged with the conduct of the corporate business
assumes, as he has the right to assume, that such agent or
officer is acting within the scope of his authority. (Curtis Land &
Loan Co. vs. Interior Land Co., 137 Wis. 341, 118 N.W. 853, 129
Am. St. Rep. 1068; as cited in 2 Fletcher's Encyclopedia, Priv.
Corp. 263, perm. Ed.)
Indeed, it is well-settled that —
If a private corporation intentionally or negligently clothes its

officers or agents with apparent power to perform acts for it,
the corporation will be estopped to deny that such apparent
authority is real, as to innocent third persons dealing in good
faith with such officers or agents. (2 Fletcher's Encyclopedia,
Priv. Corp. 255, Perm. Ed.)
Hence, even if it were the board secretary who sent the telegram,
the corporation could not evade the binding effect produced by
the telegram..
The defendant-appellant does not disown the telegram, and even

asserts that it came from its offices, as may be gleaned from the
letter, dated 31 May 1960, to Atty. Francisco, and signed "R. P. Andal,
general manager by Leovigildo Monasterial, legal counsel", wherein
these phrases occur: "the telegram sent ... by this office" and "the
telegram we sent your" (emphasis supplied), but it alleges mistake in
couching the correct wording. This alleged mistake cannot be taken
seriously, because while the telegram is dated 20 February 1959, the
defendant informed Atty. Francisco of the alleged mistake only on
31 May 1960, and all the while it accepted the various other
remittances, starting on 28 February 1959, sent by the plaintiff to it in
compliance with her performance of her part of the new contract.
The inequity of permitting the System to deny its acceptance

become more patent when account is taken of the fact that in
remitting the payment of P30,000 advanced by her father, plaintiff's
letter to Mr. Andal quoted verbatim the telegram of acceptance.
This was in itself notice to the corporation of the terms of the
allegedly unauthorized telegram, for as Ballentine says:
Knowledge of facts acquired or possessed by an officer or

agent of a corporation in the course of his employment, and in
relation to matters within the scope of his authority, is notice to

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the corporation, whether he communicates such knowledge or
not. (Ballentine, Law on Corporations, section 112.)
since a corporation cannot see, or know, anything except through

its officers.
Yet, notwithstanding this notice, the defendant System pocketed the

amount, and kept silent about the telegram not being in
accordance with the true facts, as it now alleges. This silence, taken
together with the unconditional acceptance of three other
subsequent remittances from plaintiff, constitutes in itself a binding
ratification of the original agreement (Civil Code, Art. 1393).
ART. 1393. Ratification may be effected expressly or tacitly. It is

understood that there is a tacit ratification if, with knowledge of
the reason which renders the contract voidable and such
reason having ceased, the person who has a right to invoke it
should execute an act which necessarily implies an intention to
waive his right.
Nowhere else do the circumstances call more insistently for the

application of the equitable maxim that between two innocent
parties, the one who made it possible for the wrong to be done
should be the one to bear the resulting loss..
The defendant's assertion that the telegram came from it but that it
was incorrectly worded renders unnecessary to resolve the other
point on controversy as to whether the said telegram constitutes an
actionable document..
Since the terms offered by the plaintiff in the letter of 20 February

1959 (Exhibit "A") provided for the setting aside of the foreclosure
effected by the defendant System, the acceptance of the offer left
the account of plaintiff in the same condition as if no foreclosure
had taken place. It follows, as the lower court has correctly held,
that the right of the System to collect attorneys' fees equivalent to
10% of the due (P35,694.14) and the expenses and charges of
P3,300.00 may no longer be enforced, since by the express terms of
the mortgage contract, these sums were collectible only "in the
event of foreclosure."
The court a quo also called attention to the unconscionability of

defendant's charging the attorney's fees, totalling over P35,000.00;
and this point appears well-taken, considering that the foreclosure
was merely extra-judicial, and the attorneys' work was limited to
requiring the sheriff to effectuate the foreclosure. However, in view of
the parties' agreement to set the same aside, with the consequential
elimination of such incidental charges, the matter of
unreasonableness of the counsel fees need not be labored further.
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Turning now to the plaintiff's separate appeal (Case G.R. No. L-
18155): Her prayer for an award of actual or compensatory
damages for P83,333.33 is predicated on her alleged unrealized
profits due to her inability to sell the compound for the price of
P750,000.00 offered by one Vicente Alunan, which sale was
allegedly blocked because the System consolidated the title to the
property in its name. Plaintiff reckons the amount of P83,333.33 by
placing the actual value of the property at P666,666.67, a figure
arrived at by assuming that the System's loan of P400,000.00
constitutes 60% of the actual value of the security. The court a quo
correctly refused to award such actual or compensatory damages
because it could not determine with reasonable certainty the
difference between the offered price and the actual value of the
property, for lack of competent evidence. Without proof we cannot
assume, or take judicial notice, as suggested by the plaintiff, that the
practice of lending institutions in the country is to give out as loan
60% of the actual value of the collateral. Nor should we lose sight of
the fact that the price offered by Alunan was payable in installments
covering five years, so that it may not actually represent true market
values.
Nor was there error in the appealed decision in denying moral

damages, not only on account of the plaintiff's failure to take the
witness stand and testify to her social humiliation, wounded feelings,
anxiety, etc., as the decision holds, but primarily because a breach
of contract like that of defendant, not being malicious or fraudulent,
does not warrant the award of moral damages under Article 2220 of
the Civil Code (Ventanilla vs. Centeno, L-14333, 28 Jan. 1961; Fores
vs. Miranda, L-12163, 4 March 1959).
There is no basis for awarding exemplary damages either, because

this species of damages is only allowed in addition to moral,
temperate, liquidated, or compensatory damages, none of which
have been allowed in this case, for reasons herein before discussed
(Art. 2234, Civil Code; Velayo vs. Shell Co. of P.I., L-7817, Res. July 30,
1957; Singson, et al. vs. Aragon and Lorza, L-5164, Jan. 27, 1953, 49
O.G. No. 2, 515).
As to attorneys' fees, we agree with the trial court's stand that in view
of the absence of gross and evident bad faith in defendant's refusal
to satisfy the plaintiff's claim, and there being none of the other
grounds enumerated in Article 2208 of the Civil Code, such absence
precludes a recovery. The award of attorneys' fees is essentially
discretionary in the trial court, and no abuse of discretion has been
shown.

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FOR THE FOREGOING REASONS, the appealed decision is hereby
affirmed, with costs against the defendant Government Service
Insurance System, in G.R. No.L-18287.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion,

Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur.
7 SCRA 577 – Business Organization – Corporation Law – Corporate

Liability
In 1956, Trinidad Francisco obtained a P400k loan from the

Government Service Insurance System (GSIS). She secured the loan
with a parcel of land. In 1959 however, due to some difficulties,
Trinidad incurred huge arrears. This prompted GSIS to foreclose the
property. But then, Trinidad’s father, Atty. Vicente Francisco, wrote a
letter to GSIS offering that he pay P30k off the loan and then allow
GSIS to administer the mortgaged property instead of foreclosing it;
that thereafter, GSIS shall receive rents from the tenants of the land
until the arrears are paid and the account is made current or up to
date (because the total of the monthly rents is bigger than the
monthly loan payments supposed to be paid by Trinidad to GSIS).
GSIS, through its general manager Rodolfo Andal, responded with a

letter which states that the GSIS Board had accepted Vicente’s
offer. But GSIS for some reason did not take over the property.
Nevertheless, the Franciscos collected rents and turned them over to
GSIS.
Then in 1960, GSIS demanded Francisco to pay off the loan. Vicente
then reminded GSIS that the agreement in 1959 which is actually a
compromise is binding upon GSIS. GSIS then averred that the letter
sent to Vicente in response to his offer was not sent in error because
Andal’s secretary sent the poorly worded response without Andal’s
knowledge.
ISSUE: Whether or not a corporation like GSIS is bound by the acts of

its officers acting in their apparent authority.
HELD: Yes. A third party transacting with a corporation cannot be

expected to know what occurs within a corporation, its meetings,
without any external manifestations from the corporation. In the case
at bar, the response by GSIS to Vicente by way of a telegram, is
within the apparent authority of Andal. If there are any irregularities
in the telegraph i.e., the sending of the secretary without the
authority of Andal, Vicente is not expected to know it because the

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telegram on its face is clear as to the acceptance. Vicente cannot
therefore be faulted for relying on the telegram; that GSIS accepted
his offer. Hence, GSIS cannot now ask Francisco to suddenly pay off
the debt. If a corporation knowingly permits one of its officers, or any
other agent, to do acts within the scope of an apparent authority,
and thus holds him out to the public as possessing power to do those
acts, the corporation will, as against anyone who has in good faith
dealt with the corporation through such agent, be estopped from
denying his authority; and where it is said “if the corporation permits”
this means the same as “if the thing is permitted by the directing
power of the corporation.
GSIS cannot also deny that it has knowledge of the acceptance. A

corporation cannot see, or know, anything except through its
officers. Knowledge of facts acquired or possessed by an officer or
relation to matters within the scope of his authority, is notice to the
corporation, whether he communicates such knowledge or not.
Andal is presumed to have knowledge of the acceptance because
it was his office which sent it to Vicente. Knowledge of Andal, an
officer of GSIS, is deemed knowledge of GSIS.
At any rate, even if the compromise agreement is void because of

the “unauthorized” telegram, GSIS’s silence and acceptance of the
subsequent remittances of the Franciscos ratified the compromise
agreement.
Facts: The plaintiff, Trinidad J. Francisco, in consideration of a loan

mortgaged in favor of the defendant, Government Service
Insurance System a parcel of land known as Vic-Mari Compound,
located at Baesa, Quezon City. The System extrajudicially foreclosed
the mortgage on the ground that up to that date the plaintiff-
mortgagor was in arrears on her monthly instalments. The System
itself was the buyer of the property in the foreclosure sale. The
plaintiff’s father, Atty. Vicente J. Francisco, sent a letter to the
general manager of the defendant corporation, Mr. Rodolfo P.
Andal. And latter the System approved the request of Francisco to
redeem the land through a telegram. Defendant received the
payment and it did not, however, take over the administration of the
compound. The System then sent a letter to Francisco informing of
his indebtedness and the 1 year period of redemption has been
expired. And the System argued that the telegram sent to Francisco

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saying that the System has approved the request in redeeming the
property is incorrect due to clerical problems.
Issue: WON the System is liable for the acts of its employees
regarding the telegram?
Held: Yes. There was nothing in the telegram that hinted at any
anomaly, or gave ground to suspect its veracity, and the plaintiff,
therefore, can not be blamed for relying upon it. There is no denying
that the telegram was within Andal’s apparent authority. Hence,
even if it were the board secretary who sent the telegram, the
corporation could not evade the binding effect produced by the
telegram. Knowledge of facts acquired or possessed by an officer or
relation to matters within the scope of his authority, is notice to the
corporation, whether he communicates such knowledge or not. Yet,
notwithstanding this notice, the defendant System pocketed the
amount, and kept silent about the telegram not being in
accordance with the true facts, as it now alleges. This silence, taken
together with the unconditional acceptance of three other
subsequent remittances from plaintiff, constitutes in itself a binding
ratification of the original agreement.
Nyco Sales Corp. vs. BA Finance Corp. (200 SCRA 637 [1991])
G.R. No. 71694 August 16, 1991
NYCO SALES CORPORATION, petitioner,

vs.
BA FINANCE CORPORATION, JUDGE ROSALIO A. DE LEON—REGIONAL
TRIAL COURT, BR. II, INTERMEDIATE APPELLATE COURT, FIRST CIVIL
CASES DIVISION, respondents.
ABC Law Offices for petitioner.
Valera, Urmeneta & Associates for private respondent.
PARAS, J.:p
In this petition for review on certiorari, petitioner challenges the April

22, 1985 decision * and the July 16, 1985 resolution * of the then
Intermediate Appellate Court in AC-G.R. CV No. 02553 entitled "BA
Finance Corporation v. Nyco Sales Corporation, et al." which
affirmed with modification the July 20, 1983 decision ** of the
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Regional Trial Court, National Capital Region, Manila, Branch II in the
same case docketed as Civil Case No. 125909 ordering petitioner to
pay respondent the amount of P60,000.00 as principal obligation
plus corresponding interest, the sum of P10,000.00 as and for,
attomey's fees and 1/3 of the costs of suit.
It appears on record that petitioner Nyco Sales Corporation

(hereinafter referred to as Nyco) whose president and general
manager is Rufino Yao, is engaged in the business of selling
construction materials with principal office in Davao City. Sometime
in 1978, the brothers Santiago and Renato Fernandez (hereinafter
referred to as the Fernandezes), both acting in behalf of Sanshell
Corporation, approached Rufino Yao for credit accommodation.
They requested Nyco, thru Yao, to grant Sanshell discounting
privileges which Nyco had with BA Finance Corporation (hereinafter
referred to as BA Finance). Yao apparently acquiesced, hence on or
about November 15, 1978, the Fernandezes went to Yao for the
purpose of discounting Sanshell's post-dated check which was a BPI-
Davao Branch Check No. 499648 dated February 17, 1979 for the
amount of P60,000.00. The said check was payable to Nyco.
Following the discounting process agreed upon, Nyco, thru Yao,
endorsed the check in favor of BA Finance. Thereafter, BA Finance
issued a check payable to Nyco which endorsed it in favor of
Sanshell. Sanshell then made use of and/or negotiated the check.
Accompanying the exchange of checks was a Deed of Assignment
executed by Nyco in favor of BA Finance with the conformity of
Sanshell. Nyco was represented by Rufino Yao, while Sanshell was
represented by the Fernandez brothers. Under the said Deed, the
subject of the discounting was the aforecited check (Rollo, pp- 26-
28). At the back thereof and of every deed of assignment was the
Continuing Suretyship Agreement whereby the Fernandezes
unconditionally guaranteed to BA Finance the full, faithful and
prompt payment and discharge of any and all indebtedness of
Nyco (Ibid., pp. 36, 46). The BPI check, however, was dishonored by
the drawee bank upon presentment for payment. BA Finance
immediately reported the matter to the Fernandezes who thereupon
issued a substitute check dated February 19,1979 for the same
amount in favor of BA Finance. It was a Security Bank and Trust
Company check bearing the number 183157, which was again
dishonored when it was presented for payment. Despite repeated
demands, Nyco and the Fernandezes failed to settle the obligation
with BA Finance, thus prompting the latter to institute an action in
court (Ibid., p 28). Nyco and the Fernandezes, despite having been
served with summons and copies of the complaint, failed to file their
answer and were consequently declared in default. On May 16,
1980, the lower court ruled in favor of BA Finance ordering them to
pay the former jointly and severally, the sum of P65,536.67 plus 14%
interest per annum from July 1, 1979 and attorney's fees in the
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amount of P3, 000. 00 as well as the costs of suit (Rollo, pp. 51-52).
Nyco, however, moved to set aside the order of default, to have its
answer admitted and to be able to implead Sanshell. The prayer
was granted through an order dated June 23, 1980, wherein the
decision of the court was set aside only as regards Nyco. Trial ensued
once more until the court reached a second decision which states:
WHEREFORE, judgment is hereby rendered in favor of the

plaintiff and against the defendant Nyco Sales
Corporation by ordering the latter to pay the former the
following:
1) P60,000.00 as principal obligation, plus interest thereon

at the rate of 14% per annum from February 1, 1979 until
fully paid;
2) The amount of P100,000.00 as and for attorney's fees;

and
3) One-third (1/3) of the costs of this suit.
With respect to defendants Santiago and Renato

Fernandez, the decision of May 16, 1980 stands.
The cross-claim of defendant Nyco Sales Corporation

against codefendants Santiago B. Fernandez and Renato
B. Fernandez is hereby denied, as there is no showing that
Nyco's Answer with cross-claim dated May 29, 1980 was
ever received by said Fernandez brothers, even as it is
noted that the latter have not been declared in default
with respect to said cross-claim, nor were evidence
adduced in connection therewith.
As to the would-be litigant Sanshell Construction and

Development Corporation, defendant Nyco Sales
Corporation did not properly implead said corporation
which should have been by way of a third-party
complaint instead of a mere cross-claim. The same
observations are noted as regard this cross-claim against
Sanshell as those made with respect to the Fernandez
brothers.
SO ORDERED.
On appeal, the appellate court also upheld BA Finance but

modified the lower court's decision by ordering that the interest
should run from February 19, 1979 until paid and not from February 1,
1979. Nyco's subsequent motion for reconsideration was denied
(Ibid., pp. 33, 62). Hence, the present recourse.

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The crux of the controversy is whether or not the assignor is liable to
its assignee for its dishonored checks.
For its defense, Nyco anchors its arguments on the following

premises: a) that the appellate court erred in affirming its liability for
the BPI check despite a similar finding of liability for the SBTC check
rendered by the same lower court; b) that it was actually discharged
of its liability over the SBTC check when BA Finance failed to give it a
notice of dishonor; c) that there was novation when BA Finance
accepted the SBTC check in replacement of the BPI check; and d)
that it cannot be held liable for its Presidents unauthorized acts.
The petition is devoid of merit.
An assignment of credit is the process of transferring the right of the

assignor to the assignee, who would then be allowed to proceed
against the debtor. It may be done either gratuitously or generously,
in which case, the assignment has an effect similar to that of a sale.
According to Article 1628 of the Civil Code, the assignor-vendor

warrants both the credit itself (its existence and legality) and the
person of the debtor (his solvency), if so stipulated, as in the case at
bar. Consequently, if there be any breach of the above warranties,
the assignor-vendor should be held answerable therefor. There is no
question then that the assignor-vendor is indeed liable for the
invalidity of whatever he as signed to the assignee-vendee.
Considering now the facts of the case at bar, it is beyond dispute

that Nyco executed a deed of assignment in favor of BA Finance
with Sanshell Corporation as the debtor-obligor. BA Finance is
actually enforcing said deed and the check covered thereby is
merely an incidental or collateral matter. This particular check
merely evidenced the credit which was actually assigned to BA
Finance. Thus, the designation is immaterial as it could be any other
check. Both the lower and the appellate courts recognized this and
so it is utterly misplaced to say that Nyco is being held liable for both
the BPI and the SBTC checks. It is only what is represented by the said
checks that Nyco is being asked to pay. Indeed, nowhere in the
dispositive parts of the decisions of the courts can it be gleaned that
BA Finance may recover from the two checks.
Nyco's pretension that it had not been notified of the fact of

dishonor is belied not only by the formal demand letter but also by
the findings of the trial court that Rufino Yao of Nyco and the
Fernandez Brothers of Sanshell had frequent contacts before, during
and after the dishonor (Rollo, p. 40). More importantly, it fails to
realize that for as long as the credit remains outstanding, it shall
continue to be liable to BA Finance as its assignor. The dishonor of an
assigned check simply stresses its liability and the failure to give a
suigeneris
notice of dishonor will not discharge it from such liability. This is
because the cause of action stems from the breach of the
warranties embodied in the Deed of Assignment, and not from the
dishonoring of the check alone (See Art. 1628, Civil Code).
Novation is the third defense set up by petitioner Nyco. It insists that

novation took place when BA Finance accepted the SBTC check in
replacement of the BPI cheek. Such is manifestly untenable.
There are only two ways which indicate the presence of novation
and thereby produce the effect of extinguishing an obligation by
another which substitutes the same. First, novation must be explicitly
stated and declared in unequivocal terms as novation is never
presumed (Mondragon v. Intermediate Appellate Court, G.R. No.
71889, April 17, 1990; Caneda Jr. v. Court of Appeals, G.R. No. 81322,
February 5, 1990). Secondly, the old and the new obligations must
be incompatible on every point. The test of incompatibility is whether
or not the two obligations can stand together, each one having its
independent existence If they cannot, they are incompatible and
the latter obligation novates the first (Mondragon v. Intermediate
Appellate Court, supra; Caneda Jr. v. Court of Appeals, supra). In
the instant case, there was no express agreement that BA Finance's
acceptance of the SBTC check will discharge Nyco from liability.
Neither is there incompatibility because both checks were given
precisely to terminate a single obligation arising from Nyco's sale of
credit to BA Finance. As novation speaks of two distinct obligations,
such is inapplicable to this case.
Finally, Nyco disowns its President's acts claiming that it never

authorized Rufino Yao (Nyco's President) to even apply to BA
Finance for credit accommodation. It supports its argument with the
fact that it did not issue a Board resolution giving Yao such authority.
However, the very evidence on record readily belies Nyco's
contention. Its corporate By-Laws clearly provide for the powers of its
President, which include, inter alia, executing contracts and
agreements, borrowing money, signing, indorsing and delivering
checks, all in behalf of the corporation. Furthermore, the appellate
court correctly adopted the lower court's observation that there was
already a previous transaction of discounting of checks involving the
same personalities wherein any enabling resolution from Nyco was
dispensed with and yet BA Finance was able to collect from Nyco
and Sanshell was able to discharge its own undertakings. Such
effectively places Nyco under estoppel in pais which arises when
one, by his acts, representations or admissions, or by his silence when
he ought to speak out, intentionally or through culpable negligence,
induces another to believe certain facts to exist and such other
rightfully relies and acts on such belief, so that he will be prejudiced if
the former is permitted to deny the existence of such facts (Panay

suigeneris
Electric Co., Inc. v. Court of Appeals, G.R. No. 81939, June 29,1989).
Nyco remained silent in the course of the transaction and spoke out
only later to escape liability. This cannot be countenanced. Nyco is
estopped from denying Rufino Yao's authority as far as the latter's
transactions with BA Finance are concerned.
PREMISES CONSIDERED, the decision appealed from is AFFIRMED.
SO ORDERED.
Melencio-Herrera (Chairperson), Padilla, Sarmiento and Regalado,

JJ., concur.
200 SCRA 637 – Mercantile Law – Negotiable Instruments Law –

Notice of Dishonor – Assignment of Credit
Nyco Sales Corporation has discounting privileges with BA Finance

Corporation. In 1978, brothers Renato Fernandez and Santiago
Renato (officers of Sanshell Corporation) approached Nyco Sales
Corporation for a credit accommodation in order for the brothers
make use of Nyco’s discounting privileges. Nyco Sales agreed and
so, on November 15, 1978, Sanshell issued a post-dated (November
17, 1978) BPI check to Nyco Sales in the amount of P60,000.00.
Following the discounting process agreed upon, Nyco Sales, thru its
president Rufino Yao, endorsed the check in favor of BA Finance.
Thereafter, BA Finance issued a check payable to Nyco Sales which
endorsed it in favor of Sanshell. Sanshell then made use of and/or
negotiated the check. Accompanying the exchange of checks was
a Deed of Assignment executed by Nyco Sales (assignor) in favor of
BA Finance (assignee) with the conformity of Sanshell. Under the said
Deed, the subject of the discounting was P60k BPI check.
The check bounced. BA Finance notified Sanshell. Sanshell

substituted the BPI check with a Security Bank and Trust Company
check for P60k. This check again bounced. BA Finance made
repeated demands to Nyco Sales and Sanshell but neither of the
two settled the obligation. Hence, BA Finance sued Nyco Sales.
Nyco Sales averred that it received no notice of dishonor when the
second check was dishonored.
ISSUE: Whether or not Nyco Sales is liable to pay BA Finance.
HELD: Yes. The relationship between Nyco Sales and BA Finance is

one of assignor-assignee. The assignor-vendor warrants both the
credit itself (its existence and legality) and the person of the debtor

suigeneris
(his solvency), if so stipulated, as in the case at bar. Consequently, if
there be any breach of the above warranties, the assignor-vendor
should be held answerable therefor. There is no question then that
the assignor-vendor is indeed liable for the invalidity of whatever he
assigned to the assignee-vendee. Considering now the facts of the
case at bar, it is beyond dispute that Nyco executed a deed of
assignment in favor of BA Finance with Sanshell Corporation as the
debtor-obligor. BA Finance is actually enforcing said deed and the
check covered thereby is merely an incidental or collateral matter.
This particular check merely evidenced the credit which was
actually assigned to BA Finance. Thus, the designation is immaterial
as it could be any other check. It is only what is represented by the
said checks that Nyco is being asked to pay.
Nyco Sales’ pretension that it had not been notified of the fact of
dishonor is belied not only by the formal demand letter issued by BA
Finance but also by the fact that Nyco Sales and Sanshell had
frequent contacts before, during and after the dishonor. More
importantly, as long as the credit remains outstanding, Nyco Sales
shall continue to be liable to BA Finance as its assignor. The dishonor
of an assigned check simply stresses its liability and the failure to give
a notice of dishonor will not discharge it from such liability. This is
because the cause of action stems from the breach of the
warranties embodied in the Deed of Assignment, and not from the
dishonoring of the check alone.
NYCO SALES CORP v BA FINANCE
FACTS:
NYCO Sales Corp extended a credit accommodation to the

Fernandez Brothers. The brothers, acting in behalf of Sanshell Corp,
discounted a BPI check for P60,000 with NYCO, which then indorsed
the said check to BA Finance accompanied by a Deed of
Assignment. BA Finance, in turn, released the funds,which were used
by the brothers. The BPI check was dishonored. The brothers issued a
substitute check,which was also dishonored. Now BA Finance goes
after NYCO, which disclaims liability.

suigeneris
ISSUE:
W/N NYCO, as the assignor, is liable for breach of warranties.
HELD:
YES. The assignor (NYCO) warrants both the existence and

legality of the credit, as well as the solvency of the debtor. If there is
a breach of any of the2 warranties, the assignor is liable to the
assignee. That being the case, NYCO cannot evade liability. So long
as the credit remains unpaid, the assignor remains liable
notwithstanding failure to give notice of dishonor that is because the
liability of NYCO stems form the assignment, not on the checks
alone.
BPI Family Savings Bank vs. First Metro Investment Corp. (429 SCRA
30 [2004])
G.R. No. 132390 May 21, 2004
BPI FAMILY SAVINGS BANK, INC., petitioner,

vs.
FIRST METRO INVESTMENT CORPORATION, respondent.
DECISION
For our resolution is the instant petition for review on certiorari under
Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing
the Decision1 dated July 4, 1997 and Resolution2 dated January 28,
1998 of the Court of Appeals in CA-G.R. CV No. 44986, "First Metro
Investment Corporation vs. BPI Family Bank."
The facts as found by the trial court and affirmed by the Court of
Appeals are as follows:
First Metro Investment Corporation (FMIC), respondent, is an

investment house organized under Philippine laws. Petitioner,
Bank of Philippine Islands Family Savings Bank, Inc. is a banking
corporation also organized under Philippine laws.
On August 25, 1989, FMIC, through its Executive Vice President

Antonio Ong, opened current account no. 8401-07473-0 and
deposited METROBANK check no. 898679 of P100 million with

suigeneris
BPI Family Bank* (BPI FB) San Francisco del Monte Branch
(Quezon City). Ong made the deposit upon request of his
friend, Ador de Asis, a close acquaintance of Jaime Sebastian,
then Branch Manager of BPI FB San Francisco del Monte
Branch. Sebastian’s aim was to increase the deposit level in his
Branch.
BPI FB, through Sebastian, guaranteed the payment of

P14,667,687.01 representing 17% per annum interest of P100
million deposited by FMIC. The latter, in turn, assured BPI FB that
it will maintain its deposit of P100 million for a period of one year
on condition that the interest of 17% per annum is paid in
advance.
This agreement between the parties was reached through their

communications in writing.
Subsequently, BPI FB paid FMIC 17% interest or P14,667,687.01

upon clearance of the latter’s check deposit.
However, on August 29, 1989, on the basis of an Authority to

Debit signed by Ong and Ma. Theresa David, Senior Manager
of FMIC, BPI FB transferred P80 million from FMIC’s current
account to the savings account of Tevesteco Arrastre –
Stevedoring, Inc. (Tevesteco).
FMIC denied having authorized the transfer of its funds to

Tevesteco, claiming that the signatures of Ong and David were
falsified. Thereupon, to recover immediately its deposit, FMIC,
on September 12, 1989, issued BPI FB check no. 129077 for
P86,057,646.72 payable to itself and drawn on its deposit with
BPI FB SFDM branch. But upon presentation for payment on
September 13, 1989, BPI FB dishonored the check as it was
"drawn against insufficient funds" (DAIF).
Consequently, FMIC filed with the Regional Trial Court, Branch

146, Makati City Civil Case No. 89-5280 against BPI FB. FMIC
likewise caused the filing by the Office of the State Prosecutors
of an Information for estafa against Ong, de Asis, Sebastian
and four others. However, the Information was dismissed on the
basis of a demurrer to evidence filed by the accused.
On October 1, 1993, the trial court rendered its Decision in Civil

Case No. 89-5280, the dispositive portion of which reads:
"Premises considered, judgment is rendered in favor of

plaintiff, ordering defendant to pay:

suigeneris
a. the amount of P80 million with interest at the legal
rate from the time this complaint was filed less
P14,667,678.01;
b. the amount of P100,000.00 as reasonable

attorney’s fees; and
c. the cost.
SO ORDERED."
On appeal by both parties, the Court of Appeals rendered a

Decision affirming the assailed Decision with modification, thus:
"WHEREFORE, considering all the foregoing, this Court hereby

modifies the decision of the trial court and adjudges BPI Family
Bank liable to First Metro Investment Corporation for the
amount of P65,332,321.99 plus interest at 17% per annum from
August 29, 1989 until fully restored. Further, this 17% interest shall
itself earn interest at 12% from October 4, 1989 until fully paid.
SO ORDERED."
BPI FB then filed a motion for reconsideration but was denied by the
Court of Appeals.
In the instant petition, BPI FB ascribes to the Appellate Court the

following assignments of error:
"A. IN VALIDATING A CLEARLY ILLEGAL AND VOID AGREEMENT

BETWEEN FMIC AND AN OVERSTEPPING BRANCH MANAGER OF
BPI FB, THE COURT OF APPEALS DECIDED THE APPEALED CASE IN
A MANNER NOT IN ACCORDANCE WITH LAW OR THE
APPLICAPLE DECISIONS OF THE HONORABLE COURT.
B. THE COURT OF APPEALS TOTALLY IGNORED THE JUDICIAL

ADMISSIONS MADE BY FMIC WHEN IT CHARACTERIZED THE
TRANSACTION BETWEEN FMIC AND BPI FB AS A TIME DEPOSIT
WHEN IN FACT IT WAS AN INTEREST-BEARING CURRENT
ACCOUNT WHICH, UNDER THE EXISTING BANK REGULATIONS,
WAS AN ILLEGAL TRANSACTION.
C. THE COURT OF APPEALS COMMITTED AN EGREGIOUS ERROR

IN RULING THAT BPI FB CLOTHED ITS BRANCH MANAGER WITH
APPARENT AUTHORITY TO ENTER INTO SUCH A PATENTLY ILLEGAL
ARRANGEMENT.
D. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR

WHEN IT REFUSED TO CONSIDER THE NEGLIGENT ACTS
COMMITTED BY FMIC ITSELF WHICH LED TO THE TRANSFER OF THE
suigeneris
P80 MILLION FROM THE FMIC ACCOUNT TO THE TEVESTECO
ACCOUNT.
E. THE COURT OF APPEALS DID NOT ADHERE TO SETTLED

JURISPRUDENCE WHEN IT ADJUDGED BPI FB LIABLE TO FMIC FOR
AN AMOUNT WHICH WAS MORE THAN WHAT WAS
CONTEMPLATED OR PRAYED FOR IN FMIC’S COMPLAINT,
MOTION FOR RECONSIDERATION OF THE TRIAL COURT’S
DECISION AND APPEAL BRIEF.
F. IN SUPPORT OF ITS ALTERNATIVE PRAYER, PETITIONER SUBMITS

THAT THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN
NOT ORDERING THE CONSOLIDATION OF THE INSTANT CASE
WITH THE TEVESTECO CASE WHICH IS STILL PENDING BEFORE THE
MAKATI REGIONAL TRIAL COURT."
Petitioner BPI FB contends that the Court of Appeals erred in

awarding the 17% per annum interest corresponding to the amount
deposited by respondent FMIC. Petitioner insists that respondent’s
deposit is not a special savings account similar to a time deposit, but
actually a demand deposit, withdrawable upon demand,
proscribed from earning interest under Central Bank Circular 777.
Petitioner further contends that the transaction is not valid as its
Branch Manager, Jaime Sebastian, clearly overstepped his authority
in entering into such an agreement with respondent’s Executive Vice
President.
We hold that the parties did not intend the deposit to be treated as
a demand deposit but rather as an interest-earning time deposit not
withdrawable any time. This is quite obvious from the
communications between Jaime Sebastian, petitioner’s Branch
Manager, and Antonio Ong, respondent’s Executive Vice President.
Both agreed that the deposit of P100 million was non-withdrawable
for one year upon payment in advance of the 17% per annum
interest. Respondent’s time deposit of P100 million was accepted by
petitioner as shown by a deposit slip prepared and signed by Ong
himself who indicated therein the account number to which the
deposit is to be credited, the name of FMIC as depositor or account
holder, the date of deposit, and the amount of P100 million as
deposit in check. Clearly, when respondent FMIC invested its money
with petitioner BPI FB, they intended the P100 million as a time
deposit, to earn 17% per annum interest and to remain intact until its
maturity date one year thereafter.
Ordinarily, a time deposit is defined as "one the payment of which

cannot legally be required within such a specified number of days."3
In contrast, demand deposits are "all those liabilities of the Bangko

Sentral and of other banks which are denominated in Philippine
suigeneris
currency and are subject to payment in legal tender upon demand
by the presentation of (depositor’s) checks."4
While it may be true that barely one month and seven days from the
date of deposit, respondent FMIC demanded the withdrawal of
P86,057,646.72 through the issuance of a check payable to itself, the
same was made as a result of the fraudulent and unauthorized
transfer by petitioner BPI FB of its P80 million deposit to Tevesteco’s
savings account. Certainly, such was a normal reaction of
respondent as a depositor to petitioner’s failure in its fiduciary duty to
treat its account with the highest degree of care.
Under this circumstance, the withdrawal of deposit by respondent

FMIC before the one-year maturity date did not change the nature
of its time deposit to one of demand deposit.
On another tack, petitioner’s argument that Central Bank regulations

prohibit demand deposit from earning interest is bereft of merit.
Under Central Bank Circular No. 22, Series of 1994, "demand deposits
shall not be subject to any interest rate ceiling." This, in effect, is an
open authority to pay interest on demand deposits, such interest not
being subject to any rate ceiling.
Likewise, time deposits are not subject to interest rate ceiling. In fact,
the rate ceiling was abolished and even allowed to float depending
on the market conditions. Sections 1244 and 1244.1 of the Manual of
Regulations of the Central Bank of the Philippines provide:
"Sec. 1244. Interest on time deposit. Time deposits shall not be

subject to any interest rate ceiling.
Sec. 1244.1. Time of payment. Interest on time deposit may be

paid at maturity or upon withdrawal or in advance. Provided,
however, That interest paid in advance shall not exceed the
interest for one year."
Thus, even assuming that respondent’s account with petitioner is a

demand deposit, still it would earn interest.
Going back to the unauthorized transfer of respondent’s funds to

Tevesteco, in its attempt to evade any liability therefor, petitioner
now impugns the validity of the subject agreement on the ground
that its Branch Manager, Jaime Sebastian, overstepped the limits of
his authority in accepting respondent’s deposit with 17% interest per
annum. We have held that if a corporation knowingly permits its
officer, or any other agent, to perform acts within the scope of an
apparent authority, holding him out to the public as possessing
power to do those acts, the corporation will, as against any person

suigeneris
who has dealt in good faith with the corporation through such
agent, be estopped from denying such authority.5 We reiterated this
doctrine in Prudential Bank vs. Court of Appeals, 6 thus:
"A bank holding out its officers and agent as worthy of

confidence will not be permitted to profit by the frauds they
may thus be enabled to perpetrate in the apparent scope of
their employment; nor will it be permitted to shirk its
responsibility for such frauds, even though no benefit may
accrue to the bank therefrom. Accordingly, a banking
corporation is liable to innocent third persons where the
representation is made in the course of its business by an agent
acting within the general scope of his authority even though
the agent is secretly abusing his authority and attempting to
perpetrate a fraud upon his principal or some other person for
his own ultimate benefit."
In Francisco vs. Government Service Insurance System,7 we ruled:
"Corporate transactions would speedily come to a standstill

were every person dealing with a corporation held duty-bound
to disbelieve every act of its responsible officers, no matter how
regular they should appear on their face. This Court has
observed in Ramirez vs. Orientalist Co., 38 Phil. 634, 654-655, that
–
‘In passing upon the liability of a corporation in cases of

this kind it is always well to keep in mind the situation as it
presents itself to the third party with whom the contract is
made. Naturally he can have little or no information as to
what occurs in corporate meetings; and he must
necessarily rely upon the external manifestations of
corporate consent. The integrity of commercial
transactions can only be maintained by holding the
corporation strictly to the liability fixed upon it by its agents
in accordance with law; and we would be sorry to
announce a doctrine which would permit the property of
a man in the city of Paris to be whisked out of his hands
and carried into a remote quarter of the earth without
recourse against the corporation whose name and
authority had been used in the manner disclosed in this
case. As already observed, it is familiar doctrine that if a
corporation knowingly permits one of its officers, or any
other agent, to do acts within the scope of an apparent
authority, and thus holds him out to the public as
possessing power to do those acts, the corporation will, as
against any one who has in good faith dealt with the
corporation through such agent, be estopped from

suigeneris
denying his authority; and where it is said ‘if the
corporation permits,’ this means the same as ‘if the thing is
permitted by the directing power of the corporation.’"
Petitioner maintains that respondent should have first inquired

whether the deposit of P100 Million and the fixing of the interest rate
were pursuant to its (petitioner’s) internal procedures. Petitioner’s
stance is a futile attempt to evade an obligation clearly established
by the intent of the parties. What transpires in the corporate board
room is entirely an internal matter. Hence, petitioner may not impute
negligence on the part of respondent’s representative in failing to
find out the scope of authority of petitioner’s Branch Manager.
Indeed, the public has the right to rely on the trustworthiness of bank
managers and their acts. Obviously, confidence in the banking
system, which necessarily includes reliance on bank managers, is
vital in the economic life of our society.
Significantly, the transaction was actually acknowledged and

ratified by petitioner when it paid respondent in advance the
interest for one year. Thus, petitioner is estopped from denying that it
authorized its Branch Manager to enter into an agreement with
respondent’s Executive Vice President concerning the deposit with
the corresponding 17% interest per annum.
Anent the award of interest, petitioner contends that such award is

not in order as it had not been prayed for by respondent in its
complaint nor was it an issue agreed upon by the parties during the
pre-trial of the case. Nonetheless, the rule is well settled that when
the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should
be that which may have been stipulated in writing, as in this case.
Furthermore, the interest due shall itself earn legal interest from the
time it is judicially demanded.8 Besides, the matter of how much
interest respondent is entitled to falls squarely within the issues
framed by the parties in their respective pleadings filed with the
court a quo. At any rate, courts may indeed grant the relief
warranted by the allegations and proof even if no such specific
relief is prayed for if only to conclude a complete and thorough
resolution of the issues involved.9
Finally, petitioner faults the Court of Appeals in not ordering the

consolidation of Civil Case No. 89-4996 (filed by petitioner against
Tevesteco) with Civil Case No. 89-5280 (the instant case). According
to petitioner, had there been consolidation of these two cases, it
would have been shown that the P80 Million transferred to
Tevesteco’s account were proceeds of a loan extended by
respondent FMIC to Tevesteco. Suffice it to state that as found by
both the trial court and the Appellate Court, petitioner’s transfer of

suigeneris
respondent’s P80M to Tevesteco was unauthorized and tainted with
fraud.
At this point, we must emphasize that this Court is not a trier of facts.
Thus, we uphold the finding of both lower courts that petitioner failed
to exercise that degree of diligence required by the nature of its
obligations to its depositors. A bank is under obligation to treat the
accounts of its depositors with meticulous care, whether such
account consists only of a few hundred pesos or of million of pesos.10
Here, petitioner cannot claim it exercised such a degree of care
required of it and must, therefore, bear the consequence.
WHEREFORE, the petition is DENIED. The assailed Decision dated July

4, 1997 and the Resolution dated January 28, 1998 of the Court of
Appeals in CA-G.R. CV No. 44986 are hereby AFFIRMED. Costs
against petitioner.
SO ORDERED.
Vitug, Corona, and Carpio-Morales, JJ., concur.
Footnotes
* Owned by petitioner BPI Family Savings Bank, Inc.
1 Annex "A", Petition for Review on Certiorari, Rollo at 67-79.
2 Annex "B", id. at 80-90.
3 10 Am Jur 2d § 652, citing 12 CFR § 204.2 (c) (1).
4See Section 58, Republic Act No. 7653 "The New Central Bank
Act."
5Francisco vs. GSIS¸ G.R. No. L-18287, March 30, 1963, 117 Phil
587, 593.
6 G.R. No. 108957, June 14, 1993, 223 SCRA 350.
7 Supra.
8Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No.
97412, July 17, 1994, 234 SCRA 78; Eastern Assurance and Surety
Corporation vs. Court of Appeals¸ G.R. No. 127135, January 18,
2000, 322 SCRA 73, cited in Rizal Commercial Banking
Corporation vs. Alfa RTW Manufacturing Corporation¸ G.R. No.
133877, November 14, 2001, 368 SCRA 611, 619.
9Robleza vs. Court of Appeals, G.R. No. 80364, June 28, 1989,
174 SCRA 354.

suigeneris
10Lim Sio Bio vs. Court of Appeals, G.R. No. 100867, April 7, 1993,
221 SCRA 307.
BPI Family Savings Bank vs First Metro Investment

(GR No 132390, May 21, 2004, Sandoval-Gutierrez)
Issues:
Whether or not the deposit in question may be treated as demand
deposit or time deposit.
If it is to be considered a demand deposit, is it legally proscribed
from earning interest?
Held:
The deposit in question is a time deposit because the deposit of Php
100 million is not withdrawable for one year provided that an
advance interest of 17% is paid.
No. Demand Deposits are not legally proscribed from earning
interest. Under CB Cir 22 s 1994, demand deposits shall not be
subject to any rate ceiling. This, according to the SC is an open
authority to pay interest even on demand deposit and with more
reason because interest is not even subject to any ceiling.
Addendum:
Time Deposit – is one where the payment of which cannot be legally
required within a specified number of days.
Demand Deposit (Current Account) – is one where the liability of the
bank is denominated in Philippine currency subject to payment in
legal tender upon presentation of the depositor’s check.
BPI Family Savings Bank, Inc. vs First Metro Investment – GR 132390,

May 21, 2004
Facts:
On August 25, 1989, FMIC, through its Executive Vice President

Antonio Ong, opened current account and deposited METROBANK
check no. 898679 of P100 million with BPI Family Bank (BPI FB). Ong
made the deposit upon request of his friend, Ador de Asis, a close
acquaintance of Jaime Sebastian, then Branch Manager of BPI FB

suigeneris
San Francisco del Monte Branch. Sebastian’s aim was to increase
the deposit level in his Branch.
BPI FB, through Sebastian, guaranteed the payment of

P14,667,687.01 representing17% per annum interest of P100 million
deposited by FMIC. The latter, in turn, assured BPI FB that it will
maintain its deposit of P100 million for a period of one year on
condition that the interest of 17% per annum is paid in advance. This
agreement between the parties was reached through their
communications in writing. Subsequently, BPI FB paid FMIC 17%
interest or P14,667,687.01 upon clearance of the latter’s check
deposit.
However, on August 29, 1989, on the basis of an Authority to Debit

signed by Ong and Ma. Theresa David, Senior Manager of FMIC, BPI
FB transferred P80 million from FMIC’s current account to the savings
account of Tevesteco Arrastre – Stevedoring,Inc. FMIC denied
having authorized the transfer of its funds to Tevesteco, claiming that
the signatures of Ong and David were falsified.
Thereupon, to recover immediately its deposit, FMIC, on September

12, 1989, issued BPI FB check no. 129077 forP86,057,646.72 payable to
itself and drawn on its deposit with BPI FB SFDM branch. But upon
presentation for payment on September 13, 1989, BPI FB dishonored
thecheck as it was “drawn against insufficient funds. Consequently,
FMIC filed a complaint against BPI FB.
FMIC filed an Information for estafa against Ong, de Asis, Sebastian

and four others. However, the Information was dismissed on the basis
of a demurrer to evidence filed by the accused.
Issues:
1. Was the transaction between FMIC and BPI, a time deposit or an

interest-bearing current account which, under existing bank
regulations, was an illegal transaction?
2. Is the bank liable for the unauthorized transfer of respondent’s

funds to Tevesteco?
Decisions:
1.We hold that the parties did not intend the deposit to be treated
as a demanddeposit but rather as an interest-earning time deposit
not withdrawable anytime. When respondent FMIC invested its
money with petitioner BPI FB, they intended the P100 million as a time
deposit, to earn 17% per annum interest and to remain intactuntil its
maturity date one year thereafter.

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Ordinarily, a time deposit is defined as “one the payment of which
cannot legally be required within such a specified number of days.In
contrast, demand deposits are “all those liabilities of the Bangko
Sentral and of other banks which are denominated in Philippine
currency and are subject to payment in legal tender upon demand
by the presentation of (depositor’s) checks.
While it may be true that barely one month and seven days from the
date of deposit, respondent FMIC demanded the withdrawal of
P86,057,646.72 through the issuance of a check payable to itself, the
same was made as a result of the fraudulent and unauthorized
transfer by petitioner BPI FB of its P80 million deposit to Tevesteco’s
savings account. Certainly, such was a normal reaction of
respondent as a depositor to petitioner’s failure in its fiduciary duty to
treat its account with the highest degree of care.
Under this circumstance, the withdrawal of deposit by respondent

FMIC before the one-year maturity date did not change the nature
of its time deposit to one of demand deposit. We have held that if a
corporation knowingly permits its officer, or any other agent, to
perform acts within the scope of an apparent authority, holding him
out to the public as possessing power to do those acts, the
corporation will, as against any person who has dealt in good faith
with the corporation through such agent, be estopped from denying
such authority.
Petitioner maintains that respondent should have first inquired

whether the deposit of P100 Million and the fixing of the interest rate
were pursuant to its (petitioner’s) internal procedures. Petitioner’s
stance is a futile attempt to evade an obligation clearly established
by the intent of the parties. What transpires in the corporate
boardroom is entirely an internal matter. Hence, petitioner may not
impute negligence on the part of respondent’s representative in
failing to find out the scope of authority of petitioner’s Branch
Manager.
Indeed, the public has the right to rely on the trustworthiness of bank
managers and their acts. Obviously, confidence in the banking
system, which necessarily includes reliance on bank managers, is
vital in the economic life of our society. Significantly, the transaction
was actually acknowledged and ratified by petitioner when it paid
respondent in advance the interest for one year. Thus, petitioner is
estopped from denying that it authorized its Branch Manager to
enter into anagreement with respondent’s Executive Vice President
concerning the deposit withthe corresponding 17% interest per
annum.

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2.Yes. We uphold the finding of both lower courts that petitioner
failed to exercise that degree of diligence required by the nature of
its obligations to its depositors. A bank is under obligation to treat the
accounts of its depositors with meticulous care, whether such
account consists only of a few hundred pesos or of million of pesos.
Here, petitioner cannot claim it exercised such adegree of care
required of it and must, therefore, bear the consequence.
Alhambra Cigar vs. SEC (24 SCRA 269 [1968])
G.R. No. L-23606 July 29, 1968
ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC.,

petitioner,
vs.
SECURITIES & EXCHANGE COMMISSION, respondent.
Gamboa and Gamboa for petitioner.

Office of the Solicitor General for respondent.
SANCHEZ, J.:
To the question — May a corporation extend its life by amendment

of its articles of incorporation effected during the three-year
statutory period for liquidation when its original term of existence had
already expired? — the answer of the Securities and Exchange
Commissioner was in the negative. Offshoot is this appeal.
That problem emerged out of the following controlling facts:
Petitioner Alhambra Cigar and Cigarette Manufacturing Company,

Inc. (hereinafter referred to simply as Alhambra) was duly
incorporated under Philippine laws on January 15, 1912. By its
corporate articles it was to exist for fifty (50) years from incorporation.
Its term of existence expired on January 15, 1962. On that date, it
ceased transacting business, entered into a state of liquidation.
Thereafter, a new corporation. — Alhambra Industries, Inc. — was

formed to carry on the business of Alhambra.
On May 1, 1962, Alhambra's stockholders, by resolution named Angel

S. Gamboa trustee to take charge of its liquidation.

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On June 20, 1963 — within Alhambra's three-year statutory period for
liquidation - Republic Act 3531 was enacted into law. It amended
Section 18 of the Corporation Law; it empowered domestic private
corporations to extend their corporate life beyond the period fixed
by the articles of incorporation for a term not to exceed fifty years in
any one instance. Previous to Republic Act 3531, the maximum non-
extendible term of such corporations was fifty years.
On July 15, 1963, at a special meeting, Alhambra's board of directors

resolved to amend paragraph "Fourth" of its articles of incorporation
to extend its corporate life for an additional fifty years, or a total of
100 years from its incorporation.
On August 26, 1963, Alhambra's stockholders, representing more

than two-thirds of its subscribed capital stock, voted to approve the
foregoing resolution. The "Fourth" paragraph of Alhambra's articles of
incorporation was thus altered to read:
FOURTH. That the term for which said corporation is to exist is

fifty (50) years from and after the date of incorporation, and for
an additional period of fifty (50) years thereafter.
On October 28, 1963, Alhambra's articles of incorporation as so

amended certified correct by its president and secretary and a
majority of its board of directors, were filed with respondent
Securities and Exchange Commission (SEC).
On November 18, 1963, SEC, however, returned said amended

articles of incorporation to Alhambra's counsel with the ruling that
Republic Act 3531 "which took effect only on June 20, 1963, cannot
be availed of by the said corporation, for the reason that its term of
existence had already expired when the said law took effect in
short, said law has no retroactive effect."
On December 3, 1963, Alhambra's counsel sought reconsideration of

SEC's ruling aforesaid, refiled the amended articles of incorporation.
On September 8, 1964, SEC, after a conference hearing, issued an

order denying the reconsideration sought.
Alhambra now invokes the jurisdiction of this Court to overturn the

conclusion below.1
1. Alhambra relies on Republic Act 3531, which amended Section 18

of the Corporation Law. Well it is to take note of the old and the new
statutes as they are framed. Section 18, prior to and after its
modification by Republic Act 3531, covers the subject of
amendment of the articles of incorporation of private corporations.
A provision thereof which remains unaltered is that a corporation

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may amend its articles of incorporation "by a majority vote of its
board of directors or trustees and ... by the vote or written assent of
the stockholders representing at least two-thirds of the subscribed
capital stock ... "
But prior to amendment by Republic Act 3531, an explicit prohibition

existed in Section 18, thus:
... Provided, however, That the life of said corporation shall not
be extended by said amendment beyond the time fixed in the
original articles: ...
This was displaced by Republic Act 3531 which enfranchises all

private corporations to extend their corporate existence. Thus
incorporated into the structure of Section 18 are the following:
... Provided, however, That should the amendment consist in

extending the corporate life, the extension shall not exceed
fifty years in any one instance: Provided, further, That the
original articles, and amended articles together shall contain all
provisions required by law to be set out in the articles of
incorporation: ...
As we look in retrospect at the facts, we find these: From July 15 to

October 28, 1963, when Alhambra made its attempt to extend its
corporate existence, its original term of fifty years had already
expired (January 15, 1962); it was in the midst of the three-year
grace period statutorily fixed in Section 77 of the Corporation Law,
thus: .
SEC. 77. Every corporation whose charter expires by its own

limitation or is annulled by forfeiture or otherwise, or whose
corporate existence for other purposes is terminated in any
other manner, shall nevertheless be continued as a body
corporate for three years after the time when it would have
been so dissolved, for the purpose of prosecuting and
defending suits by or against it and of enabling it gradually to
settle and close its affairs, to dispose of and convey its property
and to divide its capital stock, but not for the purpose of
continuing the business for which it was established.2
Plain from the language of the provision is its meaning: continuance

of a "dissolved" corporation as a body corporate for three years has
for its purpose the final closure of its affairs, and no other; the
corporation is specifically enjoined from "continuing the business for
which it was established". The liquidation of the corporation's affairs
set forth in Section 77 became necessary precisely because its life
had ended. For this reason alone, the corporate existence and

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juridical personality of that corporation to do business may no longer
be extended.
Worth bearing in mind, at this juncture, is the basic development of

corporation law.
The common law rule, at the beginning, was rigid and inflexible in
that upon its dissolution, a corporation became legally dead for all
purposes. Statutory authorizations had to be provided for its
continuance after dissolution "for limited and specified purposes
incident to complete liquidation of its affairs".3 Thus, the moment a
corporation's right to exist as an "artificial person" ceases, its
corporate powers are terminated "just as the powers of a natural
person to take part in mundane affairs cease to exist upon his
death".4 There is nothing left but to conduct, as it were, the
settlement of the estate of a deceased juridical person.
2. Republic Act 3531, amending Section 18 of the Corporation Law,

is silent, it is true, as to when such act of extension may be made. But
even with a superficial knowledge of corporate principles, it does
not take much effort to reach a correct conclusion. For, implicit in
Section 77 heretofore quoted is that the privilege given to prolong
corporate life under the amendment must be exercised before the
expiry of the term fixed in the articles of incorporation.
Silence of the law on the matter is not hard to understand. Specificity

is not really necessary. The authority to prolong corporate life was
inserted by Republic Act 3531 into a section of the law that deals
with the power of a corporation to amend its articles of
incorporation. (For, the manner of prolongation is through an
amendment of the articles.) And it should be clearly evident that
under Section 77 no corporation in a state of liquidation can act in
any way, much less amend its articles, "for the purpose of continuing
the business for which it was established".
All these dilute Alhambra's position that it could revivify its corporate
life simply because when it attempted to do so, Alhambra was still in
the process of liquidation. It is surely impermissible for us to stretch the
law — that merely empowers a corporation to act in liquidation — to
inject therein the power to extend its corporate existence.
3. Not that we are alone in this view. Fletcher has written: "Since the
privilege of extension is purely statutory, all of the statutory conditions
precedent must be complied with in order that the extension may
be effectuated. And, generally these conditions must be complied
with, and the steps necessary to effect the extension must be taken,
during the life of the corporation, and before the expiration of the
term of existence as original fixed by its charter or the general law,
since, as a rule, the corporation is ipso facto dissolved as soon as
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that time expires. So where the extension is by amendment of the
articles of incorporation, the amendment must be adopted before
that time. And, similarly, the filing and recording of a certificate of
extension after that time cannot relate back to the date of the
passage of a resolution by the stockholders in favor of the extension
so as to save the life of the corporation. The contrary is true,
however, and the doctrine of relation will apply, where the delay is
due to the neglect of the officer with whom the certificate is
required to be filed, or to a wrongful refusal on his part to receive it.
And statutes in some states specifically provide that a renewal may
be had within a specified time before or after the time fixed for the
termination of the corporate existence".5
The logic of this position is well expressed in a foursquare case

decided by the Court of Appeals of Kentucky.6 There,
pronouncement was made as follows:
... But section 561 (section 2147) provides that, when any
corporation expires by the terms of its articles of incorporation,
it may be thereafter continued to act for the purpose of closing
up its business, but for no other purpose. The corporate life of
the Home Building Association expired on May 3, 1905. After
that date, by the mandate of the statute, it could continue to
act for the purpose of closing up its business, but for no other
purpose. The proposed amendment was not made until
January 16, 1908, or nearly three years after the corporation
expired by the terms of the articles of incorporation. When the
corporate life of the corporation was ended, there was nothing
to extend. Here it was proposed nearly three years after the
corporate life of the association had expired to revivify the
dead body, and to make that relate back some two years and
eight months. In other words, the association for two years and
eight months had only existed for the purpose of winding up its
business, and, after this length of time, it was proposed to
revivify it and make it a live corporation for the two years and
eight months daring which it had not been such.
The law gives a certain length of time for the filing of records in
this court, and provides that the time may be extended by the
court, but under this provision it has uniformly been held that
when the time was expired, there is nothing to extend, and that
the appeal must be dismissed... So, when the articles of a
corporation have expired, it is too late to adopt an
amendment extending the life of a corporation; for, the
corporation having expired, this is in effect to create a new
corporation ..."7

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True it is, that the Alabama Supreme Court has stated in one case.8
that a corporation empowered by statute to renew its corporate
existence may do so even after the expiration of its corporate life,
provided renewal is taken advantage of within the extended
statutory period for purposes of liquidation. That ruling, however, is
inherently weak as persuasive authority for the situation at bar for at
least two reasons: First. That case was a suit for mandamus to
compel a former corporate officer to turn over books and records
that came into his possession and control by virtue of his office. It
was there held that such officer was obliged to surrender his books
and records even if the corporation had already expired. The
holding on the continued existence of the corporation was a mere
dictum. Second. Alabama's law is different. Corporations in that
state were authorized not only to extend but also to renew their
corporate existence.That very case defined the word "renew" as
follows; "To make new again; to restore to freshness; to make new
spiritually; to regenerate; to begin again; to recommence; to
resume; to restore to existence, to revive; to re-establish; to recreate;
to replace; to grant or obtain an extension of Webster's New
International Dict.; 34 Cyc. 1330; Carter v. Brooklyn Life Ins. Co., 110
N.Y. 15, 21, 22, 17 N.E. 396; 54 C.J. 379. Sec".9
On this point, we again draw from Fletcher: "There is a broad

distinction between the extension of a charter and the grant of a
new one. To renew a charter is to revive a charter which has expired,
or, in other words, "to give a new existence to one which has been
forfeited, or which has lost its vitality by lapse of time". To "extend" a
charter is "to increase the time for the existence of one which would
otherwise reach its limit at an earlier period".10 Nowhere in our statute
— Section 18, Corporation Law, as amended by Republic Act 3531
— do we find the word "renew" in reference to the authority given to
corporations to protract their lives. Our law limits itself to extension of
corporate existence. And, as so understood, extension may be
made only before the term provided in the corporate charter
expires.
Alhambra draws attention to another case11 which declares that

until the end of the extended period for liquidation, a dissolved
corporation "does not become an extinguished entity". But this
statement was obviously lifted out of context. That case dissected
the question whether or not suits can be commenced by or against
a corporation within its liquidation period. Which was answered in
the affirmative. For, the corporation still exists for the settlement of its
affairs.
People, ex rel. vs. Green, 12 also invoked by Alhambra, is as

unavailing. There, although the corporation amended its articles to
extend its existence at a time when it had no legal authority yet, it

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adopted the amended articles later on when it had the power to
extend its life and during its original term when it could amend its
articles.
The foregoing notwithstanding, Alhambra falls back on the

contention that its case is arguably within the purview of the law. It
says that before cessation of its corporate life, it could not have
extended the same, for the simple reason that Republic Act 3531
had not then become law. It must be remembered that Republic
Act 3531 took effect on June 20, 1963, while the original term of
Alhambra's existence expired before that date — on January 15,
1962. The mischief that flows from this theory is at once apparent. It
would certainly open the gates for all defunct corporations — whose
charters have expired even long before Republic Act 3531 came
into being — to resuscitate their corporate existence.
4. Alhambra brings into argument Republic Act 1932, which amends

Section 196 of the Insurance Act, now reading as follows:
1äwphï1.ñët
SEC. 196. Any provision of law to the contrary notwithstanding,

every domestic life insurance corporation, formed for a limited
period under the provisions of its articles of incorporation, may
extend its corporate existence for a period not exceeding fifty
years in any one instance by amendment to its articles of
incorporation on or before the expiration of the term so fixed in
said articles ...
To be observed is that the foregoing statute — unlike Republic Act

3531 — expressly authorizes domestic insurance corporations to
extend their corporate existence "on or before the expiration of the
term" fixed in their articles of incorporation. Republic Act 1932 was
approved on June 22, 1957, long before the passage of Republic
Act 3531 in 1963. Congress, Alhambra points out, must have been
aware of Republic Act 1932 when it passed Republic Act 3531. Since
the phrase "on or before", etc., was omitted in Republic Act 3531,
which contains no similar limitation, it follows, according to
Alhambra, that it is not necessary to extend corporate existence on
or before the expiration of its original term.
That Republic Act 3531 stands mute as to when extention of

corporate existence may be made, assumes no relevance. We have
already said, in the face of a familiar precept, that a defunct
corporation is bereft of any legal faculty not otherwise expressly
sanctioned by law.
Illuminating here is the explanatory note of H.B. 1774, later Republic

Act 3531 — now in dispute. Its first paragraph states that "Republic
Act No. 1932 allows the automatic extension of the corporate
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existence of domestic life insurance corporations upon amendment
of their articles of incorporation on or before the expiration of the
terms fixed by said articles". The succeeding lines are decisive: "This is
a good law, a sane and sound one. There appears to be no valid
reason why it should not be made to apply to other private
corporations.13
The situation here presented is not one where the law under
consideration is ambiguous, where courts have to put in harness
extrinsic aids such as a look at another statute to disentangle doubts.
It is an elementary rule in legal hermeneutics that where the terms of
the law are clear, no statutory construction may be permitted. Upon
the basic conceptual scheme under which corporations operate,
and with Section 77 of the Corporation Law particularly in mind, we
find no vagueness in Section 18, as amended by Republic Act 3531.
As we view it, by directing attention to Republic Act 1932, Alhambra
would seek to create obscurity in the law; and, with that, ask of us a
ruling that such obscurity be explained. This, we dare say, cannot be
done.
The pari materia rule of statutory construction, in fact, commands

that statutes must be harmonized with each other.14 So harmonizing,
the conclusion is clear that Section 18 of the Corporation Law, as
amended by Republic Act 3531 in reference to extensions of
corporate existence, is to be read in the same light as Republic Act
1932. Which means that domestic corporations in general, as with
domestic insurance companies, can extend corporate existence
only on or before the expiration of the term fixed in their charters.
5. Alhambra pleads for munificence in interpretation, one which

brushes technicalities aside. Bases for this posture are that Republic
Act 3531 is a remedial statute, and that extension of corporate life is
beneficial to the economy.
Alhambra's stance does not induce assent. Expansive construction is

possible only when there is something to expand. At the time of the
passage of Republic Act 3531, Alhambra's corporate life had
already expired. It had overstepped the limits of its limited existence.
No life there is to prolong.
Besides, a new corporation — Alhambra Industries, Inc., with but

slight change in stockholdings15 — has already been established. Its
purpose is to carry on, and it actually does carry on,16 the business of
the dissolved entity. The beneficial-effects argument is off the mark.
The way the whole case shapes up then, the only possible
drawbacks of Alhambra might be that, instead of the new
corporation (Alhambra Industries, Inc.) being written off, the old one
(Alhambra Cigar & Cigarette Manufacturing Company, Inc.) has to
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be wound up; and that the old corporate name cannot be retained
fully in its exact form.17 What is important though is that the word
Alhambra, the name that counts [it has goodwill], remains.
FOR THE REASONS GIVEN, the ruling of the Securities and Exchange
Commission of November 18, 1963, and its order of September 8,
1964, both here under review, are hereby affirmed.
Costs against petitioner Alhambra Cigar & Cigarette Manufacturing

Company, Inc. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro,

Angeles and Fernando, JJ., concur.
Footnotes
1Rule 43, Rules of Court.
2Emphasis supplied.
319 C.J.S., p. 1487.
4Id.,
p. 1485, at footnote 76, citing Sharp vs. Eagle Lake Lumber
Co., 212 P. 933, 60 Cal. App. 386.
58Fletcher, Cyclopedia Corporations, Perm, ed., 1931, pp. 559-
560, citing cases. Emphasis supplied.
6Home Bldg. Ass'n vs. Bruner, 120 S.W. 306, 307.
7Citing cases; emphasis supplied.
8Rayburn vs. Guntersville Realty Company, 93 A.L.R. 1055, 1059-
1060, cited by petitioner.
9At p. 1059.
10Fletcher, p. 535. In 18 Am. Jur. 2d., p. 612, we find at footnote
14 the following: "Loeffler v. Federal Supply Co. 187 Okla 373,
102 P2d 862, wherein the court notes a distinction between the
words "extend" and "renew." The court said that the word
"extend" means to prolong or lengthen in time, whereas the
word "renew" means to restore to existence, to revive, re-
establish, or recreate.
24 SCRA 269 – Business Organization – Corporation Law – Corporate

Lifespan
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On January 15, 1912, Alhambra Cigar & Cigarette Manufacturing
Company, Inc. was incorporated. Its lifespan was for 50 years so on
January 15, 1962, it expired. Thereafter, its Board authorized its
liquidation. Under the prevailing law, Alhambra has 3 years to
liquidate.
In 1963, while Alhambra was liquidating, Republic Act 3531 was

enacted. It amended Section 18 of the Corporation Law; it
empowered domestic private corporations to extend their corporate
life beyond the period fixed by the articles of incorporation for a
term not to exceed fifty years in any one instance. Previous to
Republic Act 3531, the maximum non-extendible term of such
corporations was fifty years.
Alhambra now amended its articles of incorporation to extend its

lifespan for another 50 years. The Securities and Exchange
Commission (SEC) denied the amended articles of incorporation.
ISSUE: Whether or not a corporation under liquidation may still

amend its articles of incorporation to extend its lifespan.
HELD: No. Alhambra cannot avail of the new law because it has
already expired at the time of its passage. When a corporation is
liquidating pursuant to the statutory period of three years to
liquidate, it is only allowed to continue for the purpose of final
closure of its business and no other purposes. In fact, within that
period, the corporation is enjoined from “continuing the business for
which it was established”. Hence, Alhambra’s board cannot validly
amend its articles of incorporation to extend its lifespan.
Caltex (Phils.), Inc. vs. PNOC Shipping and Transport Corp. (498
SCRA 400 [2006])
G.R. No. 150711 August 10, 2006
CALTEX (PHILIPPINES), INC., Petitioner,

vs.
PNOC SHIPPING AND TRANSPORT CORPORATION, Respondent.
DECISION
CARPIO, J.:
The Case

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Before the Court is a petition for review1 assailing the 31 May 2001
Decision2 and 9 November 2001 Resolution3 of the Court of Appeals
in CA-G.R. CV No. 46097. The Court of Appeals reversed the 1 June
1994 Decision4 of the Regional Trial Court of Manila, Branch 51 ("trial
court"), and dismissed the complaint filed by Caltex (Philippines), Inc.
("Caltex") against PNOC Shipping and Transport Corporation (PSTC).
The Antecedent Facts
On 6 July 1979, PSTC and Luzon Stevedoring Corporation

("LUSTEVECO") entered into an Agreement of Assumption of
Obligations ("Agreement"). The Agreement provides that PSTC shall
assume all the obligations of LUSTEVECO with respect to the claims
enumerated in Annexes "A" and "B" ("Annexes") of the Agreement.
The Agreement also provides that PSTC shall control the conduct of
any litigation pending or which may be filed with respect to the
claims in the Annexes. The Agreement further provides that
LUSTEVECO shall deliver to PSTC all papers and records of the claims
in the Annexes. Finally, the Agreement provides that LUSTEVECO
appoints and constitutes PSTC as its attorney-in-fact to demand and
receive any claim out of the countersuits and counterclaims arising
from the claims in the Annexes.
Among the actions enumerated in the Annexes is Caltex (Phils.), Inc.

v. Luzon Stevedoring Corporation docketed as AC-G.R. CV No.
62613 which at that time was pending before the then Intermediate
Appellate Court (IAC). The case was an appeal from the Decision by
the then Court of First Instance of Manila (CFI) directing LUSTEVECO
to pay Caltex P103,659.44 with legal interest from the filing of the
action until full payment. In its 12 November 1985 Decision,5 the IAC
affirmed with modification the Decision of the CFI. The dispositive
portion of the Decision reads:
WHEREFORE, the decision appealed from is hereby MODIFIED and

judgment is rendered ordering the defendant [LUSTEVECO] to pay
plaintiff [Caltex]:
(a) P126,771.22 under the first cause of action, with legal interest until
fully paid;
(b) P103,659.44 under the second cause of action with legal interest
until fully paid;
(c) 10% of the sums due as and for attorney’s fees;
(d) costs of the suit.
SO ORDERED.6

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The Decision of the IAC became final and executory.
The Regional Trial Court of Manila, Branch 12, issued a writ of

execution in favor of Caltex. However, the judgment was not
satisfied because of the prior foreclosure of LUSTEVECO’s properties.
The Manila Bank Intramuros Branch and the Traders Royal Bank
Aduana Branch did not respond to the notices of garnishment.
Caltex subsequently learned of the Agreement between PSTC and

LUSTEVECO. Caltex sent successive demands to PSTC asking for the
satisfaction of the judgment rendered by the CFI. PSTC requested for
the copy of the records of AC-G.R. CV No. 62613. Later, PSTC
informed Caltex that it was not a party to AC-G.R. CV No. 62613 and
thus, PSTC would not pay LUSTEVECO’s judgment debt. PSTC advised
Caltex to demand satisfaction of the judgment directly from
LUSTEVECO.
Caltex continued to send several demand letters to PSTC. On 5

February 1992, Caltex filed a complaint for sum of money against
PSTC. The case was docketed as Civil Case No. 91-59512.
On 1 June 1994, the trial court rendered its Decision, the dispositive
WHEREFORE, in view of the foregoing, judgment is hereby rendered

in favor of the plaintiff, ordering defendant to pay plaintiff the sums
due the latter in the decision rendered by the Court of Appeals in
CA-G.R. No. 62613, CALTEX vs. LUSTEVECO, or to pay plaintiff (Exhibit
"C"):
(a) P126,771.22 under the first cause of action, with legal interest
from the date of the promulgation of the decision on November 12,
(b) P103,659.44 under the second cause of action with legal interest
from the date of the promulgation of the decision on November 12,
(c) 10% of the sums due as and for attorney’s fees; and
(d) Costs of suit.
SO ORDERED.7
PSTC appealed the trial court’s Decision.
The Ruling of the Court of Appeals
In its 31 May 2001 Decision, the Court of Appeals found the appeal
meritorious. The Court of Appeals ruled that Caltex has no

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personality to sue PSTC. The Court of Appeals held that non-
compliance with the Agreement could only be questioned by the
signatories to the contract, namely, LUSTEVECO and PSTC. The Court
of Appeals stated that LUSTEVECO and PSTC are the only parties
who can file an action to enforce the Agreement. The Court of
Appeals considered fatal the omission of LUSTEVECO, the real party
in interest, as a party defendant in the case. The Court of Appeals
further ruled that Caltex is not a beneficiary of a stipulation pour
autrui because there is no stipulation in the Agreement which clearly
and deliberately favors Caltex.
The dispositive portion of the Decision of the Court of Appeals reads:
WHEREFORE, premises considered, the appealed Decision dated

June 1, 1994, rendered by the Regional Trial Court of Manila, Branch
51, is hereby REVERSED and SET ASIDE and a new one entered
DISMISSING the complaint filed by appellee [Caltex], against
appellant [PSTC], for want of cause of action.
SO ORDERED.8
Caltex filed a motion for reconsideration of the 31 May 2001

Decision. In a Resolution promulgated on 9 November 2001, the
Court of Appeals denied the motion for lack of merit.
Hence, this petition before this Court.
The Issues
The issues in this case are:
1. Whether PSTC is bound by the Agreement when it assumed all
the obligations of LUSTEVECO; and
2. Whether Caltex is a real party in interest to file an action to

recover from PSTC the judgment debt against LUSTEVECO.
The Ruling of this Court
Caltex May Recover from PSTC Under the Terms of the Agreement
Caltex may recover the judgment debt from PSTC not because of a
stipulation in Caltex’s favor but because the Agreement provides
that PSTC shall assume all the obligations of LUSTEVECO.
In this case, LUSTEVECO transferred, conveyed and assigned to PSTC

all of LUSTEVECO’s business, properties and assets pertaining to its

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tanker and bulk business "together with all the obligations relating to
the said business, properties and assets." The Agreement,
reproduced here in full, provides:
AGREEMENT OF ASSUMPTION
OF OBLIGATIONS
This Agreement of Assumption of Obligations made and executed

this 6th day of July 1979, in the City of Manila, by and between:
LUZON STEVEDORING CORPORATION, a corporation duly organized

and existing under and by virtue of Philippine Laws, with offices at
Tacoma and Second Streets, Port Area, Manila, represented by
GERONIMO Z. VELASCO, in his capacity as Chairman of the Board,
hereinafter referred to as ASSIGNOR,
- and -
PNOC SHIPPING AND TRANSPORT CORPORATION, a corporation duly

organized and existing under and by virtue of Philippine Laws, with
offices at Makati Avenue, Makati, Metro Manila, represented by
MARIO V. TIAOQUI, in his capacity as Vice-President, hereinafter
referred to as ASSIGNEE,
WITNESSETH : T h a t -
WHEREAS, on April 1, 1979, ASSIGNOR, for valuable consideration,

executed an Agreement of Transfer with ASSIGNEE whereby
ASSIGNOR transferred, conveyed and assigned unto ASSIGNEE all of
ASSIGNOR’s business, properties and assets appertaining to its tanker
and bulk all (sic) departments, together with all the obligations
relating to said business, properties and assets;
WHEREAS, relative to the conduct, operation and management of

the business, properties and assets transferred, conveyed and
assigned by ASSIGNOR to ASSIGNEE certain actions and claims
particularly described in Annex "A" consisting of four (4) pages and
Annex "B", consisting of one (1) page, attached hereto and made
integral parts hereof, have been filed, either with ASSIGNOR or with
appropriate courts and administrative tribunals.
WHEREAS, under the terms and conditions hereinafter mentioned,

ASSIGNEE agree[s] to assume the obligations incident and relative to
the actions and claims enumerated and described in Annexes "A"
and "B" hereof.

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NOW, THEREFORE, for and in consideration of the foregoing premises,
the parties hereto have agreed as follows:
1. ASSIGNEE shall assume, as it hereby assumes all the obligations of

ASSIGNOR in respect to the actions and claims and described in
Annexes "A" and "B";
2. ASSIGNEE shall have complete control in the conduct of any and

all litigations now pending or may be filed with respect to the actions
and claims enumerated and described in Annexes "A" and "B";
3. ASSIGNOR shall deliver and convey unto ASSIGNEE all papers,

documents, files and any other records appertaining to the actions
and claims enumerated and described in Annexes "A" and "B";
4. ASSIGNOR hereby constitutes and appoints ASSIGNEE, its

successors and assigns, the true and lawful attorney of ASSIGNOR,
with full power of substitution, for it and in its name, place and stead
or otherwise, but on behalf and for the benefit of ASSIGNEE, its
successors and assigns, to demand and receive any and all claim[s]
out of countersuits or counterclaims arising from the actions and
claims enumerated and described in Annexes "A" and "B".9 (Emphasis
supplied)
When PSTC assumed all the properties, business and assets of

LUSTEVECO pertaining to LUSTEVECO’s tanker and bulk business,
PSTC also assumed all of LUSTEVECO’s obligations pertaining to such
business. The assumption of obligations was stipulated not only in the
Agreement of Assumption of Obligations but also in the Agreement
of Transfer. The Agreement specifically mentions the case between
LUSTEVECO and Caltex, docketed as AC-G.R. CV No. 62613, then
pending before the IAC. The Agreement provides that PSTC may
demand and receive any claim out of counter-suits or counterclaims
arising from the actions enumerated in the Annexes.
PSTC is bound by the Agreement. PSTC cannot accept the benefits

without assuming the obligations under the same Agreement. PSTC
cannot repudiate its commitment to assume the obligations after
taking over the assets for that will amount to defrauding the creditors
of LUSTEVECO. It will also result in failure of consideration since the
assumption of obligations is part of the consideration for the transfer
of the assets from LUSTEVECO to PSTC. Failure of consideration will
revert the assets to LUSTEVECO for the benefit of the creditors of
LUSTEVECO. Thus, PSTC cannot escape from its undertaking to
assume the obligations of LUSTEVECO as stated in the Agreement.
Disposition of Assets should not Prejudice Creditors
Even without the Agreement, PSTC is still liable to Caltex.

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The disposition of all or substantially all of the assets of a corporation
is allowed under Section 40 of Batas Pambansa Blg. 68, otherwise
known as The Corporation Code of the Philippines ("Corporation
Code"). Section 40 provides:
SEC. 40. Sale or other disposition of assets. ─ Subject to the provisions

of existing laws on illegal combinations and monopolies, a
corporation may, by a majority vote of its board of directors, or
trustees, sell, lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its property and assets, including its
goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other
instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem
expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock;
or in case of non-stock corporation, by the vote of at least two-thirds
(2/3) of the members, in a stockholders’ or members’ meeting duly
called for the purpose. Written notice of the proposed action and of
the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right under the
conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all

the corporate property and assets, if thereby the corporation would
be rendered incapable of continuing the business or accomplishing
the purposes for which it was incorporated.
xxxx
While the Corporation Code allows the transfer of all or substantially

all the properties and assets of a corporation, the transfer should not
prejudice the creditors of the assignor. The only way the transfer can
proceed without prejudice to the creditors is to hold the assignee
liable for the obligations of the assignor. The acquisition by the
assignee of all or substantially all of the assets of the assignor
necessarily includes the assumption of the assignor’s liabilities,10
unless the creditors who did not consent to the transfer choose to
rescind the transfer on the ground of fraud.11 To allow an assignor to
transfer all its business, properties and assets without the consent of
its creditors and without requiring the assignee to assume the
assignor’s obligations will defraud the creditors. The assignment will
place the assignor’s assets beyond the reach of its creditors.

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Here, Caltex could not enforce the judgment debt against
LUSTEVECO. The writ of execution could not be satisfied because
LUSTEVECO’s remaining properties had been foreclosed by
lienholders. In addition, all of LUSTEVECO’s business, properties and
assets pertaining to its tanker and bulk business had been assigned
to PSTC without the knowledge of its creditors. Caltex now has no
other means of enforcing the judgment debt except against PSTC.
If PSTC refuses to honor its written commitment to assume the

obligations of LUSTEVECO, there will be fraud on the creditors of
LUSTEVECO. PSTC agreed to take over, and in fact took over, all the
assets of LUSTEVECO upon its express written commitment to pay all
obligations of LUSTEVECO pertaining to those assets, including
specifically the claim of Caltex. LUSTEVECO no longer informed its
creditors of the transfer of all of its assets presumably because PSTC
committed to pay all such creditors. Such transfer, leaving the claims
of creditors unenforceable against the debtor, is fraudulent and
rescissible.12 To allow PSTC now to welsh on its commitment is to
sanction a fraud on LUSTEVECO’s creditors.13
In Oria v. McMicking, the Court enumerated the badges of fraud as

follows:
1. The fact that the consideration of the conveyance is fictitious or is

inadequate.
2. A transfer made by a debtor after suit has been begun and while it
is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor,

especially when he is insolvent or greatly embarrassed financially.
6. The fact that the transfer is made between father and son, when
there are present other of the above circumstances.
7. The failure of the vendee to take exclusive possession of all the

property.14 (Emphasis supplied)
In Pepsi-Cola Bottling Co. v. NLRC,15 which involved the illegal

dismissal of the employees of Pepsi-Cola Distributors of the Philippines
(PCD), the Court has ruled that Pepsi-Cola Products Philippines, Inc.
(PCPPI) which acquired the franchise of PCD is liable for the
reinstatement of PCD’s employees. The Court rejected PCPPI’s
argument that it is a company separate and distinct from PCD. The
Court ruled that the complaint was filed when PCD was still in

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existence. Further, there was no evidence that PCPPI, as the new
entity or purchasing company, was free from any liabilities incurred
by PCD.
In this case, PSTC was aware of the pendency of the case between
Caltex and LUSTEVECO. PSTC assumed LUSTEVECO’s obligations,
including specifically any obligation that might arise from Caltex’s
suit against LUSTEVECO. The Agreement transferred the
unencumbered assets of LUSTEVECO to PSTC, making any money
judgment in favor of Caltex unenforceable against LUSTEVECO. To
allow PSTC to renege on its obligation under the Agreement will
allow PSTC to defraud Caltex. This militates against the statutory
policy of protecting creditors from fraudulent contracts.
Article 1313 of the Civil Code provides that "[c]reditors are protected
in cases of contracts intended to defraud them." Further, Article 1381
of the Civil Code provides that contracts entered into in fraud of
creditors may be rescinded when the creditors cannot in any
manner collect the claims due them.16 Article 1381 applies to
contracts where the creditors are not parties, for such contracts are
usually made without their knowledge. Thus, a creditor who is not a
party to a contract can sue to rescind the contract to prevent fraud
upon him. Or, the same creditor can instead choose to enforce the
contract if a specific provision in the contract allows him to collect
his claim, and thus protect him from fraud.
If PSTC does not assume the obligations of LUSTEVECO as PSTC had

committed under the Agreement, the creditors of LUSTEVECO could
no longer collect the debts of LUSTEVECO. The assignment becomes
a fraud on the part of PSTC, because PSTC would then have
inveigled LUSTEVECO to transfer the assets on the promise to pay
LUSTEVECO’s creditors. However, after taking over the assets, PSTC
would now turn around and renege on its promise.
The Agreement, under Article 1291 of the Civil Code,17 is also a

novation of LUSTEVECO’s obligations by substituting the person of the
debtor. Under Article 1293 of the Civil Code, a novation which
consists in substituting a new debtor in place of the original debtor
cannot be made without the consent of the creditor.18 Here, since
the Agreement novated the debt without the knowledge and
consent of Caltex, the Agreement cannot prejudice Caltex. Thus,
the assets that LUSTEVECO transferred to PSTC in consideration,
among others, of the novation, or the value of such assets, remain
even in the hands of PSTC subject to execution to satisfy the
judgment claim of Caltex.
Caltex is a Real Party in Interest
Section 2, Rule 3 of the 1997 Rules of Civil Procedure provides:

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SEC. 2. Parties in interest. ─ A real party in interest is the party who
stands to be benefited or injured by the judgment in the suit, or the
party entitled to the avails of the suit. Unless otherwise authorized by
law or these Rules, every action must be prosecuted or defended in
the name of the real party in interest.
Ordinarily, one who is not a privy to a contract may not bring an

action to enforce it. However, this case falls under the exception. In
Oco v. Limbaring, we ruled:
The parties to a contract are the real parties in interest in an action

upon it, as consistently held by the Court. Only the contracting
parties are bound by the stipulation in the contract; they are the
ones who would benefit from and could violate it. Thus, one who is
not a party to a contract, and for whose benefit it was not expressly
made, cannot maintain an action on it. One cannot do so, even if
the contract performed by the contracting parties would
incidentally inure to one’s benefit.
As an exception, parties who have not taken part in a contract may

show that they have a real interest affected by its performance or
annulment. In other words, those who are not principally or
subsidiarily obligated in a contract, in which they had no
intervention, may show their detriment that could result from it. x x x19
(Emphasis supplied)
Caltex may enforce its cause of action against PSTC because PSTC
expressly assumed all the obligations of LUSVETECO pertaining to its
tanker and bulk business and specifically, those relating to AC-G.R.
CV No. 62613. While Caltex is not a party to the Agreement, it has a
real interest in the performance of PSTC’s obligations under the
Agreement because the non-performance of PSTC’s obligations will
defraud Caltex.
Even if PSTC did not expressly assume to pay the creditors of

LUSTEVECO, PSTC would still be liable to Caltex up to the value of the
assets transferred. The transfer of all or substantially all of the
unencumbered assets of LUSTEVECO to PSTC cannot work to
defraud the creditors of LUSTEVECO. A creditor has a real interest to
go after any person to whom the debtor fraudulently transferred its
assets.
WHEREFORE, we REVERSE and SET ASIDE the 31 May 2001 Decision

and 9 November 2001 Resolution of the Court of Appeals in CA-G.R.
CV No. 46097. We AFFIRM the 1 June 1994 Decision of the Regional
Trial Court of Manila, Branch 51, in Civil Case No. 91-59512. Costs
against respondent.
SO ORDERED.
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ANTONIO T. CARPIO
Associate Justice
WE CONCUR:
Associate Justice
Chairperson
CONCHITA CARPIO MORALES, DANTE O. TINGA
PRESBITERO J. VELASCO, JR.

Associate Justice
ATTESTATION

Associate Justice
Chairperson
CERTIFICATION
Chief Justice
Footnotes
1 Under Rule 45 of the 1997 Rules of Civil Procedure.
2Penned by Associate Justice Juan Q. Enriquez, Jr. with
Associate Justices Presbitero J. Velasco, Jr. and Bienvenido L.
Reyes, concurring. Rollo, pp. 41-47.
3Penned by Associate Justice Juan Q. Enriquez, Jr. with
Associate Justices Wenceslao I. Agnir, Jr. and Bienvenido L.
Reyes, concurring. Rollo, p. 49.

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4 Penned by Judge Rustico V. Panganiban. Rollo, pp. 66-72.
5Penned by Associate Justice Jose C. Campos, Jr. with
Associate Justices Crisolito Pascual, Serafin E. Camilon and
Desiderio P. Jurado, concurring. Records, pp. 14-21.
6 Id. at 20-21.
7 Rollo, pp. 71-72.
8 Id. at 46.
9 Id. at 50-52.
10See Rivera v. Litam & Company, Inc., L-16954, 25 April 1962, 4
SCRA 1072.
11 See note 16 infra.
12 Article 1381(3), Civil Code.
13See China Banking Corp. v. Court of Appeals, 384 Phil. 116
(2000).
14 21 Phil. 243, 250-251 (1912).
15G.R. No. 101900, 23 June 1992, 210 SCRA 277. See also Pepsi-
Cola Distributors of the Phil., Inc. v. NLRC, 317 Phil. 461 (1995)
and Corral v. National Labor Relations Commission, G.R. No.
96795, 12 July 1996, 258 SCRA 704.
16 Article 1381 of the Civil Code provides:
Art. 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the

wards whom they represent suffer lesion by more than one-
fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the

latter suffer the lesion stated in the preceding number;
(3) Those undertaken in fraud of creditors when the latter

cannot in any other manner collect the claims due them;
(4) Those which refer to things under litigation if they have been
entered into by the defendant without the knowledge and
approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject

to rescission. (Emphasis supplied)
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17 Article 1291 provides:
Art. 1291. Obligations may be modified by:
(1) Changing their object or principal conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the rights of the creditor.

18 Article 1293 provides:
Art. 1293. Novation which consists in substituting a new debtor

in the place of the original one, may be made even without
the knowledge or against the will of the latter, but not without
the consent of the creditor. Payment made by the new debtor
gives him the rights mentioned in Articles 1236 and 1237.
19 G.R. No. 161298, 31 January 2006, 481 SCRA 348, 358-359.
Ong Yong vs. Tiu (401 SCRA 1 [2003])
G.R. No. 144476 April 8, 2003
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG,

WILLIAM T. ONG, WILLIE T. ONG, and JULIE ONG ALONZO, petitioners,
vs.
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y.
TIU, JOHN YU, LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT
CORP., MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY
CITY, and the SECURITIES AND EXCHANGE COMMISSION,
respondents.
x-----------------------------x
G.R. No. 144629 April 8, 2003
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y.
TIU, JOHN YU, LOURDES C. TIU, and INTRALAND RESOURCES
DEVELOPMENT CORP., petitioners,
vs.
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG,

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WILLIAM T. ONG, WILLIE T. ONG, and JULIA ONG ALONZO,
respondents.
RESOLUTION
CORONA, J.:
Before us are the (1) motion for reconsideration, dated March 15,
2002, of petitioner movants Ong Yong, Juanita Tan Ong, Wilson Ong,
Anna Ong, William Ong, Willie Ong and Julia Ong Alonzo (the Ongs);
(2) motion for partial reconsideration, dated March 15, 2002, of
petitioner movant Willie Ong seeking a reversal of this Court's
Decision,1 dated February 1, 2002, in G.R. Nos. 144476 and 144629
affirming with modification the decision2 of the Court of Appeals,
dated October 5, 1999, which in turn upheld, likewise with
modification, the decision of the SEC en banc, dated September 11,
1998; and (3) motion for issuance of writ of execution of petitioners
David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu,
John Yu and Lourdes C. Tiu (the Tius) of our February 1, 2002 Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City

was threatened with stoppage and incompletion when its
owner, the First Landlink Asia Development Corporation
(FLADC), which was owned by the Tius, encountered dire
financial difficulties. It was heavily indebted to the Philippine
National Bank (PNB) for P190 million. To stave off foreclosure of
the mortgage on the two lots where the mall was being built,
the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong,
Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs),
to invest in FLADC. Under the Pre-Subscription Agreement they
entered into, the Ongs and the Tius agreed to maintain equal
shareholdings in FLADC: the Ongs were to subscribe to
1,000,000 shares at a par value of P100.00 each while the Tius
were to subscribe to an additional 549,800 shares at P100.00
each in addition to their already existing subscription of 450,200
shares. Furthermore, they agreed that the Tius were entitled to
nominate the Vice-President and the Treasurer plus five
directors while the Ongs were entitled to nominate the
President, the Secretary and six directors (including the
chairman) to the board of directors of FLADC. Moreover, the
Ongs were given the right to manage and operate the mall.
Accordingly, the Ongs paid P100 million in cash for their subscription
to 1,000,000 shares of stock while the Tius committed to contribute to
FLADC a four-storey building and two parcels of land respectively
valued at P20 million (for 200,000 shares), P30 million (for 300,000
shares) and P49.8 million (for 49,800 shares) to cover their additional
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549,800 stock subscription therein. The Ongs paid in another P70
million3 to FLADC and P20 million to the Tius over and above their
P100 million investment, the total sum of which (P190 million) was
used to settle the P190 million mortgage indebtedness of FLADC to
PNB.
The business harmony between the Ongs and the Tius in FLADC,
however, was shortlived because the Tius, on February 23, 1996,
rescinded the Pre-Subscription Agreement. The Tius accused the
Ongs of (1) refusing to credit to them the FLADC shares covering
their real property contributions; (2) preventing David S. Tiu and Cely
Y. Tiu from assuming the positions of and performing their duties as
Vice-President and Treasurer, respectively, and (3) refusing to give
them the office spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely S.
Tiu to assume the positions and perform the duties of Vice-President
and Treasurer, respectively, but the Ongs prevented them from
doing so. Furthermore, the Ongs refused to provide them the space
for their executive offices as Vice-President and Treasurer. Finally,
and most serious of all, the Ongs refused to give them the shares
corresponding to their property contributions of a four-story building,
a 1,902.30 square-meter lot and a 151 square-meter lot. Hence, they
felt they were justified in setting aside their Pre-Subscription
Agreement with the Ongs who allegedly refused to comply with their
undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in
fact assumed the positions of Vice-President and Treasurer of FLADC
but that it was they who refused to comply with the corporate duties
assigned to them. It was the contention of the Ongs that they
wanted the Tius to sign the checks of the corporation and undertake
their management duties but that the Tius shied away from helping
them manage the corporation. On the issue of office space, the
Ongs pointed out that the Tius did in fact already have existing
executive offices in the mall since they owned it 100% before the
Ongs came in. What the Tius really wanted were new offices which
were anyway subsequently provided to them. On the most
important issue of their alleged failure to credit the Tius with the
FLADC shares commensurate to the Tius' property contributions, the
Ongs asserted that, although the Tius executed a deed of
assignment for the 1,902.30 square-meter lot in favor of FLADC, they
(the Tius) refused to pay P 570,690 for capital gains tax and
documentary stamp tax. Without the payment thereof, the SEC
would not approve the valuation of the Tius' property contribution
(as opposed to cash contribution). This, in turn, would make it
impossible to secure a new Transfer Certificate of Title (TCT) over the
property in FLADC's name. In any event, it was easy for the Tius to

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simply pay the said transfer taxes and, after the new TCT was issued
in FLADC's name, they could then be given the corresponding shares
of stocks. On the 151 square-meter property, the Tius never executed
a deed of assignment in favor of FLADC. The Tius initially claimed that
they could not as yet surrender the TCT because it was "still being
reconstituted" by the Lichaucos from whom the Tius bought it. The
Ongs later on discovered that FLADC had in reality owned the
property all along, even before their Pre-Subscription Agreement
was executed in 1994. This meant that the 151 square-meter property
was at that time already the corporate property of FLADC for which
the Tius were not entitled to the issuance of new shares of stock.
The controversy finally came to a head when this case was

commenced4 by the Tius on February 27, 1996 at the Securities and
Exchange Commission (SEC), seeking confirmation of their rescission
of the Pre-Subscription Agreement. After hearing, the SEC, through
then Hearing Officer Rolando G. Andaya, Jr., issued a decision on
May 19, 1997 confirming the rescission sought by the Tius, as follows:
WHEREFORE, judgment is hereby rendered confirming the

rescission of the Pre-Subscription Agreement, and consequently
ordering:
(a) The cancellation of the 1,000,000 shares subscription of the

individual defendants in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the

individual defendants representing the return of their
contribution for 1,000,000 shares of FLADC;
(c) The plaintiffs to submit with (sic) the Securities and Exchange
Commission amended articles of incorporation of FLADC to
conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493,

132494, 134066 (formerly 15587), 135325 and 134204 and any
other title or deed in the name of FLADC, failing in which said
titles are declared void;
(e) The Register of Deeds to issue new certificates of titles in

favor of the plaintiffs and to cancel the annotation of the Pre-
Subscription Agreement dated 15 August 1994 on TCT No.
134066 (formerly 15587);
(f) The individual defendants, individually and collectively, their

agents and representatives, to desist from exercising or
performing any and all acts pertaining to stockholder, director
or officer of FLADC or in any manner intervene in the
management and affairs of FLADC;

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(g) The individual defendants, jointly and severally, to return to
FLADC interest payment in the amount of P8,866,669.00 and all
interest payments as well as any payments on principal
received from the P70,000,000.00 inexistent loan, plus the legal
rate of interest thereon from the date of their receipt of such
payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum
of P20,000,000.00 representing his loan from said defendants
plus legal interest from the date of receipt of such amount.
SO ORDERED.5
On motion of both parties, the above decision was partially

reconsidered but only insofar as the Ongs' P70 million was declared
not as a premium on capital stock but an advance (loan) by the
Ongs to FLADC and that the imposition of interest on it was correct.6
Both parties appealed7 to the SEC en banc which rendered a

decision on September 11, 1998, affirming the May 19, 1997 decision
of the Hearing Officer. The SEC en banc confirmed the rescission of
the Pre-Subscription Agreement but reverted to classifying the P70
million paid by the Ongs as premium on capital and not as a loan or
advance to FLADC, hence, not entitled to earn interest.8
On appeal, the Court of Appeals (CA) rendered a decision on

October 5, 1999, thus:
WHEREFORE, the Order dated September 11, 1998 issued by the

Securities and Exchange Commission En Banc in SEC AC CASE
NOS. 598 and 601 confirming the rescission of the Pre-
Subscription Agreement dated August 15, 1994 is hereby
AFFIRMED, subject to the following MODIFICATIONS:
1. The Ong and Tiu Groups are ordered to liquidate First

Landlink Asia Development Corporation in accordance with
the following cash and property contributions of the parties
therein.
(a) Ong Group – P100,000,000.00 cash contribution for one

(1) million shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share;
(b) Tiu Group:
1) P45,020,000.00 original cash contribution for

450,200 shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share;

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2) A four-storey building described in Transfer
Certificate of Title No. 15587 in the name of Intraland
Resources and Development Corporation valued at
P20,000,000.00 for 200,000 shares in First Landlink Asia
Development Corporation at a par value of P100.00
per share;
3) A 1,902.30 square-meter parcel of land covered

by Transfer Certificate of Title No. 15587 in the name
of Masagana Telamart, Inc. valued at P30,000,000.00
for 300,000 shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share.
2) Whatever remains of the assets of the First Landlink Asia

Development Corporation and the management thereof is
(sic) hereby ordered transferred to the Tiu Group.
3) First Landlink Asia Development Corporation is hereby

ordered to pay the amount of P70,000,000.00 that was
advanced to it by the Ong Group upon the finality of this
decision. Should the former incur in delay in the payment
thereof, it shall pay the legal interest thereon pursuant to Article
4) The Tius are hereby ordered to pay the amount of

P20,000,000.00 loaned them by the Ongs upon the finality of this
decision. Should the former incur in delay in the payment
thereof, it shall pay the legal interest thereon pursuant to Article
SO ORDERED.9
An interesting sidelight of the CA decision was its description of the

rescission made by the Tius as the "height of ingratitude" and as
"pulling a fast one" on the Ongs. The CA moreover found the Tius
guilty of withholding FLADC funds from the Ongs and diverting
corporate income to their own MATTERCO account.10 These were
findings later on affirmed in our own February 1, 2002 Decision which
is the subject of the instant motion for reconsideration.11
But there was also a strange aspect of the CA decision. The CA

concluded that both the Ongs and the Tius were in pari delicto
(which would not have legally entitled them to rescission) but, "for
practical considerations," that is, their inability to work together, it
was best to separate the two groups by rescinding the Pre-
Subscription Agreement, returning the original investment of the
Ongs and awarding practically everything else to the Tius.

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Their motions for reconsideration having been denied, both parties
filed separate petitions for review before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al.,
the Ongs argued that the Tius may not properly avail of rescission
under Article 1191 of the Civil Code considering that the Pre-
Subscription Agreement did not provide for reciprocity of
obligations; that the rights over the subject matter of the rescission
(capital assets and properties) had been acquired by a third party
(FLADC); that they did not commit a substantial and fundamental
breach of their agreement since they did not prevent the Tius from
assuming the positions of Vice-President and Treasurer of FLADC, and
that the failure to credit the 300,000 shares corresponding to the
1,902.30 square-meter property covered by TCT No. 134066 (formerly
15587) was due to the refusal of the Tius to pay the required transfer
taxes to secure the approval of the SEC for the property contribution
and, thereafter, the issuance of title in FLADC's name. They also
argued that the liquidation of FLADC may not legally be ordered by
the appellate court even for so called "practical considerations" or
even to prevent "further squabbles and numerous litigations," since
the same are not valid grounds under the Corporation Code.
Moreover, the Ongs bewailed the failure of the CA to grant interest
on their P70 million and P20 million advances to FLADC and David S.
Tiu, respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al.,
the Tius, on the other hand, contended that the rescission should
have been limited to the restitution of the parties' respective
investments and not the liquidation of FLADC based on the
erroneous perception by the court that: the Masagana Citimall was
threatened with incompletion since FLADC was in financial distress;
that the Tius invited the Ongs to invest in FLADC to settle its P190
million loan from PNB; that they violated the Pre-Subscription
Agreement when it was the Lichaucos and not the Tius who
executed the deed of assignment over the 151 square-meter
property commensurate to 49,800 shares in FLADC thereby failing to
pay the price for the said shares; that they did not turn over to the
Ongs the entire amount of FLADC funds; that they were diverting
rentals from lease contracts due to FLADC to their own MATTERCO
account; that the P70 million paid by the Ongs was an advance and
not a premium on capital; and that, by rescinding the Pre-
Subscription Agreement, they wanted to wrestle away the
management of the mall and prevent the Ongs from enjoying the
profits of their P190 million investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the subject

of the instant motions), affirming the assailed decision of the Court of
Appeals but with the following modifications:

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1. the P20 million loan extended by the Ongs to the Tius shall
earn interest at twelve percent (12%) per annum to be
computed from the time of judicial demand which is from April
23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall

earn interest at ten percent (10%) per annum to be computed
from the date of the FLADC Board Resolution which is June 19,
1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for their
property contribution, specifically, the 151 sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius violated
their respective obligations under the Pre-Subscription Agreement.
The Ongs prevented the Tius from assuming the positions of Vice-
President and Treasurer of the corporation. On the other hand, the
Decision established that the Tius failed to turn over FLADC funds to
the Ongs and that the Tius diverted rentals due to FLADC to their
MATTERCO account. Consequently, it held that rescission was not
possible since both parties were in pari delicto. However, this Court
agreed with the Court of Appeals that the remedy of specific
performance, as espoused by the Ongs, was not practical and
sound either and would only lead to further "squabbles and
numerous litigations" between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for
Issuance of a Writ of Execution on the grounds that: (a) the SEC
order had become executory as early as September 11, 1998
pursuant to Sections 1 and 12, Rule 43 of the Rules of Court; (b) any
further delay would be injurious to the rights of the Tius since the case
had been pending for more than six years; and (c) the SEC no longer
had quasi-judicial jurisdiction under RA 8799 (Securities Regulation
Code). The Ongs filed their opposition, contending that the Decision
dated February 1, 2002 was not yet final and executory; that no
good reason existed to issue a warrant of execution; and that,
pursuant to Section 5.2 of RA 8799, the SEC retained jurisdiction over
pending cases involving intra-corporate disputes already submitted
for final resolution upon the effectivity of the said law.
Aside from their opposition to the Tius' Motion for Issuance of Writ of
Execution, the Ongs filed their own "Motion for Reconsideration;
Alternatively, Motion for Modification (of the February 1, 2002
Decision)" on March 15, 2002, raising two main points: (a) that
specific performance and not rescission was the proper remedy
under the premises; and (b) that, assuming rescission to be proper,
the subject decision of this Court should be modified to entitle
movants to their proportionate share in the mall.

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On their first point (specific performance and not rescission was the
proper remedy), movants Ong argue that their alleged breach of
the Pre-Subscription Agreement was, at most, casual which did not
justify the rescission of the contract. They stress that providing
appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-President
and Treasurer, respectively, had no bearing on their obligations
under the Pre-Subscription Agreement since the said obligation (to
provide executive offices) pertained to FLADC itself. Such obligation
arose from the relations between the said officers and the
corporation and not any of the individual parties such as the Ongs.
Likewise, the alleged failure of the Ongs to credit shares of stock in
favor of the Tius for their property contributions also pertained to the
corporation and not to the Ongs. Just the same, it could not be
done in view of the Tius' refusal to pay the necessary transfer taxes
which in turn resulted in the inability to secure SEC approval for the
property contributions and the issuance of a new TCT in the name of
FLADC.
Besides, according to the Ongs, the principal objective of both

parties in entering into the Pre-Subscription Agreement in 1994 was to
raise the P190 million desperately needed for the payment of
FLADC's loan to PNB. Hence, in this light, the alleged failure to
provide office space for the two corporate officers was no more
than an inconsequential infringement. For rescission to be justified,
the law requires that the breach of contract should be so "substantial
or fundamental" as to defeat the primary objective of the parties in
making the agreement. At any rate, the Ongs claim that it was the
Tius who were guilty of fundamental violations in failing to remit funds
due to FLADC and diverting the same to their MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that
both parties were guilty of violating the Pre-Subscription Agreement,
neither of them could resort to rescission under the principle of pari
delicto. In addition, since the cash and other contributions now
sought to be returned already belong to FLADC, an innocent third
party, said remedy may no longer be availed of under the law.
On their second point (assuming rescission to be proper, the Ongs

should be given their proportionate share of the mall), movants Ong
vehemently take exception to the second item in the dispositive
portion of the questioned Decision insofar as it decreed that
whatever remains of the assets of FLADC and the management
thereof (after liquidation) shall be transferred to the Tius. They point
out that the mall itself, which would have been foreclosed by PNB if
not for their timely investment of P190 million in 1994 and which is
now worth about P1 billion mainly because of their efforts, should be
included in any partition and distribution. They (the Ongs) should not
merely be given interest on their capital investments. The said portion

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of our Decision, according to them, amounted to the unjust
enrichment of the Tius and ran contrary to our own pronouncement
that the act of the Tius in unilaterally rescinding the agreement was
"the height of ingratitude" and an attempt "to pull a fast one" as it
would prevent the Ongs from enjoying the fruits of their P190 million
investment in FLADC. It also contravenes this Court's assurance in the
questioned Decision that the Ongs and Tius "will have a bountiful
return of their respective investments derived from the profits of the
corporation."
Willie Ong filed a separate "Motion for Partial Reconsideration" dated

March 8, 2002, pointing out that there was no violation of the Pre-
Subscription Agreement on the part of the Ongs; that, after more
than seven years since the mall began its operations, rescission had
become not only impractical but would also adversely affect the
rights of innocent parties; and that it would be highly inequitable
and unfair to simply return the P100 million investment of the Ongs
and give the remaining assets now amounting to about P1 billion to
the Tius.
The Tius, in their opposition to the Ongs' motion for reconsideration,

counter that the arguments therein are a mere re-hash of the
contentions in the Ongs' petition for review and previous motion for
reconsideration of the Court of Appeals' decision. The Tius compare
the arguments in said pleadings to prove that the Ongs do not raise
new issues, and, based on well-settled jurisprudence,12 the Ongs'
present motion is therefore pro-forma and did not prevent the
Decision of this Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held
oral arguments on the respective positions of the parties. On
February 27, 2003, Dr. Willie Ong and the rest of the movants Ong
filed their respective memoranda. On February 28, 2003, the Tius
submitted their memorandum.
We grant the Ongs' motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion
for reconsideration. In Philippine Consumers Foundation, Inc. vs.
National Telecommunications Commission,13 this Court, through then
Chief Justice Felix V. Makasiar, said that its members may and do
change their minds, after a re-study of the facts and the law,
illuminated by a mutual exchange of views.14 After a thorough re-
examination of the case, we find that our Decision of February 1,
2002 overlooked certain aspects which, if not corrected, will cause
extreme and irreparable damage and prejudice to the Ongs, FLADC
and its creditors.

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The procedural rule on pro-forma motions pointed out by the Tius
should not be blindly applied to meritorious motions for
reconsideration. As long as the same adequately raises a valid
ground15 (i.e., the decision or final order is contrary to law), this Court
has to evaluate the merits of the arguments to prevent an unjust
decision from attaining finality. In Security Bank and Trust Company
vs. Cuenca,16 we ruled that a motion for reconsideration is not pro-
forma for the reason alone that it reiterates the arguments earlier
passed upon and rejected by the appellate court. We explained
there that a movant may raise the same arguments, if only to
convince this Court that its ruling was erroneous. Moreover, the rule
(that a motion is pro-forma if it only repeats the arguments in the
previous pleadings) will not apply if said arguments were not
squarely passed upon and answered in the decision sought to be
reconsidered. In the case at bar, no ruling was made on some of the
petitioner Ongs' arguments. For instance, no clear ruling was made
on why an order distributing corporate assets and property to the
stockholders would not violate the statutory preconditions for
corporate dissolution or decrease of authorized capital stock. Thus, it
would serve the ends of justice to entertain the subject motion for
reconsideration since some important issues therein, although mere
repetitions, were not considered or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally
rescind the Pre-Subscription Agreement. We rule that they could not.
FLADC was originally incorporated with an authorized capital stock

of 500,000 shares with the Tius owning 450,200 shares representing the
paid-up capital. When the Tius invited the Ongs to invest in FLADC as
stockholders, an increase of the authorized capital stock became
necessary to give each group equal (50-50) shareholdings as agreed
upon in the Pre-Subscription Agreement. The authorized capital
stock was thus increased from 500,000 shares to 2,000,000 shares with
a par value of P100 each, with the Ongs subscribing to 1,000,000
shares and the Tius to 549,800 more shares in addition to their 450,200
shares to complete 1,000,000 shares. Thus, the subject matter of the
contract was the 1,000,000 unissued shares of FLADC stock allocated
to the Ongs. Since these were unissued shares, the parties' Pre-
Subscription Agreement was in fact a subscription contract as
defined under Section 60, Title VII of the Corporation Code:
Any contract for the acquisition of unissued stock in an existing

corporation or a corporation still to be formed shall be deemed
a subscription within the meaning of this Title, notwithstanding
the fact that the parties refer to it as a purchase or some other
contract (Italics supplied).

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A subscription contract necessarily involves the corporation as one
of the contracting parties since the subject matter of the transaction
is property owned by the corporation – its shares of stock. Thus, the
subscription contract (denominated by the parties as a Pre-
Subscription Agreement) whereby the Ongs invested P100 million for
1,000,000 shares of stock was, from the viewpoint of the law, one
between the Ongs and FLADC, not between the Ongs and the Tius.
Otherwise stated, the Tius did not contract in their personal
capacities with the Ongs since they were not selling any of their own
shares to them. It was FLADC that did.
Considering therefore that the real contracting parties to the

subscription agreement were FLADC and the Ongs alone, a civil
case for rescission on the ground of breach of contract filed by the
Tius in their personal capacities will not prosper. Assuming it had valid
reasons to do so, only FLADC (and certainly not the Tius) had the
legal personality to file suit rescinding the subscription agreement
with the Ongs inasmuch as it was the real party in interest therein.
Article 1311 of the Civil Code provides that "contracts take effect
only between the parties, their assigns and heirs…" Therefore, a party
who has not taken part in the transaction cannot sue or be sued for
performance or for cancellation thereof, unless he shows that he has
a real interest affected thereby.17
In their February 28, 2003 Memorandum, the Tius claim that there are
two contracts embodied in the Pre-Subscription Agreement: a
shareholder's agreement between the Tius and the Ongs defining
and governing their relationship and a subscription contract
between the Tius, the Ongs and FLADC regarding the subscription of
the parties to the corporation. They point out that these two
component parts form one whole agreement and that their terms
and conditions are intrinsically related and dependent on each
other. Thus, the breach of the shareholders' agreement, which was
allegedly the consideration for the subscription contract, was also a
breach of the latter.
Aside from the fact that this is an entirely new angle never raised in
any of their previous pleadings until after the oral arguments on
January 29, 2003, we find this argument too strained for comfort. It is
obviously intended to remedy and cover up the Tius' lack of legal
personality to rescind an agreement in which they were personally
not parties-in-interest. Assuming arguendo that there were two "sub-
agreements" embodied in the Pre-Subscription Agreement, this
Court fails to see how the shareholders agreement between the
Ongs and Tius can, within the bounds of reason, be interpreted as
the consideration of the subscription contract between FLADC and
the Ongs. There was nothing in the Pre-Subscription Agreement even
remotely suggesting such alleged interdependence. Be that as it

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may, however, the Tius are nevertheless not the proper parties to
raise this point because they were not parties to the subscription
contract between FLADC and the Ongs. Thus, they are not in a
position to claim that the shareholders agreement between them
and the Ongs was what induced FLADC and the Ongs to enter into
the subscription contract. It is the Ongs alone who can say that.
Though FLADC was represented by the Tius in the subscription
contract, FLADC had a separate juridical personality from the Tius.
The case before us does not warrant piercing the veil of corporate
fiction since there is no proof that the corporation is being used "as a
cloak or cover for fraud or illegality, or to work injustice."18
The Tius also argue that, since the Ongs represent FLADC as its
management, breach by the Ongs is breach by FLADC. This must
also fail because such an argument disregards the separate juridical
personality of FLADC.
The Tius allege that they were prevented from participating in the
management of the corporation. There is evidence that the Ongs
did prevent the rightfully elected Treasurer, Cely Tiu, from exercising
her function as such. The records show that the President, Wilson
Ong, supervised the collection and receipt of rentals in the
Masagana Citimall;19 that he ordered the same to be deposited in
the bank;20 and that he held on to the cash and properties of the
corporation.21 Section 25 of the Corporation Code prohibits the
President from acting concurrently as Treasurer of the corporation.
The rationale behind the provision is to ensure the effective
monitoring of each officer's separate functions.
However, although the Tius were adversely affected by the Ongs'

unwillingness to let them assume their positions, rescission due to
breach of contract is definitely the wrong remedy for their personal
grievances. The Corporation Code, SEC rules and even the Rules of
Court provide for appropriate and adequate intra-corporate
remedies, other than rescission, in situations like this. Rescission is
certainly not one of them, specially if the party asking for it has no
legal personality to do so and the requirements of the law therefor
have not been met. A contrary doctrine will tread on extremely
dangerous ground because it will allow just any stockholder, for just
about any real or imagined offense, to demand rescission of his
subscription and call for the distribution of some part of the
corporate assets to him without complying with the requirements of
Hence, the Tius, in their personal capacities, cannot seek the

ultimate and extraordinary remedy of rescission of the subject
agreement based on a less than substantial breach of subscription
contract. Not only are they not parties to the subscription contract

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between the Ongs and FLADC; they also have other available and
effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius
possess the legal standing to sue for rescission based on breach of
contract, said action will nevertheless still not prosper since rescission
will violate the Trust Fund Doctrine and the procedures for the valid
distribution of assets and property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923
case of Philippine Trust Co. vs. Rivera,22 provides that subscriptions to
the capital stock of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction of their claims.23 This
doctrine is the underlying principle in the procedure for the
distribution of capital assets, embodied in the Corporation Code,
which allows the distribution of corporate capital only in three
instances: (1) amendment of the Articles of Incorporation to reduce
the authorized capital stock,24 (2) purchase of redeemable shares by
the corporation, regardless of the existence of unrestricted retained
earnings,25 and (3) dissolution and eventual liquidation of the
corporation. Furthermore, the doctrine is articulated in Section 41 on
the power of a corporation to acquire its own shares26 and in Section
122 on the prohibition against the distribution of corporate assets
and property unless the stringent requirements therefor are complied
with.27
The distribution of corporate assets and property cannot be made to

depend on the whims and caprices of the stockholders, officers or
directors of the corporation, or even, for that matter, on the earnest
desire of the court a quo "to prevent further squabbles and future
litigations" unless the indispensable conditions and procedures for
the protection of corporate creditors are followed. Otherwise, the
"corporate peace" laudably hoped for by the court will remain
nothing but a dream because this time, it will be the creditors' turn to
engage in "squabbles and litigations" should the court order an
unlawful distribution in blatant disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement

will effectively result in the unauthorized distribution of the capital
assets and property of the corporation, thereby violating the Trust
Fund Doctrine and the Corporation Code, since rescission of a
subscription agreement is not one of the instances when distribution
of capital assets and property of the corporation is allowed.
Contrary to the Tius' allegation, rescission will, in the final analysis,

result in the premature liquidation of the corporation without the
benefit of prior dissolution in accordance with Sections 117, 118, 119
and 120 of the Corporation Code.28 The Tius maintain that rescinding

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the subscription contract is not synonymous to corporate liquidation
because all rescission will entail would be the simple restoration of
the status quo ante and a return to the two groups of their cash and
property contributions. We wish it were that simple. Very noticeable
is the fact that the Tius do not explain why rescission in the instant
case will not effectively result in liquidation. The Tius merely refer in
cavalier fashion to the end-result of rescission (which incidentally is
100% favorable to them) but turn a blind eye to its unfair, inequitable
and disastrous effect on the corporation, its creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that
rescission of the agreement will not result in an unauthorized
liquidation of the corporation because their case is actually a
petition to decrease capital stock pursuant to Section 38 of the
Corporation Code. Section 122 of the law provides that "(e)xcept by
decrease of capital stock…, no corporation shall distribute any of its
assets or property except upon lawful dissolution and after payment
of all its debts and liabilities." The Tius claim that their case for
rescission, being a petition to decrease capital stock, does not
violate the liquidation procedures under our laws. All that needs to
be done, according to them, is for this Court to order (1) FLADC to
file with the SEC a petition to issue a certificate of decrease of
capital stock and (2) the SEC to approve said decrease. This new
argument has no merit.
The Tius' case for rescission cannot validly be deemed a petition to

decrease capital stock because such action never complied with
the formal requirements for decrease of capital stock under Section
33 of the Corporation Code. No majority vote of the board of
directors was ever taken. Neither was there any stockholders
meeting at which the approval of stockholders owning at least two-
thirds of the outstanding capital stock was secured. There was no
revised treasurer's affidavit and no proof that said decrease will not
prejudice the creditors' rights. On the contrary, all their pleadings
contained were alleged acts of violations by the Ongs to justify an
order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs

of the corporation to compel FLADC to file at the SEC a petition for
the issuance of a certificate of decrease of stock. Decreasing a
corporation's authorized capital stock is an amendment of the
Articles of Incorporation. It is a decision that only the stockholders
and the directors can make, considering that they are the
contracting parties thereto. In this case, the Tius are actually not just
asking for a review of the legality and fairness of a corporate
decision. They want this Court to make a corporate decision for
FLADC. We decline to intervene and order corporate structural

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changes not voluntarily agreed upon by its stockholders and
directors.
Truth to tell, a judicial order to decrease capital stock without the

assent of FLADC's directors and stockholders is a violation of the
"business judgment rule" which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of
directors are binding upon the corporation and courts will not
interfere unless such contracts are so unconscionable and
oppressive as to amount to wanton destruction to the rights of
the minority, as when plaintiffs aver that the defendants
(members of the board), have concluded a transaction
among themselves as will result in serious injury to the plaintiffs
stockholders.29
The reason behind the rule is aptly explained by Dean Cesar L.

Villanueva, an esteemed author in corporate law, thus:
Courts and other tribunals are wont to override the business

judgment of the board mainly because, courts are not in the
business of business, and the laissez faire rule or the free
enterprise system prevailing in our social and economic set-up
dictates that it is better for the State and its organs to leave
business to the businessmen; especially so, when courts are ill-
equipped to make business decisions. More importantly, the
social contract in the corporate family to decide the course of
the corporate business has been vested in the board and not
with courts.30
Apparently, the Tius do not realize the illegal consequences of

seeking rescission and control of the corporation to the exclusion of
the Ongs. Such an act infringes on the law on reduction of capital
stock. Ordering the return and distribution of the Ongs' capital
contribution without dissolving the corporation or decreasing its
authorized capital stock is not only against the law but is also
prejudicial to corporate creditors who enjoy absolute priority of
payment over and above any individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is

not difficult to understand. If rescission is denied, will injustice be
inflicted on any of the parties? The answer is no because the
financial interests of both the Tius and the Ongs will remain intact
and safe within FLADC. On the other hand, if rescission is granted, will
any of the parties suffer an injustice? Definitely yes because the
Ongs will find themselves out in the streets with nothing but the
money they had in 1994 while the Tius will not only enjoy a windfall
estimated to be anywhere from P450 million to P900 million 31 but will

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also take over an extremely profitable business without much effort
at all.
Another very important point follows. The Court of Appeals and, later
on, our Decision dated February 1, 2002, stated that both groups
were in pari delicto, meaning, that both the Tius and the Ongs
committed breaches of the Pre-Subscription Agreement. This may be
true to a certain extent but, judging from the comparative gravity of
the acts separately committed by each group, we find that the
Ongs' acts were relatively tame vis-à-vis those committed by the Tius
in not surrendering FLADC funds to the corporation and diverting
corporate income to their own MATTERCO account. The Ongs were
right in not issuing to the Tius the shares corresponding to the four-
story building and the 1,902.30 square-meter lot because no title for it
could be issued in FLADC's name, owing to the Tius' refusal to pay
the transfer taxes. And as far as the 151 square-meter lot was
concerned, why should FLADC issue additional shares to the Tius for
property already owned by the corporation and which, in the final
analysis, was already factored into the shareholdings of the Tius
before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the

Court of Appeals, to "pull a fast one" on the Ongs because that was
where the problem precisely started. It is clear that, when the
finances of FLADC improved considerably after the equity infusion of
the Ongs, the Tius started planning to take over the corporation
again and exclude the Ongs from it. It appears that the Tius' refusal
to pay transfer taxes might not have really been at all unintentional
because, by failing to pay that relatively small amount which they
could easily afford, the Tius should have expected that they were
not going to be given the corresponding shares. It was, from every
angle, the perfect excuse for blackballing the Ongs. In other words,
the Tius created a problem then used that same problem as their
pretext for showing their partners the door. In the process, they stood
to be rewarded with a bonanza of anywhere between P450 million
to P900 million in assets (from an investment of only P45 million which
was nearly foreclosed by PNB), to the extreme and irreparable
damage of the Ongs, FLADC and its creditors.
After all is said and done, no one can close his eyes to the fact that
the Masagana Citimall would not be what it has become today
were it not for the timely infusion of P190 million by the Ongs in 1994.
There are no ifs or buts about it.
Without the Ongs, the Tius would have lost everything they originally
invested in said mall. If only for this and the fact that this Resolution
can truly pave the way for both groups to enjoy the fruits of their
investments — assuming good faith and honest intentions — we

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cannot allow the rescission of the subject subscription agreement.
The Ongs' shortcomings were far from serious and certainly less than
substantial; they were in fact remediable and correctable under the
law. It would be totally against all rules of justice, fairness and equity
to deprive the Ongs of their interests on petty and tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March 15, 2002,

of petitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong,
William Ong, Willie Ong and Julie Ong Alonzo and the motion for
partial reconsideration, dated March 15, 2002, of petitioner Willie
Ong are hereby GRANTED. The Petition for Confirmation of the
Rescission of the Pre-Subscription Agreement docketed as SEC Case
No. 02-96-5269 is hereby DISMISSED for lack of merit. The unilateral
rescission by the Tius of the subject Pre-Subscription Agreement,
dated August 15, 1994, is hereby declared as null and void.
The motion for the issuance of a writ of execution, dated March 15,
2002, of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See
Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu is hereby DENIED for
being moot.
Accordingly, the Decision of this Court, dated February 1, 2002,

affirming with modification the decision of the Court of Appeals,
dated October 5, 1999, and the SEC en banc, dated September 11,
1998, is hereby REVERSED.
Costs against the petitioner Tius.
SO ORDERED.
Bellosillo, (Chairman), Quisumbing, and Callejo, Sr., JJ., concur.
Footnotes
1Ong Yong, et.al vs. Tiu, et al., G.R. No. 144476; Tiu, et.al. vs.
Ong Yong, et.al., G.R. No. 144629.
2 Rollo of G.R. No. 144476, pp. 111-135.
3 The testimony of Wilson Ong, never refuted by the Tius, was
that the parties' original agreement was to increase FLADC's
authorized capital stock from P50 million to P340 million (which
explains the Ongs' 50% share of P170 million). Later on, the
parties decided to downgrade the proposed new authorized
capital stock to only P200 million but the Ongs decided to
leave the overpayment of P70 million in FLADC to help pay off
the loan to PNB. (TSN at the SEC, January 29, 1997 cited in CA

suigeneris
Rollo, pp. 429-452; TSN at the SEC, February 6, 1997 cited in CA
Rollo, pp. 485-489).
4 Docketed as SEC Case No. 02-96-5269.
5 Rollo of G.R. No. 144476, pp. 114-116.
6 Ibid., pp. 116-117.
7 Docketed as SEC Cases Nos. 598 and 601.
8 Rollo of G.R. No. 144476, pp. 117-118.
9 Ibid., pp. 133-135.
10CA Decision dated October 5, 1999, p. 18; CA Records, p.
1045; Penned by Associate Justice Ramon A. Barcelona and
concurred in by Associate Justices Mariano M. Umali and
Edgardo P. Cruz. Then Associate Justice Demetrio G. Demetria
dissented while also then Associate Justice Conchita Carpio
Morales concurred and dissented.
11Supreme Court Decision dated February 1, 2002, pp. 34-35;
Rollo, pp. 299-300.
12Estrada vs. Sto. Domingo, 28 SCRA 890 [1969]; Cruz vs. Tuazon
& Co., Inc., 76 SCRA 543 [1977]; Llanter vs. Court of Appeals,
105 SCRA 609 [1981]; Luzon Brokerage Co., Inc. vs. Maritime
Building Co., Inc., 86 SCRA 305 [1978].
13 131 SCRA 200 [1984].
14 Id at 221.
15 See Section 1, Rule 37 of the 1997 Rules of Civil Procedure.
G.R. No. 138544, October 3, 2000 citing Guerra Enterprises vs.

16
CFI, 32 SCRA 314 [1970].
Sustiguer vs. Tamayo, 176 SCRA 579 [1989] citing Marimperio

17
Compania Naviera vs. Court of Appeals, 156 SCRA 368 [1987].

18 Boyer-Roxas vs. Court of Appeals, 211 SCRA 470 [1992].
19 TSN, December 11, 1996, pp. 699-702, Rollo, pp. 705-706.
20 TSN, December 17, 1996, pp. 28-34; Rollo, pp. 699-702.
21 TSN, January 17, 1997, pp. 92-93; Rollo, pp. 705-706.
22 44 Phil 469 [1923].

suigeneris
23Id; Garcia vs. Lim Chu Sing, 59 Phil. 562 [1934]; Boman
Environmental Dev't. Corp. vs. Court of Appeals, 167 SCRA 540
[1988].
24 Section 38 of the Corporation Code provides for the process
to be followed for reduction of the authorized capital stock.
First, a proposal to decrease capital stock must be approved
by a majority vote of the board of directors and affirmed by
stockholders who own 2/3 of the outstanding capital stock in a
meeting duly called for that purpose. Written notice of the time
and place of the meeting on the proposed decrease in the
capital stock must be served to each of the stockholders at his
place of residence as shown in the corporate books.
Thereafter, the SEC shall approve the certificate of decrease of
capital stock only if the same is accompanied by a new
treasurer's affidavit stating that 25% of the authorized capital
stock has been subscribed while 25% of the subscribed capital
stock has been paid-up, and also if said decrease will not
prejudice the rights of corporate creditors.
25 Section 8 of the Corporation Code provides that :
SEC. 8. Redeemable shares – Redeemable shares may be

issued by the corporation when expressly so provided in
the articles of incorporation. They may be purchased or
taken up by the corporation upon the expiration of a
fixed period, regardless of the existence of unrestricted
retained earnings in the books of the corporation, and
upon such other terms and conditions as may be stated in
the articles of incorporation, which terms and conditions
must also be stated in the certificate of stock representing
said shares.
Section 5, par. 5, SEC Rules Governing Redeemable and

Treasury Shares provides that redeemable shares may be
redeemed regardless of the existence of unrestricted
retained earning, provided that the corporation has, after
such redemption, assets in its books to cover debts and
liabilities of capital stock. Therefore, redemption,
according to SEC Opinion, January 23, 1985, may not be
made where the corporation is insolvent or if such
redemption would cause insolvency or inability of the
corporation to meet its debts as they mature. (cited in
Hector De Leon, The Corporation Code of the Philippines,
1999 Ed., pp. 96-97).
26 Section 41 of the Corporation Code provides that:

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Sec. 41. Power to acquire own shares. – A stock
corporation shall have the power to purchase or acquire
its own shares for a legitimate corporate purpose or
purposes, including but not limited to the following cases:
Provided, That the corporation has unrestricted retained
earnings in its books to cover the shares to be purchased
or acquired:
(1) To eliminate fractional shares arising out of stock

dividends;
(2) To collect or compromise an indebtedness to the

corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent
shares sold during said sale; and
(3) To pay dissenting or withdrawing stockholders

entitled to payment for their shares under the
provisions of this Code. (Italics supplied)
27 xxx xxx xxx
Except by decrease of capital stock and as otherwise

allowed by this Code, no corporation shall distribute any
of its assets or property except upon lawful dissolution and
after payment of all its debts and liabilities.
28Sections 117, 118, 119, and 120 of the Corporation Code
provide that:
SEC. 117. Methods of dissolution. - A corporation formed or

organized under the provisions of this Code may be
dissolved voluntarily or involuntarily. (n)
SEC. 118. Voluntary dissolution where no creditors are

affected. - If dissolution of a corporation does not
prejudice the rights of any creditor having a claim against
it, the dissolution may be effected by majority vote of the
board of directors or trustees, and by a resolution duly
adopted by the affirmative vote of the stockholders
owning at least two –thirds (2/3) of the outstanding capital
or of at least two-thirds (2/3) of the members at a meeting
to be held upon call of the directors or trustees after
publication of the notice of time, place and object of the
meeting for three (3) consecutive weeks in a newspaper
published in the place where the principal office of said
corporation is located; and if no newspaper is published in
such place, then in a newspaper of general circulation in
the Philippines, after sending such notice to each

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stockholder or member either by registered mail or by
personal delivery at least thirty (30) days prior to said
meeting. A copy of the resolution authorizing the
dissolution shall be certified by a majority of the board of
directors or trustees and countersigned by the secretary of
the corporation. The Securities and Exchange Commission
shall thereupon issue the certificate of dissolution. (62a)
SEC. 119. Voluntary dissolution where creditors are

affected. - Where the dissolution of a corporation may
prejudice the rights of any creditor, the petition for
dissolution shall be filed with the Securities and Exchange
Commission. The petition shall be signed by a majority of
its board of directors or trustees or other officers having
the management of its affairs, verified by its president or
secretary or one of its directors or trustees, and shall set
forth all claims and demands against it, and that its
dissolution was resolved upon by the affirmative vote of
the stockholders representing at least two-thirds (2/3) of
the outstanding capital stock or by at least two-thirds (2/3)
of the members, at a meeting of its stockholders or
members called for that purpose.
If the petition is sufficient in form and substance, the

Commission shall, by an order reciting the purpose of the
petition, fix a date on or before which objections thereto
may be filed by any person, which date shall not be less
than thirty (30) days nor more than sixty (60) days after the
entry of the order. Before such date, a copy of the order
shall be published at least once a week for three (3)
consecutive weeks in a newspaper of general circulation
published in municipality or city where the principal office
of the corporation is situated, or if there be no such
newspaper, then in a newspaper of general circulation in
the Philippines, and a similar copy shall be posted for
three (3) consecutive weeks in three (3) public places in
such municipality or city.
Upon five (5) days' notice, given after the date on which
the right to file objections as fixed in the order has expired,
the Commission shall proceed to hear the petition and try
any issue made by the objections filed; and if no such
objection is sufficient, and the material allegations of the
petition are true, it shall render judgment dissolving the
corporation and directing such disposition of its assets as
justice requires, and may appoint a receiver to collect
such assets and pay the debts of the corporation. (Rule
104, RCa)

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SEC. 120. Dissolution by shortening corporate term. - A
voluntary dissolution may be effected by amending the
articles of incorporation to shorten the corporate term
pursuant to the provisions of this Code. A copy of the
amended articles of incorporation shall be submitted to
the Securities and Exchange Commission in accordance
with this Code. Upon approval of the amended articles of
incorporation or the expiration of the shortened term, as
the case may be, the corporation shall be deemed
dissolved without any further proceedings, subject to the
provisions of this Code on liquidation. (n)
29 Gamboa vs. Victoriano, 90 SCRA 40 [1979].
30Cesar L. Villanueva, Philippine Corporate Law, 1998 Ed., p.
228.
31 Estimates of FLADC's current net worth cited during the oral
arguments on January 29, 2003 ranged from P450 million to P1
billion.
April 8, 2003
Lessons Applicable: Pre-incorporation Subscription (Corporate Law)
FACTS:
 1994: construction of the Masagana Citimall in Pasay City was

threatened with stoppage, when its owner, the First Landlink
Asia Development Corporation (FLADC), owned by the Tius,
became heavily indebted to the Philippine National Bank (PNB)
for P190M
 To save the 2 lots where the mall was being built

from foreclosure, the Tius invited Ong Yong, Juanita Tan Ong,
Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong
Alonzo (the Ongs), to invest in FLADC.
 Pre-Subscription Agreement: Ongs and the Tius agreed to

maintain equal shareholdings in FLADC
o Ongs: subscribe to 1,000,000 shares
o Tius: subscribe to an additional 549,800 shares in addition

to their already existing subscription of 450,200 shares
 Tius: nominate the Vice-President and the Treasurer plus 5

directors

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 Ongs nominate the President, the Secretary and 6 directors
(including the chairman) to the board of directors of FLADC
and right to manage and operate the mall.
 Tius: contribute to FLADC a 4-storey building P20M (for 200K

shares)and 2 parcels of land P30M (for 300K shares) and P49.8M
(for 49,800 shares)
 Ongs: paid P190M to settle the mortgage indebtedness of

FLADC to PNB (P100M in cash for their subscription to 1M shares)
 February 23, 1996: Tius rescinded the Pre-Subscription

Agreement
 February 27, 1996: Tius filed at the Securities and Exchange

Commission (SEC) seeking confirmation of their rescission of the
Pre-Subscription Agreement
 SEC: confirmed recission of Tius
 Ongs filed reconsideration that their P70M was not a premium

on capital stock but an advance loan
 SEC en banc: affirmed it was a premium on capital stock
 CA: Ongs and the Tius were in pari delicto (which would not
have legally entitled them to rescission) but, "for practical
considerations," that is, their inability to work together, it was
best to separate the two groups by rescinding the Pre-
Subscription Agreement, returning the original investment of the
Ongs and awarding practically everything else to the Tius.
ISSUE: W/N Specific performance and NOT recission is the remedy
HELD: YES. Ongs granted.
 did not justify the rescission of the contract
 providing appropriate offices for David S. Tiu and Cely Y. Tiu as

Vice-President and Treasurer, respectively, had no bearing on
their obligations under the Pre-Subscription Agreement since
the obligation pertained to FLADC itself
 failure of the Ongs to credit shares of stock in favor of the Tius

for their property contributions also pertained to the
corporation and not to the Ongs
 the principal objective of both parties in entering into the Pre-

Subscription Agreement in 1994 was to raise the P190 million

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 law requires that the breach of contract should be so
"substantial or fundamental" as to defeat the primary objective
of the parties in making the agreement
 since the cash and other contributions now sought to be

returned already belong to FLADC, an innocent third party,
said remedy may no longer be availed of under the law.
 Any contract for the acquisition of unissued stock in an existing

corporation or a corporation still to be formed shall be deemed
a subscription within the meaning of this Title, notwithstanding
the fact that the parties refer to it as a purchase or some other
contract
 allows the distribution of corporate capital only in three

instances: (1) amendment of the Articles of Incorporation to
reduce the authorized capital stock,24 (2) purchase of
redeemable shares by the corporation, regardless of the
existence of unrestricted retained earnings,25 and (3) dissolution
and eventual liquidation of the corporation.
 They want this Court to make a corporate decision for FLADC.
 The Ongs' shortcomings were far from serious and certainly less
than substantial; they were in fact remediable and correctable
under the law. It would be totally against all rules of justice,
fairness and equity to deprive the Ongs of their interests on
petty and tenuous grounds.
Asia’s Emerging Dragon Corp. vs. DOTC (549 SCRA 44 [2007])
G.R. No. 169914 – ASIA’S EMERGING DRAGON CORPORATION versus

DEPARTMENT OF TRANSPORTATION AND COMMUNICATION,
SECRETARY LEANDRO R. MENDOZA and MANILA INTERNATIONAL
AIRPORT AUTHORITY.
G.R. No. 174166 – REPUBLIC OF THE PHILIPPINES, Represented by the

DEPARTMENT OF TRANSPORTATION AND COMMUNICATIONS and
MANILA INTERNATIONAL AIRPORT AUTHORITY versus COURT OF
APPEALS (Eighth Division) and SALACNIB BATERINA.
DISSENTING OPINION
CORONA, J.:
Before the Court are consolidated cases involving the Ninoy Aquino
International Airport International Passenger Terminal III (NAIA IPT III).
suigeneris
G.R. No. 169914 is a special civil action for mandamus and
prohibition under Rule 65 of the Rules of Court originally filed before
us. G. R. No. 174166 is a petition for certiorari and prohibition also
under Rule 65 seeking to nullify the August 24, 2006 resolution of the
Court of Appeals (CA) in CA-G.R. SP No. 95539 and to enjoin the CA
from proceeding with said case.1
On May 5, 2003, we rendered a decision in Agan, Jr. v. Philippine

International Air Terminals Co., Inc.2 nullifying the 1997 Concession
Agreement, the Amended and Restated Concession Agreement
(ARCA) and its Supplements executed by the government (through
the Department of Transportation and Communication [DOTC] and
the Manila International Airport Authority [MIAA]) and the Philippine
International Air
Terminals Co., Inc. (PIATCO) for the development of NAIA IPT III.
On December 19, 2005, we ruled in Republic v. Gingoyon3 that the

national government could expropriate NAIA IPT III, with RA 8974 4 as
the governing law.
In these consolidated petitions, NAIA IPT III is once again at the

vortex of yet another storm. 2008 marks the fifteenth year after NAIA
IPT III was first conceptualized and proposed as a BOT project. Up to
now there appears to be no light at the end of the tunnel as this is
the third decision of the Supreme Court on that project. How many
more will there be before this project is finally opened?
Unfortunately, by its decision today in G.R. No. 169914, the majority

may have not only unwittingly prolonged the opening and
operation of NAIA IPT III. More significantly, it may have watered
down the spirit of RA 6957, otherwise known as the Build-Operate-
and-Transfer Law (BOT Law), as amended by RA 7718. In the process,
it diluted the rights of an original proponent under Section 4-A of the
said law. Thus, I respectfully dissent.
In G.R. No. 169914, petitioner Asia's Emerging Dragon Corporation

(AEDC) seeks to: (1) compel respondents DOTC, Secretary Leandro
R. Mendoza5 and MIAA or their agents and successors to execute
and formalize with AEDC the draft concession agreement for the
operation of NAIA IPT III and (2) direct them to cease and desist from
awarding the operation of NAIA IPT III to third parties, or negotiating
and entering into any concession agreement with third parties.6
In G.R. No. 174166, petitioner Republic of the Philippines, through the

DOTC and MIAA, prays that the August 24, 2006 resolution of the CA
be set aside7 and CA-G.R. SP No. 95539 be ordered dismissed.8 In the
August 24, 2006 resolution, the CA issued a Temporary Restraining

suigeneris
Order (TRO) enjoining the payment of the proffered value of NAIA IPT
III.
The antecedent facts from Agan serve as a backdrop for both

petitions:
Some time in 1993, six business leaders consisting of John

Gokongwei, Andrew Gotianun, Henry Sy, Sr., Lucio Tan, George
Ty and Alfonso Yuchengco met with then President Fidel V.
Ramos to explore the possibility of investing in the construction
and operation of a new international airport terminal. To signify
their commitment to pursue the project, they formed [AEDC]
which was registered with the Securities and Exchange
Commission (SEC) on September 15, 1993.
On October 5, 1994, AEDC submitted an unsolicited proposal to

the Government through the DOTC/MIAA for the development
of [NAIA IPT III] under a build-operate-and-transfer arrangement
pursuant to RA 6957 as amended by RA 7718 (BOT Law).
On December 2, 1994, the DOTC issued Dept. Order No. 94-832

constituting the Prequalification Bids and Awards Committee
(PBAC) for the implementation of the NAIA IPT III project.
On March 27, 1995, then DOTC Secretary Jose Garcia

endorsed the proposal of AEDC to the National Economic and
Development Authority (NEDA). A revised proposal, however,
was forwarded by the DOTC to NEDA on December 13, 1995.
On January 5, 1996, the NEDA Investment Coordinating Council
(NEDA ICC) — Technical Board favorably endorsed the project
to the ICC — Cabinet Committee which approved the same,
subject to certain conditions, on January 19, 1996. On February
13, 1996, the NEDA passed Board Resolution No. 2 which
approved the NAIA IPT III Project.9
On February 26, 1996, respondent DOTC and AEDC signed a

memorandum of understanding (MOU) stipulating the following:
1. The DOTC, on its own behalf and in representation of the

[Government of the Philippines (GOP)], hereby represents that
the [NAIA IPT III] project is consistent with the development
program of the DOTC and the GOP, and the Government is
unequivocally committed to pursue, implement and complete
the same on or before the year 1998.
2. The DOTC will undertake the [NAIA IPT III] Project under [RA
6957] as amended by [RA 7718] and its IRR. Having officially
secured ICC approval of the unsolicited proposal of AEDC, the
DOTC commits to pursue the project under Rules 10 and 11 of

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the IRR, subject to the existing laws, rules and regulations
applicable or relevant thereto.
3. The DOTC hereby officially declares the necessity and

urgency of the [NAIA IPT III] Project. Accordingly, the DOTC
hereby manifests its desire for AEDC to have at least a partial
soft opening of Terminal 3 by the first quarter of 1998, to
substantially complete the works by mid 1998 and to
commission and open the Terminal by the third quarter of 1998.
4. In pursuance of paragraph 3 hereof, AEDC shall adopt a fast

track approach to project implementation and accordingly
has engaged project advisors and consultants to prepare the
preliminary designs and tender documents for the major works
of the project.
5. Without prejudice to the outcome of negotiations on the

terms and conditions of the BOT Contract that shall be
executed, the parties commit themselves to the aforesaid
schedule.
6. Consistent with the fast track approach and to anticipate

and preempt delays resulting from financing and other
problems, AEDC shall, and is hereby encouraged by the DOTC
to, forthwith commence negotiations with its financial partners,
investors and creditors to ensure that financial commitments
are firmed up and financial resources are made available after
the final approval of the project.
7. Due to the complexity and urgency of the project, the

parties recognize the need for closer and timely coordination
between the DOTC and AEDC. The parties hereto hereby
agree to form forthwith a Joint Working Committee (JWC)
composed of members from, and acceptable to, both parties
to ensure complete and adequate coordination between
them.
8. In conjunction with the "fast track" approach proposed by

AEDC, the DOTC shall:
a. Commence and conclude, within the soonest possible

time, negotiations with AEDC on the BOT contract;
b. Fast track the publication, invitation and evaluation of

counter proposals for the Project; and
c. Coordinate with the Department of Public Works and

Highways (DPWH), the Metro Manila Development
Authority (MMDA), the concerned local government units

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and other government agencies to ensure proper
interfacing of the [NAIA IPT III] design and road access
requirements with the existing road and interchange
improvement and traffic management projects
particularly at the South Luzon Expressway (SLE) and EDSA;
and
9 AEDC may be called upon to render assistance to DOTC in

the activities enumerated to par. 8 hereof.
10. Nothing in the [MOU] shall be understood, interpreted or

construed as permitting, allowing or authorizing the
circumvention of, or non-compliance with, or as waiving, the
provisions of, and requirements and procedures under, existing
laws, rules and regulations.
xxx xxx xxx 10
We continue with the narration of facts in Agan:
On June 7, 14, and 21, 1996, DOTC/MIAA caused the

publication in two daily newspapers of an invitation for
competitive or comparative proposals on AEDC's unsolicited
proposal, in accordance with Sec. 4-A of RA 6957, as
amended. The alternative bidders were required to submit
three (3) sealed envelopes on or before 5:00 p.m. of September
20, 1996. The first envelope should contain the Prequalification
Documents, the second envelope the Technical Proposal, and
the third envelope the Financial Proposal of the proponent.
xxx xxx xxx
On September 20, 1996, the consortium composed of People's

Air Cargo and Warehousing Co., Inc. (Paircargo), Phil. Air and
Grounds Services, Inc. (PAGS) and Security Bank Corp. (Security
Bank) (collectively, Paircargo Consortium) submitted their
competitive proposal to the PBAC. On September 23, 1996, the
PBAC opened the first envelope containing the
prequalification documents of the Paircargo Consortium. On
the following day, September 24, 1996, the PBAC prequalified
the Paircargo Consortium.
xxx xxx xxx
On September 26, 1996, AEDC informed the PBAC in writing of

its reservations as regards the Paircargo Consortium, which
include:
xxx xxx xxx

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The PBAC gave its reply on October 2, 1996, informing AEDC
that it had considered the issues raised by the latter, and that
based on the documents submitted by Paircargo and the
established prequalification criteria, the PBAC had found that
the challenger, Paircargo, had prequalified to undertake the
project. The Secretary of the DOTC approved the finding of the
PBAC.
The PBAC then proceeded with the opening of the second

envelope of the Paircargo Consortium which contained its
Technical Proposal.
On October 3, 1996, AEDC reiterated its objections, particularly

with respect to Paircargo's financial capability, in view of the
restrictions imposed by Section 21-B of the General Banking Act
and Sections 1380 and 1381 of the Manual Regulations for
Banks and Other Financial Intermediaries. On October 7, 1996,
AEDC again manifested its objections and requested that it be
furnished with excerpts of the PBAC meeting and the
accompanying technical evaluation report where each of the
issues they raised were addressed.
On October 16, 1996, the PBAC opened the third envelope

submitted by AEDC and the Paircargo Consortium containing
their respective financial proposals. Both proponents offered to
build the [NAIA IPT III] for at least $350 million at no cost to the
government and to pay the government: 5% share in gross
revenues for the first five years of operation, 7.5% share in gross
revenues for the next ten years of operation, and 10% share in
gross revenues for the last ten years of operation, in
accordance with the Bid Documents. However, in addition to
the foregoing, AEDC offered to pay the government a total of
P135 million as guaranteed payment for 27 years while
Paircargo Consortium offered to pay the government a total of
P17.75 billion for the same period.
Thus, the PBAC formally informed AEDC that it had accepted

the price proposal submitted by the Paircargo Consortium, and
gave AEDC 30 working days or until November 28, 1996 within
which to match the said bid, otherwise, the project would be
awarded to Paircargo.
As AEDC failed to match the proposal within the 30-day period,

then DOTC Secretary Amado Lagdameo, on December 11,
1996, issued a notice to Paircargo Consortium regarding AEDC's
failure to match the proposal.
On February 27, 1997, Paircargo Consortium incorporated into

[PIATCO].
suigeneris
AEDC subsequently protested the alleged undue preference
given to PIATCO and reiterated its objections as regards the
prequalification of PIATCO.
On April 11, 1997, the DOTC submitted the concession

agreement for the second-pass approval of the NEDA-ICC,
On April 16, 1997, AEDC filed with the Regional Trial Court of
Pasig a Petition for Declaration of Nullity of the Proceedings,
Mandamus and Injunction against the Secretary of the DOTC,
the Chairman of the PBAC, the voting members of the PBAC
and Pantaleon D. Alvarez, in his capacity as Chairman of the
PBAC Technical Committee.
xxx xxx xxx
On July 9, 1997, the DOTC issued the notice of award for the
project to PIATCO.
On July 12, 1997, the Government, through then DOTC

Secretary Arturo T. Enrile, and PIATCO, through its President,
Henry T. Go, signed the "Concession Agreement for the Build-
Operate-and-Transfer Arrangement of the [NAIA IPT III]" (1997
Concession Agreement).
xxx xxx xxx
On November 26, 1998, the Government and PIATCO signed

an Amended and Restated Concession Agreement (ARCA).
xxx xxx xxx
Subsequently, the Government and PIATCO signed three

Supplements to the ARCA. The First Supplement was signed on
August 27, 1999; the Second Supplement on September 4,
2000; and the Third Supplement on June 22, 2001 (collectively,
Supplements).
xxx xxx xxx 11
In the meantime, the petition for the declaration of nullity of

proceedings, mandamus and injunction filed by AEDC against the
Secretary of DOTC et al.12 in the Regional Trial Court (RTC) of Pasig
City (Pasig court), Branch 261, docketed as Civil Case No. 66213 13
was dismissed with prejudice in an order dated April 30, 1999 14 after
the parties signed and filed a joint motion to dismiss on February 9,
1999.15
As already stated, we nullified in 2003 the contracts between the

government and PIATCO for being contrary to public policy 16 and
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for lack of the requisite financial capacity of the Paircargo
Consortium (predecessor of PIATCO). We quote our conclusion in
Agan:
In sum, this Court rules that in view of the absence of the

requisite financial capacity of the Paircargo Consortium,
predecessor of respondent PIATCO, the award by the PBAC of
the contract for the construction, operation and maintenance
of the NAIA IPT III is null and void. Further, considering that the
1997 Concession Agreement contains material and substantial
amendments, which amendments had the effect of converting
the 1997 Concession Agreement into an entirely different
agreement from the contract bidded upon, the 1997
Concession Agreement is similarly null and void for being
contrary to public policy. The provisions under Sections 4.04(b)
and (c) in relation to Section 1.06 of the 1997 Concession
Agreement and Section 4.04(c) in relation to Section 1.06 of the
ARCA, which constitute a direct government guarantee
expressly prohibited by, among others, the BOT Law and its
Implementing Rules and Regulations are also null and void. The
Supplements, being accessory contracts to the ARCA, are
likewise null and void.17
Thereafter, on December 21, 2004, the government filed a complaint

in the RTC,18 Pasay City, Branch 117 (the expropriation court), for the
expropriation of the NAIA IPT III facilities. This case ultimately reached
us by way of a petition for certiorari and prohibition in Gingoyon
where we ruled that: (1) RA 8974 applied insofar as it required the
immediate payment by the government to PIATCO of the proffered
value (P3,002,125,000) of NAIA IPT III before the government could
take possession of the facility; (2) the government was authorized to
start the implementation of the NAIA IPT III airport terminal project by
performing acts essential to its operation as an international airport
terminal upon the effectivity of the writ of possession and (3) the
government was to pay just compensation to PIATCO as fixed in the
decision of the trial court immediately upon the finality of the said
decision.19 As of today, therefore, the issue of expropriation has been
settled in favor of the government. What remains to be settled by
the Pasay City RTC is solely the issue of valuation of NAIA IPT III under
RA 8974.
On March 10, 2005, former Congressman Salacnib Baterina,20 private

respondent in G.R. No. 174166, sought to intervene in the
expropriation proceedings in the RTC by filing a motion to intervene,
motion to admit and a petition for prohibition in intervention.21 He
asserted his legal interest by virtue of being a legislator, taxpayer,
concerned citizen and the transcendental importance of the case.22
He sought to permanently enjoin the Republic from making or

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causing any payment of just compensation to PIATCO for NAIA IPT III
arguing that the latter was not the owner of such structure.23
Meanwhile, in a letter to respondent DOTC dated March 14, 2005,

AEDC offered to immediately operate the NAIA IPT III project.24 DOTC
did not respond. In another letter dated September 1, 2005, AEDC
demanded the immediate implementation of the February 26, 1996
MOU. Again, DOTC did not reply. It was only after AEDC wrote a third
letter on September 8, 2005 that the government, through the Office
of the Solicitor General, responded in a letter dated September 21,
2005 stating:
We have carefully searched Philippine law, in vain, for the basis

of what you claim is AEDC's "vested and perfected legal right
to operate NAIA IPT III." xxx
We have also searched carefully the [MOU]. We see nothing in

its language to believe that there is any existing obligation on
the part of Government to recognize in AEDC the right to
operate the terminal.25
Thus, on October 20, 2005, AEDC filed G.R. No. 169914.
Meanwhile, in another venue of conflict (the Pasay City RTC

expropriation court), the events leading to G.R. No. 174166 were
unfolding.
In an order dated October 27, 2005, the expropriation court granted

the petition (for intervention) of Baterina.26 The Republic's motion for
reconsideration was denied in an omnibus order dated December
13, 2005.27
Gingoyon was promulgated on December 19, 2005 by this Court,

prompting Baterina to file a motion for intervention with motion for
reconsideration in intervention on January 6, 2006.28 This was denied
in a resolution dated February 1, 2006.29 The decision in Gingoyon
became final and executory on March 17, 2006.30
On March 22, 2006, Baterina filed in the expropriation court a motion

to declare in default and/or motion for summary judgment and
prayed therein that the court (1) declare PIATCO and the Republic
in default insofar as the petition for prohibition in intervention was
concerned and (2) render a partial summary judgment on the issues
of [a] whether the State, through the Bases Conversion Development
Authority (BCDA), was the owner of NAIA IPT III and [b] whether NAIA
IPT III was a proper object of expropriation.31
On March 27, 2006, the expropriation court motu proprio issued an

order directing MIAA to immediately release to PIATCO the proffered

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value of NAIA IPT III in the amount of P3,002,125,000.32 On the same
date, the ceiling of the arrival lobby section of NAIA IPT III collapsed,
creating a 100-square foot hole in the ceiling.33 This prompted the
Republic to file an urgent motion to quash the writ of execution.34
On March 29, 2006, AEDC filed a motion for leave to admit attached
answer-in-intervention.35
On June 15, 2006, the expropriation court denied the Republic's

motion to quash the writ of execution.36 On June 21, 2006, the
Republic manifested that it would comply with the order of
payment.37
On August 3, 2006, Baterina filed a petition for certiorari and

prohibition [with urgent prayer for the issuance of a temporary
restraining order (TRO) and writ of preliminary injunction] in the CA,38
docketed as CA-G.R. SP No. 95539.39
In an order dated August 8, 2006, the expropriation court

reconsidered its December 13, 2005 omnibus order and denied,
among others, the motion for intervention and motion to admit of
Baterina.40 It also disallowed the intervention of AEDC.41
In a resolution dated August 24, 2006, the CA (in CA-G.R. SP No.

95539) issued a TRO:
x x x directing [Judge Jesus B. Mupas], in his capacity as Acting

Presiding Judge of the [RTC] of Pasay City, Branch 117, or
whoever is, or may be acting in his place and stead, as well as
the other public respondents herein named,42 to cease and
desist from implementing the assailed Orders43 subject of this
petition for certiorari and prohibition with urgent prayer for the
issuance of a [TRO] and writ of preliminary injunction, or from
otherwise causing payment and from further proceeding with
the determination of just compensation in the expropriation
case involved herein, until such time that petitioner's motion to
declare in default and motion for partial summary judgment
shall have been resolved by the [RTC]; or that it is clarified that
PIATCO categorically disputes the proffered value of [NAIA IPT
III].44 x x x x
On September 4, 2006, the Republic filed G.R. No 174166 45 in this

Court. However, on September 8, 2006, the CA lifted the TRO and set
aside its August 24, 2006 resolution.46 On September 11, 2006, the
Republic tendered to the expropriation court a check47 payable to
PIATCO in the amount of P3,002,125,000 representing the proffered
value of NAIA IPT III.48 This was received by PIATCO's duly authorized
representative.49

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In a resolution of this Court dated September 12, 2006, the cases
docketed as G.R. Nos. 169914 and 174166 were consolidated. Oral
arguments were held on November 14, 2006.
In a manifestation dated July 12, 2007, Baterina informed the Court

that the CA promulgated its decision on December 27, 2006 in CA-
G.R. SP No. 95539.50 The CA denied due course and dismissed the
action on the ground that Baterina was barred by the doctrine of
"law of the case" from questioning the legality of the expropriation.
On January 18, 2007, Baterina filed a motion to suspend proceedings
with ad cautelam motion for reconsideration of the decision. This
was denied in a resolution dated May 21, 2007.51
Baterina thus filed a motion for time to file petition for review on
certiorari with this Court praying for an extension of thirty days within
which to file a petition from the CA's December 27, 2006 decision
and May 21, 2007 resolution. This was docketed as G.R. No. 178022.
However, since the issues that he wanted to raise in this petition were
the same as those already raised in G.R. No. 174166, he manifested
that he would no longer pursue G.R. No. 178022. Consequently, the
latter action was terminated.
The Issues In G.R. No. 169914
The issues raised by AEDC in G.R. No. 169914 are:
1. whether AEDC, as the recognized and unchallenged original

proponent, has the exclusive, clear and vested statutory right
to the award of the NAIA IPT III project;
2. whether respondents DOTC et al. have the statutory duty to

award the NAIAI IPT III project to AEDC as the unchallenged
original proponent, after the nullification of the award to
PIATCO and
3. whether respondents DOTC et al. have the legal basis or

authority to take over the NAIA IPT III project, to the exclusion of
AEDC, or to award the project to third parties.52
The Issues In G.R. No. 174166
On the other hand, the Republic raises the following issues in G.R. No.
174166:
1. whether respondent Baterina has legal standing to sue and
2. whether CA-G.R. SP No. 95539 has become moot and

academic.
The issues that Baterina wants us to decide may be distilled into two:
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1. whether NAIA IPT III is owned by BCDA and is a proper object
of expropriation and
2. whether PIATCO is entitled to just compensation under RA

8974 or based on quantum meruit or not at all.
For purposes of clarity, the issues in G.R. Nos. 169914 and 174166 will
be tackled separately.
(A) G.R. No. 169914
During the oral arguments, there were discussions regarding the

possibility that the claim of AEDC may already be barred by res
judicata since it previously filed Civil Case No. 66213 in the Pasig
Regional Trial Court in 1997. This case was dismissed with prejudice
upon a joint motion to dismiss filed by the parties and granted by the
court in 1999.
Respondents DOTC et al. hardly exerted any effort to argue and

emphasize this point. They merely stated that "the alleged clarity of
AEDC's claimed legal right had been diluted by its own [joint motion]
to dismiss a previous petition for Mandamus against the Republic,
with prejudice."53 Instead, DOTC et al. chose to meet the substantive
issues raised in AEDC's petition head on.
The parties in their joint motion specifically stated that they were
"jointly mov[ing] for the dismissal [of the case] without any of the
parties admitting liability or conceding to the position taken by the
other in the instant case."54 However, the Pasig court still dismissed
the case with prejudice. For this reason, the majority ruled that
AEDC's petition is already barred by res judicata.
I disagree.
A case is barred by prior judgment or res judicata when the following

elements are present: (1) there must be a final judgment or order; (2)
it is rendered by a court having jurisdiction over the subject matter
and the parties; (3) it is a judgment or an order on the merits and (4)
there must be, between the first and the second actions, identity of
parties, of subject matter and of causes of action.55
The presence of the first two elements is not controversial. Regarding

the third element, the order of dismissal based on amicable
settlement is considered as one on the merits:
A compromise agreement once approved by final order of the

court has the force of res judicata between the parties and
should not be disturbed except for vices of consent or forgery.
Hence, a decision on a compromise agreement is final and

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executory; it has the force of law and is conclusive between
the parties.56
The agreement was considered as the decision on the case.57

Moreover, the order was specified to be with prejudice. A dismissal
with prejudice is an adjudication on the merits which finally disposes
of the controversy and it constitutes a bar to a future action unless it
is reversed.58
The fourth element is likewise present. There is identity of subject

matter which is the NAIA IPT III. There is also an identity of parties
between the instant case and the previous action by AEDC even if
the PBAC chairman and members were impleaded in the previous
action but not here:
Well settled is the rule that only substantial, and not absolute,
identity of parties is required for res judicata to lie. There is
substantial identity of parties when there is a community of
interest between a party in the first case and a party in the
second case albeit the latter was not impleaded in the first
case.59
There is a community of interest since all the respondents in both

actions were involved in the approval and implementation of the
NAIA IPT project under the BOT Law.
However, the final element is doubtful, to say the least. There is no

identity of causes of action. In the case dismissed by the Pasig court,
AEDC principally sought to prevent the award of NAIA IPT III project
to PIATCO which it argued to be unqualified to submit a bid (a fact
later confirmed by Agan in 2003 when the PIATCO contracts were
nullified.) In the present case, however, AEDC, on the strength of its
argument that it is entitled to the award of the project as an
unchallenged original proponent of an unsolicited proposal, prays
that it be awarded the project.
The Court should have therefore declined to dismiss this case on

doubtful technicality. Given the huge significance and peculiar
circumstances of this case, not to mention the great impact of this
project on the national economy and the country's reputation in the
international community, we can justifiably relax the application of
the rule on res judicata. As we emphasized in Salud v. Court of
Appeals:60
In our age, where courts are harassed by crowded dockets

and complaints against slow foot justice, frequent technical
reliance on the preclusive breadth of res judicata is
understandable. The importance of judicial economy and
avoidance of repetitive suits are strong norms in a society in
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need of swift justice. Be that as it may, there should not be a
mechanical and uncaring reliance on res judicata where more
important societal values deserve protection.61
Procedural rules are mere tools to aid the courts in the speedy, just
and inexpensive resolution of pending cases.62 Substantial justice
remains the primordial and all-important objective and, to this end,
the liberal construction of the rules may be permitted. Jurisprudence
holds that, as much as possible, cases should be decided on their
merits and not on technicalities.63 Indeed, the principle of res
judicata can rightfully be set aside in favor of substantial justice.64
We now proceed to resolve the substantive issues.
Legal right of AEDC

as Original Proponent
The proposal submitted by AEDC for the NAIA IPT III project was an
unsolicited proposal governed by Section 4-A of RA 6957, as
amended by RA 7718:65
Sec. 4.-A. Unsolicited Proposals. — Unsolicited proposals for

projects may be accepted by any government agency or
local government unit [or LGU] on a negotiated basis:
Provided, That, all the following conditions are met: (1) such
projects involve a new concept in technology and/or are not
part of the list of priority projects, (2) no direct government
guarantee, subsidy or equity is required, and (3) the
government agency or local government unit has invited by
publication, for three (3) consecutive weeks, in a newspaper of
general circulation, comparative or competitive proposals and
no other proposal is received for a period of sixty (60) working
days: Provided, further, That in the event another proponent
submits a lower price proposal, the original proponent shall
have the right to match that price within thirty (30) working
days.
The pertinent implementing rules and regulations (IRR) on unsolicited

proposals state:
Sec. 10.1. Requisites for Unsolicited Proposals. – Any

Agency/LGU may accept unsolicited proposals on a
negotiated basis provided that all the following conditions are
met:
a. the project involves a new concept or technology

and/or is not part of the list of priority projects;

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b. no direct government guarantee, subsidy or equity is
required; and
c. the Agency/LGU concerned has invited by publication,

for three (3) consecutive weeks, in a newspaper of
general circulation, comparative or competitive
proposals and no other proposal is received for a period
of sixty (60) working days. In the event that another project
proponent submits a price proposal lower than that
submitted by the original proponent, the latter shall have
the right to match said price proposal within thirty (30)
working days. Should the original project proponent fail to
match the lower price proposal submitted within the
specified period, the contract shall be awarded to the
tenderer of the lowest price. On the other hand, if the
original project proponent matches the submitted lowest
price within the specified period, he shall immediately be
awarded the project.
xxx xxx xxx
Sec. 10.6. Evaluation of Unsolicited Proposals. - The

Agency/LGU is tasked with the initial evaluation of the
proposal. The Agency/LGU shall: 1) appraise the merits of the
project; 2) evaluate the qualification of the proponent; and 3)
assess the appropriateness of the contractual arrangement
and reasonableness of the risk allocation. The Agency/LGU is
given sixty (60) days to evaluate the proposal from the date of
submission of the complete proposal. Within this 60-day period
the Agency/LGU, shall advise the proponent in writing whether
it accepts or rejects the proposal. Acceptance means
commitment of the Agency/LGU to pursue the project and
recognition of the proponent as the "original proponent." At this
point, the Agency/LGU will no longer entertain other similar
proposals until the solicitation of comparative proposals. The
implementation of the project, however, is still contingent
primarily on the approval of the appropriate approving
authorities consistent with Section 2.7 of these IRR, the
agreement between the original proponent and the
Agency/LGU of the contract terms, and the approval of the
contract by the ICC or Local Sanggunian.
xxx xxx xxx
Sec. 10.9. Negotiation With the Original Proponent. –

Immediately after ICC/Local Sanggunian's clearance of the
project, the Agency/LGU shall proceed with the in-depth
negotiation of the project scope, implementation

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arrangements and concession agreement, all of which will be
used in the Terms of Reference [TOR] for the solicitation of
comparative proposals. The Agency/LGU and the proponent
are given ninety (90) days upon receipt of ICC's approval of
the project to conclude negotiations. The Agency/LGU and the
original proponent shall negotiate in good faith. However
should there be unresolvable differences during the
negotiations, the Agency/LGU shall have the option to reject
the proposal and bid out the project. On the other hand, if the
negotiation is successfully concluded, the original proponent
shall then be required to reformat and resubmit its proposal in
accordance with the requirements of the [TOR] to facilitate
comparison with the comparative proposals. The Agency/LGU
shall validate the reformatted proposal if it meets the
requirements of the TOR prior to the issuance of the invitation
for comparative proposals.
xxx xxx xxx
Sec. 10.13. Simultaneous Qualification of the Original

Proponent. - The Agency/LGU shall qualify the original
proponent based on the provisions of Rule 5 hereof, within thirty
(30) days from start of negotiation. For consistency, the
evaluation criteria used for qualifying the original proponent
should be the same criteria used in the [TOR] for the
challengers. (Emphasis supplied)
AEDC argues that once an unsolicited proposal is accepted by the

government and the proponent assumes the status of a recognized
original proponent, the government becomes committed to pursue
the project with it (the original proponent) unless a better
competitive or comparative proposal is offered by a challenger in a
process known as the "swiss challenge" and the original proponent is
unable to match such better offer.66 It asserts that necessarily, if the
swiss challenge process fails to produce a better price offer, as in this
case, the vested right to the award of the project to the recognized
original proponent is deemed perfected and it "shall immediately be
awarded the project" by the government, consistent with the clear
intent and logical implication of Section 10.1(c) of the IRR.67
According to AEDC, the swiss challenge failed to produce a better

offer from a qualified challenger because PIATCO was found to be
ineligible and disqualified by this Court and the award to PIATCO
and all agreements it entered into with respondents DOTC et al. were
declared null and void.68
AEDC claims that this evidences its "exclusive, clear and vested
statutory right" to the formal award of the NAIA IPT III project and the

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formalization and execution of the draft concession agreement for
the operation of the project. And respondents DOTC et al. are duty
bound to recognize and give effect and protection to such right.69
Respondents DOTC et al., on the other hand, counter:
A plain reading of these provisions reveals that the BOT Law

accords the "original proponent" the following rights:
1. The right to match the lower price proposal within thirty

(30) days;
2. The right to the award of the project if the original

proponent is able to match the lower price proposal.
These are the only clear rights recognized in favor of the

original proponent in the context of a claim to the automatic
award of the [NAIA IPT III] Project, as [AEDC] prays in the instant
petition. Nothing in the BOT Law or its implementing rules says,
expressly or impliedly, that the original proponent is
automatically entitled to the award of the BOT Project in case
the award to the challenger is subsequently nullified, or if the
challenger is later declared to be unqualified, as what
transpired in the instant case. xxx70
Intent of Section 4-A of the BOT Law Is to Protect Original Proponent
As we noted in Agan, the lack of infrastructure funds has forced the

government to resort to the BOT Law which allows and even
encourages the private sector to participate in projects needed by
the public.71 Indeed, the declared policy of the law states:
It is the declared policy of the State to recognize the

indispensable role of the private sector as the main engine for
national growth and development and provide the most
appropriate incentives to mobilize private resources for the
purpose of financing the construction, operation and
maintenance of infrastructure and development projects
normally financed and undertaken by the Government. Such
incentives, aside from financial incentives as provided by law,
shall include providing a climate of minimum government
regulations and procedures and specific government
undertakings in support of the private sector.72
This is consistent with the state policy enshrined in the Constitution

that "[t]he State recognizes the indispensable role of the private
sector, encourages private enterprise, and provides incentives to
needed investments."73

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RA 7718 was later enacted introducing several amendments to the
original BOT Law (RA 6957). One such amendment was the inclusion
of unsolicited proposals (Section 4-A). In her sponsorship speech,74
then Senator Gloria Macapagal-Arroyo75 explained the concept
behind unsolicited proposals and the objective of the amendment:
Unsolicited proposals refer to proposals of the private sector for

projects not included in the medium-term infrastructure
program of the agencies. In the proposed amendments, new
and/or unsolicited proposals for national projects eligible for
implementation, which are not included in the list of projects
eligible for financing under the law and which do not involve
government financing or direct guarantee, may still be pursued
and implemented by the agencies concerned provided a
copy of each proposal and the eventual contract is submitted
to the NEDA Board for their information, within 30 days from
receipt and/or signing thereof.
The object of the amendment is to protect proponents which

have already incurred costs in the conceptual design and in
the preparation of the proposal, and which may have adopted
an imaginative method of construction or innovative concept
for the proposal. The amendment also aims to harness the
ingenuity of the private sector to come up with solutions to the
country's infrastructure problems.76 (Emphasis supplied)
Under Section 4-A, after the original proponent submits its unsolicited
proposal, other proponents may make lower price offers (referred to
as the "swiss challenge"). The original proponent has the right to
match any lower bid submitted – a form of protection and
advantage conferred on the original proponent which has already
"incurred costs in the conceptual design and in the preparation of
the proposal, and which may have adopted an imaginative method
of construction or innovative concept for the proposal."77 Because of
its valuable role in initiating an infrastructure project the government
would otherwise be unable to put up or design out of its own
resources, the original proponent is granted the option to match the
lower price proposal of any challenger.
The law recognizes the initiative and civic-mindedness, as well as the

innovative concept proposal (and the costs voluntarily assumed to
come up with it), of the original proponent. It accords him a
preferred status and vests on him the right to pursue his approved
proposal and implement the project. His status and right are tested
in the crucible of a swiss challenge and may be defeated only if and
when he fails to match the bid of a qualified winning bidder.

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Thus, the original proponent is entitled to the award of the BOT
project in the following cases:
1. no competitive bid was submitted;
2. there was a lower bid title by a qualified bidder but the

original proponent matched it and
3. there was a lower bid but it was made by a person/entity not

qualified to bid, in which case it is as if no competitive bid was
made.
The congressional deliberations show that the legislative intent was

to give protection to the original proponent. The following
statements of former Senators Neptali Gonzales and Sergio Osmeña
III during the second reading of Senate Bill No. 1586 (precursor of RA
7718) were clearly reflective of this intent:
Senator Gonzales:
xxx xxx xxx
The concept being that in case of an unsolicited proposal and

nonetheless public bidding has been held, then [the original
proponent] shall, in effect, be granted what is the equivalent of
the right of first refusal by offering a bid which shall equal or
better the bid of the winning bidder within a period of, let us
say, 30 days from the date of bidding.
Senator Osmeña:
xxx xxx xxx
To capture the tenor of the proposal of the distinguished

Gentleman, a subsequent paragraph has to be added which
says: "IF THERE IS A COMPETITIVE PROPOSAL, THE ORIGINAL
PROPONENT SHALL HAVE THE RIGHT TO EQUAL THE TERMS AND
CONDITIONS OF THE COMPETITIVE PROPOSAL."
In other words, if there is nobody who will submit a competitive

proposal, then nothing is lost. Everybody knows it, and it is open
and transparent. But if somebody comes in with another
proposal—and because it was the idea of the original
proponent—that proponent now has the right to equal the
terms of the original proposal.
Senator Gonzales:
That is the idea, Mr. President. Because it seems to me that it is

utterly unfair for one who has conceived an idea or a concept,

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spent and invested in feasibility studies, in the drawing of plans
and specifications, and the project is submitted to a public
bidding, then somebody will win on the basis of plans and
specifications and concepts conceived by the original
proponent. He should at least be given the right to submit an
equalizing bid. xxxx78 (Emphasis supplied)
As an original proponent, AEDC should rightfully be accorded this

protection.79
The majority recognizes that an original proponent of an unsolicited

proposal has rights and privileges because the law intended "to
encourage private sector initiative in conceptualizing infrastructure
projects that would benefit the public."80 However, the majority limits
the rights of an original proponent to the following: (1) the right to
match the lowest or most advantageous proposal and (2) the right
to be awarded the project in the event that the original proponent is
able to match the lowest or most advantageous proposal submitted.
Moreover, for the majority, these rights arise only when there are
other proposals submitted during the public bidding of the
infrastructure project.
The majority's reading of the law considerably waters down the rights
accorded to an original proponent. In failing to consider a situation
where either no competitive bid was submitted or a lower bid was
submitted by an entity not qualified to bid, the rights of the original
proponent are unduly subjected to the condition of the presence of
competitive bids. To reiterate, the spirit of the provision is "to protect
project proponents which have already incurred costs in the
conceptual design and in the preparation of the proposal."
Certainly, regardless of the presence of competitive bids, the original
proponent incurs costs. As such, it deserves the protection which the
law seeks to afford it. The law which seeks to encourage private
sector participation should be interpreted in a way that would
recognize, not emasculate, rights of private investors.
The Swiss Challenge Did

Not Produce a Lower Bid
Under Section 10.6 of the IRR of the BOT Law, as amended by RA

7718, after the proposal is accepted by the agency involved (in this
case respondent DOTC), the latter becomes committed to pursue
the project and can no longer entertain other similar proposals until
the solicitation of comparative proposals. In fact, AEDC, as original
proponent, and respondent DOTC already executed an MOU
wherein they agreed to fast track the project.81 In the MOU, AEDC
was also encouraged by the DOTC to commence negotiations with
its financial partners and to ensure that financial commitments and

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resources were firmed up and made available after the final
approval of the project.82 This was because, at this point, the only
thing left to be hurdled (before the project was awarded to AEDC)
was the resolution of the swiss challenge.
However, PIATCO, the lone bidder in the swiss challenge, turned out
to be unqualified. We said so in no uncertain terms in Agan. The
subsequent award of the project to it and the contracts it entered
into with the government were all nullified and voided.83 Since there
was no qualified bidder during the swiss challenge, it followed that
no other proposal(s) could have been considered by respondents
and the original proponent remained unchallenged.
This of course meant only one thing: there was no qualified

challenger to AEDC's proposal and consequently, there was no
better offer to match. The legal effect of PIATCO's disqualification
was simply that no other proposal could be deemed to have been
received during the designated period and AEDC, having complied
with all the requirements and conditions under Section 4-A of the
law, had the right to be awarded the project.
Mandamus Is Proper
Under Rule 65, Section 384 of the Rules of Court, a petition for
mandamus may be filed when any tribunal, corporation, board,
officer or person unlawfully neglects the performance of an act
which the law specifically enjoins as a duty resulting from an office,
trust or station. Mandamus is an extraordinary writ to compel the
performance, when refused, of a ministerial duty that is already
imposed on respondent and there is no other plain, speedy and
adequate remedy in the ordinary course of law. Petitioner should
have a well-defined, clear and certain legal right to the
performance of the act and it must be the clear and imperative
duty of respondent to do the act required to be done.85
Mandamus will not issue to enforce a right, or to compel

compliance with a duty, which is questionable or over which a
substantial doubt exists. The principal function of the writ of
mandamus is to command and to expedite, not to inquire and
to adjudicate; thus, it is neither the office nor the aim of the writ
to secure a legal right but to implement that which is already
established. Unless the right to the relief sought is unclouded,
mandamus will not issue.86
Mandamus applies as a remedy where petitioner's right is founded

clearly in law.87 AEDC's right to the award of the NAIA IPT III project
was clear under Section 4-A of the BOT Law (in the light of Agan)
given the fact that no better offer legally existed or could be taken

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into account. It acquired this vested right from the time PIATCO was
disqualified to bid during the swiss challenge.
Respondents argue, and the majority agreed, that there are only
two clear legal rights recognized in favor of the original proponent
under Section 4-A of the BOT Law and Section 10.1 of its IRR: (1) the
right to match the lower price proposal within 30 days and (2) the
right to the award of the project if the original proponent is able to
match the lower price proposal.
I disagree. This view fails to consider a situation wherein there is no

other qualified bidder like in the case of AEDC. Legally, the situation
is as if no competitive bid was ever submitted. We have stated that
for mandamus to issue, it is not necessary that the right and/or duty
are absolutely expressed; they must, however, be clear.88 Here, it is
obvious that the original proponent is entitled to the award in the
event that there is no other qualified bidder during the swiss
challenge. The law need not expressly state the obvious.
The parties do not dispute that the government already accepted

the unsolicited proposal of AEDC, subject only to the swiss challenge.
Section 10.1, par. (c) of the IRR states that "if the original project
proponent matches the submitted lowest price within the specified
period, [it] shall immediately be awarded the project." As a matter of
fact, there was no need for AEDC to match any lower bid for the
simple reason that there was no qualified bidder during the swiss
challenge. It therefore became the ministerial duty of respondents to
award the NAIA IPT III project to it.
Respondents DOTC et al. contend that the BOT implementing rules

have provisions on "recommendation to award" 89 and "decision to
award"90 thereby belying any duty on their part to automatically
award the project to AEDC.91 I disagree with this interpretation of the
BOT Law. It is outrageous to even suggest that a proponent's fate
can be made to hang in the balance even after the conclusion of
the swiss challenge process. At this point, it has either matched the
lower price proposal or there never was any other proposal or
challenger. Yet DOTC et al. insist that the right can still be effectively
negated at the discretion of the approving authorities. This is
oppressive to the proponent and one good way to drive away
investors from our shores, what with the uncertainty of the process
and status of their rights.
AEDC having satisfied all the requisites therefor, the writ of

mandamus shall issue. Respondents should award the NAIA IPT III
project to AEDC and formalize the NEDA-approved draft concession
agreement offered for public bidding during the swiss challenge and
turn over possession of the facilities to AEDC.92

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In finalizing the draft concession agreement, care should be taken
that the parties do not repeat the mistake of introducing "material
and substantial amendments" which resulted in the nullification of
the PIATCO contracts. It is important to note that in its
representations to this Court, AEDC obligated itself to:
1. construct an underground passenger access tunnel

connecting terminals I, II and III;93
2. complete the construction of NAIA IPT III;94
3. finance the additional investments necessary to put NAIA IPT

III in operation;95
4. reimburse the government the initial payment of

P3,002,125,000 it made to PIATCO96 and
5. pay the obligations owing to the general contractors.97
Needless to say, the government is likewise entitled to the fees and

income it should receive from AEDC under the BOT Law.
The NAIA IPT III Project

Remains a BOT Project
In view of AEDC's rights as original proponent, the NAIA IPT III project
cannot be arbitrarily removed from the coverage of the BOT Law to
its prejudice. AEDC, through no fault of its own, obviously can no
longer fulfill its obligation under the law to build the terminal since the
construction of NAIA IPT III is now substantially complete. But it can
pay whatever amount is still due, specifically the fair value of the
facility, pursuant to our ruling in Gingoyon.98
The majority ruled that the BOT Law is neither applicable nor
practicable in view of the fact that the NAIA IPT III is substantially
complete. However, the fact that the terminal is substantially built
should not be a serious hindrance to the recognition of AEDC's rights
under the BOT Law. While AEDC no longer has to build the facility as
one already exists, it will have to assume the payment due to the
builder thereof, PIATCO, and to complete the facility to make it fully
functional. It would essentially undertake the burden of building it.
Why should AEDC be penalized for having been unduly prevented
from building it?
Furthermore, building the facility is simply one stage of AEDC's

proposal and of the project. As a BOT project, the proposal also
pertained to the operation of the facility (which is also covered by
the protection of Section 4-A).99 While AEDC can no longer build the

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facility without any fault on its part, it can and should operate said
facility.
Thus, after the concession agreement is finalized, AEDC may lawfully

proceed with the operation of NAIA IPT III. Our ruling in Gingoyon:
xxx xxx xxx
(4) Applying [RA 8974], the Government is authorized to start

the implementation of the [NAIA IPT III] project by performing
the acts that are essential to the operation of the [NAIA IPT III]
as an international airport terminal upon the effectivity of the
Writ of Possession, subject to the conditions above-stated. As
prescribed by the Court, such authority encompasses "the
repair, reconditioning and improvement of the complex,
maintenance of the existing facilities and equipment,
installation of new facilities and equipment, provision of services
and facilities pertaining to the facilitation of air traffic and
transport, and other services that are integral to a modern-day
international airport."100
must be taken in the context of the legal right of AEDC to the award
of the project. This necessarily includes the turn-over of possession
and the operation of NAIA IPT III.
Accordingly, it follows that prohibition101 also lies to prevent

respondents' threatened acts to bid out or award to third parties the
operation of NAIA IPT III. Otherwise, the rights of AEDC would be
rendered inutile.
(B) G.R. No. 174166
We will first settle the procedural issues involved here.
Private respondent
has Legal Standing
Petitioner Republic argues that private respondent Baterina has no

legal standing to sue.102 According to the Republic, this Court in
Gingoyon already rejected Baterina's legal standing:
We now turn to the three (3) motions for intervention all of

which were filed after the promulgation of the Court's Decision.
All three (3) motions must be denied. Under Section 2, Rule 19
of the 1997 Rules of Civil Procedure[,] the motion to intervene
may be filed at any time before rendition of judgment by the
court. Since this case originated from an original action filed
before this Court, the appropriate time to file the motions-in-
intervention in this case if ever was before and not after

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resolution of this case. To allow intervention at this juncture
would be highly irregular. It is extremely improbable that the
movants were unaware of the pendency of the present case
before the Court, and indeed none of them allege such lack of
knowledge.
Moreover, the requisite legal interest required of a party-in-

intervention has not been established so as to warrant the
extra-ordinary step of allowing intervention at this late stage. x x
x x In the case of Representative Baterina, he invokes his
prerogative as legislator to curtail the disbursement without
appropriation of public funds to compensate PIATCO, as well
as that as a taxpayer, as the basis of his legal standing to
intervene. However, it should be noted that the amount which
the Court directed to be paid by the Government to PIATCO
was derived from the money deposited by the [MIAA], an
agency which enjoys corporate autonomy and possesses a
legal personality separate and distinct from those of the
National Government and agencies thereof whose budgets
have to be approved by Congress.
It is also observed that the interests of the movants-in-

intervention may be duly litigated in proceedings which are
extant before lower courts. There is no compelling reason to
disregard the established rules and permit the interventions
belatedly filed after the promulgation of the Court's Decision.103
It also contends Baterina lost his standing as intervenor in the

expropriation case pending before the RTC when the latter denied
his motion for intervention on August 8, 2006.104
Baterina counters that the Court in Gingoyon did not actually rule
that he had no legal standing to intervene.105 It simply denied the
motion because it was filed only after the rendition of the decision.106
Moreover, the Court merely "noted" that the proffered value was
derived from money deposited by MIAA and did not make any
conclusion, whether of law or fact.107 In addition, the December 13,
2005 order which recognized his standing to intervene was already
final, thus Acting Presiding Judge Mupas of the expropriation court
committed grave abuse of discretion when he reconsidered this
ruling in his August 8, 2006 order.108
Legal standing or locus standi is a party's personal and substantial

interest in a case such that he has sustained or will sustain direct
injury as a result of the governmental act being challenged.109 It calls
for more than just a generalized grievance.110 The term "interest"
means a material interest, an interest in the issue affected by the
govermental act, as distinguished from mere interest in the question

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involved or a mere incidental interest.111 Here, Baterina invoked that
his being a legislator, taxpayer, concerned citizen, and the
transcendental importance of the issues involved, imbued him with
standing to intervene in the expropriation case.112
We need not go into an extensive discussion of this point. Being a

mere procedural technicality, the requirement of legal standing may
be waived or relaxed by the Court in the exercise of its discretion.
Hence, in Agan, we ruled that:
Standing is a peculiar concept in constitutional law because in

some cases, suits are not brought by parties who have been
personally injured by the operation of a law or any other
government act but by concerned citizens, taxpayers or voters
who actually sue in the public interest. Although we are not
unmindful of the cases of Imus Electric Co. v. Municipality of
Imus and Gonzales v. Raquiza wherein this Court held that
appropriation must be made only on amounts immediately
demandable, public interest demands that we take a more
liberal view in determining whether the petitioners suing as
legislators, taxpayers and citizens have locus standi to file the
instant petition. In Kilosbayan, Inc. v. Guingona, this Court held
"[i]n line with the liberal policy of this Court on locus standi,
ordinary taxpayers, members of Congress, and even
association of planters, and non-profit civic organizations were
allowed to initiate and prosecute actions before this Court to
question the constitutionality or validity of laws, acts, decisions,
rulings, or orders of various government agencies or
instrumentalities," Further, "insofar as taxpayers' suits are
concerned . . . (this Court) is not devoid of discretion as to
whether or not it should be entertained." As such ". . . even if,
strictly speaking, they [the petitioners] are not covered by the
definition, it is still within the wide discretion of the Court to
waive the requirement and so remove the impediment to its
addressing and resolving the serious constitutional questions
raised." In view of the serious legal questions involved and their
impact on public interest, we resolve to grant standing to the
petitioners.113 (Emphasis supplied)
The issues raised in these petitions involving an airport terminal

costing more than P3 billion have a great impact on public interest.
Given the transcendental importance of the case, we grant
standing to Baterina.
Technicalities May Be Set Aside Where The

Issues are of Transcendental Importance

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The remaining relief being pursued by the Republic in G.R. No.
174166 is the issuance of a writ of injunction permanently enjoining
the CA from proceeding with and resolving CA-G.R. SP No. 95539,
the petition filed by Baterina.114
In CA-G.R. SP No. 95539, Baterina basically wanted to stop the

payment to PIATCO of the P3,002,125,000 proffered value of NAIA IPT
III115 and for the expropriation court to first resolve the issue of the
ownership of NAIA IPT III and its propriety as an object of
expropriation.
Considering that payment (a supervening event) has already been

released to and received by PIATCO and the fact that CA-G.R. SP
No. 95539 was already dismissed by the CA, the Republic's petition
may well be considered moot and academic. However, both the
Republic and Baterina have signified their desire to submit for
resolution of this Court the substantive issues raised by Baterina in the
expropriation court.116 As we already stated and discussed, this case
involves matters of transcendental importance which should not be
evaded. It is imperative that all pertinent unanswered questions
which remain obstacles to the operationalization of NAIA IPT III be
resolved immediately and completely. We may settle these
substantive issues here and now, considering that these are
questions of law cognizable by this Court.
Furthermore, the Court can relax or even suspend its procedural rules
in the exercise of its inherent power under the Constitution "to
promulgate rules concerning … pleading, practice and procedure
in all courts."117 Besides, this Court is the final arbiter of all legal
questions or controversies.
Thus, the Court may dispense with the normal procedure of

remanding the case to the expropriation court in order to avoid
further delays in the resolution of the case.118 It can consider the
substantive issues raised by Baterina as properly brought before this
Court and rule on them accordingly.
Now, the substantive issues.
Republic May Properly Resort To

Expropriation of NAIA IPT III
The power of eminent domain is the inherent right of the State to

condemn private property for public use upon payment of just
compensation.119 Thus, for expropriation to be valid, the following
requirements must be met: (1) the taking must be for public use and
(2) just compensation must be paid to the owner of the private
property.120

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At the very heart of Baterina's intervention in the expropriation case
is his argument that the Republic could not rightfully expropriate
NAIA IPT III because the government already owned it. Stated
differently, PIATCO, as builder of the structure under a BOT
arrangement, never owned NAIA IPT III. It was the Republic, from the
onset, which owned it because:
1. Sec. 2 (b) of the BOT Law121 does not contemplate that

ownership over the built structure is vested upon the project
proponent;
2. If the legislature intended that the project proponent would

have ownership of the structure, then the BOT Law would have
simply said so;
3. The statement in Tatad v. Garcia, Jr.122 regarding the

ownership of structures built under a BOT arrangement is obiter
dictum; and
4. NAIA IPT III was built on land owned by the BCDA thus it
belongs to the owner of the land under the Civil Code.123
I disagree. The builder in a BOT arrangement is the owner of the

facilities it builds.
In Tatad v. Garcia, we ruled that a foreign corporation which

constructed the facilities of EDSA Light Rail Transit III under a Build-
Lease-Transfer scheme was the owner of such facilities:
What private respondent owns are the rail tracks, rolling stocks
like the coaches, rail stations, terminals and the power plant,
not a public utility. xxx What constitutes a public utility is not
their ownership but their use to serve the public.
The Constitution, in no uncertain terms, requires a franchise for

the operation of a public utility. However, it does not require a
franchise before one can own the facilities needed to operate
a public utility so long as it does not operate them to serve the
public.
xxx xxx xxx
In law, there is a clear distinction between the "operation" of a

public utility and the ownership of the facilities and equipment
used to serve the public.
Ownership is defined as a relation in law by virtue of which a

thing pertaining to one person is completely subjected to his
will in everything not prohibited by law or the concurrence with
the rights of another.
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xxx xxx xxx
The right to operate a public utility may exist independently

and separately from the ownership of the facilities thereof. One
can own said facilities without operating them as a public
utility, or conversely, one may operate a public utility without
owning the facilities used to serve the public. xxxx
xxx xxx xxx
The BOT scheme is expressly defined as one where the

contractor undertakes the construction and financing of an
infrastructure facility, and operates and maintains the same.
The contractor operates the facility for a fixed period during
which it may recover its expenses and investment in the project
plus a reasonable rate of return thereon. After the expiration of
the agreed term, the contractor transfers the ownership and
operation of the project to the government.124 (Emphasis
supplied)
There is no reason why this ruling should not apply here.
We already stated in Gingoyon that:
x x x In Tatad v. Garcia, the Court acknowledged that the

operator of the EDSA Light Rail Transit project under a BOT
scheme was the owner of the facilities such as "the rail tracks,
rolling stocks like the coaches, rail stations, terminals and the
power plant."
There can be no doubt that PIATCO has ownership rights over

the facilities which it had financed and constructed. The 2004
[Agan] Resolution squarely recognized that right when it
mandated the payment of just compensation to PIATCO prior
to the takeover by the Government of [NAIA IPT III]. The fact
that the Government resorted to eminent domain proceedings
in the first place is a concession on its part of PIATCO's
ownership. Indeed, if no such right is recognized, then there
should be no impediment for the Government to seize control
of NAIA 3 through ordinary ejectment proceedings.
Since the rights of PIATCO over the NAIA 3 facilities are

established, the nature of these facilities should now be
determined. x x x125 (Emphasis supplied)
To construe the BOT law the other way would be highly prejudicial to
the proponent/builder of the project. The proponent/builder who
spends a tremendous amount of money on the facilities has

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ownership rights126 over what it builds. Its rights are of course limited
by the provisions of the BOT law and other relevant laws.
The correctness or propriety of the expropriation of NAIA IPT III was

assumed in Gingoyon. It was not even an issue there because the
question squarely confronted was which law (Rule 67 of the Rules of
Court or RA 8974) should govern the valuation of the subject matter
of the expropriation proceedings. To resolve this, the Court, precisely,
had to first accept the propriety of the expropriation:
The Government has chosen to resort to expropriation, a

remedy available under the law, which has the added benefit
of an integrated process for the determination of just
compensation and the payment thereof to PIATCO. We
appreciate that the case at bar is a highly unusual case,
whereby the Government seeks to expropriate a building
complex constructed on land which the State already owns.
There is an inherent illogic in the resort to eminent domain on
property already owned by the State. At first blush, since the
State already owns the property on which [NAIA IPT III] stands,
the proper remedy should be akin to an action for ejectment.
However, the reason for the resort by the Government to

expropriation proceedings is understandable in this case. The
2004 [Agan] Resolution, in requiring the payment of just
compensation prior to the takeover by the Government of
[NAIA IPT III], effectively precluded it from acquiring possession
or ownership of the [NAIA IPT III] through the unilateral exercise
of its rights as the owner of the ground on which the facilities
stood. Thus, as things stood after the 2004 [Agan] Resolution,
the right of the Government to take over the [NAIA IPT III]
terminal was preconditioned by lawful order on the payment of
just compensation to PIATCO as builder of the structures.
The determination of just compensation could very well be

agreed upon by the parties without judicial intervention, and it
appears that steps towards that direction had been engaged
in. Still, ultimately, the Government resorted to its inherent
power of eminent domain through expropriation proceedings.
Is eminent domain appropriate in the first place, with due
regard not only to the law on expropriation but also to the
Court's 2004 Resolution in Agan?
The right of eminent domain extends to personal and real

property, and the [NAIA IPT III] structures, adhered as they are
to the soil, are considered as real property. The public purpose
for the expropriation is also beyond dispute. It should also be
noted that Section 1 of Rule 67 (on Expropriation) recognizes

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the possibility that the property sought to be expropriated may
be titled in the name of the Republic of the Philippines,
although occupied by private individuals, and in such case an
averment to that effect should be made in the complaint. The
instant expropriation complaint did aver that the [NAIA IPT III]
complex "stands on a parcel of land owned by the Bases
Conversion Development Authority, another agency of [the
Republic of the Philippines]."
Admittedly, eminent domain is not the sole judicial recourse by

which the Government may have acquired the [NAIA IPT III]
facilities while satisfying the requisites in the 2004 [Agan]
Resolution. Eminent domain though may be the most effective,
as well as the speediest means by which such goals may be
accomplished. Not only does it enable immediate possession
after satisfaction of the requisites under the law, it also has a
built-in procedure through which just compensation may be
ascertained. Thus, there should be no question as to the
propriety of eminent domain proceedings in this case.127
(Emphasis supplied)
In recognizing the right of AEDC to the award of the NAIA IPT III
project, would the public purpose of the expropriation be defeated
by the government's taking over a privately owned structure, only to
turn over its operation to another private entity (AEDC)? The answer
is no.
To be valid, the taking must be for public use. The meaning of the
term "public use" has evolved over time in response to changing
public needs and exigencies. Public use which was traditionally
understood as strictly limited to actual "use by the public" has
already been abandoned.128 "Public use" has `now been held to be
synonymous with "public interest," "public benefit," "public welfare"
and "public convenience."129 It includes the broader notion of
indirect public benefit or advantage.130 Whatever may be
beneficially employed for the general welfare satisfies the
requirement of public use.131
In the 2006 case of Didipio Earth-Savers' Multi-Purpose Association,

Incorporated (DESAMA) v. Gozun,132 we considered the taking of
land by the State to enable holders of Financial and Technical
Assistant Agreements to pursue their mining operations as taking for
a public use since "mining is an industry which is of public benefit." 133
We said: "That public use is negated by the fact that the State would
be taking private properties for the benefit of private mining firms or
mining contractors is not at all true."134

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We took our cue from earlier cases wherein we considered the
expanded and modern meaning of "public use:"
1. In Heirs of Juancho Ardona v. Reyes,135 we held that

promotion of tourism is within the meaning of "public use"—
The petitioners' contention that the promotion of tourism is

not "public use" because private concessionaires would
be allowed to maintain various facilities such as
restaurants, hotels, stores, etc. inside the tourist complex is
impressed with even less merit. Private bus firms, taxicab
fleets, roadside restaurants, and other private businesses
using public streets and highways do not diminish in the
least bit the public character of expropriations for roads
and streets. The lease of store spaces in underpasses of
streets built on expropriated land does not make the
taking for a private purpose. Airports and piers catering
exclusively to private airlines and shipping companies are
still for public use. The expropriation of private land for
slum clearance and urban development is for a public
purpose even if the developed area is later sold to private
homeowners, commercial firms, entertainment and
service companies, and other private concerns.136
(Emphasis supplied)
2. In Estate of Salud Jimenez v. Philippine Export Processing

Zone,137 we ruled that the establishment of an export
processing zone is a legitimate public purpose notwithstanding
that portion of the land was leased to private commercial
banks:
… The expropriation of Lot 1406-B for the purpose of being

leased to [commercial] banks and for the construction of
a [transportation] terminal has the purpose of making
banking and transportation facilities easily accessible to
the persons working at the industries located in [the
Philippine Export Processing Zone].138
3. In Reyes v. National Housing Authority,139 we stated that the

low cost housing project on the expropriated lots is compliant
with the "public use" requirement:
The act of respondent [National Housing Authority] in

entering into a contract with a real estate developer for
the construction of low cost housing on the expropriated
lots to be sold to qualified low income beneficiaries
cannot be taken to mean as a deviation from the stated
public purpose of their taking.140 (Emphasis supplied)

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Clearly, the State, through expropriation proceedings, may take
private property even if, admittedly, it will transfer this property again
to another private party as long as there is a public purpose to the
taking. In 2005, the United States Supreme Court held in Kelo v. New
London141 that promotion of economic development qualifies as a
public use even if private parties are benefited:
Quite simply, the government's pursuit of a public purpose will

often benefit individual private parties. For example, in Midkiff,
the forced transfer of property conferred a direct and
significant benefit on those lessees who were previously unable
to purchase their homes. In Monsanto, we recognized that the
"most direct beneficiaries" of the data-sharing provisions were
the subsequent pesticide applicants, but benefiting them in this
way was necessary to promoting competition in the pesticide
market. The owner of the department store in Berman objected
to "taking from one businessman for the benefit of another
businessman," referring to the fact that under the
redevelopment plan land would be leased or sold to private
developers for redevelopment. Our rejection of that contention
has particular relevance to the instant case: "The public end
may be as well or better served through an agency of private
enterprise than through a department of government–or so the
Congress might conclude. We cannot say that public
ownership is the sole method of promoting the public purposes
of community redevelopment projects."142
Expropriation may have been viewed as illogical 143 or problematic

but there was no doubt that the government had the power and
right to institute such proceedings as long as the requisites for its valid
exercise were present, as they are here. Consequently, the
P3,002,125,000 paid by the Republic to PIATCO as proffered value of
the expropriated structure was held to be valid. AEDC will reimburse
this amount to the Republic in consonance with our ruling that it
(AEDC) shall assume the payment of just compensation due to
PIATCO.
DETERMINATION OF
JUST COMPENSATION IS A
JUDICIAL FUNCTION
Baterina argues that if expropriation is permitted, PIATCO will be

entitled to just compensation based on the
replacement cost of the structures which will include contractor's

profit and overhead costs.144 He asserts that PIATCO is, at best, only
entitled to recover its costs on the basis of quantum meruit and, at

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worst, is not at all entitled to compensation since it is guilty of fraud
and bad faith.145
The Republic counters that nothing in RA 8974 precludes the

expropriation court from considering evidence of illegality or
wrongdoing on the part of PIATCO in the determination of just
compensation.146
I agree with the Republic.
In Agan, we stated:
This Court, however, is not unmindful of the reality that the

structures comprising the NAIA IPT III facility are almost
complete and that funds have been spent by PIATCO in their
construction. For the government to take over the said facility,
it has to compensate [PIATCO] as builder of the said structures.
The compensation must be just and in accordance with law
and equity for the government can not unjustly enrich itself at
the expense of PIATCO and its investors.147 (Emphasis supplied)
In determining the proper amount to be paid under RA 8974, we

held in Gingoyon that:
Under [RA 8974], the Government is required to "immediately

pay" the owner of the property the amount equivalent to the
sum of (1) one hundred percent (100%) of the value of the
property based on the current relevant zonal valuation of the
[BIR]; and (2) the value of the improvements and/or structures
as determined under Section 7. As stated above, the BIR zonal
valuation cannot apply in this case, thus the amount subject to
immediate payment should be limited to "the value of the
improvements and/or structures as determined under Section
7," with Section 7 referring to the "implementing rules and
regulations for the equitable valuation of the improvements
and/or structures on the land." Under the present implementing
rules in place, the valuation of the improvements/structures are
to be based using "the replacement cost method." However,
the replacement cost is only one of the factors to be
considered in determining the just compensation.
In addition to [RA 8974], the 2004 Resolution in Agan also

mandated that the payment of just compensation should be in
accordance with equity as well. Thus, in ascertaining the
ultimate amount of just compensation, the duty of the trial court
is to ensure that such amount conforms not only to the law,
such as [RA 8974], but to principles of equity as well.148
(Emphasis supplied)

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As we stated in Agan (which we likewise recognized in Gingoyon),
compensation must conform not only with law but equity as well. This
means that the expropriation court is not confined to strictly
following the formula spelled out in the law and instead is given
latitude in its determination of the compensation due to PIATCO.149
After all, the determination of just compensation is a judicial
function.
Equity is defined as justice outside law, being ethical rather than jural
and belonging to the sphere of morals than of law.150 It is grounded
on the precepts of conscience and not on any sanction of positive
law.151 Hence, equity finds no room for application where there is
law.152 It cannot prevail over an express provision of the law.
However, it is
… a complement of legal jurisdiction [that] seeks to reach and

to complete justice where courts of law, through the inflexibility
of their rules and want of power to adapt their judgments to
the special circumstances of cases, are incompetent to do so.
x x x153
Equity is a principle which takes into consideration the particular and

special circumstances of the case so as to prevent inflicting
unintended injustice on a party. Its application should not deprive
any party of an existing right, but should render complete justice to
one with a meritorious cause.
The determination of the final amount of fair and just

compensation154 due PIATCO remains the task of the expropriation
court.
Equity seeks to render complete justice by correcting deficiencies or

flaws in the law. It affords the expropriation court flexibility to take
into consideration factors which it could not have considered if it
applied RA 8974 alone. Needless to state, the just compensation
owing to PIATCO for the construction of NAIA IPT III should not
include any amounts that are bloated or unreasonable and those
that involve illegality, bribery, corruption, collusion, fraud and
contravention of public policy. Defects in the terminal and the
amounts needed to correct them, specially those affecting public
safety, must also be excluded. Therefore, Baterina's misgivings that
PIATCO will be unjustly rewarded for its supposed wrongdoings have
no basis and are merely speculative.
In line with this, Baterina's prayer that the Solicitor General be

directed to disclose evidence its office has gathered on PIATCO's
alleged bad faith, corruption and fraud should be denied for being
premature. The government must be given the chance to present its
evidence as it deems fit. In this connection, since AEDC will
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ultimately shoulder the just compensation to be paid to PIATCO, it
should be allowed to intervene in the expropriation proceedings.155
A Final Note
The BOT Law, as amended, was enacted to mobilize the resources of

the private sector for the economic development of the country.
AEDC took one step further and submitted an unsolicited proposal.
The BOT scheme, no matter how laudable its objectives, will not
attain its ends if the legal rights of an original proponent under the
law are not recognized.
It may be claimed that maintaining the nature of NAIA IPT III as a BOT
project is inherently incompatible with the continuation of the
expropriation proceedings. I think not. The vested right of AEDC to
be awarded the project should be balanced with the legal authority
of the government to expropriate the terminal. The right of AEDC
does not nullify the authority of the government and vice versa. In
the absence of any prohibition under our laws, this Court should
uphold both.
With due respect to the majority, AEDC should be allowed to pursue

the project it conceived, designed and proposed. This will uphold its
rights as an original proponent under the BOT Law, satisfy the just
compensation owing to PIATCO at no cost to the government and
finally bring about the long overdue operationalization of NAIA IPT III
as committed by the Philippine government on January 25, 2008 at
the World Economic Forum in Davos, Switzerland, not to mention the
generation of the revenues that the government is entitled to under
the BOT Law. Ultimately, it is public welfare that will benefit from the
operation of a fully functional world-class airport terminal.
The finality of this decision will effectively end the first phase of the
expropriation proceedings given that we have categorically upheld
the legal authority of the Republic to expropriate NAIA IPT III. There
should be no more hindrance to the determination by the
expropriation court of the final amount of just compensation (in
accordance with law and equity) to be paid to PIATCO. As we have
also ruled on the issues raised by Baterina, there is no need to
maintain CA-G.R. SP No. 95539. Hence, it is dismissed.
Accordingly, I vote that the petition for mandamus and prohibition in

G.R. No 169914 be GRANTED. Respondents, their officers, agents,
successors, representatives or persons or entities acting on their
behalf should be ordered to:
1) formally award the NAIA IPT III project to AEDC;

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2) execute and formalize with AEDC the approved draft
concession agreement (with a provision on the assignment to
and assumption by AEDC of the national government's
obligation to pay just compensation to PIATCO) and
3) cease and desist from entering into any concession contract

with third parties for the operation of the NAIA IPT III project.
On the other hand, the petition for certiorari and prohibition in G.R.
No. 174166 should be DISMISSED for being moot and academic.
RENATO C. CORONA
Associate Justice
Footnotes
1 Penned by Associate Justice Renato C. Dacudao (retired)
and concurred in by Associate Justices Rosmari D. Carandang
and Estela M. Perlas-Bernabe of the Eighth Division of the CA;
rollo (G.R. No. 174166), pp. 60-61.
2 G.R. Nos. 155001, 155547, 155661 (450 Phil. 744).
3 G.R. No. 166429, 478 SCRA 474.
4 An Act to Facilitate the Acquisition of Right-of-Way, Site or
Location for National Government Infrastructure Projects and
for Other Purposes.
5In his capacity as Secretary of Transportation and
Communication.
6 Rollo (G.R. No. 169914), p. 58.
7This was rendered moot when the CA issued a resolution
dated September 8, 2006 lifting the TRO issued by virtue of the
August 24, 2006 resolution and setting aside the said resolution.
8 Rollo (G.R. No. 174166), pp. 53-54.
9 Supra note 2, at 788-789.
10 Rollo (G.R. No. 169914), pp. 107-108.
11 Supra note 2, at 788-796.
12 Rollo (G.R. No. 169914), p. 297.
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13 The causes of action were the following:
"FIRST CAUSE OF ACTION
58. x x x [T]he Joint Venture has failed to fulfill the

requirements to prequalify since: (a) the designated
facility operator of the Joint Venture for the [NAIA IPT III]
Project does not possess the nationality requirement
imposed by the Constitution, the BOT Law, the IRR and the
PBAC Bid Documents and Bulletins; and (b) the Joint
Venture does not possess the minimum financial
capability to qualify as a challenge bidder for the NAIA IPT
III Project as required by the BOT law, the IRR and the
PBAC Bid Documents and Bulletins.
59. The prequalification of the Joint Venture being

contrary to the Constitution, the law, the IRR and the Bid
Documents and Bulletins, as well as being attended with
serious irregularities, all proceedings in connection
therewith should be declared null and void and the Joint
Venture should be declared disqualified as a challenge
bidder to the NAIA IPT III Project.
SECOND CAUSE OF ACTION
xxx xxx xxx
61. There being no valid and legal challenge bid,

respondents, and all persons doing under them, should be
permanently enjoined from conducting proceedings on
the challenge bid of the Joint Venture which is void ab
initio, including the awarding of the subject Concession
Agreement, and the implementation of said Concession
Agreement if already awarded. Thus, respondents should
be directed to act on petitioner's unsolicited proposal
without considering the void challenge bid of the Joint
Venture.
THIRD CAUSE OF ACTION
xxx xxx xxx
63. Assuming arguendo that the Joint Venture has legally

fulfilled the requirements for prequalification set under the
BOT Law and the IRR, it should still be disqualified for failing
to comply with the mandatory requirements within the
periods prescribed under the BOT law and the IRR.

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64. Pursuant to the same BOT Law, the DOTC should
award the NAIA IPT III Project to petitioner, in the absence
of any other qualified proponent submitting a competitive
bid in an unsolicited proposal." (Id. at 333-335.)
14AEDC's Memorandum, p. 4. The order issued by First Vice-
Executive Judge Alfredo C. Flores states in full:
"Submitted for resolution is a 'Joint Motion To Dismiss.'
Extant on the motion is the signature of Lucio C. Tan in

representation of [AEDC] assisted by the Law Firm of
Carpio Villaraza & Cruz. The Secretary of [DOTC], the
Honorable Vicente C. Rivera, Jr., on his behalf and on
behalf of the other respondents, signed, assisted by the
Solicitor General, the Honorable Ricardo P. Galvez. It
bears the Conforme of the Executive Secretary, the
Honorable Ronaldo B. Zamora.
Finding the "Joint Motion To Dismiss" in order, being

premised upon amicable settlement, let this case be, as it
is hereby DISMISSED with prejudice. Cost de oficio.
SO ORDERED."
15 The motion states in full:
"JOINT MOTION TO DISMISS
The parties, assisted by their respective counsel,

respectfully state:
1. [PIATCO] and the respondents have submitted to

petitioner [AEDC], through the Office of the Executive
Secretary, Malacañang, a copy of the Concession
Agreement (attached as Annex "A") which they executed
for the construction and operation of the [NAIA IPT III
Project] which petitioner requested.
2. Consequently, the parties have decided to amicably

settle the instant case and jointly move for the dismissal
thereof without any of the parties admitting liability or
conceding to the position taken by the other in the instant
case.
3. Petitioner, on the one hand, and the respondents, on

the other hand, hereby release and forever discharge
each other from any and all liabilities, direct or indirect,
whether criminal or civil, which arose in connection with
the instant case.
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4. The parties agree to bear the costs, attorney's fees and
other expenses they respectively incurred in connection
with the instant case.
PRAYER
WHEREFORE, it is respectfully prayed that the instant case

be dismissed." (Id. at 349-350.)
16 Supra note 2, at 678-679.
17 Id., p. 678.
Presided by Judge Henrick Gingoyon (now deceased). He

18
was replaced by Judge Jesus B. Mupas.

19 Supra note 3, at 548-550.
Together with Clavel Martinez, Hermy Banico, Francisco B.

20
Mero and Carlito P. Rallistan; rollo, (G.R. No. 174166), p. 20.

21 Id., p. 21.
22 Baterina's Comment with Prayer for Affirmative Reliefs, p. 6.
23 Id., p. 7.
24 Rollo (G.R. No. 169914), p. 31.
25 Id., p. 364.
26 Rollo (G.R. No. 174166), p. 21.
27 Id., pp. 21-22.
28 Supra note 22, at 13.
29 481 SCRA 457.
30 Rollo (G.R. No. 174166), p. 23.
32 Rollo (G.R. No. 174166), p. 24.
33 Id.
34 Id.
35 Id., p. 25.
36 Id., p. 26.
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37 Id.
The other intervenors did not join Baterina in the petition

38
before the CA; id., p. 27.

39Id., pp. 27, 363-365. In the petition entitled "Salacnib F.
Baterina v. Hon. Jesus B. Mupas, in his capacity as Acting
Presiding Judge of the [RTC] of Pasay City, Branch 117,
Republic of the Philippines, [DOTC], [MIAA], and [PIATCO],"
Baterina sought the following reliefs:
"A. Upon the filing of this Petition, to issue a [TRO] directing

Public Respondent Judge to desist and desist from
implementing the assailed Orders or otherwise causing
payment of the proffered amount to PIATCO, and from
further proceeding with the determination of just
compensation in the expropriation case until such time
that:
i. Petitioner's Motion to Declare in Default and

Motion for Partial Summary Judgment shall have
been received by the [RTC];
ii. It is clarified that PIATCO categorically disputes the

proffered value for [NAIA IPT III];
iii. It is clarified that Public Respondents have been

specifically authorized by the President of the
Republic of the Philippines to file the Complaint for
expropriation of [NAIA IPT III].
B. After further proceedings, to issue a Writ of Preliminary

Injunction restraining Public Respondent Judge to cease
and desist from implementing the assailed Orders or
otherwise causing payment of the proffered amount to
PIATCO, and from further proceeding with the
determination of just compensation in the expropriation
case until such time that:
i. Petitioner's Motion to Declare in Default and

Motion for Partial Summary Judgment shall have
been resolved by the [RTC];
ii. It is clarified that PIATCO categorically disputes the

proffered value for [NAIA IPT III]; and
iii. It is clarified that Public Respondents have been

specifically authorized by the President of the

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Republic of the Philippines to file the Complaint for
expropriation of [NAIA IPT III].
C. To declare and set aside as null and void the Orders

dated 27 March 2006 and 15 June 2006 and the Writ of
Execution dated 27 March 2006.
D. To direct the [RTC] of Pasay City, Branch 117, to

forthwith [resolve] Petitioner's Motion to Declare in Default
and Motion for Partial Summary Judgment dated 22
March 2006.
Other reliefs, just and equitable in the premises, are likewise

prayed for."
40 Id., pp. 28-29.
41 Id., p. 29.
42Republic of the Philippines, DOTC, MIAA and PIATCO; id., p.
60.
The order and writ of execution both dated March 27, 2006
43
and order dated June 15, 2006; id., p. 301.

44 Id., pp. 60-61.
45 Republic's Consolidated Memorandum, p. 12.
46 Id.
47 Land Bank Manager's Check No. 0000008082; id.
48 Id.
49 Id.
50This was consolidated with CA-G.R. SP No. 95583 entitled
"Manuel L. Fortes, Jr. v. Hon. Jesus B. Mupas, in his capacity as
Acting Presiding Judge of the Regional Trial Court of Pasay City,
Branch 117, Republic of the Philippines, Department of
Transportation and Communications, Manila International
Airport Authority and Philippine International Air Terminals Co.,
Inc." in a resolution dated October 13, 2006.
51Associate Justice Estela M. Perlas-Bernabe was replaced by
Associate Justice Monina Arevalo Zenarosa in the Special
Former Eighth Division.
52 Rollo (G.R. No. 169914), p. 33.

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54 Supra note 14.
55Balanay v. Paderanga, G.R. No. 136963, 28 August 2006,
citations omitted.
56 Martir v. Verano, G.R. No. 170395, 28 July 2006.
57Philippine National Oil Company-Energy Development
Corporation (PNOC-EDC) v. Abella, G.R. No. 153904, 17
January 2005, 448 SCRA 549, 566.
58Nabus v. Court of Appeals, G.R. No. 91670, 7 February 1991,
193 SCRA 732, 741.
59 Supra note 53.
60 G.R. No. 100156, 27 June 1994, 233 SCRA 384.
61 Id., p. 389.
62 Sanchez v. Court of Appeals, G.R. No. 152766, June 20, 2003.
63Herrera, Comments on the 1997 Rules of Civil Procedure as
Amended (1st Ed., 1997), p. 22, citing Pacific Asia Overseas
Shipping Corp. v. NLRC, G.R. No. 76595, 6 May 1988, 161 SCRA
122; The International Corporate Bank, Inc. v. The Intermediate
Appellate Court et al., G.R. No. 69560, 30 June 1988, 163 SCRA
296.
64 De Leon v. Balinag, G.R. No. 169996, 11 August 2006.
65 Act Amending Certain Sections of Republic Act No. 6957,
Entitled "An Act Authorizing the Financing, Construction,
Operation and Maintenance of Infrastructure Projects by the
Private Sector, and for Other Purposes."
66 Rollo (G.R. No. 169914), pp. 35-38.
67 Id.
68 Id.
69 Id., pp. 41 and 44.
70 Id., pp. 451-452.
72 RA 6957 (1990), as amended by RA 7718 (1994), Sec. 1.

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73 Art. II, Sec. 20.
74 On Senate Bill No. 1586.
75 Now incumbent President of the Republic of the Philippines.
76January 25, 1994, Senate deliberations; rollo (G.R. No.
169914), p. 75.
77 Id.
78 March 1, 1994, Senate deliberations; id. at 369.
79 Counsel of AEDC stated during the oral arguments on
November 14, 2006 that his client spent around P180,000,000 for
its expenses as original proponent; TSN, p. 71.
80 Majority opinion, p. 22.
81 Supra note 10.
82 Id.
83 Supra note 2, at 653 and 679.
84SEC. 3. Petition for Mandamus. — When any tribunal,
corporation, board, officer or person unlawfully neglects the
performance of an act which the law specifically enjoins as a
duty resulting from an office, trust, or station, or unlawfully
excludes another from the use and enjoyment of a right or
office to which such other is entitled, and there is no other
plain, speedy and adequate remedy in the ordinary course of
law, the person aggrieved thereby may file a verified petition in
the proper court, alleging the facts with certainty and praying
that judgment be rendered commanding the respondent,
immediately or at some other time to be specified by the court,
to do the act required to be done to protect the rights of the
petitioner, and to pay the damages sustained by the petitioner
by reason of the wrongful acts of the respondent. xxx
85University of San Agustin, Inc. v. Court of Appeals, G.R. No.
100588, 7 March 1994, 230 SCRA 761, 771, citations omitted.
86BPI Family Savings Bank, Inc. v. Manikan, G.R. No. 148789, 16
January 2003, 395 SCRA 373, 375, citing Pacheco v. Court of
Appeals, 389 Phil. 200 (2000).
87 Pacheco v. Court of Appeals, id. at 203, citation omitted.
88 Supra note 84.

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89Rule 11, Sec. 11.1. Recommendation to Award. - Within seven
(7) calendar days from the date the financial evaluation shall
have been completed, the Agency/LGU PBAC will submit a
recommendation of award to the Head of Agency/LGU. The
PBAC will prepare and submit a detailed
evaluation/assessment report on its decision regarding the
evaluation of the bids and explain in clear terms the basis of its
recommendations.
90 Rule 11, Sec. 11.2. Decision to Award. – Within seven (7)
calendar days from the submission by PBAC of the
recommendation to award, the Agency/LGU Head shall
decide on the award. The approval shall be manifested by
signing and issuing the Notice of Award to the awardee within
seven (7) calendar days from approval thereof.
91 Rollo (G.R. No. 169914), p. 454.
93 AEDC's Memorandum, p. 35.
94 Id., p. 36.
95 Id., p. 43.
96 Id.
97TSN of November 14, 2006 Oral Arguments, pp. 28, 179-180.
These are the Takenaka and Asahikosan Corporations.
98 The dispositive portion of the decision states:
xxx xxx xxx
3) RTC Branch 117 is hereby directed, within sixty (60) days

from finality of this Decision, to determine the just
compensation to be paid to PIATCO by the Government;
(Republic v. Gingoyon, supra note 3, at 550).
99Indeed, Sec. 2 (b) of RA 6957, as amended by RA 7718,
defines a BOT project as "[a] contractual arrangement
whereby the project proponent undertakes the construction,
including financing, of a given infrastructure facility, and the
operation and maintenance thereof…."
Sec. 2. Petition for prohibition. — When the proceedings of

101
any tribunal, corporation, board, officer or person, whether

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exercising judicial, quasi-judicial or ministerial functions, are
without or in excess of its or his jurisdiction, or with grave abuse
of discretion amounting to lack or excess of jurisdiction, and
there is no appeal or any other plain, speedy, and adequate
remedy in the ordinary course of law, a person aggrieved
thereby may file a verified petition in the proper court, alleging
the facts with certainty and praying that judgment be
rendered commanding the respondent to desist from further
proceedings in the action or matter specified therein, or
otherwise granting such incidental reliefs as law and justice
may require. xxxx
102 Rollo (G.R. No. 174166), p. 43.
103 Supra note 28, at 470-471.
104 Rollo (G.R. No. 174166), p. 44.
106 Id.
107 Id., p. 63.
108According to Baterina, this Order is now the subject of a
Supplemental Petition for Certiorari and Prohibition he filed in
the CA; id., pp. 67-68.
Integrated Bar of the Philippines v. Zamora, 392 Phil. 618, 632-

109
633 (2000).
110 Id.
111 Id.
112Supra note 22, at 58. In his Motion for Intervention and
Motion to Admit the Petition for Prohibition in Intervention he
stated:
xxx xxx xxx
2. As legislators and taxpayers, the Respondents-in-

intervention have a legal interest in the matter of litigation
insofar as they stand to be benefited or injured by the
impending payment of just compensation by the
government to defendants-in-intervention PIATCO and
FRAPORT AG Frankfurt Airport Services.
3. As legislators and taxpayers, the Respondents-in-

intervention have an interest in the instant case, because

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public funds are in danger of being misused and
dissipated. It is the fundamental duty of the
[Respondents]-in-intervention not only to appropriate
public funds, but more importantly, to see to it that public
funds are being used properly and legally.
4. Likewise, the [Respondents]-in-intervention's standing in

the PIATCO cases was affirmed by the Supreme Court
because as legislators, they have standing to question the
disbursement of any public funds, especially if
unappropriated by the legislature. The plan to
compensate PIATCO and/or FRAPORT is also illegal and
affects matters of transcendental importance to the
nation.
5. As matters involving the nature of the PIATCO Contracts

are of transcendental importance, the [Respondents]-in-
intervention are not real parties in interest. They have
sufficient legal interest in the matter in litigation, such that
they will either gain or lose by the direct legal operation
and effect of the judgment in the instant case as regards
the payment of just compensation by the government to
PIATCO and FRAPORT AG Frankfurt Airport Services.
(Emphasis in the original)
113Supra note 2, at 803-804, citations omitted. In the recent
case of David v. Macapagal-Arroyo, a summary of the various
pronouncements of this Court regarding its liberal policy on
standing was provided:
"By way of summary, the following rules may be culled

from the cases decided by this Court. Taxpayers, voters,
concerned citizens, and legislators may be accorded
standing to sue, provided that the following requirements
are met:
(1) the cases involve constitutional issues;
(2) for taxpayers, there must be a claim of illegal

disbursement of public funds or that the tax measure
is unconstitutional;
(3) for voters, there must be a showing of obvious

interest in the validity of the election law in question;
(4) for concerned citizens, there must be a showing

that the issues raised are of transcendental
importance which must be settled early; and

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(5) for legislators, there must be a claim that the
official action complained of infringes upon their
prerogatives as legislators." (Emphasis supplied) (G.R.
No. 171396, 3 May 2006, 489 SCRA 160, 220-221)
114 Manifestation dated September 12, 2006 , p. 2.
115 Supra note 39.
116 The Solicitor General stated:
"It is submitted that the correct interpretation of the

applicable law on the expropriation of [NAIA IPT III] could
avoid the said dreaded consequences. It is further
submitted that this Honorable Court had, in many similar
instances where its silence on an issue will only prolong or
multiply litigation, exercised the judicial prerogative to lay
down the parameters for the application of a law. There is
no reason for it to do otherwise now." (Supra note 45, at
44)
Baterina, on his part, stated:
"… [p]rivate respondent moves that this Honorable

Court exercise its judicial discretion to relax the rules
of procedure and exercise its discretion in
determining whether justice would be better served
if all the legal issues involved, which will not require a
trial of facts, were to be given due course or
otherwise be taken up by this Honorable Court."
(Manifestation and Motion for Relaxation of
Procedural Rules in the Exercise of this Honorable
Court's Judicial Discretion, p. 13)
117 Art. VIII, Sec. 5 (5).
118National Commercial Bank of Saudi Arabia v. Court of
Appeals, G.R. No. 124267, 18 August 2004, 437 SCRA 1, 9,
citations omitted.
Didipio Earth-Savers' Multi-Purpose Association, Incorporated

119
(Desama) v. Gozun, G.R. No. 157882, 30 March 2006, 485 SCRA

586, 604, citing Robern Development Corporation v. Quitain,
373 Phil. 773, 792-793 (1999).
120 See Constitution, Art. III, Sec. 9.
121Build-operate-and-transfer — A contractual arrangement
whereby the project proponent undertakes the construction,
including financing, of a given infrastructure facility, and the
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operation and maintenance thereof. The project proponent
operates the facility over the fixed term during which it is
allowed to charge facility users appropriate tolls, fees, rentals,
and charges not exceeding those proposed in its bid or as
negotiated and incorporated in the contract to enable the
project proponent to recover its investment, and operating and
maintenance expenses in the project. The project proponent
transfers the facility to the government agency or local
government unit concerned at the end of the fixed term which
shall not exceed fifty (50) years: x x x x
122 313 Phil. 296 (1995).
123 Supra note 22, at 82-90; Baterina's Memorandum, pp. 32-39.
124 Supra note 120, at 321-323, 328.
125 Supra note 3, at 521-522.
126These rights are: the jus utendi or the right to receive from the
thing what it produces; the jus abutendi or the right to consume
the thing by its use; the jus disponendi or the power of the
owner to alienate, encumber, transform and even destroy the
thing owned; the jus vindicandi or the right to exclude from the
possession of the thing owned any other person to whom the
owner has not transmitted such thing; the jus possidendi or the
right to possess and jus fruendi or the right to the fruits. (Austria-
Magat v. Court of Appeals, G.R. No. 106755, 1 February 2002,
375 SCRA 556, 566; Distilleria Washington, Inc. v. La Tondeña
Distillers, Inc., G.R. No. 120961, 2 October 1997, 280 SCRA 116,
125)
127 Supra note 3, at 512-514.
Reyes v. National Housing Authority, G.R. No. 147511, 20

128
January 2003, 395 SCRA 494, 501.

129 Id.
Didipio Earth-Savers' Multi-Purpose Association, Incorporated

130
(DESAMA) v. Gozun, G.R. No. 157882, 30 March 2006, 485 SCRA

586, 613.
131Heirs of Juancho Ardona v. Reyes, G.R. Nos. L-60553 to
60555, 26 October 1983, 125 SCRA 220, 235, citing Chief Justice
Enrique M. Fernando, The Constitution of the Philippines, 2nd ed.,
pp. 523-524.
132 Supra note 128.

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133 Id. at 614.
134 Id.
135 Supra note 129.
136 Id. at 235.
137 G.R. No. 137285, 16 January 2001, 349 SCRA 240.
138 Id. p. 262.
139 Supra note 126.
140 Id.
141 545 US 469 [2005],
<www.supremecourtus.gov/opinions/04pdf/04-108.pdf >
(visited February 5, 2007).
142 Id.
144 Baterina's Memorandum, p. 24.
145 Id. p. 57.
In the dissenting opinion of then Senior Associate Justice,

149
now Chief Justice Puno in Gingoyon, he stated that:
… Agan involved solely the issue of the validity of the

PIATCO contracts. After striking down the contracts as
void, we ruled that the State must pay just compensation
to PIATCO before it could exercise the right to take over
considering the undeniable fact that the latter spent a
considerable sum of money to build the structures
comprising the NAIA IPT III. The Court, however, did not
spell out a rigid formula for just compensation to be paid
to PIATCO except to say that it must be according to law
and equity. The Court's language was carefully crafted to
give the trial court sufficient flexibility in determining just
compensation considering the exchange of charges and
countercharges that the cost in building the said structures

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was unreasonably bloated. (Emphasis supplied) (Supra
note 3, at 551)
Aparente, Sr. v. National Labor Relations Commission, G.R.

150
No. 117652, 27 April 2000, 331 SCRA 82, 93, citation omitted.
151 Id.
152 Id.
Tamio v. Ticson, G.R. No. 154895, 18 November 2004, 443

153
SCRA 44, 55, citation omitted.
In a long line of cases, this Court applied the standard of

154
quantum meruit to null and void projects. See Republic v. CA,

G.R. No. 103882, November 25, 1998; Eslao v. COA, G.R. No.
89745, April 8, 1991; F.F. Mañacop Construction Corp. v. CA
and MIAA, 266 SCRA 335 and EPG Construction, et al. v. Vigilar,
354 SCRA 566.
155 AEDC has no objection to this since it stated in its
Memorandum that "[t]hus it is submitted that the expropriation
in the lower court may still be pursued as the equitable process
by which PIATCO as the builder of NAIA IPT III may be paid
compensation that is just and in accordance with law, thereby
upholding the principle of unjust enrichment." (p. 51)
Price and Sulu Dev. Co. vs. Martin (58 Phil. 707 [1933])
G.R. No. L-37281 November 10, 1933
W. S. PRICE and THE SULU DEVELOPMENT COMPANY, plaintiffs-

appellants,
vs.
H. MARTIN, defendant-appellant.
THE AGUSAN COCONUT COMPANY, defendant-appellee.
J.W. Ferrier for plaintiff-appellants.

G.E. Campbell and W.A. Caldwell for defendant-appellant.
DeWitt, Perkins and Brady for appellee.
HULL, J.:
Plaintiffs brought suit in the Court of First Instance of Manila praying

that a mortgage executed by the Sulu Development Company on
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its properties in favor of the Agusan Coconut Company be dissolved
and declared null and void, the principal contentions being that at
the stockholders' meeting in which the officers of the Sulu
Development Company were elected and at which the proposed
mortgage was approved of, 97 shares of stock of the Sulu
Development Company were voted by the proxy of Mrs. Worcester,
in whose name the stock at that time stood upon the books of the
company, whereas defendant Martin claimed that he was the true
owner and that he should have voted the stock.
From the records of the Sulu Development Company it appears that

at the meeting of November 12, 1925, Martin presented evidence to
the effect that he, and not Mrs. Worcester, was the owner of the 97
shares of stock. Copies of the documents relied upon by Martin were
made a part of the record, but apparently no action was taken by
the stockholders or by the directors, and at the meetings of
November 12, 17, and 19, Mrs. Worcester's proxy apparently voted
the stock without protest on the part of Martin or any other
stockholder.
As far as the record shows, every formal action taken at those three
meetings was unanimous, and Martin at the last two meetings was
accompanied by two members of the Bar of the Philippine Islands as
his counsel.
The Sulu Development Company from its inception up to the time of

executing the contract was virtually owned and controlled by
Martin. Prince purchased one share of stock about a month before
the called meeting but was not present at the meetings in question.
Another ground relied upon by plaintiffs is a claim that the mortgage

was without consideration. The evidence shows that for years the
Agusan Coconut Company, through its general manager, had been
advancing sums through Martin in order that the Sulu Development
Company might secure good and sufficient title to a large tract of
land situated near Siasi and thereon develop a coconut plantation.
The amount of money so advanced was in dispute, but between the
meeting on November 12 and the final action on November 19, the
attorney of the Sulu Development Company, one of whom was also
an accountant, and the attorneys of the Agusan Coconut
Company went over the mutual accounts with care and arrived at
the sum set forth in the mortgaged. Had there been no agreement,
suit would have been instituted by the Agusan Company against the
Sulu Development Company.
There is also a claim that there was a parol agreement between

Martin and Worcester, representing the two companies, that after
the death of Mr. Worcester on May 2, 1924, the Agusan Coconut

suigeneris
Company failed to comply with the terms and conditions of the so-
called cultivation agreement, and Martin prayed in his special cross-
complaint and counter-claim that the Defendant Agusan Coconut
Company be required to make such further cash advances to "carry
out the full scale development of the tract of land in the cultivation
agreement and as contemplated therein."
The trial court, on timely objection, refused to receive the parol

evidence as to the cultivation agreement, and after trial and a
lengthy opinion, held that the mortgage in question was valid and
refused to order its cancellation.
From that decision plaintiff appeal and make the following

assignments of error:
The trial court erred:
1. In refusing appellants the right to introduce evidence as to

the "cultivation agreement" extensively referred to by the
parties herein.
2. In refusing to reopen the case on motion filed in due form

and manner by the plaintiffs and appellants herein, on the
ground of newly discovered evidence, such motion having
been filed the rendition of the judgment herein.
3. In finding that the plaintiff, W.S. Price, did not appear here as
a plaintiff to depend his own right but for the purpose of giving
aid to the defendant, Harry Martin.
4. In ruling that although the 97 shares voted by Mrs. Nanon L.

Worcester at the meetings in question thru her proxy belonged
to Harry Martin and were only held in trust by her late husband,
Dean C. Worcester, yet such trusteeship was for the benefit of
the Agusan Coconut Company, and that such company is the
actual cestui que trust thereunder, in violation of the express
terms of the trust agreement.
5. In holding that Mrs. Nanon L. Worcester could legally vote

the said 97 shares she actually voted at the meeting in
question, notwithstanding the facts as found by said court, that
said shares belonged to H. Martin and were merely held in trust
by her deceased husband.
6. In finding that the 97 shares of stock in question had been

adjudicated to Mrs. Nanon L. Worcester by the commissioners
on claims against the estate of her deceased husband; that
such adjudication had been approved by the Court of First
Instance of the City of Manila, and that the said Nanon L.

suigeneris
Worcester had inherited said shares by virtue of the will of her
deceased husband.
7. In holding the effect that there was a quorum in the

pretended meetings of the stockholders of the Sulu
Development Company alleged to have taken place on
November 12, 17 and 19, 1925, particularly that one asserted to
have been held on November 19, 1925, when in law and in
fact there was no such quorum.
8. In finding in effect that the meetings pretended to be held

by Sulu Development on the dates aforementioned were
validly and legally held and that the action taken and
proceedings had thereat were valid and effective.
9. In finding that if the defendant H. Martin had had the 97

shares in question in his own name at the alleged meetings of
the Sulu Development Company, he would have voted them in
the same way and to the same effect as the said Nanon L.
Worcester voted them.
10. In not finding that there was attendant fraud,

misrepresentation and deceit in the execution and issuance of
the mortgage contract, Exhibit U.
11. In not holding that said mortgage is null and void for want
of legal consideration.
12. In finding that the plaintiffs and appellants herein are legally
bound by the said mortgage contract Exhibit U.
13. In holding that the plaintiffs and appellants herein are

legally estopped to contest the efficacy and validity of the
mortgage contract, Exhibit, U.
14. In dismissing plaintiffs' complaint herein.
15. In denying plaintiffs' motion for a new trial.
While defendant Martin appeals and assigns the following errors:
1. The trial court erred in refusing to find that the one hundred
shares of the capital stock of the appellant, the Sulu
Development Company, delivered on November 23, 1922, by
the appellant, H. Martin, to the late Dean C. Worcester, were so
delivered in trust to be held and used for the benefit of the said
H. Martin.
2. The trial court erred in finding that the voting by Mrs. Nanon L.
Worcester, in the meeting held by the stockholders of the
suigeneris
appellant, the Sulu Development Company, on November 12,
17, and 19, 1925, was legal.
3. The trial court erred in refusing to find that the mortgage

involved in this litigation, purported to have been executed by
the appellant, the Sulu Development Company, in favor of the
appellee, the Agusan Coconut Company, is null and void.
4. The trial court erred in excluding, as being within the statute

of frauds, testimony regarding a certain verbal agreement
entered into by and between the appellee, the Agusan
Coconut Company, and the appellant, H. Martin, which
agreement had been fully performed by the latter.
5. The trial court erred in excluding as "Hearsay Evidence",

testimony regarding statements made by certain officials of the
appellee, the Agusan Company.
6. The trial court erred in excluding the testimony of the

appellant, H. Martin, regarding matters of fact which occurred
between him and certain officials of the appellee, the Agusan
Coconut Company, who had died prior to the trial of this
action.
An examination of the assignments of error will show that although

this case in its main aspects is a simple one and confined to the
questions, first, as to whether the mortgage was duly executed by
the Sulu Development Company and, second, whether it was given
for a valuable consideration, many side issues of no moment were
urged upon the trial court, which probably accounts for the
voluminous record with which we are confronted and numerous
assignments of error which we do not deem it necessary to discuss in
detail.
Plaintiffs contend that the transference on the books of the

company of 97 shares of stock in the name of Mrs. Worcester was
fraudulent and illegal. The evidence of record, however, under all
the circumstances of the case, fails to demonstrate the allegation of
fraud, and this court believes that she acted in good faith and in the
honest belief that she had not only a legal right but a duty to
participate in the stockholders meeting.
As to whether the stock was rightfully the property of Martin, that is a

question for the courts and for a stockholder's meeting. Until
challenged in a proper proceeding, a stockholder according to the
books of the company has a right to participate in that meeting,
and in the absence of fraud the action of the stockholders' meeting
cannot be collaterally attacked on account of such participation. "A
person who has purchased stock, and who desires to be recognized
suigeneris
as a stockholder, for the purpose of voting, must secure such a
standing by having the transfer recorder upon the books. If the
transfer is not duly made upon request, he has, as his remedy, to
compel it to be made." (Morrill vs. Little Falls Mfg. Co., 53 Minn., 371;
21 L.R.A., 175-178, citing Cook, Stock & Stockholders, par. 611; People
vs. Robinson, 64 Cal., 373; Downing vs. Potts, 23 N.J.L., 66; State vs.
Ferris, 42 Conn., 560; New York & N.H.R. Co. vs. Schuyler, 34 N.Y., 80;
Bank of Commerce's App., 73 Pa., 59; Hoppin vs. Buffum, 9 R.I., 513;
11 Am. Rep., 219; Re St. Lawrence S.R. Co., 44 N. J. L., 529.)
As to the question of lack of consideration for the mortgage,

throughout the brief for appellants it appears by the constant
reiteration of the phrase that all the advances were made "by the
Agusan Coconut Company and/or its then General Manager, the
late Dean C. Worcester, to H. Martin and/or the Sulu Development
Company."
It must be remembered that there is no dispute between the

Worcester interests and the Agusan Coconut Company as to who
advanced the money, namely, the Agusan Coconut Company, nor
is there any difficulty in determining to whom the money was
advanced. Although Martin was virtually the owner of all the capital
stock of the Sulu Development Company, business was carried on in
the name of the company, and the land and properties were
secured in the name of the company, and up to the time of the
execution of the mortgage and some time thereafter there was no
claim from anybody the money had been advanced to Martin
instead of the company. Even a repeated use of the questionable
phrase "and/or" as to the grantor "and/or" as to the grantee, will not
fabricate a life-raft on which a recalcitrant debtor can reach a safe
harbor of repudiation.lawphil.net
We are therefore convinced that the contention that the mortgage

was made without consideration was a afterthought without
foundation in fact and in a vain attempt to avoid a legal and
binding obligation.
We find no merit in the contention that the trial court should have
concerned itself with an alleged parol contract between Martin and
Dean C. Worcester, deceased. The alleged contract not being in
writing or to be executed within a year, it is within the statute of
frauds. The value of the rule is shown in this case as it was some time
after Mr. Worcester's death before anything was heard of such an
alleged agreement. Even if such an agreement had been made
and it had been proper to receive proof thereof, it would not benefit
plaintiffs as the mortgage was executed pursuant to a compromise
agreement to settle the affairs between the two companies, and all

suigeneris
the transactions between the two companies were merged and
settle by that compromise.
The contention that a new trial should have been granted in order
that plaintiffs could present in evidence a letter from Mr. Worcester
to the late Governor-General Wood, is likewise without merit. The
letter, even if admitted, would not have changed the result of these
proceedings, as a fair reading of the letter is not repugnant to a
single contention of defendant-appellee.
The judgment appealed from is therefore affirmed. Costs against

appellants. So ordered.
Malcolm, Villa-Real, Abad Santos, and Imperial, JJ., concur.
Cojuangco Jr. vs. Roxas (195 SCRA 797 [1991])
G.R. No. 91925 April 16, 1991
EDUARDO M. COJUANGCO, JR., MANUEL M. COJUANGCO and

RAFAEL G. ABELLO, petitioners,
vs.
ANTONIO J. ROXAS, JOSE L. CUISIA, JR., OSCAR HILADO, Presidential
Commission on Good Government (PCGG), SAN MIGUEL
CORPORATION (SMC) and SANDIGANBAYAN (First Division),
respondents.
G.R. No. 93005 April 16, 1991
EDUARDO M. COJUANGCO, JR., ENRIQUE M. COJUANGCO and

MANUEL M. COJUANGCO, petitioners,
vs.
ADOLFO AZCUNA, EDISON COSETENG, PATRICIO PINEDA, Presidential
Commission on Good Government (PCGG), and SAN MIGUEL
CORPORATION (SMC), respondents.
Estelito P. Mendoza and Villareal Law Offices for petitioners.
GANCAYCO, J.:
The issue squarely presented by the petitioners is whether or not the

Presidential Commission on Good Government (PCGG) may vote
the sequestered shares of stock of San Miguel Corporation (SMC)
and elect its members of the board of directors.

suigeneris
In G.R. No. 91925 the facts alleged are undisputed. Petitioners are
stockholders of record of SMC as follows —
Stockholders No. of Shares
Eduardo M. Cojuangco, Jr. 13,225
Manuel M. Cojuangco 5,750
Rafael G. Abello 5,750
On April 18, 1989, the annual meeting of shareholders of SMC was

held. Among the matters taken up was the election of fifteen (15)
members of the board of directors for the ensuing year. Petitioners
were among the twenty four (24) nominees to the board, namely ––
1 Mr. Rafael G. Abello
2 Mr. Eduardo M. Cojuangco, Jr.
3 Mr. Enrique M. Cojuangco
4 Mr. Manuel M. Cojuangco
5 Mr. Marcos O. Cojuangco
6 Mr. Jose C. Concepcion
7 Mr. Amado C. Mamuric
8 Mr. Rodolfo M. Tinsay
9 Mr. Danilo S. Ursua
10 Mr. Eduardo De Los Angeles
11 Mr. Feliciano Belmonte, Jr.
12 Mr. Teodoro L. Locsin
13 Mr. Domingo Lee
14 Mr. Philip Ella Juico
15 Mr. Patrick Pineda

suigeneris
16 Mr. Adolfo Azcuna
17 Mr. Edison Coseteng
18 Mr. Jose L. Cuisia, Jr.
19 Mr. Oscar Hilado
20 Mr. Andres Soriano III
21 Mr. Eduardo J. Soriano
22 Mr. Francisco C. Eizmendi, Jr.
23 Mr. Benigno P. Toda, Jr.
24 Mr. Antonio J. Roxas
On the date of the annual meeting, there were 140,849,970 shares

outstanding, of which 133,224,130 shares, or 94.58%, were present at
the meeting, either in person or by proxy. Because of PCGG's claim
that the shares of stock were under sequestration, PCGG was
allowed to represent and vote the shares of stocks of the following
shareholders.
STOCKHOLDER NO. OF SHARES
PRIMAVERA FARMS, INC. 5,381,543
BLACK STALLION RANCH, INC. 3,587,695
MISTY MOUNTAINS AGRI'L CORP. 3,587,695
PASTORAL FARMS, INC. 3,587,695
MEADOW LARK PLANTATION, INC. 2,690,771
SILVER LEAF PLANTATION, INC. 2,690,771
LUCENA OIL FACTORY, INC. 169,174

suigeneris
PCY OIL FACTORY, INC. 167,867
METROPLEX COMMODITIES, INC. 167,777
KAUNLARAN AGRICULTURAL CORP. 145,475
REDDEE DEVELOPERS, INC. 169,071
AGR'L CONSULTANCY SERV., INC. 167,907
FIRST UNITED TRANSPORT, INC. 168,963
VERDANT PLANTATIONS, INC. 145,475
CHRISTENSEN PLANTATIONS, INC. 168,920
NORTHERN CARRIERS CORPORATION 167,891
VESTA AGRICULTURAL CORP. 145,475
OCEAN SIDE MARITIME ENT., INC. 132,250
PURA ELECTRIC COMPANY, INC. 99,587
UNEXPLORED LAND DEVELOPERS, INC. 102,823
PUNONG-BAYAN HOUSING DEVT. CORP. 132,250
HABAGAT REALTY DEVELOPMENT, INC. 145,822
SPADE ONE RESORTS CORP. 147,040

suigeneris
WINGS RESORTS CORPORATION 104,885
KALAWAKAN RESORTS, INC. 132,250
LABAYUG AIR TERMINALS, INC. 159,106
LANDAIR INT'L MARKETING CORP. 168,965
SAN ESTEBAN DEVELOPMENT CORP. 167,679
PHILIPPINE TECHNOLOGIES, INC. 132,250
BALETE RANCH, INC. 166,395
DISCOVERY REALTY CORP. 169,203
ARCHIPELAGO REALTY CORP. 167,761
SOUTHERN SERVICE TRADERS, INC. 120,480
ORO VERDE SERVICES, INC. 132,250
NORTHEAST CONTRACT TRADERS, INC. 159,536
DREAM PASTURES, INC. 169,237
LHL CATTLE CORPORATION 169,216
RANCHO GRANDE, INC. 167,614
ECHO RANCH, INC. 167,897

suigeneris
FAR EAST RANCH, INC. 169,227
SOUTHERN STAR CATTLE CORP. 169,095

RADIO AUDIENCE DEVELOPERS
INTEGRATED ORGANIZATION, INC 167,787
RADYO PILIPINO CORPORATION 167,777
EDUARDO M. COJUANGCO, JR. 13,225
TOTAL 27,211,770
==============
The above shares are collectively referred to as "corporate shares" in

the petition.
Representatives of the corporate shares present at the meeting

claimed that the shares are not under sequestration; or that if they
are under sequestration, the PCGG had no right to vote the same.
They were overruled.
With PCGG voting the corporate shares, the following was the result
of the election for members of the SMC board of directors:
Stockholder No. of Votes
1. Mr. Eduardo De Los Angeles 135,115,521
2. Mr. Feliciano Belmonte, Jr. 135,312,254
3. Mr. Teodoro L. Locsin 132,309,520
4. Mr. Domingo lee 132,308,355

suigeneris
5. Mr. Philip Ella Juico 132,301,569
6. Mr. Patrick Pineda 132,284,365
7. Mr. Adolfo Azcuna 132,284,364
8. Mr. Edison Coseteng 132,284,364
9. Mr. Andres Soriano III 132,182,000
10. Mr. Eduardo Soriano 132,173,943
11. Mr. Francisco C. Eizmendi, Jr. 132,164,470
12. Mr. Benigno P. Toda, Jr. 132,147,319
13. Mr. Antonio J. Roxas 132,146,107
14. Mr. Jose L. Cuisia, Jr. 132,141,775
15. Mr. Oscar Hilado 132,110,402
16. Mr. Eduardo M. Cojuangco, Jr. 2,280,618
17. Mr. Enrique M. Cojuangco 2,279,729
18. Mr. Manuel M. Cojuangco 2,279,719
19. Mr. Rafael G. Abello 2,278,863
20. Mr. Jose C. Concepcion 1,596

suigeneris
21. Mr. Marcos O. Cojuangco 875
22. Mr. Danilo S. Ursua 650
23. Mr. Rodolfo M. Tinsay 23
24. Mr. Amado C. Mamuric 0
The fifteen individuals who received the highest number of votes

were declared elected.
The PCGG claimed it represented 85,756,279 shares at the meeting

including the corporate shares which corresponded to 1,286,744,185
votes which in turn were distributed equally among the fifteen (15)
candidates who were declared elected.
Petitioners allege that the 27,211,770 shares or a total of 408,176,550

votes representing the corporate shares, were illegally cast by PCGG
and should be counted in favor of petitioners so that the results of
the election would be as follows ––
Add:
Votes 408,176,550
Originally divided by 3 Resulting
Stockholder Credited (136,058,850) Votes
1. Mr. Eduardo M.
2,280,618 136,058,850 138,339,468
Cojuangco, Jr.
2. Mr. Manuel M.
2,279,719 136,058,850 138,338,569
Cojuangco
3. Mr. Rafael G. Abello 2,278,863 136,058,850 138,337,713
Votes
Less:
Originally Resulting
408,176,550
Stockholder Credited Votes
divided by

suigeneris
15
(27,211,770)
4. Mr. Eduardo De Los

135,115,521 27,211,770 107,903,751
Angeles
5. Mr. Feliciano
132,312,254 27,211,770 105,100,484
Belmonte, Jr.
6. Mr. Teodoro L. Locsin 132,309,520 27,211,770 105,097,750
7. Mr. Domingo Lee 132,308,355 27,211,770 105,096,585
8. Mr. Philip Ella Juico 132,301,569 27,211,770 105,089,799
9. Mr. Patrick Pineda 132,284,365 27,211,770 105,072,595
10. Mr. Adolfo Azcuna 132,284,364 27,211,770 105,072,594
11. Mr. Edison

132,284,364 27,211,770 105,072,594
Coseteng
12. Mr. Andres Soriano

132,182,000 27,211,770 104,970,230
III
13. Mr. Eduardo

132,173,943 27,211,770 104,962,173
Soriano
14. Mr. Francisco C.

132,164,470 27,211,770 104,952,700
Eizmendi, Jr.
15. Mr. Benigno P.

132,147,319 27,211,770 104,935,549
Toda, Jr.

suigeneris
16. Mr. Antonio J. Roxas 132,146,107 27,211,770 104,934,337
17. Mr. Jose L. Cuisia, Jr. 132,141,775 27,211,770 104,930,005
18. Mr. Oscar Hilado 132,110,402 27,211,770 104,898,632
19. Mr. Enrique M.

2,279,729
Cojuangco
20. Mr. Jose C.

1,596
Concepcion
21. Mr. Marcos O.

875
Cojuangco
22. Mr. Danilo S. Ursua 650
23. Mr. Rodolfo M.

23
Tinsay
24. Mr. Amado C.

0
Mamuric
The petitioners assert that is they were allowed to vote their

corresponding shares accordingly, then they would obtain enough
votes to be elected.
On May 31, 1989, petitioners filed with the Sandiganbayan a petition

for quo warranto impleading as respondents the fifteen (15)
candidates who were declared elected members of the board of
directors of SMC for the year 1989-1990. Summons was issued only as
to respondents Antonio J. Roxas, Jose L. Cuisia, Jr. and Oscar T.
Hilado whose election will be affected by the claim of petitioners if
the same were upheld.
In due course, a resolution was rendered by the Sandiganbayan on

November 16, 1989, affirming its jurisdiction over the petition but

suigeneris
dismissing it for lack of cause of action on the ground that the PCGG
has the right to vote sequestered shares.
Hence, this petition for certiorari, the main thrust of which is that the
right to vote sequestered shares of stock is vested in the actual
shareholders not in the PCGG.
Respondents were required to comment on the petition while

petitioners were required to comment on the motion to dismiss filed
by respondent SMC. The required comments and consolidated reply
thereto have all now been submitted.
In G.R. No. 93005, the facts alleged are substantially similar in nature.
Petitioners are stockholders of SMC as follows ––
ENRIQUE M. COJUANGCO 23,000
MANUEL M. COJUANGCO 23,000
On April 17, 1990, the annual meeting of the SMC shareholders was
held. Among the matters taken up was the election of the fifteen
(15) members of the board of directors of SMC for the ensuing year.
Petitioners were among the twenty (20) nominees to the board,
namely ––
1. Mr. Andres Soriano III
2. Mr. Francisco C. Eizmendi, Jr.
3. Mr. Eduardo J. Soriano
4. Mr. Antonio J. Roxas
5. Mr. Benigno P. Toda, Jr.
6. Mr. Eduardo De Los Angeles
7. Mr. Feliciano Belmonte, Jr.
8. Mr. Renato Valencia

suigeneris
9. Mr. Domingo Lee
10. Mr. Teodoro L. Locsin
11. Mr. Oscar Hilado
12. Mr. Philip Ella Juico
13. Mr. Adolfo Azcuna
14. Mr. Edison Coseteng
15. Mr. Patricio Pineda
16. Mr. Eduardo M. Cojuangco, Jr.
17. Mr. Marcos O. Cojuangco
18. Mr. Rafael G. Abello
19. Mr. Enrique M. Cojuangco
20. Mr. Manuel M. Cojuangco
On the date of the meeting, there were 565,916,550 shares

outstanding, of which 531,598,051 shares, or 93.58%, were present at
the meeting, either in person or by proxy.1 The PCGG was allowed to
represent and vote the following shares of stock under sequestration:
NORTHEAST CONTRACT TRADERS, INC. 638,144
LABAYUG AIR TERMINALS, INC. 636,416
SPADE ONE RESORTS CORP. 588,280
HABAGAT REALTY DEVELOPMENT, INC. 583,280
PUNONG-BAYAN HOUSING DEV'T CORP. 529,000
OCEAN SIDE MARITIME ENT., INC. 529,000

suigeneris
PHILIPPINE TECHNOLOGIES, INC. 529,000
SOUTHERN SERVICE TRADERS, INC. 481,916
WINGS RESORTS CORPORATION 419,536
UNEXPLORED LAND DEVELOPERS, INC. 411,288
PURA ELECTRIC COMPANY, INC. 398,336
PRIMAVERA FARMS, INC. 21,526,164
BLACK STALLION RANCH, INC. 14,350,772
MISTY MOUNTAIN AGR'L. CORP. 14,350,772
PASTORAL FARMS, INC. 14,350,772
MEADOW LARK PLANTATION, INC. 10,763,080
SILVER LEAF PLANTATION, INC 10,763,080
PCY OIL MANUFACTURING CORP. 671,464
METROPLEX COMMODITIES, INC. 671,104
LUCENA OIL FACTORY, INC. 676,696
DISCOVERY REALTY CORP. 676,808
DREAM PASTURES, INC. 676,948

suigeneris
FAR EAST RANCH, INC. 676,908
LHL CATTLE CORPORATION 676,860
ARCHIPELAGO REALTY CORP. 671,040
SOUTHERN STAR CATTLE CORP. 676,376
REDDEE DEVELOPERS, INC. 676,280
LANDAIR INT'L. MARKETING CORP. 675,856
FIRST UNITED TRANSPORT, INC. 675,848
CHRISTENSEN PLANTATION COMPANY 675,680
AGR'L. CONSULTANCY SERV. INC. 671,624
ECHO RANCH, INC. 671,584
NORTHERN CARRIERS CORPORATION 671,560
RADIO AUDIENCE DEVELOPERS

INTEGRATED ORGANIZATION, INC 671,148
RADYO PILIPINO CORPORATION 671,104
SAN ESTEBAN DEVELOPMENT CORP. 670,452
BALETE RANCH, INC. 665,576

suigeneris
VERDANT PLANTATIONS, INC. 581,900
KAUNLARAN AGRICULTURAL CORP. 581,900
VESTA AGRICULTURAL CORP. 581,900
ORO VERDE SERVICES, INC. 529,000
KALAWAKAN RESORTS, INC. 529,000
TOTAL 108,846,948
==============
The above shares are once again referred to as "corporate shares" in

the petition. At the meeting, a representative of the corporate share
maintained that they are not under sequestration, or if they are
under sequestration, the PCGG had no authority to vote them.
Nevertheless, the PCGG was allowed to vote the corporate shares
and the result of the election was as follows ––
Stockholder No. of Votes
1. Andres Soriano III 549,648,661
2. Francisco C. Eizmendi,Jr. 549,105,318
3. Eduardo J. Soriano 548,864,733
4. Antonio J. Roxas 548,809,271

suigeneris
5. Benigno Toda, Jr. 548,751,713
6. Eduardo De Los Angeles 522,678,527
7. Feliciano Belmonte 517,170,373
8. Renato Valencia 517,048,521
9. Domingo Lee 517,014,895
10. Teodoro L. Locsin, Jr. 516,361,120
11. Oscar Hilado 516,197,450
12. Philip Ella Juico 516,118,723
13. Adolfo S. Azcuna 516,105,147
14. Edison Coseteng 516,047,825
15. Patricio Pineda 515,990,250
16. Eduardo M. Cojuangco, Jr. 37,335,365
17. Marcos O Cojuangco 73,404
18. Rafael G. Abello 40,404
19. Enrique M. Cojuangco 34,950
20. Manuel M. Cojuangco 30,955

suigeneris
Uncast votes 3,150,231
Invalid votes 381,865
TOTAL 7,956,960,120
================
The fifteen individuals who received the highest number of votes

were declared elected.
Representatives of the corporate shares manifested that if they were

allowed to vote their shares, the votes corresponding to their shares,
a total of 108,846,948 shares, amounting to 1,632,704,220 votes,
would have been cast equally, or 544,234, 740 votes each for
petitioners Eduardo Cojuangco, Jr., Enrique M. Cojuangco and
Manuel M. Cojuangco, all of whom would have been among those
who received 15 highest number of votes, and that respondents
Adolfo S. Azcuna, Edison Coseteng and Patricio Pineda would not
be included therein, and should thus be ousted from the board of
directors.
As the petition under G.R. No. 91925 which was decided adversely
by the Sandiganbayan is now before this Court, and since time is of
the essence as petitioners have been denied the right to vote since
1986, instead of seeking relief from the Sandiganbayan, the
petitioners filed this petition for quo warranto (G.R. No. 93005), the
issues in which are the same as those raised in G.R. No. 91925.
The petitions are impressed with merit.
Nothing is more settled than the ruling of this Court in BASECO VS.
PCGG,2 that the PCGG cannot exercise acts of dominion over
property sequestered. It may not vote sequestered shares of stock or
elect the members of the board of directors of the corporation
concerned —
a. PCGG May Not Exercise Acts of Ownership
One thing is certain, and should be stated at the outset: the

PCGG cannot exercise acts of dominion over property
sequestered, frozen or provisionally taken over. As already
earlier stressed with no little insistence, the act of sequestration,

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freezing or provisional takeover of property does not import or
bring about a divestment of title over said property; does not
make the PCGG the owner thereof. In relation to the property
sequestered, frozen or provisionally taken over, the PCGG is a
conservator, not an owner. Therefore, it can not perform acts of
strict ownership; and this is specially true in the situations
contemplated by the sequestration rules where, unlike cases of
receivership, for example, no court exercises effective
supervision or can upon due application and hearing, grant
authority for the performance of acts of dominion.
Equally evident is that the resort to the provisional remedies in

question should entail the least possible interference with
business operations or activities so that, in the event that the
accusation of the business enterprise being "ill-gotten" be not
proven, it may be returned to its rightful owner as far as possible
in the same condition as it was at the time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration

over the property or business sequestered or provisionally taken
over, much like a court-appointed receiver, such as to bring
and defend actions in its own name; receive rents; collect
debts due; pay outstanding debts; and generally do such other
acts and things as may be necessary to fulfill its mission as
conservator and administrator. In this context, it may in addition
enjoin or restrain any actual or threatened commission of acts
by any person or entity that may render moot and academic,
or frustrate or otherwise make ineffectual its efforts to carry out
its task; punish for direct or indirect contempt in accordance
with the Rules of Court; and seek and secure the assistance of
any office, agency or instrumentality of the government. In the
case of sequestered businesses generally, (i.e., going concerns,
businesses in current operation), as in the case of sequestered
objects, its essential role, as already discussed, is that of
conservator, caretaker, "watchdog" or overseer, it is not that of
manager, or innovator, much less an owner.
c. Powers over Business Enterprises Taken Over by Marcos or

Entities or Persons Close to him, Limitations Thereon
Now, in the special instance of a business enterprise shown by

evidence to have been "taken over by the government of the
Marcos Administration or by entities or persons close to former
President Marcos," the PCGG is given power and authority, as
already adverted to, to "provisionally take (it) over in the public
interest or to prevent . . . (its) disposal or dissipation" and since

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the term is obviously employed in reference to going concerns,
or business enterprises in operation, something more than mere
physical custody is connoted; the PCGG may in this case
exercise some measure of control in the operation, running, or
management of the business itself. But even in this special
situation, the intrusion into management should be restricted to
the minimum degree necessary to accomplish the legislative
will, which is "to prevent the disposal or dissipation" of the
business enterprise. There should be no hasty, indiscriminate,
unreasoned replacement or substitution of management
officials, or change of policies, particularly in respect of viable
establishments. In fact, such a replacement or substitution
should be avoided if at all possible, and undertaken only when
justified by demonstrably tenable grounds and in line with the
stated objectives of the PCGG. And it goes without saying that
where replacement of management officers may be called
for, the greatest prudence, circumspection, care and attention
should accompany that undertaking to the end that truly
competent, experienced and honest managers may be
recruited. There should be no role to be played in this area by
rank amateurs, no matter how well meaning. The road to hell, it
has been said, is paved with good intentions. The business is not
to be experimented or played around with, not run into the
ground, not driven to the bankruptcy, not fleeced not ruined.
Sight should never be lost sight of the ultimate objective of the
whole exercise, which is to turn over the business to the
Republic, once judicially established to be "ill-gotten." Reason
dictates that it is only under these conditions and
circumstances that the supervision, administration and control
of business enterprises provisionally taken over may legitimately
be exercised.
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and

circumstances that the PCGG may properly exercise the
prerogative to vote sequestered stock of corporations, granted
to it by the President of the Philippines through a memorandum
dated June 26, 1986. That memorandum authorizes the PCGG
"pending the outcome of proceedings to determine the
ownership of . . . (sequestered) shares of stock," "to vote such
shares of stock as it may have sequestered in corporations at all
stockholders" meetings called for the election of directors,
declaration of dividends, amendment of the Articles of
Incorporation, etc." The Memorandum should be construed in
such a manner as to be consistent with, and not contradictory
of the Executive Orders earlier promulgated on the same
matter. There should be no exercise of the right to vote simply

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because the right exists, or because the stocks sequestered
constitute the controlling or a substantial part of the corporate
voting power. The stock is not to be voted to replace directors,
or revise the articles or by-laws, or otherwise bring about
substantial changes in policy, program of practice of the
corporation except for demonstrably weighty and defensible
grounds, and always in the context of the stated purposes of
sequestration or provisional takeover, i.e., to prevent the
dispersion or undue disposal of the corporate assets. Directors
are not to be voted out simply because the power to do so
exists. Substitution of directors is not to be done without reason
or rhyme, should indeed be shunned if at all possible, and
undertaken only when essential to prevent disappearance or
wastage of corporate property, and always under such
circumstances as to assure that the replacements are truly
possessed of competence, experience and probity
In the case at bar, there was adequate justification to vote the

incumbent directors out of office and elect others in their stead
because the evidence showed prima facie that the former
were just tools of President Marcos and were no longer owners
of any stock in the firm, if they ever were at all. This is why, in its
Resolution of October 28, 1986; this Court declared that ––
Petitioner has failed to make out a case of grave abuse or

excess of jurisdiction in respondents' calling and holding of a
stockholders meeting for the election of directors as authorized
by the Memorandum of the President . . . (to the PCGG) dated
June 26, 1986, particularly, where as in this case, the
government can, through its designated directors, properly
exercise control and management over what appear to be
properties and assets owned and belonging to the government
itself and over which the persons who appear in this case on
behalf of BASECO have failed to show any right or even any
shareholding in said corporation.
It must however be emphasized that the conduct of the PCGG

nominees in the BASECO Board in the management of the
company's affairs should henceforth be guided and governed
by the norms herein laid down. They should never for a moment
allow themselves to forget that they are conservators, not
owners of the business; they are fiduciaries trustees, of whom
the highest degree of diligence and rectitude is, in the
premises, required.3
In BASECO, Mr. Justice Padilla, in his concurring opinion4 asserted

that the removal and election of members of the board of directors
are clear acts of ownership on the part of the shareholders of the

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corporation, a right that should be denied the PCGG under ordinary
circumstances. Of course, in BASECO, wherein it appears that Mr.
Marcos took possession and control of 95% of the total ownership
thereof which he could not have acquired out of his lawfully gotten
wealth, the PCGG was allowed by the Court to vote the
sequestered shares.
Madame Justice Melencio-Herrera in a concurring opinion which in

turn was concurred in by Justice Feliciano, stated that she has no
objection to according the right to vote sequestered stock in case of
a take-over of business actually belonging to the government and
whose capitalization comes from public funds but which, somehow,
landed in the hands of private persons, as in the case of BASECO.
She advised caution and prudence in the case of sequestered
shares of an on-going private business enterprise, specially the
sensitive ones, since the true and real ownership of said shares is yet
to be determined and proved more conclusively before the courts.5
Mr. Justice Gutierrez, in a concurring and dissenting opinion,

reiterated that the election of the board of directors is distinctly and
unqualifiedly an act of ownership. He would disallow the voting of
shares by the PCGG on the ground that the same is authoritarian
and ultra vires.6
Mr. Justice Cruz also dissented, He asserted that the acts of voting
the shares and reorganizing the board of directors are acts of
ownership which clash with the implacable principles of a free
society, foremost of which is due process.7
The Solicitor General, however, contends in these two cases that if

the purpose of sequestration is to "help prevent the dissipation of the
corporation's assets" or to "preserve" the said assets, the PCGG may
resort to "acts of strict ownership," such as voting the sequestered
shares.8
There is no proof or indications showing that the petitioners seek to

exercise their right as stockholders to dissipate, dispose, conceal,
destroy, transfer or encumber their sequestered shares. On the other
hand, there is no doubt that petitioners have the right to vote their
shares at the shareholders meeting even if they are sequestered and
that they as stockholders have a right to be voted for as members of
the board of directors of SMC.9
Besides, there are other means by which the said shares may be
preserved and their dissipation prevented. The PCGG may restrain
their sale, encumbrance, assignment or any other disposition during
the period of sequestration. It may monitor the business operations of
petitioners as to said shares. It need not vote the shares in order to
accomplish its role as conservator.
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The rule in this jurisdiction is, therefore, clear. The PCGG cannot
perform acts of strict ownership of sequestered property. It is a mere
conservator. It may not vote the shares in a corporation and elect
the members of the board of directors. The only conceivable
exception is in a case of a takeover of a business belonging to the
government or whose capitalization comes from public funds, but
which landed in private hands as in BASECO.
The constitutional right against deprivation of life, liberty and

property without due process of law is so well-known and too
precious so that the hand of the PCGG must be stayed in its
indiscriminate takeover of and voting of shares allegedly ill-gotten in
these cases. It is only after appropriate judicial proceedings when a
clear determination is made that said shares are truly ill-gotten when
such a takeover and exercise of acts of strict ownership by the
PCGG are justified.
It is true that in G.R. No. 91925 the term of office of the term of office
of the assailed members of the board of directors, private
respondents therein, for 1989-1990 had expired. To this extent said
petition may be considered moot and academic. However, the
issue of whether public respondent Sandiganbayan committed a
grave abuse of discretion in rendering the resolution dated
November 16, 1989, which affects all subsequent shareholders'
meetings and elections of the members of the board of directors of
SMC, is a justiciable controversy that must be resolved.
As to G.R. No. 93005 the term of office of private respondents as

members of the SMC board of directors will expire on or after
another election is held in April 1991.
Thus, the issue raised in G.R. No. 93005 relating to the election of the
members of the board for 1990-1991 pursuant to sequestered shares
of stock is a justiciable issue which should be determined once and
for all.
In the light of the foregoing discussion, the Court finds and so holds
that the PCGG has no right to vote the sequestered shares of
petitioners including the sequestered corporate shares. Only their
owners, duly authorized representatives or proxies may vote the said
shares. Consequently, the election of private respondents Adolfo
Azcuna, Edison Coseteng and Patricio Pineda as members of the
board of directors of SMC for 1990-1991 should be set aside.
However, petitioners cannot be declared duly elected members of

the board of directors thereby. An election for the purpose should
be held where the questioned shares may be voted by their owners
and/or their proxies. Such election may be held at the next

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shareholders' meeting in April 1991 or at such date as may be set
under the by-laws of SMC.
Private respondents in both cases are hereby declared to be de

facto officers who in good faith assumed their duties and
responsibilities as duly elected members of the board of directors of
the SMC. They are thereby legally entitled to the emoluments of the
office including salary, fees and other compensation attached to
the office until they vacate the same.10
Nevertheless, the right of the Government, represented by the

PCGG, as conservator of sequestered assets must be adequately
protected.
The important rights of stockholders are the following:
a) the right to vote;
b) the right to receive dividends;
c) the right to receive distributions upon liquidation of the

corporation; and
d) the right to inspect the books of the corporation.
It is through the right to vote that the stockholder participates in the

management of the corporation. The right to vote, unlike the rights
to receive dividends and liquidating distributions, is not a passive
thing because management or administration is, under the
Corporation Code, vested in the board of directors, with certain
reserved powers residing in the stockholders directly. The board of
directors and executive committee (or management committee)
and the corporate officers selected by the board may make it very
difficult if not impossible for the PCGG to carry out its duties as
conservator if the Board or officers do not cooperate, are hostile or
antagonistic to the conservator's objectives.
Thus, it is necessary to achieve a balancing of or reconciliation

between the stockholder's right to vote and the conservator's
statutory duty to recover and in the process thereof, to conserve
assets, thought to be ill-gotten wealth, until final judicial
determination of the character of such assets or until a final
compromise agreement between the parties is reached.
There are, in the main, two (2) types of situations that need to be
addressed. The first situation arises where the sequestered shares of
stock constitute a distinct minority of the voting shares of the
corporation involved, such that the registered owners of such
sequestered shares would in any case be able to vote in only a

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minority of the Board of Directors of the corporation. The second
situation arises where the sequestered shares of stock constitute a
majority of the voting shares of the corporation concerned, such
that the registered owners of such shares of stock would in any case
be entitled to elect a majority of the Board of Directors of the
corporation involved.
Turning to the first situation, the Court considers and so holds that in
order to enable the PCGG to perform its functions as conservator of
the sequestered shares of stock pending final determination by the
courts as to whether or not the same constitute ill-gotten wealth or a
final compromise agreement between the parties, the PCGG must
be represented in the Board of Directors of the corporation and of its
majority-owned subsidiaries or affiliates and in the Executive
Committee (or its equivalent) and the Audit Committee thereof, in at
least an ex officio (i.e., non-voting) capacity. The PCGG
representative must have a right of full access to and inspection of
(including the right to obtain copies of) the books, records and all
other papers of the corporation relating to its business, as well as a
right to receive copies of reports to the Board of Directors, its
Executive (or equivalent) and Audit Committees. By such
representation and rights of full access, the PCGG must be able so
to observe and monitor the carrying out of the business of the
corporation as to discover in a timely manner any move or effort on
the part of the registered owners of the sequestered stock, alone or
in concert with other shareholders, to conceal, waste and dissipate
the assets of the corporation, or the sequestered shares themselves,
and seasonably to bring such move or effort to the attention of the
Sandiganbayan for appropriate action.
In the second situation above referred to, the Court considers and so
holds that the following minimum safeguards must be set in place
and carefully maintained until final judicial resolution of the question
of whether or not the sequestered shares of stock (or, in a proper
case, the underlying assets of the corporation concerned) constitute
ill-gotten wealth or until a final compromise agreement between the
parties is reached:
a. An independent comptroller must be appointed by the

Board of Directors upon nomination of the PCGG as
conservator.1âwphi1 The comptroller shall not be removable
(nor shall his position be abolished or his compensation
changed) without the consent of the conservator. The
comptroller shall, in addition to his other functions as Such,
have charge of internal audit.
b. The corporate secretary must be acceptable to the

conservator. If the corporate secretary ceases to be

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acceptable to the conservator, a new one must be appointed
by the Board of Directors upon nomination of the conservator.
c. The external auditors of the corporation must be

independent and must be acceptable to the
conservator.1âwphi1 The independent external auditors shall
not be changed without the consent of the conservator.
d. The conservator must be represented in the Board of

Directors and in the Executive (or equivalent) and Audit
Committees of the corporation involved and of its majority-
owned subsidiaries or affiliates. The representative of the
conservator must be a full director (not merely an honorary or
ex oficio director) with the right to vote and all other rights and
duties of a member of the Board of Directors under the
Corporation Code. The conservator's representative shall not
be removed from the Board of Directors (or the mentioned
Committees) without the consent of the conservator. The
conservator shall, however, have the right to remove and
change its representative at any time, and the new
representative shall be promptly elected to the Board and its
mentioned Committees.
e. All transactions involving the disbursement of corporate

funds in excess of P5 million must have the prior approval of the
director representing the conservator, in order to be valid and
effective.
f. The incurring of debt by the corporation, whether in the form

of bonds, debentures commercial paper or any other form, in
excess of P5 million, must have the prior approval of the
director representing the conservator, in order to be valid and
effective.
g. The disposition of a substantial part of assets of the

corporation (substantial meaning in excess of P5 million) shall
require the prior approval of the director representing the
conservator, in order to be valid and effective.
h. The above safeguards must be written into the articles of

incorporation and by-laws of the company involved. In other
words, the articles of incorporation and by-laws of the
company must be amended so as to incorporate the above
safeguards.
i. Any amendment of the articles of incorporation or by-laws of

the company that will modify in any way any of the above
safeguards, shall need the prior approval of the director
representing the conservator.
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The amount of P5,000,000.00 referred to in paragraphs (e), (f) and (g)
above is intended merely to be indicative. The precise amount may
differ depending upon the size of the corporation involved and the
reasonable operating requirements of its business.
Whether a particular case falls within the first or the second type of
situation described above, the following safeguards are
indispensably necessary:
1. The sequestered shares and any stock dividends pertaining

to such shares, may not be sold, transferred, alienated,
mortgaged, or otherwise disposed of and no such sale, transfer
or other disposition shall be registered in the books of the
corporation, pending final judicial resolution of the question of
ill-gotten wealth or a final compromise agreement between
the parties; and
2. Dividend and liquidating distributions shall not be delivered

to the registered stockholders of the sequestered shares,
including stock dividends pertaining to such shares, but shall
instead be deposited in an escrow, interest-bearing, account in
a first class bank or banks, acceptable to the Sandiganbayan,
to be held by such banks for the benefit of whoever is held by
final judicial decision or final compromise agreement, to be
entitled to the shares involved.
The Court is aware that implementation of some of the above

safeguards may require agreement between the registered
stockholders and the PCGG as well as action on the part of the
Securities and Exchange Commission. The Court, therefore, directs
petitioners and the PCGG to effect the implementation of this
decision under the supervision and control of the Sandiganbayan so
that the right to vote the sequestered shares and the installation and
operation of the safeguards above-specified may be exercised and
effected in a substantially contemporaneous manner and with all
deliberate dispatch.
WHEREFORE, the Petitions are GIVEN DUE COURSE and GRANTED.

Private respondents Adolfo Azcuna, Edison Coseteng and Patricio
Pineda are hereby DIRECTED to vacate their respective offices as
members of the Board of Directors of the SMC as soon as this
decision is implemented. Contemporaneously with the installation of
the safeguards above-required to enable the PCGG to perform its
statutory role as conservator of the sequestered shares of stock or
assets, the respondent SMC is hereby ORDERED to allow the
petitioners to vote their shares in person or by proxy and to be voted
for as members of the Board of Directors of the SMC and otherwise
to enjoy the rights and privileges of shareholders; and the PCGG is

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hereby ENJOINED from voting the sequestered shares of stock
except as otherwise authorized in the safeguards above-required.
The questioned order of the Sandiganbayan dated 16 November
1989 is hereby SET ASIDE; however, the implementation of this
decision shall be carried out under the supervision and control of the
Sandiganbayan. The Court makes no pronouncement as to costs.
SO ORDERED.
Fernan, C.J., Narvasa, Melencio-Herrera, Gutierrez, Jr., Cruz, Paras,

Feliciano, Bidin, Griño-Aquino, Regalado and Davide, Jr., JJ., concur.
Sarmiento and Medialdea, JJ., took no part.
Separate Opinions
In all cases (en banc and division) involving San Miguel Corporation
(SMC), I take no part because of personal equity interest in said
corporation. I am taking no part in this case for the same reason
even if the real party-respondents in the case are the PCGG and its
nominees to the SMC board of directors, and SMC itself appears to
be only a nominal party in the case.
At the same time, I will be less than candid if I did not state on this
occasion that in earlier decisions of this Court, I have expressed my
views on sequestration and its implicitness. I refer particularly to my
concurring opinion in BASECO vs. PCGG, 150 SCRA 252 (cited on
page 14 of the present ponencia of Mr. Justice Gancayco) and to
my dissenting opinion in Eduardo M. Cojuangco, Jr. vs. Republic of
the Philippines, et. al., G.R. No. 93278, 4 March 1991.
Footnotes
1 Certification dated April 20, 1990 issued Mr. Jose Y. Feria,

Corporate Secretary of SMC; attached as Annex A to Petition.
2 150 SCRA 181 (1987).
3 Ibid., pages 236 to 240; Emphasis supplied.
4 Ibid., page 252.
5 Ibid., pages 252 to 253.

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8 Citing PCGG vs. SEC, G.R. No. 82188, June 30,1988.
9 Section 24 of the Corporation Code (Batas Pambansa Blg. 68)

provides as follows:
Sec. 24. Election of directors or trustees. –– At all elections

of directors or trustees, there must be present, either in
person or by representative authorized to act by written
proxy, the owners of the majority of the outstanding
capital stock, or if there be no capital stock, a majority of
the members entitled to vote. The election must be by
ballot if requested by any voting stockholder or member.
In stock corporations, every stockholder entitled to vote
shall have the right to vote in person or by proxy the
number of shares of stock standing, at the time fixed in the
by-laws, in his own name on the stock books of the
corporation, or where the by-laws are silent, at the time of
the election; and said stockholder may vote such number
of shares for as many persons as there are directors to be
elected or he may cumulate said shares and give one
candidate as many votes as the number of directors to
be elected multiplied by the number of his shares shall
equal, or he may distribute them on the same principle
among as many candidates as he shall see fit. Provided,
That the total number of votes cast by him shall not
exceed the number of shares owned by him as shown in
the books of the corporation multiplied by the whole
number of directors to be elected: Provided, however,
That no delinquent stock shall be voted. Unless otherwise
provided in the articles of incorporation or in the by-laws,
members of corporations which have no capital stock
may cast as many votes as there are trustees to be
elected but may not cast more than one vote for one
candidate. Candidates receiving the highest number of
votes shall be declared elected. Any meeting of the
stockholders or members called for an election may
adjourn from day to day or from time to time but not since
die or indefinitely if, for any reason, no election is held, or if
there are not present or represented by proxy, at the
meeting, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of
the members entitled to vote. (Emphasis supplied.)
10 Civil Liberties Union vs. The Executive Secretary and Anti-

Graft League of the Philippines vs. The Executive Secretary, G.R.
Nos. 83896 and 83815, February 22, 1991.

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Gochan vs. Young (354 SCRA 207 [2001])
G.R. No. 131889 March 12, 2001
VIRGINIA O. GOCHAN, FELIX Y. GOCHAN III, MAE GOCHAN EFANN,

LOUISE Y. GOCHAN, ESTEBAN Y. GOCHAN JR., DOMINIC Y.GOCHAN,
FELIX 0. GOCHAN III, MERCEDES R. GOCHAN, ALFREDO R. GOCHAN,
ANGELINA R. GOCHAN-HERNAEZ, MARIA MERCED R. GOCHAN,
CRISPO R. GOCHAN JR., MARION R. GOCHAN, MACTAN REALTY
DEVELOPMENT CORPORATION and FELIX GOCHAN & SONS REALTY
CORPORATION, petitioner,
vs.
RICHARD G. YOUNG, DAVID G. YOUNG, JANE G. YOUNG-LLABAN,
JOHN D. YOUNG JR., MARY G. YOUNG-HSU and ALEXANDER THOMAS
G. YOUNG as heirs of Alice Gochan; the INTESTATE ESTATE OF JOHN
D. YOUNG SR.; and CECILIA GOCHAN-UY and MIGUEL C. UY, for
themselves and on behalf and for the benefit of FELIX GOCHAN &
SONS REALTY CORPORATION, respondents.
PANGANIBAN, J.:
A court or tribunal's jurisdiction over the subject matter is determined

by the allegations in the complaint. The fact that certain persons are
not registered as stockholders in the books of the corporation will not
bar them from filing a derivative suit, if it is evident from the
allegations in the complaint that they are bona fide stockholders. In
view of RA 8799, intra-corporate controversies are now within the
jurisdiction of courts of general jurisdiction, no longer of the Securities
and Exchange Commission. 1âwphi1.nêt
The Case
Before us is a Petition for Review on Certiorari under Rule 45 of the

Rules of Court. The Petition assails the February 28, 1996 Decision 1 of
the Court of Appeals (CA), as well as its December 18, 1997
Resolution denying petitioner's Motion for Reconsideration. The
dispositive part of the CA Decision reads as follows:
"WHEREFORE, the petition as far as the heirs of Alice Gochan, is

DISMISSED, without prejudice to filing the same in the regular
courts.
SO ORDERED."2
In dismissing the Complaint before the SEC regarding only Alice

Gochan's heirs but not the other complainants, the CA effectively
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modified the December 9, 1994 Order of the hearing officer3 of the
Securities and Exchange Commission (SEC). The Order, which was
affirmed in full by the SEC en banc, dismissed the entire case.
The Facts
The undisputed facts are summarized by the Court of Appeals as

follows:
"Felix Gochan and Sons Realty Corporation (Gochan Realty, for

brevity) was registered with the SEC on June, 1951, with Felix
Gochan, Sr., Maria Pan Nuy Go Tiong, Pedro Gochan, Tomasa
Gochan, Esteban Gochan and Crispo Gochan as its
incorporators.
"Felix Gochan Sr.'s daughter, Alice, mother of [herein

respondents], inherited 50 shares of stock in Gochan Realty
from the former.
"Alice died in 1955, leaving the 50 shares to her husband, John

Young, Sr.
"In 1962, the Regional Trial Court of Cebu adjudicated 6/14 of

these shares to her children, herein [respondents] Richard
Young, David Young, Jane Young Llaban, John Young Jr., Mary
Young Hsu and Alexander Thomas Young.
"Having earned dividends, these stocks numbered 179 by 20

September 1979.
"Five days later (25 September), at which time all the children
had reached the age of majority, their father John Sr.,
requested Gochan Realty to partition the shares of his late wife
by cancelling the stock certificates in his name and issuing in
lieu thereof, new stock certificates in the names of [herein
respondents].
"On 17 October 1979, respondent Gochan Realty refused,

citing as reason, the right of first refusal granted to the
remaining stockholders by the Articles of Incorporation.
"On 21, 1990, [sic] John, Sr. died, leaving the shares to the
[respondents].
"On 8 February 1994, [respondents] Cecilia Gochan Uy and

Miguel Uy filed a complaint with the SEC for issuance of shares
of stock to the rightful owners, nullification of shares of stock,
reconveyance of property impressed with trust, accounting,
removal of officers and directors and damages against

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respondents. A Notice of Lis Pendens was annotated as [sic]
real properties of the corporation.
"On 16 March 1994, [herein petitioners] moved to dismiss the

complaint alleging that: (1) the SEC ha[d] no jurisdiction over
the nature of the action; (2) the [respondents] [were] not the
real parties-in-interest and ha[d] no capacity to sue; and (3)
[respondents'] causes of action [were] barred by the Statute of
Limitations.
"The motion was opposed by herein [respondents].
"On 29 March 1994, [petitioners'] filed a Motion for cancellation

of Notice of Lis Pendens. [Respondents] opposed the said
motion.
"On 9 December 1994, the SEC, through its Hearing Officer,

granted the motion to dismiss and ordered the cancellation of
the notice of lis pendens annotated upon the titles of the
corporate lands. In its order, the SEC opined:
'In the instant case, the complaint admits that

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

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

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

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

complainants bring this action as [a] derivative suit on
their own behalf and on behalf of respondent FGSRC.
'Section 5, Rule III of the Revised Rules of Procedure in the

Securities and Exchange Commission provides:
'Section 5. Derivative Suit. No action shall be brought

by stockholder in the right of a corporation unless the
complainant was a stockholder at the time the
questioned transaction occurred as well as at the
time the action was filed and remains a stockholder
during the pendency of the action. x x x.'
'The rule is in accord with well settled jurisprudence

holding that a stockholder bringing a derivative action
must have been [so] at the time the transaction or act
complained of [took] place. (Pascual vs. Orozco, 19 Phil.
82; Republic vs. Cuaderno, 19 SCRA 671; San Miguel
Corporation vs. Khan, 176 SCRA 462-463) The language of
the rule is mandatory, strict compliance with the terms
thereof thus being a condition precedent, a jurisdictional
requirement to the filing of the instant action.
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'Otherwise stated, proof of compliance with the
requirement must be sufficiently established for the action
to be given due course by this Commission. The failure to
comply with this jurisdictional requirement on derivative
action must necessarily result in the dismissal of the instant
complaint.' (pp. 77-79, Rollo)
"[Respondents] moved for a reconsideration but the same was

denied for being pro-forma.
"[Respondents] appealed to the SEC en banc, contending,

among others, that the SEC ha[d] jurisdiction over the case.
"[Petitioners], on the other hand, contend that the appeal was

97 days late, beyond the 30-day period for appeals.
"On 3 March 1995, the SEC en banc ruled for the [petitioners,]
holding that the [respondents'] motion for reconsideration did
not interrupt the 30-day period for appeal because said motion
was pro-forma."4
Aggrieved, herein respondents then filed a Petition for Review with

the Court of Appeals.
The Court of Appeals ruled that the SEC had no jurisdiction over the
case as far as the heirs of Alice Gochan were concerned, because
they were not yet stockholders of the corporation. On the other
hand, it upheld the capacity of Respondents Cecilia Gochan Uy
and her spouse, Miguel Uy. It also held that the Intestate Estate of
John Young Sr. was an indispensable party.
The appellate court further ruled that the cancellation of the notice
of lis pendens on the titles of the corporate real estate was not
justified. Moreover, it declared that respondents' Motion for
Reconsideration before the SEC was not pro forma; thus, its filing
tolled the appeal period.
The Issues
These are the issues presented before us:
"A. Whether or not the Spouses Uy have the personality to file

an action before the SEC against Gochan Realty Corporation.
"B. Whether or not the Spouses Uy could properly bring a

derivative suit in the name of Gochan Realty to redress wrongs

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allegedly committed against it for which the directors refused
to sue.
"C. Whether or not the intestate estate of John D. Young Sr. is

an indispensable party in the SEC case considering that the
individual heirs' shares are still in the decedent stockholder's
name.
"D. Whether or not the cancellation of [the] notice of lis

pendens was justified considering that the suit did not involve
real properties owned by Gochan Realty."6
In addition, the Court will determine the effect of Republic Act

No.87997 on this case.
The Court's Ruling
The Petition has no merit. In view of the effectivity of RA 8799,

however, the case should be remanded to the proper regional trial
court, not to the Securities and Exchange Commission.
First Issue:
Personality of the Spouses Uy to File a Suit Before the SEC
Petitioners argue that Spouses Cecilia and Miguel Uy had no

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

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

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In any event, the present controversy, whether intra-corporate or
not, is no longer cognizable by the SEC, in view of RA 8799, which
transferred to regional trial courts the former's jurisdiction over cases
involving intra-corporate disputes.
Action Has Not Prescribed
Petitioners contend that the statute of limitations already bars the Uy

spouses' action, be it one for annulment of a voidable contract or
one based upon a written contract. The Complaint, however,
contains respondents' allegation that the sale of the shares of stock
was not merely voidable, but was void ab initio. Below we quote its
relevant portion:
"38. That on November 21, 1979, respondent Felix Gochan &

Sons Realty Corporation did not have unrestricted retained
earnings in its books to cover the purchase price of the 208
shares of stock it was then buying from complainant Cecilia
Gochan Uy, thereby rendering said purchase null and void ab
initio for being violative of the trust fund doctrine and contrary
to law, morals good customs, public order and public policy;"
Necessarily, petitioners' contention that the action has prescribed

cannot be sustained. Prescription cannot be invoked as a ground if
the contract is alleged to be void ab initio.10 It is axiomatic that the
action or defense for the declaration of nullity of a contract does not
prescribe.11
Second Issue:
Derivative Suit and the Spouses Uy
Petitioners also contend that the action filed by the Spouses Uy was
not a derivative suit, because the spouses and not the corporation
were the injured parties. The Court is not convinced. The following
quoted portions of the Complaint readily shows allegations of injury
to the corporation itself:
"16. That on information and belief, in further pursuance of the

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

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

complainant Cecilia Gochan Uy for her shares of stock
constituted an unlawful, premature and partial liquidation and
distribution of assets to a stockholder, resulting in the
impairment of the capital of the Corporation and prevented it
from otherwise utilizing said amount for its regular and lawful
business, to the damage and prejudice of the Corporation, its
creditors, and of complainants as minority stockholders;"12
As early as 1911, this Court has recognized the right of a single

stockholder to file derivative suits. In its words:
"[W]here corporate directors have committed a breach of trust

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

derivative suit. The allegations of injury to the Spouses Uy can coexist
with those pertaining to the corporation. The personal injury suffered
by the spouses cannot disqualify them from filing a derivative suit on
behalf of the corporation. It merely gives rise to an additional cause
of action for damages against the erring directors. This cause of
action is also included in the Complaint filed before the SEC.
The Spouses Uy have the capacity to file a derivative suit in behalf of

and for the benefit of the corporation. The reason is that, as earlier
discussed, the allegations of the Complaint make them out as
stockholders at the time the questioned transaction occurred, as
well as at the time the action was filed and during the pendency of
the action.
Third Issue:
Capacity of the Intestate Estate of John D. Young Sr.
Petitioners contend that the Intestate Estate of John D. Young Sr. is

not an indispensable party, as there is no showing that it stands to be
benefited or injured by any court judgement.
It would be useful to point out at this juncture that one of the causes
of action stated in the Complaint filed with the SEC refers to the
registration, in the name of the other heirs of Alice Gochan Young, of
6/14th of the shares still registered under the name of John D. Young

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Sr. Since all the shares that belonged to Alice are still in his name, no
final determination can be had without his estate being impleaded
in the suit. His estate is thus an indispensable party with respect to the
cause of action dealing with the registration of the shares in the
names of the heirs of Alice.
Petitioners further claim that the Estate of John Young Sr. was not
properly represented. They claim that "when the estate is under
administration, suits for the recovery or protection of the property or
rights of the deceased may be brought only by the administrator or
executor as approved by the court."14 The rules relative to this matter
do not, however, make any such categorical and confining
statement.
Section 3 of Rule 3 of the Rules of Court, which is cited by petitioners

in support of their position, reads:
"Sec. 3. Representatives as parties. - Where the action is

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

administrators, states:
"Sec. 2. Executor or administrator may bring or defend actions

which survive. -For the recovery or protection of the property or
rights of the deceased, an executor or administrator may bring
or defend, in the right of the deceased, actions for causes
which survive."
The above-quoted rules, while permitting an executor or

administrator to represent or to bring suits on behalf of the
deceased, do not prohibit the heirs from representing the deceased.
These rules are easily applicable to cases in which an administrator
has already been appointed. But no rule categorically addresses the
situation in which special proceedings for the settlement of an estate
have already been instituted, yet no administrator has been
appointed. In such instances, the heirs cannot be expected to wait
for the appointment of an administrator; then wait further to see if
the administrator appointed would care enough to file a suit to
protect the rights and the interests of the deceased; and in the

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meantime do nothing while the rights and the properties of the
decedent are violated or dissipated.1âwphi1.nêt
The Rules are to be interpreted liberally in order to promote their

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

titles of the properties of the corporation and the other respondents,
we still find no reason to disturb the ruling of the Court of Appeals.
Under the third, fourth and fifth causes of action of the Complaint,
there are allegations of breach of trust and confidence and
usurpation of business opportunities in conflict with petitioners'
fiduciary duties to the corporation, resulting in damage to the
Corporation. Under these causes of action, respondents are asking
for the delivery to the Corporation of possession of the parcels of
land and their corresponding certificates of title. Hence, the suit
necessarily affects the title to or right of possession of the real
property sought to be reconveyed. The Rules of Court17 allows the
annotation of a notice of lis pendens in actions affecting the title or
right of possession of real property.18 Thus, the Court of Appeals was
correct in reversing the SEC Order for the cancellation of the notice
of lis pendens.
The fact that respondents are not stockholders of the Mactan Realty
Development Corporation and the Lapu-Lapu Real Estate
Corporation does not make them non-parties to this case. To repeat,
the jurisdiction of a court or tribunal over the subject matter is
determined by the allegations in the Complaint. In this case, it is
alleged that the aforementioned corporations are mere alter egos
of the directors-petitioners, and that the former acquired the
properties sought to be re conveyed to FGSRC in violation of the
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directors-petitioners' fiduciary duty to FGSRC. The notion of
corporate entity will be pierced or disregarded and the individuals
composing it will be treated as identical19 if, as alleged in the present
case, the corporate entity is being used as a cloak or cover for fraud
or illegality; as a justification for a wrong; or as an alter ego, an
adjunct, or a business conduit for the sole benefit of the
stockholders.
Effect of RA 8799
While we sustain the appellate court, the case can no longer be

remanded to the SEC. As earlier stated, RA 8799, which became
effective on August 8, 2000, transferred SEC's jurisdiction over cases
involving intra-corporate disputes to courts of general jurisdiction or
to the regional trial courtS.20 Section 5.2 thereof reads as follows:
"5.2. The Commission's jurisdiction over all cases enumerated

under Section 5 of Presidential Decree No. 902-A is hereby
transferred to the Courts of general jurisdiction or the
appropriate Regional Trial Court: Provided, That the Supreme
Court in the exercise of its authority may designate the
Regional Trial Court branches that shall exercise jurisdiction over
these cases. The Commission shall retain jurisdiction over
pending cases involving intra-corporate disputes submitted for
final resolution which should be resolved within one (1) year
from the enactment of this Code. The Commission shall retain
jurisdiction over pending suspension of payments/rehabilitation
cases filed as of 30 June 2000 until finally disposed."
In the light of the Resolution issued by this Court in AM No. 00-8-10-

SC,21 the Court Administrator and the Securities and Exchange
Commission should be directed to cause the transfer of the records
of SEC Case No. 02-94-4674 to the appropriate court of general
jurisdiction.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision

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

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Footnote
1 Penned by Justice Antonio M. Martinez (Division chairman), with the concurrence of Justices
Pacita Canizares-Nye and Romeo J. Callejo Sr.
3 Atty. Enrique L. Flores Jr.
5 The case was deemed submitted for resolution on November 12, 1999, upon receipt by this Court
of respondents' Memorandum filed by Attys. Jose R. Ebro Jr. and Emesto T. Morales. Petitioners had
previously filed their Memorandum, signed by Atty. Victor Basilio N. de Leon of Antonio R. Bautista &
Partners, on October 27, 1999.
6 Petitioners' Memorandum, p. 5; rollo, p. 114.
7 Otherwise known as "The Securities Regulation Code," it became effective on August 8, 2000.
8 Lim Tay v. Court of Appeals, 293 SCRA 634, August 5, 1998, citing Javelosa v. Court of Appeals,
265 SCRA 493, December 10, 1996.
9 Tolentino, Civil Code, Vol. IV, 1991 ed. p. 631.
10 Ruiz v. Court of Appeals, 79 SCRA 525, October 21, 1977; Castillo v. Heirs of Vicente Madrigal,
198 SCRA 556, June 27, 1991.
11 Art. 1410, Civil Code.
12 Respondents' Memorandum, p. 29; rollo, p. 170.
13 Pascual v. Del Saz Orozco, 19 Phil. 82, March 17, 1911, per Trent, J.; cited in Bitong v. Court of
Appeals, 292 SCRA 503, July 13, 1998.
15 Rule 1, Section 6, Rules of Court.
16 Pascual v. Pascual, 73 Phil. 561 (1942); Velasquez v. George, 125 SCRA 456, October 27, 1983;
Borromeo v. Borromeo et at., 98 Phil. 432 (1956).
17 Section 14, Rule 13, Rules of Court.
18 Alberto v. CA, GR No.119088, June 30, 2000; Viewmaster Construction Cory. v. CA, GR No.
136283, February 29, 2000; Villanueva v. CA, 281 SCRA 298, November 5, 1997.
19 Yutivo Sons Hardware Co. v. Court of Tax Appeals, 1 SCRA 160, January 28, 1961; Umali v. Court
of Appeals, 189 SCRA 529, September 13, 1990.
20 See Pascual v. CA, GR No. 138542, August 25, 2000.

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21 "In Re: Transfer of Cases from the Securities and Exchange Commission to the Regular Courts
pursuant to RA 8799."
Gochan vs. Young Case Digest
Gochan vs. Young
[GR 131889, 12 March 2001]
Facts: Felix Gochan and Sons Realty Corporation (Gochan Realty)

was registered with the SEC on June 1951, with Felix Gochan, Sr.,
Maria Pan Nuy Go Tiong, Pedro Gochan, Tomasa Gochan, Esteban
Gochan and Crispo Gochan as its incorporators. Felix Gochan Sr.'s
daughter, Alice inherited 50 shares of stock in Gochan Realty from
the former. Alice died in 1955, leaving the 50 shares to her husband,
John Young, Sr. In 1962, the Regional Trial Court of Cebu adjudicated
6/14 of these shares to her children, Richard Young, David Young,
Jane Young Llaban, John Young Jr., Mary Young Hsu and Alexander
Thomas Young (the Youngs). Having earned dividends, these stocks
numbered 179 by 20 September 1979. 5 days later (25 September),
at which time all the children had reached the age of majority, their
father John Sr., requested Gochan Realty to partition the shares of
his late wife by cancelling the stock certificates in his name and
issuing in lieu thereof, new stock certificates in the names of the
Youngs. On 17 October 1979, Gochan Realty refused, citing as
reason, the right of first refusal granted to the remaining stockholders
by the Articles of Incorporation. In 1990, John, Sr. died, leaving the
shares to the Youngs. On 8 February 1994, Cecilia Gochan Uy and
Miguel Uy filed a complaint with the SEC for issuance of shares of
stock to the rightful owners, nullification of shares of stock,
reconveyance of property impressed with trust, accounting, removal
of officers and directors and damages against Virginia Gochan, et.
al. (Gochans) A Notice of Lis Pendens was annotated to the real
properties of the corporation.
On 16 March 1994, the Gochans moved to dismiss the complaint

alleging that: (1) the SEC had no jurisdiction over the nature of the

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action; (2) the the Youngs were not the real parties-in-interest and
had no capacity to sue; and (3) the Youngs' causes of action were
barred by the Statute of Limitations. The motion was opposed by the
Youngs. On 29 March 1994, the Gochans filed a Motion for
cancellation of Notice of Lis Pendens. The Youngs opposed the said
motion. On 9 December 1994, the SEC, through its Hearing Officer,
granted the motion to dismiss and ordered the cancellation of the
notice of lis pendens annotated upon the titles of the corporate
lands; holding that the Youngs never been stockholders of record of
FGSRC to confer them with the legal capacity to bring and maintain
their action, and thus, the case cannot be considered as an intra-
corporate controversy within the jurisdiction of the SEC; and that on
the allegation that the Youngs brought the action as a derivative suit
on their own behalf and on behalf of Gochan Realty, rhe failure to
comply with the jurisdictional requirement on derivative action
necessarily result in the dismissal of the complaint. The Youngs filed a
Petition for Review with the Court of Appeals. On 28 February 1996,
the Court of Appeals ruled that the SEC had no jurisdiction over the
case as far as the heirs of Alice Gochan were concerned, because
they were not yet stockholders of the corporation. On the other
hand, it upheld the capacity of Cecilia Gochan Uy and her spouse
Miguel Uy. It also held that the Intestate Estate of John Young Sr. was
an indispensable party. The appellate court further ruled that the
cancellation of the notice of lis pendens on the titles of the
corporate real estate was not justified. Moreover, it declared that
the Youngs' Motion for Reconsideration before the SEC was not pro
forma; thus, its filing tolled the appeal period. The Gochans moved
for reconsideration but were denied in a Resolution dated 18
December 1997. The Gochans filed the Petition for Review on
Certiorari.
Issue: Whether the action filed by the Spouses Uy was not a

derivative suit, because the spouses and not the corporation were
the injured parties.
Held: The following portions of the Complaint shows allegations of

injury to the corporation itself, to wit: "That on information and belief,
in further pursuance of the said conspiracy and for the fraudulent
purpose of depressing the value of the stock of the Corporation and

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to induce the minority stockholders to sell their shares of stock for an
inadequate consideration as aforesaid, respondent Esteban T.
Gochan . . ., in violation of their duties as directors and officers of the
Corporation . . ., unlawfully and fraudulently appropriated [for]
themselves the funds of the Corporation by drawing excessive
amounts in the form of salaries and cash advances . . . and by
otherwise charging their purely personal expenses to the
Corporation"; and "That the payment of P1,200,000.00 by the
Corporation to complainant Cecilia Gochan Uy for her shares of
stock constituted an unlawful, premature and partial liquidation and
distribution of assets to a stockholder, resulting in the impairment of
the capital of the Corporation and prevented it from otherwise
utilizing said amount for its regular and lawful business, to the
damage and prejudice of the Corporation, its creditors, and of
complainants as minority stockholders." As early as 1911, the Court
has recognized the right of a single stockholder to file derivative suits.
"Where corporate directors have committed a breach of trust either
by their frauds, ultra vires acts, or negligence, and the corporation is
unable or unwilling to institute suit to remedy the wrong, a single
stockholder may institute that suit, suing on behalf of himself and
other stockholders and for the benefit of the corporation, to bring
about a redress of the wrong done directly to the corporation and
indirectly to the stockholders." Herein, the Complaint alleges all the
components of a derivative suit. The allegations of injury to the
Spouses Uy can coexist with those pertaining to the corporation. The
personal injury suffered by the spouses cannot disqualify them from
filing a derivative suit on behalf of the corporation. It merely gives rise
to an additional cause of action for damages against the erring
directors. This cause of action is also included in the Complaint filed
before the SEC. The Spouses Uy have the capacity to file a derivative
suit in behalf of and for the benefit of the corporation. The reason is
that the allegations of the Complaint make them out as stockholders
at the time the questioned transaction occurred, as well as at the
time the action was filed and during the pendency of the action.
Everett vs. Asia Banking Corp. (49 Phil. 512 [1927])

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G.R. No. L-25241 November 3, 1926
HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and GEORGE W.

ROBINSON, plaintiffs-appellants,
vs.
THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN, ERIC
BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and CHARLES D.
MACINTOSH, defendants-appellees.
Thomas Cary Welch for appellants.

Gibbs and McDonough for appellees.
OSTRAND, J.:
This is an appeal from a decision of the Court of First Instance of

Manila, sustaining a demurrer to the complaint. The plaintiffs
declined to amend and judgment was rendered dismissing the case.
The complaint in question reads as follows:
The above named plaintiffs, by Thomas Cary Welch, their

attorney, complain of the above-named defendants and for
cause of action against them allege:
1st. That at al times in this complaint mentioned the plaintiffs

Harrie S. Everett, Ellis H. Teal and George W. Robinson were and
now are residents of the City of Manila, Philippine Islands. That
the plaintiff Carl G. Clifford was formerly a resident of said City
of Manila and now is the resident of the City of Washington,
District of Columbia.
2nd. That at all times in this complaint mentioned the

defendant the Asia Banking Corporation hereinafter called "the
Bank", was and now is a foreign banking corporation duly
licensed to transact banking business in the Philippine Islands,
having, its principal office and place of business at Manila
aforesaid and that said Asia Banking Corporation never has
been empowered by law or licensed to do any business other
than commercial banking in the Philippine Islands. That the
defendants Nicholas E. Mullen, Alfred F. Kelly, John W. Mears,
and Charles D. Macintosh were residents of said City of Manila
and were officers, agents and employees of the said Asia
Banking Corporation, the said Mullen being the General
Manager thereof in said City; That: the defendant Eric Barclay is
a now a resident of Los Angeles, California, and the defendant
Mcintosh is also residing in the United States, his exact residence
being unknown.

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3rd. That at all times in this complaint mentioned Teal and
Company hereinafter called the Company, was and now is a
domestic corporation duly incorporated under the laws of the
Philippine Islands and having its principal office and place of
business at Manila aforesaid. That during said times the plaintiffs
Everett, Clifford, Teal and Robinson were the principal
stockholders in the Company owning a total of 4,478 shares
therein and that the defendant Barclay was the only other
stockholder, owning one share thereof.
4th. That in the year 1921, the said Teal and Company has
become indebted to the firm of H. W. Peabody and Company
in about the sum of P300,000, being for tractors, plows and
parts which had been ordered and delivered, the Bank and
other banks in Manila held drafts accepted by the Company
under said H. W. Peabody and Company's guarantee. That
said tractors having become unsailable by reason of the
financial and agricultural depression that had overtaken the
Islands, the said tractors were all returned to the said H. W.
Peabody and Company and as these plaintiffs are informed
and verily believes were by it returned to the United States, and
while the events herein set forth were taking place the
Company made payments on its indebtedness through the
Bank to H. W. Peabody and Company, amounting to the sum
of at least P150,000. that at about the same time the Company
had ordered another lot of tractors, etc., from a business house
in the United States, known as Smith, Kirkpatrick and Co., under
a commercial letter of credit which the Company had from the
Bank in New York City, but that shipment of such tractors had
been delayed until the credit had been rescinded by the Bank
and that upon such rescission Smith, Kirkpatrick and Co., had
been advised by telegraph that the order was cancelled and
not to ship the tractors. That nevertheless and contrary to such
advise the said Smith, Kirkpatrick and Co. did ship the tractors
doing so under D/A drafts therefor and that when said tractors
arrived in Manila and in order, if possible to save Smith,
Kirkpatrick and Co. from additional loss, the Company at the
request and on the advice of the said Bank accepted the
drafts and stored the same in a warehouse in Manila rented by
it and gave receipts therefor.
5th. That thereafter and on or about March 1921, the Bank

persuaded the Company and the said H. W. Peabody and Co.
and Smith, Kirkpatrick and Co. to enter into a so called
"creditors agreement" with itself, wherein it was mutually
agreed that neither of the parties should take action to collect
its debts from the Company for the term of two years after the
date thereof. That these plaintiffs have no copy of said

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agreement but beg leave to refer to the original of same, in
possession of the Bank, for greater certainty.
6th. That the business of said Company consisted mainly in the

merchandising of automobiles, trucks, tractors, spare parts and
accessories therefor, and the repairing thereof. That on the 29th
day of December, 1922, said company was solvent and in the
enjoyment of a large, growing, and lucrative business and in
the possession of a valuable reputation and good-will. That
since its, organization in May, 1919, it had done its banking
business and financing almost exclusively thru and with the
Bank and by reason of such continued relations the officers of
the Company had acquired trust and confidence in the
integrity and good intentions of the said bank and its officers
and the other defendants in their friendliness to themselves and
the Company.
7th. That on said 29th day of December, 1922, the said

Company was indebted to the Bank in about the sum of
P750,000, which said sum was secured by mortgage on its
personal property and the improvements upon the real estate
occupied by it, which real estate was held under a ninety-nine
years lease upon very favorable terms and which lease was a
valuable asset and constantly increasing in value, and that the
said Bank held acceptances, warehouse receipts or pledges
for such other indebtedness, as was not covered by the last
mentioned mortgage, which said security was ample to cover
the amount of the indebtedness.
8th. That toward the end of the year 1922, the Bank, through its
manager the defendant Mullen represented to the Company
and its managers that for the protection both of the Bank and
the Company it was advisable for them both that the Bank
should temporarily obtain control of the management and
affairs of the Company in order that the affairs of the Company
could be conducted by the Bank without interference or
hindrance from outside, and to this end that it would be
necessary for the stockholders in the Company to place their
shares therein in a Voting Trust to be held by the Bank would
then finance the Company under its own supervision and that if
and when the same were successful and in position to resume
independent operation the said trust would be terminated and
the stock returned to its true owners, and further represented
that in case at any time the Bank decided to discontinue
operation under the said trust that then the stock also would be
so returned.

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9th. That it was further represented by the Bank and the said
Mullen that in order to protect the mutual interests of the Bank
and the Company it was necessary to carry into effect the said
proposed voting trust without the knowledge of the creditors
above named and thereby place the Bank in an
advantageous position with regard to them. That relying upon
the previous friendly relations between the bank and the
Company and between the individual defendants and these
plaintiffs and relying upon the promise and representations of
the defendants, these plaintiffs were induced to sign and did
sign and deliver to the Bank simultaneously a so-called "Voting
Trust Agreement," executed by the plaintiff stockholders and a
Memorandum of Agreement executed by the Company, both
dated and executed and delivered the 29th day of December,
1922, the two forming one document and a copy of which is
hereto attached and marked Exhibit A.
10th. That by reason of the facts above set forth and of their
reliance upon the good faith and good-will of the defendants
these plaintiffs were induced to sign the "Memorandum of
Agreement," and "Voting Trust Agreement," Exhibit A,
understanding from the defendant that the same were
intended for the protection of all parties thereto from outside
creditors, but that they were not intended to be enforced
according to the letter thereof, and that they did not contain
the true agreement between the Bank and the Company
which was to finance the Company without interference from
the above named creditors, to hold the voting trust as a
protection to the bank as against the said creditors and for its
own advances, and the further agreement that in case in the
Bank did not operate under the said voting trust because of the
disapproval by its New York headquarters of such action, or for
any other cause, the said trust would be cancelled and the
stock in and control of the Company returned to its true
owners.
11th. That shortly subsequent to the execution and delivery of

the voting trust and memorandum of agreement hereinabove
described, in violation of the obligations and duties imposed by
law upon the trustee and in pursuance of a scheme to defraud
these plaintiffs hereinbelow more fully set forth, the said voting
trustee, the defendant Mullen, caused and procured, by virtue
of the powers delegated in the said voting trust, the
displacement and removal from the Board of Directors of the
Company of each and every person who was at the time of
the execution of the said voting trust a stockholder in the
Company and the substitution in their places as such directors,
of the above named persons defendant, or of other persons at

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the time employees and servants of the Bank, that thereafter
and at no subsequent time did the said trustee allow or permit
to act as a Director of the Company any person who was in
fact a stockholder in the Company; that no one of the so-
called directors so placed in ostensible office, at any time has
ever purchased from any stockholder of the Company a single
share of the capital stock thereof, or paid to any stockholder or
the Company any money or consideration whatsoever for the
stock by virtue of the assumed ownership of which he has
assumed to be a director of the Company and that at all time
since, the Company has been exclusively controlled and
managed by the said defendants none of whom had any legal
or equitable right to a voice in the control or management
thereof.
12th. That in pursuance of the above-mentioned and

hereinafter described scheme to defraud these plaintiffs, the
new so-called directors proceeded to remove from office the
Secretary of the Company, and to discharge from employment
all of the old responsible managers and foremen in the office
and shops who were total to the Company and to these
plaintiffs as the strockholders thereof and to displace them
substitute for them creatures of their own choosing whose
interest consisted wholly in pleasing themselves and the Bank,
and who were wholly foreign to the stockholders, these
plaintiffs who were and are the real owners of the Company.
That thereafter said defendants conducted the business of the
Company without consulting the stockholders thereof and
denied to the stockholders any knowledge or information as to
their actions, or the business of the Company, and at all times
thereafter carried on the business and management in all
respects as if they and the Bank were the real stockholders and
owners thereof and in utter and entire disregard of the rights
and interests of these plaintiffs who were and are the real
owners. That the said individual defendants, as such pretended
stockholders and directors as aforesaid, from time to time gave
new mortgages upon the properties of the Company to the
Bank as if from time to time required and without regard to the
interest of the Company and looking solely to the advantage
of the Bank whose employees and henchmen all of them were
and are.
13th. That after excluding the real owners from voice in the
management or knowledge of the affairs of the Company, the
said individual defendants and or the Bank by agreement
among themselves or because the individual defendants as
employees were coerced by the Bank, the said defendants
gave pledges and mortgages from the Company to the Bank

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and entered into contracts as directed by the Bank, and
permitted the Bank to foreclose the same and to sell the
property of the Company at such times and in such manners as
to be solely to the interests of the Bank of themselves, and
wholly without regard to the best interests of the Company itself
in disregard to the duties and obligations of a trustee, and
permitted the Bank to bring suits or suits against the Company,
in which the Company was not represented by anyone having
its interest at heart and in which by reason of the above set
forth relation of the Company to the Bank, the Bank in truth
occupied the position of both plaintiff and defendant and
tricked and deluded the courts into giving judgments in which
the rights of the real parties were concealed and unknown to
the courts.
14th. That on or about the 18th day of August, 1923, in order

more effectually to plunder the Company and to defraud
these plaintiffs the said defendants, Mullen, Barclay, Mears and
Mcintosh, made, executed and filed in the Bureau of
Commerce and Industry of the Philippine Islands, articles of
incorporation of a corporation called the "Philippine Motors
Corporation," having its principal office in the City of Manila, a
capital stock of P25,000, of which the sum of P5,000, was
alleged to have been subscribed and paid as follows: the
defendant Barclay P200, defendant Mears P1,200, defendant
Kelly P1,200, defendant Mcintosh P1,200, defendant Mullen
P1,200, the treasurer thereof being the defendant Mears. And
these plaintiffs beg leave to refer to the original articles of
Incorporation on file in the said Bureau for greater certainty.
That at the time of such incorporation each and every one of

the last above named defendants was an officer or employee
of the defendant Bank. That these plaintiffs have nor
information nor means of obtaining information as to whether
the money alleged to have been described by them for their
shares of stock was of their personal funds and property or
whether it was money furnished them by the Bank of purpose
moneys such incorporation was a fraud upon these plaintiffs for
the reason that it was intended for the sole purpose of taking
over the assets of the Company and said defendants were
enabled to effectuate such intent by reason of their positions
as officers and employees of the Bank and because each and
every one of them were nominally and de facto directors of
the Company, by reason of their appointments as such by the
defendant Mullen, the Voting Trustee, under the Voting Trust
hereinabove set forth, of which facts each and every one of
said defendant incorporators were at the time fully informed as
these plaintiffs verily believe.

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15th. That after the incorporation described in the last
preceding paragraph the said Bank turned over to the
Philippine Motors Corporation all of the business and assets of
the company of every name nature and description and with
the connivance and consent of the individual defendants
acting in their double capacity as directors of both
corporations, permitted and assisted the said Philippine Motors
Corporation to enter and possess itself of the premises and
good will of the Company and to continue and carry on the
business for the sole benefit of the new corporation and to
collect the debts owing to the Company and convert the
advantages, profits and proceeds thereof to itself. And that at
all times since the said Philippine Motors Corporation has
continued to conduct and advantage itself of the business of
the Company to the disregard of and detriment to the rights of
these plaintiffs and to their damage.
16th. That these plaintiffs, by reason of the facts hereinabove

set forth were and are ignorant of the exact relations that have
existed and do exist between the Bank and the said Philippine
Motors Corporation, or between the Bank and the individual
defendants as ostensible stockholders thereof and that the
Bank has prevented these plaintiffs from obtaining any such
information by refusing after demand to return to these
plaintiffs their stock in the Company or to dissolve the Voting
Trust or in any wise to allow them to regain control of what is left
of the Company or its records and has endeavored to forestall
and prevent any action toward regaining such control or
enforcement of their rights by bringing suit against one of the
principal stockholders in the Company, the plaintiff Everett,
based on an alteration and falsification of the books of the
Company and by threat of proceedings against another
principal stockholder in the Company, the plaintiff Clifford, to
collect a large sum of money as and for an alleged non
payment of a subscription to the stock of the Company, which
the records of the Company plainly show does not exist and
has no foundation in equity or in law.
That by the reason of ignorance, so generated and

maintained, of facts wholly within the knowledge of
defendants and concealed from these plaintiffs, they are
unable to allege positively and therefore must charge as they
do charge in the alternative;
(a) That the said Philippine Motors Corporation is a

fictitious entity brought into semblance of being by the
Bank through the control of its employees the above
named individual defendants acting as pretended

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incorporators, stockholders and directors, when in truth
and in fact the said individuals had and have no personal
property interest therein, and that in case of foregoing is
found to be the fact the said Philippine Motors
Corporations never obtained and has now no legal
existence for the reason that it was and is the Bank itself
operating under a disguise and because said Bank, under
its license to do business in the Philippine Islands, is without
power or authority to engage in the business assumed by
the Philippine Motors Corporation, and because said
corporation so pretendedly created by the Bank is in
violation of its duties and obligations assumed by it as
Trustee of the stockholders of the Company, Or
(b) That in case the individual defendants as individuals

created the said, the Philippine Motors Corporation, and
the same is the property of themselves as stockholders
and bona fide investors of their own money in the stock of
the same, then such creation and all subsequent
operations of the said Corporation were a fraud upon
these plaintiffs because such incorporation and
subsequent acts of the Corporation were caused and
procured by said individual defendants the defendant
Mullen being the voting trustee of the Company and at
the same time being the Manager in the Philippine Islands
of the Bank, and by virtue of the power so focused and
concentrated in himself together with the powers of the
others individual defendants as agents and employees of
the Bank, and simultaneously as officers and directors of
the Company enabled the said individual defendants to
take advantage of their position in respect to the
Company and the Bank and to sue the same to the
defraudation of these plaintiffs.
17th. That the return to the above named individual plaintiffs by

the Trustee of the stock in the Company, transferred to it by
said Voting Trust Agreement, has been demanded and
refused.
18th. That by reason of the facts above alleged these plaintiffs

have been kept and are in ignorance of accurate knowledge
of the actions of the defendants and of the amount of
damage thereby caused these plaintiffs and represent to the
court what accurate information can only be obtained by a
discovery by the defendants and each of them of all and
every fact relevant to this cause.

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19th. That these plaintiffs are credibly informed and verily
believe that the defendants are now confabulating among
themselves further to conceal the facts and to damage these
plaintiffs by a sale of the Philippine Motors Corporation and all
its assets tangible and intangible to a new purchaser, in which
new purchaser the said defendants will have interests, and that
in case such sale should be made it will damage these plaintiffs
in a manner for which there is no adequate remedy and will
cause and produce a multiplicity of actions.
Wherefore these plaintiffs demand the decrees and judgment of this

court:
1st. Enjoining and restraining the defendants and each of them

from transferring the corporation called Philippine Motors
Corporation or any of the capital stock therein to any person or
corporation during the pendency of this action.
2nd. Ordering the said defendants at once to cancel the said

Voting trust and to return to these plaintiffs their shares of the
stock of Teal and Company, taken under said trust and to
return to them all the books and records of every kind and
nature of said Teal and Company, and to regain to these
defendants their pretended positions in and control of Teal and
Company.
3rd. Decreeing that the defendants and each of them make

full and true discovery of all the facts in relation to the
formation, incorporation, and ownership of the Philippine
Motors Corporation and of all dealings and transactions
between the defendant Asia Banking Corporation and said
Philippine Motors Corporation to the end that the court and
these plaintiffs shall have information whether said Philippine
Motors Corporation is in fact the Asia Banking Corporation
operating under a disguise or is the creation of the individual
defendants availing themselves of their connections with and
positions in the said Bank in order to take advantage of these
plaintiffs and of Teal and Company.
4th. Decreeing that the said defendants make discovery of all

and every one of their acts and transactions with respect to
Teal and Company since the same was taken by them adding
and including a full and true discovery of all sales of the
property of Teal and Company of every kind and nature with
the full and true consideration received in every case, the
amount received from any compromise entered into by them
in the name of Teal and Company and the true consideration
therefor.

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5th. In case it be found that the said Philippine Motors
Corporations is in fact the Asia Banking Corporation that a
decree be entered ordering the said Bank immediately to
dissolve the same and to account to these plaintiffs for all
profits made thereby since its organization.
6th. For judgment against said defendants jointly and severally

for the damages caused by their acts aforesaid which the
plaintiffs charged to be not less than P500,000.
7th. For such other or further relief, or both, in the premises as to

this court may seem just and equitable.
To this complaint the defendants demurred on the grounds (1) that it

is ambiguous, unintelligible and uncertain; (2) that the plaintiffs have
not the legal capacity to bring this action; (3) that the complaint
does not state facts sufficient to constitute a cause of action, and (4)
that there is a defect or misjoinder of parties defendant.
The court below sustained the demurrer on all four grounds and held
that the complaint, especially in its paragraphs 4 and 5, is
ambiguous, confusing, unintelligible and vague; that Teal and
Company should have been joined as a party plaintiff; that, as far as
the Philippine Motors Corporation is concerned, the plaintiffs, not
being stockholders in that corporation, had no legal right to proceed
against it in this case; and that the court could not be called upon to
act as investigator of the facts referred to in paragraphs 3 and 4 of
the complaint, but that such investigations fall within the duty of the
interested party, the Attorney-General, the Insular Auditor or the
Insular Treasurer.
If this were an ordinary action at law, the ruling of the court below
would be correct in most respects; it must be conceded that the
complaint violates at least three of the four principal rules as to the
manner or stating facts in complaints in such actions. It suffers from
duplicity, the facts are not stated with certainty, and the statement is
sometimes indirect and partly in the alternative.lawphil.net
But we are not here dealing with a complaint in an action at law;

this is in effect a bill of discovery and the proceeding is primarily one
for equitable relief, though it may eventually develop into an action
at law. In such proceedings considerable latitude in the manner of
stating facts in the pleadings is allowed. The minute and varied
statements of the probative facts, the charge to anticipate a
defense, and the interrogatories, become necessary in the equity
practice, because bills are for discovery as well as for relief, and in
order to search the conscience of the defendant, he is treated, in
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the pleading, somewhat as though placed upon the stand and
examined as an unwilling witness. (Bliss on Code Pleading, 3rd
edition, section 319.)
Counsel for the defendants argue that there is no express provision in

the Code of Civil Procedure for a proceeding such as the present,
and that, therefore, proceedings for discovery must be considered
limited to the taking of depositions under subsection 1 of section 355
of the Code and the compulsory attendance of witnesses by means
of subpoena. But, upon a moment's reflection, it becomes evident
that the means of discovery suggested by counsel are not always
available or adequate. Before they can be utilized there must be an
action pending, or, in other words, a complaint must have been filed
and summons served upon the defendants. Now, there are cases
where facts, essential to the plaintiffs cause of action, are within the
knowledge of the defendants, but of which the plaintiff is so
imperfectly informed that he cannot state them with certainty, even
on information and belief. He may, however, known that one out of
two or more sets of facts is true without knowing which of them is
true. In such circumstances the plaintiff cannot, of course, state any
of the facts with certainty and it stands to reason that he cannot be
required to plead with certainty facts which he does not definitely
believe to be true. But the facts being essential to this cause of
action, he must state them in one form or another and cannot very
well file his complaint before so doing. And if he cannot file his
complaint, he cannot, as we have already stated, avail himself of
the remedy, provided for in subsection 1 of section 355, supra. It
seems clear that, in such a case, the proper procedure is for the
plaintiff to state the facts within his knowledge with certainty, but to
plead in the alternative the, to him, doubtful facts, which are wholly
within the defendant's knowledge and call upon the defendant to
make a full disclosure of these facts. That is exactly what the plaintiffs
have done in the present case, and bearing in mind the purpose of
the action, their complaint seems sufficiently intelligible and free
from ambiguity.
The fact that there is no special express provision in the Code of Civil
Procedure for bills of discovery of this character does not necessarily
signify that the remedy does not exist in this jurisdiction. The maxim of
equity that "Equity will not permit a wrong without a remedy" still
holds good, and our liberal Code of Civil Procedure is, if properly
interpreted, sufficiently broad and flexible to enable the courts to
apply all necessary remedies, both legal and equitable.
II
Invoking the well-known rule that shareholders cannot ordinarily sue

in equity to redress wrongs done to the corporation, but that the

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action must be brought by the Board of Directors, the appellees
argue — and the court below held — that the corporation Teal and
Company is a necessary party plaintiff and that the plaintiff
stockholders, not having made any demand on the Board to bring
the action, are not the proper parties plaintiff. But, like most rules, the
rule in question has its exceptions. It is alleged in the complaint and,
consequently, admitted through the demurrer that the corporation
Teal and Company is under the complete control of the principal
defendants in the case, and, in these circumstances, it is obvious
that a demand upon the Board of Directors to institute an action
and prosecute the same effectively would have been useless, and
the law does not require litigants to perform useless acts. (Exchange
bank of Wewoka vs. Bailey, 29 Okla., 246; Fleming and Hewins vs.
Black Warrior Copper Co., 15 Ariz., 1; Wickersham vs. Crittenden, 106
Cal., 329; Glenn vs. Kittaning Brewing Co., 259 Pa., 510; Hawes vs.
Contra Costa Water Company, 104 U. S., 450.)
III
The conclusion of the court below that the plaintiffs, not being
stockholders in the Philippine Motors Corporation, had no legal right
to proceed against that corporation in the manner suggested in the
complaint evidently rest upon a misconception of the character of
the action. In this proceeding it was necessary for the plaintiffs to set
forth in full the history of the various transactions which eventually led
to the alleged loss of their property and, in making a full disclosure,
references to the Philippine Motors Corporation appear to have
been inevitable. It is to be noted that the plaintiffs seek no judgment
against the corporation itself at this stage of the proceedings.
IV
The court below also erred in holding that the investigation of the
transaction referred to in the complaint is not within the province of
the courts, but should be conducted by some other agency. That
discovery, such as that demanded in the present action, is one of
the functions of a court of equity is so well established as to require
no discussion.
In our opinion the plaintiffs state a good cause of action for

equitable relief and their complaint is not in any respect fatally
defective. The judgment of the court below is therefore reversed, the
defendants demurrer is overruled, and it is ordered that the return of
the record to the Court within ten days from the return of the record
to the Court of First Instance. So ordered.
Avanceña, C. J., Street, Villamor, Johns, Romualdez and Villa-Real,

JJ., concur.

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Fleischer vs. Botica Nolasco (47 Phil. 583 [1925])
G.R. No. L-23241 March 14, 1925
HENRY FLEISCHER, plaintiff-appellee,

vs.
BOTICA NOLASCO CO., INC., defendant-appellant.
Antonio Gonzalez for appellant.

Emilio M. Javier for appellee.
JOHNSON, J.:
This action was commenced in the Court of First Instance of the

Province of Oriental Negros on the 14th day of August, 1923, against
the board of directors of the Botica Nolasco, Inc., a corporation duly
organized and existing under the laws of the Philippine Islands. The
plaintiff prayed that said board of directors be ordered to register in
the books of the corporation five shares of its stock in the name of
Henry Fleischer, the plaintiff, and to pay him the sum of P500 for
damages sustained by him resulting from the refusal of said body to
register the shares of stock in question. The defendant filed a
demurrer on the ground that the facts alleged in the complaint did
not constitute sufficient cause of action, and that the action was not
brought against the proper party, which was the Botica Nolasco, Inc.
The demurrer was sustained, and the plaintiff was granted five days
to amend his complaint.
On November 15, 1923, the plaintiff filed an amended complaint

against the Botica Nolasco, Inc., alleging that he became the owner
of five shares of stock of said corporation, by purchase from their
original owner, one Manuel Gonzalez; that the said shares were fully
paid; and that the defendant refused to register said shares in his
name in the books of the corporation in spite of repeated demands
to that effect made by him upon said corporation, which refusal
caused him damages amounting to P500. Plaintiff prayed for a
judgment ordering the Botica Nolasco, Inc. to register in his name in
the books of the corporation the five shares of stock recorded in said
books in the name of Manuel Gonzalez, and to indemnify him in the
sum of P500 as damages, and to pay the costs. The defendant
again filed a demurrer on the ground that the amended complaint
did not state facts sufficient to constitute a cause of action, and that
said amended complaint was ambiguous, unintelligible, uncertain,
which demurrer was overruled by the court.

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The defendant answered the amended complaint denying
generally and specifically each and every one of the material
allegations thereof, and, as a special defense, alleged that the
defendant, pursuant to article 12 of its by-laws, had preferential right
to buy from the plaintiff said shares at the par value of P100 a share,
plus P90 as dividends corresponding to the year 1922, and that said
offer was refused by the plaintiff. The defendant prayed for a
judgment absolving it from all liability under the complaint and
directing the plaintiff to deliver to the defendant the five shares of
stock in question, and to pay damages in the sum of P500, and the
costs.
Upon the issue presented by the pleadings above stated, the cause
was brought on for trial, at the conclusion of which, and on August
21, 1924, the Honorable N. Capistrano, judge, held that, in his
opinion, article 12 of the by-laws of the corporation which gives it
preferential right to buy its shares from retiring stockholders, is in
conflict with Act No. 1459 (Corporation Law), especially with section
35 thereof; and rendered a judgment ordering the defendant
corporation, through its board of directors, to register in the books of
said corporation the said five shares of stock in the name of the
plaintiff, Henry Fleischer, as the shareholder or owner thereof, instead
of the original owner, Manuel Gonzalez, with costs against the
defendant.
The defendant appealed from said judgment, and now makes

several assignment of error, all of which, in substance, raise the
question whether or not article 12 of the by-laws of the corporation is
in conflict with the provisions of the Corporation Law (Act No. 1459).
There is no controversy as to the facts of the present case. They are

simple and may be stated as follows:
That Manuel Gonzalez was the original owner of the five shares of
stock in question, Nos. 16, 17, 18, 19 and 20 of the Botica Nolasco,
Inc.; that on March 11, 1923, he assigned and delivered said five
shares to the plaintiff, Henry Fleischer, by accomplishing the form of
endorsement provided on the back thereof, together with other
credits, in consideration of a large sum of money owed by Gonzalez
to Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that on March 13, 1923,
Dr. Eduardo Miciano, who was the secretary-treasurer of said
corporation, offered to buy from Henry Fleischer, on behalf of the
corporation, said shares of stock, at their par value of P100 a share,
for P500; that by virtue of article 12 of the by-laws of Botica Nolasco,
Inc., said corporation had the preferential right to buy from Manuel
Gonzalez said shares (Exhibit 2); that the plaintiff refused to sell them
to the defendant; that the plaintiff requested Doctor Miciano to
register said shares in his name; that Doctor Miciano refused to do

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so, saying that it would be in contravention of the by-laws of the
corporation.
It also appears from the record that on the 13th day of March, 1923,
two days after the assignment of the shares to the plaintiff, Manuel
Gonzales made a written statement to the Botica Nolasco, Inc.,
requesting that the five shares of stock sold by him to Henry Fleischer
be noted transferred to Fleischer's name. He also acknowledged in
said written statement the preferential right of the corporation to buy
said five shares (Exhibit 3). On June 14, 1923, Gonzalez wrote a letter
to the Botica Nolasco, withdrawing and cancelling his written
statement of March 13, 1923 (Exhibit C), to which letter the Botica
Nolasco on June 15, 1923, replied, declaring that his written
statement was in conformity with the by-laws of the corporation; that
his letter of June 14th was of no effect, and that the shares in
question had been registered in the name of the Botica Nolasco,
Inc., (Exhibit X).
As indicated above, the important question raised in this appeal is

whether or not article 12 of the by-laws of the Botica Nolasco, Inc., is
in conflict with the provisions of the Corporation Law (Act No. 1459).
Appellant invoked said article as its ground for denying the request
of the plaintiff that the shares in question be registered in his
(plaintiff's) name, and for claiming that it (Botica Nolasco, Inc.) had
the preferential right to buy said shares from Gonzalez. Appellant
now contends that article 12 of the said by-laws is in conformity with
the provisions of Act No. 1459. Said article is as follows:
ART. 12. Las acciones de la Corporacion pueden ser

transferidas a otra persona, pero para que estas transferencias
tengan validez legal, deben constar en los registros de la
Corporacion con el debido endoso del accionista a cuyo
nombre se ha expedido la accion o acciones que se
transfieran, o un documento de transferencia. Entendiendose
que, ningun accionista transferira accion alguna a otra
persona sin participar antes por escrito al Secretario-Tesorero.
En igualdad de condiciones, la sociedad tendra el derecho de
adquirir para si la accion o acciones que se traten de transferir.
(Exhibit 2.)
The above-quoted article constitutes a by-law or regulation

adopted by the Botica Nolasco, Inc., governing the transfer of
shares of stock of said corporation. The latter part of said article
creates in favor of the Botica Nolasco, Inc., a preferential right to
buy, under the same conditions, the share or shares of stock of a
retiring shareholder. Has said corporation any power, under the
Corporation Law (Act. No. 1459), to adopt such by-law?

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The particular provisions of the Corporation Law referring to transfer
of shares of stock are as follows:
SEC. 13. Every corporation has the power:
xxx xxx xxx
(7) To make by-laws, not inconsistent with any existing law, for
the fixing or changing of the number of its officers and directors
within the limits prescribed by law, and for the transferring of its
stock, the administration of its corporate affairs, etc.
xxx xxx xxx
SEC. 35. The capital stock of stock corporations shall de divided

into shares for which certificates signed by the president or the
vice-president, countersigned by the secretary or clerk and
sealed with the seal of the corporation, shall be issued in
accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the
certificate indorsed by the owner or his attorney in fact or other
person legally authorized to make the transfer. No transfer,
however, shall be valid, except as between the parties, until
the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the
transaction, that date of the transfer, the number of the
certificate, and the number of shares transferred.
No share of stock against which the corporation holds any

unpaid claim shall be transferable on the books of the
corporation.
Section 13, paragraph 7, above-quoted, empowers a corporation to

make by-laws, not inconsistent with any existing law, for the
transferring of its stock. It follows from said provision, that a by-law
adopted by a corporation relating to transfer of stock should be in
harmony with the law on the subject of transfer of stock. The law on
this subject is found in section 35 of Act No. 1459 above quoted. Said
section specifically provides that the shares of stock "are personal
property and may be transferred by delivery of the certificate
indorsed by the owner, etc." Said section 35 defines the nature,
character and transferability of shares of stock. Under said section
they are personal property and may be transferred as therein
provided. Said section contemplates no restriction as to whom they
may be transferred or sold. It does not suggest that any
discrimination may be created by the corporation in favor or against
a certain purchaser. The holder of shares, as owner of personal
property, is at liberty, under said section, to dispose of them in favor
of whomsoever he pleases, without any other limitation in this
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respect, than the general provisions of law. Therefore, a stock
corporation in adopting a by-law governing transfer of shares of
stock should take into consideration the specific provisions of section
35 of Act No. 1459, and said by-law should be made to harmonize
with said provisions. It should not be inconsistent therewith.
The by-law now in question was adopted under the power conferred
upon the corporation by section 13, paragraph 7, above quoted;
but in adopting said by-law the corporation has transcended the
limits fixed by law in the same section, and has not taken into
consideration the provisions of section 35 of Act No. 1459.
As a general rule, the by-laws of a corporation are valid if they are

reasonable and calculated to carry into effect the objects of the
corporation, and are not contradictory to the general policy of the
laws of the land. (Supreme Commandery of the Knights of the
Golden Rule vs. Ainsworth, 71 Ala., 436; 46 Am. Rep., 332.)
On the other hand, it is equally well settled that by-laws of a

corporation must be reasonable and for a corporate purpose, and
always within the charter limits. They must always be strictly
subordinate to the constitution and the general laws of the land.
They must not infringe the policy of the state, nor be hostile to public
welfare. (46 Am. Rep., 332.) They must not disturb vested rights or
impair the obligation of a contract, take away or abridge the
substantial rights of stockholder or member, affect rights of property
or create obligations unknown to the law. (People's Home Savings
Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs.
Globe Milling Co., 79 Am. St. Rep., 769.)
The validity of the by-law of a corporation is purely a question of law.

(South Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)
The power to enact by-laws restraining the sale and transfer of

stock must be found in the governing statute or the charter.
Restrictions upon the traffic in stock must have their source in
legislative enactment, as the corporation itself cannot create
such impediments. By-law are intended merely for the
protection of the corporation, and prescribe regulation and not
restriction; they are always subject to the charter of the
corporation. The corporation, in the absence of such a power,
cannot ordinarily inquire into or pass upon the legality of the
transaction by which its stock passes from one person to
another, nor can it question the consideration upon which a
sale is based. A by-law cannot take away or abridge the
substantial rights of stockholder. Under a statute authorizing by-
laws for the transfer of stock, a corporation can do no more
than prescribe a general mode of transfer on the corporate

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books and cannot justify an unreasonable restriction upon the
right of sale. (4 Thompson on Corporations, sec. 4137, p. 674.
The right of unrestrained transfer of shares inheres in the very

nature of a corporation, and courts will carefully scrutinize any
attempt to impose restrictions or limitations upon the right of
stockholders to sell and assign their stock. The right to impose
any restraint in this respect must be conferred upon the
corporation either by the governing statute or by the articles of
the corporation. It cannot be done by a by-law without
statutory or charter authority. (4 Thompson on Corporations,
sec. 4334, pp. 818, 819.)
The jus disponendi, being an incident of the ownership of

property, the general rule (subject to exceptions hereafter
pointed out and discussed) is that every owner of corporate
shares has the same uncontrollable right to alien them which
attaches to the ownership of any other species of property. A
shareholder is under no obligation to refrain from selling his
shares at the sacrifice of his personal interest, in order to secure
the welfare of the corporation, or to enable another
shareholder to make gains and profits. (10 Cyc., p. 577.)
It follows from the foregoing that a corporation has no power to

prevent or to restrain transfers of its shares, unless such power is
expressly conferred in its charter or governing statute. This
conclusion follows from the further consideration that by-laws or
other regulations restraining such transfers, unless derived from
authority expressly granted by the legislature, would be
regarded as impositions in restraint of trade. (10 Cyc., p. 578.)
The foregoing authorities go farther than the stand we are taking on

this question. They hold that the power of a corporation to enact by-
laws restraining the sale and transfer of shares, should not only be in
harmony with the law or charter of the corporation, but such power
should be expressly granted in said law or charter.
The only restraint imposed by the Corporation Law upon transfer of

shares is found in section 35 of Act No. 1459, quoted above, as
follows: "No transfer, however, shall be valid, except as between the
parties, until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the
transaction, the date of the transfer, the number of the certificate,
and the number of shares transferred." This restriction is necessary in
order that the officers of the corporation may know who are the
stockholders, which is essential in conducting elections of officers, in
calling meeting of stockholders, and for other purposes. but any
restriction of the nature of that imposed in the by-law now in

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question, is ultra vires, violative of the property rights of shareholders,
and in restraint of trade.
And moreover, the by-laws now in question cannot have any effect
on the appellee. He had no knowledge of such by-law when the
shares were assigned to him. He obtained them in good faith and for
a valuable consideration. He was not a privy to the contract
created by said by-law between the shareholder Manuel Gonzalez
and the Botica Nolasco, Inc. Said by-law cannot operate to defeat
his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his

shares without first offering them to the corporation for a period
of thirty days is not binding upon an assignee of the stock as a
personal contract, although his assignor knew of the by-law
and took part in its adoption. (10 Cyc., 579; Ireland vs. Globe
Milling Co., 21 R.I., 9.)
When no restriction is placed by public law on the transfer of

corporate stock, a purchaser is not affected by any
contractual restriction of which he had no notice. (Brinkerhoff-
Farris Trust and Savings Co. vs. Home Lumber Co., 118 Mo., 447.)
The assignment of shares of stock in a corporation by one who

has assented to an unauthorized by-law has only the effect of
a contract by, and enforceable against, the assignor; the
assignee is not bound by such by-law by virtue of the
assignment alone. (Ireland vs. Globe Milling Co., 21 R.I., 9.)
A by-law of a corporation which provides that transfers of stock

shall not be valid unless approved by the board of directors,
while it may be enforced as a reasonable regulation for the
protection of the corporation against worthless stockholders,
cannot be made available to defeat the rights of third persons.
(Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa,
336.)
Counsel for defendant incidentally argues in his brief, that the

plaintiff does not have any right of action against the defendant
corporation, but against the president and secretary thereof,
inasmuch as the signing and registration of shares is incumbent upon
said officers pursuant to section 35 of the Corporation Law. This
contention cannot be sustained now. The question should have
been raised in the lower court. It is too late to raise it now in this
appeal. Besides, as stated above, the corporation was made
defendant in this action upon the demurrer of the attorney of the
original defendant in the lower court, who contended that the
Botica Nolasco, Inc., should be made the party defendant in this

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action. Accordingly, upon order of the court, the complaint was
amended and the said corporation was made the party defendant.
Whenever a corporation refuses to transfer and register stock in

cases like the present, mandamus will lie to compel the officers of
the corporation to transfer said stock upon the books of the
corporation. (26 Cyc. 347; Hager vs. Bryan, 19 Phil., 138.)
In view of all the foregoing, we are of the opinion, and so hold, that
the decision of the lower court is in accordance with law and should
be and is hereby affirmed, with costs. So ordered.
Malcolm, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.
G.R. No. L-23241 March 14, 1925
Lessons Applicable: Right of First Refusal (Corporate Law)
FACTS:
 March 13, 1923: Manuel Gonzales made a written statement to

the Botica Nolasco, Inc., requesting that 5 shares of stock sold
by him to Henry Fleischer be noted transferred to Fleischer's
name
o He also acknowledged in said written statement the

preferential right of the corporation to buy said five shares
 June 14, 1923: he withdraw and cancelled his written statement

of March 13, 1923
o Nolasco replied that his letter of June 14th was of no

effect, and that the shares in question had been
registered in the name of the Botica Nolasco, Inc.,
 November 15, 1923: Fleischer
 filed an amended complaint against the Botica Nolasco, Inc.,

alleging that he became the owner of 5 shares of fully
paid stock of Botica Nolasco Co (Nolasco) by purchase from
their original owner, Manuel Gonzalez

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 Despite repeated demands, Nolasco refused to register said
shares in his name in the books of the corporation
o caused him damages amounting to P500
 Nolasco's defense:
o article 12 of its by-laws: it had preferential right to buy the

shares at the par value of P100/share, plus P90 as
dividends corresponding to the year 1922
 offer was refused by Fleischer
 Trial Court: favored Fleischer and ordered the shared be

registered
ISSUE: W/N article 12 of Nolasco's by-laws is in conflict with Act No.

1459 (Corporation Law), especially with section 35 (Now Sec. 63)
HELD: Affirmed. mandamus will lie to compel the officers of the

corporation to transfer said stock upon the books of the corporation
 Section 13, paragraph 7, above-quoted, empowers a

corporation to make by-laws, not inconsistent with any existing
law, for the transferring of its stock.
 section 35 of Act No. 1459 (now Sec. 63)
o contemplates no restriction as to whom they may be

transferred or sold
 It does not suggest that any discrimination may be

created by the corporation in favor or against a
certain purchaser.
o The holder of shares, as owner of personal property, is at

liberty, under said section, to dispose of them in favor of
whomsoever he pleases, without any other limitation in
this respect, than the general provisions of law
 GR: the by-laws of a corporation are valid if they are

reasonable and calculated to carry into effect the objects of
the corporation, and are not contradictory to the general
policy of the laws of the land
o A by-law cannot take away or abridge the substantial

rights of stockholder.

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o Under a statute authorizing by- laws for the transfer of
stock, a corporation can do no more than prescribe a
general mode of transfer on the corporate books and
cannot justify an unreasonable restriction upon the right of
sale.
 by-law cannot operate to defeat his rights as a purchaser

who obtained them in good faith and for a valuable
consideration
Cyanamid Phils. vs. CA (322 SCRA 639 [2000])
G.R. No. 108067 January 20, 2000
CYANAMID PHILIPPINES, INC., petitioner,

vs.
THE COURT OF APPEALS, THE COURT OF TAX APPEALS and
COMMISSIONER OF INTERNAL REVENUE, respondent.
QUISUMBING, J.:
Petitioner disputes the decision1 of the Court of Appeals which

affirmed the decision2 of the Court of Tax Appeals, ordering
petitioner to pay respondent Commissioner of Internal Revenue the
amount of three million, seven hundred seventy-four thousand, eight
hundred sixty seven pesos and fifty centavos (P3,774,867.50) as 25%
surtax on improper accumulation of profits for 1981, plus 10%
surcharge and 20% annual interest from January 30, 1985 to January
30, 1987, under Sec. 25 of the National Internal Revenue
Code.1âwphi1.nêt
The Court of Tax Appeals made the following factual findings:
Petitioner, Cyanamid Philippines, Inc., a corporation organized under

Philippine laws, is a wholly owned subsidiary of American Cyanamid
Co. based in Maine, USA. It is engaged in the manufacture of
pharmaceutical products and chemicals, a wholesaler of imported
finished goods, and an importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to petitioner

and demanded the payment of deficiency income tax of one
hundred nineteen thousand eight hundred seventeen (P119,817.00)
pesos for taxable year 1981, as follows:

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Net income disclosed by the return as audited 14,575,210.00
Add: Discrepancies:
Professional fees/yr. 17018 261,877.00
per investigation 110,399.37
Total Adjustment 152,477.00
Net income per Investigation 14,727,687.00
Less: Personal and additional exemptions
Amount subject to tax 14,727,687.00
Income tax due thereon . . . 25%

2,385,231.50 3,237,495.00
Surtax
Less: Amount already assessed 5,161,788.00
BALANCE 75,709.00
monthly interest from 1,389,639.00 44,108.00
Compromise penalties
TOTAL AMOUNT DUE 3,774,867.50 119,817.003

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On March 4, 1985, petitioner protested the assessments particularly,
(1) the 25% Surtax Assessment of P3,774,867.50; (2) 1981 Deficiency
Income Assessment of P119,817.00; and 1981 Deficiency Percentage
Assessment of P8,846.72.4 Petitioner, through its external accountant,
Sycip, Gorres, Velayo & Co., claimed, among others, that the surtax
for the undue accumulation of earnings was not proper because the
said profits were retained to increase petitioner's working capital and
it would be used for reasonable business needs of the company.
Petitioner contended that it availed of the tax amnesty under
Executive Order No. 41, hence enjoyed amnesty from civil and
criminal prosecution granted by the law.
On October 20, 1987, the CIR in a letter addressed to SGV & Co.,
refused to allow the cancellation of the assessment notices and
rendered its resolution, as follows:
It appears that your client availed of Executive Order No. 41

under File No. 32A-F-000455-41B as certified and confirmed by
our Tax Amnesty Implementation Office on October 6, 1987.
In reply thereto, I have the honor to inform you that the

availment of the tax amnesty under Executive Order No. 41, as
amended is sufficient basis, in appropriate cases, for the
cancellation of the assessment issued after August 21, 1986.
(Revenue Memorandum Order No. 4-87) Said availment does
not, therefore, result in cancellation of assessments issued
before August 21, 1986. as in the instant case. In other words,
the assessments in this case issued on January 30, 1985 despite
your client's availment of the tax amnesty under Executive
Order No. 41, as amended still subsist.
Such being the case, you are therefore, requested to urge your
client to pay this Office the aforementioned deficiency income
tax and surtax on undue accumulation of surplus in the
respective amounts of P119,817.00 and P3,774,867.50 inclusive
of interest thereon for the year 1981, within thirty (30) days from
receipt hereof, otherwise this office will be constrained to
enforce collection thereof thru summary remedies prescribed
by law.
This constitutes the final decision of this Office on this matter.5
Petitioner appealed to the Court of Tax Appeals. During the

pendency of the case, however, both parties agreed to
compromise the 1981 deficiency income tax assessment of
P119,817.00. Petitioner paid a reduced amount — twenty-six
thousand, five hundred seventy-seven pesos (P26,577.00) — as
compromise settlement. However, the surtax on improperly
accumulated profits remained unresolved.
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Petitioner claimed that CIR's assessment representing the 25% surtax
on its accumulated earnings for the year 1981 had no legal basis for
the following reasons: (a) petitioner accumulated its earnings and
profits for reasonable business requirements to meet working capital
needs and retirement of indebtedness; (b) petitioner is a wholly
owned subsidiary of American Cyanamid Company, a corporation
organized under the laws of the State of Maine, in the United States
of America, whose shares of stock are listed and traded in New York
Stock Exchange. This being the case, no individual shareholder
income taxes by petitioner's accumulation of earnings and profits,
instead of distribution of the same.
In denying the petition, the Court of Tax Appeals made the following
pronouncements:
Petitioner contends that it did not declare dividends for the

year 1981 in order to use the accumulated earnings as working
capital reserve to meet its "reasonable business needs". The law
permits a stock corporation to set aside a portion of its retained
earnings for specified purposes (citing Section 43, paragraph 2
of the Corporation Code of the Philippines). In the case at bar,
however, petitioner's purpose for accumulating its earnings
does not fall within the ambit of any of these specified
purposes.
More compelling is the finding that there was no need for

petitioner to set aside a portion of its retained earnings as
working capital reserve as it claims since it had considerable
liquid funds. A thorough review of petitioner's financial
statement (particularly the Balance Sheet, p. 127, BIR Records)
reveals that the corporation had considerable liquid funds
consisting of cash accounts receivable, inventory and even its
sales for the period is adequate to meet the normal needs of
the business. This can be determined by computing the current
asset to liability ratio of the company:
current ratio = current assets/ current liabilities
= P 47,052,535.00 / P21,275,544.00
= 2.21: 1
========
The significance of this ratio is to serve as a primary test of a

company's solvency to meet current obligations from current
assets as a going concern or a measure of adequacy of
working capital.
xxx xxx xxx

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We further reject petitioner's argument that "the accumulated
earnings tax does not apply to a publicly-held corporation"
citing American jurisprudence to support its position. The
reference finds no application in the case at bar because
under Section 25 of the NIRC as amended by Section 5 of P.D.
No. 1379 [1739] (dated September 17, 1980), the exceptions to
the accumulated earnings tax are expressly enumerated, to
wit: Bank, non-bank financial intermediaries, corporations
organized primarily, and authorized by the Central Bank of the
Philippines to hold shares of stock of banks, insurance
companies, or personal holding companies, whether domestic
or foreign. The law on the matter is clear and specific. Hence,
there is no need to resort to applicable cases decided by the
American Federal Courts for guidance and enlightenment as
to whether the provision of Section 25 of the NIRC should apply
to petitioner.
Equally clear and specific are the provisions of E.O. 41

particularly with respect to its effectivity and coverage . . .
. . . Said availment does not result in cancellation of

assessments issued before August 21, 1986 as petitioner seeks to
do in the case at bar. Therefore, the assessments in this case,
issued on January 30, 1985 despite petitioner's availment of the
tax amnesty under E.O. 41 as amended, still subsist.
xxx xxx xxx
WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to

pay respondent Commissioner of Internal Revenue the sum of
P3,774,867.50 representing 25% surtax on improper
accumulation of profits for 1981, plus 10% surcharge and 20%
annual interest from January 30, 1985 to January 30, 1987.6
Petitioner appealed the Court of Tax Appeal's decision to the Court

of Appeals. Affirming the CTA decision, the appellate court said:
In reviewing the instant petition and the arguments raised

herein, We find no compelling reason to reverse the findings of
the respondent Court. The respondent Court's decision is
supported by evidence, such as petitioner corporation's
financial statement and balance sheets (p. 127, BIR Records).
On the other hand the petitioner corporation could only come
up with an alternative formula lifted from a decision rendered
by a foreign court (Bardahl Mfg. Corp. vs. Commissioner, 24
T.C.M. [CCH] 1030). Applying said formula to its particular
financial position, the petitioner corporation attempts to justify
its accumulated surplus earnings. To Our mind, the petitioner
corporation's alternative formula cannot overturn the
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persuasive findings and conclusion of the respondent Court
based, as it is, on the applicable laws and jurisprudence, as
well as standards in the computation of taxes and penalties
practiced in this jurisdiction.
WHEREFORE, in view of the foregoing, the instant petition is

hereby DISMISSED and the decision of the Court of Tax Appeals
dated August 6, 1992 in C.T.A. Case No. 4250 is AFFIRMED in
toto.7
Hence, petitioner now comes before us and assigns as sole issue:
WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT THE

PETITIONER IS LIABLE FOR THE ACCUMULATED EARNINGS TAX
FOR THE YEAR 1981.8
Sec. 259 of the old National Internal Revenue Code of 1977 states:
Sec. 25. Additional tax on corporation improperly

accumulating profits or surplus —
(a) Imposition of tax. — If any corporation is formed or availed

of for the purpose of preventing the imposition of the tax upon
its shareholders or members or the shareholders or members of
another corporation, through the medium of permitting its
gains and profits to accumulate instead of being divided or
distributed, there is levied and assessed against such
corporation, for each taxable year, a tax equal to twenty-five
per-centum of the undistributed portion of its accumulated
profits or surplus which shall be in addition to the tax imposed
by section twenty-four, and shall be computed, collected and
paid in the same manner and subject to the same provisions of
law, including penalties, as that tax.
(b) Prima facie evidence. — The fact that any corporation is

mere holding company shall be prima facie evidence of a
purpose to avoid the tax upon its shareholders or members.
Similar presumption will lie in the case of an investment
company where at any time during the taxable year more
than fifty per centum in value of its outstanding stock is owned,
directly or indirectly, by one person.
(c) Evidence determinative of purpose. — The fact that the

earnings or profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business shall
be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by clear
preponderance of evidence, shall prove the contrary.

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(d) Exception. — The provisions of this sections shall not apply to
banks, non-bank financial intermediaries, corporation
organized primarily, and authorized by the Central Bank of the
Philippines to hold shares of stock of banks, insurance
companies, whether domestic or foreign.
The provision discouraged tax avoidance through corporate surplus

accumulation. When corporations do not declare dividends, income
taxes are not paid on the undeclared dividends received by the
shareholders. The tax on improper accumulation of surplus is
essentially a penalty tax designed to compel corporations to
distribute earnings so that the said earnings by shareholders could, in
turn, be taxed.
Relying on decisions of the American Federal Courts, petitioner

stresses that the accumulated earnings tax does not apply to
Cyanamid, a wholly owned subsidiary of a publicly owned
company.10 Specifically, petitioner cites Golconda Mining Corp. vs.
Commissioner, 507 F.2d 594, whereby the U.S. Ninth Circuit Court of
Appeals had taken the position that the accumulated earnings tax
could only apply to a closely held corporation.
A review of American taxation history on accumulated earnings tax

will show that the application of the accumulated earnings tax to
publicly held corporations has been problematic. Initially, the Tax
Court and the Court of Claims held that the accumulated earnings
tax applies to publicly held corporations. Then, the Ninth Circuit
Court of Appeals ruled in Golconda that the accumulated earnings
tax could only apply to closely held corporations. Despite Golconda,
the Internal Revenue Service asserted that the tax could be imposed
on widely held corporations including those not controlled by a few
shareholders or groups of shareholders. The Service indicated it
would not follow the Ninth Circuit regarding publicly held
corporations.11 In 1984, American legislation nullified the Ninth
Circuit's Golconda ruling and made it clear that the accumulated
earnings tax is not limited to closely held corporations.12 Clearly,
Golconda is no longer a reliable precedent.
The amendatory provision of Section 25 of the 1977 NIRC, which was

PD 1739, enumerated the corporations exempt from the imposition
of improperly accumulated tax: (a) banks; (b) non-bank financial
intermediaries; (c) insurance companies; and (d) corporations
organized primarily and authorized by the Central Bank of the
Philippines to hold shares of stocks of banks. Petitioner does not fall
among those exempt classes. Besides, the rule on enumeration is
that the express mention of one person, thing, act, or consequence
is construed to exclude all others.13 Laws granting exemption from
tax are construed strictissimi juris against the taxpayer and liberally in

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favor of the taxing power.14 Taxation is the rule and exemption is the
exception.15 The burden of proof rests upon the party claiming
exemption to prove that it is, in fact, covered by the exemption so
claimed,16 a burden which petitioner here has failed to discharge.
Another point raised by the petitioner in objecting to the assessment,

is that increase of working capital by a corporation justifies
accumulating income. Petitioner asserts that respondent court erred
in concluding that Cyanamid need not infuse additional working
capital reserve because it had considerable liquid funds based on
the 2.21:1 ratio of current assets to current liabilities. Petitioner relies
on the so-called "Bardahl" formula, which allowed retention, as
working capital reserve, sufficient amounts of liquid assets to carry
the company through one operating cycle. The "Bardahl" 17 formula
was developed to measure corporate liquidity. The formula requires
an examination of whether the taxpayer has sufficient liquid assets to
pay all of its current liabilities and any extraordinary expenses
reasonably anticipated, plus enough to operate the business during
one operating cycle. Operating cycle is the period of time it takes to
convert cash into raw materials, raw materials into inventory, and
inventory into sales, including the time it takes to collect payment for
the
sales.18
Using this formula, petitioner contends, Cyanamid needed at least

P33,763,624.00 pesos as working capital. As of 1981, its liquid asset
was only P25,776,991.00. Thus, petitioner asserts that Cyanamid had
a working capital deficit of P7,986,633.00.19 Therefore, the
P9,540,926.00 accumulated income as of 1981 may be validly
accumulated to increase the petitioner's working capital for the
succeeding year.
We note, however, that the companies where the "Bardahl" formula

was applied, had operating cycles much shorter than that of
petitioner. In Atlas Tool Co., Inc, vs. CIR,20 the company's operating
cycle was only 3.33 months or 27.75% of the year. In Cataphote
Corp. of Mississippi vs. United States,21 the corporation's operating
cycle was only 56.87 days, or 15.58% of the year. In the case of
Cyanamid, the operating cycle was 288.35 days, or 78.55% of a year,
reflecting that petitioner will need sufficient liquid funds, of at least
three quarters of the year, to cover the operating costs of the
business. There are variations in the application of the "Bardahl"
formula, such as average operating cycle or peak operating cycle.
In times when there is no recurrence of a business cycle, the working
capital needs cannot be predicted with accuracy. As stressed by
American authorities, although the "Bardahl" formula is well-
established and routinely applied by the courts, it is not a precise
rule. It is used only for administrative convenience.22 Petitioner's

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application of the "Bardahl" formula merely creates a false illusion of
exactitude.
Other formulas are also used, e.g. the ratio of current assets to
current liabilities and the adoption of the industry standard.23 The
ratio of current assets to current liabilities is used to determine the
sufficiency of working capital. Ideally, the working capital should
equal the current liabilities and there must be 2 units of current assets
for every unit of current liability, hence the so-called "2 to 1" rule.24
As of 1981 the working capital of Cyanamid was P25,776,991.00, or

more than twice its current liabilities. That current ratio of Cyanamid,
therefore, projects adequacy in working capital. Said working
capital was expected to increase further when more funds were
generated from the succeeding year's sales. Available income
covered expenses or indebtedness for that year, and there
appeared no reason to expect an impending "working capital
deficit" which could have necessitated an increase in working
capital, as rationalized by petitioner.
In Basilan Estates, Inc. vs. Commissioner of Internal Revenue,25 we

held that:
. . . [T]here is no need to have such a large amount at the

beginning of the following year because during the year,
current assets are converted into cash and with the income
realized from the business as the year goes, these expenses
may well be taken care of. [citation omitted]. Thus, it is
erroneous to say that the taxpayer is entitled to retain enough
liquid net assets in amounts approximately equal to current
operating needs for the year to cover "cost of goods sold and
operating expenses:" for "it excludes proper consideration of
funds generated by the collection of notes receivable as trade
accounts during the course of the year."26
If the CIR determined that the corporation avoided the tax on

shareholders by permitting earnings or profits to accumulate, and
the taxpayer contested such a determination, the burden of proving
the determination wrong, together with the corresponding burden of
first going forward with evidence, is on the taxpayer. This applies
even if the corporation is not a mere holding or investment company
and does not have an unreasonable accumulation of earnings or
profits.27
In order to determine whether profits are accumulated for the

reasonable needs to avoid the surtax upon shareholders, it must be
shown that the controlling intention of the taxpayer is manifest at the
time of accumulation, not intentions declared subsequently, which
are mere afterthoughts.28 Furthermore, the accumulated profits must
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be used within a reasonable time after the close of the taxable year.
In the instant case, petitioner did not establish, by clear and
convincing evidence, that such accumulation of profit was for the
immediate needs of the business.
In Manila Wine Merchants, Inc. vs. Commissioner of Internal

Revenue,29 we ruled:
To determine the "reasonable needs" of the business in order to

justify an accumulation of earnings, the Courts of the United
States have invented the so-called "Immediacy Test" which
construed the words "reasonable needs of the business" to
mean the immediate needs of the business, and it was
generally held that if the corporation did not prove an
immediate need for the accumulation of the earnings and
profits, the accumulation was not for the reasonable needs of
the business, and the penalty tax would apply. (Mertens. Law of
Federal Income Taxation, Vol. 7, Chapter 39, p, 103).30
In the present case, the Tax Court opted to determine the working
capital sufficiency by using the ratio between current assets to
current liabilities. The working capital needs of a business depend
upon nature of the business, its credit policies, the amount of
inventories, the rate of the turnover, the amount of accounts
receivable, the collection rate, the availability of credit to the
business, and similar factors. Petitioner, by adhering to the "Bardahl"
formula, failed to impress the tax court with the required definiteness
envisioned by the statute. We agree with the tax court that the
burden of proof to establish that the profits accumulated were not
beyond the reasonable needs of the company, remained on the
taxpayer. This Court will not set aside lightly the conclusion reached
by the Court of Tax Appeals which, by the very nature of its function,
is dedicated exclusively to the consideration of tax problems and
has necessarily developed an expertise on the subject, unless there
has been an abuse or improvident exercise of authority.31 Unless
rebutted, all presumptions generally are indulged in favor of the
correctness of the CIR's assessment against the taxpayer. With
petitioner's failure to prove the CIR incorrect, clearly and
conclusively, this Court is constrained to uphold the correctness of
tax court's ruling as affirmed by the Court of Appeals.
WHEREFORE, the instant petition is DENIED, and the decision of the

Court of Appeals, sustaining that of the Court of Tax Appeals, is
hereby AFFIRMED. Costs against petitioner.1âwphi1.nêt
SO ORDERED.
Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.

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reasonable needs of the business to avoid the surtax upon the
shareholders, it must be shown that the controlling intention of the
taxpayer is manifested at the time of the accumulation, not
intentions subsequently, which are mere afterthoughts.
Facts:
Petitioner is a corporation organized under Philippine laws and is a

wholly owned subsidiary of American Cyanamid Co. based in
Maine, USA. It is engaged in the manufacture of pharmaceutical
products and chemicals, a wholesaler of imported finished goods
and an imported/indentor. In 1985 the CIR assessed on petitioner a
deficiency income tax of P119,817) for the year 1981. Cyanamid
protested the assessments particularly the 25% surtax for undue
accumulation of earnings. It claimed that said profits were retained
to increase petitioner’s working capital and it would be used for
reasonable business needs of the company. The CIR refused to allow
the cancellation of the assessments, petitioner appealed to the CTA.
It claimed that there was not legal basis for the assessment because
1) it accumulated its earnings and profits for reasonable business
requirements to meet working capital needs and retirement of
indebtedness 2) it is a wholly owned subsidiary of American
Cyanamid Company, a foreign corporation, and its shares are listed
and traded in the NY Stock Exchange. The CTA denied the petition
stating that the law permits corporations to set aside a portion of its
retained earnings for specified purposes under Sec. 43 of the
Corporation Code but that petitioner’s purpose did not fall within
such purposes. It found that there was no need to set aside such
retained earnings as working capital as it had considerable liquid
funds. Those corporations exempted from the accumulated earnings
tax are found under Sec. 25 of the NIRC, and that the petitioner is
not among those exempted. The CA affirmed the CTA’s decision.
Issue: Whether or not the accumulation of income was justified.
Held:

reasonable needs of the business to avoid the surtax upon the
shareholders, it must be shown that the controlling intention of the
taxpayer is manifested at the time of the accumulation, not
intentions subsequently, which are mere afterthoughts. The

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accumulated profits must be used within reasonable time after the
close of the taxable year. In the instant case, petitioner did not
establish by clear and convincing evidence that such accumulated
was for the immediate needs of the business.
To determine the reasonable needs of the business, the United States

Courts have invented the “Immediacy Test” which construed the
words “reasonable needs of the business” to mean the immediate
needs of the business, and it is held that if the corporation did not
prove an immediate need for the accumulation of earnings and
profits such was not for reasonable needs of the business and the
penalty tax would apply. (Law of Federal Income Taxation Vol 7) The
working capital needs of a business depend on the nature of the
business, its credit policies, the amount of inventories, the rate of
turnover, the amount of accounts receivable, the collection rate,
the availability of credit and other similar factors. The Tax Court
opted to determine the working capital sufficiency by using the
ration between the current assets to current liabilities. Unless,
rebutted, the presumption is that the assessment is correct. With the
petitioner’s failure to prove the CIR incorrect, clearly and
conclusively, the Tax Court’s ruling is upheld.
Commissioner of Internal Revenue vs. Lincoln Phil. Life Insurance

Co. (379 SCRA 423 [2002])
G.R. No. 119176 March 19, 2002

vs.
LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-
CMA LIFE INSURANCE COMPANY, INC.) and THE COURT OF APPEALS,
respondents.
KAPUNAN, J.:
This is a petition for review on certiorari filed by the Commission on

Internal Revenue of the decision of the Court of Appeals dated
November 18, 1994 in C.A. G.R. SP No. 31224 which reversed in part
the decision of the Court of Tax Appeals in C.T.A. Case No. 4583.
The facts of the case are undisputed.
Private respondent Lincoln Philippine Life Insurance Co., Inc., (now

Jardine-CMA Life Insurance Company, Inc.) is a domestic
corporation registered with the Securities and Exchange Commission
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and engaged in life insurance business. In the years prior to 1984,
private respondent issued a special kind of life insurance policy
known as the "Junior Estate Builder Policy," the distinguishing feature
of which is a clause providing for an automatic increase in the
amount of life insurance coverage upon attainment of a certain
age by the insured without the need of issuing a new policy. The
clause was to take effect in the year 1984. Documentary stamp
taxes due on the policy were paid by petitioner only on the initial
sum assured.
In 1984, private respondent also issued 50,000 shares of stock

dividends with a par value of P100.00 per share or a total par value
of P5,000,000.00. The actual value of said shares, represented by its
book value, was P19,307,500.00. Documentary stamp taxes were
paid based only on the par value of P5,000,000.00 and not on the
book value.1âwphi1.nêt
Subsequently, petitioner issued deficiency documentary stamps tax

assessment for the year 1984 in the amounts of (a) P464,898.75,
corresponding to the amount of automatic increase of the sum
assured on the policy issued by respondent, and (b) P78,991.25
corresponding to the book value in excess of the par value of the
stock dividends. The computation of the deficiency documentary
stamp taxes is as follows:
On Policies Issued:
Total policy issued P1,360,054,000.00

during the year
Documentary stamp
tax due thereon
(P1,360,054,000.00 P 2,380,094.50
divided by P200.00
multiplied by P0.35)
Less: Payment P 1,915,495.75
Deficiency P 464,598.75
Add: Compromise 300.00

Penalty
-----------------------
TOTAL AMOUNT DUE & P 464,898.75

COLLECTIBLE

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Private respondent questioned the deficiency assessments and
sought their cancellation in a petition filed in the Court of Tax
Appeals, docketed as CTA Case No. 4583.
On March 30, 1993, the Court of Tax Appeals found no valid basis for
the deficiency tax assessment on the stock dividends, as well as on
the insurance policy. The dispositive portion of the CTA’s decision
reads:
WHEREFORE, the deficiency documentary stamp tax

assessments in the amount of P464,898.76 and P78,991.25 or a
total of P543,890.01 are hereby cancelled for lack of merit.
Respondent Commissioner of Internal Revenue is ordered to
desist from collecting said deficiency documentary stamp
taxes for the same are considered withdrawn.
SO ORDERED.1
Petitioner appealed the CTA’s decision to the Court of Appeals. On

November 18, 1994, the Court of Appeals promulgated a decision
affirming the CTA’s decision insofar as it nullified the deficiency
assessment on the insurance policy, but reversing the same with
regard to the deficiency assessment on the stock dividends. The CTA
ruled that the correct basis of the documentary stamp tax due on
the stock dividends is the actual value or book value represented by
the shares. The dispositive portion of the Court of Appeals’ decision
states:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is

hereby REVERSED with respect to the deficiency tax assessment
on the stock dividends, but AFFIRMED with regards to the
assessment on the Insurance Policies. Consequently, private
respondent is ordered to pay the petitioner herein the sum of
P78,991.25, representing documentary stamp tax on the stock
dividends it issued. No costs pronouncement.
SO ORDERED.2
A motion for reconsideration of the decision having been denied,3

both the Commissioner of Internal Revenue and private respondent
appealed to this Court, docketed as G.R. No. 118043 and G.R. No.
119176, respectively. In G.R. No. 118043, private respondent
appealed the decision of the Court of Appeals insofar as it upheld
the validity of the deficiency tax assessment on the stock dividends.
The Commissioner of Internal Revenue, on his part, filed the present
petition questioning that portion of the Court of Appeals’ decision
which invalidated the deficiency assessment on the insurance
policy, attributing the following errors:

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THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED
THAT THERE IS A SINGLE AGREEMENT EMBODIED IN THE POLICY
AND THAT THE AUTOMATIC INCREASE CLAUSE IS NOT A
SEPARATE AGREEMENT, CONTRARY TO SECTION 49 OF THE
INSURANCE CODE AND SECTION 183 OF THE REVENUE CODE
THAT A RIDER, A CLAUSE IS PART OF THE POLICY.
THE HONORABLE COURT OF APPEALS ERRED IN NOT

COMPUTING THE AMOUNT OF TAX ON THE TOTAL VALUE OF THE
INSURANCE ASSURED IN THE POLICY INCLUDING THE
ADDITIONAL INCREASE ASSURED BY THE AUTOMATIC INCREASE
CLAUSE DESPITE ITS RULING THAT THE ORIGINAL POLICY AND THE
AUTOMATIC CLAUSE CONSTITUTED ONLY A SINGULAR
TRANSACTION.4
Section 173 of the National Internal Revenue Code on documentary

stamp taxes provides:
Sec. 173. Stamp taxes upon documents, instruments and

papers. - Upon documents, instruments, loan agreements, and
papers, and upon acceptances, assignments, sales, and
transfers of the obligation, right or property incident thereto,
there shall be levied, collected and paid for, and in respect of
the transaction so had or accomplished, the corresponding
documentary stamp taxes prescribed in the following section of
this Title, by the person making, signing, issuing, accepting, or
transferring the same wherever the document is made, signed,
issued, accepted, or transferred when the obligation or right
arises from Philippine sources or the property is situated in the
Philippines, and at the same time such act is done or
transaction had: Provided, That whenever one party to the
taxable document enjoys exemption from the tax herein
imposed, the other party thereto who is not exempt shall be the
one directly liable for the tax. (As amended by PD No. 1994)
The basis for the value of documentary stamp taxes to be paid
on the insurance policy is Section 183 of the National Internal
Revenue Code which states in part:
The basis for the value of documentary stamp taxes to be paid on

the insurance policy is Section 183 of the National Internal Revenue
Code which states in part:
Sec. 183. Stamp tax on life insurance policies. - On all policies

of insurance or other instruments by whatever name the same
may be called, whereby any insurance shall be made or
renewed upon any life or lives, there shall be collected a
documentary stamp tax of thirty (now 50c) centavos on each

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Two hundred pesos per fractional part thereof, of the amount
insured by any such policy.
Petitioner claims that the "automatic increase clause" in the subject

insurance policy is separate and distinct from the main agreement
and involves another transaction; and that, while no new policy was
issued, the original policy was essentially re-issued when the
additional obligation was assumed upon the effectivity of this
"automatic increase clause" in 1984; hence, a deficiency assessment
based on the additional insurance not covered in the main policy is
in order.
The Court of Appeals sustained the CTA’s ruling that there was only
one transaction involved in the issuance of the insurance policy and
that the "automatic increase clause" is an integral part of that policy.
Section 49, Title VI of the Insurance Code defines an insurance policy

as the written instrument in which a contract of insurance is set forth.5
Section 50 of the same Code provides that the policy, which is
required to be in printed form, may contain any word, phrase,
clause, mark, sign, symbol, signature, number, or word necessary to
complete the contract of insurance.6 It is thus clear that any rider,
clause, warranty or endorsement pasted or attached to the policy is
considered part of such policy or contract of insurance.
The subject insurance policy at the time it was issued contained an

"automatic increase clause." Although the clause was to take effect
only in 1984, it was written into the policy at the time of its issuance.
The distinctive feature of the "junior estate builder policy" called the
"automatic increase clause" already formed part and parcel of the
insurance contract, hence, there was no need for an execution of a
separate agreement for the increase in the coverage that took
effect in 1984 when the assured reached a certain age.
It is clear from Section 173 that the payment of documentary stamp

taxes is done at the time the act is done or transaction had and the
tax base for the computation of documentary stamp taxes on life
insurance policies under Section 183 is the amount fixed in policy,
unless the interest of a person insured is susceptible of exact
pecuniary measurement.7 What then is the amount fixed in the
policy? Logically, we believe that the amount fixed in the policy is
the figure written on its face and whatever increases will take effect
in the future by reason of the "automatic increase clause" embodied
in the policy without the need of another contract.
Here, although the automatic increase in the amount of life

insurance coverage was to take effect later on, the date of its
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effectivity, as well as the amount of the increase, was already
definite at the time of the issuance of the policy. Thus, the amount
insured by the policy at the time of its issuance necessarily included
the additional sum covered by the automatic increase clause
because it was already determinable at the time the transaction
was entered into and formed part of the policy.
The "automatic increase clause" in the policy is in the nature of a

conditional obligation under Article 1181,8 by which the increase of
the insurance coverage shall depend upon the happening of the
event which constitutes the obligation. In the instant case, the
additional insurance that took effect in 1984 was an obligation
subject to a suspensive obligation,9 but still a part of the insurance
sold to which private respondent was liable for the payment of the
documentary stamp tax.
The deficiency of documentary stamp tax imposed on private

respondent is definitely not on the amount of the original insurance
coverage, but on the increase of the amount insured upon the
effectivity of the "Junior Estate Builder Policy."
Finally, it should be emphasized that while tax avoidance schemes

and arrangements are not prohibited,10 tax laws cannot be
circumvented in order to evade the payment of just taxes. In the
case at bar, to claim that the increase in the amount insured (by
virtue of the automatic increase clause incorporated into the policy
at the time of issuance) should not be included in the computation
of the documentary stamp taxes due on the policy would be a clear
evasion of the law requiring that the tax be computed on the basis
of the amount insured by the policy.
WHEREFORE, the petition is hereby given DUE COURSE. The decision of

the Court of Appeals is SET ASIDE insofar as it affirmed the decision of
the Court of Tax Appeals nullifying the deficiency stamp tax
assessment petitioner imposed on private respondent in the amount
of P464,898.75 corresponding to the increase in 1984 of the sum
under the policy issued by respondent.1âwphi1.nêt
SO ORDERED.
Davide, Jr., C.J. and Ynares-Santiago, J., concur.

Footnote
1 Court of Appeals (CA) Rollo. p. 16, Annex "B."

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2 Rollo, p. 47.
3 CA Rollo, p. 218.
4 Rollo, p. 19.
5 SEC. 49. The written instrument in which a contract of
insurance is set forth, is called a policy of insurance.
6SEC. 50. The policy shall be in printed form which may contain
blank spaces; and any word, phrase, clause, mark, sign,
symbol, signature, number, or word necessary to complete the
contract of insurance shall be written on the blank spaces
provided therein.
Any rider, clause, warranty or endorsement purporting to

be part of the contract of insurance and which is pasted
or attached to said policy is not binding on the insured,
unless the descriptive title or name of the rider, clause,
warranty, or endorsement is also mentioned and written
on the blank spaces provided in the policy.
Unless applied for by the insured or owner, any rider,

clause, warranty or endorsement issued after the original
policy shall be countersigned by the insured or owner,
which counter-signature shall be taken as his agreement
to the contents of such rider, clause, warranty or
endorsement.
Group insurance and group annuity policies, however,

may be typewritten and need not be in printed form.
7Sec. 183. Insurance Code of the Phils. – Unless the interest of a
person insured is capable of exact pecuniary measurement,
the measure of indemnity under a policy of insurance upon life
or health is the sum fixed in the policy.
8Art. 1181. In conditional obligations, the acquisition of rights, as
well as the extinguishment or loss of those already acquired,
shall depend upon the happening of the event which
constitutes the condition.
9Article 18 of the Civil Code provides that "on matters which
are governed by the Code of Commerce and special laws,
their deficiency shall be supplied by the provision of this Code."
10Delpher Trades Corporation vs. Intermediate Appellate Court,
157 SCRA 349 (1988).

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379 SCRA 423 – Mercantile Law – Insurance Law – The Policy –
Automatic Increase in the Coverage – Documentary Stamp Tax
Prior to 1984, Lincoln Philippine Life Insurance Company, Inc. (now

called Jardine-CMA Life Insurance Company, Inc.) used to issue
policies called “Junior Estate Builder Policy”. A clause therein
provides for an automatic increase in the amount of life insurance
coverage upon attainment of a certain age by the insured without
the need of issuing a new policy. The clause was to take effect in the
year 1984. Documentary stamp taxes due on the policy were paid
by Lincoln Philippine only on the initial sum assured.
When the clause became effective in 1984, the Commissioner of

Internal Revenue assessed an additional tax on the increased
amount of the coverage of the said policies. Said tax was to cover
the deficiency documentary stamps tax for said year. The Court of
Appeals ruled that there is only one policy and the automatic
increase is not a separate policy; that said increase of coverage is
not covered by another documentary stamp tax.
ISSUE: Whether or not there is only one policy.
HELD: Yes. Section 49, Title VI of the Insurance Code defines an

insurance policy as the written instrument in which a contract of
insurance is set forth. Section 50 of the same Code provides that the
policy, which is required to be in printed form, may contain any
word, phrase, clause, mark, sign, symbol, signature, number, or word
necessary to complete the contract of insurance. It is thus clear that
any rider, clause, warranty or endorsement pasted or attached to
the policy is considered part of such policy or contract of insurance.

“automatic increase clause.” Although the clause was to take effect
The distinctive feature of the “junior estate builder policy” called the
“automatic increase clause” already formed part and parcel of the
The said increase however is imposable with documentary stamp

taxes. The original documentary stamps tax paid by Lincoln
Philippine covers the original amount of the policies without the
projected increase. The said increase was already definite at the
time of the issuance of the policy. Thus, the amount insured by the

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policy at the time of its issuance necessarily included the additional
sum covered by the automatic increase clause because it was
already determinable at the time the transaction was entered into
and formed part of the policy.
While tax avoidance schemes and arrangements are not prohibited,

tax laws cannot be circumvented in order to evade the payment of
just taxes. In the case at bar, to claim that the increase in the
amount insured (by virtue of the automatic increase clause
incorporated into the policy at the time of issuance) should not be
included in the computation of the documentary stamp taxes due
on the policy would be a clear evasion of the law requiring that the
tax be computed on the basis of the amount insured by the policy.
G.R. No. 119176 March 19, 2002

Lessons Applicable: Measure of Indemnity (Insurance Code)
Laws Applicable: Section 173,Section 183 of the National Internal

Revenue Code, Section 49,Section 50 Title VI of the Insurance Code
FACTS:
 Lincoln Philippine Life Insurance Co., Inc., (now Jardine-CMA

Life Insurance Company, Inc.) issued a special kind of life
insurance policy known as the "Junior Estate Builder Policy" with
a distinguishing feature. It had a "automatic increase
clause" upon attainment of a certain age by the insured.
 Commissioner of Internal Revenue issued deficiency

documentary stamps tax assessment for the year 1984
pertaining to the amount in the automatic increase clause
 Lincoln questioned the deficiency assessments
 Court of Tax Appeals: found no valid basis and cancelled it
 CA: affirmed CTA
 CIR claims that "automatic increase clause" in the subject

insurance policy is separate
ISSUE: W/N the "automatic increase clause" should not be taxed with
the main policy
HELD: NO. CA set aside
 Section 49, Title VI of the Insurance Code defines an insurance

policy as the written instrument in which a contract of
insurance is set forth

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 Section 50 of the same Code provides that the policy, which is
required to be in printed form, may contain any word, phrase,
clause, mark, sign, symbol, signature, number, or word
necessary to complete the contract of insurance.
 any rider, clause, warranty or endorsement pasted or attached

to the policy is considered part of such policy or contract of
insurance
 Section 173 that the payment of documentary stamp taxes is

done at the time the act is done or transaction had and the
tax base for the computation of documentary stamp taxes on
life insurance policies under Section 183 is the amount fixed in
policy, unless the interest of a person insured is susceptible of
exact pecuniary measurement
 the amount fixed in the policy is the figure written on its face
and whatever increases will take effect in the future by reason
of the "automatic increase clause" embodied in the policy
without the need of another contract
 the amount insured by the policy at the time of its issuance

necessarily included the additional sum covered by the
automatic increase clause because it was already
determinable at the time the transaction was entered into and
formed part of the policy
 to claim that the increase in the amount insured (by virtue of

the automatic increase clause incorporated into the policy at
the time of issuance) should not be included in the
computation of the documentary stamp taxes due on the
policy would be a clear evasion of the law requiring that the
tax be computed on the basis of the amount insured by the
policy
CIR v. Lincoln Phil Life - Automatic Increase Clause
379 SCRA 423 (2002)
Facts:
> In the years prior to 1984, Lincoln issued a special kind of life
insurance policy known as the "Junior Estate Builder Policy," the
distinguishing feature of which is a clause providing for an automatic

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increase in the amount of life insurance coverage upon attainment
of a certain age by the insured without the need of issuing a new
policy. The clause was to take effect in the year 1984.
> Documentary stamp taxes due on the policy were paid to the
petitioner only on the initial sum assured.
> Subsequently, petitioner issued deficiency documentary stamps

tax assessment for the year 1984, corresponding to the amount of
automatic increase of the sum assured on the policy issued by
respondent.
> Lincoln questioned the deficiency assessments and sought their

cancellation in a petition filed in the Court of Tax Appeals. CTA
found no basis for the assessment. CA affirmed.
Issue:
Whether or not the automatic increase of the sum assured on the

policy is taxable.
Held:
YES.
CIR claims that the "automatic increase clause" in the subject

insurance policy is separate and distinct from the main agreement
and involves another transaction; and that, while no new policy was
issued, the original policy was essentially re-issued when the
additional obligation was assumed upon the effectivity of this
"automatic increase clause" in 1984; hence, a deficiency assessment
based on the additional insurance not covered in the main policy is
in order. The SC agreed with this contention.

"automatic increase clause." Although the clause was to take effect
The distinctive feature of the "junior estate builder policy" called the
"automatic increase clause" already formed part and parcel of the

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It is clear from Section 173 of the NIRC that the payment of
documentary stamp taxes is done at the time the act is done or
transaction had and the tax base for the computation of
documentary stamp taxes on life insurance policies under Section
183 of NIRC is the amount fixed in policy, unless the interest of a
person insured is susceptible of exact pecuniary measurement.
Logically, we believe that the amount fixed in the policy is the figure
written on its face and whatever increases will take effect in the
future by reason of the "automatic increase clause" embodied in the
policy without the need of another contract.
Here, although the automatic increase in the amount of life

insurance coverage was to take effect later on, the date of its
effectivity, as well as the amount of the increase, was already
definite at the time of the issuance of the policy. Thus, the amount
insured by the policy at the time of its issuance necessarily included
the additional sum covered by the automatic increase clause
because it was already determinable at the time the transaction
was entered into and formed part of the policy.
The "automatic increase clause" in the policy is in the nature of a

conditional obligation under Article 1181, 8 by which the increase of
the insurance coverage shall depend upon the happening of the
event which constitutes the obligation. In the instant case, the
additional insurance that took effect in 1984 was an obligation
subject to a suspensive obligation, 9 but still a part of the insurance
sold to which private respondent was liable for the payment of the
documentary stamp tax.
NATU vs. Secretary of Labor (109 SCRA 139 [1981])
G.R. No. L-39889 November 12, 1981

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UNION OF SUPERVISORS (R.B.) — NATU, petitioner,
vs.
THE SECRETARY OF LABOR and REPUBLIC BANK, respondents.
MAKASIAR, J.:
This is a petition for review on certiorari of the order dated December

6, 1974 of respondent Secretary of Labor, the dispositive portion of
which reads as follows:
WHEREFORE, the Commission's Decision in so far as that

portion of the decision of the Arbitrator dated September
6, 1974, granting clearance to terminate the services of
complainant Norberto Luna and dismissing the unfair
labor practice are concerned, is hereby affirmed;
whereas, that portion awarding separation pay in
accordance with the Termination Pay Law is hereby
modified, and in lieu thereof said complainant should be
granted the sum of TEN THOUSAND PESOS P10,000.00 by
way of financial assistance. (pp. 67-68, rec.)
It appears that on April 2, 1974, petitioner filed with the National

Labor Relations Commission a complaint against respondent Bank,
charging it with unfair labor practice committed against its president
Mr. Norberto Luna, for harassment, unjust suspension from his
employment as Manager of respondent's San Juan branch and as
member of the Board of Trustees of the RB Provident Fund, as well as
his unlawful dismissal as Administrator and Secretary of the said fund,
all due to his militant espousal and defense of workers' rights (p. 16,
rec.).
On April 15, 1974, a supplemental complaint was filed by the same

petitioner with the allegation that after filing of the original
complaint, the respondent Bank followed up its harassment of Mr.
Luna by terminating his employment as Branch Manager and as
trustee, administrator and secretary of the RB Provident Fund
purportedly due to his libelous remarks against the bank
management (pp. 18-19, rec.). Such termination was effected
through a letter dated April 5, 1974 of the Bank President, Mr. Pablo
Roman to the said Mr. Luna, citing as basis thereof (1) grave
misconduct for making derogatory and libelous remarks against the
bank management as a whole and against the assistant vice-
president in particular, and (2) insubordination for refusal to obey the
lawful order of his superior, the Chairman of the RB Provident Fund
(pp. 206-207, NLRC rec.). The termination was to take effect upon
receipt by the bank of the necessary clearance from the Secretary
of Labor pursuant to Section 11, PD 21, and Section 25 of the Rules
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and Regulations of the NLRC dated October 18, 1972 (pp. 180-181,
NLRC rec.).
On May 20, 1974, respondent bank filed its answer, denying the
allegations in both the original as well as the supplemental
complaint and contending that Mr. Luna's suspension and
subsequent dismissal from his various positions were for cause and
had nothing to do with his alleged espousal and defense of workers'
rights (pp. 20-21, rec.).
On October 6, 1974, a decision (pp. 58-65, rec.) was rendered by

Flavio P. Aguas, NLRC Arbitrator, with the conclusion that Luna
actually made the derogatory remarks against the officers of the
bank. The said decision has the following pronouncements:
In the interest of justice and equity, however, complaint's

dismissal should be considered as without sufficient just
cause.
Conformably to the foregoing, let clearance to terminate

the services of Norberto Luna be granted to Republic
Bank which is hereby ordered to pay the complainant
separation pay in accordance with the Termination Pay
Law.
The charges of unfair labor practice against the employer

is hereby dismissed.
From this decision, petitioner appealed to the National Labor

Relations Commission, which affirmed en toto the said decision on
October 17, 1974 (p. 39, rec.).
On October 29, 1974, petitioner appealed to respondent Secretary

of Labor (pp. 40-48, rec.), and on December 6, 1974, the latter issued
an order the dispositive portion of which has been quoted above,
affirming the decision insofar as it granted clearance for the
termination of employment of Mr. Norberto Luna and dismissing the
unfair labor practice charge, and modifying the portion granting him
separation pay, and in lieu thereof, ordering the payment to him of
P10,000.00 as financial assistance. The said order of the Secretary of
Labor is the subject of the present petition.
The antecedent facts of this case are as follows:
The Republic Bank Provident Fund was established pursuant to the

collective bargaining agreement between the employees and
respondent bank, and became operational in 1970 for the benefit of
the officers and employees of the Republic Bank. Membership
therein was open to an fun-time officers and employees of the bank

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on a regular salary basis. The sources of its fund include contributions
from members equivalent to 2% of their basic monthly salary and of
the bank equivalent to 6% of the basic monthly salary of the
members, annual donations of the bank, fines and penalties (please
see Sections 1 and 3, Rules and Regulations of the RB Provident Fund,
p. 270-A, NLRC rec.). The fund is supposed to be managed by a
Board of Trustees composed of five (5) members, of which three (3),
including the chairman, are supposed to be designated by the bank
president, and the other two are the presidents of the Republic Bank
Union of Supervisors and of the Republic Bank Employees' Union
(Sec. 7, supra).
Shortly after the fund became operational, Mr. Norberto Luna,

president of the petitioner union and ex-oficio member of the fund's
Board of Trustees, became the fund's administrator and secretary.
During the three (3) years of his incumbency as administrator, the
resources of the fund grew from P278,445.27 to P1,779,159.85 (p. 5 of
petition and p. 4 of respondent's brief, pages 7 and 149 of the
records, respectively).
In February 1974, the respondent bank decided to establish a money

market department (p. 5 of petition and p. 5 of appellees' brief,
supra). This was pursuant to the authority granted by the Central
Bank to operate a quasi-banking operation on December 17, 1973
(p. 296, NLRC rec.).
Prior to the February meeting of the Provident Fund Board of Trustees,

or on January 22, 1974, Mr. Restituto C. de Vera, an assistant vice-
president of respondent bank, was designated to replace Mr. Jose
C. Lugod during the latter's leave of absence as member of the
Board of Trustees (p. 316, NLRC rec.).
On February 12, 1974, at the meeting of the Board of Trustees of the

RB Provident Fund, Mr. de Vera proposed a reorganization of the
fund in order to carry out the instruction of the (respondent's) Board
of Directors, which wants to have control of the fund so as to tie it up
with the Investment Money Market Operations of the bank (p. 296,
NLRC rec.). Mr. Luna vehemently objected to this, saying that the
Provident Fund does not belong to the respondent bank but to the
officers and employees. A heated discussion followed. The
reorganization move was carried by a 3 to 2 vote, with all
management-appointed trustees voting for it. To protect the
interests of the fund, Mr. Luna moved that a trust agreement be
executed between the trustees on the one hand and the members
of the provident fund on the other, and that the trustees should
execute a bond. It was during the ensuing discussion that Mr. Luna
allegedly uttered the libelous remarks as follows:

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The basis of my apprehension is that if management wig
run the RB I feel that the management of the RB are
experts in distressing the RB and it's a known fact that for
the past 10 years the RB has been in distress for which
there is no reason why the RB should be controlled by
management. Furthermore, the latest that Mr. de Vera is
harping on is that he has good intentions. The present
Board of Trustees decided against giving out a loan to Mr.
de Vera who was considered a poor credit risk. Now how
can we expect a person who cannot be given a loan
and who will now have a say in the PF I don't think the PF
will allow that.
xxx xxx xxx
As I have said before the personal standing of a trustee is

very important so that if a man has a very poor standing
and crooked (sic) at that he will be very bad for the
interest of the PF. I repeat that the trustees had in the past
denied a loan application of Mr. de Vera for the reason
that his salary is under garnishment and for a man to be
appointed as trustee when his records show that his salary
was under garnishment, definitely, the intention of the RB
is to appoint unscrupulous people (pp. 300-301, NLRC
rec.).
After more discussion, Mr. Luna's motion was ruled as without merit
by the chairman who proceeded to consider the appointment of a
new administrator. At this point, Mr. Luna and Mr. Antonio Canizares
the trustee representing the RB Employees' Union walked out of the
meeting. When they were gone, Mr. Mario Galicia, a management-
appointed trustee, was unanimously elected new administrator by
the three (3) remaining trustees.
On February 21, 1974, Mr. Armando Abad, chairman of the RB

Provident Fund, wrote a memorandum to Mr. Luna, asking him to
turn over as soon as possible to the new administrator, Mr. Galicia, all
his records, papers and documents relative to the operations of the
Provident Fund.
Mr. Luna answered him in the following manner:
To: Mr. Armando Abad Sr. Date: 2/22/74
From: Mr. Norberto Luna, Administrator
Subject: TURNOVER OF RECORDS RE:
PROVIDENT FUND

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This is with reference to your letter of February 21, 1974.
You being a lawyer and therefore relies on facts, should
know that I am without doubt whatsoever the
Administrator of the Provident Fund. What are these facts?
1. The Rules and Regulations of the Republic Bank -

Provident Fund govern the actions of the Provident Fund,
its Board of Trustees and its officers and staff.
Sec. 7, 3rd to the last paragraph of these "Rules and

Regulations" states: "The Board of Trustees shall hold
regular meetings on the second Tuesday of every month
at the hour and place designated by them. If the second
Tuesday falls on a holiday, the regular meeting will be
held on the first working day following. Any three (3)
members of the Board of Trustees shall constitute a
quorum to do business, Provided, that at least one of such
three (3) members is a trustee representing the Union'"
2. The transcript of stenographic notes made by Mrs.

Evelyn Unson states in page I under "Other Matters"
DE VERA I would like to move that a

reorganization of this Fund be effected.
After this, discussion followed and then on

page 3, the transcript states:
ABAD Let us better put this into votation. Those

who are in favor of reorganization — 3 voted
for and 2 against.
Then on page 7 of the transcript it states:
ABAD You are free to do that as a member of the Board

of Trustees and as President of the Supervisor's Union, but
we have to go ahead with the motion of Mr. de Vera to
appoint a new Administrator.
MESSRS. NORBERTO LUNA, ANTONIO CANIZARES AND FELIX

VILLAFUERTE WALKED OUT AT THIS POINT.
DE VERA Before I make the motion for a new

administrator, I would like to move that all the
personal remarks made against me be stricken
off the records, my personal affairs have
nothing to do as to my being a trustee. I can
sue Mr. Luna for slander in court.

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ABAD Deleting of the remarks made by Mr.
Luna demeaning Mr. de Vera be carried.
DE VERA I move that a reorganization of the

Provident Fund be made and a new
administrator be named. I move that Mr. Mario
Galicia be the new administrator.
ABAD It was moved and seconded that Mr.

Galicia be elected the new administrator of
the Provident Fund in lieu of Mr. Luna.
Unanimous decision.
GALICIA I would like to make it known that I will

temporarily accept this position as
administrator pending the final replacement of
management's choice of a permanent trustee
who will be the administrator of the Provident
Fund.
THE MEETING ADJOURNED AT 3:00 P.M.
From the above motions and sequence of discussion you

will note the following.
1. No motion was ever made to declare the position of

Administrator vacant nor was there ever a motion to
retire, separate, lay off, consider resigned or dismissed the
administrator. Therefore I am still administrator.
2. BY the time Mr. de Vera move (sic) that a new ad-

administrator be named there was no longer a quorum.
Any motion or action of a group of people pretending or
holding themselves out as a Board, when there actually
was no quorum is illegal.
Considering that the minutes of this meeting has not yet

been confirmed for you to act on this matter based on
your interpretation of what happened, or what you were
planning to happen, or what you wished happened is
rather dangerous.
In view of the foregoing, it is requested:
1. That all loans or any matter that needs the action of the
administrator be forwarded to me for appropriate action.
2. That you stop hindering or delaying the action of the

Provident Fund and myself as administrator.

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In this connection I would like to reiterate my request that
you as legal officer of the Provident Fund prepare a "Trust
Agreement" between the members of the Provident Fund
and the Trustees so this can be discussed and signed in
our next meeting.
I believe that any man who claims to be a trustee but

who refuses to sign a trust agreement is committing moral
estafa, and is preparing to commit actual estafa.
(SGD) NORBERTO LUNA
Administrator
On the same date (February 22, 1974) Mr. Abad caused a notice to
be sent to all members of the Board of Trustees for a special meeting
on February 26, 1974, to take up the following.
1) Confirmation of the election of the new administrator,
2) Loan applications;
3) Maturing Bankers' Acceptances' and
4) Other matters (p. 304, NLRC rec.).
Mr. Luna failed to attend the said meeting.
On February 28, 1974 Mr. Abad submitted to the Board of Directors a

report on the February 12th incident and its aftermath, and
recommended disciplinary action against Luna.
On the same date, a memorandum was sent to Mr. Luna by Antonio

P. Roman, Jr., corporate secretary, informing him of Resolution No.
26-1974 of the Board of Directors which suspends him as Branch
Manager of the San Juan Branch pending the investigation of the
charges contained in Mr. Abad's memorandum, and directing the
Committee on Personnel to immediately convene and investigate
the said charges (pp. 196197, NLRC rec.).
On March 4, 1974, the Committee on Personnel headed by Sabino

de Leon, Jr. sent Mr. Luna a copy of Resolution No. 261974 and of the
memorandum-complaint of Mr. Abad dated February 28, 1974,
informing him of the charges against him for:
1) Dereliction of duties both as trustee of the Republic

Bank Provident Fund and as an employee of the bank;
and

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2) Making utterly derogatory and libelous remarks against
the entire management of the Republic Bank during the
meeting of the Board of Trustees of the Provident Fund
held on February 12, 1974 (pp. 198-199, NLRC rec.), and
directing him to submit his written answer or explanation
to the charges.
On March 5, 1974, Mr. Luna answered Mr. de Leon's letter expressing

his belief that his actuations as trustee of the Provident Fund are
beyond the authority of the Republic Bank because of the following
reasons:
1) The PF is a different entity from the RB having its own

Rules and Regulations, its own name, its own source of
income and files a separate income tax returns with the
BIR;
2) His appointment as trustee was not made by the

Republic Bank but by the Union of Supervisors; and
3) He receives his honoraria from the Provident Fund and

not the Republic Bank. Nevertheless, he answered the
charges in the following manner:
However, I am concerned that if I do not answer your

charges rumors may float that I am indeed guilty of the
same. In order to avoid this, and also to clarify matters
and soothe hurt feelings, I make the following point-by-
point reply:
1. In view of the unsystematic way that the charges and

its enclosures were made I have to guess what it is that I
am accused of in Dereliction of duties. My guess are (1) I
did not attend the special meeting caned by the
Chairman (2) 1 walked out of the meeting (3) 1 did not
turn over the records, papers, etc. to the new
administrator.
My answer to these are (1) Mr. Armando Abad, Sr.'s claim

that I was duly notified on February 24, 1974 of a special
meeting is not true, because February 24 was a Sunday
and I was in the province at that time. I could not have
been notified on February 25, I was on union leave. I
received the notification at 2:00 p.m. on February 26 by
telephone from Mrs. Unson. It was then too late for me to
attend if I wanted to. Besides I have the right not to
attend a meeting if I so desire, just like the other trustees
who have absented themselves on various dates.

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2. I walked out of the meeting because I felt disgusted by
the rather high-handed attitude of management trustees.
Besides it is the right of a trustee to walk out of any
meeting, this has been done before by Mr. Abad on the
meeting of September 11, 1973.
3. I did not turn over the records, papers, etc., for reasons
that I stated in my letter addressed to Mr. Abad dated
February 22, received by him February 26, 1974. Since he
did not pursue the matter further I concluded that he
agreed to the contents of my letter.
xxx xxx xxx
2. Mr. Luna objected to the motion and said "The basis of

my apprehension is that if management will run the
Provident Fund, I feel that the management of the RB are
experts in distressing the RB and it is a known fact that for
the past 10 years, the RB has been in distress for which
there is no reason why the Provident Fund should be
controlled by management" (t.s.n., p. 6, copy attached).
On said page 6, I cannot find any such remarks and I

never said that statement. What I said was "The basis of
my apprehension is that if management will run the
Provident Fund, I feel that the management of the
Republic Bank are not experts and it is a known fact that
for the past 10 years, the Republic Bank has been in
distress for which reason the Provident Fund should not be
controlled by management." Let me state very clearly
that Mrs. Unson is not a court stenographer. Besides, the
trustees at this point were talking at the same time making
it very hard for Mrs. Unson to take down everything
accurately. If you will examine word for word this alleged
statement I could not have possibly made such a
statement because my position was that management
should not run the Provident Fund while this alleged
remarks gave reason why management should control it. I
quote: "there is no reason why the Provident Fund should
be controlled by management." To prove further that Mrs.
Unson failed to take an accurate record of the
discussions, I made other remarks which do not appear at
all in her transcript. Messrs. Canizares and Galicia also
made remarks that Cannot be found in this transcript. All
the trustees can attest to this. In this transcript also, you will
find many inconsistencies, hanging sentences, statements
attributed to a trustee that were made by another trustee.
Statements or motions of trustees that were mangled

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beyond recognition or understanding. The other persons
attending this meeting I am sure can attest to this.
In other words this transcript is not an exact account of

what was said, but is merely an interpretation by Mrs.
Unson of what she understood was said.
In this connection I would like to point out the great

disservice that Mr. Abad would be doing to management
by pursuing these charges. Had Mr. Abad waited until the
natural course of events had happened one of two things
would happen. These are:
1. The minutes of the meeting would come out

signed by me without any unbecoming
remarks, as what has happened in the past
when there had been heated discussion also
but nothing derogatory has even come out in
the minutes and therefore everybody would be
happy since only Mrs. Unson and I would have
seen this inaccurate transcript; or
2. The minutes would come out signed by me

with derogatory remarks, in which case my
goose is cooked. But unfortunately Mr. Abad
jumped the gun. Now it is the transcript that is
on trial as to its accuracy, and all sorts of rumors
are going on in the Republic Bank that the
Union President is being harassed for
articulating things that everybody has all along
known for the past ten years.
In view of the foregoing it is requested that this

investigation be terminated now and that the case
against me be dropped immediately.
Very truly yours,
(SGD) NORBERTO LUNA
The investigation of the charges against Mr. Luna was held ex-parte
on March 6, 18, 21 and 25, 1974. Meanwhile, Mr. Luna was
prevented from attending the regular meeting of the PF Board of
Trustees on March 12, 1974.
The Investigating Committee submitted its report of investigation (pp.

215-235, NLRC rec.) on March 27, 1974 which became the basis of
Resolution No. 40-1974 of the Board of Directors dated March 28,
1974 (p. 186, NLRC rec.), dismissing Mr. Luna for cause, effective

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upon receipt of the written clearance therefor from the Secretary of
Labor pursuant to Section 11 of Presidential Decree No. 21 in
conjunction with Section 25 of the Rules and Regulations of the
National Labor Relations Commission dated October 18, 1972.
Upon the foregoing premises, it is the contention of the petitioner

that:
1. The respondent Secretary of Labor erred in not

considering the utterances of Norberto Luna as falling
within the purview of protected labor activity;
2. Respondent Secretary of Labor erred in authorizing the

dismissal of Norberto Luna despite finding that same is
without sufficient just cause;
3. Respondent Secretary of Labor erred in failing to secure

the employment tenure of Norberto Luna in consonance
with express constitutional mandate;
4. Respondent Secretary of Labor erred in not finding

respondent bank's management guilty of unfair labor
practice for the unjustified harassment and dismissal of
Norberto Luna on account of his union activities; and
5. Respondent Secretary of Labor erred in not ordering the

reinstatement of Norberto Luna to his various posts, with
full back wages from the date of his removal therefrom to
the date of his actual reinstatement thereto.
The foregoing assignments of error may be consolidated into the

following issues:
1. Whether or not Mr. Luna's utterances and alleged acts of

insubordination constitute just cause for his dismissal;
2. Whether or not the dismissal of said Mr. Luna constitutes unfair

labor practice.
There are two different versions of the statement made by Mr. Luna
in the meeting of the Board of Trustees of the RB Provident Fund on
February 12, 1974. The management version is that which is quoted
on page 4 thereof, and purportedly appearing in the stenographic
notes of Mrs. Evelyn Unson, the clerk who took down notes of the
meeting Mr. Luna, however, alleges that the transcript of
stenographic notes was not an accurate record of the proceedings,
considering that Mrs. Unson was not a court stenographer. Besides,
at the time of the alleged utterances, the trustees were talking at the
same time.

suigeneris
Mr. Luna contends that what he said was the following:
The basis of my apprehension is that if management will

run the Providend Fund, I feel that the management of
the Republic Bank are not experts, and it is a known fact
that for the past 10 years the Republic Bank has been in
distress for which reason the Provident Fund should not be
controlled by Management (p. 202, NLRC rec.).
Mr. Luna further alleges that his utterances were made in his
capacity as trustee representing the Union of Supervisors. it was by
reason of his presidency of the said union that he became a trustee,
and is therefore supposed to guard the interests of its members. It
was precisely in acting out that role that he vehemently opposed
the management-inspired proposal to transfer the funds of the
Provident Fund to the bank's newly-opened money market
department that a heated argument ensued, in the course of which
he made the supposedly libelous statements. Luna now argues that
his statement should be regarded as falling under protected labor
activity and therefore privileged.
There is merit in this contention. A review of the events prior to the

ouster of Luna from his position as branch manager of respondent
bank and as trustee, administrator and secretary of the Provident
Fund will show the following:
1. February 1, 1974: Luna filed with the NLRC an unfair labor practice
case against the management, docketed as Case No. LR-2673.
2. February 12, 1974. —
a) A meeting of the PF Board of Trustees was

held, attended by Mr. Restituto de Vera, a
bank Assistant Vice-President who had then just
been designated to sit in the board in
substitution of a trustee who was on leave.
b) De Vera opened the meeting with the

following statement:
I received word from the Board of

Directors, specifically from Mr. Pery
that the Provident Fund PF is an
entity of the Republic Bank because
the main bulk of contributions is put
up by the RB into the PF so that they
would like to have control of the
funds of the PF and for that matter
the administration of the Fund. Along

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that line of instruction and in
consonance with the creation of the
Investment Money Market of the RB
the management would like to have
control of the administration so that
the operation of the PF could be tied
up with the operation of the
Investment Money Market of the RB.
The Central Bank has given us an
authority to operate a quasi-banking
operation on December 17, 1973. To
effect the instruction, I would like to
move that a reorganization of this
board be effected" (p. 245, NLRC
rec.).
c) Mr. Luna, the erstwhile administrator and

Secretary of the Fund, vigorously objected.
d) Messrs. Armando Abad (chairman) and

Mario Galicia, the two other management-
appointed trustees took up the cudgels for de
Vera, and forced the issue of reorganization.
The same was carried by a vote of 3 to 2, with
all the management appointed trustees voting
for it, and the two labor representatives voting
against (p. 245, LRC rec.).
e) Mr. Luna moved that all the trustees execute

a trust agreement and a bond in favor of the
PF members — to protect the interests of the PF
Messrs. Abad, de Vera and Galicia counter
argued against the proposal. Lina remarked.
"As long as we are supported by the members
of the union, RB must follow. We will fight to
protect the interests of the PF If you insist, there
will be labor trouble. " (p. 248, NLRC rec.).
f ) De Vera questioned Luna's apprehensions. In

answer, Luna made the allegedly derogatory
statements (p. 249, NLRC rec.).
g) Luna's motion was declared without merit by

the chairman, Mr. Abad (p. 250, NLRC rec.).
h) Luna and Antonio Canizares the other labor

representative walked out of the meeting.

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i) The remaining three [31 trustees unanimously
elected Galicia as the new administrator (p.
251, NLRC rec.).
3. February 21, 1974. A memorandum was sent by

Chairman Abad to Luna. Subject: Request to turn over
records re Provident Fund (p. 191, NLRC rec.).
4. February 22, 1974: Reply of Luna to Abad informing of

his belief that he is still the administrator because: a] the
position of administrator was never declared vacant; b]
Mr. Galicia's election was illegal for having been made
without the requisite quorum; and c] the minutes of the
February 12th meeting has not yet been confirmed (pp.
192-194, NLRC rec.).
A notice of special meeting on February 26, 1974 was

released on February 22, 1974, with the copy for Luna
being delivered to Mr. Canizares (p. 304, NLRC rec.).
5. February 26, 1974. A special meeting of the Board of

Trustees was held. Both Luna and Canizares were absent.
6. February 28, 1974:
a) Report of Mr. Abad to the respondent's

Board of Directors, recommending
administrative action against Luna for having
uttered defamatory words against the bank
management and against one of its vice-
presidents; for walking out of the meeting on
February 12, 1974; for refusing to turn over the
records of the Provident Fund to the new
administrator; and for failure to attend the
special meeting for no apparent reason (pp.
236-237, NLRC rec.).
b) Office Memorandum suspending Luna, per

Resolution No. 26-1974 of the Board of Directors
(pp. 196- 197, NLRC rec.).
7. March 4, 1974: Letter of the Chairman, -Committee on

Personnel of respondent bank, informing Luna of the
charges against him for dereliction of duty and for making
utterly derogatory and libelous remarks against the bank
management (pp. 198-199, NLRC rec.).
8. March 5, 1974: Answer of Luna to the charges (pp. 200-

203, NLRC rec.).

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9. March 6, 1974: Administrative investigation of Luna, with
witnesses Armando Abad PF Chairman) and Maximo
Galicia (trustee) testifying (pp. 272-275, NLRC rec.). No
apparent notice to Luna.
10. March 12, 1974. Regular meeting of the PF Board of

Trustees, wherein Luna was prevented from attending
because of his suspension.
11. March 18, 1974.- Continuation of the administrative

investigation of Luna, with witnesses Restituto de Vera
(trustee) and Evelyn Unson (stenographer) testifying (pp.
276-281, NLRC rec). No apparent notice to Luna.
12. March 19, 1974: Letter of the chairman of the

investigating committee (Personnel), inviting Luna to
appear if he so desires at the continuation of investigation
to be held on March 20, 1974 [P. 204, NLRC rec], at 3:00
p.m.
13. March 21, 1974: Continuation of the administrative

investigation of Luna, with Antonio Canizares (trustee) and
Carlos Mora (PF auditor) testifying in the morning [pp. 283-
288, NLRC rec.].
As stated in his notice, Luna appeared at the investigation

at 3:00 p.m. with his counsel, and it was explained to him
that the purpose of inviting him was to find out if he
wanted to add anything more to his written explanation
(p. 289, NLRC rec.). Luna's counsel questioned the
authority of the committee to conduct the investigation,
which the committee noted; after which the testimony of
Felix Villafuerte (credit investigator) was taken [pp. 291-
293, NLRC rec.].
14. March 27, 1974: Report of the Investigating Committee

to the Board of Directors, finding Luna guilty of grave
misconduct for his derogatory and libelous remarks
against the bank management, and of insubordination,
for his refusal to turn over the records of the PF to the new
administrator. The report contains a recommendation for
Luna's dismissal to take effect upon receipt of the
clearance from the Secretary of Labor pursuant to PD 21
(pp. 232- 235, NLRC rec.).
15. April 15,1974:

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a) Request of respondent bank for clearance
to terminate Luna's services (pp. 208-214, NLRC
rec.).
b) Advice to Luna re termination of his

employment effective upon receipt of the
clearance from the Secretary of Labor (pp.
180-181, NLRC rec.).
These series of events unmistakably show that respondent bank had

wanted to do away with Luna even before that eventful February
12th meeting of the PF Board of Trustees, when one of its Assistant
Vice-Presidents, de Vera, who had just been appointed to fill the
temporary vacancy therein was instructed by the bank's Board of
Directors to press for the reorganization of the PF Board of Trustees.
This is evident from the words of de Vera when he said, "the
management proposed a reorganization because it thinks that a
new administration can serve the PF better. You have been tried.
Why can we not appoint a new administrator and give us a chance
to do things in our way or fashion x x x?" (p. 248, NLRC rec.). The
angry reaction and statements that Luna made in the face of this
became a convenient tool for the management to use in its desire
for Luna's ouster - and its eventual control of PF funds.
But the evidence presented in this case does not support the
findings.
Luna challenged the accuracy of the stenographic notes of the said

meeting on the ground that Mrs. Unson was not a court
stenographer and her notes do not truly reflect all that transpired
during the meeting. He also stated that had the usual procedure
been followed the minutes should have been submitted to him first
for whatever corrections he might make before being finalized and
signed by him (pp. 202-203, NLRC rec.). He further alleged that
although he was given a copy of the transcribed notes, and he
informed Mrs. Unson that there were errors he would like to correct,
he was not able to make such corrections because Mrs. Unson did
not want to take orders from him anymore (p. 291, NLRC rec.).
These allegations were never refuted. In fact, Mrs. Unson herself

admitted that she was a clerk, "just a mere clerk" (p. 278, NLRC rec.)
although it was part of her duties to take down stenographic notes
of the discussions in board meetings; that it was likewise routinary for
her to submit her transcribed notes to Luna as secretary; and that
when she did the same after transcribing her notes of the February
12th meeting, Luna informed her that there were errors, but such
errors were never corrected. Since there is nothing in the records to
indicate that Luna has been changed as secretary, the minutes

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should have been signed by him before being officially released.
Without such signature, neither probative value nor credibility could
be accorded to such minutes; for the one who signed, Abad, is also
the accuser of, and therefore biased against Luna.
This leaves only the testimonial evidence to clinch the case against
Luna. It appears, however, that of the seven (7) witnesses presented,
namely, Abad, Galicia, de Vera, Unson, Canizares Mora and
Vallesteros, only the first three (3) positively testified as to the alleged
derogatory statements. This is understandable, considering that
Abad is the accuser, Galicia is the successor, and de Vera was the
prime mover of Luna's ouster. Thus, the weakness of the evidence for
respondent bank is easily discernible.
Even if it were not so, and had the alleged derogatory or libelous
statements been substantially established, still the same will not justify
Luna's dismissal.
For one thing, his allegations were never controverted. On the

contrary, the said allegations were confirmed by the takeover by the
Central Bank of the distressed respondent bank which was of public
knowledge.
Moreover, Luna's remarks at the meeting of an official board are

privileged in nature as a valid. exercise of his constitutional freedom
of expression. He addressed his remarks to the body that has
jurisdiction over the question of management of the assets of the
Provident Fund. Luna's remarks were intended to protect the interests
of the members of the Provident Fund from what he honestly
believed was a risky venture on the part of the management. His
protests could even be treated as union activity by the Industrial
Peace Act, which assures the employees' right "to self-organization
and to form, join or assist labor organizations of their own choosing
and to engage in concerted activities for the purpose of collective
bargaining and other mutual aid and protection ... " (Sec. 3, Rep.
Act 875). This is so because Luna's membership in the PF Board of
Trustees was by virtue of his being president of the RB Union of
Supervisors. The Provident Fund was itself created as a result of the
union's collective bargaining agreement with the bank. Luna was
therefore acting out his role as protector of his constituents when he
voiced out his apprehension and protests over the plan of
management. It matters not that he acted singly or individually.
What is important is that he had been selected by the supervisors of
respondent bank to be their president and representative in the PF
Board of Trustees. His actuations as such should therefore be
considered as legitimate exercise of the employees' right to self-
organization and as an activity for their mutual aid and protection,
aside from being privileged communication protected by the

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constitutional guarantee on free speech. His remarks were in
defense of the interest of the Provident Fund, part of which comes
from the contribution of the rank and file employees. Moreover, his
remarks had factual basis. As heretofore stated, the Central Bank
took over the management of the respondent Republic Bank
because it became distressed due to mismanagement. And his
remarks were addressed to the Board of Trustee which has
jurisdiction over the matter.
In Republic Savings Bank vs. C.I.R. (21 SCRA 226 [1967] cited with
approval in Philippine Blooming Mills Employees Organization vs.
Philippine Blooming Mills, Inc., 51 SCRA 189 [1973], involving the same
bank where eight (8) union officials were dismissed for having written
and published a patently libelous letter against the bank President,
WE held:
It will avail the Bank none to gloat over this admission of

the respondents. Assuming that the latter acted in their
individual capacities when they wrote the letter-charge
they were nonetheless protected for they were engaged
in concerted activity, in the exercise of their right of self-
organization that includes concerted activity for mutual
aid and protection (Section 3 of the Industrial Peace Act
... ). This is the view of some members of this Court. For, as
has been aptly stated, the joining in protests or demands,
even by a small group of employees, if in furtherance of
their interests as such, is a concerted activity protected by
the Industrial Peace Act. It is not necessary that union
activity be involved or that collective bargaining be
contemplated (Annot., 6 A.L.R. 2d 416 [1949]).
xxx xxx xxx
Instead of stifling criticism, the Bank should have allowed

the respondents to air their grievances.
xxx xxx xxx
The Bank defends its action by invoking its right to

discipline for what it calls the respondents' libel in giving
undue publicity to their letter-charge. To be sure, the right
of self-organization of employees is not unlimited
(Republic Aviation Corp. vs. NLRB 324 U.S. 793 [1945]), as
the right of the employer to discharge for cause
(Philippine Education Co. vs. Union of Philippine Education
Employees, L-13773, April 29, 1960) is undenied. The
Industrial Peace Act does not touch the normal exercise
of the right of the employer to select his employees or to
discharge them. It is directed solely against the abuse of
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that right by interfering with the countervailing right of self
organization (Phelps Dodge Corp. vs. NLRB 313 U.S. 177
[1941]). ... .
xxx xxx xxx
In the final sum and substance, this Court is in unanimity

that the Bank's conduct, Identified as an interference with
the employees' right of self-organization, or as a retaliatory
action and/or as a refusal to bargain collectively,
constituted an unfair labor practice within the meaning
and intendment of section 4(e) of the Industrial Peace
Act.
The other basis for dismissal — insubordination — appears to be

likewise without justifiable ground. Such charge arose out of the
alleged refusal of Luna to obey the order of his superior, to turn over
the records of the Provident Fund to the new administrator. The
"order" referred to was not an order but a letter-request dated
February 21, 1974 of Provident Fund Chairman Abad as it was in fact
entitled "Request to Turn Over Records re Provident Fund" (p. 191,
NLRC rec.). Upon receipt thereof, Luna immediately answered in
writing (p. 192, NLRC, rec.), explaining why he feels justified to keep
them. And in his answer to the charges, Luna averred that when no
follow-up was made thereon, he assumed that his explanation had
been satisfactory (p. 201, NLRC rec.). Indeed, the Board of Trustees,
upon receipt of such written explanation, should have referred the
matter to the grievance machinery under the collective bargaining
agreement.
But no, this was not done. Instead, management preferred as many
charges as it could frame against Luna, obviously to make sure that
if one charge could not suffice to bring about his ouster, the other
charges might produce the desired result. Thus, even his having
walked out of the meeting on February 12, 1974, and his absence
from the special meeting on February 26, 1974, were included under
the heading dereliction of duty". It was to the credit of the
Investigating Committee that the latter charges were ruled out.
All the foregoing shows that Luna's dismissal had no legal justification.
In the words of the arbitrator, Flavio P. Aguas, " ... complainant's
dismissal should be considered as without sufficient just cause" (p. 64,
rec.).
WE therefore find the respondent then Secretary (now Minister) of

Labor to have acted with grave abuse of discretion when he
affirmed the grant of clearance to terminate Luna's services with
respondent bank on the ground of loss of confidence, despite the
fact that the charges against him were not substantiated.
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In the case of Bonifacio de Leon vs. NLRC, et al. (G.R. No. L-52056,
October 30, 1980), WE held:
While a managerial employee may be dismissed merely

on the ground of loss of confidence, the matter of
determining whether the cause for dismissing an
employee is justified on grounds of loss of confidence
cannot be kept entirely to the employer. Impartial
tribunals do not rely only on the statement made by the
employer that there is loss of confidence unless duly
proved or sufficiently substantiated. ... .
After having served the company for more than 22 years,

dismissal would be too severe a penalty for petitioner who
was not even afforded an opportunity to be heard. He
was just a victim of the whims and malicious maneuver of
private respondents.
That the respondent bank tried to maneuver Luna's ouster is evident

from the way the investigation was conducted by its Committee on
Personnel. As shown in the above narration of events, the testimonies
of witnesses — who were not even under oath — were taken without
notice to Luna and without giving him a chance to cross-examine
them. And corporate actions through the Board of Directors, such as
filing of charges, suspension and termination, were taken against
Luna just as soon as, and on the very same dates the reports are
made. Were it not for the filing of this complaint with the NLRC Luna
could have been booted out of office without due process.
In the case of Central Textile Mills, Inc. vs. NLRC, et al. (L-50150, 90
SCRA 9 [1979]). Chief Justice Enrique M. Fernando, speaking for the
Court, ruled:
The weakness of the petition, to repeat, is thus

indisputable Petitioner, however, would try to impart a
substance of plausibility by alleging that even on the
assumption that no theft was committed, still there was
loss of confidence, sufficient to cause his dismissal. In the
Philippine Air Lines decisions referred to, the accusation
that theft was committed by the employee was likewise
not borne out by the evidence. To justify a dismissal,
management relied on the allegation that there was
breach of trust, a ground analogous to loss of confidence.
The Court of Industrial Relations did not agree. Neither did
this Court, Reinstatement was ordered. So it must be in this
case. Such a vague, an-encompassing pretext as loss of
confidence, if given the seal of approval by this Court,
could easily be utilized to reduce to a barren form of

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words the constitutional guarantee of security of tenure.
Precisely, the employee is afforded that protection so that
his means of livelihood is not placed at the mercy of
management. He is just as much a participant in the
industrial process. He is entitled to be considered as such.
Constitutional provisions protecting labor are in line with
the predominant thinking all over the world safeguarding
human dignity. It would then be to ignore not only a
mandate of the fundamental law but also a counsel of
wisdom and fair play to impart the concept of loss of
confidence such a latitudinarian scope.
... The constitutional provision is not to be so easily brushed

aside. If it were otherwise, there would be failure, in the
language of the Philippine Air Lines' opinion 'to conform to
the Ideal of the New Society, the establishment of which
was so felicitously referred to by the First Lady as the
compassionate Society.
And in the cited case of Philippine Air Lines vs. PALEA (L-24626, 57
SCRA 489 [1974]), the Court held:
The futility of this appeal becomes even more apparent

considering the express provision in the Constitution
already noted, requiring the State to assure workers
"security of tenure." It was not that specific in the 1935
charter. The mandate was limited to the State affording
'protection to labor, especially to working women and
minors, ... . If by virtue of the above, it would not be legally
justifiable to reverse the order of reinstatement, it
becomes even more readily apparent that such a
conclusion is even more unwarranted now. To reach it
would be to show lack of fealty to a constitutional
command. This is not to say that dismissal for cause is now
outlawed. No such thing is intimated in this opinion. It is
merely to stress that where respondent Court of Industrial
Relations, in the light of all the circumstances disclosed
particularly that it was a first offense after seventeen years
of service, reached the conclusion neither arbitrary nor
oppressive, that dismissal was too severe a penalty, this
Court should not view the matter differently. That is to
conform to the Ideal of the New Society, the
establishment of which was so felicitously referred to by
the First Lady as the Compassionate Society.
In the case at bar, Luna, the complaining witness had more than 21
years of service with respondent bank, starting on April 2, 1953. The
record is not clear as to what position he first held; but it is

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undisputed that he was the Branch Manager of respondent bank's
San Juan Branch and for eleven (11) years the president of the RB
Union of Supervisors. It is likewise not denied that the Union of
Supervisors had, prior to this case, caused the filing of several cases
against the bank with the NLRC. According to Arbitrator Aguas,
some of these cases had been decided or were settled by the
parties. NLRC Case No. LR-729 was decided by the compulsory
arbitrator and the parties entered into an agreement as to how to
implement the decision. NLRC Case No. 2673 was withdrawn by the
unions and submitted the issue to voluntary arbitration (p. 60, rec.). It
is evident, therefore, that the respondent bank's predilection to oust
Luna was because of his union activities.
The respondent bank, however, argues that Luna's union activities

had nothing to do with his dismissal, and that the same was for
cause. If Luna's union activism indeed caused his separation, the
bank contends, how come it never took action against Antonio
Canizares the president of the RB Employee's Union, nor against
Villafuerte and Mora who were likewise officers of the Union of
Supervisors, and who were the credit investigator and appraiser,
respectively, of the Provident Fund?
To this, WE may ask the following: Why was not Cañizares cited for
dereliction of duty when he also walked out of the meeting on
February 12, 1974; failed to attend the special meeting on February
26, 1974 despite notice; and walked out of the meeting on March
12, 1974 after Luna was physically ejected therefrom by security
guards? The answers to these questions are obvious: Canizares and
the other union officers were not as active and militant in their
defense of union rights, much less did they pose any threat against
the respondent bank's plan to control the funds of the Provident
Fund which was established as a result of the collective bargaining
agreement. Only Luna posed such threat. Understandably therefore,
management wanted him out. Forgotten were his almost 22 years of
service to the respondent bank without any showing of any
irregularity in the performance of his duties during those long years.
All these circumstances taken together indubitably show that Luna's

discharge was discriminatory and constituted unfair labor practice
under paragraph (5) Section 4 of the Industrial Peace Act. He is
therefore entitled to reinstatement with back wages pursuant to the
policy to decree back wages not exceeding three (3) years without
requiring the parties to submit proof of compensation received from
other sources at the time of illegal dismissal until actual
reinstatement, in order that judgment in favor of an employee or
laborer can be executed without delay (Luzon Stevedoring Corp. vs.
C.I.R., 61 SCRA 162).

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WHEREFORE, THE ASSAILED ORDER DATED DECEMBER 6,1974 OF
RESPONDENT SECRETARY OF LABOR IS HEREBY SET ASIDE AND THE
RESPONDENT REPUBLIC BANK IS HEREBY DIRECTED TO IMMEDIATELY
REINSTATE COMPLAINANT NORBERTO LUNA TO HIS FORMER POSITION
WITHOUT LOSS OF SENIORITY RIGHTS AND OTHER BENEFITS AND
INCREASES RECOGNIZED BY LAW OR GRANTED BY PRIVATE
RESPONDENT DURING THE PERIOD OF HIS ILLEGAL DISMISSAL, WITH
BACK WAGES EQUIVALENT TO THREE (3) YEARS WITHOUT
QUALIFICATION.
THIS DECISION IS HEREBY MADE IMMEDIATELY EXECUTORY.
SO ORDERED.
Teehankee (Chairman), Fernandez, Guerrero and Melencio-Herrera,

JJ., concur.
Veraguth vs. Isabela Sugar Co. (57 Phil. 266 [1932])
G.R. No. L-37064 October 4, 1932
EUGENIO VERAGUTH, Director and Stockholder of the Isabela Sugar

Company, Inc., petitioner,
vs.
ISABELA SUGAR COMPANY, INC., GIL MONTILLA, Acting President,
and AGUSTIN B. MONTILLA, Secretary of the same corporation,
respondents.
Jose B. Gamboa for petitioner.

Agustin P. Seva for respondents.
MALCOLM, J.:
The parties to this action are Eugenio Veraguth, a director and

stockholder of the Isabela Sugar Company, Inc., who is the
petitioner, and the Isabela Sugar Company, Inc., Gil Montilla, acting
president of the company, and Agustin B. Montilla, secretary of the
company, who are the respondents. The petitioner prays: (a) That
the respondents be required within five days from receipt of notice
of this petition to show cause why they refuse to notify the petitioner,

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as director, of the regular and special meetings of the board of
directors, and to place at his disposal at reasonable hours, the
minutes, and documents, and books of the aforesaid corporation,
for his inspection as director and stockholder, and to issue, upon
payment of the fees, certified copies of any documentation in
connection with said minutes, documents, and books of the
corporation; and (b) that, in view of the memoranda and hearing of
the parties, a final and absolute writ of mandamus be issued to each
and all of the respondents to notify immediately the petitioner within
the reglamentary period, of all regular and special meetings of the
board of directors of the Isabela Sugar Central Company, Inc., and
to place at his disposal at reasonable hours the minutes, documents,
and books of said corporation for his inspection as director and
stockholder, and to issue immediately, upon payment of the fees,
certified copies of any documentation in connection with said
minutes, documents, and the books of the aforesaid corporation. To
the petition an answer has been interposed by the respondent, too
long to be here summarized, which raised questions of fact and law.
Following the taking of considerable before the clerk as
commissioner, the case has been submitted on memoranda.
It should first be observed that when the case was filed here, it was,
in accordance with settled practice, dismissed without prejudice to
the right of the petitioner to present the action before the Court of
First Instance of Occidental Negros. Thereafter, on a motion of
reconsideration being presented, this order was set aside and the
case was permitted to continue in this court. On further reflection,
we now feel that this was error, and that it would have been the
correct practice to have required the petitioner to present the
action in a court of First Instance which is better equipped for the
taking of testimony and the resolution of questions of fact than is the
appellate court. Only with considerable difficulty, therefore, can we
decide the issues of fact, since none of the members of the court
saw or heard the witnesses testify.
Speaking to the first point with which the petition is concerned,

relating to the alleged failure of the secretary of the company to
notify the petitioner in due time of a special meeting of the
company, we find by-laws, together with a resolution of the board of
directors, providing for the holding of ordinary and special meetings.
Whether there was a malicious attempt to keep Director Veraguth
from attending a special meeting of the board of the board of
directors at which the compensation of the attorneys of the
company was fixed, or whether Director Veraguth, in a spirit of
antogonism, has made this merely a pretext to cause trouble, we
are unable definitely to say. This much, however, can appropriately
be stated and is decisive, and this is that the meeting in question is in
the past and, therefore, now merely presents an academic question;

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that no damage was caused to Veraguth by the action taken at the
special meeting which he did not attend, since his interests were fully
protected by the Philippine National Bank; and that as to meetings
in the future it is to be presumed that the secretary of the company
will fulfill the requirements of the resolutions of the company
pertaining to regular and special meetings. It will, of course, be
incumbent upon Veraguth to give formal notice to the secretary of
his post-office address if he desires notice sent to a particular
residence. 1awphil.net
On the second question pertaining to the right of inspection of the

books of the company, we find Director Veraguth telegraphing the
secretary of the company, asking the latter to forward in the shortest
possible time a certified copy of the resolution of the board of
directors concerning the payment of attorney's fees in the case
against the Isabela Sugar Company and others. To this the secretary
made answer by letter stating that, since the minutes of the meeting
in question had not been signed by the directors present, a certified
copy could not be furnished and that as to other proceedings of the
stockholders a request should be made to the president of the
Isabela Sugar Company, Inc. It further appears that the board of
directors adopted a resolution providing for inspection of the books
and the taking of copies "by authority of the President of the
corporation previously obtained in each case."
The Corporation Law, section 51, provides that:
All business corporations shall keep and carefully preserve a

record of all business transactions, and a minute of all meetings
of directors, members, or stockholders, in which shall be set
forth in detail the time and place of holding the meeting was
regular or special, if special its object, those present and
absent, and every act done or ordered done at the meeting. .
..
The record of all business transactions of the corporation and

the minutes of any meeting shall be open to the inspection of
any director, member, or stockholder of the corporation at
reasonable hours.
The above puts in statutory form the general principles of

Corporation Law. Directors of a corporation have the unqualified
right to inspect the books and records of the corporation at all
reasonable times. Pretexts may not be put forward by officers of
corporations to keep a director or shareholder from inspecting the
books and minutes of the corporation, and the right of inspection is
not to be denied on the ground that the director or shareholder is on
unfriendly terms with the officers of the corporation whose records

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are sought to be inspected. A director or stockholder can not of
course make copies, abstracts, and memoranda of documents,
books, and papers as an incident to the right of inspection, but
cannot, without an order of a court, be permitted to take books
from the office of the corporation. We do not conceive, however,
that a director or stockholder has any absolute right to secure
certified copies of the minutes of the corporation until these minutes
have been written up and approved by the directors. (See Fisher's
Philippine Law of Stock Corporations, sec. 153, and Fletcher
Cyclopedia Corporations, vol. 4, Chap. 45.)
Combining the facts and the law, we do not think that anything
improper occurred when the secretary declined to furnish certified
copies of minutes which had not been approved by the board of
directors, and that while so much of the last resolution of the board
of directors as provides for prior approval of the president of the
corporation before the books of the corporation can be inspected
puts an illegal obstacle in the way of a stockholder or director, that
resolution, so far as we are aware, has not been enforced to the
detriment of anyone. In addition, it should be said that this is a family
dispute, the petitioner and the individual respondents belonging to
the same family; that a test case between the petitioner and the
respondents has not been begun in the Court of First Instance of
Occidental Negros involving hundreds of thousands of pesos, and
that the appellate court should not intrude its views to give an
advantage to either party. We rule that the petitioner has not made
out a case for relief by mandamus.
Petition denied with costs.
Avanceña, C.J., Villamor, Villa-Real, Hull and Imperial, JJ., concur.
Separate Opinions
VICKERS, J., dissenting:
I dissent.
An extraordinary meeting of the directors of the defendant

corporation was held at Isabela, Occidental Negros, on April 21,
1932. A notice of this meeting was sent to the plaintiff by registered
letter, but the notice was not received by him until May 4th, because
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the letter was addressed to the plaintiff at Isabela. The post-office
address of the plaintiff at that time was Pulupandan, Occidental
Negros, and this fact was known to the defendant officers of the
corporation, as is evidenced by the notices refer, because these
notices were not mailed until the day of the respective meetings,
although the notice were dated three days prior to the dates when
they were mailed. These notices of February 23 and March 11, 1932
were not admissible over the objection of the attorney for the
defendants for the purpose of proving that the plaintiff was not
notified of those two meetings, because there is no allegation to that
effect in the complaint. They were, however, admissible for the
purpose of showing that the defendant officers of the corporation
knew the plaintiff's post-office address to be Pulupandan. It is clear,
therefore, that no notice of the meeting of April 21, 1932 was given
the plaintiff, because the notice of said meeting was sent to Isabela
instead of Pulupandan. Taking into consideration the relations
existing between the parties, I am satisfied that this notice was
addressed to Isabela instead of Pulupandan for the purpose of
depriving the plaintiff of an opportunity of attending the meeting.
In the majority opinion it is stated that the meeting in question having

already been held, the failure of the defendants to notify the plaintiff
of said meeting is now merely an academic question. I cannot
agree with that conclusion. The plaintiff seeks the protection of his
right to a notice of all meetings of the board of directors, and prays
that the defendant officers be required to perform their duties in
accordance with the law. It is obvious that if the defendant officers
should again fail to notify the plaintiff of any meeting of the board of
directors, he would be in no better position than he is at the present
time. Under the theory of the majority opinion the plaintiff would
have no redress.
As to the second ground of plaintiff's complaint, or the refusal of the

secretary of the corporation to allow the plaintiff to read the
resolution adopted on April 21, 1932, on the ground that it had not
been signed by the directors, the plaintiff was clearly within his rights
in demanding that he be given an opportunity to examine said
resolution. It does not appear that there was any necessity for the
directors to sign the resolution in question. Such a resolution was a
part of the secretary's minutes of the meeting, which would ordinarily
be reported for approval at the next meeting. In any event the
directors had adopted the resolution, and whether it was to be
signed or not, the plaintiff as a director of the corporation had a right
to see it.
As to the fact that ill-feeling exists between the parties and another
suit between them is now pending, that seems to me only an

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additional reason why the plaintiff should be protected in the lawful
rights which he now seeks to enforce.
For the foregoing reasons, the writ prayed for should be granted.
Street, Ostrand and Abad Santos, JJ., concur.
BUTTE, J., dissenting:
I concur in the foregoing dissent insofar as it relates to the actions of

the respondent corporation and its officers in denying to the
petitioner, as stockholder and as director, the rights which statutes
confer upon him to examine and make or receive copies of any and
all of the books and papers of the corporation pertaining to the
conduct of its business. The record shows clearly that the officers and
remaining directors have adopted a policy of obstruction toward
the petitioner in this respect and imposed for the future, by
resolution, illegal conditions upon the petitioner's exercise of the said
right.
[Digest] Veraguth vs. Isabela Sugar Company (G.R. No. L-37064)
Facts:
 Eugenio Veraguth, a director and stockholder of the Isabela

Sugar Company, Inc., filed a petition to respondents Isabela
Sugar Company, Inc. for the following: (a) That the respondents
be required within five days from receipt of notice of this
petition to show cause why they refuse to notify the petitioner,
as director, of the regular and special meetings of the board of
directors, and to place at his disposal at reasonable hours, the
minutes, and documents, and books of the aforesaid
corporation, for his inspection as director and stockholder, and
to issue, upon payment of the fees, certified copies of any
documentation in connection with said minutes, documents,
and books of the corporation; and (b) that, in view of the
memoranda and hearing of the parties, a final and absolute
writ of mandamus be issued to each and all of the respondents
to notify immediately the petitioner within the reglamentary
period, of all regular and special meetings of the board of
directors of the Isabela Sugar Central Company, Inc., and to
place at his disposal at reasonable hours the minutes,
documents, and books of said corporation for his inspection as
director and stockholder, and to issue immediately, upon
payment of the fees, certified copies of any documentation in

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connection with said minutes, documents, and the books of
the aforesaid corporation
Issue:
 Whether or not the petition should be granted or not
Ruling:
 The meeting in question is in the past and, therefore, now

merely presents an academic question; that no damage was
caused to Veraguth by the action taken at the special meeting
which he did not attend, since his interests were fully protected
by the Philippine National Bank; and that as to meetings in the
future it is to be presumed that the secretary of the company
will fulfill the requirements of the resolutions of the company
pertaining to regular and special meetings.
 On the second question, it is proven that the secretary told the

Director through correspondents that they cannot provide the
minutes in question because it has not been signed by the
directors present. It further appears that the board of directors
adopted a resolution providing for inspection of the books and
the taking of copies “by authority of the President of the
corporation previously obtained in each case.”
 Combining the facts and the law, we do not think that

anything improper occurred when the secretary declined to
furnish certified copies of minutes which had not been
approved by the board of directors, and that while so much of
the last resolution of the board of directors as provides for prior
approval of the president of the corporation before the books
of the corporation can be inspected puts an illegal obstacle in
the way of a stockholder or director, that resolution, so far as
we are aware, has not been enforced to the detriment of
anyone.
 We rule that the petitioner has not made out a case for relief
by mandamus. Petition denied with costs.
Case Digest on VERAGUTH VS ISABELA SUGAR CO
Directors have the unqualified right to inspect the books and records
of the corp at all reasonable times

suigeneris
Right not to be denied on ground that director is on unfriendly terms
with officers of corp whose records are sought to be inspected
Director without court order cannot be permitted to take books out

of the corp
Nothing improper in secretary’s refusal since the minutes of these

prior meetings have to be verified, confirmed and signed by the
directors then present so Veraguth has to wait until after the next
meeting
SH or director may make copies, extracts and memoranda of such

records
By-law cannot provide for inspection only upon authority of

president of corp previously obtained in each case
Gonzales vs. PNB (122 SCRA 489 [1983])
G.R. No. L-33320 May 30, 1983
RAMON A. GONZALES, petitioner,

vs.
THE PHILIPPINE NATIONAL BANK, respondent.
Ramon A. Gonzales in his own behalf.
Juan Diaz for respondent.
VASQUEZ, J.:
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First

Instance of Manila a special civil action for mandamus against the
herein respondent praying that the latter be ordered to allow him to
look into the books and records of the respondent bank in order to
satisfy himself as to the truth of the published reports that the
respondent has guaranteed the obligation of Southern Negros
Development Corporation in the purchase of a US$ 23 million sugar-
mill to be financed by Japanese suppliers and financiers; that the
respondent is financing the construction of the P 21 million Cebu-
Mactan Bridge to be constructed by V.C. Ponce, Inc., and the
construction of Passi Sugar Mill at Iloilo by the Honiron Philippines,

suigeneris
Inc., as well as to inquire into the validity of Id transactions. The
petitioner has alleged hat his written request for such examination
was denied by the respondent. The trial court having dismissed the
petition for mandamus, the instant appeal to review the said
dismissal was filed.
The facts that gave rise to the subject controversy have been set
forth by the trial court in the decision herein sought to be reviewed,
as follows:
Briefly stated, the following facts gathered from the

stipulation of the parties served as the backdrop of this
proceeding.
Previous to the present action, the petitioner instituted

several cases in this Court questioning different
transactions entered into by the Bark with other parties.
First among them is Civil Case No. 69345 filed on April 27,
1967, by petitioner as a taxpayer versus Sec. Antonio
Raquiza of Public Works and Communications, the
Commissioner of Public Highways, the Bank, Continental
Ore Phil., Inc., Continental Ore, Huber Corporation, Allis
Chalmers and General Motors Corporation In the course
of the hearing of said case on August 3, 1967, the
personality of herein petitioner to sue the bank and
question the letters of credit it has extended for the
importation by the Republic of the Philippines of public
works equipment intended for the massive development
program of the President was raised. In view thereof, he
expressed and made known his intention to acquire one
share of stock from Congressman Justiniano Montano
which, on the following day, August 30, 1967, was
transferred in his name in the books of the Bank.
Subsequent to his aforementioned acquisition of one

share of stock of the Bank, petitioner, in his dual capacity
as a taxpayer and stockholder, filed the following cases
involving the bank or the members of its Board of Directors
to wit:
l. On October l8,1967, Civil Case No. 71044 versus the

Board of Directors of the Bank; the National Investment
and Development Corp., Marubeni Iida Co., Ltd., and
Agro-Inc. Dev. Co. or Saravia;
2. On May 11, 1968, Civil Case No. 72936 versus Roberto

Benedicto and other Directors of the Bank, Passi (Iloilo)
Sugar Central, Inc., Calinog-Lambunao Sugar Mill

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Integrated Farming, Inc., Talog sugar Milling Co., Inc.,
Safary Central, Inc., and Batangas Sugar Central Inc.;
3. On May 8, 1969, Civil Case No. 76427 versus Alfredo

Montelibano and the Directors of both the PNB and DBP;
On January 11, 1969, however, petitioner addressed a

letter to the President of the Bank (Annex A, Pet.),
requesting submission to look into the records of its
transactions covering the purchase of a sugar central by
the Southern Negros Development Corp. to be financed
by Japanese suppliers and financiers; its financing of the
Cebu-Mactan Bridge to be constructed by V.C. Ponce,
Inc. and the construction of the Passi Sugar Mills in Iloilo.
On January 23, 1969, the Asst. Vice-President and Legal
Counsel of the Bank answered petitioner's letter denying
his request for being not germane to his interest as a one-
share stockholder and for the cloud of doubt as to his real
intention and purpose in acquiring said share. (Annex B,
Pet.) In view of the Bank's refusal the petitioner instituted
this action.' (Rollo, pp. 16-18.)
The petitioner has adopted the above finding of facts made by the
trial court in its brief which he characterized as having been
"correctly stated." (Petitioner-Appellant"s Brief, pp. 57.)
The court a quo denied the prayer of the petitioner that he be

allowed to examine and inspect the books and records of the
respondent bank regarding the transactions mentioned on the
grounds that the right of a stockholder to inspect the record of the
business transactions of a corporation granted under Section 51 of
the former Corporation Law (Act No. 1459, as amended) is not
absolute, but is limited to purposes reasonably related to the interest
of the stockholder, must be asked for in good faith for a specific and
honest purpose and not gratify curiosity or for speculative or vicious
purposes; that such examination would violate the confidentiality of
the records of the respondent bank as provided in Section 16 of its
charter, Republic Act No. 1300, as amended; and that the petitioner
has not exhausted his administrative remedies.
Assailing the conclusions of the lower court, the petitioner has

assigned the single error to the lower court of having ruled that his
alleged improper motive in asking for an examination of the books
and records of the respondent bank disqualifies him to exercise the
right of a stockholder to such inspection under Section 51 of Act No.
1459, as amended. Said provision reads in part as follows:
Sec. 51. ... The record of all business transactions of the

corporation and the minutes of any meeting shall be
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open to the inspection of any director, member or
stockholder of the corporation at reasonable hours.
Petitioner maintains that the above-quoted provision does not justify

the qualification made by the lower court that the inspection of
corporate records may be denied on the ground that it is intended
for an improper motive or purpose, the law having granted such
right to a stockholder in clear and unconditional terms. He further
argues that, assuming that a proper motive or purpose for the
desired examination is necessary for its exercise, there is nothing
improper in his purpose for asking for the examination and inspection
herein involved.
Petitioner may no longer insist on his interpretation of Section 51 of

Act No. 1459, as amended, regarding the right of a stockholder to
inspect and examine the books and records of a corporation. The
former Corporation Law (Act No. 1459, as amended) has been
replaced by Batas Pambansa Blg. 68, otherwise known as the
"Corporation Code of the Philippines."
The right of inspection granted to a stockholder under Section 51 of

Act No. 1459 has been retained, but with some modifications. The
second and third paragraphs of Section 74 of Batas Pambansa Blg.
68 provide the following:
The records of all business transactions of the corporation

and the minutes of any meeting shag be open to
inspection by any director, trustee, stockholder or
member of the corporation at reasonable hours on
business days and he may demand, in writing, for a copy
of excerpts from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to

allow any director, trustee, stockholder or member of the
corporation to examine and copy excerpts from its
records or minutes, in accordance with the provisions of
this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition,
shall be guilty of an offense which shall be punishable
under Section 144 of this Code: Provided, That if such
refusal is made pursuant to a resolution or order of the
board of directors or trustees, the liability under this section
for such action shall be imposed upon the directors or
trustees who voted for such refusal; and Provided, further,
That it shall be a defense to any action under this section
that the person demanding to examine and copy
excerpts from the corporation's records and minutes has
improperly used any information secured through any

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prior examination of the records or minutes of such
corporation or of any other corporation, or was not acting
in good faith or for a legitimate purpose in making his
demand.
As may be noted from the above-quoted provisions, among the

changes introduced in the new Code with respect to the right of
inspection granted to a stockholder are the following the records
must be kept at the principal office of the corporation; the
inspection must be made on business days; the stockholder may
demand a copy of the excerpts of the records or minutes; and the
refusal to allow such inspection shall subject the erring officer or
agent of the corporation to civil and criminal liabilities. However,
while seemingly enlarging the right of inspection, the new Code has
prescribed limitations to the same. It is now expressly required as a
condition for such examination that the one requesting it must not
have been guilty of using improperly any information through a prior
examination, and that the person asking for such examination must
be "acting in good faith and for a legitimate purpose in making his
demand."
The unqualified provision on the right of inspection previously

contained in Section 51, Act No. 1459, as amended, no longer holds
true under the provisions of the present law. The argument of the
petitioner that the right granted to him under Section 51 of the
former Corporation Law should not be dependent on the propriety
of his motive or purpose in asking for the inspection of the books of
the respondent bank loses whatever validity it might have had
before the amendment of the law. If there is any doubt in the
correctness of the ruling of the trial court that the right of inspection
granted under Section 51 of the old Corporation Law must be
dependent on a showing of proper motive on the part of the
stockholder demanding the same, it is now dissipated by the clear
language of the pertinent provision contained in Section 74 of Batas
Pambansa Blg. 68.
Although the petitioner has claimed that he has justifiable motives in

seeking the inspection of the books of the respondent bank, he has
not set forth the reasons and the purposes for which he desires such
inspection, except to satisfy himself as to the truth of published
reports regarding certain transactions entered into by the
respondent bank and to inquire into their validity. The circumstances
under which he acquired one share of stock in the respondent bank
purposely to exercise the right of inspection do not argue in favor of
his good faith and proper motivation. Admittedly he sought to be a
stockholder in order to pry into transactions entered into by the
respondent bank even before he became a stockholder. His obvious
purpose was to arm himself with materials which he can use against

suigeneris
the respondent bank for acts done by the latter when the petitioner
was a total stranger to the same. He could have been impelled by a
laudable sense of civic consciousness, but it could not be said that
his purpose is germane to his interest as a stockholder.
We also find merit in the contention of the respondent bank that the
inspection sought to be exercised by the petitioner would be
violative of the provisions of its charter. (Republic Act No. 1300, as
amended.) Sections 15, 16 and 30 of the said charter provide
respectively as follows:
Sec. 15. Inspection by Department of Supervision and

Examination of the Central Bank. — The National Bank
shall be subject to inspection by the Department of
Supervision and Examination of the Central Bank'
Sec. 16. Confidential information. —The Superintendent of

Banks and the Auditor General, or other officers
designated by law to inspect or investigate the condition
of the National Bank, shall not reveal to any person other
than the President of the Philippines, the Secretary of
Finance, and the Board of Directors the details of the
inspection or investigation, nor shall they give any
information relative to the funds in its custody, its current
accounts or deposits belonging to private individuals,
corporations, or any other entity, except by order of a
Court of competent jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this

Act.— Any director, officer, employee, or agent of the
Bank, who violates or permits the violation of any of the
provisions of this Act, or any person aiding or abetting the
violations of any of the provisions of this Act, shall be
punished by a fine not to exceed ten thousand pesos or
by imprisonment of not more than five years, or both such
fine and imprisonment.
The Philippine National Bank is not an ordinary corporation. Having a

charter of its own, it is not governed, as a rule, by the Corporation
Code of the Philippines. Section 4 of the said Code provides:
SEC. 4. Corporations created by special laws or charters.

— Corporations created by special laws or charters shall
be governed primarily by the provisions of the special law
or charter creating them or applicable to them.
supplemented by the provisions of this Code, insofar as
they are applicable.

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The provision of Section 74 of Batas Pambansa Blg. 68 of the new
Corporation Code with respect to the right of a stockholder to
demand an inspection or examination of the books of the
corporation may not be reconciled with the abovequoted provisions
of the charter of the respondent bank. It is not correct to claim,
therefore, that the right of inspection under Section 74 of the new
Corporation Code may apply in a supplementary capacity to the
charter of the respondent bank.
WHEREFORE, the petition is hereby DISMISSED, without costs.
Melencio-Herrera, Plana and Gutierrez, Jr., JJ., concur.
Teehankee (Chairman), concurs in the result.
Relova, J., is on leave.
Gonzales vs PNB Case Digest
Gonzales vs. Philippine National Bank
[GR L-33320, 30 May 1983]
Facts: Ramon A. Gonzales initially instituted several cases in the

Supreme Court questioning different transactions entered into by the
Bank with other parties. First among them is Civil Case 69345 filed on
27 April 1967, by Gonzales as a taxpayer versus Sec. Antonio Raquiza
of Public Works and Communications, the Commissioner of Public
Highways, the Bank, Continental Ore Phil., Inc., Continental Ore,
Huber Corporation, Allis Chalmers and General Motors Corporation.
In the course of the hearing of said case on 3 August 1967, the
personality of Gonzales to sue the bank and question the letters of
credit it has extended for the importation by the Republic of the
Philippines of public works equipment intended for the massive
development program of the President was raised. In view thereof,
he expressed and made known his intention to acquire one share of
stock from Congressman Justiniano Montano which, on the following
day, 30 August 1967, was transferred in his name in the books of the
Bank. Subsequent to his aforementioned acquisition of one share of

suigeneris
stock of the Bank, Gonzales, in his dual capacity as a taxpayer and
stockholder, filed the following cases involving the bank or the
members of its Board of Directors to wit: (1) On 18 October 1967, Civil
Case 71044 versus the Board of Directors of the Bank; the National
Investment and Development Corp., Marubeni Iida Co., Ltd., and
Agro-Inc. Dev. Co. or Saravia; (2) On 11 May 1968, Civil Case 72936
versus Roberto Benedicto and other Directors of the Bank, Passi
(Iloilo) Sugar Central, Inc., Calinog-Lambunao Sugar Mill Integrated
Farming, Inc., Talog sugar Milling Co., Inc., Safary Central, Inc., and
Batangas Sugar Central Inc.; and (3) On 8 May 1969, Civil Case
76427 versus Alfredo Montelibano and the Directors of both the PNB
and DBP.
On 11 January 1969, however, Gonzales addressed a letter to the

President of the Bank, requesting submission to look into the records
of its transactions covering the purchase of a sugar central by the
Southern Negros Development Corp. to be financed by Japanese
suppliers and financiers; its financing of the Cebu-Mactan Bridge to
be constructed by V.C. Ponce, Inc. and the construction of the Passi
Sugar Mills in Iloilo. On January 23, 1969, the Asst. Vice President and
Legal Counsel of the Bank answered petitioner's letter denying his
request for being not germane to his interest as a one share
stockholder and for the cloud of doubt as to his real intention and
purpose in acquiring said share. In view of the Bank's refusal,
Gonzales instituted the petition for mandamus. The Court of First
Instance of Manila denied the prayer of Gonzales that he be
allowed to examine and inspect the books and records of PNB
regarding the transactions mentioned on the grounds that the right
of a stockholder to inspect the record of the business transactions of
a corporation granted under Section 51 of the former Corporation
Law (Act No. 1459, as amended) is not absolute, but is limited to
purposes reasonably related to the interest of the stockholder, must
be asked for in good faith for a specific and honest purpose and not
gratify curiosity or for speculative or vicious purposes; that such
examination would violate the confidentiality of the records of the
bank as provided in Section 16 of its charter, RA 1300, as amended;
and that Gonzales has not exhausted his administrative remedies.
Gonzales filed the petition for review.

suigeneris
Issue:
1. Whether Gonzales' can ask for an examination of the books

and records of PNB, in light of his ownership of one share in the
bank.
2. Whether the inspection sought to be exercised by Gonzales

would be violative of the provisions of PNB's charter.
Held:
1. The unqualified provision on the right of inspection previously

contained in Section 51, Act No. 1459, as amended, no longer holds
true under the provisions of the present law. The argument of
Gonzales that the right granted to him under Section 51 of the
former Corporation Law should not be dependent on the propriety
of his motive or purpose in asking for the inspection of the books of
PNB loses whatever validity it might have had before the
amendment of the law. If there is any doubt in the correctness of the
ruling of the trial court that the right of inspection granted under
Section 51 of the old Corporation Law must be dependent on a
showing of proper motive on the part of the stockholder demanding
the same, it is now dissipated by the clear language of the pertinent
provision contained in Section 74 of Batas Pambansa Bilang 68.
Although Gonzales has claimed that he has justifiable motives in
seeking the inspection of the books of the PNB, he has not set forth
the reasons and the purposes for which he desires such inspection,
except to satisfy himself as to the truth of published reports regarding
certain transactions entered into by the respondent bank and to
inquire into their validity. The circumstances under which he
acquired one share of stock in the PNB purposely to exercise the
right of inspection do not argue in favor of his good faith and proper
motivation. Admittedly he sought to be a stockholder in order to pry
into transactions entered into by the PNB even before he became a
stockholder. His obvious purpose was to arm himself with materials
which he can use against the PNB for acts done by the latter when
Gonzales was a total stranger to the same. He could have been
impelled by a laudable sense of civic consciousness, but it could not
be said that his purpose is germane to his interest as a stockholder.

suigeneris
2. Section 15 of the PNB's Charter (RA 1300, as amended) provides
that "Inspection by Department of Supervision and Examination of
the Central Bank. — The National Bank shall be subject to inspection
by the Department of Supervision and Examination of the Central
Bank." Section 16 thereof providest that "Confidential information. —
The Superintendent of Banks and the Auditor General, or other
officers designated by law to inspect or investigate the condition of
the National Bank, shall not reveal to any person other than the
President of the Philippines, the Secretary of Finance, and the Board
of Directors the details of the inspection or investigation, nor shall
they give any information relative to the funds in its custody, its
current accounts or deposits belonging to private individuals,
corporations, or any other entity, except by order of a Court of
competent jurisdiction." On the other hand, Section 30 of the same
provides that "Penalties for violation of the provisions of this Act. —
Any director, officer, employee, or agent of the Bank, who violates or
permits the violation of any of the provisions of this Act, or any person
aiding or abetting the violations of any of the provisions of this Act,
shall be punished by a fine not to exceed ten thousand pesos or by
imprisonment of not more than five years, or both such fine and
imprisonment." The Philippine National Bank is not an ordinary
corporation. Having a charter of its own, it is not governed, as a rule,
by the Corporation Code of the Philippines. The provision of Section
74 of Batas Pambansa Blg. 68 of the new Corporation Code with
respect to the right of a stockholder to demand an inspection or
examination of the books of the corporation may not be reconciled
with the above quoted provisions of the charter of the PNB. It is not
correct to claim, therefore, that the right of inspection under Section
74 of the new Corporation Code may apply in a supplementary
capacity to the charter of the PNB.
R.N. Symaco Trading Corp. vs. Santos (467 SCRA 312 [2005])
G.R. No. 142474. August 18, 2005
R.N. SYMACO TRADING CORPORATION and/or NORMA SYMACO,

ESTATE OF MARIANO GUISON, Petitioners,
vs.

suigeneris
LUISITO T. SANTOS, for and in behalf of the MALABON FISH BROKERS
ASSOCIATION, INC., Respondent.
DECISION
CALLEJO, SR., J.:
Respondent Malabon Fish Brokers Association, Inc. (MFBAI) was a

non-stock corporation established to erect and operate the
Malabon Fish Brokers Association Fish Market, aimed at promoting
the economic welfare of its members in their business of buying and
selling fish and other marine products.1 Linda Sioson was elected as
treasurer of the corporation.
On April 30, 1980, Mariano Guison, as lessor, and the MFBAI, as

lessee, executed a contract of lease over a portion of five parcels of
land located in Malabon, Metro Manila. Included in the lease
agreement was a portion of his property occupied by Rudy Symaco
along Estrella Street, Malabon, Metro Manila. The lease was for a
period of ten years from the execution of the contract, renewable
on such terms as agreed upon by the parties, provided that the
rentals shall not be increased in excess of 500% of the monthly rate
agreed upon. As provided in the contract, the lessee paid
P28,000.00 upon its execution as advance rentals for four years, and
a monthly rental of P600.00 to be paid thereafter.2
The MFBAI, thus, constructed the market on the leased property

where its members installed their respective stalls.
On August 13, 1983, a group of MFBAI members, led by Marcos

Valle, Jr., approved the corporation’s By-Laws.
On August 18, 1983, another set of MFBAI members, led by Lino

Buhain, met and amended the By-Laws which the Securities and
Exchange Commission (SEC) approved on September 7, 1983.
However, Valle, Jr. and ten others filed a petition with the SEC
against Buhain, et al. for the nullification of the amended By-Laws; to
give due course to the By-Laws approved on August 13, 1983; and to
declare them (Valle, Jr., et al.) as the duly-established members of
the corporation’s Board of Directors.3 The case was docketed as SEC
Case No. 2521.
On May 8, 1987, the SEC Hearing Officer rendered a Decision 4

ordering the dismissal of the petition, and directing the hold-over
officers to call for a membership meeting to elect the new Board of
Directors and Officers of the Malabon Fish Brokers Association, Inc.
within 30 days from finality of the decision. According to the hearing
officer, from its incorporation, the MFBAI had only 35 legitimate

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members,5 and respondent Luisito T. Santos was not listed as one of
them.
The decision was appealed to the SEC, docketed as SEC-AC No.

205, which was, however, dismissed on November 2, 1988.6 This
prompted Valle, Jr., et al. to elevate the decision to the Court of
Appeals (CA) via petition for review.
Meanwhile, Mariano Guison died intestate. On April 30, 1990, the

Heirs of Mariano Guison and petitioner Norma Symaco, then
President and Chairman of the Board of Directors of petitioner R.N.
Symaco Trading Corporation (Symaco Corporation), executed an
unnotarized contract of lease over a portion of the property
previously leased to MFBAI. Two rows of 25 stalls each, with a path in
between, had been installed on the leased premises; there was also
another perpendicular road which intersected with Estrella Street.
This latter area, consisting of about 5,978 square meters, was then
occupied by the MFBAI.7 The contract, which took effect on May 1,
1990, was for a four-year period, renewable under the same terms
and conditions, except as to the amount of rentals.8 The parties also
agreed on the following:
"2. The monthly rental of the premises shall be TWENTY FIVE

THOUSAND (P25,000.00) PESOS, PROVIDED that upon signing of this
Agreement, the LESSEE shall pay the LESSOR an advance rental
equivalent to the First (1st) year, or THREE HUNDRED THOUSAND
(P300,000.00) PESOS, and PROVIDED furthermore, that on May 1,
1990, the LESSEE shall again pay the LESSOR in advance, the rental
for the second (2nd) year or another sum of THREE HUNDRED
THOUSAND (P300,000.00) PESOS less the ONE HUNDRED THOUSAND
(P100,000.00) PESOS, which the LESSEE had advanced to the LESSOR
on March 14, 1987.9
Norma Symaco was then also a member of the MFBAI Board of

Directors.
Symaco Corporation had the stallholders evicted from the market,

and filed a complaint for forcible entry against them with the
Metropolitan Trial Court (MeTC) of Malabon, Branch 55. On October
4, 1990, the MeTC issued a writ of preliminary mandatory injunction
against the defendants. It rendered judgment in favor of the plaintiff
corporation on October 11, 1990.10
On May 31, 1990, the CA rendered judgment affirming the SEC

decision in SEC Case No. 2521. The decision became final and
executory.11
On October 29, 1990, respondent Santos, for and in behalf of the

MFBAI, filed a complaint for the annulment of the April 30, 1990
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Contract of Lease between the Heirs of Mariano Guison and
defendant Symaco Corporation, with injunctive relief, against
petitioners Estate of Mariano Guison, Symaco Corporation, and
Norma Symaco in the Regional Trial Court (RTC) of Malabon.
Respondent Santos alleged, inter alia, that as an MFBAI member, he

was a nominal party; he filed the derivative suit for and in behalf of
MFBAI. He further alleged that the April 30, 1990 Contract of Lease
executed by the defendants was null and void since it was executed
by Symaco Corporation, through Norma Symaco, who was the
president and chairman of the Board of Directors of the said
corporation and still a member of the MFBAI Board of Directors;
hence, the contract was executed in violation of the principle of
corporate opportunity under Sections 31 and 34 of the Corporation
Code of the Philippines. It was also pointed out that Symaco
Corporation was actually owned by Norma Symaco’s family. It was,
likewise, stated that the MFBAI failed to provide market stalls for its
members on account of the April 30, 1990 Contract of Lease
between Symaco Corporation and the Heirs of Mariano Guison.
Moreover, the complaint was filed since the officials of the
corporation, by their pronouncements and actions, had virtually
accepted the April 30, 1990 Contract of Lease, thereby leaving no
room for redress within the corporation itself.
The complaint contained the following prayer:
WHEREFORE, it is most respectfully prayed that:
1. The second lease contract between the Defendant Corporation

and the Defendant Estate, which is evidenced by Annex B hereof,
be annulled and set aside;
2. The Defendant Estate be directed to execute a new contract

over the aforesaid leased premises in favor of the Plaintiff
Corporation;
3. In the meantime that this action is pending, a temporary

restraining order or a writ of preliminary injunction be issued stopping
the Defendants or any other person acting under them from
enforcing, in any manner, the second lease contract (Annex B
hereof), and, after hearing, to make this injunction permanent.
Plaintiff prays for such other just and equitable remedies proper
under the premises.12
The petitioner Estate opposed the respondent’s plea for injunctive

relief, alleging that Santos had filed the complaint simply because
Patricinio Gaddi and spouses Emmanuel and Angelina Cruz, the

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sublessees of his stall in the fish market, had been evicted based on
the MTC decision in Civil Case No. 057-90.
During the hearing of the MFBAI’s plea for injunction, Santos testified
and declared that he was a member of the said corporation. A
market was constructed on the leased property, where he leased
Stall No. 39, but Symaco Corporation had him evicted. When the
contract of lease between Mariano Guison and MFBAI expired, he
asked the corporate secretary, Brigida Bautista, why it was not
renewed, and he was told that nothing could be done about it. He
also inquired from other officers, to no avail. He admitted that he
was not aware of any meeting of the MFBAI Board of Directors
regarding the renewal of the contract of lease. He thus decided to
file the complaint in behalf of MFBAI.
Restituto Santos testified that Lino Buhain even issued a certification

that his son, Luisito T. Santos, was member of MFBAI.13
In opposition to the motion for a writ of preliminary injunction, the

petitioners presented Linda Sioson, MFBAI treasurer since 1979 to
1990. She testified that although Santos had been a member of the
MFBAI, he was able to pay his membership fee and monthly dues
only from August 1983 to February 1984, and a part of March 1984,
and never offered to pay his dues despite reminders.14
Lino Buhain testified that the MFBAI failed to pay its rentals over the
subject property for four years because of a dispute (between his
group and that of Marcos Valle, Jr.) as to who were its legitimate
members and officers; its members likewise failed to pay their
membership dues. Nonetheless, the MFBAI was able to build a fish
market on the property and leased the stalls therein to its members.
On July 9, 1985, a Deed of Assignment over its leasehold rights under
its contract of lease was executed by Mariano Guison to the MFBAI,
represented by its president, Luzviminda Francisco. On April 9, 1990,
the corporation received a letter from the Heirs of Mariano Guison
informing it that the contract of lease would not be renewed.
Petitioner Norma Symaco testified that the defendant corporation

was established in 1986 to engage in the business of leasing stalls.
She further stated that MFBAI could not renew its contract of lease
with Mariano Guison because it had failed to pay rentals over the
property for six years, since its members were not paying their
monthly dues. The corporate secretary, Brigida Bautista, tried to
collect the dues from the members, to no avail. Moreover, there was
an internal struggle between two factions of its members. She
clarified that Symaco Corporation leased a portion of the property
from the petitioner Estate only after it decided not to renew the
lease contract with the MFBAI upon its expiry, and that the said

suigeneris
corporation had likewise paid advance rentals of P100,000.00 to the
Heirs of Mariano Guison.
In the meantime, 22 stallholders of the fish market, some of whom

were MFBAI members, sought to intervene, seeking the same reliefs
prayed for by the latter. The petitioner Estate opposed the
intervention on the ground that, the plaintiff had earlier filed a
complaint with the RTC of Malabon City, docketed as Civil Case No.
1571, against the same defendants (Lino Buhain and Linda Sioson),
praying for the same reliefs, plus damages; hence, the intervention
filed for harassment purposes. Nevertheless, the court allowed the
intervenors to intervene, and admitted the complaint-in-
intervention.15
On their evidence-in-chief, petitioners Norma Symaco and Symaco

Corporation offered in evidence the decisions of the Hearing Officer
in SEC Case No. 2521, the SEC in SEC-AC No. 205, and that of the
CA.16 The petitioners also offered in evidence the testimonies of
Guison, Buhain, Bautista and Norma Symaco during the hearing of
the plea for a writ of preliminary injunction, as well as the letters of
the petitioner Estate’s counsel, dated April 9 and 16, 1990, addressed
to Lino Buhain, as evidence.17
The defendants Norma Symaco and Symaco Corporation adduced

in evidence the Deed of Assignment dated July 9, 1985, where the
leasehold rights over the property were turned over to Tony
Francisco,18 and the letters of the counsel of Mariano Guison’s Estate
addressed to the plaintiff, through Lino Buhain, informing the latter
that the Estate had decided not to renew the contract of lease after
its expiry.19
The court admitted all the documentary exhibits of the petitioners.

The parties did not adduce any other further evidence on evidence-
in-chief.
In their answer to the complaint, the petitioners specifically denied

the allegation that (a) Luisito T. Santos was a member of MFBAI and
as such, had no standing to file the complaint for and in its behalf;
(b) the petitioner Estate could not be compelled to execute a
contract of lease in favor of MFBAI after the expiry of the 1980
Contract of Lease; and (c) petitioner Norma Symaco was not
personally liable for the execution of the 1990 Contract of Lease.
On September 27, 1993, the trial court rendered judgment in favor of

the petitioners. The fallo of the decision reads:
WHEREFORE, in view of the foregoing, the complaint and complaint-

in-intervention are hereby dismissed for lack of merit.

suigeneris
On defendants’ compulsory counterclaim, the plaintiffs are ordered
to pay the sum of Ten Thousand (P10,000.00) Pesos to each counsel
for the defendants for and as attorneys fees and the costs of suit.
SO ORDERED.20
The court ruled that, based on the decisions of the SEC Hearing
Officer, the SEC and the CA on appeal, Santos and most of the
intervenors were not bona fide members of the MFBAI; hence, they
had no cause of action against the petitioners. It also ruled that
Norma Symaco did not violate the doctrine of corporate
opportunity.
The private respondent and intervenors appealed the decision to

the CA, wherein it averred that –
I. THE COURT A QUO ERRED IN HOLDING THAT THE DEFENDANTS

NORMA SYMACO AND/OR R.N. SYMACO TRADING CORP. DID NOT
VIOLATE THE DOCTRINE OF CORPORATE OPPORTUNITY.
II. THE COURT A QUO, WHILE HOLDING THAT THE CONTRACT OF LEASE
BETWEEN DEFENDANTS R.N. SYMACO TRADING WITH DEFENDANT
ESTATE IS VALID, ERRED IN NOT ORDERING SYMACO TO PAY THE
PLAINTIFFS DAMAGES.
III. THE COURT A QUO ERRED IN HOLDING THAT THE PLAINTIFF LUISITO
SANTOS AND THE INTERVENORS CANNOT BRING A DERIVATIVE SUIT
FOR AND IN BEHALF OF THE MALABON FISH BROKERS ASSOCIATION,
INC.21
The intervenors failed to file their respective briefs as appellees

before the CA. As a consequence, the appellate court dismissed the
intervenors’ appeal.22
On May 21, 1997, the CA rendered judgment reversing the decision

of the RTC. The fallo of the decision reads:
WHEREFORE, the Decision dated December 27, 1993, of the court a

quo is hereby reversed and SET ASIDE and a new judgment is
entered ordering appellee Norma T. Symaco to render an
accounting to [the] appellant of all the profits acquired by [the]
appellees during the five years that appellee R.N. Symaco Trading
was the lessee of the subject property from 1990 to 1995.
The records of the case are remanded to the court a quo which is
directed to hear the accounting proceedings and thereafter to
decide the case on the basis of the results of the accounting.23
The CA held that as early as 1987, Norma Symaco had negotiated

with the Heirs of Mariano Guison for the lease of the property; hence,
suigeneris
she was guilty of violating the doctrine of corporate opportunity. The
appellate court failed to rule on the issue of whether Santos was a
member of MFBAI or not.
The petitioners then filed a motion for the reconsideration of the

decision, alleging that:
a.) The Honorable Court, with all due respects, erred in giving due
course to the appeal, despite the lack of personality and authority of
Luisito Santos to initiate the same as a derivative suit, being a non-
member of MFBAI and the abandonment and dismissal of the
appeal of the intervenors;
b.) The Honorable Court, with all due respects, erred in its findings
that defendant-appellee Norma Symaco negotiated for the lease of
the subject property for RN Symaco in 1987, while the lease with
MFBAI was still subsisting;
c.) The Honorable Court, with all due respects, erred in holding
defendant-appellee Norma T. Symaco liable for violation of the
doctrine of corporate opportunity.24
They also alleged that Santos was not a member of the MFBAI;
hence, he "had no legal personality" and "no authority" to appeal
the RTC decision. They averred that petitioner Norma Symaco did
not violate the doctrine of corporate opportunity because:
a) As early as 1985, the MFBAI is (sic) already in shambles. It is (sic) in

total disarray, with the members feuding, with two sets of officers,
and with two persons claiming to be President of the corporation
leading to several cases filed by the officers against each other.
(TSN, Lino Buhain, March 1, 1991, Pages 56-60)
b) MFBAI has NOT paid its rentals from 1984 up to the expiration of
the contract in 1990. Stated otherwise, the MFBAI was only able to
pay for 4 years out of a 10-year contract. (TSN, Norma Symaco,
January 15, 1992, Pages 18, 35, 38 & 39)
Although the President of MFBAI, Lino Buhain insists that MFBAI failed
to pay rentals only for a period of 4 years. (TSN, Lino Buhain, March 1,
1991, Pages 38, 50 & 51)
c) Defendant-appellant Norma T. Symaco leased only a PORTION of

the original property leased by MFBAI, while the other half is being
leased by a certain Tony Francisco of New Malabon Corporation,
who is not even a member of MFBAI. (TSN, Norma T. Symaco,
January 15, 1992, Pages 23, 43 & 44) (TSN, Lino Buhain, March 1, 1991,
Pages 77 & 78)

suigeneris
d) Guizon (sic) Estate, through counsel, sent a letter to the MFBAI
President Lino Buhain on April 9, 1990, notifying MFBAI that they are
no longer interested in renewing their contract. (Exh. 2-Guizon
Injunction; Exh. 3-Symaco Injunction and TSN, Lino Buhain, Mar. 1,
1991, P. 52)25
On March 20, 1998, the CA issued a Resolution 26 granting the motion

for reconsideration; it set aside its decision and affirmed that of the
RTC. The appellate court declared that when it rendered its initial
ruling, it had no full view of the appeal because of the respondent’s
failure to file their Brief. Relying on the decisions of the SEC Hearing
Officer and the SEC, the appellate court ruled that Santos was not a
member of MFBAI; hence, he had no standing to file a complaint for
and in behalf of the said corporation.
This time, the respondent filed a motion for reconsideration of the CA

Resolution. On February 21, 2000, the CA granted the motion and
rendered an Amended Decision, this time, in favor of the
respondent. The fallo of the amended decision reads:
WHEREFORE, the Motion for Reconsideration filed by plaintiff-

appellant is hereby given due course, the Resolution dated March
20, 1998 is hereby REVERSED AND/OR REVIVING Our Decision dated
May 21, 1997 with modification which reversed and SET ASIDE the
Decision dated September 27, 1993 of the court a quo.
Accordingly, defendant-appellee Norma T. Symaco is hereby

ordered to render an accounting to this Court of all the profits
acquired by appellees during the five years that appellee RN
Symaco Trading was the lessee of the subject property from 1990 to
1995 and thereafter to turn over said profits to herein plaintiffs-
appellants.
SO ORDERED.27
The appellate court ruled that based on the respondent’s claim in

SEC Case No. 2521, the MFBAI had 42 legitimate members, including
the 35 original members and respondent Santos; moreover, the RTC
resolved that Santos was a member. The petitioners were bound by
the said evidence and were estopped from claiming that Santos
was not a member. Hence, Santos had the standing to file the
complaint with the RTC "for and in behalf of the appellant". The CA
further held that Norma Symaco violated the principle of corporate
opportunity, and that the other members/stockholders of MFBAI
should be impleaded as parties to the suit.
The petitioners filed the instant petition for review on certiorari under
Rule 45 of the Rules of Court, as amended, raising the following
issues:
suigeneris
1. Whether respondent Luisito T. Santos was a bona fide member of
the respondent corporation;
2. Whether the petitioners are estopped from assailing the

membership of Luisito T. Santos in the respondent corporation;
3. Whether the case filed by Luisito T. Santos is a derivative suit, for

and in behalf of the respondent corporation;
4. Whether the other members of the respondent corporation should

be impleaded as parties-respondents; and
5. Whether the petitioners violated the principle of corporate

opportunity.
On the first three issues, the petitioners aver that, as gleaned from
the Hearing Officer’s Decision in SEC Case No. 2521, the Decision in
SEC-AC No. 205, and the CA ruling, Santos was not a member of
MFBAI. Any admission made by Lino Buhain in the SEC could not bind
it, unless approved by its board of directors or majority of its
members. The petitioners insist that estoppel will apply only when the
party who relied on the admissions of another seeks only to enforce
a purely private right or private interest, and not when an action is to
enforce a corporate right. They claim that respondent Santos’ action
was not a derivative suit, and that the complaint he filed was
premature, considering that he failed to seek redress from MFBAI first
before filing the complaint.
For his part, respondent Santos avers that the petitioners are
estopped from claiming in the CA, and in this case, that he is not a
member of the respondent MFBAI. He insists that the RTC declared in
its decision that, based on the petitioners’ (therein defendants’)
evidence, he was such a member.
The ruling of the CA is erroneous. As gleaned from the decision of the

Hearing Officer in SEC Case No. 2521, there were 35 original
members of the respondent MFBAI, including petitioner Norma
Symaco. Respondent Luisito Santos is not one of them, and failed to
testify for or against any of the parties therein. While it is true that Lino
Buhain and the other respondents therein claimed that the MFBAI
had 42 members, including the original members, the Hearing
Officer declared that such claim was not proven:
On the other hand, while the respondents claimed that MFBAI has
forty-two (42) members, including the thirty-five (35) original
members therein, this fact was, likewise, not proven during the trial.
As regards Virgilio Sarmiento, who is one of the

incorporators/directors of MFBAI whose name does not appear in

suigeneris
the aforesaid list of members, there was no showing that his
membership therein has been terminated in one way or another.
Hence, We find that since its incorporation, MFBAI has not accepted
any new member and, therefore, it has only thirty-five (35) legitimate
members including that of Virgilio Sarmiento.
The second and third issues are quite interrelated and thus can be
resolved jointly.
From the evidence on hand, it appears that there was but one
meeting for the election of the members of the board of directors
and officers of MFBAI that took place in 1983 and that was the
alleged membership meeting conducted by the petitioners’ group
held on August 13, 1983. Said meeting, however, was not attended
by the majority of the aforesaid thirty-five (35) legitimate members of
MFBAI; hence, there was no quorum (Section 52, Code). In fact,
most of those present then were non-members. Therefore, since
there was no quorum, it follows that all actions taken in said meeting,
including the alleged adoption of the by-laws by the petitioners’
group, are not valid. On the contrary, the respondents have
categorically stated, in their answer, that the organizational meeting
for the election of the members of the Board of Directors and
Officers of MFBAI, which was supposed to be held on September 17,
1983, did not proceed.
Accordingly, We hold that since there were no legally elected

directors and officers of MFBAI for the year 1983, and the by-laws
purportedly adopted on August 13, 1983, filed by the petitioners, has
not been legally adopted and approved by the general
membership of MFBAI since the meeting of the sixty-four (64) alleged
members held on August 13, 1983 was not valid.
Anent the fourth issue, our records show that the By-Laws of MFBAI
was adopted by the majority of its members on August 18, 1983,
certified to by a majority of the original members of its Board of
Directors and countersigned by its Corporate Secretary, Brigida
Bautista. Said By-Laws was filed with, and approved by, the
Commission on September 7, 1983 pursuant to the provisions of
Section 46 of the Code.
We do not agree with petitioners’ claim that MFBAI’s By-Laws which

was filed by the respondents has not been approved and adopted
by the affirmative vote of at least a majority of all the members of
MFBAI. Petitioners would have been correct in their contention had
there been either sixty-four (64) or forty-two (42) MFBAI members at
the time of the adoption of the said By-Laws. That is so since the
signatories in said By-Laws are only twenty-one (21) members. But
that is not the case. The Commission has already ruled that from the
suigeneris
time of its inception up to this moment, MFBAI has only thirty-five (35)
legitimate members and the clear majority of which is eighteen (18)
members. Besides, the presumption of the validity and regularity in
the adoption of the said By-Laws lies in favor of the respondents. The
petitioners failed to disprove said presumption.28
The SEC Hearing Officer concluded that from its inception, the MFBAI
had not accepted any new member and, therefore, it had only 35
legitimate members, including Virgilio Sarmiento.29 The Hearing
Officer also ruled that:
Consistent with our rulings, the Members of the Board of Directors

appearing in the Articles of Incorporation of MFBAI shall hold office
until their successors are elected and qualified. As regards the
officers of MFBAI, respondents Lino Buhain and Brigida Bautista shall
act as President and Secretary of MFBAI, respectively, since they
were duly recognized by the majority of the said members of the
Board of Directors appearing in the Articles of Incorporation as
shown by the Certification accompanying MFBAI’s By-Laws and the
Minutes of the Meeting held on August 18, 1983, the date when the
By-Laws of MFBAI was adopted by the majority of its members.
Respondent Erlinda Sioson shall act as Treasurer, being the
designated Treasurer whose name appears in the Articles of
Incorporation. These three (3) officers shall, likewise, hold their
respective offices until their successors are elected and qualified.30
This ruling was affirmed by the SEC on appeal.
For its part, the CA affirmed the rulings of the Hearing Officer and the
SEC on appeal, as follows:
The thirty (30) alleged members were not original members of the
association. They showed up later on, i.e., long after the
incorporation, and they failed to comply with the requirements laid
down in the by-laws aforementioned. They were never accepted as
members even informally by the association. Their acceptance as
members could not be done by the president alone, let alone by
Marcos Valle whose position as president has been successfully
assailed here. There was no quorum in the said meeting held on
August 13, 1983 because those thirty (30) persons who attended
were non-members; and whatever was agreed upon in said
meeting was null and void.31
In its Amended Decision, the appellate court relied on the statement

in the RTC decision, that the petitioners (defendants therein)
adduced evidence that Santos was an MFBAI member. This reliance
is misplaced. The CA failed to consider the RTC decision in its entirety
and the ratio decidendi of the ruling. As gleaned from the said
decision, the RTC ruled in favor of the petitioners (defendants
suigeneris
therein), and relied on the decisions of the Hearing Officer, the SEC
on appeal and the CA; the trial court did not rely on the parties’
evidence aliunde.32 In fine, the RTC correctly considered the
decisions of the Hearing Officer, the SEC and the CA on appeal as
conclusive and binding on it, prescinding from the parties’ evidence
aliunde. Indeed, the testimonial and documentary evidence of the
petitioners and the respondent cannot prevail over the decisions of
the Hearing Officer, the SEC and the CA. The respondent was
proscribed from attacking the said decision either directly or
collaterally in the RTC.
It may not be amiss to observe that the erroneous amended

decision of the CA was precipitated in part by the petitioners, when
they adduced testimonial and documentary evidence that Santos
was a member of the respondent, but that he failed to pay his
monthly dues from March 1984. The evidence on record showing
that Santos paid the membership fee and his monthly dues up to
March 1984 and was certified as a member by Lino Buhain is not
sufficient to qualify him as such member under the By-laws of
respondent MFBAI.
The Court also agrees with the petitioners’ contention that as

respondent Santos was not a legitimate MFBAI member, he had no
standing to file a derivative suit for and in its behalf. One of the
requisites of a derivative suit is that the party bringing the suit should
be a stockholder/member at the time of the action or transaction
complained of.33 The right to sue derivatively is an attribute of
corporate ownership which, to be exercised, requires that the injury
alleged be indirect as far as the stockholders/members are
concerned, and direct only insofar as the corporation is concerned.
The whole purpose of the law authorizing a derivative suit is to allow
the stockholder/member to enforce rights which are derivative
(secondary) in nature.34 A derivative action is a suit by a
shareholder/member to enforce a corporate cause of action.35
The Court notes that several MFBAI members, like Brigida Baustista,
Jose Cruz, Constantino Lopez, Eduardo del Rosario, Rogelio Vicente,
Araceli Banaag and Rosalinda Reyes, intervened as plaintiffs.
However, they failed to file their Brief in the CA, which impelled the
appellate court to dismiss their appeal. The resolution of the court,
likewise, became final and executory.
The Court also agrees with the petitioners’ contention that the CA
erred in ordering that all the original members of the MFBAI should
be impleaded as parties in respondent Santos’ complaint. Contrary
to the CA ruling, all the MFBAI members are not indispensable parties
in a derivative suit. It is enough that a member or a minority of such
members file a derivative suit for and in behalf of the corporation.

suigeneris
After all, the members/stockholders who filed a derivative suit are
merely nominal parties, the real party-in-interest being the
corporation itself for and in whose behalf the suit is filed.36 Any
monetary benefits under the decision of the court shall pertain to the
corporation.37
In light of the foregoing, there is no longer a need for the Court to still
resolve the other issues that were raised in the petition.
WHEREFORE, PREMISES CONSIDERED, the petition is GRANTED. The

Amended Decision of the Court of Appeals in CA-G.R. CV No. 43425
dated February 21, 2000 is REVERSED AND SET ASIDE. The Decision of
the Regional Trial Court of Manila, Branch 51 in Civil Case No. 90-
54960, as affirmed by the CA in its Resolution dated March 20, 1998,
is AFFIRMED. No costs.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Tinga, and Chico-Nazario, JJ.,

concur.
Chua vs. CA (443 SCRA 259 [2004])
G.R. No. 150793 November 19, 2004
FRANCIS CHUA, petitioner,

vs.
HON. COURT OF APPEALS and LYDIA C. HAO, respondents.
DECISION
QUISUMBING, J.:
Petitioner assails the Decision,1 dated June 14, 2001, of the Court of
Appeals in CA-G.R. SP No. 57070, affirming the Order, dated
October 5, 1999, of the Regional Trial Court (RTC) of Manila, Branch
19. The RTC reversed the Order, dated April 26, 1999, of the
Metropolitan Trial Court (MeTC) of Manila, Branch 22. Also
challenged by herein petitioner is the CA Resolution,2 dated
November 20, 2001, denying his Motion for Reconsideration.
The facts, as culled from the records, are as follows:

suigeneris
On February 28, 1996, private respondent Lydia Hao, treasurer of
Siena Realty Corporation, filed a complaint-affidavit with the City
Prosecutor of Manila charging Francis Chua and his wife, Elsa Chua,
of four counts of falsification of public documents pursuant to Article
1723 in relation to Article 1714 of the Revised Penal Code. The charge
reads:
That on or about May 13, 1994, in the City of Manila, Philippines,

the said accused, being then a private individual, did then and
there willfully, unlawfully and feloniously commit acts of
falsification upon a public document, to wit: the said accused
prepared, certified, and falsified the Minutes of the Annual
Stockholders meeting of the Board of Directors of the Siena
Realty Corporation, duly notarized before a Notary Public, Atty.
Juanito G. Garcia and entered in his Notarial Registry as Doc
No. 109, Page 22, Book No. IV and Series of 1994, and therefore,
a public document, by making or causing it to appear in said
Minutes of the Annual Stockholders Meeting that one LYDIA
HAO CHUA was present and has participated in said
proceedings, when in truth and in fact, as the said accused
fully well knew that said Lydia C. Hao was never present during
the Annual Stockholders Meeting held on April 30, 1994 and
neither has participated in the proceedings thereof to the
prejudice of public interest and in violation of public faith and
destruction of truth as therein proclaimed.
CONTRARY TO LAW.5
Thereafter, the City Prosecutor filed the Information docketed as

Criminal Case No. 2857216 for falsification of public document,
before the Metropolitan Trial Court (MeTC) of Manila, Branch 22,
against Francis Chua but dismissed the accusation against Elsa
Chua.
Herein petitioner, Francis Chua, was arraigned and trial ensued

thereafter.
During the trial in the MeTC, private prosecutors Atty. Evelyn Sua-Kho
and Atty. Ariel Bruno Rivera appeared as private prosecutors and
presented Hao as their first witness.
After Hao's testimony, Chua moved to exclude complainant's

counsels as private prosecutors in the case on the ground that Hao
failed to allege and prove any civil liability in the case.
In an Order, dated April 26, 1999, the MeTC granted Chua's motion
and ordered the complainant's counsels to be excluded from
actively prosecuting Criminal Case No. 285721. Hao moved for
reconsideration but it was denied.
suigeneris
Hence, Hao filed a petition for certiorari docketed as SCA No. 99-
94846,7 entitled Lydia C. Hao, in her own behalf and for the benefit
of Siena Realty Corporation v. Francis Chua, and the Honorable
Hipolito dela Vega, Presiding Judge, Branch 22, Metropolitan Trial
Court of Manila, before the Regional Trial Court (RTC) of Manila,
Branch 19.
The RTC gave due course to the petition and on October 5, 1999,
the RTC in an order reversed the MeTC Order. The dispositive portion
reads:
WHEREFORE, the petition is GRANTED. The respondent Court is

ordered to allow the intervention of the private prosecutors in
behalf of petitioner Lydia C. Hao in the prosecution of the civil
aspect of Crim. Case No. 285721, before Br. 22 [MeTC], Manila,
allowing Attys. Evelyn Sua-Kho and Ariel Bruno Rivera to actively
participate in the proceedings.
SO ORDERED.8
Chua moved for reconsideration which was denied.
Dissatisfied, Chua filed before the Court of Appeals a petition for

certiorari. The petition alleged that the lower court acted with grave
abuse of discretion in: (1) refusing to consider material facts; (2)
allowing Siena Realty Corporation to be impleaded as co-petitioner
in SCA No. 99-94846 although it was not a party to the criminal
complaint in Criminal Case No. 285721; and (3) effectively amending
the information against the accused in violation of his constitutional
rights.
On June 14, 2001, the appellate court promulgated its assailed

Decision denying the petition, thus:
WHEREFORE, premises considered, the petition is hereby DENIED

DUE COURSE and DISMISSED. The Order, dated October 5, 1999
as well as the Order, dated December 3, 1999, are hereby
AFFIRMED in toto.
SO ORDERED.9
Petitioner had argued before the Court of Appeals that respondent

had no authority whatsoever to bring a suit in behalf of the
Corporation since there was no Board Resolution authorizing her to
file the suit.
For her part, respondent Hao claimed that the suit was brought
under the concept of a derivative suit. Respondent maintained that

suigeneris
when the directors or trustees refused to file a suit even when there
was a demand from stockholders, a derivative suit was allowed.
The Court of Appeals held that the action was indeed a derivative
suit, for it alleged that petitioner falsified documents pertaining to
projects of the corporation and made it appear that the petitioner
was a stockholder and a director of the corporation. According to
the appellate court, the corporation was a necessary party to the
petition filed with the RTC and even if private respondent filed the
criminal case, her act should not divest the Corporation of its right to
be a party and present its own claim for damages.
Petitioner moved for reconsideration but it was denied in a

Resolution dated November 20, 2001.
Hence, this petition alleging that the Court of Appeals committed

reversible errors:
I. … IN RULING THAT LYDIA HAO'S FILING OF CRIMINAL CASE NO.

285721 WAS IN THE NATURE OF A DERIVATIVE SUIT
II. … IN UPHOLDING THE RULING OF JUDGE DAGUNA THAT SIENA

REALTY WAS A PROPER PETITIONER IN SCA NO. [99-94846]
III. … IN UPHOLDING JUDGE DAGUNA'S DECISION ALLOWING

LYDIA HAO'S COUNSEL TO CONTINUE AS PRIVATE PROSECUTORS
IN CRIMINAL CASE NO. 285721
IV. … IN [OMITTING] TO CONSIDER AND RULE UPON THE ISSUE

THAT JUDGE DAGUNA ACTED IN GRAVE ABUSE OF DISCRETION
IN NOT DISMISSING THE PETITION IN SCA NO. [99-94846] FOR
BEING A SHAM PLEADING.10
The pertinent issues in this petition are the following: (1) Is the criminal
complaint in the nature of a derivative suit? (2) Is Siena Realty
Corporation a proper petitioner in SCA No. 99-94846? and (3) Should
private prosecutors be allowed to actively participate in the trial of
Criminal Case No. 285721.
On the first issue, petitioner claims that the Court of Appeals erred
when (1) it sustained the lower court in giving due course to
respondent's petition in SCA No. 99-94846 despite the fact that the
Corporation was not the private complainant in Criminal Case No.
285721, and (2) when it ruled that Criminal Case No. 285721 was in
the nature of a derivative suit.
Petitioner avers that a derivative suit is by nature peculiar only to

intra-corporate proceedings and cannot be made part of a criminal
action. He cites the case of Western Institute of Technology, Inc. v.

suigeneris
Salas,11 where the court said that an appeal on the civil aspect of a
criminal case cannot be treated as a derivative suit. Petitioner
asserts that in this case, the civil aspect of a criminal case cannot be
treated as a derivative suit, considering that Siena Realty
Corporation was not the private complainant.
Petitioner misapprehends our ruling in Western Institute. In that case,

we said:
Here, however, the case is not a derivative suit but is merely an

appeal on the civil aspect of Criminal Cases Nos. 37097 and
37098 filed with the RTC of Iloilo for estafa and falsification of
public document. Among the basic requirements for a
derivative suit to prosper is that the minority shareholder who is
suing for and on behalf of the corporation must allege in his
complaint before the proper forum that he is suing on a
derivative cause of action on behalf of the corporation and all
other shareholders similarly situated who wish to join. . . .This was
not complied with by the petitioners either in their complaint
before the court a quo nor in the instant petition which, in part,
merely states that "this is a petition for review on certiorari on
pure questions of law to set aside a portion of the RTC decision
in Criminal Cases Nos. 37097 and 37098" since the trial court's
judgment of acquittal failed to impose civil liability against the
private respondents. By no amount of equity considerations, if
at all deserved, can a mere appeal on the civil aspect of a
criminal case be treated as a derivative suit.12
Moreover, in Western Institute, we said that a mere appeal in the civil

aspect cannot be treated as a derivative suit because the appeal
lacked the basic requirement that it must be alleged in the
complaint that the shareholder is suing on a derivative cause of
action for and in behalf of the corporation and other shareholders
who wish to join.
Under Section 3613 of the Corporation Code, read in relation to

Section 23,14 where a corporation is an injured party, its power to sue
is lodged with its board of directors or trustees.15 An individual
stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stocks in order to protect or vindicate
corporate rights, whenever the officials of the corporation refuse to
sue, or are the ones to be sued, or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest.16
A derivative action is a suit by a shareholder to enforce a corporate

cause of action. The corporation is a necessary party to the suit. And
the relief which is granted is a judgment against a third person in

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favor of the corporation. Similarly, if a corporation has a defense to
an action against it and is not asserting it, a stockholder may
intervene and defend on behalf of the corporation.17
Under the Revised Penal Code, every person criminally liable for a
felony is also civilly liable.18 When a criminal action is instituted, the
civil action for the recovery of civil liability arising from the offense
charged shall be deemed instituted with the criminal action, unless
the offended party waives the civil action, reserves the right to
institute it separately or institutes the civil action prior to the criminal
action.19
In Criminal Case No. 285721, the complaint was instituted by

respondent against petitioner for falsifying corporate documents
whose subject concerns corporate projects of Siena Realty
Corporation. Clearly, Siena Realty Corporation is an offended party.
Hence, Siena Realty Corporation has a cause of action. And the civil
case for the corporate cause of action is deemed instituted in the
criminal action.
However, the board of directors of the corporation in this case did

not institute the action against petitioner. Private respondent was the
one who instituted the action. Private respondent asserts that she
filed a derivative suit in behalf of the corporation. This assertion is
inaccurate. Not every suit filed in behalf of the corporation is a
derivative suit. For a derivative suit to prosper, it is required that the
minority stockholder suing for and on behalf of the corporation must
allege in his complaint that he is suing on a derivative cause of
action on behalf of the corporation and all other stockholders
similarly situated who may wish to join him in the suit.20 It is a
condition sine qua non that the corporation be impleaded as a
party because not only is the corporation an indispensable party,
but it is also the present rule that it must be served with process. The
judgment must be made binding upon the corporation in order that
the corporation may get the benefit of the suit and may not bring
subsequent suit against the same defendants for the same cause of
action. In other words, the corporation must be joined as party
because it is its cause of action that is being litigated and because
judgment must be a res adjudicata against it.21
In the criminal complaint filed by herein respondent, nowhere is it

stated that she is filing the same in behalf and for the benefit of the
corporation. Thus, the criminal complaint including the civil aspect
thereof could not be deemed in the nature of a derivative suit.
We turn now to the second issue, is the corporation a proper party in

the petition for certiorari under Rule 65 before the RTC? Note that the
case was titled "Lydia C. Hao, in her own behalf and for the benefit

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of Siena Realty Corporation v. Francis Chua, and the Honorable
Hipolito dela Vega, Presiding Judge, Branch 22, Metropolitan Trial
Court of Manila." Petitioner before us now claims that the
corporation is not a private complainant in Criminal Case No.
285721, and thus cannot be included as appellant in SCA No. 99-
94846.
Petitioner invokes the case of Ciudad Real & Dev't. Corporation v.

Court of Appeals.22 In Ciudad Real, it was ruled that the Court of
Appeals committed grave abuse of discretion when it upheld the
standing of Magdiwang Realty Corporation as a party to the petition
for certiorari, even though it was not a party-in-interest in the civil
case before the lower court.
In the present case, respondent claims that the complaint was filed
by her not only in her personal capacity, but likewise for the benefit
of the corporation. Additionally, she avers that she has exhausted all
remedies available to her before she instituted the case, not only to
claim damages for herself but also to recover the damages caused
to the company.
Under Rule 65 of the Rules of Civil Procedure,23 when a trial court

commits a grave abuse of discretion amounting to lack or excess of
jurisdiction, the person aggrieved can file a special civil action for
certiorari. The aggrieved parties in such a case are the State and the
private offended party or complainant.24
In a string of cases, we consistently ruled that only a party-in-interest

or those aggrieved may file certiorari cases. It is settled that the
offended parties in criminal cases have sufficient interest and
personality as "person(s) aggrieved" to file special civil action of
prohibition and certiorari.25
In Ciudad Real, cited by petitioner, we held that the appellate court

committed grave abuse of discretion when it sanctioned the
standing of a corporation to join said petition for certiorari, despite
the finality of the trial court's denial of its Motion for Intervention and
the subsequent Motion to Substitute and/or Join as Party/Plaintiff.
Note, however, that in Pastor, Jr. v. Court of Appeals26 we held that if

aggrieved, even a non-party may institute a petition for certiorari. In
that case, petitioner was the holder in her own right of three mining
claims and could file a petition for certiorari, the fastest and most
feasible remedy since she could not intervene in the probate of her
father-in-law's estate.27
In the instant case, we find that the recourse of the complainant to

the respondent Court of Appeals was proper. The petition was
brought in her own name and in behalf of the Corporation.
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Although, the corporation was not a complainant in the criminal
action, the subject of the falsification was the corporation's project
and the falsified documents were corporate documents. Therefore,
the corporation is a proper party in the petition for certiorari because
the proceedings in the criminal case directly and adversely affected
the corporation.
We turn now to the third issue. Did the Court of Appeals and the
lower court err in allowing private prosecutors to actively participate
in the trial of Criminal Case No. 285721?
Petitioner cites the case of Tan, Jr. v. Gallardo,28 holding that where
from the nature of the offense or where the law defining and
punishing the offense charged does not provide for an indemnity,
the offended party may not intervene in the prosecution of the
offense.
Petitioner's contention lacks merit. Generally, the basis of civil liability

arising from crime is the fundamental postulate that every man
criminally liable is also civilly liable. When a person commits a crime
he offends two entities namely (1) the society in which he lives in or
the political entity called the State whose law he has violated; and
(2) the individual member of the society whose person, right, honor,
chastity or property has been actually or directly injured or
damaged by the same punishable act or omission. An act or
omission is felonious because it is punishable by law, it gives rise to
civil liability not so much because it is a crime but because it caused
damage to another. Additionally, what gives rise to the civil liability is
really the obligation and the moral duty of everyone to repair or
make whole the damage caused to another by reason of his own
act or omission, whether done intentionally or negligently. The
indemnity which a person is sentenced to pay forms an integral part
of the penalty imposed by law for the commission of the crime.29 The
civil action involves the civil liability arising from the offense charged
which includes restitution, reparation of the damage caused, and
indemnification for consequential damages.30
Under the Rules, where the civil action for recovery of civil liability is
instituted in the criminal action pursuant to Rule 111, the offended
party may intervene by counsel in the prosecution of the offense.31
Rule 111(a) of the Rules of Criminal Procedure provides that, "[w]hen
a criminal action is instituted, the civil action arising from the offense
charged shall be deemed instituted with the criminal action unless
the offended party waives the civil action, reserves the right to
institute it separately, or institutes the civil action prior to the criminal
action."

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Private respondent did not waive the civil action, nor did she reserve
the right to institute it separately, nor institute the civil action for
damages arising from the offense charged. Thus, we find that the
private prosecutors can intervene in the trial of the criminal action.
Petitioner avers, however, that respondent's testimony in the inferior

court did not establish nor prove any damages personally sustained
by her as a result of petitioner's alleged acts of falsification. Petitioner
adds that since no personal damages were proven therein, then the
participation of her counsel as private prosecutors, who were
supposed to pursue the civil aspect of a criminal case, is not
necessary and is without basis.
When the civil action is instituted with the criminal action, evidence
should be taken of the damages claimed and the court should
determine who are the persons entitled to such indemnity. The civil
liability arising from the crime may be determined in the criminal
proceedings if the offended party does not waive to have it
adjudged or does not reserve the right to institute a separate civil
action against the defendant. Accordingly, if there is no waiver or
reservation of civil liability, evidence should be allowed to establish
the extent of injuries suffered.32
In the case before us, there was neither a waiver nor a reservation
made; nor did the offended party institute a separate civil action. It
follows that evidence should be allowed in the criminal proceedings
to establish the civil liability arising from the offense committed, and
the private offended party has the right to intervene through the
private prosecutors.
WHEREFORE, the instant petition is DENIED. The Decision, dated June

14, 2001, and the Resolution, dated November 20, 2001, of the Court
of Appeals in CA-G.R. SP No. 57070, affirming the Order, dated
October 5, 1999, of the Regional Trial Court (RTC) of Manila, Branch
19, are AFFIRMED. Accordingly, the private prosecutors are hereby
allowed to intervene in behalf of private respondent Lydia Hao in the
prosecution of the civil aspect of Criminal Case No. 285721 before
Branch 22, of Metropolitan Trial Court (MeTC) of Manila. Costs
against petitioner.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna,

JJ., concur.
Footnotes

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1Rollo, pp. 34-43. Penned by Associate Justice Bernardo P.
Abesamis, with Associate Justices Godardo A. Jacinto, and
Eliezer R. De Los Santos concurring.
2 Id. at 45.
3ART. 172. Falsification by private individuals and use of falsified
documents.—The penalty of prision correccional in its medium
and maximum periods and a fine of not more than 5,000
[pesos] shall be imposed upon:

falsifications enumerated in the next preceding article in
any public or official document or letter of exchange or
any other kind of commercial document; and
...
4ART. 171. Falsification by public officer, employee; or notary or
ecclesiastic minister.—The penalty of prision mayor and a fine
the following acts:
...
2. Causing it to appear that persons have participated in

any act or proceeding when they did not in fact so
participate;
...
5 CA Rollo, p. 59.
6 Criminal Case No. 285721-CR in some parts of the Records.
7 SCA No. 99-94648 in some parts of the Records.
8 CA Rollo, p. 23.
9 Rollo, p. 43.
10 Id. at 18.
11 G.R. No. 113032, 21 August 1997, 278 SCRA 216, 226.
12 Id. at 225-226.
13SEC. 36. Corporate powers and capacity.—Every corporation
incorporated under this Code has the power and capacity:
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1. To sue and be sued in its corporate name;
...
14 SEC. 23. The Board of directors or trustees.—Unless
(1) year until their successors are elected and qualified.
...
15Tam Wing Tak v. Makasiar, G.R. No. 122452, 29 January 2001,
350 SCRA 475, 485, citing Premium Marble Resources, Inc. v.
Court of Appeals, G.R. No. 96551, 4 November 1996, 264 SCRA
11, 17.
16Gamboa v. Victoriano, No. L-40620, 5 May 1979, 90 SCRA 40,
47.
17 Price v. Gurney, 324 U.S. 100 (1944).
18 Article 100, Revised Penal Code.
19 Section 1(a), Rule 111, Revised Rules of Criminal Procedure.
20Tam Wing Tak v. Makasiar, supra, note 15 at 485-486, citing
Western Institute of Technology, Inc. v. Salas, supra, note 11 at
225.
21Asset Privatization Trust v. Court of Appeals, G.R. No. 121171,
29 December 1998, 300 SCRA 579, 615, citing III A.F. Agbayani,
Commercial Laws of the Philippines, 561-562 (1996).
22 G.R. No. 107888, 4 January 1994, 229 SCRA 71.
23SECTION 1. Petition for certiorari.—When any tribunal, board
or officer exercising judicial or quasi-judicial functions has acted
without or in excess of its or his jurisdiction, or with grave abuse
of discretion amounting to lack or excess of jurisdiction, and
there is no appeal, nor any plain, speedy, and adequate
remedy in the ordinary course of law, a person aggrieved
thereby may file a verified petition in the proper court, alleging
the facts with certainty and praying that judgment be
rendered annulling or modifying the proceedings of such

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tribunal, board or officer, and granting such incidental reliefs as
law and justice may require.
The petition shall be accompanied by a certified true copy of

the judgment, order or resolution subject thereof, copies of all
pleadings and documents relevant and pertinent thereto, and
a sworn certification of non-forum shopping as provided in the
third paragraph of Section 3, Rule 46.
24Dela Rosa v. Court of Appeals, G.R. No. 116945, 9 February
1996, 253 SCRA 499, 507.
25Flores v. Joven, G.R. No. 129874, 27 December 2002, 394
SCRA 339, 344-345; Narciso v. Sta. Romana-Cruz, G.R. No.
134504, 17 March 2000, 385 Phil. 208, 221-224; Martinez v. Court
of Appeals, G.R. No. 112387, 13 October 1994, 237 SCRA 575,
582.
26 No. L-56340, 24 June 1983, 122 SCRA 885.
27 Id. at 903-904.
28 Nos. L-41213-14, 5 October 1976, 73 SCRA 306, 313.
29Banal v. Tadeo, Jr., Nos. L-78911-25, 11 December 1987, 156
SCRA 325, 329-330.
30 Article 104, Revised Penal Code.
31 Section 16, Rule 110, Revised Rules of Criminal Procedure.
32Corpuz v. Siapno, A.M. No. MTJ-96-1106, 17 June 2003, 404
SCRA 83, 90.
Chua vs. CA and Hao G.R. No. 150793 November 19, 2004
Facts: PR Lydia Hao, treasurer of Siena Realty Corporation, filed a

complaint-affidavit against petitioner for committing acts of
falsification by falsifying the Minutes of the Annual Stockholders
meeting of the Board of Directors by causing it to appear in said
Minutes that LYDIA HAO CHUA was present and has participated in
said proceedings, when in truth and in fact, as the said accused fully
well knew that said Lydia Hao was never present during the meeting.
Petitioner alleges that respondent Lydia Hao has no the authority to

bring a suit in behalf of the Corporation since there was no Board

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Resolution authorizing her to file the suit. For her part, respondent
Hao claimed that the suit was brought under the concept of a
derivative suit.
Issue: (1) Is the criminal complaint in the nature of a derivative suit?

(2) Is Siena Realty Corporation a proper petitioner in SCA No. 99-
94846?
Held: Under Section 36 of the Corporation Code, read in relation to

Section 23, where a corporation is an injured party, its power to sue is
lodged with its board of directors or trustees. An individual
stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stocks in order to protect or vindicate
corporate rights, whenever the officials of the corporation refuse to
sue, or are the ones to be sued, or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest.
A derivative action is a suit by a shareholder to enforce a corporate

cause of action. The corporation is a necessary party to the suit. And
the relief which is granted is a judgment against a third person in
favor of the corporation. Similarly, if a corporation has a defense to
an action against it and is not asserting it, a stockholder may
intervene and defend on behalf of the corporation.
In the Criminal Case, the complaint was instituted by respondent

against petitioner for falsifying corporate documents whose subject
concerns corporate projects of Siena Realty Corporation. Clearly,
SRC is an offended party. Hence, SRC has a cause of action. And
the civil case for the corporate cause of action is deemed instituted
in the criminal action.
However, the board of directors of the corporation in this case did

not institute the action against petitioner. Private respondent was the
one who instituted the action. Private respondent asserts that she
filed a derivative suit in behalf of the corporation. This assertion is
inaccurate. Not every suit filed in behalf of the corporation is a
derivative suit. For a derivative suit to prosper, it is required that the
minority stockholder suing for and on behalf of the corporation must
allege in his complaint that he is suing on a derivative cause of
action on behalf of the corporation and all other stockholders
similarly situated who may wish to join him in the suit. It is a condition
sine qua non that the corporation be impleaded as a party because
not only is the corporation an indispensable party, but it is also the
present rule that it must be served with process. The judgment must
be made binding upon the corporation in order that the corporation
may get the benefit of the suit and may not bring subsequent suit
against the same defendants for the same cause of action. In other

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words, the corporation must be joined as party because it is its cause
of action that is being litigated and because judgment must be a res
adjudicata against it.
In the criminal complaint filed by herein respondent, nowhere is it

stated that she is filing the same in behalf and for the benefit of the
corporation. Thus, the criminal complaint including the civil aspect
thereof could not be deemed in the nature of a derivative suit.
The compulsory coverage of the employer shall take effect on the

first day of his operation and that of the employee on the day of his
employment. However, the compulsory coverage of the self-
employed person shall take effect upon his registration with the SSS.
Coverage under the SSS is compulsory for all employers in the private
sector and their employees who are not over 60 years of age,
whether with permanent or provisional employment status, including
domestic helpers earning at least PhP1,000 a month. All self-
employed persons are also subject to mandatory coverage under
the Regular Self Employed Program for artists, entertainers,
proprietors and professionals, and the Expanded Self Employed
Program for those with monthly earnings of at least PhP1,000
regardless of trade, business or occupation. Farmers and fishermen
earning at least PhP1,500 also fall under the self-employed category.
Coverage under the SSS may also be on a voluntary basis as for the
following: Filipino workers recruited by foreign-based employers for
work abroad, SSS members separated from employment but would
like to continue paying contributions, and non-working spouses of
SSS members (i.e., spouses who devote full time to managing the
household and family affairs).
—————————————
Illustrative Case:
Chua vs. Court of Appeals, G.R. No. 125837, October 6, 2004.
Facts:
On August 20, 1985, private respondents Andres Paguio, Pablo

Canale, Ruel Pangan, Aurelio Paguio, Rolando Trinidad, Romeo
Tapang and Carlos Maliwat filed a petition with the SSC for SSS
coverage and contributions against petitioner Reynaldo Chua,
owner of Prime Mover Construction Development, claiming that they

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were all regular employees of the petitioner in his construction
business.
Private respondents alleged that petitioner dismissed all of them

without justifiable grounds, and without notice to them and to the
then Ministry of Labor and Employment. They further alleged that
petitioner did not report them to the SSS for compulsory coverage in
flagrant violation of the Social Security Act.
Petitioner claimed that private respondents were not regular

employees, but project employees whose work had been fixed for a
specific project or undertaking the completion of which was
determined at the time of their engagement. This being the case, he
concluded that said employees were not entitled to coverage
under the Social Security Act. Petitioner also claimed that the case
has prescribed. The Court of Appeals ruled in favor of the private
respondents.
Issue:
Whether or not the private respondents are entitled to compulsory

SSS coverage.
Held:
Yes. Well-settled is the rule that the mandatory coverage of Republic

Act No. 1161, as amended, is premised on the existence of an
employer-employee relationship, the essential elements of which
are: (a) selection and engagement of the employee; (b) payment
of wages; (c) the power of dismissal; and (d) the power of control
with regard to the means and methods by which the work is to be
accomplished, with the power of control being the most
determinative factor. The existence of an employer-employee
relationship between the parties can easily be determined by the
application of the “control test.”
It is clear that private respondents are employees of petitioner, the

latter having control over the results of the work done, as well as the
means and methods by which the same were accomplished. Suffice
it to say that regardless of the nature of their employment, whether it
is regular or project, private respondents are subject of the
compulsory coverage under the SSS Law, their employment not
falling under the exceptions provided under Section 8(j) of the Social
Security Act. In addition, private respondents’ right to file their claim
had not yet prescribed at the time of the filing of their petition.
Republic Act No. 1161, as amended, prescribes a period of twenty
(20) years, from the time the delinquency is known or assessment is
made by the SSS, within which to file a claim for non-remittance
against employers.
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Hornilla vs. Salunat (405 SCRA 220 [2003])
A.C. No. 5804 July 1, 2003
BENEDICTO HORNILLA and ATTY. FEDERICO D. RICAFORT,

complainants,
vs.
ATTY. ERNESTO S. SALUNAT, respondent.
RESOLUTION
On November 21, 1997, Benedicto Hornilla and Federico D. Ricafort

filed an administrative complaint1 with the Integrated Bar of the
Philippines (IBP) Commission on Bar Discipline, against respondent
Atty. Ernesto S. Salunat for illegal and unethical practice and conflict
of interest. They alleged that respondent is a member of the ASSA
Law and Associates, which was the retained counsel of the
Philippine Public School Teachers Association (PPSTA). Respondent’s
brother, Aurelio S. Salunat, was a member of the PPSTA Board which
approved respondent’s engagement as retained counsel of PPSTA.
Complainants, who are members of the PPSTA, filed an intra-

corporate case against its members of the Board of Directors for the
terms 1992-1995 and 1995-1997 before the Securities and Exchange
Commission, which was docketed as SEC Case No. 05-97-5657, and
a complaint before the Office of the Ombudsman, docketed as
OMB Case No. 0-97-0695, for unlawful spending and the
undervalued sale of real property of the PPSTA. Respondent entered
his appearance as counsel for the PPSTA Board members in the said
cases. Complainants contend that respondent was guilty of conflict
of interest because he was engaged by the PPSTA, of which
complainants were members, and was being paid out of its
corporate funds where complainants have contributed. Despite
being told by PPSTA members of the said conflict of interest,
respondent refused to withdraw his appearance in the said cases.
Moreover, complainants aver that respondent violated Rule 15.06 2 of

the Code of Professional Responsibility when he appeared at the
meeting of the PPSTA Board and assured its members that he will win
the PPSTA cases.
In his Answer,3 respondent stressed that he entered his appearance

as counsel for the PPSTA Board Members for and in behalf of the
ASSA Law and Associates. As a partner in the said law firm, he only
filed a "Manifestation of Extreme Urgency" in OMB Case No. 0-97-

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0695.4 On the other hand, SEC Case No. 05-97-5657 was handled by
another partner of the firm, Atty. Agustin V. Agustin. Respondent
claims that it was complainant Atty. Ricafort who instigated,
orchestrated and indiscriminately filed the said cases against
members of the PPSTA and its Board.
Respondent pointed out that his relationship to Aurelio S. Salunat was

immaterial; and that when he entered into the retainer contract with
the PPSTA Board, he did so, not in his individual capacity, but in
representation of the ASSA Law Firm. He denied that he ensured the
victory of the PPSTA Board in the case he was handling. He merely
assured the Board that the truth will come out and that the case
before the Ombudsman will be dismissed for lack of jurisdiction,
considering that respondents therein are not public officials, but
private employees. Anent the SEC case, respondent alleged that
the same was being handled by the law firm of Atty. Eduardo de
Mesa, and not ASSA.
By way of Special and Affirmative Defenses, respondent averred that

complainant Atty. Ricafort was himself guilty of gross violation of his
oath of office amounting to gross misconduct, malpractice and
unethical conduct for filing trumped-up charges against him and
Atty. De Mesa. Thus, he prayed that the complaint against him be
dismissed and, instead, complainant Ricafort be disciplined or
disbarred.
The complainant was docketed as CBD Case No. 97-531 and

referred to the IBP Commission on Bar Discipline. After investigation,
Commissioner Lydia A. Navarro recommended that respondent be
suspended from the practice of law for six (6) months. The Board of
Governors thereafter adopted Resolution No. XV-3003-230 dated
June 29, 2002, approving the report and recommendation of the
Investigating Commissioner.
Respondent filed with this Court a Motion for Reconsideration of the

above Resolution of the IBP Board of Governors.
The pertinent rule of the Code of Professional Responsibility provides:
RULE 15.03. – A lawyer shall not represent conflicting interests

except by written consent of all concerned given after a full
disclosure of the facts.
There is conflict of interest when a lawyer represents inconsistent

interests of two or more opposing parties. The test is "whether or not
in behalf of one client, it is the lawyer’s duty to fight for an issue or
claim, but it is his duty to oppose it for the other client. In brief, if he
argues for one client, this argument will be opposed by him when he
argues for the other client."5 This rule covers not only cases in which
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confidential communications have been confided, but also those in
which no confidence has been bestowed or will be used.6 Also,
there is conflict of interests if the acceptance of the new retainer will
require the attorney to perform an act which will injuriously affect his
first client in any matter in which he represents him and also whether
he will be called upon in his new relation to use against his first client
any knowledge acquired through their connection.7 Another test of
the inconsistency of interests is whether the acceptance of a new
relation will prevent an attorney from the full discharge of his duty of
undivided fidelity and loyalty to his client or invite suspicion of
unfaithfulness or double dealing in the performance thereof.8
In this jurisdiction, a corporation’s board of directors is understood to

be that body which (1) exercises all powers provided for under the
Corporation Code; (2) conducts all business of the corporation; and
(3) controls and holds all property of the corporation.9 Its members
have been characterized as trustees or directors clothed with a
fiduciary character.10 It is clearly separate and distinct from the
corporate entity itself.
Where corporate directors have committed a breach of trust either

unable or unwilling to institute suit to remedy the wrong, a
stockholder may sue on behalf of himself and other stockholders and
for the benefit of the corporation, to bring about a redress of the
wrong done directly to the corporation and indirectly to the
stockholders.11 This is what is known as a derivative suit, and settled is
the doctrine that in a derivative suit, the corporation is the real party
in interest while the stockholder filing suit for the corporation’s behalf
is only nominal party. The corporation should be included as a party
in the suit.12
Having thus laid a suitable foundation of the basic legal principles

pertaining to derivative suits, we come now to the threshold
question: can a lawyer engaged by a corporation defend members
of the board of the same corporation in a derivative suit? On this
issue, the following disquisition is enlightening:
The possibility for conflict of interest here is universally recognized.

Although early cases found joint representation permissible where no
conflict of interest was obvious, the emerging rule is against dual
representation in all derivative actions. Outside counsel must thus be
retained to represent one of the defendants. The cases and ethics
opinions differ on whether there must be separate representation
from the outset or merely from the time the corporation seeks to take
an active role. Furthermore, this restriction on dual representation
should not be waivable by consent in the usual way; the corporation

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should be presumptively incapable of giving valid consent.13
(underscoring ours)
In other jurisdictions, the prevailing rule is that a situation wherein a

lawyer represents both the corporation and its assailed directors
unavoidably gives rise to a conflict of interest. The interest of the
corporate client is paramount and should not be influenced by any
interest of the individual corporate officials.14 The rulings in these
cases have persuasive effect upon us. After due deliberation on the
wisdom of this doctrine, we are sufficiently convinced that a lawyer
engaged as counsel for a corporation cannot represent members of
the same corporation’s board of directors in a derivative suit brought
against them. To do so would be tantamount to representing
conflicting interests, which is prohibited by the Code of Professional
Responsibility.
In the case at bar, the records show that SEC Case No. 05-97-5657,
entitled "Philippine Public School Teacher’s Assn., Inc., et al. v. 1992-
1995 Board of Directors of the Philippine Public School Teacher’s
Assn. (PPSTA), et al.," was filed by the PPSTA against its own Board of
Directors. Respondent admits that the ASSA Law Firm, of which he is
the Managing Partner, was the retained counsel of PPSTA. Yet, he
appeared as counsel of record for the respondent Board of Directors
in the said case. Clearly, respondent was guilty of conflict of interest
when he represented the parties against whom his other client, the
PPSTA, filed suit.
In his Answer, respondent argues that he only represented the Board

of Directors in OMB Case No. 0-97-0695. In the said case, he filed a
Manifestation of Extreme Urgency wherein he prayed for the
dismissal of the complaint against his clients, the individual Board
Members. By filing the said pleading, he necessarily entered his
appearance therein.15 Again, this constituted conflict of interests,
considering that the complaint in the Ombudsman, albeit in the
name of the individual members of the PPSTA, was brought in behalf
of and to protect the interest of the corporation.
Therefore, respondent is guilty of representing conflicting interests.

Considering however, that this is his first offense, we find the penalty
of suspension, recommended in IBP Resolution No. XV-2002-230
dated June 29, 2002, to be too harsh. Instead, we resolve to
admonish respondent to observe a higher degree of fidelity in the
practice of his profession.
ACCORDINGLY, respondent Atty. Ernesto Salunat is found GUILTY of

representing conflicting interests and is ADMONISHED to observe a
higher degree of fidelity in the practice of his profession. He is further

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WARNED that a repetition of the same or similar acts will be dealt
with more severely.
SO ORDERED.
Davide, Jr., C.J., Vitug, Carpio, and Azcuna, JJ., concur.
Footnotes
1 Record, Vol. 1, p. 1.
2 Rule 15.06 – A lawyer shall not state or imply that he is able to
influence any public official, tribunal or legislative body.
3 Rollo, p. 58.
4 Id., p. 79.
5 Pineda, Legal and Judicial Ethics, p. 199 [1999 ed.].
6Id., citing Hilado v. David, 84 Phil. 569 [1949]; Nombrado v.
Hernandez, 26 SCRA 13 [1968]; Bautista v. Barrios, 9 SCRA 695
[1963].
7Pineda, Legal and Judicial Ethics, supra, p. 199, citing Pierce v.
Palmer, 31 R.I. 432.
8 Agpalo, Legal Ethics, supra, p. 220, citing In re De la Rosa, 27
Phil. 258 [1914]; Grievance Committee v. Rottner, 152 Conn. 59,
203 A 2d 82 [1954] and Titania v. Ocampo, 200 SCRA 472
[1991].
9 Corporation Code, sec. 23.
103 Fletcher, Cyclopedia Corporations (Permanent Ed.) § 8044
(Importance of determining whether officer a trustee or agent).
11 Pascual v. Del Saz Orozco, 19 Phil. 82 (1911), cited in Gochan
v. Young, G.R. No. 131889, 12 March 2001.
12 Asset Privatization Trust v. CA, 360 Phil. 768 (1998).
13Harvard Law Review, Developments in the Law: Conflict of
Interest, 94 Harv. L. Rev. 1244, 1339-1342 (1981), cited in
Solomon, Schwartz, Bauman & Weiss, Corporations: Law and
Policy (3rd ed.) 1129 (1994).
14Cannon v. United States Acoustics Corporation, 398 F. Supp.
209 (N.D. Ill. 1975), affirmed in relevant part per curiam 532 F. 2d

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1118 (7th Circ. 1978), citing Murphy v. Washington American
League Baseball Club, Inc., 116 U.S. App. D.C. 362, 324 F. 2d 394
(1963).
15 Ong Ching v. Ramolete, 151-A Phil. 509, 514 [1973].
Facts: Hornilla filed a complaint against Atty. Salunat with the IBP
Commission on Bar Discipline for unethical practice regarding
conflict of interests. Said counsel is a member of the ASSA Law Office
and acted as the lawyer for the Philippine Public School Teacher’s
Association.
In a squabble between the PPSTA and some of its board members

pending SEC resolution for unlawful spending and undervalued sale
of real properties, Atty. Salunat appeared as counsel for said board
members.
Respondent says he only appeared in behalf of ASSA since he was a

partner. Moreover, he only filed a Manifestation for extreme
urgency.
Issue: Whether or not Salunat is guilty of unethical behavior as a

member of the IBP.
Held: Yes. Respondent Atty. Ernesto Salunat is found GUILTY of

representing conflicting interests and is ADMONISHED to observe a
higher degree of fidelity in the practice of his profession. He is further
WARNED that a repetition of the same or similar acts will be dealt
with more severely.
RULE 15.03. A lawyer shall not represent conflicting interests except

by written consent of all concerned given after a full disclosure of
the facts.

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There is conflict of interest when a lawyer represents inconsistent
interests of two or more opposing parties. The test is whether or not in
behalf of one client, it is the lawyers duty to fight for an issue or claim,
but it is his duty to oppose it for the other client. In brief, if he argues
for one client, this argument will be opposed by him when he argues
for the other client. This rule covers not only cases in which
confidential communications have been confided, but also those in
which no confidence has been bestowed or will be used. Also, there
is conflict of interests if the acceptance of the new retainer will
require the attorney to perform an act which will injuriously affect his
first client in any matter in which he represents him and also whether
he will be called upon in his new relation to use against his first client
any knowledge acquired through their connection.Another test of
the inconsistency of interests is whether the acceptance of a new
relation will prevent an attorney from the full discharge of his duty of
undivided fidelity and loyalty to his client or invite suspicion of
unfaithfulness or double dealing in the performance thereof.
Where corporate directors have committed a breach of trust either

unable or unwilling to institute suit to remedy the wrong, a
stockholder may sue on behalf of himself and other stockholders and
for the benefit of the corporation, to bring about a redress of the
wrong done directly to the corporation and indirectly to the
stockholders. This is what is known as a derivative suit, and settled is
the doctrine that in a derivative suit, the corporation is the real party
in interest while the stockholder filing suit for the corporations behalf
is only nominal party. The corporation should be included as a party
in the suit.
In the case at bar, the records show that SEC Case No. 05-97-5657,
entitled Philippine Public School Teachers Assn., Inc., et al. v. 1992-
1995 Board of Directors of the Philippine Public School Teachers Assn.
(PPSTA), et al., was filed by the PPSTA against its own Board of
in the said case. Clearly, respondent was guilty of conflict of interest
when he represented the parties against whom his other client, the
PPSTA, filed suit.

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[A.C. No. 5804. July 1, 2003]
BENEDICTO HORNILLA and ATTY. FEDERICO D. RICAFORT,
complainants, vs. ATTY. ERNESTO S. SALUNAT, respondent.
An SEC Case was filed by the PPSTA against its own Board of
in the said case. Complainants contend that respondent was guilty
of conflict of interest because he was engaged by the PPSTA, of
which complainants were members, and was being paid out of its
corporate funds where complainants have contributed. Despite
being told by PPSTA members of the said conflict of interest,
respondent refused to withdraw his appearance in the said cases.
Held: GUILTY of representing conflicting interests and is ADMONISHED

to observe a higher degree of fidelity in the practice of his
profession. WARNED that a repetition of the same or similar acts will
be dealt with more severely.
RULE 15.03. – A lawyer shall not represent conflicting interests except

by written consent of all concerned given after a full disclosure of
the facts.
In other jurisdictions, the prevailing rule is that a situation wherein a

lawyer represents both the corporation and its assailed directors
unavoidably gives rise to a conflict of interest. The interest of the
corporate client is paramount and should not be influenced by any
interest of the individual corporate officials. The rulings in these cases
have persuasive effect upon us. After due deliberation on the
wisdom of this doctrine, we are sufficiently convinced that “a lawyer
engaged as counsel for a corporation cannot represent members of
the same corporation’s board of directors in a derivative suit brought
against them. To do so would be tantamount to representing
conflicting interests, which is prohibited by the Code of Professional
Responsibility.”
Lim vs. Lim-Yu (352 SCRA 216 [2001])

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G.R. No. 138343 February 19, 2001
GILDA C. LIM, WILHELMINA V. JOVEN and DITAS A. LERIOS, petitioners,

vs.
PATRICIA LIM-YU, in her capacity as a minority stockholder of
LIMPAN INVESTMENT CORPORATION, respondent.
PANGANIBAN, J.:
A suit to enforce preemptive rights in a corporation is not a

derivative suit. Thus, a temporary restraining order enjoining a person
from representing the corporation will not bar such action, because
it is instituted on behalf and for the benefit of the shareholder, not
the corporation.
Statement of the Case
Petitioners seek the reversal,1 under Rule 45 of the Rules of Court, of

the July 31, 1998 Decision2 of the Court of Appeals3 (CA) in CA-GR SP
No. 46292 and of its March 25, 1999 Resolution4 denying
reconsideration. The decretal portion of the appealed Decision,
which affirmed the Securities and Exchange Commission (SEC),
reads as follows:
"WHEREFORE, judgment is hereby rendered DISMISSING the

Petition for lack of merit. The preliminary injunction previously
issued is hereby LIFTED."5
The Facts
The undisputed facts are summarized by the Court of Appeals as

follows:
"At a special meeting on 07 October 1994, the Board of

Directors of Limpan Investment Corporation (LIMPAN)
approved a resolution of the following tenor:
'RESOLVED that the corporation make a partial payment

[for] the legal services of Gilda C. Lim in the handling of
various cases on behalf of, or involving the corporation in
the amount of P1,551,500.00 to be paid in equivalent
value in shares of stock of the corporation totaling 15,515
shares, the same being found to be reasonable, and
there being no available funds to pay the
same.1âwphi1.nêt

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'RESOLVED FURTHER, that the Corporate Secretary be
authorized, as he is hereby authorized, to secure and
comply with necessary requirements of the law for the
issuance of said shares.'
"On 18 October 1994, the Corporate Secretary Jaime G.

Manzano filed a request before the Corporate and legal Affairs
Department of the SEC asking for the exemption of the 15,515
shares from the registration requirements of the Revised
Securities Act; the request was granted in a Resolution dated
14 November 1994. Due to the issuance of the unsubscribed
shares to the petitioner GILDA C. LIM (LIM), all of LIMPAN's
authorized capital stock became fully subscribed, with LIM
ending up controlling 62.5% of the shares.
"In July 1996, the private respondent PATRICIA LIM YU (YU), a

sister of the petitioner, LIM, filed a complaint against the
members of the Board of Directors of LIMPAN who approved
the aforesaid resolution (GILDA C. LIM, WILHEIMINA V. JOVEN,
DITAS A. LERIOS, AUGUSTO R. BUNDANG, TERESITA C. VELEZ and
JAIME MANZANO). The action was docketed as SEC Case No.
07-95-5114.
"BUNDANG, VELEZ, and MANZANO filed an Answer, asserting as

affirmative defenses that the complaint failed to state a cause
of action against them; that YU had no legal capacity to sue;
and that the issuance of the shares in LIM's favor was bona fide
and valid pursuant to law and LIMPAN's By-laws. In turn, the
herein petitioners LIM, JOVEN and LERIOS filed a Motion to
Dismiss on the following grounds: that YU had no legal capacity
to sue; that the complaint failed to state a cause of action
against JOVEN and LERIOS, and that no earnest efforts were
exerted towards a compromise, YU and LIM being siblings.
"In support of their ground that YU ha[d] no legal capacity to

sue, the petitioners pointed out that LIM had previously filed a
petition for guardianship before the Regional Trial Court of
Manila, docketed as Special proceeding No. 94-71010, praying
for the issuance of letters of guardianship over YU. On 14 July
1994, the Presiding Judge of Branch 48, the Hon. Demetrio M.
Batario, Jr., issued an Order, the relevant portion of which
enjoined YU 'from entering into, or signing, contracts or
documents on her behalf or on behalf of others' x x x.' On 16
August 1994, LIM was appointed [as] YU's general guardian,
and the former took her oath as such on the same day. YU
appealed LIM's appointment to the Supreme Court ("Patricia C.
Lim-Yu, et al. v. Hon. Judge Demetrio M. Batario, Jr., et al.,' G.R.
No.116926). On 27 February 1994, the High Court issued a

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Resolution giving due course to YU's petition. It likewise issued a
temporary restraining order, the (pertinent portion of which is
quoted hereunder:
'(b) to ISSUE the TEMPORARY RESTRAINING ORDER prayed

for, limited however, to the 'Writ of Preliminary Injunction'
dated 22 August 1994 and the order dated 14 July 1994
both issued in SP Proceeding No. 94-71010 which in the
opinion of the Court are all too encompassing and should
be limited in scope and subject to the conditions set forth
in the resolution of September 28, 1994 that, '(D)uring the
effectivity of the temporary restraining order, petitioner
Patricia C. Lim, her attorneys, representatives, agents and
any other persons assisting petitioner Patricia C. Lim will be
able to act, enter into or sign contracts or documents
solely for and on behalf of Patricia C. Lim; said actions,
contracts or documents should not in any way bind or
affect the interests of her parents, Isabelo P. Lim an
Purificacion C. Lim, her brothers and sisters and any family
owned or controlled corporation in particular, the Limpan
Investment Corporation.'
'NOW THEREFORE, You (Respondent Hon. Judge Demetrio

M. Batario, Jr.), your agents, representatives, and/or any
person or persons, acting upon your orders or in your
place or stead, are hereby RESTRAINED and ENJOINED
from enforcing and carrying out the Writ of Preliminary
Injunction dated 22 August 1994 and the Order dated 14
July 1994 both issued by respondent Judge In SP
Proceeding No. 94-71010.' (underscoring supplied)
"The petitioners argued that, under the aforesaid order YU [was]

incapacitated from filing a derivative suit. YU naturally
espoused the opposite view.
"Acting on the petitioners' Motion to Dismiss, the Hearing

Officer, Atty. Manuel Perea, issued an Order dated 05 January
1996, holding in abeyance the resolution of the motion to
dismiss, which reads as follows:
'Before this Commission is the motion to dismiss filed by

respondents Gilda C. Lim, et al., as well as the opposition
thereto.
'In view of the conflicting interpretation of the order issued

by the Supreme Court in Sp. Proc. No. 94-70010 regarding
the legal capacity of the plaintiff [--] x x x who is allegedly
under guardianship [-- to file the instant action] either or
both parties are directed to file a motion for clarification
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of the orders invoked by respondent Gilda C. Lim, et al.
The desired clarification is perceived to settle the issue of
plaintiff's capacity to file the instant action.
'Meanwhile, resolution of the pending incident shall be

held in abeyance until the parties shall have secured the
desired interpretation/opinion of the Supreme Court on
the matter.'
"Yu filed a Motion for Reconsideration dated 08 April 1996,

which was denied in an Order dated 25 April 1996, on the
ground that it was filed beyond the ten-day period allowed for
seeking reconsideration. Yu filed a Motion for Leave to Admit
Second Motion for Reconsideration dated 02 July 1996 which
the Hearing Officer also denied.
"From the denial of her second motion for reconsideration, Yu

filed a petition for certiorari before the SEC En Banc seeking to
set aside the Order of 05 January 1994. On 04 February 1994,
the SEC En Banc issued the first assailed order granting the
petition for certiorari, and ordering the Securities Investigation &
Clearing Department (SICD) to hear the other grounds of the
Motion to Dismiss and to continue the case until its final
determination. A motion for reconsideration filed by L[im]
having been denied, the instant petition for review was
instituted before this Court. x x x."6
Ruling of the Court of Appeal
Ruling that the Supreme Court's TRO was clear, the CA agreed with
the SEC that, pending clarification thereof, there was no need for
the hearing officer to defer ruling on the Motion to Dismiss. The
appellate court stated that the TRO did not prohibit herein
Respondent Patricia Lim-Yu from acting or entering into contracts on
her own behalf or from protecting her rights. The root of the present
controversy -- the Complaint she filed before the SEC -- relates to a
denial of her preemptive right as a shareholder. Thus, her capacity to
file the suit must be sustained. Finally, on the question of the
timeliness of respondent's Petition for Certiorari. before the SEC, the
CA ruled that adherence to strict technical rules should be relaxed
to prevent palpable injustice.
Hence, this recourse.7
Issues
In their Memorandum,8 petitioners raise the following issues:
"I

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The Honorable Court of Appeals erred in sustaining the
respondent's legal capacity to sue the petitioners by relying
solely on the first half of this Honorable Court's TRO and without
considering the second half of said TRO.
"II
The Honorable Court of Appeals erred in disregarding the sole

power/authority of the Supreme Court to enforce/clarify its own
resolutions/orders under the Rules of Court.
"III
The Honorable Court of Appeals in effect allowed the Securities

and Exchange Commission (SEC) to maintain two conflicting
positions on similar matters before it (SEC) when it upheld the
SEC's position that clarification of this Honorable Court's TRO
was not needed in SEC Case No. 07-95-5114.
"IV.
The Honorable Court of Appeals failed to consider that herein

respondent had been repeatedly and notoriously guilty of
laches.
Simply put, the main issue is whether respondent had the legal
capacity to file her Complaint before the SEC. The others are merely
incidental to this main point.
The Court's Ruling
First Issue:
Legal Capacity to Sue
Petitioners point out that both the SEC and the Court of Appeals
considered only the first part of the Supreme Court TRO and
completely ignored the second part. Supposedly, the latter part
barred respondent from entering into agreements that would affect
her family and the corporation. Hence, they claim that the TRO,
taken as a whole, proscribed respondent's "derivative suit," which
sought to "enjoin herein [P]etitioner Gilda C. Lim from further voting
or exercising any and all rights arising from the issuance to her of
15,515 shares of stock of the corporation."9
We do not agree. The pertinent portion of the TRO issued by this

Court reads as follows:

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"(b) to ISSUE the TEMPORARY RESTRAINING ORDER prayed for,
limited however, to the 'Writ of Preliminary Injunction' dated 22
August 1994 and the Order dated 14 July 1994 both issued in SP
Proceeding No. 94-71010 which in the opinion of the Court are
all too encompassing and should be limited in scope and
subject to the conditions set forth in the Resolution of
September 28, 1994 that, '(D)uring the effectivity of the
Temporary Restraining Order, petitioner Patricia C. Lim, her
attorneys, representatives, agents and any other persons
assisting petitioner Patricia C. Lim will be able to act, enter into
or sign contracts or documents solely for and on behalf of
Patricia C. Lim; said actions, contracts or documents should not
in any way bind or affect the interests of her parents, Isabelo P.
Lim and Purificacion C. Lim, her brothers and sisters and any
family owned or controlled corporation in particular, the
Limpan Investment Corporation."
Simply put, the TRO allows Respondent Patricia Lim-Yu to act for
herself and to enter into any contract on her own behalf. However,
she cannot transact in representation of or for the benefit of her
parents, brothers or sisters, or the Limpan Investment Corporation.
Contrary to what petitioners suggest, all that is prohibited is any
action that will bind them. In short, she can act only on and in her
own behalf, not that of petitioners or the Corporation.
There appears to be a confusion on the nature of the suit initiated

before the SEC. Petitioners describe it as a derivative suit, which has
been defined as "an action brought by minority shareholders in the
name of the corporation to redress wrongs committed against it, for
which the directors refuse to sue. It is a remedy designed by equity
and has been the principal defense of the minority shareholders
against abuses by the majority."10 In a derivative action, the real
party in interest is the corporation itself, I not the shareholder(s) who
actually instituted it.
"If the suit filed by respondent was indeed derivative in character,

then respondent may not have the capacity to sue. The reason is
that she would be acting in representation of the corporation, an
act which the TRO enjoins her from doing.
We hold, however, that the suit of respondent cannot be

characterized as derivative, because she was complaining only of
the violation of her preemptive right under Section 39 of the
Corporation Code.11 She was merely praying that she be allowed to
subscribe to the additional issuances of stocks in proportion to her
shareholdings to enable her to preserve her percentage of
ownership in the corporation. She was therefore not acting for the
benefit of the corporation. Quite the contrary, she was suing on her

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own behalf, out of a desire to protect and preserve her preemptive
rights. Unquestionably, the TRO did not prevent her from pursuing
that action.
To repeat, the TRO issued by this Court had two components: (1) it
allowed respondent to enter into agreements on her own behalf;
and (2) it clarified that respondent's acts could not bind or affect the
interests of her parents, brothers or sisters, or Limpan. In other words,
respondent was, as a rule, allowed to act; but, as an exception, was
prohibited from doing anything that would bind the corporation or
any of the above-named persons.
In this light, the TRO did not prohibit respondent from filing, on and in
her own behalf; a suit for the alleged violation of her preemptive
rights to purchase additional stock subscriptions. In other words, it did
not restrain respondent from acting and enforcing her own rights. It
merely barred her from acting in representation of the corporation.
Petitioners fail to appreciate the distinction between the act itself

and its net result. The act of filing the suit did not in any way bind the
corporation. The result of such act affected it, however. Similarly,
respondent can sell her shares to the corporation or make a will and
designate her parents, for example, as beneficiaries. It would be
quite far-fetched to say that these acts are prohibited by the TRO,
even if they will definitely affect the corporation and her parents.
Section 2 of Rule 3 of the Rules of Court12 defines a real party in

interest - as one who is entitled to the avails of any judgment
rendered in a suit, or who stands to be benefited or injured by it. In
the present case, it is clear that respondent was suing on her own
behalf in order to enforce her preemptive rights. Nothing, not the
TRO, barred her from filing that suit.1âwphi1.nêt
Incidental Issues
Power to Clarify Own Resolutions
Petitioners also assail the ruling of the Court of Appeals that the SEC
hearing officer "was bound to interpret the Supreme Court's order
instead of burdening [it] with the responsibility of 'clarifying' what
already appears to be a clear order." Citing Section 5 (5) of Article
VIII13 of the Constitution and Section 5 of Rule 135,14 petitioners
contend that the ruling disregarded the Supreme Court's power to
control and to clarify its own orders, as granted by the Constitution.
The argument must be rejected outright. First, as stated earlier the

TRO was very clear. In such instances, it was axiomatic that there
was no need for interpretation, only for application.15 Hence, there
was no reason for the SEC hearing officer to rely on the rules of

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statutory construction or for this Court to clarify its Order. Second,
even assuming that there was a need to interpret the TRO, the
hearing officer was duty-bound to do so. Indeed, the mandate to
apply and interpret pertinent laws and rulings is necessarily included
in the "adjudicative functions"16 of the SEC or of any other quasi-
judicial body for that matter.17
Verily, the power of this Court to clarify its own orders does not divest
the SEC of its function to apply those orders to cases before it. If
parties disagree with the SEC, they can file the proper suit in a
regular court in accordance with law." In any event, the seeming
obscurity or ambiguity of a TRO is not an excuse for a quasi-judicial
body, or any regular court or judge, to shirk from the responsibility of
applying and interpreting it.18
Alleged Conflicting Positions of the SEC
Petitioners further contend that the CA effectively allowed the SEC

to maintain contradictory positions on similar matters. They cite
Philippine Commercial International Bank v. Aquaventures
Corporation, docketed as SEC En Banc Case No. 455, in "which the
SEC referred a TRO to this Court for clarification.19
This argument is untenable. The alleged contradictory SEC ruling in

the said case is irrelevant and unnecessary to the resolution of the
present one. Petitioners do not claim that the factual milieu of the
former is similar to that of the latter. Moreover, the actions of the SEC
in the above-mentioned, case have not been put at issue by the
proper parties in these proceedings. In any event, they are neither
binding nor conclusive on appeal. They may be the subject of the
Court's review in accordance with the applicable provisions of the
Rules of Court.
Laches
Petitioners further contend that the CA failed to appreciate that

respondent had been "repeatedly and notoriously guilty of laches."
They point out that she filed a Motion for Reconsideration of the SEC
hearing officer's Order almost four months late. They further allege
that it took her another two and a half months to file a Motion for
Leave to Admit Second Motion for Reconsideration.20
We reject this argument. It has been held that it is the better rule that
courts, under the principle of equity, shall not be bound strictly by
the doctrine of laches, when a manifest wrong or injustice would
result.21 To rule that respondent can no longer question the hearing
officer would deprive her of the opportunity to sue in order to
enforce her preemptive rights, an act that is not proscribed by this
Court's TRO.
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WHEREFORE, the Petition is hereby DENIED and the assailed Decision
AFFIRMED. Costs against petitioners.
SO ORDERED.
Melo, Vitug, Gonzaga-Reyes, and Sandoval-Gutierrez, JJ., concur.
Footnote
1 Rollo, pp. 29-49.
2 Rollo, pp. 8-16.
3Fourth Division. Written by Justice Hector L. Hofilena, with the
concurrence of Justices Minerva P. Gonzaga-Reyes (then
Division chairman and currently a member of this Court) and
Omar U. Amin.
4 Rollo, pp. 19-20
7This case was deemed submitted for resolution on February
14, 2000, upon receipt by this Court of petitioners'
Memorandum signed by Attys. Virgelio T. Nibungco and
Carmela D. Medina. Respondent's Memorandum, signed by:
Atty. Ferdinand R. Silerio, was received earlier on January 10,
2000.
8 Rollo, pp. 411-419.
9 Petitioners' Memoradum, p. 3; rollo p. 413.
10Western Institute of Technology, Inc. v. Salas, 278 SCRA 216,
225, August 21, 1997, per Hermosisima Jr., J.
11 "SEC. 39. Power to deny pre-emptive right. - All stockholders
of a stock corporation shall enjoy pre-emptive right to subscribe
to all issues or disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is denied by the
articles of incorporation or an amendment thereto: Provided,
That such preemptive right shall not extend to shares to be
issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public; or to shares to be
issued in good faith with the approval of the stockholders
representing two-thirds (2/3) of the outstanding capital stock, in

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exchange for property needed for corporate purposes or in
payment of a previously contracted debt."
12 It provides as Follows: "SEC. 2. Parties in interest. - A real party
in interest is the party who stands to be benefited or injured by
the judgment in the suit, or the party entitled to the avails 0£
the suit. Unless otherwise authorized by law or these Rules, every
action must be prosecuted or defended in the name of the
real party in interest." See also Board of Optometry v. Colet, 260
SCRA 88, July 30, 1996; Fortich v. Corona, 289 SCRA 624, April
24, 1998.
13 "Sections. The Supreme Court shall have the following powers:
xxx xxx xxx
(5) Promulgate rules concerning the protection and

enforcement of constitutional rights, pleading, practice,
and procedure in all courts, the admission to the practice
of law, the Integrated Bar, and legal assistance to the
underprivileged. Such rules shall provide a simplified and
inexpensive procedure for the speedy disposition of cases,
shall be uniform for all courts of the same grade, and shall
not diminish, increase, or modify substantive rights. Rules of
procedure of special courts and quasi-judicial bodies shall
remain effective unless disapproved by the Supreme
Court.
14"Sec. 5. Inherent powers of courts. - Every court shall
have the power:
xxx xxx xxx
(b) To enforce order in proceedings before it, or before a

person or persons empowered to conduct a judicial
investigation under its authority;
(c) To compel obedience to its judgments, orders, and

processes, and to the lawful orders of a judge out of
court, in a case pending therein; xxx."
15Ayala Corporation v. Ray Burton Development Corp., 294
SCRA 48, August 7 1998.
16 Section 5, PD 902-A.
17See Siapian v. CA, GR No. 111928, March 1, 2000; Philippine
International Trading Corporation v. Angeles, 263 SCRA 421,
October 21, 1996; Philippines Today v. NLRC, 267 SCRA 202,
January 30, 1997.
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18 See Article 9, Civil Code.
20 Petitioners' Memorandum, pp. 17-18; rollo, pp. 427-428.
See Ang Ping v. CA, 310 SCRA 343, July 15, 1999; Santiago v.
21
CA, 278 SCRA 98, August 21, 1997.
Evangelista vs. Santos (86 Phil. 387 [1950])
G.R. No. L-1721 May 19, 1950
JUAN D. EVANGELISTA ET AL., plaintiffs-appellants,

vs.
RAFAEL SANTOS, defendant-appellee.
Antonio Gonzales for appellants.

Benjamin H. Tirol for appellee.
REYES, J.:
This is an action by the minority stockholders of a corporation against

its principal officer for damages resulting from his mismanagement of
its affairs and misuse of its assets.
The complaint alleges that plaintiffs are minority stockholders of the

Vitali Lumber Company, Inc., a Philippine corporation organized for
the exploitation of a lumber concession in Zamboanga, Philippines;
that defendant holds more than 50 per cent of the stocks of said
corporation and also is and always has been the president,
manager, and treasurer thereof; and that defendant, in such triple
capacity, through fault, neglect, and abandonment allowed its
lumber concession to lapse and its properties and assets, among
them machineries, buildings, warehouses, trucks, etc., to disappear,
thus causing the complete ruin of the corporation and total
depreciation of its stocks. The complaint therefore prays for
judgment requiring defendant: (1) to render an account of his
administration of the corporate affairs and assets: (2) to pay plaintiffs
the value of t heir respective participation in said assets on the basis
of the value of the stocks held by each of them; and (3) to pay the
costs of suit. Plaintiffs also ask for such other remedy as may be and
equitable.
The complaint does not give plaintiffs' residence, but, but purposes
of venue, alleges that defendant resides at 2112 Dewey Boulevard,

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corner Libertad Street, Pasay, province of Rizal. Having been served
with summons at that place, defendant filed a motion for the
dismissal of the complaint on the ground of improper venue and also
on the ground that the complaint did not state a cause of action in
favor of plaintiffs.
In support of the objection to the venue, the motion, which is under

oath, states that defendant is a resident of Iloilo City and not of
Pasay, and at the hearing of the motion defendant also presented
further affidavit to the effect that while he has a house in Pasay,
where members of his family who are studying in Manila live and
where he himself is sojourning for the purpose of attending to his
interests in Manila, yet he has permanent residence in the City of
Iloilo where he is registered as a voter for election purposes and has
been paying his residence certificate. Plaintiffs opposed the motion
for dismissal but presented no counter proof and merely called
attention to the Sheriff's return showing service of summons on
defendant personally at his alleged residence at No. 2112 Dewey
Boulevard, Pasay.
After hearing, the lower court rendered its order, granting the motion
for dismissal upon the two grounds alleged by defendant, and
reconsideration of this order having been denied, plaintiffs have
appealed to this Court.
The appeal presents two questions. The first refers to venue and the
second, to the right of the plaintiffs to bring this action for their
benefit.
As to the first question, it is important to remember that the laying of

the venue of an action is not left to plaintiff's caprice. The matter is
regulated by the Rules of Court. And in actions like the present,
which is one in personam, the regulation applicable is that
contained in section 1 of Rule 5, which provides:
Civil actions in Courts of First Instance may be commenced

and tried where the defendant or any of the defendant resides
or may be found, or where the plaintiff or any of the plaintiffs
resides, at the election of the plaintiff.
Objection to improper venue may be interposed at any time prior to

the trial. (Moran's Comments on the Rules of Court, Vol. I, 2nd ed., p.
108.)
Believing that defendant resided in the province of Rizal, herein

plaintiffs brought their action in the Court of First Instance of that
province. But that belief proved erroneous, for the lower court found
after hearing that defendant had his residence in Iloilo. The finding is

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based on defendant's sworn statement not rebutted by any proof to
the contrary.
There is nothing to the contention that defendant's motion to dismiss

necessarily presupposes a hypothetical admission of the allegations
of the complaint, among them the averment that defendant is a
resident of Rizal province, for the motion precisely denies that
averment and alleges that his real residence is in Iloilo City. This,
defendant had the right to do in objecting to the court's jurisdiction
on the ground of improper venue.
Section 1 of Rule 5 may seem, at first blush, to authorize the laying of

the venue in the province where the defendant "may be found." But
this phrase has already been held to have a limited application. It is
the same phrase used in section 377 of Act 190 from which section 1
of Rule 5 was taken, and as construed by this Court it applies only to
cases where defendant has no residence in the Philippine Islands.
This was the construction adopted in the case of Cohen vs. Benguet
Commercial Co., Ltd., 34 Phil. 526, which was an action brought in
Manila by a nonresident against a corporation which had its
residence for legal purposes in Baguio but whose President was
found in Manila and there served with summons. This Court there
said:
Section 377 provides that actions of this character "may be

brought in any province where the defendants or any
necessary party defendant may reside or be found, or in any
province where the plaintiff or one of the plaintiffs resides, at
the election of the plaintiff." The plaintiff in this action has no
residence in the Philippine Islands. Only one of the parties to the
action resides here. There can be, therefore, no election by
plaintiff as to the trial. It must be in the province where the
defendant resides. The defendant resides, in the eye of the law,
in Baguio. Was it "found" in the city of Manila under section 377,
its president being in that city where the service of summons
was made? We think not. The word "found" as used section 377
has a different meaning that belongs to it as used in section
394, which refers exclusively to the place where the summons
may be served. As we have said a summons may be legally
served on a defendant wherever he may be "found," i. e.,
wherever he may be, provided he be in the Philippine Islands;
but the venue cannot be laid wherever the defendant may be
"found." There is an element entering in section 377 which is not
present in section 394, that is a residence. Residence of the
plaintiff or defendant does not affect the place where a
summons may be served; but residence is the vital thing when
we deal with venue. The venue must be laid in the province
where one of the parties resides. If the plaintiff is a nonresident

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the venue must laid in the province of the defendant's
residence. The venue can be laid in the province where
defendant is "found" only when defendant has no residence in
the Philippine Islands. A defendant can not have a residence in
one province and be "found" in another. As long as he has a
residence in the Philippine Islands he can be "found," for the
purposes of section 377, only in the province of his residence. In
such case the words "residence" and "found" are synonymous. If
he is a nonresident then the venue may laid in the province
where he is "found" at the time venue the action is
commenced or in the province of plaintiff's residence. This
applies also to a domestic corporation.
While the service of the summons was good in either Baguio or

Manila we are of the opinion that the objection of the
defendant to the place of trial was proper in both cases and
that the trial court should have held that the venue was
improperly laid.
And elaborating on the point when the case came up for

reconsideration, the Court further said:
The moving party contends that the venue was properly laid
under section 377 in that was laid in the province where the
defendant was found at the time summons was served on its
president, he having been found and served with process in
the city of Manila. for the purpose of the discussion we
assumed in the main case, as the plaintiff claimed, that the
defendant was in fact and in law found in the city of Manila;
and proceeded to decide the cause upon the theory that,
even if the defendant were found in the city of Manila, that did
not justify, under the facts of the case, the laying of the venue
in the city of Manila.
We do not believe that the moving party's objection that our

construction deprives the word "found" of all significance and
results, in effect, in eliminating it from the statue, is sound. We
do not deprive it of all significance and effect and do not
eliminate it from the statue. We give it the only effect which
can be given it and still accord with the other provisions of the
section which give defendant the right to have the venue laid
in the province of his residence, the effect which it was
intended by the legislature they should have. We held that the
word "found" was applicable in certain cases, and in such
cases gave it full significance and effect. We declared that it
was applicable and effective in cases where the defendant is
a nonresident. In such cases where the defendant is a
nonresident. In such cases the venue may be laid wherever he

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may be found in the Philippine Islands at the time of the service
of the process, but we also held that where he is a resident of
the Philippine Islands the word "found" has no application and
the venue must be laid in the province where he resides.
The construction which the moving party asks us to place on

that provision of section 377 above quoted would result in the
destruction of the privilege conferred by the section upon a
resident defendant which requires the venue to be laid in the
province where he resides. This is clear; for, if the venue may be
laid in any province where the defendant, although a resident
of some other province, any be found at the time process is
served on him, then the provision that it shall be laid in the
province where he resides is no value to him. If a defendant
residing in the province of Rizal is helpless when the venue is
laid in the province of Mindoro in an action in which the
plaintiff is a nonresident or resides in Manila, what is the value of
a residence in Rizal? If a defendant residing in Jolo is without
remedy when a nonresident plaintiff or a plaintiff residing in Jolo
lays the venue in Bontoc because the defendant happens to
be found there, of what significance is a residence in Jolo? The
phrases "where the defendant ... may reside" and "or be found"
must be construed together and in such manner that both may
be given effect. The construction asked for by the moving party
would deprive the phrase "where the defendant ... may reside"
of all significance, as the plaintiff could always elect to lay the
venue in the province where the defendant was "found" and
not where he resided; whereas the construction which we
place upon these phrases permits both to have effect. We
declare that, when the defendant is a resident of the Philippine
Islands, the venue must be laid either in the province where the
plaintiff resides or in the province where the defendant resides,
and in no other province. Where, however, the defendant is a
nonresident the venue may be laid wherever defendant may
be found in the Philippine Islands. This construction gives both
phrases their proper and legitimate effect without doing
violence to the spirit which informs all laws relating to venue
and which insists always that the action shall tried in the place
where the greater convenience of the parties will be served.
Ordinarily a defendant's witness are found where the
defendant resides; and plaintiff's witnesses are generally found
where he resides or where the defendant resides. It is,
therefore, generally desirable to have the action tried where
on of the resides. Where the plaintiff is a nonresident and the
contract upon which suit is brought was made in the Philippine
Islands it may safely be asserted that the convenience of the
defendant would be best served by a trial in the province
where he resides.
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The fact that defendant was sojourning in Pasay t the time he was
served with summons does not make him a resident of that place for
purposes of venue. Residence is "the permanent home, the place to
which, whenever absent for business or pleasure, one intends to
return, ..." (67 C.J., pp. 123-124.) A man can have but one domicile
at a time (Alcantara vs. Secretary of Interior, 61 Phil., 459), and
residence is anonymous with domicile under section 1 of Rule 5
(Moran's Comments, supra, p. 104).
In view of the foregoing, we hold that the objection to the venue

was correctly sustained by the lower court.
As to the second question, the complaint shows that the action is for
damages resulting from mismanagement of the affairs and assets of
the corporation by its principal officer, it being alleged that
defendant's maladministration has brought about the ruin of the
corporation and the consequent loss of value of its stocks. The injury
complained of is thus primarily to the corporation, so that the suit for
the damages claimed should be by the corporation rather than by
the stockholders (3 Fletcher, Cyclopedia of Corporation pp. 977-
980). The stockholders may not directly claim those damages for
themselves for that would result in the appropriation by, and the
distribution among them of part of the corporate assets before the
dissolution of the corporation and the liquidation of its debts and
liabilities, something which cannot be legally done in view of section
16 of the Corporation Law, which provides:
No shall corporation shall make or declare any stock or bond

dividend or any dividend whatsoever from the profits arising
from its business, or divide or distribute its capital stock or
property other than actual profits among its members or
stockholders until after the payment of its debts and the
termination of its existence by limitation or lawful dissolution.
But while it is to the corporation that the action should pertain in

cases of this nature, however, if the officers of the corporation, who
are the ones called upon to protect their rights, refuse to sue, or
where a demand upon them to file the necessary suit would be futile
because they are the very ones to be sued or because they hold the
controlling interest in the corporation, then in that case any one of
the stockholders is allowed to bring suit (3 Fletcher's Cyclopedia of
Corporations, pp. 977-980). But in that case it is the corporation itself
and not the plaintiff stockholder that is the real property in interest, so
that such damages as may be recovered shall pertain to the
corporation (Pascual vs. Del Saz Orosco, 19 Phil. 82, 85). In other
words, it is a derivative suit brought by a stockholder as the nominal
party plaintiff for the benefit of the corporation, which is the real
property in interest (13 Fletcher, Cyclopedia of Corporations, p. 295).

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In the present case, the plaintiff stockholders have brought the
action not for the benefit of the corporation but for their own
benefit, since they ask that the defendant make good the losses
occasioned by his mismanagement and pay to them the value of
their respective participation in the corporate assets on the basis of
their respective holdings. Clearly, this cannot be done until all
corporate debts, if there be any, are paid and the existence of the
corporation terminated by the limitation of its charter or by lawful
dissolution in view of the provisions of section 16 of the Corporation
Law.
It results that plaintiff's complaint shows no cause of action in their

favor so that the lower court did not err in dismissing the complaint
on that ground.
While plaintiffs ask for remedy to which they are not entitled unless
the requirement of section 16 of the Corporation Law be first
complied with, we note that the action stated in their complaint is
susceptible of being converted into a derivative suit for the benefit
of the corporation by a mere change in the prayer. Such
amendment, however, is not possible now, since the complaint has
been filed in the wrong court, so that the same last to be dismissed.
The order appealed from is therefore affirmed, but without prejudice

to the filing of the proper action in which the venue shall be laid in
the proper province. Appellant's shall pay costs. So ordered.
Moran, C.J., Ozaeta, Pablo, Bengzon, Tuason, and Montemayor, JJ.,

concur.
Case Digest on EVANGELISTA, ET AL V. SANTOS
Facts: Plaintiffs, minority stockholders of Vitali Lumber Company,

alleges in their complaint that defendant as president, manager and
treasurer of their company, through fault, neglect and
abandonment allowed it lumber concession to lapse and its
properties and assets to disappear causing the complete ruin of the
corporation’s operation and total depreciation of its stocks.
They pray for an accounting from the defendant of the corporate

affairs and assets, payment to them of the value of their respective
participation in said assets on the basis of the value of the stocks
held by each of them and to pay the cost of the suit.

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Ruling: In derivative suits, the injury complained of must be one
which is against the corporation, thus the action properly belongs to
the corporation rather than the stockholders. The suit is brought by
the individual stockholder as the nominal party plaintiff for the
benefit of the corporation which is the real party in interest.
In the case at bar, however, plaintiff stockholders brought the action

not for the benefit of the corporation but for their own benefit since
they ask that the defendant make good losses occasioned by his
mismanagement and to pay them the value of their respective
participation in the corporate assets on the basis of their respective
holdings.
Petition dismissed for venue being improperly laid.
Class notes: In effect what the stockholders petitioning for, in this

case, was a distribution of corporate assets before liquidation which
is not allowed. Their remedy is to amend the complaint and bring it
to the proper venue.
Derivative suits may be brought by: (a) a minority stockholder, (b) a

corporate officer, (c) a treasurer, (d) a director, or (e) a majority
stockholder when requirement of 2/3 affirmative vote is necessary.
Evangelista & Co. et.al. v. Estrella Abad Santos
FACTS:
On October 9, 1954, a co-partnership with herein petitioners as

capitalist partners was formed under the name “Evangelista & Co.”
The Articles of Co-partnership was, however, amended on June
7, 1955 so as to include herein respondent, Estrella Abad Santos, as
an industrial partner.
Consequently, on December 17, 1963, Abad Santos filed suit against

the three (3) capitalist partners, alleging that the partnership,
which was also made a party-defendant, had been paying

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dividends to the partners except to her. It was further alleged that
despite her requests that she be allowed to examine partnership
books, to give her information regarding the partnership affairs and
to receive her share in the dividends declared by the partnership,
the petitioners refused and continued to refuse. She therefore
prayed that the petitioners be ordered to render an accounting of
the partnership business and to pay her the corresponding share in
the dividends.
ISSUE:
Whether or not the Articles of Co-partnership shall be considered as

a conclusive evidence of respondent’s status as a limited partner?
HELD:
NO. The Court held that despite the genuineness of the Articles
of Co-partnership the same did not express the true intent
and agreement of the parties, however, as the subsequent events
and testimonial evidences indicate otherwise, the Court upheld that
respondent is an industrial partner of the company.
Article 1789 provides that ‘An industrial partner cannot engage in

business for himself, unless the partnership expressly permits him to do
so; and if he should do so, the capitalist partners may either exclude
him from the firm or avail themselves of the benefits which he may
have obtained in violation of this provision, with a right to damages
in either case.’ Since 1954 and until after the promulgation of the
decision of the appellate court, Abad Santos has served as a judge
of the City Court of Manila and had been paid for services rendered

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allegedly contributed by her to the partnership. Though being a
judge of the City Court of Manila cannot be characterized a
business and/or may be considered an antagonistic business to the
partnership, the petitioners, subsequent of petitioners’ answer to the
complaint, petitioners reached the decision that respondent be
excluded from and deprived of her alleged share in the interest or
participation as an alleged industrial partner in the net profits or
income of the partnership.
Having always known the respondent is a City Judge even before

she joined the partnership, why did it take petitioners so many years
before excluding her from said company? Furthermore, the act of
exclusion is premised on the ground that respondent has always
been a partner, an industrial partner. In addition, the Court further
held that with the consideration of Article 1767 that ‘By a contract of
partnership two or more persons bind themselves, to contribute
money, property, or industry to a common fund, with the intention of
dividing profits among themselves’, the services rendered by
respondent may legitimately be considered the respondent’s
contribution to the common fund.
EVANGELISTA vs. SANTOS Case Digest
EVANGELISTA vs. SANTOS
86 P.R. 387
Facts: Plaintiff’s are minority stockholders of the Vitali Lumber

Company, Inc., a Philippine corporation organized for the
exploitation of a lumber concession in Zamboanga, Philippines; that
defendant holds more than 50 per cent of the stocks of said
corporation and also is and always has been the president,
manager, and treasurer thereof; and that defendant, in such triple
capacity, through fault, neglect, and abandonment allowed its

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lumber concession to lapse and its properties and assets to
disappear, thus causing the complete ruin of the corporation and
total depreciation of its stocks. Their complaint therefore prays for
judgment requiring defendant: (1) to render an account of his
administration of the corporate affairs and assets: (2) to pay plaintiffs
the value of their respective participation in said assets on the basis
of the value of the stocks held by each of them; and (3) to pay the
costs of suit.
The complaint does not give plaintiffs’ residence, but, for purposes of
venue, alleges that defendant resides at 2112 Dewey Boulevard,
corner Libertad Street, Pasay, province of Rizal. Having been served
with summons at that place, defendant filed a motion for the
dismissal of the complaint on the ground of improper venue and also
on the ground that the complaint did not state a cause of action in
favor of plaintiffs.
In support of the objection to the venue, defendant states that he is

a resident of Iloilo City and not of Pasay, defendant also presented
further affidavit to the effect that while he has a house in Pasay,
where members of his family who are studying in Manila live and
where he himself is sojourning for the purpose of attending to his
interests in Manila, yet he has his permanent residence in the City of
Iloilo where he is registered as a voter for election purposes and has
been paying his residence certificate.
Issue: Whether or not defendant is a resident of Iloilo, therefore, there

was no proper venue when he was served with summons in Pasay.
Held: The facts in this case show that the objection to the venue is
well-founded. Where the plaintiff is a nonresident and the contract
upon which suit is brought was made in the Philippine Islands it may
safely be asserted that the convenience of the defendant would be
best served by a trial in the province where he resides. The fact that
defendant was sojourning in Pasay at the time he was served with
summons does not make him a resident of that place for purposes of
venue. Residence is “the permanent home, the place to which,
whenever absent for business or pleasure, one intends to return.

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President of PDIC vs. Reyes (460 SCRA 473 [2005])
G.R. No. 154973 June 21, 2005
THE PRESIDENT OF PHILIPPINE DEPOSIT INSURANCE CORPORATION AS

LIQUIDATOR OF PACIFIC BANKING CORPORATION, petitioner,
vs.
HON. WILFREDO D. REYES, Pairing Judge, RTC Manila, Branch 31; ANG
ENG JOO; ANG KEONG LAN; and E.J. ANG INTERNATIONAL, LTD.,
represented by FORNIER & FORNIER LAW, respondents.
DECISION
DAVIDE, JR., C.J.:
May an investment in a corporation, whose existence has been

terminated, be entitled to an interest in the concept of actual and
compensatory damages from the time such investment was made
until the closure of the corporation? This is the pivotal issue in this
petition for certiorari filed by the President of the Philippine Deposit
Insurance Corporation (PDIC), in his capacity as the Liquidator of the
Pacific Banking Corporation (PaBC).
The antecedent facts are as follows:
On 5 July 1985, pursuant to Resolution No. 699 of the Monetary Board

of the Central Bank of the Philippines, the PaBC was placed under
receivership on the ground of insolvency. Subsequently, it was
placed under liquidation, and a liquidator was designated.
On 7 April 1986, the Central Bank of the Philippines, through the

Office of the Solicitor General, filed with the Regional Trial Court
(RTC) of Manila, Branch 31, a petition for assistance in the liquidation
of PaBC.
On 17 May 1991, Vitaliano N. Nañagas, President of the PDIC, was

appointed by the Central Bank as Liquidator.
On 26 June 1992, private respondents Ang Eng Joo, Ang Keong Lan,
and E.J. Ang International Ltd. (hereafter Singaporeans), then
represented by their attorney-in-fact Gonzalo C. Sy, filed their claim
before the liquidating court. Citing Republic Act No. 5186, otherwise
known as the Investment Incentives Act, they claimed to be
preferred creditors and prayed for the return of their equity
investment in the amount of US$2,531,632.18 with interest until the
closure of the PaBC.
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After due hearing or on 11 September 1992, the liquidation court,
through Presiding Judge Regino Veridiano II, issued an order that
reads as follows:
At this stage of the liquidation proceedings, the claimants who are

foreign investors should already be paid. If there is any doubt as to
whether claimants who are foreign investors should be treated as
preferred claimants, the doubt should be resolved in favor of
claimants since it is of judicial notice that government adopted the
policy to entice foreign investors to help boost the economy.
Claimants who are foreign investors should be treated with liberality
such that they should be categorized among preferred creditors.
Claimants were invited to invest at PaBC in 1981 and after a short
period of less than four (4) years the bank was closed in 1985 due to
mismanagement.1
WHEREFORE, premises considered, the Liquidator of PaBC is ordered

to pay claimants through their Attorney-in-Fact Gonzalo C. Sy, their
total investment of US$2,531,632.18 as preferred creditors. Dividends
and/or interest that accrued in favor of claimants is hereby deferred
pending study by the Liquidator who is hereby ordered to submit his
report and recommendation within thirty (30) days from receipt of
this Order.2
His motion for reconsideration having been denied, the Liquidator

filed a notice of appeal. In an Order dated 28 October 1992, the
liquidation court struck off the record the notice of appeal for having
been filed beyond the 15-day period to appeal, and directed the
execution of the Order of 11 September 1992.
The Liquidator thus filed a petition for certiorari before the Court of
Appeals, which was, however, dismissed on the ground that the
notice of appeal was correctly dismissed by the liquidation court for
having been filed out of time. In our decision3 of 20 March 1995 in
G.R. Nos. 109373 and 112991, we sustained the Court of Appeals, but
on a different ground. We held that while the Liquidator filed the
notice of appeal within the reglementary 30-day period provided in
special proceedings, he failed to file the requisite record on appeal,
and thus the appeal was not perfected on time, causing the 11
September 1992 Order to become final and executory.
Consequently, the liquidation court, through the pairing judge Hon.

Wilfredo D. Reyes, issued an Order dated 13 April 1998 implementing
the execution order of 28 October 1992 by directing the President of
the Land Bank of the Philippines (LBP) to release to the Sheriff the
garnished amount of US$2,531,632.18 or its peso equivalent

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computed at the current exchange rate, to be paid to the
Singaporeans.
The Bureau of Internal Revenue (BIR) and the Bangko Sentral ng

Pilipinas promptly filed before the liquidation court separate motions
to hold in abeyance the liquidation court’s orders of 28 October
1992 and 13 April 1998.4 The Liquidator also filed an urgent motion to
prohibit the Singaporeans from withdrawing the money from their
account with the LBP.5 It was accompanied by an application for a
temporary restraining order and/or preliminary injunction praying
that Gonzalo C. Sy be prohibited from withdrawing the amount of
P82,658,671.43 from his account with the LBP and be directed to
return any funds that might already have been withdrawn by him.
On 12 May 1998, Judge Reyes issued an Order6 denying the motions

and ordered the payment of accrued legal interest on the
Singaporeans’ equity investment of US$2,531,632.18 at the rate of
12% per annum computed from 15 October 1981, the date the
outward remittance and the investment were actually made, until its
full payment, at the exchange rate prevailing at the time of
payment.
Finally, on 15 May 1998, Judge Reyes issued another Order 7 directing

the President of the Philippine National Bank (PNB) to release the
garnished amount sufficient to cover the additional sum of
P172,374,220.64.
Aggrieved by these orders, the BIR, PDIC, and the Liquidator filed
before the Court of Appeals a petition for certiorari, mandamus, and
prohibition with a prayer for a temporary restraining order8 assailing
Judge Reyes’ Orders of 13 April 1998, 12 May 1998, and 15 May 1998.
In its decision9 of 31 January 2002, the Court of Appeals affirmed the

Orders of 13 April 1998 and 15 May 1998, but modified the Order of
12 May 1998 as follows:
(1) [P]ayment of accrued legal interest in the sum of

P56,034,877.04 still left uncollected shall be made to private
respondents, Singaporeans, directly or through their new
attorney-in-fact and legal counsel, the law firm of Fornier &
Fornier;
(2) [E]njoining respondent Gonzalo C. Sy from withdrawing the

garnished amount from his savings/current account with the
Land Bank of the Philippines or any other bank in which funds
released from the garnished accounts of PaBC, LBP and PNB
have been deposited; and

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(3) [A]n amount equivalent to 15% of the remaining garnished
amount or the balance of accrued legal interest of Pesos
56,034,877.04 shall be withheld and remitted to petitioner
Bureau of Internal Revenue, without prejudice to the right of
said petitioner to make other assessments for taxes in the future.
Consequently, the writ of preliminary injunction issued on September

14, 1998 is hereby DISSOLVED. By virtue hereof, the garnished amount
from the savings/current account with the Land Bank of the
Philippines or any other bank in which funds released from the
garnished accounts of PaBC, LBP and PNB have been deposited
may now be released only to private respondents, Singaporeans,
directly or through their new attorney-in-fact and legal counsel, the
law firm of Fornier & Fornier.10
After an unsuccessful motion for reconsideration,11 the Liquidator

came before us assigning the following errors:
4.1
THE RESPONDENT APPELLATE COURT COMMITTED A FUNDAMENTAL

ERROR OF FACT AND LAW WHEN IT DECLARED THE SINGAPOREANS’
EQUITY INVESTMENT WITH CLOSED PACIFIC BANKING CORPORATION
ENTITLED TO PAYMENT OF INTEREST.
4.2
THE RESPONDENT APPELLATE COURT COMMITTED A FUNDAMENTAL

ERROR OF FACT AND LAW WHEN IT APPLIED THE LANDMARK CASE OF
EASTERN SHIPPING LINES, INC. V. CA (G.R. NO. 97412, JULY 12, 1994)
IN FIXING THE RATES OF INTEREST AND/OR DIVIDENDS THAT ALLEGEDLY
ACCRUED ON THE EQUITY INVESTMENT OF THE SINGAPOREANS ON
PABC.
4.3
ASSUMING FOR THE SAKE OF ARGUMENT THAT PABC IS LIABLE FOR

COMPENSATORY DAMAGES TO THE SINGAPOREAN EQUITY HOLDERS,
ACCRUAL OF THE 6% INTEREST RATE SHOULD COMMENCE FROM
DEMAND.
4.4
ASSUMING FOR THE SAKE OF ARGUMENT THE CORRECTNESS OF THE

RESPONDENT APPELLATE COURT’S IMPOSITION OF THE 6% AND 12%
INTEREST RATE ON THE EQUITY INVESTMENTS OF THE SINGAPOREAN
EQUITY HOLDERS, THE LATTER SHOULD ONLY BE ENTITLED TO A TOTAL
AMOUNT OF P73,246,702.21 BY WAY OF THE ALLEGED ACCRUED
DIVIDENDS AND/OR INTERESTS.

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4.5
FOLLOWING THE JANUARY 31, 2002 DECISION OF THE RESPONDENT

APPELLATE COURT WHICH DIRECTED THE PAYMENT OF ALLEGED
ACCRUED DIVIDENDS AND/OR INTEREST COMMENCING ON
OCTOBER 15, 1981 WHERE THE PREVAILING EXCHANGE RATE WAS
P8.067 TO A DOLLAR, THE OVERPAYMENT TO THE SINGAPOREAN
EQUITY HOLDERS SHALL AMOUNT TO P182,893,303.55. 12
Anent the first issue, the Liquidator interprets the affirmation by the
Court of Appeals of the 12 May 1998 Order of Judge Reyes as
amounting to an unlawful grant of undeclared dividends. He argues
that the only fruits that can arise from an equity investment are
dividends declared from unrestricted retained earnings by the Board
of Directors in accordance with the Corporation Code. Absent a
declaration in this case, the interest awarded has no legal basis.
As for the second and third issues, the Liquidator argues that no
actual damages can arise from the closure of the bank. The ruling in
Eastern Shipping Lines, Inc. v. Court of Appeals13 is not applicable
because that case clearly refers to an award of interest in the
concept of actual and compensatory damages in case of breach
of an obligation. The failure of PaBC to return the Singaporeans’
equity investment because of its closure is not a breach of an
obligation – the closure being akin to a force majeure. If indeed
PaBC is liable to the Singaporeans for actual and compensatory
damages, accrual thereof should be reckoned from the date of
demand pursuant to Article 1169 of the Civil Code. Instead of
running from 15 October 1981 when the Singaporeans bought their
shares in PaBC, the 6% interest rate should be reckoned from 26 June
1992, the date the Singaporeans filed their claim in the liquidation
court.
The Liquidator likewise asserts that there is already an overpayment

of accrued dividends or interests. The liquidation court’s Order of 12
May 1998 awarded an interest of 12% per annum to be computed
from 15 October 1981 (the date of actual remittance of the
investment) until full payment. Pursuant to that Order, the PNB
released P116,339,343.60. On appeal, however, the Court of Appeals
modified the decision and awarded an interest of 6% per annum
from 15 October 1981 up to PaBC’s closure, as well as an interest of
12% per annum from 11 October 1992, when the 11 September 1992
Order became final and executory, until 17 April 1998, when the
equity investment of US$2,531,632.18 was fully paid. With the
prevailing exchange rate of P8.067 to a dollar on 15 October 1981,
the total peso equivalent of the Singaporeans’ claim is only
P30,230,338.29 – P20,422,676.80 of which represents the principal
equity investment of US$2,531,632.18 and P9,807,661.49, as alleged

suigeneris
accrued interest. As of 18 May 1998, the total releases to the
Singaporeans from the garnished funds of the PaBC amounted to
P213,123,641.84. There is therefore an overpayment of
P182,893,303.55. Thus, the order of the Court of Appeals to further
release P56,034,877.04 from the garnished funds would result to unjust
enrichment in favor of the Singaporeans.
For their part, the Singaporeans assert that the Court of Appeals
committed no error in affirming their entitlement to accrued interests
in the amount of P56,034,877.04 and in ordering its payment less 15%
in taxes as agreed upon by the BIR. The Order of 11 September 1992
included the payment of the principal due the Singaporeans as
preferred creditors, but it deferred the payment of interest on the
principal for study by the Liquidator. Unfortunately, no study and
recommendation was done since September 1992; thus, the
liquidation court took it upon itself to arithmetically compute and fix
the amount of interest at the legal rate of 12% per annum as
reflected in the Order of 12 May 1998. Likewise, the award of 12%
interest has become the law of the case with respect to the
Liquidator and the Singaporeans.
The Singaporeans also argue that the petition should be dismissed

because it assails errors of judgment, not errors of jurisdiction. They
submit that the filing of a special civil action for certiorari rather than
an appeal is wrong, improper, and fatal to the case. Moreover, the
issue of overpayment is a question of fact that could not be threshed
out in a special civil action for certiorari.
We shall first tackle the procedural issue of the propriety of the

petition filed by the Liquidator.
A petition for certiorari is the proper remedy when a tribunal, board,

or officer exercising judicial or quasi-judicial functions has acted
without or in excess of jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction and there is no appeal nor
any plain, speedy, and adequate remedy at law.14 Grave abuse of
discretion is defined as the capricious, whimsical exercise of
judgment as is equivalent to lack of jurisdiction. An error of judgment
committed in the exercise of its legitimate jurisdiction is not the same
as grave abuse of discretion. Thus, the special writ of certiorari is not
the remedy for errors of judgment that can be corrected by
appeal.15
Although denominated as a petition for certiorari under Rule 65 of

the Rules of Civil Procedure, the petition assigns errors of judgment of
the Court of Appeals. It does not allege grave abuse of discretion
committed by the Court of Appeals. However, in the interest of
justice, this Court shall treat the petition as an appeal under Rule 45

suigeneris
of the Rules of Civil Procedure especially since it was filed within the
reglementary period for filing an appeal. Sections 1 and 2 of Rule 45
of the 1997 Rules of Civil Procedure provide:
SECTION 1. Filing of petition with Supreme Court. – A party desiring to

appeal by certiorari from a judgment or final order or resolution of
the Court of Appeals, the Sandiganbayan, the Regional Trial Court or
other courts whenever authorized by law, may file with the Supreme
Court a verified petition for review on certiorari. The petition shall
raise only questions of law which must be distinctly set forth.
SEC. 2. Time for filing; extension. – The petition shall be filed within
fifteen (15) days from notice of the judgment or final order or
resolution appealed from, or of the denial of the petitioner’s motion
for new trial or reconsideration filed in due time after notice of the
judgment. On motion duly filed and served, with full payment of the
docket and other lawful fees and the deposit for costs before the
expiration of the reglementary period, the Supreme Court may for
justifiable reasons grant an extension of thirty (30) days only within
which to file the petition.
The records show that the Liquidator received on 30 August 2002 a

copy of the resolution of the Court of Appeals denying his motion for
reconsideration. He had fifteen days, or until 14 September 2002, to
file a petition for review on certiorari. Since 14 September 2002 fell on
a Saturday, he could file his petition on the next working day, which
was 16 September 2002.16 Indeed, the Liquidator filed the instant
petition and paid the necessary docket and legal fees on 16
September 2002.
Before delving into the merits of the case, it bears stressing that we
are constrained to make our judgment according to the confines set
by the 11 September 1992 Order of the liquidation court.
According to the principle of the law of the case, "whatever is once

irrevocably established as the controlling legal rule or decision
between the same parties in the same case continues to be the law
of the case."17 To this the Court must adhere, whether the legal
principles laid down were "correct on general principles or not," or
"whether the question is right or wrong."18
As a result, upon the finality of the 11 September 1992 Order, the

following issues were laid to rest: (1) the Singaporeans are deemed
preferred creditors; and (2) they are entitled to the payment of their
total investment amounting to US$2,531,632.18.
The determination of interests or dividends was, however, deferred

pending a report to be submitted by the Liquidator. It was only in the
12 May 1998 Order of the liquidation court that an interest was
suigeneris
awarded, giving rise to a new question of law. Therefore, the award
of interest is not a controlling legal rule or decision that had been
previously established as between the parties, since the parties did
not have the chance to argue on that issue.
A perusal of the 12 May 1998 Order shows that the liquidation court
awarded interest not as a form of accrued dividends or return of
investment, but as actual and compensatory damages.
Categorically, the order states:
The December 16, 1993 decision of the Court of Appeals ruled that
the remittance of earnings of this type of foreign investment is
guaranteed (CA decision, p. 15, emphasis supplied). Legal interests
are earnings and they are provided for by law arising from the
withholding of funds due to a party. They are not computed on the
amount of earnings of a business.19
We take note of the fact that when the trial court, in its Order of 11
September 1992, declared the Singaporeans to have the status of
preferred creditors, it did so only for the purpose of giving them
priority in the order of payment upon the liquidation of the PaBC.
Relying only on the Investment Incentive Act, the trial court did not
decide whether the Singaporeans’ investment was a loan or equity.
Since the Singaporeans were declared preferred creditors for a
limited purpose, it does not follow that the court likewise implied that
the original remittance of the Singaporeans was in the nature of a
loan or forbearance of money, goods, or credit.
The Court of Appeals found that the equity investment of

US$2,531,632.18 was not a loan or forbearance of money; hence,
Central Bank Circular No. 416, prescribing 12% interest per annum on
loans or forbearance of money, goods, or credit is inapplicable. It
applied Article 2209 of the Civil Code, which provides for the legal
interest of 6% per annum in the absence of a stipulation to the
contrary. Thus, the Court of Appeals modified the Order of 12 May
1998 and reduced the rate of interest on the investment of
US$2,531,632.18 from 12% to 6% to run from 15 October 1981 – when
the outward remittance and equity investment was actually made –
up to the closure of PaBC. Also, following Eastern Shipping Lines, Inc.
v. Court of Appeals it upheld the grant of 12% interest on the
monetary award of US$2,531,632.18 to run from the date of the
finality of the 11 September 1992 Order until its satisfaction.
In Eastern Shipping Lines, Inc. v. Court of Appeals, we laid down the

following guidelines:
I. When an obligation, regardless of its source, i.e., law,

contracts, quasi-contracts, delicts or quasi-delicts is breached,
the contravenor can be held liable for damages. The provisions
suigeneris
under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest, in the

concept of actual and compensatory damages, the rate of
interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the

payment of a sum of money, i.e., a loan or forbearance
of money, the interest due should be that which may
have been stipulated in writing. Furthermore, the interest
due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the
Civil Code.
2. When an obligation, not constituting a loan or

forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the
discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated
claims or damages except when or until the demand can
be established with reasonable certainty. Accordingly,
where the demand is established with reasonable
certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the
court is made (at which time the quantification of
damages may be deemed to have been reasonably
ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of

money becomes final and executory, the rate of legal
interest whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being
deemed to be by then an equivalent to a forbearance of
credit.20
It is undisputed that the amount of US$2,531,632.58 remitted by the

Singaporeans represented the 154,462 PaBC common shares
previously issued to, and owned by, Mandarin Development

suigeneris
Corporation bought by the Singaporeans at the price of US$16.39
per share. The investment was approved by the Central Bank under
Monetary Board Resolution No. 323 dated 19 February 1982 and
constituted about 11% of the total subscribed capital stock of PaBC.
Clearly, the amount remitted to PaBC by the Singaporeans was an
investment.
An "investment" is an expenditure to acquire property or other assets

in order to produce revenue. It is the placing of capital or laying out
of money in a way intended to secure income or profit from its
employment. "To invest" is to purchase securities of a more or less
permanent nature, or to place money or property in business
ventures or real estate, or otherwise lay it out, so that it may produce
a revenue or income.21
Thus, unlike a deposit of money or a loan that earns interest, the

investment of the Singaporeans cannot be assured of a dividend or
an interest on the amount invested. For, interests or dividends are
granted only after profits or gains are generated.
We therefore agree with the Court of Appeals in holding that the

amount of US$2,531,632.18 remitted by the Singaporeans to PaBC
was not a loan or forbearance of money in favor of PaBC. Hence
No. II-1 of the above-quoted guidelines in Eastern Shipping Lines
does not come into play. Neither can we apply Central Bank
Circular No. 416, which imposes the rate of 12% per annum on loans
and forbearance of money. Nor can No. II-2 of the above-quoted
guidelines be invoked because, as correctly pointed out by the
Liquidator, the closure of the PaBC did not constitute a breach of
obligation. Article 2209 of the Civil Code, which was relied upon by
the Court of Appeals, does not find application either. That Article,
which provides for 6% interest per annum, governs when there is a
delay in the payment of a sum of money. Such is not the case here.
Thus, the Court of Appeals’ award of 6% interest on the

Singaporeans’ equity investment as actual or compensatory
damages from the date of its remittance until the closure of PaBC
has no leg to stand on and must, therefore, be deleted.
The interest that may be awarded as actual or compensatory

damages in this case is that provided in No. II-3 of the afore-quoted
guidelines. Upon the finality of the Order of 11 September 1992, the
award of US$2,531,632.18 representing the Singaporeans’ equity
investment became a judgment debt. As such, it shall bear an
interest of 12% per annum from the finality of the Order until its full
satisfaction.
However, the grant of the said interest does not bar the
Singaporeans from claiming liquidating dividends which may have
suigeneris
accrued from their equity investment after being determined by the
Liquidator. In the liquidation of a corporation, after the payment of
all corporate debts and liabilities, the remaining assets, if any, must
be distributed to the stockholders in proportion to their interests in the
corporation. The share of each stockholder in the assets upon
liquidation is what is known as liquidating dividend.22 Verily, the
Singaporeans are entitled to 11% of the total liquidating dividend,
this being in proportion to their 11% interest of the total subscribed
capital stock of PaBC.
Anent the fourth issue, the Court is unable to determine the veracity
of the alleged overpayments in the absence of verified records on
the total payments made in favor of the Singaporeans. The award of
the Court of Appeals of P56,034,877.04 representing uncollected
interest is likewise unsubstantiated because it was not shown how the
amount was derived.
To resolve this question of fact, the case is hereby remanded to the

trial court to recompute the payments vis-à-vis the total amount due
the Singaporeans, also considering the undisputed award of 12%
interest per annum on the judgment debt of US$2,531,632.18 to be
reckoned from 22 October 1992,23 when the 11 September 1992
Order became final, until its full satisfaction.
WHEREFORE, the decision of the Court of Appeals of 31 January 2002

in CA-G.R. SP No. 47878 is hereby AFFIRMED insofar as the
respondents ANG ENG JOO, ANG KEONG LAN, and E.J. ANG
INTERNATIONAL, LTD., are entitled to the payment of 12% interest per
annum in the form of actual or compensatory damages on the
judgment award of US$2,531,632.18 to run from 22 October 1992,
when the 11 September 1992 Order of the Regional Trial Court of
Manila, Branch 31, became final and executory, until the amount is
fully paid. The said decision is, however, MODIFIED as follows:
1. The award of interest at the rate of 6% per annum as actual

or compensatory damages from 15 October 1981 until the
closure of PaBC is hereby deleted for lack of basis without
prejudice, however, to liquidating dividends or interests as may
be determined by the Liquidator.
2. The Regional Trial Court of Manila, Branch 31, is hereby

directed to make a recomputation of all the total amounts
paid by the petitioner Liquidator in favor of the private
respondent Singaporeans taking into account the exact
amount due them, and to issue the proper orders for payment,
if warranted. The amount due shall include the 12% rate of
legal interests on the judgment debt of US$2,531,632.18.
SO ORDERED.
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Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.
Footnotes
1 Rollo, 463.
2Pacific Banking Corporation Employees Organization v. Court
of Appeals, G.R. Nos. 109373 and 112991, 20 March 1995, 242
SCRA 492, 498.
3 Id.
4 Rollo, 94, 104.
5 Id., 104.
6 Id., 126-138.
7 Id., 139.
8 Id., 140-171.
9Id., 55-56. Per Associate Justice Bienvenido L. Reyes, with
Presiding Justice Ma. Alicia Austria-Martinez (now Supreme
Court Associate Justice) and Associate Justice Roberto A.
Barrios concurring.
10 Rollo, 82-83.
11 Id., 86-92.
12 Rollo, 24-25.
13 G.R. No. 97412, 12 July 1994, 234 SCRA 78.
14 Section 1, Rule 65, 1997 Rules of Civil Procedure.
15Montecillo v. Civil Service Commission, G.R. No. 131954, 28
June 2001, 360 SCRA 99, 104.
16 SECTION 1. How to compute time. - In computing any period
of time prescribed or allowed by these Rules, or by order of the
court, or by any applicable statute, the day of the act or event
from which the designated period of time begins to run is to be
excluded and the date of performance included. If the last
day of the period, as thus computed falls on a Saturday, a
Sunday, or a legal holiday in the place where the court sits, the
time shall not run until the next working day (Rule 22 of the 1997
Rules of Civil Procedure).
suigeneris
17Padillo v. Court of Appeals, G.R. No. 119707, 29 November
2001, 371 SCRA 27, citing Zarate v. Director of Lands, 39 Phil.
747, 749-750 (1919).
Id.; See also Esperas v. Court of Appeals, G.R. No. 121182, 2

18
October 2000, 341 SCRA 583.

19 Rollo, 135.
20Eastern Shipping Lines, Inc. v. Court of Appeals, supra note
13, at 95-97.
21 Black’s Law Dictionary 741 (5th ed.).
222 Jose Campos, Jr., and Maria Clara L. Campos, The
corporation Code 417 (1990 ed).
23 The Liquidator received the Order of 11 September 1992 on
16 September 1992. On 30 September 1992, he filed a motion
for reconsideration, which was denied in the liquidation court’s
Order of 2 October 1992. He received the denial order on 5
October 1992. From 16 September 1992 until 30 September
1992, the period for him to appeal had run for 14 days but was
tolled by the motion for reconsideration. It commenced to run
again on 5 October 1992 upon his receipt of the denial of his
motion for reconsideration. He, therefore, had 16 days more or
until 21 October 1992 to perfect his appeal. While he filed the
notice of appeal on 14 October 1992, which was within the 30-
day appeal period, he failed to file the record on appeal.
Having failed to do so, the 11 September 1992 order became
final and executory on 22 October 1992 (see Pacific Banking
Corporation Employees Organization v. Court of Appeals, supra
note 2, at 498).

suigeneris

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Table of Contents

1. Monfort Hermanos Agricultural Development Corp vs 152542; 155472

Corporation Law/alfred0 Page 1 of 1509

Corporation Law/alfred0 Page 2 of 1509

Corp Law Cases

Monfort hermanos Agricultural development corporation vs Monfort

G.R. No. 152542 July 8, 2004

MONFORT HERMANOS AGRICULTURAL DEVELOPMENT

G.R. No. 155472 July 8, 2004

ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON,

Corporation Law/alfred0 Page 3 of 1509

Before the Court are consolidated petitions for review of the

Monfort Hermanos Agricultural Development Corporation, a

In 1997, the group of Antonio Monfort III, through force and

In G.R. No. 155472:

On April 10, 1997, the Corporation, represented by its President, Ma.

The group of Antonio Monfort III filed a motion to dismiss contending,

Corporation Law/alfred0 Page 4 of 1509

The motion for reconsideration filed by the group of Antonio Monfort

In G.R. No. 152542:

On April 21, 1997, Ma. Antonia M. Salvatierra filed on behalf of the

On February 18, 1998, the MTC of Cadiz City rendered a decision

Corporation Law/alfred0 Page 5 of 1509

The focal issue in these consolidated petitions is whether or not Ma.

A corporation has no power except those expressly conferred on it

Corollary thereto, corporations are required under Section 26 of the

xxx xxx xxx

2. A General Information Sheet shall be filed with this

2.A. Should a director, trustee or officer die, resign or in

Corporation Law/alfred0 Page 6 of 1509

The General Information Sheet shall state, among others, the

1. Ma. Antonia M. Salvatierra (Chairman);

2. Ramon H. Monfort (Member);

3. Antonio H. Monfort, Jr., (Member);

4. Joaquin H. Monfort (Member);

5. Francisco H. Monfort (Member) and

6. Jesus Antonio H. Monfort (Member).20

There is thus a doubt as to whether Paul M. Monfort, Yvete M.

In Premium Marble Resources, Inc. v. Court of Appeals,22 the Court

Petitioner, through the first set of officers, viz., Mario Zavalla,

Corporation Law/alfred0 Page 7 of 1509

Later on, petitioner submitted its Articles of Incorporation dated

However, it appears from the general information sheet and

Alberto C. Nograles — President/Director

Fernando D. Hilario — Vice President/Director

Augusto I. Galace — Treasurer

Jose L.R. Reyes — Secretary/Director

Pido E. Aguilar — Director

Saturnino G. Belen, Jr. — Chairman of the Board.

While the Minutes of the Meeting of the Board on April 1, 1982

We agree with the finding of public respondent Court of

Corporation Law/alfred0 Page 8 of 1509

Sec. 26 of the Corporation Code provides, thus:

"Sec. 26. Report of election of directors, trustees and

Evidently, the objective sought to be achieved by Section 26 is

The claim, therefore, of petitioners as represented by Atty.

To correct the alleged error in the General Information Sheet, the

Corporation Law/alfred0 Page 9 of 1509

What further militates against the purported election of those who

Considering the foregoing, we find that Ma. Antonia M. Salvatierra

WHEREFORE, in view of all the foregoing, the petition in G.R. No.

Davide, Jr., C.J., (Chairman), Panganiban, Carpio, and Azcuna, JJ.,

Monfort Hermanos Agricultural Development Corp. vs Monfort III