Batch 2 Corpo Cases

8/13/2019 Batch 2 Corpo Cases

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G.R. No. 161886 March 16, 2007

FILIPINAS PORT SERVICES, INC., represented by stockholders, ELIODORO C. CRUZ andMINDANAO 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.

D E C I S I O N

GARCIA, J.:

Assailed and sought to be set aside in this petition for review on certiorari is the Decision1 dated19 January 2004 of the Court of Appeals (CA) in CA-G.R. CV No. 73827, reversing an earlierdecision of the Regional Trial Court (RTC) of Davao City and accordingly dismissing the derivativesuit instituted by petitioner Eliodoro C. Cruz for and in behalf of the stockholders of co-petitionerFilipinas Port Services, Inc. (Filport, hereafter).

The case is actually an intra-corporate dispute involving Filport, a domestic corporation engagedin 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 unresolvedfor 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 andconsistent with R.A. No. 8799, the case was transferred to the RTC of Manila, Branch 14, sittingas a corporate court. Subsequently, upon respondents’ motion, the case eventually landed at theRTC 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. CVNo. 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 hisbid 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 of the followingpositions 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 fromthose 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 whatspecific action/actions the board had taken on the letter. Evidently, whatever action/actions theboard took did not sit well with Cruz.

On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders, among whichis herein co-petitioner Mindanao Terminal and Brokerage Services, Inc. (Minterbro), filed with theSEC a petition3 which he describes as a derivative suit against the herein respondents who werethen the incumbent members of Filport’s Board of Directors, for alleged acts of mismanagementdetrimental 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 theboard with compensation of P500.00 for each member per meeting, an office which, to

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Cruz, is not provided for in the by-laws of the corporation and whose function merelyduplicates those of the President and General Manager;

2. increase in the emoluments of the Chairman, Vice-President, Treasurer and AssistantGeneral Manager which increases are greatly disproportionate to the volume andcharacter 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 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 BoardChairman, with Fortunato V. de Castro and Arsenio Lopez Chua elected to the same, thedirectors elected/appointed thereto not doing any work to deserve the monthlyremuneration of P13,050.00 each.

In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged that despite demandsmade upon the respondent members of the board of directors to desist from creating the positionsin question and to account for the amounts incurred in creating the same, the demands wereunheeded. Cruz thus prayed that the respondent members of the board of directors be made topay Filport, jointly and severally, the sums of money variedly representing the damages incurredas a result of the creation of the offices/positions complained of and the aggregate amount of thequestioned increased salaries.

In their common Answer with Counterclaim,4 the respondents denied the allegations ofmismanagement and materially averred as follows:

1. the creation of the executive committee and the grant of per diems for the attendance ofeach member are allowed under the by-laws of the corporation;

2. the increases in the salaries/emoluments of the Chairman, Vice-President, Treasurerand Assistant General Manager were well within the financial capacity of the corporationand well-deserved by the officers elected thereto; and

3. the positions of AVPs for Corporate Planning, Operations, Finance and Administrationwere already in existence during the tenure of Cruz as president of the corporation, andwere 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 theChairman and the President, rendered services to deserve their compensation.

In the same Answer, respondents further averred that Cruz and his co-petitioner Minterbro, whileadmittedly stockholders of Filport, have no authority nor standing to bring the so-called "derivativesuit" for and in behalf of the corporation; that respondent Mary Jean D. Co has already ceased tobe a corporate director and so with Fortunato V. de Castro, one of those holding an assailedposition; and that no demand to cease and desist from further committing the acts complained ofwas 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, asrepresented by Cruz and Minterbro, failed to exhaust remedies for redress within the corporationbefore bringing the suit; and (3) the petition does not show that the stockholders bringing the suitare joined as nominal parties. In support of their counterclaim, respondents averred that Cruz filedthe 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 along period of time. With the enactment of R.A. No. 8799, the case was first turned over to theRTC of Manila, Branch 14, sitting as a corporate court. Thereafter, on respondents’ motion, it waseventually 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 ofthe corporation since the board is the governing body; and (2) the increases in the salaries of theboard chairman, vice-president, treasurer and assistant general manager are reasonable, the trialcourt nonetheless rendered judgment against the respondents by ordering the directors holdingthe positions of Assistant Vice President for Corporate Planning, Special Assistant to thePresident and Special Assistant to the Board Chairman to refund to the corporation the salariesthey have received as such officers "considering that Filipinas Port Services is not a big










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corporation requiring multiple executive positions" and that said positions "were just created foraccommodation." 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 totalamount of salaries he received as assistant vice president for corporate planning; and likewiseordering Fortunato V. de Castro and Arsenio Lopez Chua under the fourth cause of action torestore 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 theboard who created their positions are subsidiarily liable.

The counter claim is dismissed.

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 thatthe creation of the positions of Assistant Vice President for Corporate Planning, Special Assistantto the President and Special Assistant to the Board Chairman was merely for accommodationpurposes, 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 decisionis REVERSED andSET ASIDE, and a new one entered DISMISSING Civil Case No. 28,552-2001with no pronouncement as to costs.

SO ORDERED.

Intrigued, and quite understandably, by the fact that, in its decision, the CA, before proceeding toaddress the merits of the appeal, prefaced its disposition with the statement reading "[T]he appealis bereft of merit,"7 thereby contradicting the very fallo of its own decision and the discussionsmade in the body thereof, respondents filed with the appellate court a Motion For Nunc Pro TuncOrder ,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 therespondents’ 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 formulatethe issues as follows:

1. Whether the CA erred in holding that Filport’s Board of Directors acted within its powersin creating the executive committee and the positions of AVPs for Corporate Planning,Operations, Finance and Administration, and those of the Special Assistants to thePresident 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 tothe Board Chairman were created merely for accommodation, and (b) thesalaries/emoluments corresponding to said positions were actually paid to and received bythe directors appointed thereto.

For their part, respondents, aside from questioning the propriety of the instant petition as the sameallegedly raises only questions of fact and not of law, also put in issue the purported derivativenature 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, onlyquestions of law may be raised and passed upon by the Court. Factual findings of the CA arebinding and conclusive and will not be reviewed or disturbed on appeal .10 Of course, the rule is notcast in stone; it admits of certain exceptions, such as when the findings of fact of the appellate





















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court are at variance with those of the trial court,11 as here. For this reason, and for a proper andcomplete 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 CorporationCode12 explicitly provides that unless otherwise provided therein, the corporate powers of allcorporations formed under the Code shall be exercised, all business conducted and all property ofthe corporation shall be controlled and held by a board of directors. Thus, with the exception onlyof some powers expressly granted by law to stockholders (or members, in case of non-stockcorporations), 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 thecorporation within the scope of its charter, i.e., its articles of incorporation, by-laws and relevantprovisions of law. Verily, the authority of the board of directors is restricted to the management ofthe regular business affairs of the corporation, unless more extensive power is expresslyconferred.

The raison d’etre behind the conferment of corporate powers on the board of directors is not loston the Court. Indeed, the concentration in the board of the powers of control of corporate businessand of appointment of corporate officers and managers is necessary for efficiency in any largeorganization. Stockholders are too numerous, scattered and unfamiliar with the business of acorporation to conduct its business directly. And so the plan of corporate organization is for thestockholders to choose the directors who shall control and supervise the conduct of corporatebusiness.13

In the present case, the board’s creation of the positions of Assistan t Vice Presidents forCorporate Planning, Operations, Finance and Administration, and those of the Special Assistantsto the President and the Board Chairman, was in accordance with the regular business operationsof Filport as it is authorized to do so by the corporation’s by-laws, pursuant to the CorporationCode.

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 acorporation must formally organize by the election of a president, who shall be a director, atreasurer 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 Filpor t14 provides the following:

Officers of the corporation, as provided for by the by-laws, shall be elected by the board ofdirectors 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, aSecretary, a Treasurer, a General Manager and such other officers as the Board of Directors mayfrom time to time provide, and these officers shall be elected to hold office until their successorsare elected and qualified. (Emphasis supplied.)

Likewise, the fixing of the corresponding remuneration for the positions in question is provided forin 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 ofan executive committee. Under Section 3515 of the Corporation Code, the creation of an executivecommittee 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 ofthe 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 asthe board of directors and in effect acting for the board itself, should be distinguished from othercommittees which are within the competency of the board to create at anytime and whose actionsrequire ratification and confirmation by the board.16 Another reason is that, ratiocinated by both thetwo (2) courts below, the Board of Directors has the power to create positions not provided for inFilport’s bylaws since the board is the corporation’s governing body, clearly upholding the powerof its board to exercise its prerogatives in managing the business affairs of the corporation.


























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As well, it may not be amiss to point out that, as testified to and admitted by petitioner Cruzhimself, it was during his incumbency as Filport president that the executive committee in questionwas 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 thecreation of the aforesaid offices, Cruz is virtually precluded from suing to declare such acts of theboard as invalid or illegal. And it makes no difference that he sues in behalf of himself and of theother stockholders. Indeed, as his voice was not heard in protest when he was still Filport’spresident, raising a hue and cry only now leads to the inevitable conclusion that he did so out ofspite 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 oftheir work, the Court, after a judicious scrutiny of the increase vis-à-vis the value of the servicesrendered to the corporation by the officers concerned, agrees with the findings of both the trial andappellate courts as to the reasonableness and fairness thereof.

Continuing, petitioners contend that the CA did not appreciate their evidence as to the alleged actsof mismanagement by the then incumbent board. A perusal of the records, however, reveals thatpetitioners merely relied on the testimony of Cruz in support of their bold claim ofmismanagement. To the mind of the Court, Cruz’ testimony on the matter of mismanagement isbereft of any foundation. As it were, his testimony consists merely of insinuations of allegedwrongdoings 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 corporatedamages and/or business losses, still the respondents may not be held liable in the absence, ashere, 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 ornegligence, directors and/or officers are not liable.17 For them to be held accountable, themismanagement and the resulting losses on account thereof are not the only matters to beproven; it is likewise necessary to show that the directors and/or officers acted in bad faith andwith malice in doing the assailed acts. Bad faith does not simply connote bad judgment ornegligence; 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 natureof fraud.18 We have searched the records and nowhere do we find a "dishonest purpose" or "somemoral obliquity," or "conscious doing of a wrong" on the part of the respondents that "partakes ofthe nature of fraud."

We thus extend concurrence to the following findings of the CA, affirmatory of those of the trialcourt:

xxx As a matter of fact, it was during the term of appellee Cruz, as president and director, that theexecutive committee was created. What is more, it was appellee himself who moved for thecreation of the positions of assistant vice presidents for operations, for finance, and foradministration. 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 generalmanager are indeed reasonable enough in view of the responsibilities assigned to them, and thespecial knowledge required, to be able to effectively discharge their respective functions andduties.

Surely, factual findings of trial courts, especially when affirmed by the CA, are binding andconclusive on this Court.

There is, however, a factual matter over which the CA and the trial court parted ways. We refer tothe 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 theBoard 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 ascompensation.

On the other hand, the CA took issue with the trial court and ruled that Cruz’s accommodationtheory is not based on facts and without any evidentiary substantiation.











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We concur with the line of the appellate court. For truly, aside from Cruz’s bare and self -servingtestimony, no other evidence was presented to show the fact of "accommodation." By itself, thetestimony of Cruz is not enough to support his claim that accommodation was the underlyingfactor behind the creation of the aforementioned three (3) positions.

It is elementary in procedural law that bare allegations do not constitute evidence adequate tosupport a conclusion. It is basic in the rule of evidence that he who alleges a fact bears the burdenof proving it by the quantum of proof required. Bare allegations, unsubstantiated by evidence, arenot 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.

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Besides, the determination of the necessity for additional offices and/or positions in a corporationis a management prerogative which courts are not wont to review in the absence of any proof thatsuch 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 Courtto determine the propriety or impropriety of the creation of offices therein and the grant of salaryincreases to officers thereof. Such are corporate and/or business decisions which only thecorporation’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 thebusiness manager of the corporation, and the court is without authority to substitute its judgmentfor that of the board, and as long as it acts in good faith and in the exercise of honest judgment inthe 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 theissues raised in the court of origin when it ruled on the absence of receipt of actual payment of thesalaries/emoluments pertaining to the positions of Assistant Vice-President for CorporatePlanning, 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 thetrial court, as in fact, the latter allegedly admitted the same in their Answer With Counterclaim.

We are not persuaded.

By claiming that Filport suffered damages because the directors appointed to the assailedpositions are not doing anything to deserve their compensation, petitioners are saddled with theburden of proving that salaries were actually paid. Since the trial court, in effect, found that thepetitioners successfully proved payment of the salaries when it directed the reimbursements of thesame, respondents necessarily have to raise the issue on appeal. And the CA rightly resolved theissue when it found that no evidence of actual payment of the salaries in question was actuallyadduced. Respondents’ alleged admission of the fact of payment cannot be inferred from areading of the pertinent portions of the parties’ respective initiatory pleadings. Respondents’allegations in their Answer With Counterclaim that the officers corresponding to the positionscreated "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, theaverment 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 dulyproven, there is no evidentiary or factual basis for the trial court to direct respondents to makereimbursements 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 lodgedwith its board of directors or trustees. But an individual stockholder may be permitted to institute aderivative suit in behalf of the corporation in order to protect or vindicate corporate rightswhenever the officials of the corporation refuse to sue, or when a demand upon them to file thenecessary action would be futile because they are the ones to be sued, or because they holdcontrol of the corporation.22 In such actions, the corporation is the real party-in-interest while thesuing stockholder, in behalf of the corporation, is only a nominal party.23























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Here, the action below is principally for damages resulting from alleged mismanagement of theaffairs of Filport by its directors/officers, it being alleged that the acts of mismanagement aredetrimental to the interests of Filport. Thus, the injury complained of primarily pertains to thecorporation so that the suit for relief should be by the corporation. However, since the ones to besued are the directors/officers of the corporation itself, a stockholder, like petitioner Cruz, mayvalidly institute a "derivative suit" to vindicate the alleged corporate injury, in which case Cruz isonly a nominal party while Filport is the real party-in-interest. For sure, in the prayer portion ofpetitioners’ 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 thiscase, to wit:

a) the party bringing suit should be a shareholder as of the time of the act or transactioncomplained 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 boardof 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 havingbeen, or being caused to the corporation and not to the particular stockholder bringing thesuit.24

Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought without success to haveits board of directors remedy what he perceived as wrong when he wrote a letter requesting theboard to do the necessary action in his complaint; and (3) the alleged wrong was in truth a wrongagainst the stockholders of the corporation generally, and not against Cruz or Minterbro, inparticular. In the end, it is Filport, not Cruz which directly stands to benefit from the suit. And whileit is true that the complaining stockholder must show to the satisfaction of the court that he hasexhausted all the means within his reach to attain within the corporation itself the redress for hisgrievances, or actions in conformity to his wishes, nonetheless, where the corporation is under thecomplete control of the principal defendants, as here, there is no necessity of making a demandupon the directors. The reason is obvious: a demand upon the board to institute an action andprosecute 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 itsway to the RTC of Davao City as Civil Case No. 28,552-2001, is a derivative suit of which Cruzhas the necessary legal standing to institute.

WHEREFORE, the petition is DENIED and the challenged decision of the CA is AFFIRMED in allrespects.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 157802 October 13, 2010

MATLING INDUSTRIAL AND COMMERCIAL CORPORATION, RICHARD K. SPENCER,CATHERINE SPENCER, AND ALEX MANCILLA, Petitioners,vs.RICARDO R. COROS, Respondent.

D E C I S I O N

BERSAMIN, J.:

This case reprises the jurisdictional conundrum of whether a complaint for illegal dismissal iscognizable by the Labor Arbiter (LA) or by the Regional Trial Court (RTC). The determination of

whether the dismissed officer was a regular employee or a corporate officer unravels theconundrum. In the case of the regular employee, the LA has jurisdiction; otherwise, the RTCexercises the legal authority to adjudicate.

In this appeal via petition for review on certiorari, the petitioners challenge the decision datedSeptember 13, 20021 and the resolution dated April 2, 2003,2 both promulgated in C.A.-G.R. SPNo. 65714 entitled Matling Industrial and Commercial Corporation, et al. v. Ricardo R. Coros andNational Labor Relations Commission, whereby by the Court of Appeals (CA) sustained the rulingof the National Labor Relations Commission (NLRC) to the effect that the LA had jurisdiction




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because the respondent was not a corporate officer of petitioner Matling Industrial andCommercial Corporation (Matling).

Antecedents

After his dismissal by Matling as its Vice President for Finance and Administration, the respondentfiled on August 10, 2000 a complaint for illegal suspension and illegal dismissal against Matlingand some of its corporate officers (petitioners) in the NLRC, Sub-Regional Arbitration Branch XII,Iligan City.3

The petitioners moved to dismiss the complaint,4 raising the ground, among others, that thecomplaint pertained to the jurisdiction of the Securities and Exchange Commission (SEC) due tothe controversy being intra-corporate inasmuch as the respondent was a member of Matling’sBoard of Directors aside from being its Vice-President for Finance and Administration prior to histermination.

The respondent opposed the petitioners’ motion to dismiss,5 insisting that his status as a memberof Matling’s Board of Directors was doubtful, considering that he had not been formally elected assuch; that he did not own a single share of stock in Matling, considering that he had been made tosign in blank an undated indorsement of the certificate of stock he had been given in 1992; thatMatling had taken back and retained the certificate of stock in its custody; and that even assumingthat he had been a Director of Matling, he had been removed as the Vice President for Financeand Administration, not as a Director, a fact that the notice of his termination dated April 10, 2000showed.

On October 16, 2000, the LA granted the petitioners’ motion to dismiss,6 ruling that the respondentwas a corporate officer because he was occupying the position of Vice President for Finance and

Administration and at the same time was a Member of the Board of Directors of Matling; and that,consequently, his removal was a corporate act of Matling and the controversy resulting from suchremoval was under the jurisdiction of the SEC, pursuant to Section 5, paragraph (c) of PresidentialDecree No. 902.

Ruling of the NLRC

The respondent appealed to the NLRC,7 urging that:

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THE HONORABLE LABOR ARBITER COMMITTED GRAVE ABUSE OF DISCRETIONGRANTING APPELLEE’S MOTION TO DISMISS WITHOUT GIVING THE APPELLANT ANOPPORTUNITY TO FILE HIS OPPOSITION THERETO THEREBY VIOLATING THE BASICPRINCIPLE OF DUE PROCESS.

II

THE HONORABLE LABOR ARBITER COMMITTED AN ERROR IN DISMISSING THE CASE

FOR LACK OF JURISDICTION.

On March 13, 2001, the NLRC set aside the dismissal, concluding that the respondent’s complaintfor illegal dismissal was properly cognizable by the LA, not by the SEC, because he was not acorporate officer by virtue of his position in Matling, albeit high ranking and managerial, not beingamong the positions listed in Matling’s Constitution and By-Laws.8 The NLRC disposed thuswise:

WHEREFORE, the Order appealed from is SET ASIDE. A new one is entered declaring andholding that the case at bench does not involve any intracorporate matter. Hence, jurisdiction tohear and act on said case is vested with the Labor Arbiter, not the SEC, considering that theposition of Vice-President for Finance and Administration being held by complainant-appellant isnot listed as among respondent's corporate officers.

Accordingly, let the records of this case be REMANDED to the Arbitration Branch of origin in orderthat the Labor Arbiter below could act on the case at bench, hear both parties, receive theirrespective evidence and position papers fully observing the requirements of due process, andresolve the same with reasonable dispatch.

SO ORDERED.



























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The petitioners sought reconsideration,9 reiterating that the respondent, being a member of theBoard of Directors, was a corporate officer whose removal was not within the LA’s jurisdiction.

The petitioners later submitted to the NLRC in support of the motion for reconsideration thecertified machine copies of Matling’s Amended Articles of Incorporation and By Laws to prove thatthe President of Matling was thereby granted "full power to create new offices and appoint theofficers thereto, and the minutes of special meeting held on June 7, 1999 by Matling’s Board ofDirectors to prove that the respondent was, indeed, a Member of the Board of Directors.10

Nonetheless, on April 30, 2001, the NLRC denied the petitioners’ motion for reconsideration.11

Ruling of the CA

The petitioners elevated the issue to the CA by petition for certiorari, docketed as C.A.-G.R. No.SP 65714, contending that the NLRC committed grave abuse of discretion amounting to lack of

jurisdiction in reversing the correct decision of the LA.

In its assailed decision promulgated on September 13, 2002,12 the CA dismissed the petition forcertiorari, explaining:

For a position to be considered as a corporate office, or, for that matter, for one to be considered

as a corporate officer, the position must, if not listed in the by-laws, have been created by thecorporation's board of directors, and the occupant thereof appointed or elected by the same boardof directors or stockholders. This is the implication of the ruling in Tabang v. National LaborRelations Commission, which reads:

"The president, vice president, secretary and treasurer are commonly regarded as the principal orexecutive officers of a corporation, and modern corporation statutes usually designate them as theofficers of the corporation. However, other offices are sometimes created by the charter or by-laws

of a corporation, or the board of directors may be empowered under the by-laws of a corporation

to create additional offices as may be necessary.

It has been held that an 'office' is created by the charter of the corporation and the officer iselected by the directors or stockholders. On the other hand, an 'employee' usually occupies no

office and generally is employed not by action of the directors or stockholders but by the managing

officer of the corporation who also determines the compensation to be paid to such employee."

This ruling was reiterated in the subsequent cases of Ongkingco v. National Labor RelationsCommission and De Rossi v. National Labor Relations Commission.

The position of vice-president for administration and finance, which Coros used to hold in thecorporation, was not created by the corporation’s board of directors but only by its president orexecutive vice-president pursuant to the by-laws of the corporation. Moreover, Coros’ appointmentto said position was not made through any act of the board of directors or stockholders of thecorporation. Consequently, the position to which Coros was appointed and later on removed from,is not a corporate office despite its nomenclature, but an ordinary office in the corporation.

Coros’ alleged illegal dismissal therefrom is, therefore, within the jurisdiction of the labor arbiter.

WHEREFORE, the petition for certiorari is hereby DISMISSED.

SO ORDERED.

The CA denied the petitioners’ motion for reconsideration on April 2, 2003.13

Issue

Thus, the petitioners are now before the Court for a review on certiorari, positing that therespondent was a stockholder/member of the Matling’s Board of Directors as well as its VicePresident for Finance and Administration; and that the CA consequently erred in holding that theLA had jurisdiction.

The decisive issue is whether the respondent was a corporate officer of Matling or not. Theresolution of the issue determines whether the LA or the RTC had jurisdiction over his complaintfor illegal dismissal.























10

Ruling

The appeal fails.

I

The Law on Jurisdiction in Dismissal Cases

As a rule, the illegal dismissal of an officer or other employee of a private employer is properly

cognizable by the LA. This is pursuant to Article 217 (a) 2 of the Labor Code, as amended, whichprovides as follows:

Article 217. Jurisdiction of the Labor Arbiters and the Commission. - (a) Except as otherwiseprovided under this Code, the Labor Arbiters shall have original and exclusive jurisdiction to hearand decide, within thirty (30) calendar days after the submission of the case by the parties fordecision without extension, even in the absence of stenographic notes, the following casesinvolving all workers, whether agricultural or non-agricultural:

1. Unfair labor practice cases;

2. Termination disputes;

3. If accompanied with a claim for reinstatement, those cases that workers may fileinvolving wages, rates of pay, hours of work and other terms and conditions ofemployment;

4. Claims for actual, moral, exemplary and other forms of damages arising fromthe employer-employee relations;

5. Cases arising from any violation of Article 264 of this Code, including questionsinvolving the legality of strikes and lockouts; and

6. Except claims for Employees Compensation, Social Security, Medicare and

maternity benefits, all other claims arising from employer-employee relations,including those of persons in domestic or household service, involving an amountexceeding five thousand pesos (P5,000.00) regardless of whether accompanied

with a claim for reinstatement.

(b) The Commission shall have exclusive appellate jurisdiction over all cases decided byLabor Arbiters.

(c) Cases arising from the interpretation or implementation of collective bargainingagreements and those arising from the interpretation or enforcement of companypersonnel policies shall be disposed of by the Labor Arbiter by referring the same to thegrievance machinery and voluntary arbitration as may be provided in said agreements. (As

amended by Section 9, Republic Act No. 6715, March 21, 1989).

Where the complaint for illegal dismissal concerns a corporate officer, however, the controversyfalls under the jurisdiction of the Securities and Exchange Commission (SEC), because thecontroversy arises out of intra-corporate or partnership relations between and amongstockholders, members, or associates, or 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 thecontroversy concerns their individual franchise or right to exist as such entity; or because thecontroversy involves the election or appointment of a director, trustee, officer, or manager of suchcorporation, partnership, or association.14 Such controversy, among others, is known as an intra-corporate dispute.

Effective on August 8, 2000, upon the passage of Republic Act No. 8799 ,15 otherwise known asThe Securities Regulation Code, the SEC’s jurisdiction over all intra-corporate disputes wastransferred to the RTC, pursuant to Section 5.2 of RA No. 8799, to wit:

5.2. The Commission’s jurisdiction over all cases enumerated under Section 5 of PresidentialDecree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriateRegional Trial Court: Provided , that the Supreme Court in the exercise of its authority maydesignate the Regional Trial Court branches that shall exercise jurisdiction over these cases. TheCommission shall retain jurisdiction over pending cases involving intra-corporate disputes







http://www.chanrobles.com/presidentialdecreeno902-a.htm








11

submitted for final resolution which should be resolved within one (1) year from the enactment ofthis Code. The Commission shall retain jurisdiction over pending suspension ofpayments/rehabilitation cases filed as of 30 June 2000 until finally disposed.

Considering that the respondent’s complaint for illegal dismissal was commenced on August 10,2000, it might come under the coverage of Section 5.2 of RA No. 8799, supra, should it turn outthat the respondent was a corporate, not a regular, officer of Matling.

II

Was the Respondent’s Position of Vice President for Administration and Finance a Corporate Office?

We must first resolve whether or not the respondent’s position as Vice President for Finance and Administration was a corporate office. If it was, his dismissal by the Board of Directors renderedthe matter an intra-corporate dispute cognizable by the RTC pursuant to RA No. 8799.

The petitioners contend that the position of Vice President for Finance and Administration was acorporate office, having been created by Matling’s President pursuant to By-Law No. V, asamended,16 to wit:

BY LAW NO. VOfficers

The President shall be the executive head of the corporation; shall preside over the meetings ofthe stockholders and directors; shall countersign all certificates, contracts and other instruments ofthe corporation as authorized by the Board of Directors; shall have full power to hire and dischargeany or all employees of the corporation; shall have full power to create new offices and to appointthe officers thereto as he may deem proper and necessary in the operations of the corporationand as the progress of the business and welfare of the corporation may demand; shall makereports to the directors and stockholders and perform all such other duties and functions as areincident to his office or are properly required of him by the Board of Directors. In case of theabsence or disability of the President, the Executive Vice President shall have the power toexercise his functions.

The petitioners argue that the power to create corporate offices and to appoint the individuals toassume the offices was delegated by Matling’s Board of Directors to its President through By-LawNo. V, as amended; and that any office the President created, like the position of the respondent,was as valid and effective a creation as that made by the Board of Directors, making the office acorporate office. In justification, they cite Tabang v. National Labor Relations Commission,17 whichheld that "other offices are sometimes created by the charter or by-laws of a corporation, or theboard of directors may be empowered under the by-laws of a corporation to create additionalofficers as may be necessary."

The respondent counters that Matling’s By-Laws did not list his position as Vice President forFinance and Administration as one of the corporate offices; that Matling’s By -Law No. III listed

only four corporate officers, namely: President, Executive Vice President, Secretary, andTreasurer; 18 that the corporate offices contemplated in the phrase "and such other officers as maybe provided for in the by-laws" found in Section 25 of the Corporation Code should be clearly andexpressly stated in the By-Laws; that the fact that Matling’s By-Law No. III dealt with Directors &Officers while its By-Law No. V dealt with Officers proved that there was a differentiation betweenthe officers mentioned in the two provisions, with those classified under By-Law No. V beingordinary or non-corporate officers; and that the officer, to be considered as a corporate officer,must be elected by the Board of Directors or the stockholders, for the President could only appointan employee to a position pursuant to By-Law No. V.

We agree with respondent.

Section 25 of the Corporation Code provides:

Section 25. Corporate officers, quorum.--Immediately after their election, the directors of acorporation must formally organize by the election of a president, who shall be a director, atreasurer who may or may not be a director, a secretary who shall be a resident and citizen of thePhilippines, and such other officers as may be provided for in the by-laws. Any two (2) ormore positions may be held concurrently by the same person, except that no one shall act aspresident and secretary or as president and treasurer at the same time.















12

The directors or trustees and officers to be elected shall perform the duties enjoined on them bylaw and the by-laws of the corporation. Unless the articles of incorporation or the by-laws providefor a greater majority, a majority of the number of directors or trustees as fixed in the articles ofincorporation shall constitute a quorum for the transaction of corporate business, and everydecision of at least a majority of the directors or trustees present at a meeting at which there is aquorum shall be valid as a corporate act, except for the election of officers which shall require thevote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board meetings.

Conformably with Section 25, a position must be expressly mentioned in the By-Laws in order tobe considered as a corporate office. Thus, the creation of an office pursuant to or under a By-Lawenabling provision is not enough to make a position a corporate office. Guerrea v. Lezama,19 thefirst ruling on the matter, held that the only officers of a corporation were those given thatcharacter either by the Corporation Code or by the By-Laws; the rest of the corporate officerscould be considered only as employees or subordinate officials. Thus, it was held in EasycallCommunications Phils., Inc. v. King :20

An "office" is created by the charter of the corporation and the officer is elected by the directors orstockholders. On the other hand, an employee occupies no office and generally is employed notby the action of the directors or stockholders but by the managing officer of the corporation whoalso determines the compensation to be paid to such employee.

In this case, respondent was appointed vice president for nationwide expansion by Malonzo,petitioner’'s general manager, not by the board of directors of petitioner. It was also Malonzo whodetermined the compensation package of respondent. Thus, respondent was an employee, not a"corporate officer." The CA was therefore correct in ruling that jurisdiction over the case wasproperly with the NLRC, not the SEC (now the RTC).

This interpretation is the correct application of Section 25 of the Corporation Code, which plainlystates that the corporate officers are the President, Secretary, Treasurer and such other officersas may be provided for in the By-Laws. Accordingly, the corporate officers in the context of PD No.902-A are exclusively those who are given that character either by the Corporation Code or by thecorporation’s By-Laws.

A different interpretation can easily leave the way open for the Board of Directors to circumventthe constitutionally guaranteed security of tenure of the employee by the expedient inclusion in theBy-Laws of an enabling clause on the creation of just any corporate officer position.

It is relevant to state in this connection that the SEC, the primary agency administering theCorporation Code, adopted a similar interpretation of Section 25 of the Corporation Code in itsOpinion dated November 25, 1993,21to wit:

Thus, pursuant to the above provision (Section 25 of the Corporation Code), whoever are thecorporate officers enumerated in the by-laws are the exclusive Officers of the corporation and theBoard has no power to create other Offices without amending first the corporate By-

laws. However, the Board may create appointive positions other than the positions ofcorporate Officers, but the persons occupying such positions are not considered ascorporate officers within the meaning of Section 25 of the Corporation Code and are notempowered to exercise the functions of the corporate Officers, except those functions lawfullydelegated to them. Their functions and duties are to be determined by the Board ofDirectors/Trustees.

Moreover, the Board of Directors of Matling could not validly delegate the power to create acorporate office to the President, in light of Section 25 of the Corporation Code requiring the Boardof Directors itself to elect the corporate officers. Verily, the power to elect the corporate officerswas a discretionary power that the law exclusively vested in the Board of Directors, and could notbe delegated to subordinate officers or agents.22 The office of Vice President for Finance and

Administration created by Matling’s President pursuant to By Law No. V was an ordinary, not a

corporate, office.

To emphasize, the power to create new offices and the power to appoint the officers to occupythem vested by By-Law No. V merely allowed Matling’s President to create non-corporate officesto be occupied by ordinary employees of Matling. Such powers were incidental to the Pre sident’sduties as the executive head of Matling to assist him in the daily operations of the business.



















13

The petitioners’ reliance on Tabang, supra, is misplaced. The statement in Tabang , to the effectthat offices not expressly mentioned in the By-Laws but were created pursuant to a By-Lawenabling provision were also considered corporate offices, was plainly obiter dictum due to theposition subject of the controversy being mentioned in the By-Laws. Thus, the Court held thereinthat the position was a corporate office, and that the determination of the rights and liabilitiesarising from the ouster from the position was an intra-corporate controversy within the SEC’s

jurisdiction.

In Nacpil v. Intercontinental Broadcasting Corporation,23 which may be the more appropriate ruling,

the position subject of the controversy was not expressly mentioned in the By-Laws, but wascreated pursuant to a By-Law enabling provision authorizing the Board of Directors to create otheroffices that the Board of Directors might see fit to create. The Court held there that the positionwas a corporate office, relying on the obiter dictum in Tabang .

Considering that the observations earlier made herein show that the soundness of their dicta is notunassailable,Tabang and Nacpil should no longer be controlling.

III

Did Respondent’s Status as Director and Stockholder Automatically Convert his Dismissalinto an Intra-Corporate Dispute?

Yet, the petitioners insist that because the respondent was a Director/stockholder of Matling, andrelying onPaguio v. National Labor Relations Commission24 and Ongkingko v. National LaborRelations Commission,25 the NLRC had no jurisdiction over his complaint, considering that anycase for illegal dismissal brought by a stockholder/officer against the corporation was an intra-corporate matter that must fall under the jurisdiction of the SEC conformably with the context ofPD No. 902-A.

The petitioners’ insistence is bereft of basis.

To begin with, the reliance on Paguio and Ongkingko is misplaced. In both rulings, thecomplainants were undeniably corporate officers due to their positions being expressly mentioned

in the By-Laws, aside from the fact that both of them had been duly elected by the respectiveBoards of Directors. But the herein respondent’s position of Vice President for Finance and

Administration was not expressly mentioned in the By-Laws; neither was the position of VicePresident for Finance and Administration created by Matling’s Board of Directors. Lastly, thePresident, not the Board of Directors, appointed him.

True it is that the Court pronounced in Tabang as follows:

Also, an intra-corporate controversy is one which arises between a stockholder and thecorporation. There is no distinction, qualification or any exemption whatsoever. The provision isbroad and covers all kinds of controversies between stockholders and corporations.26

However, the Tabang pronouncement is not controlling because it is too sweeping and does notaccord with reason, justice, and fair play. In order to determine whether a dispute constitutes anintra-corporate controversy or not, the Court considers two elements instead, namely: (a) thestatus or relationship of the parties; and (b) the nature of the question that is the subject of theircontroversy. This was our thrust in Viray v. Court of Appeals:27

The establishment of any of the relationships mentioned above will not necessarily always confer jurisdiction over the dispute on the SEC to the exclusion of regular courts. The statement made inone case that the rule admits of no exceptions or distinctions is not that absolute. The better policyin determining which body has jurisdiction over a case would be to consider not only the status orrelationship of the parties but also the nature of the question that is the subject of theircontroversy.

Not every conflict between a corporation and its stockholders involves corporate matters that onlythe SEC can resolve in the exercise of its adjudicatory or quasi-judicial powers. If, for example, aperson leases an apartment owned by a corporation of which he is a stockholder, there should beno question that a complaint for his ejectment for non-payment of rentals would still come underthe jurisdiction of the regular courts and not of the SEC. By the same token, if one person injuresanother in a vehicular accident, the complaint for damages filed by the victim will not come underthe jurisdiction of the SEC simply because of the happenstance that both parties are stockholders






















14

of the same corporation. A contrary interpretation would dissipate the powers of the regular courtsand distort the meaning and intent of PD No. 902-A.

In another case, Mainland Construction Co., Inc. v. Movilla,28 the Court reiterated thesedeterminants thuswise:

In order that the SEC (now the regular courts) can take cognizance of a case, the controversymust 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 as far as its franchise,permit or license to operate is concerned; and

d) among the stockholders, partners or associates themselves.

The fact that the parties involved in the controversy are all stockholders or that the parties involvedare the stockholders and the corporation does not necessarily place the dispute within the ambit of

the jurisdiction of SEC. The better policy to be followed in determining jurisdiction over a caseshould be to consider concurrent factors such as the status or relationship of the parties or thenature of the question that is the subject of their controversy. In the absence of any one of thesefactors, the SEC will not have jurisdiction. Furthermore, it does not necessarily follow that everyconflict between the corporation and its stockholders would involve such corporate matters as onlythe SEC can resolve in the exercise of its adjudicatory or quasi-judicial powers .29

The criteria for distinguishing between corporate officers who may be ousted from office at will, onone hand, and ordinary corporate employees who may only be terminated for just cause, on theother hand, do not depend on the nature of the services performed, but on the manner of creationof the office. In the respondent’s case, he was supposedly at once an employee, a stockholder,and a Director of Matling. The circumstances surrounding his appointment to office must be fullyconsidered to determine whether the dismissal constituted an intra-corporate controversy or alabor termination dispute. We must also consider whether his status as Director and stockholderhad any relation at all to his appointment and subsequent dismissal as Vice President for Financeand Administration.

Obviously enough, the respondent was not appointed as Vice President for Finance and Administration because of his being a stockholder or Director of Matling. He had started workingfor Matling on September 8, 1966, and had been employed continuously for 33 years until histermination on April 17, 2000, first as a bookkeeper, and his climb in 1987 to his last position asVice President for Finance and Administration had been gradual but steady, as the followingsequence indicates:

1966 – Bookkeeper

1968 – Senior Accountant

1969 – Chief Accountant

1972 – Office Supervisor

1973 – Assistant Treasurer

1978 – Special Assistant for Finance

1980 – Assistant Comptroller

1983 – Finance and Administrative Manager

1985 – Asst. Vice President for Finance and Administration

1987 to April 17, 2000 – Vice President for Finance and Administration











15

Even though he might have become a stockholder of Matling in 1992, his promotion to the positionof Vice President for Finance and Administration in 1987 was by virtue of the length of qualityservice he had rendered as an employee of Matling. His subsequent acquisition of the status ofDirector/stockholder had no relation to his promotion. Besides, his status of Director/stockholderwas unaffected by his dismissal from employment as Vice President for Finance and

Administration.1avvphi1

In Prudential Bank and Trust Company v. Reyes,30 a case involving a lady bank manager who hadrisen from the ranks but was dismissed, the Court held that her complaint for illegal dismissal was

correctly brought to the NLRC, because she was deemed a regular employee of the bank. TheCourt observed thus:

It appears that private respondent was appointed Accounting Clerk by the Bank on July 14, 1963.From that position she rose to become supervisor. Then in 1982, she was appointed AssistantVice-President which she occupied until her illegal dismissal on July 19, 1991. The bank’scontention that she merely holds an elective position and that in effect she is not a regularemployee is belied by the nature of her work and her length of service with the Bank. Asearlier stated, she rose from the ranks and has been employed with the Bank since 1963 until thetermination of her employment in 1991. As Assistant Vice President of the Foreign Department ofthe Bank, she is tasked, among others, to collect checks drawn against overseas banks payable inforeign currency and to ensure the collection of foreign bills or checks purchased, including thesigning of transmittal letters covering the same. It has been stated that "the primary standard of

determining regular employment is the reasonable connection between the particular activityperformed by the employee in relation to the usual trade or business of the employer. Additionally,"an employee is regular because of the nature of work and the length of service, not because ofthe mode or even the reason for hiring them." As Assistant Vice-President of the ForeignDepartment of the Bank she performs tasks integral to the operations of the bank and her lengthof service with the bank totaling 28 years speaks volumes of her status as a regular employee ofthe bank. In fine, as a regular employee, she is entitled to security of tenure; that is, her servicesmay be terminated only for a just or authorized cause. This being in truth a case of illegaldismissal, it is no wonder then that the Bank endeavored to the very end to establish loss of trustand confidence and serious misconduct on the part of private respondent but, as will be discussedlater, to no avail.

WHEREFORE, we deny the petition for review on certiorari, and affirm the decision of the Court of Appeals.

Costs of suit to be paid by the petitioners.

SO ORDERED.

G.R. No. 102300. March 17, 1993.

CITIBANK, N.A., petitioner, vs. HON. SEGUNDINO G. CHUA, SANTIAGO M. KAPUNAN andLUIS L. VICTOR, ASSOCIATE JUSTICES OF THE HON. COURT OF APPEALS, THIRDDIVISION, MANILA, HON. LEONARDO B. CANARES, Judge of Regional, Trial Court of Cebu,

Branch 10, and SPOUSES CRESENCIO AND ZENAIDA VELEZ, respondents.

SYLLABUS

1. COMMERCIAL LAW; PRIVATE CORPORATIONS; LEVELS OF CONTROL IN CORPORATEHIERARCHY; BOARD OF DIRECTORS MAY VALIDLY DELEGATE SOME FUNCTIONS TOINDIVIDUAL OFFICERS OR AGENTS. — In the corporate hierarchy, there are three levels ofcontrol: (1) the board of directors, which is responsible for corporate policies and the generalmanagement of the business affairs of the corporation; (2) the officers, who in theory execute thepolicies laid down by the board, but in practice often have wide latitude in determining the courseof business operations; and (3) the stockholders who have the residual power over fundamentalcorporate changes, like amendments of the articles of incorporation. However, just as a naturalperson 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.

2. ID.; ID.; HOW CORPORATE POWERS CONFERRED UPON CORPORATE OFFICERS OR AGENTS; EXERCISE OF POWERS INCIDENTAL TO EXPRESS POWERS CONFERRED. — Corporate powers may be directly conferred upon corporate officers or agents by statute, thearticles of incorporation, the by-laws or by resolution or other act of the board of directors. Inaddition, an officer who is not a director may also appoint other agents when so authorized by theby-laws or by the board of directors. Such are referred to as express powers. There are alsopowers incidental to express powers conferred. It is a fundamental principle in the law of agency







16

that every delegation of authority, whether general or special, carries with it, unless the contrarybe expressed, implied authority to do all of those acts, naturally and ordinarily done in such cases,which are reasonably necessary and proper to be done in order to carry into effect the mainauthority conferred. Since the by-laws are a source of authority for corporate officers and agentsof the corporation, a resolution of the Board of Directors of Citibank appointing an attorney in factto represent and bind it during the pre-trial conference of the case at bar is not necessary becauseits by-laws allow its officers, the Executing Officer and the Secretary Pro-Tem, to execute a powerof attorney to a designated bank officer, William W. Ferguson in this case, clothing him withauthority to direct and manage corporate affairs.

3. ID.; ID.; ADOPTION OF BY-LAWS; PROVISION OF SECTION 46 OF CORPORATION CODEREFERRING TO EFFECTIVITY OF CORPORATE BY-LAWS APPLICABLE ONLY TODOMESTIC CORPORATIONS. — A corporation can submit its by-laws, prior to incorporation, orwithin one month after receipt of official notice of the issuance of its certificate of incorporation bythe SEC. When the third paragraph of the above provision mentions "in all cases", it can only referto these two options; i.e., whether adopted prior to incorporation or within one month afterincorporation, the by-laws shall be effective only upon the approval of the SEC. But even moreimportant, said provision starts with the phrase "Every corporation formed under this Code", whichcan only refer to corporations incorporated in the Philippines. Hence, Section 46, in so far as itrefers to the effectivity of corporate by-laws, applies only to domestic corporations and not toforeign corporations.

4. ID.; FOREIGN CORPORATIONS; ISSUANCE OF LICENSE TO TRANSACT BUSINESS INTHE PHILIPPINES; REQUISITES; GRANT OF LICENSE IN EFFECT APPROVAL BY SEC OFFOREIGN CORPORATION'S BY-LAWS. — Section 125 of the same Code requires that a foreigncorporation applying for a license to transact business in the Philippines must submit, among otherdocuments, to the SEC, a copy of its articles of incorporation and by-laws, certified in accordancewith law. Unless these documents are submitted, the application cannot be acted upon by theSEC. In the following section, the Code specifies when the SEC can grant the license applied for.Section 126 provides in part: "SEC. 126. Issuance of a license. — If the Securities and ExchangeCommission is satisfied that the applicant has complied with all the requirements of this Code andother special laws, rules and regulations, the Commission shall issue a license to the applicant totransact business in the Philippines for the purpose or purposes specified in such license . . ."Since the SEC will grant a license only when the foreign corporation has complied with all therequirements of law, it follows that when it decides to issue such license, it is satisfied that theapplicant's by-laws, among the other documents, meet the legal requirements. This, in effect, is anapproval of the foreign corporations by-laws. It may not have been made in express terms, still it isclearly an approval. Therefore, petitioner bank's by-laws, though originating from a foreign

jurisdiction, are valid and effective in the Philippines.

5. CIVIL LAW; AGENCY; SPECIAL POWER OF ATTORNEY; WHEN POWER OF ATTORNEYCOMPREHENSIVE ENOUGH TO INCLUDE AUTHORITY TO APPEAR AT PRE-TRIALCONFERENCE. — It is also error on the part of the Court of Appeals to state that the power ofattorney given to the four (4) Citibank employees is not a special power of attorney as required inparagraph 3, Article 1878 of the Civil Code and Section 1 (a), Rule 20 of the Rules of Court. In thecase of Tropical Homes, Inc. vs. Villaluz, the special power of attorney executed by petitioner banktherein contained the following pertinent terms — "to appear for and in its behalf in the above-

entitled case in all circumstances where its appearance is required and to bind it in all saidinstances". The court ruled that: "Although the power of attorney in question does not specificallymention the authority of petitioner's counsel to appear and bind the petitioner at the pre-trialconference, the terms of said power of attorney are comprehensive enough as to include theauthority to appear for the petitioner at the pre-trial conference."

6. ID.; ID.; ID.; LEGAL COUNSEL APPOINTED TO REPRESENT BANK IN COURT PURSUANTTO BY-LAW PROVISION CONSIDERED AN EMPLOYEE FOR A SPECIAL PURPOSE. —

Attorney was sufficient under the by-law provision authorizing Ferguson to delegate any of hisfunctions to any one or more employees of the petitioner bank. A reasonable interpretation of thisprovision would include an appointment of a legal counsel to represent the bank in court, for,under the circumstances, such legal counsel can be considered, and in fact was considered by thepetitioner bank, an employee for a special purpose. Furthermore, Ferguson, who heads thePhilippine office thousands of miles away from its main office in the United States, must beunderstood to have sufficient powers to act promptly in order to protect the interests of hisprincipal.

7. REMEDIAL LAW; CIVIL PROCEDURE; PRECIPITATE ORDERS OF DEFAULT FROWNEDUPON BY SUPREME COURT; REASON THEREFOR; WHEN PARTY MAY BE PROPERLYDEFAULTED. — We reiterate the previous admonitions of this Court against "precipitate orders ofdefault as these have the effect of denying the litigant the chance to be heard. While there are



17

instances, to be sure, when a party may be properly defaulted, these should be the exceptionsrather than the rule and should be allowed only in clear cases of an obstinate refusal or inordinateneglect to comply with the orders of the court. Absent such a showing, the party must be givenevery reasonable opportunity to present his side and to refute the evidence of the adverse party indeference to due process of law".

8. LEGAL ETHICS; AUTHORITY OF ATTORNEYS TO BIND CLIENTS. — Under Rule 138,Section 23 of the Rules of Court, an attorney has authority to bind his client in any case by anagreement in relation thereto made in writing, and this authority would include taking appeals and

all matters of ordinary judicial procedure. But he cannot, without special authority, compromise hisclient's litigation or receive anything in discharge of a client's claim but the full amount in cash. Thespecial powers of attorney separately executed by Florencia Tarriela and William W. Fergusongranted to J.P. Garcia & Associates are very explicit in their terms as to the counsel's authority inthe case at bar.

D E C I S I O N

CAMPOS, JR., J p:

Petitioner is a foreign commercial banking corporation duly licensed to do business in thePhilippines. Private respondents, spouses Cresencio and Zenaida Velez, were good clients ofpetitioner bank's branch in Cebu until March 14, 1986 when they filed a complaint for specificperformance and damages against it in Civil Case No. CEB-4751 before the Regional Trial Courtof Cebu, Branch 10.

Private respondents alleged in their complaint that the petitioner bank extended to them creditlines sufficiently secured with real estate and chattel mortgages on equipment. They claim thatpetitioner offered them special additional accommodation of Five Million Pesos (P5,000,000.00) tobe availed of in the following manner:

"a. Defendant would and did purchase check or checks from the plaintiffs by exchanging it withdefendant's manager's check on a regular daily basis as reflected in the defendant's own ledgerfurnished to plaintiffs;

b. It was further agreed that on the following day, defendant CITIBANK would again purchase fromthe plaintiffs, check or checks, by exchanging the same with defendant's manager's check, whichcheck, however, will be deposited by the plaintiffs with their other banks to cover the check orchecks previously issued by the plaintiffs mentioned above;

c. The same regular and agreed activity would be undertaken by the plaintiffs and defendantCITIBANK herein every banking day thereafter;" 1

This arrangement started on September 4, 1985 until March 11, 1986, when private respondentstried to exchange with petitioner bank six checks amounting to P3,095,000.00 but petitioner bankallegedly refused to continue with the arrangement even after repeated demands. Instead,petitioner bank suggested to private respondents that the total amount covered by the

"arrangement be restructured to thirty (30) months with prevailing interest rate on the diminishingbalance". 2 Private respondents agreed to such a proposal. Then as a sign of good faith, theyissued and delivered a check for P75,000.00 in favor of petitioner bank which was refused by thelatter demanding instead full payment of the entire amount.

For the failure of petitioner bank to comply with this restructuring agreement private respondentssued for specific performance and damages.

Petitioner bank has a different version of the business relationship that existed between it andprivate respondents. Thus:

". . . starting sometime on September 4 of 1985, he (private respondent Crescencio Velez)

deposited his unfunded personal checks with his current account with the petitioner. But prior todepositing said checks, he would present his personal checks to a bank officer asking the latter tohave his personal checks immediately credited as if it were a cash deposit and at the same timeassuring the bank officer that his personal checks were fully funded. Having already gained thetrust and confidence of the officers of the bank because of his past transactions, the bank's officerwould always accommodate his request. After his requests are granted which is done by way ofthe bank officer affixing his signature on the personal checks, private respondent Cresencio Velezwould then deposit his priorly approved personal checks to his current account and at the sametime withdraw sums of money from said current account by way of petitioner bank's manager's



18

check. Private respondent would then deposit petitioner bank's manager's check to his variouscurrent accounts in other commercial banks to cover his previously deposited unfunded personalchecks with petitioner bank. Naturally, petitioner bank and its officers never discovered that hispersonal check deposits were unfunded. On the contrary, it gave the petitioner bank the falseimpression that private respondent's construction business was doing very well and that he wasone big client who could be trusted. This deceptive and criminal scheme he did every banking daywithout fail from September 4, 1985 up to March 11, 1986. The amounts that he was depositingand withdrawing during this period (September 4, 1985 to March 11, 1986) progressively becamebigger. It started at P46,000.00 on September 4, 1985 and on March 11, 1986 the amount ofdeposit and withdrawal already reached over P3,000,000.00. At this point in time (March 11,1986), the private respondent Cresencio Velez presumably already feeling that sooner or later hewould be caught and that he already wanted to cash in on his evil scheme, decided to run awaywith petitioner's money. On March 11, 1986, he deposited various unfunded personal checkstotalling P3,095,000.00 and requested a bank officer that the same be credited as cash and aftersecuring the approval of said bank officer, deposited his various personal checks in the amount ofP3,095,000.00 with his current account and at the same time withdrew the sum of P3,244,000.00in the form of petitioner's manager's check. Instead of using the proceeds of his withdrawals tocover his unfunded personal checks, he ran away with petitioner bank's money. Thus, privaterespondent Cresencio Velez's personal checks deposited with petitioner bank on March 11, 1986in the total aggregate amount of P3,095,000.00 bounced. The checks bounced after said personalchecks were made the substantial basis of his withdrawing the sum of P3,244,000.00 from hiscurrent account with petitioner bank." 3

Subsequently, on August 19, 1986, petitioner bank filed a criminal complaint against privaterespondents for violation of Batas Pambansa Blg. 22 (Bouncing Checks Law) and estafa (sixcounts) under Article 315 par. 2(d) of the Revised Penal Code. On April 28, 1988, the investigatingfiscal recommended the filing of an information against private respondents for violations of thementioned laws.

On June 13, 1989, petitioner bank submitted its answer to the complaint filed by privaterespondents. In the Order dated February 20, 1990, the case was set for pre-trial on March 30,1990 and petitioner bank was directed to submit its pre-trial brief at least 3 days before the pre-trial conference. Petitioner bank only filed its pre-trial brief on March 30, 1990.

On March 30, 1990, the date of the pre-trial conference, counsel for petitioner bank appeared,presenting a special power of attorney executed by Citibank officer Florencia Tarriela in favor ofpetitioner bank's counsel, the J.P. Garcia & Associates, to represent and bind petitioner bank atthe pre-trial conference of the case at bar.

Inspite of this special power of attorney, counsel for private respondents orally moved to declarepetitioner bank as in default on the ground that the special power of attorney was not executed bythe Board of Directors of Citibank. Petitioner bank was then required to file a written opposition tothis oral motion to declare it as in default. In said opposition petitioner bank attached anotherspecial power of attorney made by William W. Ferguson, Vice President and highest rankingofficer of Citibank, Philippines, constituting and appointing the J.P. Garcia & Associates torepresent and bind the BANK at the pre-trial conference and/or trial of the case of "CresencioVelez, et al. vs. Citibank, N.A.". 4 In an Order dated April 23, 1990, respondent judge denied

private respondents' oral motion to declare petitioner bank as in default and set the continuation ofthe pre-trial conference for May 2, 1990.

On the scheduled pre-trial conference, private respondents reiterated, by way of asking forreconsideration, their oral motion to declare petitioner bank as in default for its failure to appearthrough an authorized agent and that the documents presented are not in accordance with therequirements of the law. Petitioner bank again filed on May 14, 1990 its opposition thereto, statingas follows:

". . . While it has been the practice of Citibank to appoint its counsels as its attorney-in-fact in civilcases because it considers said counsels equivalent to a Citibank employee, yet, in order to avoidfurther arguments on the matter, the defendant Citibank will secure another power of attorney from

Mr. William W. Ferguson in favor of its employee/s who will represent the defendant Citibank inthe pre-trial conferences of this case. As soon as the said special power of attorney is secured,the defendant will present it before this Honorable Court and in pursuance therewith, thedefendant hereby makes a reservation to present such document as soon as available." 5

In compliance with the above promise, petitioner bank filed a manifestation, dated May 23, 1990,attaching therewith a special power of attorney executed by William W. Ferguson in favor ofCitibank employees to represent and bind Citibank on the pre-trial conference of the case at bar. 6



19

On August 15, 1990, respondent judge issued an order declaring petitioner bank as in default.This order, received by petitioner bank on September 27, 1990, cited the following as reason forthe declaration of default:

"Defendant-bank, although a foreign corporation, is bound by Philippine laws when doing andconducting business in the Philippines (Sec. 129, B.P. Blg. 68), and its corporate powers couldonly be exercised by its Board of Directors (Sec. 23, B.P. Blg. 68). The exercise by the Board ofDirectors of such power could only be valid if it bears the approval of the majority of the Board(Sec. 25, par. 2, Corporation Code). The records does not show the requisite document. The

alleged authority (Special Power of Attorney, Annex "A") executed by Mr. William W. Ferguson infavor of the alleged Citibank employees, assuming the same to be a delegable authority, torepresent the defendant in the pre-trial conference, made no mention of J.P. Garcia & Associatesas one of the employees of the defendant.

It stands to reason therefore, that the defendant-bank has no proper representation during the pre-trial conference on May 2, 1990 for purposes of Sec. 2, Rule 20 of the Rules of Court." 7

On October 1, 1990, petitioner bank filed a motion for reconsideration of the above order but itwas denied on December 10, 1990.

Petitioner bank then filed a petition for certiorari, prohibition and mandamus with preliminaryinjunction and/or temporary restraining order with the Court of Appeals. On June 26, 1991, theCourt of Appeals dismissed the petition on the following grounds:

". . . In the first place, petitioner admitted that it did not and could not present a Board resolutionfrom the bank's Board of Directors appointing its counsel, Atty. Julius Z. Neri, as its attorney-in-factto represent and bind it during the pre-trial conference of this case. This admission is contained onpages 12 and 13 of the instant petition.

In the second place, the "By-Laws" of petitioner which on its face authorizes (sic) the appointmentof an attorney-in-fact to represent it in any litigation, has not been approved by the Securities andExchange Commission, as required by Section 46 of the Corporation Code of the Philippines.

Apparently, the "By-Laws" in question was (sic) approved under the laws of the United States, butthere is no showing that the same was given the required imprimatur by the Securities and

Exchange Commission. Since petitioner is a foreign corporation doing business in the Philippines,it is bound by all laws, rules and regulations applicable to domestic corporations (Sec. 129,Corporation Code).

In the third place, no special power of attorney was presented authorizing petitioner's counsel ofrecord, Atty. Julius Neri and/or J.P. Garcia Associates, to appear for and in behalf of petitionerduring the pre-trial.

What petitioner exhibited to the court a quo was a general power of attorney given to one WilliamW. Ferguson who in turn executed a power of attorney in favor of five (5) (sic) Citibank employeesto act as attorney-in-fact in Civil Case No. CEB-4751. Yet, during the pre-trial not one of saidemployees appeared, except counsel who is not even a bank employee.

Furthermore, even assuming the validity of the power of attorney issued by petitioner in favor ofFerguson as well as the power of attorney he issued to five (5) (sic) Citibank employees, saidpower of attorney has not been shown to be a Special Power of Attorney precisely intended notonly to represent the bank at the pre-trial of the case on a certain date but also to enter into anycompromise as required in paragraph 3, Article 1878 of the Civil Code and Section 1 (a), Rule 20,Rules of Court." 8

Hence, this instant petition.

Petitioner bank contends that no board resolution was necessary for its legal counsel, Atty. JuliusZ. Neri, or Citibank employees to act as its attorney-in-fact in the case at bar because petitioner

bank's by-laws grant to its Executing Officer and Secretary Pro-Tem the power to delegate to aCitibank officer, in this case William W. Ferguson, the authority to represent and defend the bankand its interests.

Furthermore, it contends that the Court of Appeals erred in holding that the by-laws of petitionerbank cannot be given effect because it did not have the imprimatur of the Securities andExchange Commission (SEC) as required by Section 46 of the Corporation Code of thePhilippines.



20

Private respondents refute both contentions. They assail the authority of petitioner bank's legalcounsel to appear at the pre-trial conference on two grounds, namely: first, that the authority didnot come from the Board of Directors which has the exclusive right to exercise corporate powers;and second, that the authority granted to the Executing Officer in the by-laws was ineffectivebecause the same were not submitted to, nor approved by, the SEC.

There are thus two issues in this case. First, whether a resolution of the board of directors of acorporation is always necessary for granting authority to an agent to represent the corporation incourt cases. And second, whether the by-laws of the petitioner foreign corporation which has

previously been granted a license to do business in the Philippines, are effective in this jurisdiction. If the by-laws are valid and a board resolution is not necessary as petitioner bankclaims, then the declaration of default would have no basis.

In the corporate hierarchy, there are three levels of control: (1) the board of directors, which isresponsible for corporate policies and the general management of the business affairs of thecorporation; (2) the officers, who in theory execute the policies laid down by the board, but inpractice often have wide latitude in determining the course of business operations; and (3) thestockholders who have the residual power over fundamental corporate changes, like amendmentsof the articles of incorporation. However, just as a natural person may authorize another to docertain acts in his behalf, so may the board of directors of a corporation validly delegate some ofits functions to individual officers or agents appointed by it.

Section 23 of the Corporation Code of the Philippines in part provides:

"SEC. 23. The board of directors or trustees. Unless otherwise provided in this Code, thecorporate powers of all corporations formed under this Code shall be exercised, all businessconducted and all property of such corporations controlled and held by the board of directors ortrustees to be elected from among the holders of stocks, or where there is no stock, from amongthe members of the corporation, who shall hold office for one (1) year and until their successorsare elected and qualified.

xxx xxx xxx" (Emphasis supplied).

Thus, although as a general rule, all corporate powers are to be exercised by the board of

directors, exceptions are made where the Code provides otherwise.

Section 25 of said Code provides that the directors of the corporation shall elect its corporateofficers, and further provides as follows:

"SEC. 25. Corporate officers; quorum. — . . . The directors or trustees and officers to be electedshall perform the duties enjoined on them by law and by the by-laws of the corporation . . ."

Furthermore, Section 47 of the same Code enumerates what may be contained in the by-laws,among which is a provision for the "qualifications, duties and compensation of directors ortrustees, officers and employees". (Emphasis supplied.)

Taking all the above provisions of law together, it is clear that corporate powers may be directlyconferred upon corporate officers or agents by statute, the articles of incorporation, the by-laws orby resolution or other act of the board of directors. In addition, an officer who is not a director mayalso appoint other agents when so authorized by the by-laws or by the board of directors. Suchare referred to as express powers. 9 There are also powers incidental to express powersconferred. It is a fundamental principle in the law of agency that every delegation of authority,whether general or special, carries with it, unless the contrary be expressed, implied authority todo all of those acts, naturally and ordinarily done in such cases, which are reasonably necessaryand proper to be done in order to carry into effect the main authority conferred. 10

Since the by-laws are a source of authority for corporate officers and agents of the corporation, aresolution of the Board of Directors of Citibank appointing an attorney in fact to represent and bind

it during the pre-trial conference of the case at bar is not necessary because its by-laws allow itsofficers, the Executing Officer and the Secretary Pro-Tem, ** to execute a power of attorney to adesignated bank officer, William W. Ferguson in this case, clothing him with authority to direct andmanage corporate affairs. The relevant provision in the general power of attorney granted to himare as follows:

"A. That the Executing Officer and the Secretary Pro-Tem are of full age, competent to act in thepremises, to me personally known, and that they are authorized to execute this instrument byvirtue of the powers granted to them pursuant to the By-Laws of the Bank and the laws of the



21

United States of America, and that the Executing Officer said that he, on the one hand, herebyrevokes and cancels any instrument of power of attorney previously executed on behalf of theBank for use in the PHILIPPINES, in favor of WILLIAM W. FERGUSON (hereinafter referred to asthe "Attorney-in-fact"), of legal age, a Banker, and now residing in the PHILIPPINES, and that he(the Executing Officer), on the other hand, does hereby authorize and empower the Attorney-in-fact, acting in the name or on behalf of the Bank, or any of its Branches, or any interest it or theymay have or represent, said revocation and authorization to be effective as of this date as follows:

xxx xxx xxx

XVII. To represent and defend the Bank and its interest before any and all judges and courts, of allclasses and jurisdictions, in any action, suit or proceeding in which the Bank may be a party ormay be interested in administrative, civil, criminal, contentious or contentious-administrativematters, and in all kinds of lawsuits, recourses or proceedings of any kind or nature, with completeand absolute representation of the Bank, whether as plaintiff or defendant, or as an interestedparty for any reason whatsoever . . .

xxx xxx xxx

XXI. To substitute or delegate this Power of Attorney in whole or in part in favor of such one ormore employees of the Bank, as he may deem advisable, but without divesting himself of any ofthe powers granted to him by this Power of Attorney; and to grant and execute in favor of any oneor more such employees, powers of attorney containing all or such authorizations, as he maydeem advisable. . . " 11

Since paragraph XXI above specifically allows Ferguson to delegate his powers in whole or inpart, there can be no doubt that the special power of attorney in favor, first, of J.P. Garcia &

Associates and later, of the bank's employees, constitutes a valid delegation of Ferguson'sexpress power (under paragraph XVII above) to represent petitioner bank in the pre-trialconference in the lower court.

This brings us to the second query: whether petitioner bank's by-laws, which constitute the basisfor Ferguson's special power of attorney in favor of petitioner bank's legal counsel are effective,considering that petitioner bank has been previously granted a license to do business in the

Philippines.

The Court of Appeals relied on Section 46 of the Corporation Code to support its conclusion thatthe by-laws in question are without effect because they were not approved by the SEC. Saidsection reads as follows:

"SEC. 46. Adoption of by-laws. — Every corporation formed under this Code must, within one (1)month after receipt of official notice of the issuance of its certificate of incorporation by theSecurities and Exchange Commission, adopt a code of by-laws for its government not inconsistentwith this Code. For the adoption of by-laws by the corporation, the affirmative vote of thestockholders representing at least a majority of the outstanding capital stock, or of at least amajority of the members in the case of non-stock corporations, shall be necessary. The by-laws

shall be signed by the stockholders or members voting for them and shall be kept in the principaloffice of the corporation, subject to the inspection of the stockholders or members during officehours; and a copy thereof, duly certified to by a majority of the directors or trustees andcountersigned by the secretary of the corporation, shall be filed with the Securities and ExchangeCommission which shall be attached to the original articles of incorporation.

Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filedprior to incorporation; in such case, such by-laws shall be approved and signed by all theincorporators and submitted to the Securities and Exchange Commission, together with thearticles of incorporation.

In all cases, by-laws shall be effective only upon the issuance by the Securities and ExchangeCommission of a certification that the by-laws are not inconsistent with this Code."

A careful reading of the above provision would show that a corporation can submit its by-laws,prior to incorporation, or within one month after receipt of official notice of the issuance of itscertificate of incorporation by the SEC. When the third paragraph of the above provision mentions"in all cases", it can only refer to these two options; i.e., whether adopted prior to incorporation orwithin one month after incorporation, the by-laws shall be effective only upon the approval of theSEC. But even more important, said provision starts with the phrase "Every corporation formedunder this Code", which can only refer to corporations incorporated in the Philippines. Hence,



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Section 46, in so far as it refers to the effectivity of corporate by-laws, applies only to domesticcorporations and not to foreign corporations.

On the other hand, Section 125 of the same Code requires that a foreign corporation applying fora license to transact business in the Philippines must submit, among other documents, to theSEC, a copy of its articles of incorporation and by-laws, certified in accordance with law. Unlessthese documents are submitted, the application cannot be acted upon by the SEC. In the followingsection, the Code specifies when the SEC can grant the license applied for. Section 126 providesin part:

"SEC. 126. Issuance of a license. — If the Securities and Exchange Commission is satisfied thatthe applicant has complied with all the requirements of this Code and other special laws, rules andregulations, the Commission shall issue a license to the applicant to transact business in thePhilippines for the purpose or purposes specified in such license . . ."

Since the SEC will grant a license only when the foreign corporation has complied with all therequirements of law, it follows that when it decides to issue such license, it is satisfied that theapplicant's by-laws, among the other documents, meet the legal requirements. This, in effect, is anapproval of the foreign corporations by-laws. It may not have been made in express terms, still it isclearly an approval. Therefore, petitioner bank's by-laws, though originating from a foreign

jurisdiction, are valid and effective in the Philippines.

In pursuance of the authority granted to him by petitioner bank's by-laws, its Executing Officerappointed William W. Ferguson, a resident of the Philippines, as its Attorney-in-Fact empoweringthe latter, among other things, to represent petitioner bank in court cases. In turn, William W.Ferguson executed a power of attorney in favor of J.P. Garcia & Associates (petitioner bank'scounsel) to represent petitioner bank in the pre-trial conference before the lower court. This act ofdelegation is explicity authorized by paragraph XXI of his own appointment, which we havepreviously cited.

It is also error for the Court of Appeals to insist that the special power of attorney, presented bypetitioner bank authorizing its counsel, Atty. Julius Neri and/or J.P. Garcia & Associates, to appearfor and in behalf of petitioner bank during the pre-trial, is not valid. The records do not sustain thisfinding. We quote with approval the contention of petitioner bank as it is borne by the records, to

wit:

". . . The records of this case would show that at the start, the petitioner, thru counsel, presented aspecial power of attorney executed by then Citibank Officer Florencio (sic) J. Tarriela which wasmarked as Exhibit "1" in the pre-trial of this case . . . This is precisely the reason why the courtdenied, in an Order dated April 23, 1990 . . . the private respondent's oral motion to declare thedefendant in fault. The said special power of attorney executed by Florencio (sic) J. Tarriela wasgranted by Mr. Rafael B. Buenaventura, who was then the Senior Vice-President of Citibank andthe highest ranking office of Citibank in the Philippines. Considering that at the time of thepresentation of the said special power of attorney Rafael B. Buenaventura was no longerconnected with Citibank, the petitioner again presented another special power of attorneyexecuted by William W. Ferguson in favor of J.P. Garcia & Associates, . . .

Finding that the authority of William W. Ferguson to delegate his authority to act for and in behalfof the bank in any civil suit is limited to individuals who are employees of the bank the petitioneragain on May 23, 1990 presented another special power of attorney dated May 16, 1990 whereinWilliam W. Ferguson appointed as attorney-in-fact the following employees of petitioner, namely:Roberto Reyes, Nemesio Solomon, Aimee Yu and Tomas Yap. The said special power of attorneywas filed and presented by the petitioner through its Manifestation filed in the Trial Court on May23, 1990, . . ." 12

Under Rule 138, Section 23 of the Rules of Court, an attorney has authority to bind his client inany case by an agreement in relation thereto made in writing, and this authority would includetaking appeals and all matters of ordinary judicial procedure. But he cannot, without specialauthority, compromise his client's litigation or receive anything in discharge of a client's claim but

the full amount in cash. The special powers of attorney separately executed by Florencia Tarrielaand William W. Ferguson granted to J.P. Garcia & Associates are very explicit in their terms as tothe counsel's authority in the case at bar. We quote the relevant provisions of the special powersof attorney showing sufficient compliance with the requirements of Section 23, Rule 138, to wit:

"That the BANK further authorized the said J.P. GARCIA & ASSOCIATES to enter into anamicable settlement, stipulation of facts and/or compromise agreement with the party or partiesinvolved under such terms and conditions which the said J.P. GARCIA & ASSOCIATES may



23

deem reasonable (under parameters previously defined by the principal) and execute and signsaid documents as may be appropriate.

HEREBY GIVING AND GRANTING unto J.P. GARCIA & ASSOCIATES full power and authoritywhatsoever requisite necessary or proper to be done in or about the premises, as fully to allintents and purposes as the BANK might or could lawfully do or cause to be done under and byvirtue of these presents." 13

It is also error on the part of the Court of Appeals to state that the power of attorney given to the

four (4) Citibank employees is not a special power of attorney as required in paragraph 3, Article1878 of the Civil Code and Section 1 (a), Rule 20 of the Rules of Court. In the case of TropicalHomes, Inc. vs. Villaluz, 14 the special power of attorney executed by petitioner bank thereincontained the following pertinent terms — "to appear for and in its behalf in the above-entitledcase in all circumstances where its appearance is required and to bind it in all said instances". Thecourt ruled that:

"Although the power of attorney in question does not specifically mention the authority ofpetitioner's counsel to appear and bind the petitioner at the pre-trial conference, the terms of saidpower of attorney are comprehensive enough as to include the authority to appear for thepetitioner at the pre-trial conference."

In the same manner, the power of attorney granted to petitioner bank's employees should beconsidered a special power of attorney. The relevant portion reads:

"WHEREAS, the Bank is the Defendant in Civil Case No. CEB-4751, entitled "Cresencio Velez, etal. vs. Citibank, N.A.," pending before the Regional Trial Court of Cebu City, Branch X;

NOW, THEREFORE, under and by virtue of Article XXI of the Power of Attorney executed by theBank in favor of the Attorney-in-Fact (Annex "A"), which provision is quoted above, the Attorney-in-Fact has nominated, designated and appointed, as by these presents he nominates, designatesand appoints, as his substitutes and delegates, with respect to the said Power of Attorney,ROBERTO REYES, Vice President and/or NEMESIO SOLOMON, JR., Manager, AIMEE YU,

Assistant Vice President and/or TOMAS YAP, Assistant Manager (hereinafter referred to as the"DELEGATES"), all of legal age, citizens of the Republic of the Philippines and with business

address at Citibank Center, Paseo de Roxas, Makati, Metro Manila, Philippines, the Attorney-in-Fact hereby granting, conferring and delegating such authorities and binding the Bank in the Pre-Trial Conference and/or Trial of the abovementioned case, pursuant to Rule 20 of the RevisedRules of Court, to the DELEGATES. The attorney-in-Fact furthermore hereby ratifying andconfirming all that the DELEGATES shall lawfully do or cause to be done under and by virtue ofthese presents." 15

From the outset, petitioner bank showed a willingness, if not zeal, in pursuing and defending thiscase. It even acceded to private respondent's insistence on the question of proper representationduring the pre-trial by presenting not just one, but three, special powers of attorney. Initially, thespecial power of attorney was executed by Florencia Tarriela in favor of J.P. Garcia & Associates,petitioner bank's counsel. Private respondents insisted that this was not proper authority required

by law. To avoid further argument, a second special power of attorney was presented by petitionerbank, executed by William W. Fersugon, the highest ranking officer of Citibank in the Philippines,in favor of its counsel J.P. Garcia & Associates. But since the authority to delegate of William A.Fersugon in favor of an agent is limited to bank employees, another special power of attorney fromWiliam W. Fersugon in favor of the Citibank employees was presented. But the respondent trialcourt judge disregarded all these and issued the assailed default order. There is nothing to showthat petitioner bank "miserably failed to oblige"; on the contrary, three special powers of attorneymanifest prudence and diligence on petitioner bank's part.

In fact, there was no need for the third power of attorney because we believe that the secondpower of attorney was sufficient under the by-law provision authorizing Fersugon to delegate anyof his functions to any one or more employees of the petitioner bank. A reasonable interpretationof this provision would include an appointment of a legal counsel to represent the bank in court,

for, under the circumstances, such legal counsel can be considered, and in fact was consideredby the petitioner bank, an employee for a special purpose. Furthermore, Fersugon, who heads thePhilippine office thousands of miles away from its main office in the United States, must beunderstood to have sufficient powers to act promptly in order to protect the interests of hisprincipal.

We reiterate the previous admonitions of this Court against "precipitate orders of default as thesehave the effect of denying the litigant the chance to be heard. While there are instances, to besure, when a party may be properly defaulted, these should be the exceptions rather than the rule



24

and should be allowed only in clear cases of an obstinate refusal or inordinate neglect to complywith the orders of the court. Absent such a showing, the party must be given every reasonableopportunity to present his side and to refute the evidence of the adverse party in deference to dueprocess of law". 16

Considering further that petitioner bank has a meritorious defense and that the amount in contestis substantial, the litigants should be allowed to settle their claims on the arena of the court basedon a trial on the merits rather than on mere technicalities.

WHEREFORE, in view of the foregoing, the petition is hereby GRANTED. The decision of theCourt of Appeals dated June 26, 1991 and its resolution denying the motion for reconsideration ofpetitioner bank dated September 26, 1991 are both REVERSED and SET ASIDE. The order ofdefault issued on August 15, 1990 in Civil Case CEB-4751 of the Regional Trial Court of Cebu is

ANNULLED and SET ASIDE and the case is hereby REMANDED to the court of origin for furtherproceedings.

SO ORDERED.

G.R. No. 147590 April 2, 2007

ANTONIO C. CARAG, Petitioner,

vs.NATIONAL LABOR RELATIONS COMMISSION, ISABEL G. PANGANIBAN-ORTIGUERRA, asExecutive Labor Arbiter, NAFLU, and MARIVELES APPAREL CORPORATION LABORUNION, Respondents.

D E C I S I O N

CARPIO, J.:

The Case

This is a petition for review on certiorar i1 assailing the Decision dated 29 February 20002 and the

Resolution dated 27 March 2001

3

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 IsabelPanganiban-Ortiguerra (Arbiter Ortiguerra) in RAB-III-08-5198-93 and the resolution dated 5January 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 fileemployees. 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 acomplaint against MAC for illegal dismissal brought about by its illegal closure of business. In theircomplaint dated 12 August 1993, complainants alleged the following:

2. Complainant NAFLU is the sole and exclusive bargaining agent representing all rankand 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 actionherein below discussed happened there was no labor dispute between the Union andManagement 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] ceasedoperations 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 sameday that the operations closed.

4. That at the time of closure, employees who have rendered one to two weeks work werenot paid their corresponding salaries/wages, which remain unpaid until time [sic] of thiswriting.

http://www.lawphil.net/judjuris/juri2007/apr2007/gr_147590_2007.html#fnt1





















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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 ofbusiness filed by NAFLU and Mariveles Apparel Corporation Labor Union for and in behalf of allrank 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 latterwent 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 beable to explore options for settlement. The respondents however did not appear prompting thisOffice 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 itsoperation as a prelude to a final closing of the firm. The complainants allege that up to the presentthe company has remained closed.

The complainants bewail that at the time of the closure, employees who have rendered one to twoweeks 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 monthbefore the intended date of closure. The respondents did not even establish that its closure wasdone 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 thecomplainants and the respondents.

The complainants pray that they be allowed to implead Atty. Antonio Carag and Mr. ArmandoDavid[,] 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, thecomplainants invoked the ruling laid down by the Supreme Court in the case of A.C. RansomLabor Union CCLU vs. NLRC, G.R. No. 69494, June 10, 1986 where it was held that [a] corporateofficer can be held liable for acting on behalf of the corporation when the latter is no longer inexistence 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. Shouldreinstatement be not feasible, the complainants pray that they be paid their separation pay inaccordance with the computation provided for in the CBA. Computations of separation pay due toindividual complainants were adduced in evidence (Annexes "C" to "C-44", Complainants' PositionPaper). 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 complaintwas filed prematurely. The respondents deny having totally closed and insist that respondentcompany is only on a temporary shut-down occasioned by the pending labor unrest. There beingno 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 sayingthat they are not the owners of Mariveles Apparel Corporation and they are only minoritystockholders holding qualifying shares. Piercing the veil of corporate fiction cannot be done in thepresent case for such remedy can only be availed of in case of closed or family ownedcorporations.

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.

After a judicious and impartial consideration of the record, this Office is of the firm belief that thecomplainants must prevail.



27

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 ofoperations has clearly exceeded the six months period fixed in Article 286 of the Labor Code. Thetemporary shutdown has ripened into a closure or cessation of operations for causes not due toserious business losses or financial reverses. Consequently, the respondents must pay thedisplaced employees separation pay in accordance with the computation prescribed in the CBA, towit, one month pay for every year of service. It must be stressed that respondents did notcontrovert the verity of the CBA provided computation.

The complainants claim that Atty. Antonio Carag and Mr. Armando David should be held jointlyand severally liable with respondent corporation. This bid is premised on the belief that theimpleader of the aforesaid officers will guarantee payment of whatever may be adjudged incomplainants' favor by virtue of this case. It is a basic principle in law that corporations havepersonality distinct and separate from the stockholders. This concept is known as corporatefiction. Normally, officers acting for and in behalf of a corporation are not held personally liable forthe obligation of the corporation. In instances where corporate officers dismissed employees inbad faith or wantonly violate labor standard laws or when the company had already ceasedoperations 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 acareful consideration of the factual backdrop of the case is inclined to grant complainants' prayerfor the impleader of Atty. Antonio Carag and Mr. Armando David, to assure that valid claims ofemployees 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 statethat they failed to establish their entitlement to aforesaid reliefs when they did not adducepersuasive evidence on the matter.

The claim for attorney's fee[s] will be as it is hereby resolved in complainants' favor. As aconsequence of the illegal closure of respondent company, the complainants were compelled tolitigate to secure benefits due them under pertinent laws. For this purpose, they secured theservices of a counsel to assist them in the course of the litigation. It is but just and proper to orderthe respondents who are responsible for the closure and subsequent filing of the case to payattorney's fee[s].

WHEREFORE, premises considered, judgment is hereby rendered declaring respondents jointlyand 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 everyyear of service, a fraction of six (6) months to be considered as one (1) year in the totalamount of P49,101,621.00; and

2. To pay complainants attorney's fee in an amount equivalent to 10% of the judgmentaward.

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 theNLRC. Carag reiterated the arguments in respondents' position paper filed before ArbiterOrtiguerra, stating that:

2.1 While Atty. Antonio C. Carag is the Chairman of the Board of MAC and Mr. ArmandoDavid 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. Caragand 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 thecorporation's liabilities;

2.4 MAC is a corporation with a distinct and separate personality from that of thestockholders; piercing the corporate veil to hold the stockholders liable for corporate







28

liabilities is only true [for] close corporations (family corporations); this is not the prevailingsituation in MAC;

2.5 Atty. Antonio Carag and Mr. Armando David are professional managers and theextension of shares to them are just qualifying shares to enable them to occupy subjectposition.9

Respondents also filed separate motions to reduce bond.

The Ruling of the NLRC

In a Resolution promulgated on 5 January 1995, the NLRC Third Division denied the motions toreduce bond. The NLRC stated that to grant a reduction of bond on the ground that the appeal ismeritorious would be tantamount to ruling on the merits of the appeal. The dispositive portion ofthe Resolution of the NLRC Third Division reads, thus:

PREMISES CONSIDERED, Motions to Reduce Bond for both respondents are herebyDISMISSED for lack of merit. Respondents are directed to post cash or surety bond in the amountof 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 1964Rules of Court. Carag filed his petition, docketed as G.R. No. 118820, on 13 February 1995. In themeantime, we granted MAC's prayer for the issuance of a temporary restraining order to enjoin theNLRC 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 theirmemoranda, we referred the consolidated cases to the appellate court in accordance with ourdecision in St. Martin Funeral Home v. NLRC .11Respondents filed separate petitions before theappellate court.

The Ruling of the Appellate Court

On 29 February 2000, the appellate court issued a joint decision on the separate petitions. Theappellate court identified two issues as essential: (1) whether Arbiter Ortiguerra properly heldCarag and David, in their capacities as corporate officers, jointly and severally liable with MAC forthe money claims of the employees; and (2) whether the NLRC abused its discretion in denyingthe 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 acause for Carag and David to impute grave abuse of discretion. The appellate court found thatCarag 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 requirementin 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 areduction of the appeal bond. Thus:

IN VIEW WHEREOF, the petitions are DISMISSED. The decision of Labor Arbiter IsabelPanganiban-Ortiguerra dated June 17, 1994, and the Resolution dated January 5, 1995, issued bythe 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 SupremeCourt 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 failureto show sufficiently that the appellate court committed any reversible error to warrant the exerciseof our discretionary appellate jurisdiction. Carag filed a motion for reconsideration of our resolutiondenying his petition. In a resolution dated 13 August 2001, this Court's First Division deniedCarag's reconsideration with finality.






















29

Despite our 13 August 2001 resolution, Carag filed a second motion for reconsideration with anomnibus motion for leave to file a second motion for reconsideration. This Court's First Divisionreferred the motion to the Court En Banc. In a resolution dated 25 June 2002, the Court En Bancresolved 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 November2003, the Court En Banc resolved to suspend the rules to allow the second motion forreconsideration. This Court's First Division referred the petition to the Court En Banc on 14 July2004, 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 issuesbefore this Court:

1. Has petitioner Carag's right to due process been blatantly violated by holding himpersonally 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 evidenceand in violation of the accepted procedure prescribed by Rule V of the NLRC Rules ofProcedure, as to render the ruling null and void?

2. Assuming, arguendo, that he had been accorded due process, is the decision holdinghim solidarily liable supported by evidence when the only pleadings (not evidence) beforethe Labor Arbiter and that of the Court of Appeals are the labor union's motion to impleadhim as respondent and his opposition thereto, without position papers, without evidencesubmitted, and without hearing on the issue of personal liability, and even when bad faithor malice, as the only legal basis for personal liability, was expressly found absent andwanting 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 reduceappeal bond?14

The Ruling of the Court

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 issuingsummons 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 hadbeen submitted for decision - in violation of Sections 2,15 3,16 4,17 5(b),18 and 11(c) 19 of Rule V ofThe New Rules of Procedure of the NLRC.20

It is clear from the narration in Arbiter Ortiguerra's Decision that she only summoned complainantsand 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." Atthe time of the conference, complainants had not yet submitted their position paper whichcontained the motion to implead Carag. Complainants could not have submitted their positionpaper before the conference since procedurally the Arbiter directs the submission of positionpapers only after the conference.21 Complainants submitted their position paper only on 10January 1994, five months after filing the complaint. In short, at the time of the conference, Caragwas not yet a party to the case. Thus, Arbiter Ortiguerra could not have possibly summoned Caragto the conference.

Carag vigorously denied receiving summons to the conference, and complainants have notproduced any order of Arbiter Ortiguerra summoning Carag to the conference. A thorough searchof the 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 forresolution. In her Decision, Arbiter Ortiguerra granted complainants' motion to implead Carag andat the same time, in the same Decision, found Carag personally liable for the debts of MACconsisting 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 himto submit a position paper, never set the case for hearing, never notified him to present his


































30

evidence, and never informed him that the case was submitted for decision - all in violation ofSections 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. Theprocedure adopted by Arbiter Ortiguerra completely prevented Carag from explaining his side andpresenting his evidence. This alone renders Arbiter Ortiguerra's Decision a nullity insofar as Caragis concerned. While labor arbiters are not required to conduct a formal hearing or trial, they haveno license to dispense with the basic requirements of due process such as affording respondentsthe opportunity to be heard. In Habana v. NLRC,22 we held:

The sole issue to be resolved is whether private respondents OMANFIL and HYUNDAI weredenied due process when the Labor Arbiter decided the case solely on the basis of the positionpaper 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 leftmuch 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 May1996. During the conference, the parties did not discuss at all the possibility of amicablesettlement due to petitioner's stubborn insistence that private respondents be declared indefault.

Second, the parties agreed to submit their respective motions - petitioner's motion todeclare respondents in default and private respondents' motion for bill of particulars - forthe consideration of the Labor Arbiter. The Labor Arbitration Associate, one Ms. GloriaVivar, then informed the parties that they would be notified of the action of the Labor

Arbiter on the pending motions.

x x x

Third, since the conference on 10 May 1996 no order or notice as to what action wastaken by the Labor Arbiter in disposing the pending motions was ever received by privaterespondents. They were not declared in default by the Labor Arbiter nor was petitionerrequired to submit a bill of particulars.

Fourth, neither was there any order or notice requiring private respondents to file theirposition paper, nor an order informing the parties that the case was already submitted fordecision. 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 thearbitration level, as the procedure adopted by the Labor Arbiter virtually prevented privaterespondents from explaining matters fully and presenting their side of the controversy. They hadno chance whatsoever to at least acquaint the Labor Arbiter with whatever defenses they mighthave to the charge that they illegally dismissed petitioner. In fact, private respondents presentedtheir 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 andto submit any evidence he may have in support of his defense. Where, as in this case, sufficientopportunity to be heard either through oral arguments or position paper and other pleadings is notaccorded 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. Themanner 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 dueprocess. 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, notaccorded a conciliatory conference, not ordered to submit a position paper, not accorded ahearing, not given an opportunity to present his evidence, and not notified that the case wassubmitted for resolution. Thus, we hold that Arbiter Ortiguerra's Decision is void as against Caragfor 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







31

This case also raises this issue: when is a director personally liable for the debts of thecorporation? 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 downthe exceptions to the rule, as follows:

Liability of directors, trustees or officers. - Directors or trustees who wilfully and knowingly vote foror assent to patently unlawful acts of the corporation or who are guilty of gross negligence or badfaith in directing the affairs of the corporation or acquire any personal or pecuniary interest inconflict 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 otherpersons.

x x x x

Section 31 makes a director personally liable for corporate debts if he wilfully and knowingly votesfor or assents to patently unlawful acts of the corporation. Section 31 also makes a directorpersonally liable if he is guilty of gross negligence or bad faith in directing the affairs of thecorporation.

Complainants did not allege in their complaint that Carag wilfully and knowingly voted for orassented to any patently unlawful act of MAC. Complainants did not present any evidenceshowing that Carag wilfully and knowingly voted for or assented to any patently unlawful act ofMAC. 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 directingthe affairs of MAC. Complainants did not present any evidence showing that Carag is guilty ofgross negligence or bad faith in directing the affairs of MAC. Neither did Arbiter Ortiguerra makeany 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 laborstandard laws or when the company had already ceased operations and there is no way by whicha 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 didnot 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 laborstandard laws he violated.

To hold a director personally liable for debts of the corporation, and thus pierce the veil ofcorporate fiction, the bad faith or wrongdoing of the director must be established clearly andconvincingly.24 Bad faith is never presumed.25 Bad faith does not connote bad judgment ornegligence. Bad faith imports a dishonest purpose. Bad faith means breach of a known dutythrough 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 bedismissed. A corporate officer is not personally liable for the money claims of dischargedcorporate employees unless he acted with evident malice and bad faith in terminating theiremployment. There is no evidence in this case that Locsin acted in bad faith or with malice incarrying out the retrenchment and eventual closure of the company (Garcia vs. NLRC, 153 SCRA640), hence, he may not be held personally and solidarily liable with the company for thesatisfaction of the judgment in favor of the retrenched employees.

Neither does bad faith arise automatically just because a corporation fails to comply with thenotice 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. Suchfailure to give notice is a violation of procedural due process but does not amount to an unlawful orcriminal act. Such procedural defect is called illegal dismissal because it fails to comply withmandatory procedural requirements, but it is not illegal in the sense that it constitutes an unlawfulor criminal act.

For a wrongdoing to make a director personally liable for debts of the corporation, the wrongdoingapproved or assented to by the director must be a patently unlawful act. Mere failure to complywith the notice requirement of labor laws on company closure or dismissal of employees does not























32

amount to a patently unlawful act. Patently unlawful acts are those declared unlawful by law whichimposes penalties for commission of such unlawful acts. There must be a law declaring the actunlawful and penalizing the act.

An example of a patently unlawful act is violation of Article 287 of the Labor Code, which statesthat "[V]iolation of this provision is hereby declared unlawful and subject to the penal provisionsprovided under Article 288 of this Code." Likewise, Article 288 of the Labor Code on PenalProvisions and Liabilities, provides that "any violation of the provision of this Code declaredunlawful 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 ofthe court."

In this case, Article 28328 of the Labor Code, requiring a one-month prior notice to employees andthe Department of Labor and Employment before any permanent closure of a company, does notstate that non-compliance with the notice is an unlawful act punishable under the Code. There isno provision in any other Article of the Labor Code declaring failure to give such notice an unlawfulact and providing for its penalty.

Complainants did not allege or prove, and Arbiter Ortiguerra did not make any finding, that Caragapproved or assented to any patently unlawful act to which the law attaches a penalty for itscommission. 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 ceasedoperations 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 echoesthe complainants' claim that Carag is personally liable for MAC's debts to complainants "on thebasis 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. Theterm shall not include any labor organization or any of its officers or agents except when acting asemployer. (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 usedby Arbiter Ortiguerra, in holding Carag personally liable for the debts of MAC.

We have already ruled in McLeod v. NLRC29 and Spouses Santos v. NLRC 30 that Article 212(e) ofthe Labor Code, by itself, does not make a corporate officer personally liable for the debts of thecorporation. The governing law on personal liability of directors for debts of the corporation is stillSection 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 apatently unlawful act of the corporation, or when they are guilty of bad faith or gross negligence indirecting 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 orwhen, having knowledge of such issuance, do not forthwith file with the corporate secretary theirwritten objection; (3) they agree to hold themselves personally and solidarily liable with thecorporation; or (4) they are made by specific provision of law personally answerable for theircorporate action.http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm -

x x x

The ruling in A.C. Ransom Labor Union-CCLU v.NLRC ,http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm - which the Court of Appeals cited, does notapply 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 lockoutshall be entitled to reinstatement with full backwages."

Article 273 of the Code provides that:













33

"Any person violating any of the provisions of Article 265 of this Code shall be punished by afine of not exceeding five hundred pesos and/or imprisonment for not less than one (1) daynor more than six (6) months."

(b) How can the foregoing provisions be implemented when the employer is a corporation? Theanswer 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. Theterm 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 isan 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 technicalsense, is the employer.

The responsible officer of an employer corporation can be held personally, not to say evencriminally, liable for non-payment of back wages. That is the policy of the law.

x x x x

(c) If the policy of the law were otherwise, the corporation employer can have devious ways forevading 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 the22 strikers win their case. RANSOM actually ceased operations on May 1, 1973, after theDecember 19, 1972 Decision of the Court of Industrial Relations was promulgated againstRANSOM.http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm - (Emphasis supplied)

Clearly, in A.C. Ransom, RANSOM, through its President, organized ROSARIO to evade paymentof backwages to the 22 strikers. This situation, or anything similar showing malice or bad faith onthe part of Patricio, does not obtain in the present case. In Santos v. NLRC ,

http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm - the Court held, thus:

It is true, there were various cases when corporate officers were themselves held by the Court tobe 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 MinimumWage Law, the responsible officer of an employer corporation could be held personally liable fornonpayment 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 clearidentification of the officer directly responsible for failure to pay the backwages, the Courtconsidered 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 forunpaid wages.

A review of the above exceptional cases would readily disclose the attendance of facts andcircumstances that could rightly sanction personal liability on the part of the company officer.In A.C. Ransom, the corporate entity was a family corporation and execution against it couldnot be implemented because of the disposition posthaste of its leviable assets evidently inorder to evade its just and due obligations. The doctrine of "piercing the veil of corporatefiction" was thus clearly appropriate. Chua likewise involved another family corporation, andthis time the conflict was between two brothers occupying the highest ranking positions in thecompany. There were incontrovertible facts which pointed to extreme personal animosity thatresulted, evidently in bad faith, in the easing out from the company of one of the brothers by theother.

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 severallyresponsible with petitioner company and CIPI for the payment of the backwages of privaterespondents. This is reversible error. The Assistant Regional Director's Decision failed to disclosethe reason why he was made personally liable. Respondents, however, alleged as grounds



34

thereof, his being the owner of one-half (½) interest of said corporation, and his alleged arbitrarydismissal of private respondents.

Petitioner Sunio was impleaded in the Complaint in his capacity as General Manager of petitionercorporation. There appears to be no evidence on record that he acted maliciously or in bad faith interminating the services of private respondents. His act, therefore, was within the scope of hisauthority 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 berelated. Mere ownership by a single stockholder or by another corporation of all or nearly all of thecapital stock of a corporation is not of itself sufficient ground for disregarding the separatecorporate personality. Petitioner Sunio, therefore, should not have been made personallyanswerable for the payment of private respondents' backsalaries.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 corporatefiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime. In theabsence of malice, bad faith, or a specific provision of law making a corporate officer liable, suchcorporate officer cannot be made 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 PropertiesCorporation:http://elibrary.supremecourt.gov.ph/DOCUMENTS/SUPREME_COURT/Decisions/2007/jan2007.zip%3E9,df%7C2007/jan2007/146667.htm -

We concur with the CA that these two respondents are not liable. Section 31 of the CorporationCode (Batas Pambansa Blg. 68) provides:

"Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully andknowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of grossnegligence or bad faith ... shall be liable jointly and severally for all damages resulting therefromsuffered by the corporation, its stockholders and other persons."

The personal liability of corporate officers validly attaches only when (a) they assent to a patentlyunlawful act of the corporation; or (b) they are guilty of bad faith or gross negligence in directing itsaffairs; or (c) they incur conflict of interest, resulting in damages to the corporation, itsstockholders 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 Caragpersonally liable for the separation pay owed by MAC to complainants based alone on Article212(e) of the Labor Code. Article 212(e) does not state that corporate officers are personally liablefor the unpaid salaries or separation pay of employees of the corporation. The liability of corporateofficers 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 2000and the Resolution dated 27 March 2001 of the Court of Appeals in CA-G.R. SP Nos. 54404-06insofar as petitioner Antonio Carag is concerned.

SO ORDERED.

SEAOIL PETROLEUM CORPORATION, petitioners,vs.AUTOCORP GROUP and PAUL Y. RODRIGUEZ, respondents.

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Courtassailing the Decision1of the Court of Appeals (CA) dated May 20, 2004 in CA-G.R. CV No.72193, which had affirmed in toto the Decision2 of the Regional Trial Court (RTC) of Pasig City,Branch 157, dated September 10, 2001 in Civil Case No. 64943.

The factual antecedents, as summarized by the CA, are as follows:













35

On September 24, 1994, defendant-appellant Seaoil Petroleum Corporation (Seaoil, for brevity)purchased one unit of ROBEX 200 LC Excavator, Model 1994 from plaintiff-appellee AutocorpGroup (Autocorp for short). The original cost of the unit was P2,500,000.00 but was increased

toP3,112,519.94 because it was paid in 12 monthly installments up to September 30, 1995. The

sales agreement was embodied in the Vehicle Sales Invoice No. A-0209 and Vehicle SalesConfirmation No. 258. Both documents were signed by Francis Yu (Yu for short), president ofSeaoil, on behalf of said corporation. Furthermore, it was agreed that despite delivery of theexcavator, ownership thereof was to remain with Autocorp until the obligation is fully settled. In thislight, Seaoil’s contractor, Romeo Valera, issued 12 postdated checks. However, Autocorp refusedto accept the checks because they were not under Seaoil’s name. Hence, Yu, on behalf of Seaoil,signed and issued 12 postdated checks for P259,376.62 each with Autocorp as payee.

The excavator was subsequently delivered on September 26, 1994 by Autocorp and was receivedby Seaoil in its depot in Batangas.

The relationship started to turn sour when the first check bounced. However, it was remediedwhen Seaoil replaced it with a good check. The second check likewise was also good whenpresented for payment. However, the remaining 10 checks were not honored by the bank sinceSeaoil requested that payment be stopped. It was downhill from thereon.

Despite repeated demands, Seaoil refused to pay the remaining balance of P2,593,766.20.

Hence, on January 24, 1995, Autocorp filed a complaint for recovery of personal property with

damages and replevin in the Regional Trial Court of Pasig. The trial court ruled for Autocorp.Hence, this appeal.

Seaoil, on the other hand, alleges that the transaction is not as simple as described above. Itclaims that Seaoil and Autocorp were only utilized as conduits to settle the obligation of oneforeign entity named Uniline Asia (herein referred to as Uniline), in favor of another foreign entity,Focus Point International, Incorporated (Focus for short). Paul Rodriguez (Rodriguez for brevity) isa stockholder and director of Autocorp. He is also the owner of Uniline. On the other hand, Yu isthe president and stockholder of Seaoil and is at the same time owner of Focus. Allegedly, Unilinechartered MV Asia Property (sic) in the amount of $315,711.71 from its owner Focus. Uniline wasnot able to settle the said amount. Hence, Uniline, through Rodriguez, proposed to settle theobligation through conveyance of vehicles and heavy equipment. Consequently, four units of

Tatamobile pick-up trucks procured from Autocorp were conveyed to Focus as partial payment.The excavator in controversy was allegedly one part of the vehicles conveyed to Focus. Seaoilclaims that Rodriguez initially issued 12 postdated checks in favor of Autocorp as payment for theexcavator. However, due to the fact that it was company policy for Autocorp not to honorpostdated checks issued by its own directors, Rodriguez requested Yu to issue 12 PBCOMpostdated checks in favor of Autocorp. In turn, said checks would be funded by the corresponding12 Monte de Piedad postdated checks issued by Rodriguez. These Monte de Piedad checks werepostdated three days prior to the maturity of the PBCOM checks.

Seaoil claims that Rodriguez issued a stop payment order on the ten checks thus constraining theformer to also order a stop payment order on the PBCOM checks.

In short, Seaoil claims that the real transaction is that Uniline, through Rodriguez, owed money toFocus. In lieu of payment, Uniline instead agreed to convey the excavator to Focus. This was tobe paid by checks issued by Seaoil but which in turn were to be funded by checks issued byUniline. x x x3

As narrated above, respondent Autocorp filed a Complaint for Recovery of Personal Property withDamages and Replevin4 against Seaoil before the RTC of Pasig City. In its September 10, 2001Decision, the RTC ruled that the transaction between Autocorp and Seaoil was a simple contractof sale payable in installments.5 It also held that the obligation to pay plaintiff the remainder of thepurchase price of the excavator solely devolves on Seaoil. Paul Rodriguez, not being a party tothe sale of the excavator, could not be held liable therefor. The decretal portion of the trial court’sDecision reads, thus:

WHEREFORE, judgment is hereby rendered in favor of plaintiff Autocorp Group and againstdefendant Seaoil Petroleum Corporation which is hereby directed to pay plaintiff:

- P2,389,179.23 plus 3% interest from the time of judicial demand until full payment; and

- 25% of the total amount due as attorney’s fees and cost of litigation.













36

The third-party complaint filed by defendant Seaoil Petroleum Corporation against third-partydefendant Paul Rodriguez is hereby DISMISSED for lack of merit.

SO ORDERED.

Seaoil filed a Petition for Review before the CA. In its assailed Decision, the CA dismissed thepetition and affirmed the RTC’s Decision in toto.6 It held that the transaction between Yu andRodriguez was merely verbal. This cannot alter the sales contract between Seaoil and Autocorpas this will run counter to the parol evidence rule which prohibits the introduction of oral and parol

evidence to modify the terms of the contract. The claim that it falls under the exceptions to theparol evidence rule has not been sufficiently proven. Moreover, it held that Autocorp’s separatecorporate personality cannot be disregarded and the veil of corporate fiction pierced. Seaoil wasnot able to show that Autocorp was merely an alter ego of Uniline or that both corporations wereutilized to perpetrate a fraud. Lastly, it held that the RTC was correct in dismissing the third-partycomplaint since it did not arise out of the same transaction on which the plaintiff’s claim is based,or that the third party’s claim, although arising out of another transaction, is connected to theplaintiff’s claim. Besides, the CA said, such claim may be enforced in a separate action.

Seaoil now comes before this Court in a Petition for Review raising the following issues:

I

Whether or not the Court of Appeals erred in partially applying the parol evidence rule to proveonly some terms contained in one portion of the document but disregarded the rule with respect toanother but substantial portion or entry also contained in the same document which should haveproven the true nature of the transaction involved.

II

Whether or not the Court of Appeals gravely erred in its judgment based on misapprehension offacts when it declared absence of facts which are contradicted by presence of evidence on record.

III

Whether or not the dismissal of the third-party complaint would have the legal effect of res judicataas would unjustly preclude petitioner from enforcing its claim against respondent Rodriguez (third-party defendant) in a separate action.

IV

Whether or not, given the facts in evidence, the lower courts should have pierced the corporateveil.

The Petition lacks merit. We sustain the ruling of the CA.

We find no fault in the trial court’s appreciation of the facts of this case. The findings of fact of th etrial court are conclusive upon this Court, especially when affirmed by the CA. None of theexceptions to this well-settled rule has been shown to exist in this case.

Petitioner does not question the validity of the vehicle sales invoice but merely argues that thesame does not reflect the true agreement of the parties. However, petitioner only had its baretestimony to back up the alleged arrangement with Rodriguez.

The Monte de Piedad checks – the supposedly "clear and obvious link"7 between the documentaryevidence and the true transaction between the parties – are equivocal at best. There is nothing inthose checks to establish such link. Rodriguez denies that there is such an agreement.

Unsubstantiated testimony, offered as proof of verbal agreements which tends to vary the terms ofa written agreement, is inadmissible under the parol evidence rule.8

Rule 130, Section 9 of the Revised Rules on Evidence embodies the parol evidence rule andstates:

SEC. 9. Evidence of written agreements.—When the terms of an agreement have been reducedto writing, it is considered as containing all the terms agreed upon and there can be, between the















37

parties and their successors-in-interest, no evidence of such terms other than the contents of thewritten agreement.

However, a party may present evidence to modify, explain or add to the terms of the writtenagreement if he puts in issue in his pleading:

(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 theexecution of the written agreement.

The term "agreement" includes wills.

The parol evidence rule forbids any addition to, or contradiction of, the terms of a writtenagreement by testimony or other evidence purporting to show that different terms were agreedupon by the parties, varying the purport of the written contract.9

This principle notwithstanding, petitioner would have the Court rule that this case falls within theexceptions, particularly that the written agreement failed to express the true intent and agreementof the parties. This argument is untenable.

Although parol evidence is admissible to explain the meaning of a contract, it cannot serve thepurpose of incorporating into the contract additional contemporaneous conditions which are notmentioned at all in the writing unless there has been fraud or mistake.10 Evidence of a prior orcontemporaneous verbal agreement is generally not admissible to vary, contradict or defeat theoperation of a valid contract.11

The Vehicle Sales Invoice12 is the best evidence of the transaction. A sales invoice is a

commercial document. Commercial documents or papers are those used by merchants orbusinessmen to promote or facilitate trade or credit transactions.13 Business forms, e.g., order slip,delivery charge invoice and the like, are commonly recognized in ordinary commercialtransactions as valid between the parties and, at the very least, they serve as an acknowledgmentthat a business transaction has in fact transpired.14 These documents are not mere scraps ofpaper bereft of probative value, but vital pieces of evidence of commercial transactions. They arewritten memorials of the details of the consummation of contracts.15

The terms of the subject sales invoice are clear. They show that Autocorp sold to Seaoil one unitRobex 200 LC Excavator paid for by checks issued by one Romeo Valera. This does not,however, change the fact that Seaoil Petroleum Corporation, as represented by Yu, is thecustomer or buyer. The moment a party affixes his or her signature thereon, he or she is bound byall the terms stipulated therein and is subject to all the legal obligations that may arise from their

breach.16

Oral testimony on the alleged conditions, coming from a party who has an interest in the outcomeof the case, depending exclusively on human memory, is not as reliable as written or documentaryevidence.17

Hence, petitioner’s contention that the document falls within the exception to the parol evidencerule is untenable. The exception obtains only where "the written contract is so ambiguous orobscure in terms that the contractual intention of the parties cannot be understood from a merereading of the instrument. In such a case, extrinsic evidence of the subject matter of the contract,of the relations of the parties to each other, and of the facts and circumstances surrounding themwhen they entered into the contract may be received to enable the court to make a proper

interpretation of the instrument."18

Even assuming there is a shred of truth to petitioner’s contention, the same cannot be made abasis for holding respondents liable therefor.

As pointed out by the CA, Rodriguez is a person separate and independent from Autocorp.Whatever obligations Rodriguez contracted cannot be attributed to Autocor p19 and vice versa. Infact, the obligation that petitioner proffers as its defense – under the Lease Purchase Agreement – was not even incurred by Rodriguez or by Autocorp but by Uniline.














































38

The Lease Purchase Agreement20 clearly shows that the parties thereto are two corporations notparties to this case: Focus Point and Uniline. Under this Lease Purchase Agreement, it is Uniline,as lessee/purchaser, and not Rodriguez, that incurred the debt to Focus Point. The obligation ofUniline to Focus Point arose out of a transaction completely different from the subject of theinstant case.

It is settled that a corporation has a personality separate and distinct from its individualstockholders or members, and is not affected by the personal rights, obligations and transactionsof the latter .21 The corporation may not be held liable for the obligations of the persons composing

it, and neither can its stockholders be held liable for its obligation.

22

Of course, this Court has recognized instances when the corporation’s separate personality maybe disregarded. However, we have also held that the same may only be done in cases where thecorporate vehicle is being used to defeat public convenience, justify wrong, protect fraud, ordefend crime.23 Moreover, the wrongdoing must be clearly and convincingly established. It cannotbe presumed.24

To reiterate, the transaction under the Vehicle Sales Invoice is separate and distinct from thatunder the Lease Purchase Agreement. In the former, it is Seaoil that owes Autocorp, while in thelatter, Uniline incurred obligations to Focus. There was never any allegation, much less anyevidence, that Autocorp was merely an alter ego of Uniline, or that the two corporations’ separatepersonalities were being used as a means to perpetrate fraud or wrongdoing.

Moreover, Rodriguez, as stockholder and director of Uniline, cannot be held personally liable forthe debts of the corporation, which has a separate legal personality of its own. While Section 31 ofthe Corporation Code25 lays down the exceptions to the rule, the same does not apply in this case.Section 31 makes a director personally liable for corporate debts if he willfully and knowingly votesfor or assents to patently unlawful acts of the corporation. Section 31 also makes a directorpersonally liable if he is guilty of gross negligence or bad faith in directing the affairs of thecorporation.26 The bad faith or wrongdoing of the director must be established clearly andconvincingly. Bad faith is never presumed.27

The burden of proving bad faith or wrongdoing on the part of Rodriguez was, on petitioner, aburden which it failed to discharge. Thus, it was proper for the trial court to have dismissed the

third-party complaint against Rodriguez on the ground that he was not a party to the sale of theexcavator.

Rule 6, Section 11 of the Revised Rules on Civil Procedure defines a third-party complaint as aclaim that a defending party may, with leave of court, file against a person not a party to theaction, called the third-party defendant, for contribution, indemnity, subrogation or any other relief,in respect of his opponent’s claim.

The purpose of the rule is to permit a defendant to assert an independent claim against a thirdparty which he, otherwise, would assert in another action, thus preventing multiplicity ofsuits.28 Had it not been for the rule, the claim could have been filed separately from the originalcomplaint.29

Petitioner’s claim against Rodriguez was fully ventilated in the proceedings before the trial court,tried and decided on its merits. The trial court’s ruling operates as res judicata against another suitinvolving the same parties and same cause of action. This is rightly so because the trial courtfound that Rodriguez was not a party to the sale of the excavator. On the other hand, petitionerSeaoil’s liability has been successfully established by respondent.

A last point. We reject Seaoil’s claim that "the ownership of the subject excavator, having beenlegally and completely transferred to Focus Point International, Inc., cannot be subject of replevinand plaintiff [herein respondent Autocorp] is not legally entitled to any writ of replevin."30 The claimis negated by the sales invoice which clearly states that "[u]ntil after the vehicle is fully paidinclusive of bank clearing time, it remains the property of Autocorp Group which reserves the rightto take possession of said vehicle at any time and place without prior notice."31

Considering, first, that Focus Point was not a party to the sale of the excavator and, second, thatSeaoil indeed failed to pay for the excavator in full, the same still rightfully belongs to Autocorp.

Additionally, as the trial court found, Seaoil had already assigned the same to its contractor for theconstruction of its depot in Batangas.32Hence, Seaoil has already enjoyed the benefit of thetransaction even as it has not complied with its obligation. It cannot be permitted to unjustly enrichitself at the expense of another.





















































39

WHEREFORE, the foregoing premises considered, the Petition is hereby DENIED. The Decisionof the Court of Appeals dated May 20, 2004 in CA-G.R. CV No. 72193 is AFFIRMED.

SO ORDERED.

G.R. No. L-68555 March 19, 1993

PRIME WHITE CEMENT CORPORATION, petitioner,vs.

HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO TE, respondents.

De Jesus & Associates for petitioner.

Padlan, Sutton, Mendoza & Associates for private respondent.

CAMPOS, JR., J.:

Before Us is a Petition for Review on Certiorari filed by petitioner Prime White Cement Corporationseeking the reversal of the decision * of the then Intermediate Appellate Court, the dispositive

portion of which reads as follows:

WHEREFORE, in view of the foregoing, the judgment appealed from is herebyaffirmed in toto. 1

The facts, as found by the trial court and as adopted by the respondent Court are hereby quoted,to wit:

On or about the 16th day of July, 1969, plaintiff and defendant corporation thru itsPresident, Mr. Zosimo Falcon and Justo C. Trazo, as Chairman of the Board,entered into a dealership agreement (Exhibit A) whereby said plaintiff wasobligated to act as the exclusive dealer and/or distributor of the said defendant

corporation of its cement products in the entire Mindanao area for a term of five (5)years and proving (sic ) among others that:

a. The corporation shall, commencing September, 1970, sell to andsupply the plaintiff, as dealer with 20,000 bags (94 lbs/bag) of whitecement per month;

b. The plaintiff shall pay the defendant corporation P9.70,Philippine Currency, per bag of white cement, FOB Davao andCagayan de Oro ports;

c. The plaintiff shall, every time the defendant corporation is ready

to deliver the good, open with any bank or banking institution aconfirmed, unconditional, and irrevocable letter of credit in favor ofthe corporation and that upon certification by the boat captain onthe bill of lading that the goods have been loaded on board thevessel bound for Davao the said bank or banking institution shallrelease the corresponding amount as payment of the goods soshipped.

Right after the plaintiff entered into the aforesaid dealership agreement, he placedan advertisement in a national, circulating newspaper the fact of his being theexclusive dealer of the defendant corporation's white cement products in Mindanaoarea, more particularly, in the Manila Chronicle dated August 16, 1969 (Exhibits Rand R-1) and was even congratulated by his business associates, so much so, he

was asked by some of his businessmen friends and close associates if they can behissub-dealer in the Mindanao area.

Relying heavily on the dealership agreement, plaintiff sometime in the months ofSeptember, October, and December, 1969, entered into a written agreement withseveral hardware stores dealing in buying and selling white cement in the Cities ofDavao and Cagayan de Oro which would thus enable him to sell his allocation of20,000 bags regular supply of the said commodity, by September, 1970 (Exhibits



40

O, O-1, O-2, P, P-1, P-2, Q, Q-1 and Q-2). After the plaintiff was assured by hissupposed buyer that his allocation of 20,000 bags of white cement can bedisposed of, he informed the defendant corporation in his letter dated August 18,1970 that he is making the necessary preparation for the opening of the requisiteletter of credit to cover the price of the due initial delivery for the month ofSeptember, 1970 (Exhibit B), looking forward to the defendant corporation's duty tocomply with the dealership agreement. In reply to the aforesaid letter of theplaintiff, the defendant corporation thru its corporate secretary, replied that theboard of directors of the said defendant decided to impose the following conditions:

a. Delivery of white cement shall commence at the end ofNovember, 1970;

b. Only 8,000 bags of white cement per month for only a period ofthree (3) months will be delivered;

c. The price of white cement was priced at P13.30 per bag;

d. The price of white cement is subject to readjustment unilaterallyon the part of the defendant;

e. The place of delivery of white cement shall be Austurias (sic );

f. The letter of credit may be opened only with the Prudential Bank,Makati Branch;

g. Payment of white cement shall be made in advance and whichpayment shall be used by the defendant as guaranty in the openingof a foreign letter of credit to cover costs and expenses in theprocurement of materials in the manufacture of white cement.(Exhibit C).

xxx xxx xxx

Several demands to comply with the dealership agreement (Exhibits D, E, G, I, R,L, and N) were made by the plaintiff to the defendant, however, defendant refusedto comply with the same, and plaintiff by force of circumstances was constrained tocancel his agreement for the supply of white cement with third parties, which wereconcluded in anticipation of, and pursuant to the said dealership agreement.

Notwithstanding that the dealership agreement between the plaintiff and defendantwas in force and subsisting, the defendant corporation, in violation of, and with evidentintention not to be bound by the terms and conditions thereof, entered into an exclusivedealership agreement with a certain Napoleon Co for the marketing of white cement inMindanao (Exhibit T) hence, this suit. (Plaintiff's Record on Appeal, pp. 86-90). 2

After trial, the trial court adjudged the corporation liable to Alejandro Te in the amount ofP3,302,400.00 as actual damages, P100,000.00 as moral damages, and P10,000.00 as and forattorney's fees and costs. The appellate court affirmed the said decision mainly on the followingbasis, and We quote:

There is no dispute that when Zosimo R. Falcon and Justo B. Trazo signed thedealership agreement Exhibit "A", they were the President and Chairman of the Board,respectively, of defendant-appellant corporation. Neither is the genuineness of the saidagreement contested. As a matter of fact, it appears on the face of the contract itselfthat both officers were duly authorized to enter into the said agreement and signed thesame for and in behalf of the corporation. When they, therefore, entered into the saidtransaction they created the impression that they were duly clothed with the authorityto do so. It cannot now be said that the disputed agreement which possesses all the

essential requisites of a valid contract was never intended to bind the corporation asthis avoidance is barred by the principle of estoppel. 3

In this petition for review, petitioner Prime White Cement Corporation made the followingassignment of errors. 4

I



41

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATECOURT ARE UNPRECEDENTED DEPARTURES FROM THE CODIFIEDPRINCIPLE THAT CORPORATE OFFICERS COULD ENTER INTOCONTRACTS IN BEHALF OF THE CORPORATION ONLY WITH PRIOR

APPROVAL OF THE BOARD OF DIRECTORS.

II

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE

COURT ARE CONTRARY TO THE ESTABLISHED JURISPRUDENCE,PRINCIPLE AND RULE ON FIDUCIARY DUTY OF DIRECTORS AND OFFICERSOF THE CORPORATION.

III

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATECOURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE, PRINCIPLE

AND RULE ON UNENFORCEABLE CONTRACTS AS PROVIDED IN ARTICLE1317 OF THE NEW CIVIL CODE.

IV

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATECOURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE AS TOWHEN AWARD OF ACTUAL AND MORAL DAMAGES IS PROPER.

V

IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN ITS ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES WITHCOUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS CLEARLYDEPARTED FROM THE ACCEPTED USUAL, COURSE OF JUDICIALPROCEEDINGS.

There is only one legal issue to be resolved by this Court: whether or not the "dealershipagreement" referred by the President and Chairman of the Board of petitioner corporation is avalid and enforceable contract. We do not agree with the conclusion of the respondent Court that itis.

Under the Corporation Law, which was then in force at the time this case arose, 5 as well as underthe present Corporation Code, all corporate powers shall be exercised by the Board of Directors,except as otherwise provided by law. 6 Although it cannot completely abdicate its power andresponsibility to act for the juridical entity, the Board may expressly delegate specific powers to itsPresident or any of its officers. In the absence of such express delegation, a contract entered intoby its President, on behalf of the corporation, may still bind the corporation if the board shouldratify the same expressly or impliedly. Implied ratification may take various forms — like silence or

acquiescence; by acts showing approval or adoption of the contract; or by acceptance andretention of benefits flowing therefrom. 7 Furthermore, even in the absence of express or impliedauthority by ratification, the President as such may, as a general rule, bind the corporation by acontract in the ordinary course of business, provided the same is reasonable under thecircumstances. 8 These rules are basic, but are all general and thus quite flexible. They applywhere the President or other officer, purportedly acting for the corporation, is dealing with a third

person, i. e., a person outside the corporation.

The situation is quite different where a director or officer is dealing with his own corporation. In theinstant case respondent Te was not an ordinary stockholder; he was a member of the Board ofDirectors and Auditor of the corporation as well. He was what is often referred to as a "self-dealing" director.

A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to hiscorporation. 9 In case his interests conflict with those of the corporation, he cannot sacrifice thelatter to his own advantage and benefit. As corporate managers, directors are committed to seekthe maximum amount of profits for the corporation. This trust relationship "is not a matter ofstatutory or technical law. It springs from the fact that directors have the control and guidance ofcorporate affairs and property and hence of the property interests of the stockholders." 10 In thecase of Gokongwei v. Securities and Exchange Commission, this Court quoted with favorfrom Pepper v. Litton, 11 thus:



42

. . . He cannot by the intervention of a corporate entity violate the ancient preceptagainst serving two masters. . . . He cannot utilize his inside information and hisstrategic position for his own preferment. He cannot violate rules of fair play bydoing indirectly through the corporation what he could not do directly. He cannotuse his power for his personal advantage and to the detriment of the stockholdersand creditors no matter how absolute in terms that power may be and no matterhow meticulous he is to satisfy technical requirements. For that power is at alltimes subject to the equitable limitation that it may not be exercised for theaggrandizement, preference, or advantage of the fiduciary to the exclusion ordetriment of the cestuis. . . . .

On the other hand, a director's contract with his corporation is not in all instances void or voidable.If the contract is fair and reasonable under the circumstances, it may be ratified by thestockholders provided a full disclosure of his adverse interest is made. Section 32 of theCorporation Code provides, thus:

Sec. 32. Dealings of directors, trustees or officers with the corporation. — Acontract of the corporation with one or more of its directors or trustees or officers isvoidable, at the option of such corporation, unless all the following conditions arepresent:

1. That the presence of such director or trustee in the board meeting in which the

contract was approved was not necessary to constitute a quorum for suchmeeting;

2. That the vote of such director or trustee was not necessary for the approval ofthe contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in the case of an officer, the contract with the officer has been previouslyauthorized by the Board of Directors.

Where any of the first two conditions set forth in the preceding paragraph is

absent, in the case of a contract with a director or trustee, such contract may beratified by the vote of the stockholders representing at least two-thirds (2/3) of theoutstanding capital stock or of two-thirds (2/3) of the members in a meeting calledfor the purpose: Provided, That full disclosure of the adverse interest of thedirectors or trustees involved is made at such meeting: Provided, however, Thatthe contract is fair and reasonable under the circumstances.

Although the old Corporation Law which governs the instant case did not contain a similarprovision, yet the cited provision substantially incorporates well-settled principles in corporatelaw. 12

Granting arguendo that the "dealership agreement" involved here would be valid and enforceable

if entered into with a person other than a director or officer of the corporation, the fact that theother party to the contract was a Director and Auditor of the petitioner corporation changes thewhole situation. First of all, We believe that the contract was neither fair nor reasonable. The"dealership agreement" entered into in July, 1969, was to sell and supply to respondent Te 20,000bags of white cement per month, for five years starting September, 1970, at the fixed price ofP9.70 per bag. Respondent Te is a businessman himself and must have known, or at least mustbe presumed to know, that at that time, prices of commodities in general, and white cement inparticular, were not stable and were expected to rise. At the time of the contract, petitionercorporation had not even commenced the manufacture of white cement, the reason why deliverywas not to begin until 14 months later. He must have known that within that period of six years,there would be a considerable rise in the price of white cement. In fact, respondent Te's ownMemorandum shows that in September, 1970, the price per bag was P14.50, and by the middle of1975, it was already P37.50 per bag. Despite this, no provision was made in the "dealership

agreement" to allow for an increase in price mutually acceptable to the parties. Instead, the pricewas pegged at P9.70 per bag for the whole five years of the contract. Fairness on his part as adirector of the corporation from whom he was to buy the cement, would require such a provision.In fact, this unfairness in the contract is also a basis which renders a contract entered into by thePresident, without authority from the Board of Directors, void or voidable, although it may havebeen in the ordinary course of business. We believe that the fixed price of P9.70 per bag for aperiod of five years was not fair and reasonable. Respondent Te, himself, when he subsequentlyentered into contracts to resell the cement to his "new dealers" Henry Wee 13 and GaudencioGalang 14 stipulated as follows:



43

The price of white cement shall be mutually determined by us but in no case shallthe same be less than P14.00 per bag (94 lbs).

The contract with Henry Wee was on September 15, 1969, and that with Gaudencio Galang, onOctober 13, 1967. A similar contract with Prudencio Lim was made on December 29, 1969. 15 Allof these contracts were entered into soon after his "dealership agreement" with petitionercorporation, and in each one of them he protected himself from any increase in the market price ofwhite cement. Yet, except for the contract with Henry Wee, the contracts were for only two yearsfrom October, 1970. Why did he not protect the corporation in the same manner when he entered

into the "dealership agreement"? For that matter, why did the President and the Chairman of theBoard not do so either? As director, specially since he was the other party in interest, respondentTe's bounden duty was to act in such manner as not to unduly prejudice the corporation. In thelight of the circumstances of this case, it is to Us quite clear that he was guilty of disloyalty to thecorporation; he was attempting in effect, to enrich himself at the expense of the corporation. Thereis no showing that the stockholders ratified the "dealership agreement" or that they were fullyaware of its provisions. The contract was therefore not valid and this Court cannot allow him toreap the fruits of his disloyalty.

As a result of this action which has been proven to be without legal basis, petitioner corporation'sreputation and goodwill have been prejudiced. However, there can be no award for moraldamages under Article 2217 and succeeding articles on Section 1 of Chapter 3 of Title XVIII of theCivil Code in favor of a corporation.

In view of the foregoing, the Decision and Resolution of the Intermediate Appellate Court datedMarch 30, 1984 and August 6, 1984, respectively, are hereby SET ASIDE. Private respondent

Alejandro Te is hereby ordered to pay petitioner corporation the sum of P20,000.00 for attorney'sfees, plus the cost of suit and expenses of litigation.

SO ORDERED.

G.R. No. L-30460 March 12, 1929

C. H. STEINBERG, as Receiver of the Sibuguey Trading Company, Incorporated, plaintiff-appellant,

vs.GREGORIO VELASCO, ET AL., defendants-appellees.

Frank H. Young for appellant.Pablo Lorenzo and Delfin Joven for appellees.

STATEMENT

Plaintiff is the receiver of the Sibuguey Trading Company, a domestic corporation. The defendantsare residents of the Philippine Islands.

It is alleged that the defendants, Gregorio Velasco, as president, Felix del Castillo, as vice-

president, Andres L. Navallo, as secretary-treasurer, and Rufino Manuel, as director of TradingCompany, at a meeting of the board of directors held on July 24, 1922, approved and authorizedvarious lawful purchases already made of a large portion of the capital stock of the company fromits various stockholders, thereby diverting its funds to the injury, damage and in fraud of thecreditors of the corporation. That pursuant to such resolution and on March 31, 1922, thecorporation purchased from the defendant S. R. Ganzon 100 shares of its capital stock of the parvalue of P10, and on June 29, 1922, it purchased from the defendant Felix D. Mendaros 100shares of the par value of P10, and on July 16, 1922, it purchased from the defendant Felix D.Mendaros 100 shares of the par value of P10, each, and on April 5, 1922, it purchased from thedefendant Dionisio Saavedra 10 shares of the same par value, and on June 29, 1922, itpurchased from the defendant Valentin Matias 20 shares of like value. That the total amount of thecapital stock unlawfully purchased was P3,300. That at the time of such purchase, the corporationhad accounts payable amounting to P13,807.50, most of which were unpaid at the time petition forthe dissolution of the corporation was financial condition, in contemplation of an insolvency anddissolution.

As a second cause of action, plaintiff alleges that on July 24, 1922, the officers and directors of thecorporation approved a resolution for the payment of P3,000 as dividends to its stockholders,which was wrongfully done and in bad faith, and to the injury and fraud of its creditors. That at thetime the petition for the dissolution of the corporation was presented it had accounts payable in thesum of P9,241.19, "and practically worthless accounts receivable."



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Plaintiff prays judgment for the sum of P3,300 from the defendants Gregorio Velasco, Felix delCastillo, Andres L. Navallo and Rufino Manuel, personally as members of the Board of Directors,or for the recovery from the defendants S. R. Ganzon, of the sum of P1,000, from the defendantFelix D. Mendaros, P2,000, and from the defendant Dionisio Saavedra, P100, and under hissecond cause of action, he prays judgment for the sum of P3,000, with legal interest against theboard of directors, and costs.

For answer the defendants Felix del Castillo, Rufino Manuel, S. R. Ganzon, Dionisio Saavedraand Valentin Matias made a general and specific denial.

In his amended answer, the defendant Gregorio Velasco admits paragraphs, 1, 2 and 3 of eachcause of action of the complaint, and that the shares mentioned in paragraph 4 of the first causeof action were purchased, but alleges that they were purchased by virtue of a resolution of theboard of directors of the corporation "when the business of the company was going on very well."That the defendant is one of the principal shareholders, and that about the same time, hepurchase other shares for his own account, because he thought they would bring profits. As to thesecond cause of action, he admits that the dividends described in paragraph 4 of the complaintwere distributed, but alleges that such distribution was authorized by the board of directors, "andthat the amount represented by said dividends really constitutes a surplus profit of thecorporation," and as counterclaim, he asks for judgment against the receiver for P12,512.47 forand on account of his negligence in failing to collect the accounts.

Although duly served, the defendant Mendaros did not appear or answer. The defendant Navallowas not served, and the case against him was dismissed.

April 30, 1928, the case was tried and submitted on a stipulation of facts, based upon which thelower court dismissed plaintiff's complaint, and rendered judgment for the defendants, with costsagainst the plaintiff, and absolved him from the cross-complaint of the defendant Velasco, and onappeal, the plaintiff assigns the following errors:

1. In holding that the Sibuguey Trading Company, Incorporated, could legally purchase itsown stock.

2. In holding that the Board of Directors of the said Corporation could legally declared a

dividend of P3,000, July 24, 1922.

JOHNS, J.:

It is stipulated that on July 24, 1922, the directors of the corporation approved the purchase ofstocks as follows:

One hundred shares from S. R. Ganzon for P1,000;

One hundred shares from Felix D. Mendaros at the same price; which purchase was made onJune 29, 1922; another

One hundred shares from Felix D. Mendaros at the same price on July 16, 1922;

Ten shares from Dionisio Saavedra at the same price on June 29, 1922.

That during such times, the defendant Gregorio Velasco purchased 13 shares for the corporationfor P130; Felix del Castillo — 42 shares for P420; Andres Navallo — 15 shares for P150; and thedefendant Mendaros — 10 shares for P100. That during the time these various purchases weremade, the total amount of subscribed and paid up capital stock of the corporation was P10,030,out of the authorized capital stock 2,000 shares of the par value of P10 each.

Paragraph 4 of the stipulation also recites:

Be it also admitted as a fact that the time of the said purchases there was a surplus profitof the corporation above-named of P3,314.72.

Paragraph 5 is as follows:

That at the time of the repeatedly mentioned various purchases of the said capital stockwere made, the said corporation had Accounts Payable in the total amount of P13,807.50as shown by the statement of the corporation, dated June 30, 1922, and the Accounts



45

Receivable in the sum of P19,126.02 according to the books, and that the intention of theBoard of Directors was to resell the stocks purchased by the corporations at a sum abovepar for each stock, this expectation being justified by the then satisfactory and soundfinancial condition of the business of the corporation.

It is also stipulated that on September 11, 1923, when the petition for the dissolution of thecorporation was presented to the court, according to a statement made June 30, 1923, it hasaccounts payable aggregating P9,41.19, and accounts receivable for P12,512.47.

Paragraph 7 of the stipulation recites:

That the same defendants, mentioned in paragraph 2 of this stipulation of facts and in thesame capacity, on the same date of July 24, 1922, and at the said meeting of the saidBoard of Directors, approved and authorized by resolution the payment of dividends to itsstockholders, in the sum of three thousand pesos (P3,000), Philippine currency, whichpayments were made at different dates, between September 30, 1922, and May 12, 1923,both dates inclusive, at a time when the corporation had accounts less in amount than theaccounts receivable, which resolution was based upon the balance sheet made as June30, 1922, said balance sheet showing that the corporation had a surplus of P1,069.41, anda profit on the same date of P2,656.08, or a total surplus amount of P3,725.49, and areserve fund of P2,889.23 for bad and doubtful accounts and depreciation of equipment,thereby leaving a balance of P3,314.72 of net surplus profit after paying this dividend.

It is also stipulated at a meeting of the board of directors held on July 24, 1922, as follows:

6. The president and manager submitted to the Board of Directors his statement andbalance sheet for the first semester ending June 30, 1922 and recommended that P3,000— out of the surplus account be set aside for dividends payable, and that payments bemade in installments so as not to effect the financial condition of the corporation. Thatstockholders having outstanding account with the corporation should settle first theiraccounts before payments of their dividends could be made. Mr. Castillo moved that thestatement and balance sheet be approved as submitted, and also the recommendations ofthe president. Seconded by Mr. Manuel. Approved.

Paragraph 8 of the stipulation is as follows:

That according to the balance sheet of the corporation, dated June 30, 1923, it hadaccounts receivable in the sum of P12,512.47, due from various contractor and laborers ofthe National Coal Company, and also employees of the herein corporation, which theherein receiver, after his appointment on February 28, 1924, although he made due effortsby personally visiting the location of the corporation, and of National Coal Company, at itsoffices, at Malangas, Mindanao, and by writing numerous letters of demand to the debtorsof the corporation, in order to collect these accounts receivable, he was unable to do so asmost of them were without goods or property, and he could not file any suit against themthat might have any property, for the reason that he had no funds on hand with which topay the filing and sheriff fees to Malangas, and other places of their residences.

From all of which, it appears that on June 30, 1922, the board of directors of the corporationauthorized the purchase of, purchased and paid for, 330 shares of the capital stock of thecorporation at the agreed price of P3,300, and that at the time the purchase was made, thecorporation was indebted in the sum of P13,807.50, and that according to its books, it hadaccounts receivable in the sum of P19,126.02. That on September 11, 1923, when the petitionwas filed for its dissolution upon the ground that it was insolvent, its accounts payable amountedto P9,241.19, and its accounts receivable P12,512.47, or an apparent asset of P3,271.28 over andabove its liabilities. But it will be noted that there is no stipulation or finding of facts as to what wasthe actual cash value of its accounts receivable. Neither is there any stipulation that thoseaccounts or any part of them ever have been or will be collected, and it does appear that after hisappointment on February 28, 1924, the receiver made a diligent effort to collect them, and that hewas unable to do so, and it also appears from the minutes of the board of directors that the

president and manager "recommended that P3,000 — out of the surplus account to be set asidefor dividends payable, and that payments be made in installments so as not to effect the financialcondition of the corporation."

If in truth and in fact the corporation had an actual bona fide surplus of P3,000 over and above allof its debt and liabilities, the payment of the P3,000 in dividends would not in the least impair thefinancial condition of the corporation or prejudice the interests of its creditors.



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It is very apparent that on June 24, 1922, the board of directors acted on assumption that,because it appeared from the books of the corporation that it had accounts receivable of the facevalue of P19,126.02, therefore it had a surplus over and above its debts and liabilities. But asstated there is no stipulation as to the actual cash value of those accounts, and it does appearfrom the stipulation that on February 28, 1924, P12,512.47 of those accounts had but little, if any,value, and it must be conceded that, in the purchase of its own stock to the amount of P3,300 andin declaring the dividends to the amount of P3,000, the real assets of the corporation werediminished P6,300. It also appears from paragraph 4 of the stipulation that the corporation had a"surplus profit" of P3,314.72 only. It is further stipulated that the dividends should "be made ininstallments so as not to effect financial condition of the corporation." In other words, that thecorporation did not then have an actual bona fidesurplus from which the dividends could be paid,and that the payment of them in full at the time would "affect the financial condition of thecorporation."

It is, indeed, peculiar that the action of the board in purchasing the stock from the corporation andin declaring the dividends on the stock was all done at the same meeting of the board of directors,and it appears in those minutes that the both Ganzon and Mendaros were formerly directors andresigned before the board approved the purchase and declared the dividends, and that out of thewhole 330 shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of 300 shares out ofthe 330, which were purchased by the corporation, and for which it paid P3,300. In other words,that the directors were permitted to resign so that they could sell their stock to the corporation. Asstated, the authorized capital stock was P20,000 divided into 2,000 shares of the par value of P10

each, which only P10,030 was subscribed and paid. Deducting the P3,300 paid for the purchaseof the stock, there would be left P7,000 of paid up stock, from which deduct P3,000 paid individends, there would be left P4,000 only. In this situation and upon this state of facts, it is veryapparent that the directors did not act in good faith or that they were grossly ignorant of theirduties.

Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7, p. 473, section 454where it is said:

General Duty to Exercise Reasonable Care. — The directors of a corporation are bound tocare for its property and manage its affairs in good faith, and for a violation of these dutiesresulting in waste of its assets or injury to the property they are liable to account the same

as other trustees. Are there can be no doubt that if they do acts clearly beyond theirpower, whereby loss ensues to the corporation, or dispose of its property or pay away itsmoney without authority, they will be required to make good the loss out of their privateestates. This is the rule where the disposition made of money or property of thecorporation is one either not within the lawful power of the corporation, or, if within theauthority of the particular officer or officers.

And section 458 which says:

Want of Knowledge, Skill, or Competency . — It has been said that directors are not liablefor losses resulting to the corporation from want of knowledge on their part; or for mistakeof judgment, provided they were honest, and provided they are fairly within the scope ofthe powers and discretion confided to the managing body. But the acceptance of the officeof a director of a corporation implies a competent knowledge of the duties assumed, anddirectors cannot excuse imprudence on the ground of their ignorance or inexperience; andif they commit an error of judgment through mere recklessness or want of ordinaryprudence or skill, they may be held liable for the consequences. Like a mandatory, towhom he has been likened, a director is bound not only to exercise proper care anddiligence, but ordinary skill and judgment. As he is bound to exercise ordinary skill and

judgment, he cannot set up that he did not possess them.

Creditors of a corporation have the right to assume that so long as there are outstanding debtsand liabilities, the board of directors will not use the assets of the corporation to purchase its ownstock, and that it will not declare dividends to stockholders when the corporation is insolvent.

The amount involved in this case is not large, but the legal principles are important, and we havegiven them the consideration which they deserve.

The judgment of the lower court is reversed, and (a), as to the first cause of action, one will beentered for the plaintiff and against the defendant S. R. Ganzon for the sum of P1,000, with legalinterest from the 10th of February, 1926, and against the defendant Felix D. Medaros for P2,000,with like interests, and against the defendant Dionisio Saavedra for P100, with like interest, andagainst each of them for costs, each on their primary liability as purchasers of stock, and (b)against the defendants Gregorio Velasco, Felix del Castillo and Rufino Manuel, personally, as



47

members of the board of directors of the Sibuguey Trading Company, Incorporated, assecondarily liable for the whole amount of such stock sold and purchased as above stated, and onthe second cause of action, judgment will be entered (c) for the plaintiff and jointly and severallyagainst the defendants Gregorio Velasco, Felix del Castillo and Rufino Manuel, personally, asmembers of the board of directors of the Sibuguey Trading Company, Incorporated, for P3,000,with interest thereon from February 10, 1926, at the rate of 6 per cent per annum, and costs. Soordered.

G.R. No. L-15092 May 18, 1962

ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,vs.BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.

Tañada, Teehankee and Carreon for plaintiffs-appellants.Hilado and Hilado for defendant-appellee.

REYES, J.B.L., J .:

Appeal on points of law from a judgment of the Court of First Instance of Occidental Negros, in itsCivil Case No. 2603, dismissing plaintiff's complaint that sought to compel the defendant Milling

Company to increase plaintiff's share in the sugar produced from their cane, from 60% to 62.33%,starting from the 1951-1952 crop year. 1äwphï1.ñët

It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and theLimited co-partnership Gonzaga and Company, had been and are sugar planters adhered to thedefendant-appellee's sugar central mill under identical milling contracts. Originally executed in1919, said contracts were stipulated to be in force for 30 years starting with the 1920-21 crop, andprovided that the resulting product should be divided in the ratio of 45% for the mill and 55% forthe planters. Sometime in 1936, it was proposed to execute amended milling contracts, increasingthe planters' share to 60% of the manufactured sugar and resulting molasses, besides otherconcessions, but extending the operation of the milling contract from the original 30 years to 45years. To this effect, a printed Amended Milling Contract form was drawn up. On August 20, 1936,the Board of Directors of the appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts

No. 11, Acuerdo No. 1) granting further concessions to the planters over and above thosecontained in the printed Amended Milling Contract. The bone of contention is paragraph 9 of thisresolution, that reads as follows:

ACTA No. 11SESSION DE LA JUNTA DIRECTIVA

AGOSTO 20, 1936

x x x x x x x x x

Acuerdo No. 1. — Previa mocion debidamente secundada, la Junta enconsideracion a una peticion de los plantadores hecha por un comite nombrado

por los mismos, acuerda enmendar el contrato de molienda enmendadomedientelas siguentes:

x x x x x x x x x

9.a Que si durante la vigencia de este contrato de Molienda Enmendado,lascentrales azucareras, de Negros Occidental, cuya produccion anual de azucarcentrifugado sea mas de una tercera parte de la produccion total de todaslascentrales azucareras de Negros Occidental, concedieren a sus plantadoresmejores condiciones que la estipuladas en el presente contrato, entonces esasmejores condiciones se concederan y por el presente se entenderan concedidas alos platadores que hayan otorgado este Contrato de Molienda Enmendado.

Appellants signed and executed the printed Amended Milling Contract on September 10, 1936,but a copy of the resolution of August 10, 1936, signed by the Central's General Manager, was notattached to the printed contract until April 17, 1937; with the notation —

Las enmiendas arriba transcritas forman parte del contrato de molienda enmendado,otorgado por — y la Bacolod-Murcia Milling Co., Inc.



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In 1953, the appellants initiated the present action, contending that three Negros sugar centrals(La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production exceeding one-third of the production of all the sugar central mills in the province, had already granted increasedparticipation (of 62.5%) to their planters, and that under paragraph 9 of the resolution of August20, 1936, heretofore quoted, the appellee had become obligated to grant similar concessions tothe plaintiffs (appellants herein). The appellee Bacolod-Murcia Milling Co., inc., resisted the claim,and defended by urging that the stipulations contained in the resolution were made withoutconsideration; that the resolution in question was, therefore, null and void ab initio, being in effecta donation that was ultra vires and beyond the powers of the corporate directors to adopt.

After trial, the court below rendered judgment upholding the stand of the defendant Millingcompany, and dismissed the complaint. Thereupon, plaintiffs duly appealed to this Court.

We agree with appellants that the appealed decisions can not stand. It must be remembered thatthe controverted resolution was adopted by appellee corporation as a supplement to, or furtheramendment of, the proposed milling contract, and that it was approved on August 20, 1936,twenty-one days prior to the signing by appellants on September 10, of the Amended MillingContract itself; so that when the Milling Contract was executed, the concessions granted by thedisputed resolution had been already incorporated into its terms. No reason appears of recordwhy, in the face of such concessions, the appellants should reject them or consider them asseparate and apart from the main amended milling contract, specially taking into account thatappellant Alfredo Montelibano was, at the time, the President of the Planters Association (Exhibit

4, p. 11) that had agitated for the concessions embodied in the resolution of August 20, 1936. Thatthe resolution formed an integral part of the amended milling contract, signed on September 10,and not a separate bargain, is further shown by the fact that a copy of the resolution was simplyattached to the printed contract without special negotiations or agreement between the parties.

It follows from the foregoing that the terms embodied in the resolution of August 20, 1936 weresupported by the same causa or consideration underlying the main amended milling contract; i.e.,the promises and obligations undertaken thereunder by the planters, and, particularly, theextension of its operative period for an additional 15 years over and beyond the 30 yearsstipulated in the original contract. Hence, the conclusion of the court below that the resolutionconstituted gratuitous concessions not supported by any consideration is legally untenable.

All disquisition concerning donations and the lack of power of the directors of the respondentsugar milling company to make a gift to the planters would be relevant if the resolution in questionhad embodied a separate agreement after the appellants had already bound themselves to theterms of the printed milling contract. But this was not the case. When the resolution was adoptedand the additional concessions were made by the company, the appellants were not yet obligatedby the terms of the printed contract, since they admittedly did not sign it until twenty-one dayslater, on September 10, 1936. Before that date, the printed form was no more than a proposal thateither party could modify at its pleasure, and the appellee actually modified it by adopting theresolution in question. So that by September 10, 1936 defendant corporation already understoodthat the printed terms were not controlling, save as modified by its resolution of August 20, 1936;and we are satisfied that such was also the understanding of appellants herein, and that the mindsof the parties met upon that basis. Otherwise there would have been no consent or "meeting of theminds", and no binding contract at all. But the conduct of the parties indicates that they assumed,

and they do not now deny, that the signing of the contract on September 10, 1936, did give rise toa binding agreement. That agreement had to exist on the basis of the printed terms as modified bythe resolution of August 20, 1936, or not at all. Since there is no rational explanation for thecompany's assenting to the further concessions asked by the planters before the contracts weresigned, except as further inducement for the planters to agree to the extension of the contractperiod, to allow the company now to retract such concessions would be to sanction a fraud uponthe planters who relied on such additional stipulations.

The same considerations apply to the "void innovation" theory of appellees. There can be nonovation unless two distinct and successive binding contracts take place, with the later designedto replace the preceding convention. Modifications introduced before a bargain becomesobligatory can in no sense constitute novation in law.

Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not attached tothe printed contract until April 17, 1937. But, except in the case of statutory forms or solemnagreements (and it is not claimed that this is one), it is the assent and concurrence (the "meetingof the minds") of the parties, and not the setting down of its terms, that constitutes a bindingcontract. And the fact that the addendum is only signed by the General Manager of the millingcompany emphasizes that the addition was made solely in order that the memorial of the terms ofthe agreement should be full and complete.



49

Much is made of the circumstance that the report submitted by the Board of Directors of theappellee company in November 19, 1936 (Exhibit 4) only made mention of 90%, the plantershaving agreed to the 60-40 sharing of the sugar set forth in the printed "amended millingcontracts", and did not make any reference at all to the terms of the resolution of August 20, 1936.But a reading of this report shows that it was not intended to inventory all the details of theamended contract; numerous provisions of the printed terms are alao glossed over. The Directorsof the appellee Milling Company had no reason at the time to call attention to the provisions of theresolution in question, since it contained mostly modifications in detail of the printed terms, and theonly major change was paragraph 9 heretofore quoted; but when the report was made, thatparagraph was not yet in effect, since it was conditioned on other centrals granting betterconcessions to their planters, and that did not happen until after 1950. There was no reason in1936 to emphasize a concession that was not yet, and might never be, in effective operation.

There can be no doubt that the directors of the appellee company had authority to modify theproposed terms of the Amended Milling Contract for the purpose of making its terms moreacceptable to the other contracting parties. The rule is that —

It is a question, therefore, in each case of the logical relation of the act to the corporatepurpose expressed in the charter. If that act is one which is lawful in itself, and nototherwise prohibited, is done for the purpose of serving corporate ends, and is reasonablytributary to the promotion of those ends, in a substantial, and not in a remote and fancifulsense, it may fairly be considered within charter powers. The test to be applied is whether

the act in question is in direct and immediate furtherance of the corporation's business,fairly incident to the express powers and reasonably necessary to their exercise. If so, thecorporation has the power to do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed.1950, pp. 266-268)

As the resolution in question was passed in good faith by the board of directors, it is valid andbinding, and whether or not it will cause losses or decrease the profits of the central, the court hasno authority to review them.

They hold such office charged with the duty to act for the corporation according to theirbest judgment, and in so doing they cannot be controlled in the reasonable exercise andperformance of such duty. Whether the business of a corporation should be operated at a

loss during depression, or close down at a smaller loss, is a purely business and economicproblem to be determined by the directors of the corporation and not by the court. It is awell-known rule of law that questions of policy or of management are left solely to thehonest decision of officers and directors of a corporation, and the court is without authorityto substitute its judgment of the board of directors; the board is the business manager ofthe corporation, and so long as it acts in good faith its orders are not reviewable by thecourts. (Fletcher on Corporations, Vol. 2, p. 390).

And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian Philippines,San Carlos and Binalbagan (which produce over one-third of the entire annual sugar production inOccidental Negros) have granted progressively increasing participations to their adhered planterat an average rate of

62.333% for the 1951-52 crop year;

64.2% for 1952-53;

64.3% for 1953-54;

64.5% for 1954-55; and

63.5% for 1955-56,

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August 20,1936, duty bound to grant similar increases to plaintiffs-appellants herein.

WHEREFORE, the decision under appeal is reversed and set aside; and judgment is decreedsentencing the defendant-appellee to pay plaintiffs-appellants the differential or increase ofparticipation in the milled sugar in accordance with paragraph 9 of the appellee Resolution of

August 20, 1936, over and in addition to the 60% expressed in the printed Amended MillingContract, or the value thereof when due, as follows:

0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants havingreceived an additional 2% corresponding to said year in October, 1953;



50

2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all appellantsthereafter — 4.2% for the 1952-1953 crop year;4.3% for the 1953-1954 crop year;4.5% for the 1954-1955 crop year;3.5% for the 1955-1956 crop year;

with interest at the legal rate on the value of such differential during the time they were withheld;and the right is reserved to plaintiffs-appellants to sue for such additional increases as they may

be entitled to for the crop years subsequent to those herein adjudged.

Costs against appellee, Bacolod-Murcia Milling Co.

G.R. No. L-5377 December 29, 1954

MARIA CLARA PIROVANA ET AL., plaintiffs-appellees,vs.THE DE LA RAMA STEAMSHIP CO., defendant-appellant.

Del Rosario and Garcia for appellant.Vicente J. Francisco for appellees.

BAUTISTA ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of Rizal declaring the donationmade by the defendant in favor of the minor children of the late Enrico Pirovano of the proceeds ofthe insurance policies taken on his life valid and binding, and ordering said defendant to pay tosaid minor children the sum of P583,813.59, with interest thereon at the rate of per cent from thedate of filing of the complaint, plus an additional amount equivalent to 20 per cent of said sum ofP538,813.59 as damages by way of attorney's fees and the costs of action.

Plaintiffs herein are the minor children of the late Enrico Pirovano represented by their mother and judicial guardian Estefania R. Pirovano. They seek to enforce certain resolutions adopted by theBoard of Directors and stockholders of the defendant company giving to said minor children of theproceeds of the insurance policies taken on the life of their deceased father Enrico Pirovano withthe company as beneficiary. Defendant's main defense is: that said resolutions and the contractexecuted pursuant thereto are ultra vires, and, if valid, the obligation to pay the amount given isnot yet due and demandable.

The trial court resolved all the issues raised by the parties in favor of the plaintiffs and, afterconsidering the evidence, both oral and documentary, arrived at the following conclusions:

First . — That the contract executed between the plaintiffs and the defendant is arenumerative donation.

Second . — That said contract or donation is not ultra vires, but an act executed within thepowers of the defendant corporation in accordance with its articles of incorporation and bylaws, sanctioned and approved by its Board of Directors and stockholders; andsubsequently ratified by other subsequent acts of the defendant company.

Third . — That the said donation is in accordance with the trend of modern and moreenlightened legislation in its treatment of questions between labor and capital.

Fourth. — That the condition mentioned in the donation is null and void because itdepends on the provisions of Article 1115 of the old Civil Code.

Fifth. — That if the condition is valid, its non-fulfillment is due to the desistance of thedefendant company from obeying and doing the wishes and mandates of the majority ofthe stockholders.

Sixth. — That the non-payment of the debt in favor of the National Development Companyis not due to the lack of funds, nor to lack of authority, but the desire of the President of thecorporation to preserve and continue the Government participation in the company.



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Seventh. — That due demands were made by the plaintiffs and their attorneys and thesedemands were rejected for no justifiable or legal grounds.

The important facts which need to be considered for purposes of this appeal may be briefly statedas follows: Defendant is a corporation duly organized in accordance with law with an authorizedcapital of P500,000, divided into 5,000 shares, with a par value of P100 each share. Thestockholders were: Esteban de la Rama, 1,800 shares, Leonor de la Rama, 100 shares, Estefaniade la Rama, 100 shares, and Eliseo Hervas, Tomas Concepcion, Antonio G. Juanco, andGaudencio Volasote with 5 shares each. Leonor and Estefania are daughters of Don Esteban,

while the rest his employees. Estefania de la Rama was married to the late Enrico Pirovano and tothem four children were born who are the plaintiffs in this case.

Enrico Pirovano became the president of the defendant company and under his management thecompany grew and progressed until it became a multi-million corporation by the time Pirovanowas executed by the Japanese during the occupation. On May 13, 1941, the capital stock of thecorporation was increased to P2,000,000, after which a 100 per cent stock dividend was declared.Subsequently, or before the outbreak of the war , new stock dividends of 200 per cent and 33 1/3per cent were again declared. On December 4, 1941, the capital stock was once more increasedto P5,000,000. Under Pirovano's management, the assets of the company grew and increasedfrom an original paid up capital of around P240,000 to P15,538,024.37 by September 30, 1941(Exhibit HH).

In the meantime, Don Esteban de la Rama, who practically owned and controlled the stock of thedefendant corporation, distributed his shareholding among his five daughters, namely, Leonor,Estefania, Lourdes, Lolita and Conchita and his wife Natividad Aguilar so that, at that time, or onJuly 10, 1946, the stockholding of the corporation stood as follows: Esteban de la Rama, 869shares, Leonor de la Rama, 3,375 shares, Estefania de la Rama, 3,368 shares, Lourdes de laRama, 3,368 shares, Lolita de la Rama, 3,368 shares, Conchita de la Rama, 3,376 shares, andNatividad Aguilar, 2,136 shares. The other stockholders , namely, Eliseo Hervas, TomasConcepcion, Antonio Juanco, and Jose Aguilar, who were merely employees of Don Esteban,were given 40 shares each, while Pio Pedrosa, Marcial P. Lichauco and Rafael Roces, one shareeach, because they merely represented the National Development Company. This Company wasgiven representation in the Board Of Directors of the corporation because at that time the latterhad an outstanding bonded indebtedness to the National Development Company.

This bonded indebtedness was incurred on February 26, 1940 and was in the amount ofP7,500.00. The bond held by the National Development Company was redeemable within a periodof 20 years from March 1, 1940,. bearing interest at the rate of 5 per cent per annum. To securesaid bonded indebtedness, all the assets of the De la Rama Steamship Co., Inc., and properties ofDon Esteban de la Rama, as well as those of the Hijos de I. de la Rama and Co., Inc., a sistercorporation owned by Don Esteban and his family, were mortgaged to the National DevelopmentCompany (Annexes A, B, C, D of Exhibit 3, Deed of Trust). Payments made by the corporationunder the management of Pirovano reduced this bonded indebtedness to P3,260,855.77.

Upon arrangement made with the National Development Company, the outstanding bondedindebtedness was converted into non-voting preferred shares of stock of the De la Rama companyunder the express condition that they would bear affixed cumulative dividend of 6 per cent perannum and would be redeemable within 15 years (Exhibits 5 and 7). This conversion was carriedout on September 23, 1949, when the National Development Company executed a "Deed ofTermination of Trust and Release of Mortgage" in favor of the De la Rama company (Exhibit 6.)The immediate effect of this conversion was the released from incumbrance of all the propertiesOf Don Esteban and of the Hijos de I. de la Rama and Co., Inc., which was apparently favorable tothe interests of the De la Rama company, but, on the other hand, it resulted in the inconveniencethat, as holder of the preferred stock, the National Development Company, was given to the rightto 40 per cent of the membership of the Board of Directors of the De la Rama company, whichmeant an increase in the representation of the National Development Company from 2 to 4 of the9 members of said Board of Directors.

The first resolution granting to the Pirovano children the proceeds of the insurance policies taken

on his life by the defendant company was adopted by the Board of Directors at a meeting held onJuly 10, 1946, (Exhibit B). This grant was called in the resolution as "Special Payment to MinorHeirs of the late Enrico Pirovano". Because of its direct hearing on the issues involved in this case,said resolution is hereunder reproduced in toto:

SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE ENRICO PIROVANO

The President stated that the principal purpose for which the meeting had been called wasto discuss the advisability of making some form of compensation to the minor heirs of the



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late Enrico Pirovano, former President and General Manager of the Company. As everymember of the Board knows, said the President, the late Enrico Pirovano who was largelyresponsible for the very successful development of the activities of the Company prior towar was killed by the Japanese in Manila sometime in 1944 leaving as his only heirs fourminor children, Maria Carla, Esteban, Enrico and John Albert. Early in 1941, explained thePresident, the Company had insured the life of Mr. Pirovano for a million pesos. Followingthe occupation of the Philippines by Japanese forces the Company was unable to pay thepremiums on those policies issued by Filipino companies and these policies had lapsed.But with regards to the York Office of the De la Rama Steamship Co., Inc. had kept uppayment of the premiums from year to year. The payments made on account of thesepremiums, however, are very small compared to the amount which the Company will nowreceive as a result of Mr. Pirovano's death. The President proposed therefore that out ofthe proceeds of these policies the sum of P400,000 be set aside for the minor children ofthe deceased, said sum of money to be convertible into 4,000 shares of the stock of theCompany, at par, or 1,000 shares for each child. This proposal, explained the President asbeing made by him upon suggestion of President Roxas, but, he added, that he himselfwas very much in favor of it also. On motion of Miss Leonor de la Rama duly seconded byMrs. Lourdes de la Rama de Osmeña, the following resolution was, thereupon,unanimously approved:

Whereas, the late Enrico Pirovano, President and General Manager of the De la RamaSteamship Company, died in Manila sometime in November, 1944:

Whereas, the said Enrico Pirovano was largely responsible for the rapid and verysuccessful development of the activities of thus company;

Whereas, early in 1941 this company insured the life of said Enrico Pirovano in variousPhilippine and American Life Insurance companies for the total sum of P1,000,000;

Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano and fourminor children, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamedPirovano;lawphil.net

Whereas, said Enrico Pirovano left practically nothing to his heirs and it is but fit proper

that this company which owes so much to the deceased should make some provision forhis children;

Whereas, this company paid premium on Mr. Pirovano's life insurance policies for a periodof only 4 years so that it will receive from the insurance companies sums of money greatlyin excess of the premiums paid by this company.

Be it resolved, That out of the proceeds to be collected from the life insurance policies onthe life of the late Enrico Pirovano, the sum of P400,000 be set aside for equal divisionamong the 4 minor children of the deceased, to wit: Esteban, Maria Carla, Enrico andJohn Albert, all surnamed Pirovano, which sum of money shall be convertible into sharesof stock of the De la Rama Steamship Company, at par and, for that purpose, that the

present registered stockholders of the corporation be requested to waive their preemptiveright to 4,000 shares of the unissued stock of the company in order to enable each of the 4minor heirs of the deceased, to wit: Esteban, Maria Carla, Enrico and John Albert, allsurnamed Pirovano, to obtain 1,000 shares at par;

Resolved, further, that in view of the fact that under the provisions of the indenture with theNational Development Company, it is necessary that action herein proposed to beconfirmed by the Board of Directors of that company, the Secretary is hereby instructed tosend a copy of this resolution to the proper officers of the National Development Companyfor appropriate action. (Exhibit B)

The above resolution, which was adopted on July 10, 1946, was submitted to the stockholders ofthe De la Rama company at a meeting properly convened, and on that same date, July 10, 1946,

the same was duly approved.

It appears that, although Don Esteban and the Members of his family were agreeable to giving tothe Pirovano children the amount of P400,000 out of the proceeds of the insurance policies takenon the life of Enrico Pirovano, they did not realize that when they provided in the above referredtwo resolutions that said Amount should be paid in the form of shares of stock, they would beactually giving to the Pirovano children more than what they intended to give. This came aboutwhen Lourdes de la Rama, wife of Sergio Osmeña, Jr., showed to the latter copies of saidresolutions and asked him to explain their import and meaning, and it was value then that Osmeña



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explained that because the value then of the shares of stock was actually 3.6 times their parvalue, the donation their value, the donation, although purporting to be only P400,00, wouldactually amount to a total of P1,440,000. He further explained that if the Pirovano children wouldgiven shares of stock in lieu of the amount to be donated, the voting strength of the five daughtersof Don Esteban in the company would be adversely affected in the sense that Mrs. Pirovanowould be adversely affected in the sense that Mrs. Pirovano would have a voting power twice asmuch as that of her sisters. This caused Lourdes de la Rama to write to the secretary of thecorporation, Atty. Marcial Lichauco, asking him to cancel the waiver she supposedly gave of herpre-emptive rights. Osmeña elaborated on this matter at the annual meeting of the stockholdersheld on December 12, 1946 but at said meeting it was decided to leave the matter in abeyancepending further action on the part of the members of the De la Rama family.

Osmeña, in the meantime, took up the matter with Don Esteban and, as consequence, the latter,on December 30, 1946, addressed to Marcial Lichauco a letter stating, among other things, that"in view of the total lack of understanding by me and my daughters of the two Resolutionsabovementioned, namely, Directors' and Stockholders' dated July 10, 1946, as finally resolved bythe majority of the Stockholders and Directors present yesterday, that you consider theabovementioned resolutions nullified." (Exhibit CC).

On January 6, 1947, the Board of Directors of the De la Rama company, as a consequence of thechange of attitude of Don Esteban, adopted a resolution changing the form of the donation to thePirovano children from a donation of 4,000 shares of stock as originally planned into a

renunciation in favor of the children of all the company's "right, title, and interest as beneficiary inand to the proceeds of the abovementioned life insurance policies", subject to the expresscondition that said proceeds should be retained by the company as a loan drawing interest at therate of 5 per cent per annum and payable to the Pirovano children after the company "shall havefirst settled in full the balance of its present remaining bonded indebtedness in the sum ofapproximately P5,000,000" (Exhibit C). This resolution was concurred in by the representatives ofthe National Development Company. The pertinent portion of the resolution reads as follows:

Be resolved, that out of gratitude to the late Enrico Pirovano this Company renounce as ithereby renounces, all of his right, title, and interest as beneficiary in and to the proceeds ofthe abovementioned life insurance policies in favor of Esteban, Maria Carla, Enrico andJohn Albert, all surnamed Pirovano, subject to the terms and conditions herein after

provided;

That the proceeds of said insurance policies shall be retained by the Company in thenature of a loan drawing interest at the rate of 5 per cent annum from the date of receipt ofpayment by the Company from the various insurance companies above-mentioned untilthe time the time the same amounts are paid to the minor heirs of Enrico Pirovanopreviously mentioned;

That all amounts received from the above-mentioned policies shall be divided equallyamong the minors heirs of said Enrico Pirovano;

That the company shall proceed to pay the proceeds of said insurance policies plusinterests that may have accrued to each of the heirs of the said Enrico Pirovano or theirduly appointed representatives after the Company shall have first settled in full the balanceof its present remaining bonded indebtedness in the sum of the approximately P5,000,000.

The above resolution was carried out by the company and Mrs. Estefania R. Pirovano, the latteracting as guardian of her children, by executing a Memorandum Agreement on January 10, 1947and June 17, 1947, respectively, stating therein that the De la Rama Steamship Co., Inc., shallenter in its books as a loan the proceeds of the life insurance policies taken on the life of Pirovanototalling S321,500, which loan would earn interest at the rate of 5 per cent per annum. Mrs.Pirovano, in executing the agreement, acted with the express authority granted to her by the courtin an order dated March 26, 1947.

On June 24, 1947, the Board of Directors approved a resolution providing therein that instead of

the interest on the loan being payable, together with the principal, only after the company shallhave first settled in full its bonded indebtedness, said interest may be paid to the Pirovano children"whenever the company is in a position to met said obligation" (Exhibit D), and on February 26,1948, Mrs. Pirovano executed a public document in which she formally accepted the donation(Exhibit H). The Dela Rama company took "official notice" of this formal acceptance at a meetingheld by its Board of Directors on February 26, 1948.

In connection with the above negotiations, the Board of Directors took up at its meeting on July 25,1949, the proposition of Mrs. Pirovano to buy the house at New Rochelle, New York, owned by the





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life of the late Enrico Pirovano as embodied in the resolution of the Board of Directors ofdefendant corporation adopted on January 6, 1947 and June 24, 1947 a remunerative donation asfound by the lower court?; (2) IN the affirmative case, has that donation been perfected before itsrescission or nullification by the stockholders of the corporation on March 8, 1951?; (3) Candefendant corporation give by way of donation the proceeds of said insurance policies to the minorchildren of the late Enrico Pirovano under the law or its articles of corporation, or is that donationan ultra vires act?; and (4) has the defendant corporation, by the acts it performed subsequent tothe granting of the donation, deliberately prevented the fulfillment of the condition precedent to thepayment of said donation such that it can be said it has forfeited its right to demand its fulfillmentand has made the donation entirely due and demandable?

We will discuss these issues separately.

1. To determine the nature of the grant made by the defendant corporation to the minor children ofthe late Enrico Pirovano, we do not need to go far nor dig into the voluminous record that lies atthe bottom of this case. We do not even need to inquire into the interest which has allegedly beenshown by President Roxas in the welfare of the children of his good friend Enrico Pirovano.Whether President Roxas has taken the initiative in the move to give something to said childrenwhich later culminated in the donation now in dispute, is of no moment for the fact is that, from themass of evidence on hand, such a donation has been given the full indorsement and encouragingsupport by Don Esteban de la Rama who was practically the owner of the corporation. We onlyneed to fall back to accomplish this purpose on the several resolutions of the Board of Directors of

the corporations containing said grant for they clearly state the reasons and purposes why thedonation has been given.

Before we proceed further, it is convenient to state here in passing that, before the Board ofDirectors had approved its resolution of January 6, 1947, as later amended by another resolutionadopted on June 24, 1947, the corporation had already decided to give to the minor children of thelate Enrico Pirovano the sum of P400,000 out of the proceeds of the insurance policies taken onhis life in the form of shares, and that when this form was considered objectionable because itsresult and effect would be to give to said children a much greater amount considering the valuethen of the stock of the corporation, the Board of Directors decided to amend the donation in theform and under the terms stated in the aforesaid resolutions. Thus, in the original resolutionapproved by the Board of Directors on July 10, 1946, wherein the reasons for granting the

donation to the minor children of the late Enrico Pirovano were clearly, we find out the followingrevealing statements:

Whereas, the late Enrico Pirovano President and General Manager of the De la RamaSteamship Company, died in Manila sometime in November, 1944;

Whereas, the said Enrico Pirovano was largely responsible for the rapid and verysuccessful development of the activities of this company;

Whereas, early in 1941 this company insured the life of said Enrico Pirovano in variousPhilippine and American Life Insurance companies for the total sum of P1,000,000;

Whereas, the said Enrico Pirovano is survived by his widow, Estefania Pirovano and 4minor children, to wit: Esteban, Maria Carla, Enrico and John Albert, all surnamedPirovano;

Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is but fit andproper that this company which owes so much to the deceased should make someprovisions for his children;

Whereas, this company paid premiums on Mr. Pirovano's life insurance policies for aperiod of only 4 years so that it will receive from the insurance companies sums of moneygreatly in excess of the premiums paid by the company,

Again, in the resolution approved by the Board of Directors on January 6, 1947, we also find thefollowing expressive statements which are but a reiteration of those already expressed in theoriginal resolution:

Whereas, the late Enrico Pirovano, President and General Manager of the De la RamaSteamship Co., Inc., died in Manila sometime during the latter part of the year 1944;

Whereas, the said Enrico Pirovano was to a large extent responsible for the rapid and verysuccessful development and expansion of the activities of this company;



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Whereas, early in 1941, the life of the said Enrico Pirovano was insured in various lifecompanies, to wit:

Whereas, the said Enrico Pirovano is survived by 4 minor children, to wit: Esteban, MariaCarla, Enrico and John Albert, all surnamed Pirovano; and

Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is but fit andproper that this Company which owes so much to the deceased should make someprovision for his children;

Be it resolved, that out of gratitude to the late Enrico Pirovano this Company renounce asit hereby renounces, . . . .

From the above it clearly appears that the corporation thought of giving the donation to thechildren of the late Enrico Pirovano because he "was to a large extent responsible for the rapidand very successful development and expansion of the activities of this company"; and alsobecause he "left practically nothing to his heirs and it is but fit and proper that this company whichowes so much to the deceased should make some provision to his children", and so, the donationwas given "out of gratitude to the late Enrico Pirovano." We do not need to stretch our imaginationto see that a grant or donation given under these circumstances is remunerative in nature incontemplation of law.

That which is made to a person in consideration of his merits or for services rendered tothe donor, provided they do not constitute recoverable debts, or that in which a burdenless than the value of the thing given is imposed upon the donee, is also a donation." (Art.619, old Civil Code.)

In donations made to a person for services rendered to the donor, the donor's will ismoved by acts which directly benefit him. The motivating cause is gratitude,acknowledgment of a favor, a desire to compensate. A donation made to one who savedthe donor's life, or a lawyer who renounced his fees for services rendered to the donor,would fall under this class of donations. These donations are called remunerativedonations . (Sinco and Capistrano, The Civil Code, Vol. 1, p. 676; Manresa, 5th ed., pp.72-73.)

2. The next question to be determined is whether the donation has been perfected such that thecorporation can no longer rescind it even if it wanted to. The answer to this question cannot but bein the affirmative considering that the same has not only been granted in several resolutions dulyadopted by the Board of Directors of the defendant corporation, and in all these corporate acts theconcurrence of the representatives of the National Development Company, the only creditorwhose interest may be affected by the donation, has been expressly given. The corporation haseven gone further. It actually transferred the ownership of the credit subject of donation to thePirovano children with the express understanding that the money would be retained by thecorporation subject to the condition that the latter would pay interest thereon at the rate of 5 percent per annum payable whenever said corporation may be in a financial position to do so. Thus,the following acts of the corporation as reflected from the evidence bear this out:

(a) The donation was embodied in a resolution duly approved by the Board of Directors onJanuary 6, 19437. In this resolution, the representatives of the National Development Company,have given their concurrence. This is the only creditor which can be considered as beingadversely affected by the donation. The resolution of June 24, 1947 did not modify the substanceof the former resolution for it merely provided that instead of the interest on the loan beingpayable, together with the principal, only after the corporation had first settled in full its bondedindebtedness, said interest would be paid "whenever the company is in a position to meet saidobligation."

(b) The resolution of January 6, 1947 was actually carried out when the company and Mrs.Estefania R. Pirovano, executed a memorandum agreement stating therein hat the proceeds ofthe insurance policies would be entered in the books of the corporation as a loan which would

bear an interest at the rate of 5 per cent per annum, and said agreement was signed by Mrs.Pirovano as judicial guardian of her children after she had been expressly authorized by the courtto accept the donation in behalf of her children.

(c) While the donation can be considered as duly executed by the execution of the documentstated in the preceding paragraph, and by the entry in the books of the corporation of the donationas a loan, a further record of said execution was made when Mrs. Pirovano executed a publicdocument on February 26, 1948 making similar acceptance of the donation. And this acceptance



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was officially recorded by the corporation when on the same date its Board of Directors approveda resolution taking "official notice" of said acceptance.

(d) On July 25, 1949, the Board of Directors approved the proposal of Mrs. Pirovano to buy thehouse at New Rochelle, New York, owned by a subsidiary of the corporation at the costs ofS75,000 which would be paid from the sum held in trust belonging to her minor children. And thisagreement was actually carried out in a document signed by the general manager of thecorporation and by Mrs. Pirovano, who acted on the matter with the express authority of the court.

(e) And on September 30, 1949, or two years and 3 months after the donation had been executed,the stockholders of the defendant corporation formally ratified and gave approval to the donationas embodied in the resolutions above referred to, subject to certain modifications which did notmaterially affect the nature of the donation.

There can be no doubt from the foregoing relation of facts the donation was a corporate actcarried out by the corporation not only with the sanction of its Board of Directors but also of itsstockholders. It is evident that the donation has reached the stage of perfection which is valid andbinding upon the corporation and as such cannot be rescinded unless there is exists legal groundsfor doing so. In this case, we see none. The two reasons given for the rescission of said donationin the resolution of the corporation adopted on March 8, 1951, to wit: that the corporation failed tocomply with the conditions to which the above donation was made subject, and that in the opinionof the Securities and Exchange Commission said donation is ultra vires, are not, in our opinion,

valid and legal as to justify the rescission of a perfected donation. These reasons, as we willdiscuss in the latter part of this decision, cannot be invoked by the corporation to rescind or set atnaught the donation, and the only way by which this can be done is to show that the donee hasbeen in default, or that the donation has not been validly executed, or is illegal or ultra vires, andsuch is not the case as we will see hereafter. We therefore declare that the resolution approved bythe stockholders of the defendant corporation on March 8, 1951 did not and cannot have the effectof nullifying the donation in question.

3. The third question to be determined is: Can defendant corporation give by way of donation theproceeds of said insurance policies to the minor children of the late Enrico Pirovano under the lawor its articles of corporation, or is that donation an ultra vires act? To answer this question it isimportant for us to examine the articles of incorporation of the De la Rama company to see this

question it is important for us to examine the articles of incorporation of the De la Rama companyto see if the act or donation is outside of their scope. Paragraph second of said articles provides:

Second .— The purposes for which said corporation is formed are:

(a) To purchase, charter, hire, build, or otherwise acquire steam or other ships or vessels,together with equipments and furniture therefor, and to employ the same in conveyanceand carriage of goods, wares and merchandise of every description, and of passengersupon the high seas.

(b) To sell, let, charter, or otherwise dispose of the said vessels or other property of thecompany.

(c) To carry on the business of carriers by water.

(d) To carry on the business of shipowners in all of its branches.

(e) To purchase or take on lease, lands, wharves, stores, lighters, barges and other thingswhich the company may deem necessary or advisable to be purchased or leased for thenecessary and proper purposes of the business of the company, and from time to time tosell the dispose of the same.

(f) To promote any company or companies for the purposes of acquiring all or any of theproperty or liabilities of this company, or both, or for any other purpose which may seem

directly or indirectly calculated to benefit the company.

(g) To invest and deal with the moneys of the company and immediately required, in suchmanner as from time to time may be determined .

(h) To borrow, or raise, or secure the payment of money in such manner as the companyshall think fit.



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(i) Generally, to do all such other thing and to transact all business as may be directly orindirectly incidental or conducive to the attainment of the above object, or any of themrespectively.

(j) Without in any particular limiting or restricting any of the objects and powers of thecorporation, it is hereby expressly declared and provided that the corporation shall havepower to issue bonds and provided that the corporation shall have power to issue bondsand other obligations, to mortgage or pledge any stocks, bonds or other obligations or anyproperty which may be required by said corporations; to secure any bonds, guarantees or

other obligations by it issued or incurred; to lend money or credit to and to aid in any othermanner any person, association, or corporation of which any obligation or in which anyinterest is held by this corporation or in the affairs or prosperity of which this corporation orin the affairs or prosperity of which this corporation has a lawful interest , and to do suchacts and things as may be necessary to protect, preserve, improve, or enhance the valueof any such obligation or interest; and, in general, to do such other acts in connection withthe purposes for which this corporation has been formed which is calculated to promotethe interest of the corporation or to enhance the value of its property and to exercise all therights, powers and privileges which are now or may hereafter be conferred by the laws ofthe Philippines upon corporations formed under the Philippine Corporation Act; to executefrom time to time general or special powers of attorney to persons, firms, associations orcorporations either in the Philippines, in the United States, or in any other country and torevoke the same as and when the Directors may determine and to do any and or all of the

things hereinafter set forth and to the same extent as natural persons might or could do.

After a careful perusal of the provisions above quoted we find that the corporation was givenbroad and almost unlimited powers to carry out the purposes for which it was organized amongthem, (1) "To invest and deal with the moneys of the company not immediately required, in suchmanner as from time to time may be determined" and, (2) "to aid in any other manner any person,association, or corporation of which any obligation or in which any interest is held by thiscorporation or in the affairs or prosperity of which this corporation has a lawful interest." Theworld deal is broad enough to include any manner of disposition, and refers to moneys notimmediately required by the corporation, and such disposition may be made in such manner asfrom time to time may be determined by the corporations. The donation in question undoubtedlycomes within the scope of this broad power for it is a fact appearing in the evidence that theinsurance proceeds were not immediately required when they were given away. In fact, theevidence shows that the corporation declared a 100 per cent cash dividend, or P2,000,000, andlater on another 30 per cent cash dividend. This is clear proof of the solvency of the corporation. Itmay be that, as insinuated, Don Esteban wanted to make use of the insurance money torehabilitate the central owned by a sister corporation, known as Hijos de I. de la Rama and Co.,Inc., situated in Bago, Negros Occidental, but this, far from reflecting against the solvency of theDe la Rama company, only shows that the funds were not needed by the corporation.

Under the second broad power we have the above stated, that is, to aid in any other manner any person in the affairs and prosperity of whom the corporation has a lawful interest, the record of thiscase is replete with instances which clearly show that the corporation knew well its scope andmeaning so much so that, with the exception of the instant case, no one has lifted a finger todispute their validity. Thus, under this broad grant of power, this corporation paid to the heirs of

one Florentino Nonato, an engineer of one of the ships of the company who died in Japan, agratuity of P7,000, equivalent to one month salary for each year of service. It also gave to RamonPons, a captain of one of its ships , a retirement gratuity equivalent to one month salary for everyyear of service, the same to be based upon his highest salary. And it contributed P2,000 to thefund raised by the Associated Steamship Lines for the widow of the late Francis Gispert, secretaryof said Association, of which the De la Rama Steamship Co., Inc., was a member along with about30 other steamship companies. In this instance, Gispert was not even an employee of thecorporation. And invoking this vast power, the corporation even went to the extent of contributingP100,000 to the Liberal Party campaign funds, apparently in the hope that by conserving itscordial relations with that party it might continue to retain the patronage of the administration. Allthese acts executed before and after the donation in question have never been questioned andwere willingly and actually carried out.

We don't see much distinction between these acts of generosity or benevolence extended to someemployees of the corporation, and even to some in whom the corporation was merely interestedbecause of certain moral or political considerations, and the donation which the corporation hasseen fit to give to the children of the late Enrico Pirovano from the point of view of the power of thecorporation as expressed in its articles of incorporation. And if the former had been sanctionedand had been considered valid and intra vires, we see no plausible reasons why the latter shouldnow be deemed ultra vires. It may perhaps be argued that the donation given to the children of thelate Enrico Pirovano is so large and disproportionate that it can hardly be considered a pension ofgratuity that can be placed on a par with the instances above mentioned, but this argument



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overlooks one consideration: the gratuity here given was not merely motivated by pure liberality oract of generosity, but by a deep sense of recognition of the valuable services rendered by the lateEnrico Pirovano which had immensely contributed to the growth of the corporation to the extentthat from its humble capitalization it blossomed into a multi-million corporation that it is today. Inother words of the very resolutions granting the donation or gratuity, said donation was given notonly because the company was so indebted to him that it saw fit and proper to make provisions forhis children, but it did so out of a sense of gratitude. Another factor that we should bear in mind isthat Enrico Pirovano was not only a high official of the company but was at the same time amember of the De la Rama family, and the recipient of the donation are the grandchildren of DonEsteban de la Rama. This we, may say, is the motivating root cause behind the grant of thisbounty.

It may be contended that a donation is different from a gratuity. While technically this may be so insubstance they are the same. They are even similar to a pension. Thus, it was granted forservices previously rendered, and which at the time they were rendered gave rise to no legalobligation. " (Words and Phrases, Permanent Edition, p. 675; O'Dea vs. Cook,, 169 Pac., 306, 176Cal., 659.) Or stated in another way, a "Gratuity is mere bounty given by the Government inconsideration or recognition or meritorious services and springs from the appreciation an dgraciousness of the Government", (Ilagan vs. Ilaya, G.R. No. 33507, Dec. 20 1930) or "A gratuityis something given freely, or without recompense, a gift, something voluntarily given in return for afavor or services; a bounty; a tip." Wood Mercantile Co. vs. Cole, 209 S.W. 2d. 290; Mendoza vs.Dizon, 77 Phil., 533, 43 Off. Gaz. p. 4633. We do not see much difference between this definition

of gratuity and a remunerative donation contemplated in the Civil Code. In essence they are thesame. Such being the case, it may be said that this donation is gratuity in a large sense for it wasgiven for valuable services rendered an ultra vires act in the light of the following authorities:

Indeed, some cases seem to hold that the giving of a pure gratuity to directors is ultravires of corporation, so that it could not be legalized even if the approval of theshareholders; but this position has no sound reason to support it, and is opposed to theweight of authority (Suffaker vs. Kierger's Assignee, 53 S.W. Rep. 288; !07 Ky. 200; 46L.R.A. 384).

But although business corporations cannot contribute to charity or benevolence, yet theyare not required always to insist on the full extent of their legal rights. They are not

forbidden for the recognizing moral obligation of which strict law takes no cognizance.They are not prohibited from establishing a reputation for board, liberal, equitable dealingwhich may stand them in good stead in competition with less fair rivals. Thus, anincorporated fire insurance company which policies except losses from explosions maynevertheless pay a loss from that cause when other companies are accustomed to do so,such liberal dealing being deemed conducive to the prosperity of the corporation." (ModernLaw of Corporations, Machen, Vol. 1, p. 81).

So, a bank may grant a five years pension to the family at one of its officers. In all cases inthis sorts, the amount of the gratuity rests entirely within the discretion of the company,unless indeed it be all together out of the reason and fitness. But where the company hasceased to be going concerned, this power to make gifts or present it at the end. (ModernLaw of Corporations, Machen, Vol. 1, p. 82.).

Payment of Gratitude out of Capital.— There seems on principle no reason to doubt thatgifts or gratuities wherever they are lawful may be paid out of capital as well as out ofprofits. (Modern Law of corporations, Machen, Vol. 1 p. 83.).

Whether desirable to supplement implied powers of this kind by express provisions.— Enough has been said to show that the implied powers of a corporation to give gratuitiesto its servants and officers, as well as to strangers, are ample, so that there is therefore noneed to supplement them by express provisions." (modern Law of Corporations, Machen,Vol. 1, p. 83.) 1

Granting arguendo that the donation given by Pirovano children is outside the scope of the powers

of the defendant corporation, or the scope of the powers that it may exercise under the law, or it isan ultra vires act, still it may said that the same can not be invalidated, or declared legallyineffective for the reason alone, it appearing that the donation represents not only the act of theBoard of Directors but of the stockholders themselves as shown by the fact that the same hasbeen expressly ratified in a resolution duly approved by the latter. By this ratification, the infirmityof the corporate act, it may has been obliterated thereby making the cat perfectly valid andenforceable. This is specially so if the donation is not merely executory but executed andconsummated and no creditors are prejudice, or if there are creditors affected, the latter hasexpressly given their confirmity.



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In making this pronouncement, advertence should made of the nature of the ultra vires act that isin question. A little digression needs be made on this matter to show the different legal effect thatmay result consequent upon the performance of a particular ultra vires act on the part of thecorporation. may authorities may be cited interpreting or defining, extent, and scope of an ultravires act, but all of them are uniform and unanimous that the same may be either an act performedmerely outside the scope of the powers granted to it by it articles of incorporation, or one which iscontrary to law or violative of any principle which will void any contract whether done individuallyor collectively. In other words, a distinction should be made between corporate acts or contractswhich are illegal and those which are merely ultra vires. The former contemplates the doing of anact which is contrary to law, morals, or public policy or public duty, and are, like similartransactions between the individuals void. They cannot serve as basis of a court action, norrequire validity ultra vires acts on the other hand, or those which are not illegal and void ab initio,but are merely within are not illegal and void ab initio, but are not merely within the scope of thearticles of incorporation, are merely voidable and may become binding and enforceable whenratified by the stockholders.

Strictly speaking, an ultra vires act is one outside the scope of the power conferred by thelegislature, and although the term has been used indiscriminately, it is properlydistinguishable from acts which are illegal, in excess or abuse of power, or executed in anunauthorized manner, or acts within corporate powers but outside the authority ofparticular officers or agents (19 C. J. S. 419).

Corporate transactions which are illegal because prohibited by statute or against publicpolicy are ordinarily void and unenforceable regardless of the part performance,ratification, or estoppel; but general prohibitions against exceeding corporate powers andprohibitions intended to protect a particular class or specifying the consequences ofviolation may not preclude enforcement of the transaction and an action may be had forthe part unaffected by the illegality or for equitable restitution. (19 C.J.S. 421.)

Generally, a transaction within corporate powers but executed in an irregular orunauthorized manner is voidable only, and may become enforceable by reason ofratification or express or implied assent by the stockholders or by reason of estoppel of thecorporation or the other party to the transaction to raise the objection, particularly wherethe benefits are retained

As appears in paragraphs 960-964 supra, the general rule is that a corporation must act inthe manner and with the formalities, if any, prescribed by its character or by the generallaw. However, a corporation transaction or contract which is within the corporation powers,which is neither wrong in itself nor against public policy, but which is defective from afailure to observe in its execution a requirement of law enacted for the benefit or protectionof a certain class, is voidable and is valid until avoided, not void until validated; the partiesfor whose benefit the requirement was enacted may ratify it or be estoppel to assert itsinvalidity, and third persons acting in good faith are not usually affected by an irregularityon the part of the corporation in the exercise of its granted powers. (19 C.J.S., 423-24.)

It is true that there are authorities which told that ultra vires acts, or those performed beyond thepowers conferred upon the corporation either by law or by its articles of incorporation, are not onlyvoidable, but wholly void and of no legal effect, and that such acts cannot be validated byratification or be the basis of any action in court; but such ruling does not constitute the weight ofauthority, the reason being that they fail to make the important distinction we have above advertedto. Because rule has been rejected by most of the state courts and even by the modern treaties orcorporations (7 Flethcer, Cyc. Corps., 563-564). And now it can be said that the majority of thecases hold that acts which are merely ultra vires, or acts which are not illegal, may be ratified bythe stockholders of a corporation (Brooklyn Heights R. Co. vs. Brooklyn City R. Co., 135 N.Y.Supp. 1001).

Strictly speaking, an act of a corporation outside of its character powers is just assuch ultra vires where all the stockholders consent thereto as in a case where none of thestockholders expressly or cannot be ratified so as to make it valid, even though all the

stockholders consent thereto; but inasmuch as the stockholders in reality constitute thecorporation, it should , it would seem, be estopped to allege ultra vires, and it is generallyso held where there are no creditors, or the creditors are not injured thereby, and wherethe rights of the state or the public are not involved, unless the act is not only ultra viresbut in addition illegal and void . of course, such consent of all the stockholders cannotadversely affect creditors of the corporation nor preclude a proper attack by the statebecause of such ultra vires act. (7 Fletcher Corp., Sec. 3432, p. 585)



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Since it is not contended that the donation under consideration is illegal, or contrary to any of theexpress provision of the articles of incorporation, nor prejudicial to the creditors of the defendantcorporation, we cannot but logically conclude, on the strength of the authorities we have quotedabove, that said donation, even if ultravires in the supposition we have adverted to, is not void,and if voidable its infirmity has been cured by ratification and subsequent acts of the defendantcorporation. The defendant corporation, therefore, is now prevented or estopped from contestingthe validity of the donation. This is specially so in this case when the very directors who conceivedthe idea of granting said donation are practically the stockholders themselves, with few nominalexception. This applies to the new stockholder Jose Cojuangco who acquired his interest after thedonation has been made because of the rule that a "purchaser of shares of stock cannotavoid ultra vires acts of the corporation authorized by its vendor, except those done after thepurchase" (7 Fletcher, Cyc. Corps. section 3456, p. 603; Pascual vs. Del Saz Orozco, 19 Phil.,82.) Indeed, how can the stockholders now pretend to revoke the donation which has been partlyconsummated? How can the corporation now set at naught the transfer made to Mrs. Pirovano ofthe property in New York, U.S.A., the price of which was paid by her but of the proceeds of theinsurance policies given as donation. To allow the corporation to undo what it has done would onlybe most unfair but would contravene the well-settled doctrine that the defense of ultra vires cannotbe set up or availed of in completed transactions (7 Fletcher, Cyc. Corps. Section 3497, p. 652; 19C.J.S., 431).

4. We now come to the fourth and last question that the defendant corporation, by the acts it hasperformed subsequent to the granting of the donation, deliberately prevented the fulfillment of the

condition precedent to the payment of said donation such that it can be said it has forfeited entirelydue and demandable.

It should be recalled that the original resolution of the Board of Directors adopted on July 10, 1946which provided for the donation of P400,000 out of the proceeds which the De la Rama companywould collect on the insurance policies taken on the life of the late Enrico Pirovano was, asalready stated above, amended on January 6, 1947 to include, among the conditions thereinprovided, that the corporation shall proceed to pay said amount, as well as the interest duethereon, after it shall have settled in full balance of its bonded indebtedness in the sum ofP5,000,000. It should be recalled that on September 13, 1949, or more than 2 years after the lastamendment referred too above, the stockholders adopted another resolution whereby theyformally ratified said donation but subject to the following clarifications: (1) that the amount of thedonation shall not be effected until such time as the company shall have first duly liquidated itspresent bonded indebtedness in the amount of P3,260,855.77 to the National DevelopmentCompany, or shall have first fully redeemed the preferred shares of stock in the amount to beissued to said company in lieu thereof, and (2) that any and all taxes, legal fees, and expensesconnected with the transaction shall be chargeable from the proceeds of said insurance policies.

The trial court, in considering these conditions in the light of the acts subsequently performed bythe corporation in connection with the proceeds of the insurance policies, considered saidconditions null and void, or at most not written because in its pinion their non-fulfillment was due toa deliberate desistance of the corporation and not to lack of funds to redeem the preferred sharesof the National Development Company. The conclusions arrived at by the trial court on this pointare as follows:

Fourth. — that the condition mentioned in the donation is null and void because it dependson the exclusive will of the donor, in accordance with the provisions of Article 1115 of theOld Civil Code.

Fifth. — That if the condition is valid, its non-fulfillment is due to the desistance of thedefendant company from obeying and doing the wishes and mandate of the majority of thestockholders.

Sixth. — That the non-payment of the debt in favor of the National Development Companyis due to the lack of funds, nor to lack of authority, but to the desire of the President of thecorporation to preserve and continue the Government participation in the company.

To this views of the trial court, we fail to agree. There are many factors we can consider why thefailure to immediately redeem the preferred shares issued to the National Development Companyas desired by the minor children of the late Enrico Pirovano cannot or should not be attributed to amere desire on the part of the corporation to delay the redemption, or to prejudice the interest ofthe minors, but rather to protect the interest of the corporation itself. One of them is the text of thevery resolution approved by the National Development Company on February 18, 1949 whichprescribed the terms and conditions under which it expressed its conformity to the conversion ofthe bonded indebtedness into preferred shares of stock. The text of the resolution abovementioned reads:



62

Resolved: That the outstanding bonded indebtedness of the Dela Rama Steamship Co.,Inc., in the approximate amount of P3,260,855.77 be converted into non-voting preferredshares of stock of said company, said shares to bear a fixed dividend of 6 percent perannum which shall be cumulative and redeemable within 15 years. Said shares shall bepreferred as to assets in the event of liquidation or dissolution of said company but shallbe non-participating.

It is plain from the text of the above resolution that the defendant corporation had 15 years fromFebruary 18, 1949, or until 1964, within which to effect the redemption of the preferred shares

issued to the National Development Company. This condition cannot but be binding and obligatoryupon the donees, if they desire to maintain the validity of the donation, for it is not only the basisupon which the stockholders of the defendant corporation expressed their willingness to ratify thedonation, but it is also by way which its creditor, the National Development Company, would wantit to be. If the defendant corporation is given 15 years within which to redeem the preferredshares, and that period would expire in 1964, one cannot blame the corporation for availing itselfof this period if in its opinion it would redound to its best interest. It cannot therefore be said thatthe fulfillment of the condition for the payment of the donation is one that wholly depends on theexclusive will of the donor, as the lower court has concluded, simply because it failed to meet theredemption of said shares in her manner desired by the donees. While it may be admitted thatbecause of the disposition of the assets of the corporation upon the suggestion of its generalmanager more than enough funds had been raised to effect the immediate redemption of theabove shares, it is not correct to say that the management has completely failed in its duty to pay

its obligations for, according to the evidence, a substantial portion of the indebtedness has beenpaid and only a balance of about P1,805,169.98 was outstanding when the stockholders of thecorporation decided to revoke or cancel the donation. (Exhibit P.)

But there are other good reasons why all the available funds have not been actually applied to theredemption of the preferred shares, one of them being the "desire of the president of thecorporation to preserve and continue the government participation in the company" which even thelower court found it to be meritorious, which is one way by which it could continue receiving thepatronage and protection of the government. Another reason is that the redemption of the sharesdoes not depend on the will of the corporation alone but to a great extent on the will of a thirdparty, the National Development Company. In fact, as the evidence shows, this Company hadpledged these shares to the Philippine National Bank and the Rehabilitation Finance Corporationas a security to obtain certain loans to finance the purchase of certain ships to be built for the useof the company under management contract entered into between the corporation and theNational Development Company, and this was what prevented the corporation from carrying outits offer to pay the sum P1,956,513.07 on April 5, 1951. Had this offer been accepted, or favorablyacted upon by the National Development Company, the indebtedness would have been practicallyliquidated, leaving outstanding only one certificate worth P217,390.45. Of course, the corporationcould have insisted in redeeming the shares if it wanted to even to the extent of taking a courtaction if necessary to force its creditor to relinquish the shares that may be necessary toaccomplish the redemption, but such would be a drastic step which would have not beenadvisable considering the policy right along maintained by the corporation to preserve its cordialand smooth relation with the government. At any rate, whether such attitude be considered as amere excuse to justify the delay in effecting the redemption of the shares, or a mere desire on thepart of the corporation to retain in its possession more funds available to attend to other pressing

need as demanded by the interest of the corporation, we fail to see in such an attitude animproper motive to circumvent the early realization of the desire of the minors to obtain theimmediate payment of the donation which was made dependent upon the redemption of saidshares there being no clear evidence that may justify such design. Anyway, a great portion of thefunds went to the stockholders themselves by way of dividends to offset, so it appears, the hugeadvances that the corporation had made to them which were entered in the books of thecorporation as loans and, therefore, they were invested for their own benefit. As General ManagerOsmeña said, "we were first confronted with the problem of the withdrawals of the family whichhad to be repaid back to the National Development Company and one of the most practicalsolutions to that was to declare dividends and reduce the amounts of their withdrawals", whichthen totalled about P3,000,000.

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

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



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The lower court adjudicated to plaintiff an additional amount equivalent to 20 per cent of theamount claimed as damages by way of attorney's fees, and in our opinion, this award can be

justified under Article 2208, paragraph 2, of the new Civil Code, which provides: "When thedefendant's act or omission has compelled the plaintiff to litigate with third persons or to incurexpenses to protect his interest", attorney's fees nay be awarded as damages. However, themajority believes that this award should be reduced to 10 per cent.

Wherefore, the decision appealed from should be modified as follows: (a) that the donation madein favor of the children of the late Enrico Pirovano of the proceeds of the insurance policies taken

on his life is valid and binding on the defendant corporation, (b) that said donation, which amountsto a total of P583,813.59, including interest, as it appears in the books of the corporation as of August 31, 1951, plus interest thereon at the rate of 5 per cent per annum from the filing of thecomplaint, should be paid to the plaintiffs after the defendant corporation shall have fullyredeemed the preferred shares issued to the National Development Company under the termsand conditions stated in the resolutions of the Board of Directors of January 6, 1947 and June 24,1947, as amended by the resolution of the stockholders adopted on September 13,1949; and (c)defendant shall pay to plaintiffs an additional amount equivalent to 10 per cent of said amount ofP583,813.59 as damages by way of attorney's fees, and to pay the costs of action.

G.R. No. 100812 June 25, 1999

FRANCISCO MOTORS CORPORATION, petitioner,

vs.COURT OF APPEALS and SPOUSES GREGORIO and LIBRADA MANUEL, respondents.

QUISUMBING, J .:

This petition for review on certiorari , under Rule 45 of the Rules of Court, seeks to annul the

decision 1 of the Court of Appeals in C.A. G.R. CV No. 10014 affirming the decision rendered by

Branch 135, Regional Trial Court of Makati, Metro Manila. The procedural antecedents of thispetition are as follows:

On January 23, 1985, petitioner filed a complaint 2 against private respondents to recover three

thousand four hundred twelve and six centavos (P3,412.06), representing the balance of the jeepbody purchased by the Manuels from petitioner; an additional sum of twenty thousand fourhundred fifty-four and eighty centavos (P20,454.80) representing the unpaid balance on the costof repair of the vehicle; and six thousand pesos (P6,000.00) for cost of suit and attorney's

fees. 3 To the original balance on the price of jeep body were added the costs of repair.

4 In their

answer, private respondents interposed a counterclaim for unpaid legal services by GregorioManuel in the amount of fifty thousand pesos (P50,000) which was not paid by the incorporators,directors and officers of the petitioner. The trial court decided the case on June 26, 1985, in favorof petitioner in regard to the petitioner's claim for money, but also allowed the counter-claim ofprivate respondents. Both parties appealed. On April 15, 1991, the Court of Appeals sustained the

trial court's decision. 5 Hence, the present petition.

For our review in particular is the propriety of the permissive counterclaim which privaterespondents filed together with their answer to petitioner's complaint for a sum of money. Privaterespondent Gregorio Manuel alleged as an affirmative defense that, while he was petitioner's

Assistant Legal Officer, he represented members of the Francisco family in the intestate estateproceedings of the late Benita Trinidad. However, even after the termination of the proceedings,his services were not paid. Said family members, he said, were also incorporators, directors andofficers of petitioner. Hence to petitioner's collection suit, he filed a counter permissive

counterclaim for the unpaid attorney's fees. 6

For failure of petitioner to answer the counterclaim, the trial court declared petitioner in default onthis score, and evidence ex-parte was presented on the counterclaim. The trial court ruled in favorof private respondents and found that Gregorio Manuel indeed rendered legal services to theFrancisco family in Special Proceedings Number 7803 — "In the Matter of Intestate Estate ofBenita Trinidad". Said court also found that his legal services were not compensated despiterepeated demands, and thus ordered petitioner to pay him the amount of fifty thousand

(P50,000.00) pesos. 7



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Dissatisfied with the trial court's order, petitioner elevated the matter to the Court of Appeals,posing the following issues:

I.

WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT ISNULL AND VOID AS IT NEVER ACQUIRED JURISDICTION OVER THEPERSON OF THE DEFENDANT.

II.

WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY INTHE ALLEGED PERMISSIVE COUNTERCLAIM SHOULD BE HELD LIABLE TOTHE CLAIM OF DEFENDANT-APPELLEES.

III.

WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-

APPELLANT TO ANSWER THE ALLEGED PERMISSIVE COUNTERCLAIM. 8

Petitioner contended that the trial court did not acquire jurisdiction over it because no summons

was validly served on it together with the copy of the answer containing the permissivecounterclaim. Further, petitioner questions the propriety of its being made party to the casebecause it was not the real party in interest but the individual members of the Francisco familyconcerned with the intestate case.

In its assailed decision now before us for review, respondent Court of Appeals held that acounterclaim must be answered in ten (10) days, pursuant to Section 4, Rule 11, of the Rules ofCourt; and nowhere does it state in the Rules that a party still needed to be summoned anew if acounterclaim was set up against him. Failure to serve summons, said respondent court, did noteffectively negate trial court's jurisdiction over petitioner in the matter of the counterclaim. Itlikewise pointed out that there was no reason for petitioner to be excused from answering thecounterclaim. Court records showed that its former counsel, Nicanor G. Alvarez, received the copy

of the answer with counterclaim two (2) days prior to his withdrawal as counsel for petitioner.Moreover when petitioner's new counsel, Jose N. Aquino, entered his appearance, three (3) daysstill remained within the period to file an answer to the counterclaim. Having failed to answer,petitioner was correctly considered in default by the trial

court. 9

Even assuming that the trial court acquired no jurisdiction over petitioner, respondent courtalso said, but having filed a motion for reconsideration seeking relief from the said order of default,

petitioner was estopped from further questioning the trial court's jurisdiction.10

On the question of its liability for attorney's fees owing to private respondent Gregorio Manuel,petitioner argued that being a corporation, it should not be held liable therefor because these feeswere owed by the incorporators, directors and officers of the corporation in their personal capacityas heirs of Benita Trinidad. Petitioner stressed that the personality of the corporation, vis-a-vis the

individual persons who hired the services of private respondent, is separate and distinct,11

hence,the liability of said individuals did not become an obligation chargeable against petitioner.

Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:

However, this distinct and separate personality is merely a fiction created by lawfor convenience and to promote justice. Accordingly, this separate personality ofthe corporation may be disregarded, or the veil of corporate fiction pierced, incases where it is used as a cloak or cover for found (sic) illegality, or to work aninjustice, or where necessary to achieve equity or when necessary for theprotection of creditors. (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347)Corporations are composed of natural persons and the legal fiction of a separate

corporate personality is not a shield for the commission of injustice and inequity.(Chemplex Philippines, Inc. vs. Pamatian, 57 SCRA 408).

In the instant case, evidence shows that the plaintiff-appellant Francisco MotorsCorporation is composed of the heirs of the late Benita Trinidad as directors andincorporators for whom defendant Gregorio Manuel rendered legal services in theintestate estate case of their deceased mother. Considering the aforestated principlesand circumstances established in this case, equity and justice demands plaintiff-appellant's veil of corporate identity should be pierced and the defendant be



65

compensated for legal services rendered to the heirs, who are directors of the plaintiff-

appellant corporation.12

Now before us, petitioner assigns the following errors:

I.

THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OFPIERCING THE VEIL OF CORPORATE ENTITY.

II.

THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS

JURISDICTION OVER PETITIONER WITH RESPECT TO THE COUNTERCLAIM.13

Petitioner submits that respondent court should not have resorted to piercing the veil of corporatefiction because the transaction concerned only respondent Gregorio Manuel and the heirs of thelate Benita Trinidad. According to petitioner, there was no cause of action by said respondentagainst petitioner; personal concerns of the heirs should be distinguished from those involvingcorporate affairs. Petitioner further contends that the present case does not fall among theinstances wherein the courts may look beyond the distinct personality of a corporation. According

to petitioner, the services for which respondent Gregorio Manuel seeks to collect fees frompetitioner are personal in nature. Hence, it avers the heirs should have been sued in their personal

capacity, and not involve the corporation.14

With regard to the permissive counterclaim, petitioner also insists that there was no proper serviceof the answer containing the permissive counterclaim. It claims that the counterclaim is a separatecase which can only be properly served upon the opposing party through summons. Furtherpetitioner states that by nature, a permissive counterclaim is one which does not arise out of nor isnecessarily connected with the subject of the opposing party's claim. Petitioner avers that sincethere was no service of summons upon it with regard to the counterclaim, then the court did notacquire jurisdiction over petitioner. Since a counterclaim is considered an action independent fromthe answer, according to petitioner, then in effect there should be two simultaneous actions

between the same parties: each party is at the same time both plaintiff and defendant with respectto the other,

15requiring in each case separate summonses.

In their Comment, private respondents focus on the two questions raised by petitioner. Theydefend the propriety of piercing the veil of corporate fiction, but deny the necessity of servingseparate summonses on petitioner in regard to their permissive counterclaim contained in theanswer.

Private respondents maintain both trial and appellate courts found that respondent GregorioManuel was employed as assistant legal officer of petitioner corporation, and that his serviceswere solicited by the incorporators, directors and members to handle and represent them inSpecial Proceedings No. 7803, concerning the Intestate Estate of the late Benita Trinidad. They

assert that the members of petitioner corporation took advantage of their positions by notcompensating respondent Gregorio Manuel after the termination of the estate proceedings despitehis repeated demands for payment of his services. They cite findings of the appellate court thatsupport piercing the veil of corporate identity in this particular case. They assert that the corporateveil may be disregarded when it is used to defeat public convenience, justify wrong, protect fraud,and defend crime. It may also be pierced, according to them, where the corporate entity is beingused as an alter ego, adjunct, or business conduit for the sole benefit of the stockholders or ofanother corporate entity. In these instances, they aver, the corporation should be treated merely

as an association of individual persons.16

Private respondents dispute petitioner's claim that its right to due process was violated whenrespondents' counterclaim was granted due course, although no summons was served upon it.

They claim that no provision in the Rules of Court requires service of summons upon a defendantin a counterclaim. Private respondents argue that when the petitioner filed its complaint before thetrial court it voluntarily submitted itself to the jurisdiction of the court. As a consequence, theissuance of summons on it was no longer necessary. Private respondents say they served a copyof their answer with affirmative defenses and counterclaim on petitioner's former counsel, NicanorG. Alvarez. While petitioner would have the Court believe that respondents served said copy upon

Alvarez after he had withdrawn his appearance as counsel for the petitioner, private respondentsassert that this contention is utterly baseless. Records disclose that the answer was received two(2) days before the former counsel for petitioner withdrew his appearance, according to private



66

respondents. They maintain that the present petition is but a form of dilatory appeal, to set offpetitioner's obligations to the respondents by running up more interest it could recover from them.

Private respondents therefore claim damages against petitioner.17

To resolve the issues in this case, we must first determine the propriety of piercing the veil ofcorporate fiction.

Basic in corporation law is the principle that a corporation has a separate personality distinct from

its stockholders and from other corporations to which it may be connected.18

However, under thedoctrine of piercing the veil of corporate entity, the corporation's separate juridical personality maybe disregarded, for example, when the corporate identity is used to defeat public convenience,

justify wrong, protect fraud, or defend crime. Also, where the corporation is a mere alter ego orbusiness conduit of a person, or where the corporation is so organized and controlled and itsaffairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of

another corporation, then its distinct personality may be ignored.19

In these circumstances, thecourts will treat the corporation as a mere aggrupation of persons and the liability will directlyattach to them. The legal fiction of a separate corporate personality in those cited instances, forreasons of public policy and in the interest of justice, will be justifiably set aside.

In our view, however, given the facts and circumstances of this case, the doctrine of piercing thecorporate veil has no relevant application here. Respondent court erred in permitting the trial

court's resort to this doctrine. The rationale behind piercing a corporation's identity in a given caseis to remove the barrier between the corporation from the persons comprising it to thwart thefraudulent and illegal schemes of those who use the corporate personality as a shield forundertaking certain proscribed activities. However, in the case at bar, instead of holding certainindividuals or persons responsible for an alleged corporate act, the situation has been reversed. Itis the petitioner as a corporation which is being ordered to answer for the personal liability ofcertain individual directors, officers and incorporators concerned. Hence, it appears to us that thedoctrine has been turned upside down because of its erroneous invocation. Note that according toprivate respondent Gregorio Manuel his services were solicited as counsel for members of theFrancisco family to represent them in the intestate proceedings over Benita Trinidad's estate.These estate proceedings did not involve any business of petitioner.

Note also that he sought to collect legal fees not just from certain Francisco family members butalso from petitioner corporation on the claims that its management had requested his services andhe acceded thereto as an employee of petitioner from whom it could be deduced he was alsoreceiving a salary. His move to recover unpaid legal fees through a counterclaim againstFrancisco Motors Corporation, to offset the unpaid balance of the purchase and repair of a jeepbody could only result from an obvious misapprehension that petitioner's corporate assets couldbe used to answer for the liabilities of its individual directors, officers, and incorporators. Suchresult if permitted could easily prejudice the corporation, its own creditors, and even otherstockholders; hence, clearly inequitous to petitioner.

Furthermore, considering the nature of the legal services involved, whatever obligation saidincorporators, directors and officers of the corporation had incurred, it was incurred in theirpersonal capacity. When directors and officers of a corporation are unable to compensate a party

for a personal obligation, it is far-fetched to allege that the corporation is perpetuating fraud orpromoting injustice, and be thereby held liable therefor by piercing its corporate veil. While thereare no hard and fast rules on disregarding separate corporate identity, we must always be mindfulof its function and purpose. A court should be careful in assessing the milieu where the doctrine ofpiercing the corporate veil may be applied. Otherwise an injustice, although unintended, mayresult from its erroneous application.

The personality of the corporation and those of its incorporators, directors and officers in theirpersonal capacities ought to be kept separate in this case. The claim for legal fees against theconcerned individual incorporators, officers and directors could not be properly directed againstthe corporation without violating basic principles governing corporations. Moreover, every action— including a counterclaim — must be prosecuted or defended in the name of the real party in

interest.20

It is plainly an error to lay the claim for legal fees of private respondent GregorioManuel at the door of petitioner (FMC) rather than individual members of the Francisco family.

However, with regard to the procedural issue raised by petitioner's allegation, that it needed to besummoned anew in order for the court to acquire jurisdiction over it, we agree with respondentcourt's view to the contrary. Section 4, Rule 11 of the Rules of Court provides that a counterclaimor cross-claim must be answered within ten (10) days from service. Nothing in the Rules of Courtsays that summons should first be served on the defendant before an answer to counterclaimmust be made. The purpose of a summons is to enable the court to acquire jurisdiction over the



67

person of the defendant. Although a counterclaim is treated as an entirely distinct andindependent action, the defendant in the counterclaim, being the plaintiff in the original complaint,has already submitted to the jurisdiction of the court. Following Rule 9, Section 3 of the 1997

Rules of Civil Procedure,21

if a defendant (herein petitioner) fails to answer the counterclaim, thenupon motion of plaintiff, the defendant may be declared in default. This is what happened topetitioner in this case, and this Court finds no procedural error in the disposition of the appellatecourt on this particular issue. Moreover, as noted by the respondent court, when petitioner filed itsmotion seeking to set aside the order of default, in effect it submitted itself to the jurisdiction of thecourt. As well said by respondent court:

Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he recordsshow that upon its request, plaintiff-appellant was granted time to file a motion forreconsideration of the disputed decision. Plaintiff-appellant did file its motion forreconsideration to set aside the order of default and the judgment rendered on thecounterclaim.

Thus, even if the court acquired no jurisdiction over plaintiff-appellant on thecounterclaim, as it vigorously insists, plaintiff-appellant is considered to have submittedto the court's jurisdiction when it filed the motion for reconsideration seeking relief fromthe court. (Soriano vs. Palacio, 12 SCRA 447). A party is estopped from assailing the jurisdiction of a court after voluntarily submitting himself to its jurisdiction. (Tejones vs.Gironella, 159 SCRA 100). Estoppel is a bar against any claims of lack of jurisdiction.

(Balais vs. Balais, 159 SCRA 37).22

WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby REVERSEDinsofar only as it held Francisco Motors Corporation liable for the legal obligation owing to privaterespondent Gregorio Manuel; but this decision is without prejudice to his filing the proper suitagainst the concerned members of the Francisco family in their personal capacity. Nopronouncement as to costs.1âwphi1.nêt

SO ORDERED.

G.R. No. 154975 January 29, 2007

GENERAL CREDIT CORPORATION (now PENTA CAPITAL FINANCECORPORATION), Petitioner,vs.ALSONS DEVELOPMENT and INVESTMENT CORPORATION and CCC EQUITYCORPORATION, Respondents.

D E C I S I O N

GARCIA, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner GeneralCredit Corporation, now known as Penta Capital Finance Corporation, seeks to annul and set

aside the Decision1 and Resolution2dated April 11, 2002 and August 20, 2002, respectively, of theCourt of Appeals (CA) in CA-G.R. CV No. 31801,affirming the November 8, 1990 decision of theRegional Trial Court (RTC) of Makati City in its Civil Case No. 12707, an action for a sum ofmoney thereat instituted by the herein respondent Alsons Development and InvestmentCorporation against the petitioner and respondent CCC Equity Corporation.

The facts:

Shortly after its incorporation in 1957 as a finance and investment company, petitioner GeneralCredit 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 ofits 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) toengage 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 otherthings, taking over the operations and management of the various franchise companies. At a timematerial hereto, respondent Alsons Development and Investment Corporation (ALSONS,hereinafter) and Conrado, Nicasio, Editha and Ladislawa, all surnamed Alcantara, and Alfredo deBorja (hereinafter the Alcantara family, for convenience), each owned, just like GCC, shares in theaforesaid GCC franchise companies, e.g., CCC Davao and CCC Cebu.

http://www.lawphil.net/judjuris/juri2007/jan2007/gr_154975_2007.html#fnt1
















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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 noteto ALSONS which thenceforth became the holder thereof .7 But even before the execution of theassignment 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 extendedfinancial support by GCC.

What happened next, as narrated in the assailed Decision of the CA, may be summarized, asfollows:

1. On January 14, 1986, before the RTC of Makati, ALSONS, having failed to collect onthe bearer note aforementioned, filed a complaint for a sum of money 8 against EQUITYand GCC. The case, docketed as Civil Case No. 12707, was eventually raffled to Branch58 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 thedoctrine 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 andaffirmative defenses that it (EQUITY):

a) was purposely organized by GCC for the latter to avoid CB Rules andRegulations on DOSRI (Directors, Officers, Stockholders and Related Interest)limitations, and that it acted merely as intermediary or bridge for loan transactionsand other dealings of GCC to its franchises and the investing public; and

b) is solely dependent upon GCC for its funding requirements, to settle, amongothers, equity purchases made by investors on the franchises; hence, GCC is

solely and directly liable to ALSONS, the former having failed to provide …EQUITYthe necessary funds to meet its obligations to ALSONS.

3. GCC filed its ANSWER to Cross-claim, stressing that it is a distinct and separate entityfrom EQUITY and alleging, in essence that the business relationships with each otherwere 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 damagesand attorney’s fees.

Issues having been joined, trial ensued. Presented by ALSONS, but testifying as adversewitnesses, 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) othermarked and subsequently admitted documents,9 were to the effect that five (5) incorporators, eachcontributing 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. BeforeEQUITY’s incorporation, however, GCC was already into the financing business as it was in factmanaging and operating various CCC franchises. Presented in evidence, too, was the September29, 1982 letter-reply of one G. Villanueva, then GCC President, to EQUITY President WilfredoLabayen, 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 explained that the GCC Board denied the Alcantaras’ request to be paid out of suchproceeds, but nonetheless authorized EQUITY to pay them interest out of EQUITY’s operationincome, 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 ofseparateness and presented documentary evidence detailing the organizational structures of bothGCC 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

























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actionable documents ALSONS and its predecessors-in-interest had in their possession and thatthe 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 GCCand considering the legal consequences and implications of such relationship, came out with itsdecision on November 8, 1990, rendering judgment for ALSONS, to wit:

WHEREFORE, the foregoing premises considered, judgment is hereby rendered in favor ofplaintiff [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 duethereon at the rate of eighteen percent (18%) annually computed from Jan. 2, 1981 untilthe obligation is fully paid;

2. liquidated damages due thereon equivalent to three percent (3%) monthly computedfrom January 2, 1982 until the obligation is fully paid;

3. attorney’s fees in an amount equivalent to twenty four percent (24%) of the totalobligation 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:

1. In holding that there is a "Parent-Subsidiary" corporate relationship between EQUITYand 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 thetrial court, thus:

WHEREFORE, premises considered, the Decision of the Regional Trial Court, Branch 58, Makatiin Civil Case No. 12707 is hereby AFFIRMED.

SO ORDERED.

In time, GCC moved for reconsideration followed by a motion for oral argument, but both motionswere 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 wereperfunctorily 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 tobearer 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 hasnot 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 isconclusive 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.











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The petition and the arguments and/or issues holding it together are without merit. The desiredreversal of the assailed decision and resolution of the appellate court is accordingly DENIED.

Instead of raising distinctly formulated questions of law, as is expected of one seeking a reviewunder Rule 45 of the Rules of Court of a final CA judgment,13 petitioner GCC starts off by voicingdisappointment over the "perfunctory" denial by the CA of its twin motions for reconsideration andoral argument. Petitioner, to be sure, cannot plausibly expect a reversal action premised on thecursory way its motions were denied, if such indeed were the case. Such manner of denial, whileperhaps 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 itsassailed denial resolution with the clause: "[F]inding no reversible error committed to warrant themodification and/or reversal of the April 11, 2002 Decision," suggesting that the appellate courtgave the petitioner’s motion for reconsideration the attention it deserved. At the very least, thepetitioner was duly apprised of the reasons why reconsideration could not be favorablyconsidered. An extended resolution was not really necessary to dispose of the motion forreconsideration in question.

Petitioner’s lament about being deprived of procedural due process owing to the denial of itsmotion for oral argument is simply specious. Under the CA Internal Rules, the appellate court maytap any of the three (3) alternatives therein provided to aid the court in resolving appealed casesbefore it. It may rely on available records alone, require the submission of memoranda or set thecase 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 therespondent’s comment on the petition, … the Court [of Appeals] may dismiss the petition if it findsthe 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 orrequire the parties to submit their memorandum or set the case for oral argument. xxx. After theoral 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 ownrules, required the parties to just submit, as they did, their respective memoranda to properlyventilate their separate causes. Under this scenario, the petitioner cannot be validly heard, havingbeen deprived of due process.

Just like the first, the last three (3) arguments set forth in the petition will not carry the day for thepetitioner. In relation therewith, the Court notes that these arguments and the issues behind themwere not raised before the trial court. This appellate maneuver cannot be allowed. For, well-settledis the rule that issues or grounds not raised below cannot be resolved on review in highercourts.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 trialcourt 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 thetrial 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 onappeal. Lack of jurisdiction over when the issues raised present a matter of public policy16 comesimmediately 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 andthe CA, based on the evidence adduced, adjudged the petitioner and respondent EQUITY jointlyand severally liable to pay what respondent ALSONS is entitled to under the "bearer" promissorynote. 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 dueexecution of the promissory note over which ALSONS, as the holder in due course thereof, hasinterest, but also the untenability of the petitioner’s counterclaim for attorney’s fees and exemplarydamages against ALSONS. At bottom, the petitioner predicated such counter-claim on thepostulate that respondent ALSONS had no cause of action, the supposed promissory note being,according to the petitioner, either a simulated or an altered document.


















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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 tothe 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 compellingreasons,17 such as when that determination is clearly without evidentiary support or when graveabuse of discretion has been committed.18 This is as it should be since the Court, in petitions forreview of CA decisions under Rule 45 of the Rules of Court, usually limits its inquiry only toquestions of law. Stated otherwise, it is not the function of the Court to analyze and weigh all overagain 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 conclusionof the CA that the P2 Million promissory note in question was authentic and was issued at the firstinstance to respondent ALSONS and the Alcantara family for the amount stated on its face, mustbe affirmed. It should be stressed in this regard that even the issuing entity, i.e., respondentEQUITY, 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 thepetitioner, 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 fromthose of the persons composing it20 as well as from that of any other entity to which it may berelated.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 itsstockholders 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 – "piercingthe veil of corporate fiction" – as in fact the court will often look at the corporation as a merecollection of individuals or an aggregation of persons undertaking business as a group,disregarding the separate juridical personality of the corporation unifying the group. Anotherformulation of this doctrine is that when two (2) business enterprises are owned, conducted andcontrolled by the same parties, both law and equity will, when necessary to protect the rights ofthird parties, disregard the legal fiction that two corporations are distinct entities and treat them asidentical 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 withcaution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or whennecessary in the interest of justice.24 After all, the concept of corporate entity was not meant topromote unfair objectives.

Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the lawcovers and isolates the corporation from any other legal entity to which it may be related, isallowed.25 These are: 1) defeat of public convenience,26 as when the corporate fiction is used asvehicle for the evasion of an existing obligation;272) fraud cases or when the corporate entity isused to justify a wrong, protect fraud, or defend a crime;28 or 3) alter ego cases, where acorporation is merely a farce since it is a mere alter ego or business conduit of a person, or wherethe corporation is so organized and controlled and its affairs are so conducted as to make itmerely 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 justifiablebasis for such action. When the appellate court spoke of a justifying factor, the reference was towhat 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 aninstrumentality or adjunct of [petitioner] GCC."

The Court agrees with the disposition of the appellate court on the application of the piercingdoctrine to the transaction subject of this case. Per the Court’s count, the trial court enumeratedno less than 20 documented circumstances and transactions, which, taken as a package, indeedstrongly 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 piercepetitioner’s corporate existence as to ALSONS’ claim in question. Foremost of what the trial courtreferred to as "certain circumstances" are the commonality of directors, officers and stockholdersand even sharing of office between petitioner GCC and respondent EQUITY; certain financing andmanagement arrangements between the two, allowing the petitioner to handle the funds of thelatter; the virtual domination if not control wielded by the petitioner over the finances, businesspolicies and practices of respondent EQUITY; and the establishment of respondent EQUITY bythe petitioner to circumvent CB rules. For a perspective, the following are some relevant excerpts






















































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from the trial court’s decision setting forth in some detail the tipping circumstances adverted totherein:

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 bythe 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% ofthe stockholders of … EQUITY were also stockholders of … GCC ….. Disclosed likewise is thefact 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 byEQUITY (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 indebted to the former but EQUITY was, in fact, a whollyowned subsidiary of …GCC. Thus, as affirmed by EQUITY’s President, … the funds invested byEQUITY 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 GCCexceeded 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 ofonly 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 thepursuit of its line of business to the extent that its business affairs were considered as GCC’s ownbusiness endeavors. xxx.

xxx xxx xxx

ALSONS has likewise shown …that the bonuses of the officers and directors of … EQUITY wasbased on its total financial performance together with all its affiliates… both firms were sharing oneand 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 thepurpose of circumventing [CB] rules and regulations and the Anti-Usury Law. Thus, as disclosedby 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 regulationsby : (a) using as a conduit its non-quasi bank affiliates …. (b) issuing without recourse facilities toenable GCC to extend credit to affiliates like … EQUITY which go beyond the single borrower’slimit without the need of showing outstanding balance in the book of accounts. (Emphasis overwords in brackets added.)

It bears to stress at this point that the facts and the inferences drawn therefrom, upon which thetwo (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, asan instrumentality or adjunct of GCC. With the view we take of this case, GCC did not adduce anyevidence, let alone rebut the testimonies and documents presented by ALSONS, to establish theprevailing circumstances adverted to that provided the justifying occasion to pierce the veil ofcorporate fiction between GCC and EQUITY. We quote the trial court:

Verily, indeed, as the relationships binding herein [respondent EQUITY and petitioner GCC] havebeen that of "parent-subsidiary corporations" the foregoing principles and doctrines find suitableapplicability in the case at bar; and, it having been satisfactorily and indubitably shown that thesaid 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 separateexistence of the percent (sic) and subsidiary the latter having been so controlled by the parent thatits 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 forthe acts and contracts of its subsidiary – [respondent] EQUITY - most especially if the latter (whohad anyhow acknowledged its liability to ALSONS) maybe (sic) without sufficient property withwhich to settle its obligations. For, after all, GCC was the entity which initiated and benefitedimmensely from the fraudulent scheme perpetrated in violation of the law. (Words in parenthesis inthe original; emphasis and bracketed words added).

Given the foregoing considerations, it behooves the petitioner, as a matter of law and equity, toassume the legitimate financial obligation of a cash-strapped subsidiary corporation which it



73

virtually controlled to such a degree that the latter became its instrument or agent. The facts, asfound by the courts a quo, and the applicable law call for this kind of disposition. Or else, the Courtwould be allowing the wrong use of the fiction of corporate veil.

WHEREFORE, the instant petition is DENIED and the appealed Decision and Resolution of theCourt of Appeals are accordingly AFFIRMED.

Costs against the petitioner.

SO ORDERED.

G.R. No. 108734 May 29, 1996

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

HERMOSISIMA, JR., J .: p

The corporate mask may be lifted and the corporate veil may be pierced when a corporation is justbut the alter ego of a person or of another corporation. Where badges of fraud exist; where publicconvenience is defeated; where a wrong is sought to be justified thereby, the corporate fiction orthe notion of legal entity should come to naught. The law in these instances will regard thecorporation as a mere association of persons and, in case of two corporations, merge them intoone.

Thus, where a sister corporation is used as a shield to evade a corporation's subsidiary liability fordamages, the corporation may not be heard to say that it has a personality separate and distinctfrom the other corporation. The piercing of the corporate veil comes into play.

This special civil action ostensibly raises the question of whether the National Labor RelationsCommission committed grave abuse of discretion when it issued a "break-open order" to thesheriff to be enforced against personal property found in the premises of petitioner's sistercompany.

Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 MaysanRoad, Valenzuela, Metro Manila, is engaged in the construction business. Private respondentswere employed by said company as laborers, carpenters and riggers.

On November, 1981, private respondents were served individual written notices of termination ofemployment by petitioner, effective on November 30, 1981. It was stated in the individual noticesthat their contracts of employment had expired and the project in which they were hired had beencompleted.

Public respondent found it to be, the fact, however, that at the time of the termination of privaterespondent's employment, the project in which they were hired had not yet been finished andcompleted. Petitioner had to engage the services of sub-contractors whose workers performed thefunctions of private respondents.

Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice andnon-payment of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner.

On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner to reinstateprivate respondents and to pay them back wages equivalent to one year or three hundred workingdays.

On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motionfor reconsideration filed by petitioner on the ground that the said decision had already becomefinal and executory. 2



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On October 16, 1986, the NLRC Research and Information Department made the finding thatprivate respondents' back wages amounted to P199,800.00. 3

On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to executethe Decision, dated December 19, 1984. The writ was partially satisfied through garnishment ofsums from petitioner's debtor, the Metropolitan Waterworks and Sewerage Authority, in theamount of P81,385.34. Said amount was turned over to the cashier of the NLRC.

On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the

sheriff to collect from herein petitioner the sum of P117,414.76, representing the balance of the judgment award, and to reinstate private respondents to their former positions.

On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of executionon petitioner through the security guard on duty but the service was refused on the ground thatpetitioner no longer occupied the premises.

On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a secondalias writ of execution.

The said writ had not been enforced by the special sheriff because, as stated in his progressreport, dated November 2, 1989:

1. All the employees inside petitioner's premises at 355 Maysan Road, Valenzuela, Metro Manila,claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;

2. Levy was made upon personal properties he found in the premises;

3. Security guards with high-powered guns prevented him from removing the properties he hadlevied upon. 4

The said special sheriff recommended that a "break-open order" be issued to enable him to enterpetitioner's premises so that he could proceed with the public auction sale of the aforesaidpersonal properties on November 7, 1989.

On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiteralleging that the properties sought to be levied upon by the sheriff were owned by Hydro (Phils.),Inc. (HPPI) of which he is the Vice-President.

On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-Open Order,"alleging that HPPI and petitioner corporation were owned by the same incorporator/stockholders.They also alleged that petitioner temporarily suspended its business operations in order to evadeits legal obligations to them and that private respondents were willing to post an indemnity bond toanswer for any damages which petitioner and HPPI may suffer because of the issuance of thebreak-open order.

In support of their claim against HPPI, private respondents presented duly certified copies of theGeneral Informations Sheet, dated May 15, 1987, submitted by petitioner to the SecuritiesExchange Commission (SEC) and the General Information Sheet, dated May 25, 1987, submittedby HPPI to the Securities and Exchange Commission.

The General Information Sheet submitted by the petitioner revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

HPPI P 6,999,500.00

Antonio W. Lim 2,900,000.00

Dennis S. Cuyegkeng 300.00

Elisa C. Lim 100,000.00

Teodulo R. Dino 100.00



75

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Dennis S. Cuyegkeng Member

Elisa C. Lim Member

Teodulo R. Dino Member

Virgilio O. Casino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa O. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road

Valenzuela, Metro Manila. 5

On the other hand, the General Information Sheet of HPPI revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

Antonio W. Lim P 400,000.00

Elisa C. Lim 57,700.00

AWL Trading 455,000.00

Dennis S. Cuyegkeng 40,100.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Elisa C. Lim Member

Dennis S. Cuyegkeng Member

Virgilio O. Casino Member

Teodulo R. Dino Member

3. Corporate Officers

Antonio W. Lim President



76

Dennis S. Cuyegkeng Assistant to the President

Elisa C. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road, Valenzuela, Metro Manila. 6

On February 1, 1990, HPPI filed an Opposition to private respondents' motion for issuance of abreak-open order, contending that HPPI is a corporation which is separate and distinct frompetitioner. HPPI also alleged that the two corporations are engaged in two different kinds ofbusinesses, i .e., HPPI is a manufacturing firm while petitioner was then engaged in construction.

On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents' motion forbreak-open order.

Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the orderof the Labor Arbiter, issued a break-open order and directed private respondents to file a bond.Thereafter, it directed the sheriff to proceed with the auction sale of the properties already levied

upon. It dismissed the third-party claim for lack of merit.

Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution,dated December 3, 1992.

Hence, the resort to the present petition.

Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered theexecution of its decision despite a third-party claim on the levied property. Petitioner furthercontends, that the doctrine of piercing the corporate veil should not have been applied, in thiscase, in the absence of any showing that it created HPPI in order to evade its liability to privaterespondents. It also contends that HPPI is engaged in the manufacture and sale of steel, concrete

and iron pipes, a business which is distinct and separate from petitioner's construction business.Hence, it is of no consequence that petitioner and HPPI shared the same premises, the samePresident and the same set of officers and subscribers. 7

We find petitioner's contention to be unmeritorious.

It is a fundamental principle of corporation law that a corporation is an entity separate and distinctfrom its stockholders and from other corporations to which it may be connected. 8 But, thisseparate and distinct personality of a corporation is merely a fiction created by law forconvenience and to promote justice. 9 So, when the notion of separate juridical personality is usedto defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device todefeat the labor laws, 10 this separate personality of the corporation may be disregarded or the veilof corporate fiction pierced. 11 This is true likewise when the corporation is merely an adjunct, abusiness conduit or an alter ego of another corporation. 12

The conditions under which the juridical entity may be disregarded vary according to the peculiarfacts and circumstances of each case. No hard and fast rule can be accurately laid down, butcertainly, there are some probative factors of identity that will justify the application of the doctrineof piercing the corporate veil, to wit:

1. Stock ownership by one or common ownership of both corporations.

2. Identity of directors and officers.

3. The manner of keeping corporate books and records.

4. Methods of conducting the business. 13

The SEC en banc explained the "instrumentality rule" which the courts have applied indisregarding the separate juridical personality of corporations as follows:

Where one corporation is so organized and controlled and its affairs are conductedso that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the



77

corporate entity of the "instrumentality" may be disregarded. The control necessaryto invoke the rule is not majority or even complete stock control but suchdomination of instances, 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 forits principal. It must be kept in mind that the control must be shown to have beenexercised at the time the acts complained of took place. Moreover, the control andbreach of duty must proximately cause the injury or unjust loss for which thecomplaint is made.

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is asfollows:

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 thetransaction attacked so that the corporate entity as to this transaction had at thetime 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 dishonestand unjust act in contravention of plaintiff's legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury orunjust loss complained of.

The absence of any one of these elements prevents "piercing the corporate veil." Inapplying the "instrumentality" or "alter ego" doctrine, the courts are concerned withreality and not form, with how the corporation operated and the individual defendant'srelationship to that operation. 14

Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation,a sham or a subterfuge is purely one of fact. 15

In this case, the NLRC noted that, while petitioner claimed that it ceased its business operationson April 29, 1986, it filed an Information Sheet with the Securities and Exchange Commission on

May 15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. Onthe other hand, HPPI, the third-party claimant, submitted on the same day, a similar informationsheet stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila.

Furthermore, the NLRC stated that:

Both information sheets were filed by the same Virgilio O. Casiño as the corporatesecretary of both corporations. It would also not be amiss to note that bothcorporations had the same president, thesame board of directors,the same corporate officers, and substantially the same subscribers.

From the foregoing, it appears that, among other things, the respondent (herein

petitioner) and the third-party claimant shared the same address and/or premises.Under this circumstances, (sic ) it cannot be said that the property levied upon by thesheriff were not of respondents. 16

Clearly, petitioner ceased its business operations in order to evade the payment to privaterespondents of back wages and to bar their reinstatement to their former positions. HPPI isobviously a business conduit of petitioner corporation and its emergence was skillfullyorchestrated to avoid the financial liability that already attached to petitioner corporation.

The facts in this case are analogous to Claparols v . Court of Industrial Relations, 17 where we hadthe occasion to rule:

Respondent court's findings that indeed the Claparols Steel and Nail Plant, whichceased operation of June 30, 1957, was SUCCEEDED by the Claparols SteelCorporation effective the next day, July 1, 1957, up to December 7, 1962, whenthe latter finally ceased to operate, were not disputed by petitioner. It is very clearthat the latter corporation was a continuation and successor of the first entity . . . .Both predecessors and successor were owned and controlled by petitionerEduardo Claparols and there was no break in the succession and continuity of thesame business. This "avoiding-the-liability" scheme is very patent, considering that90% of the subscribed shares of stock of the Claparols Steel Corporation (thesecond corporation) was owned by respondent . . . Claparols himself, and all the





79

a) the BORROWER fails to make payment when due and payable of any amounthe is obligated to pay under this Agreement;

b) the BORROWER fails to mortgage in favor of the LENDER real propertysufficient to cover the amount of the LOAN.4

As petitioner failed to pay the installments as they became due, respondent, apparently in answerto a proposal of petitioner respecting the settlement of the loan, advised him by letter dated July15, 1998 that he may use his retirement benefits in Sky Vision in partial settlement of his loan after

he settles his accountabilities to the latter and gives his written instructions to it (Sky Vision).5

Petitioner protested the computation indicated in the July 15, 1998 letter, he asserting that theimputed unliquidated advances from Sky Vision had already been properly liquidated.6

On August 18, 1998, respondent filed a complaint for collection of sum of money with damages atthe Regional Trial Court (RTC) of Pasig City against petitioner, alleging that petitioner violated theabove-quoted Section 6 of the loan agreement as he failed to put up the needed collateral for theloan and pay the installments as they became due, and that despite his receipt of letters ofdemand dated December 1, 19977 and January 13, 1998,8he refused to pay.

In his answer, petitioner alleged that the loan agreement did not reflect his true agreement with

respondent, it being merely a "cover document" to evidence the reward to him of ten million pesos(P10,000,000.00) for his loyalty and excellent performance as General Manager of Sky Vision andthat the payment, if any was expected, was in the form of continued service; and that it was whenhe was compelled by respondent to retire that the form of payment agreed upon was renderedimpossible, prompting the late Eugenio Lopez, Jr. to agree that his retirement benefits from SkyVision would instead be applied to the loan.9

By way of compulsory counterclaim, petitioner claimed that he was entitled to retirement benefitsfrom Sky Vision in the amount of P98,280,000.00, unpaid salaries in the amount of P2,740,000.00,unpaid incentives in the amount of P500,000, unpaid share from the "net income of Plaintiff

corporation," equity in his service vehicle in the amount of P1,500,000, reasonable return on thestock ownership plan for services rendered as General Manager, and moral damages andattorney’s fees.10

Petitioner thus prayed for the dismissal of the complaint and the award of the following sums ofmoney in the form of compulsory counterclaims:

1. P103,020,000.00, PLUS the value of Defendant’s stock options and unpaid share fromthe net income with Plaintiff corporation (to be computed) as actual damages;

2. P15,000,000.00, as moral damages; and

3. P1,500,000.00, as attorney’s fees plus appearance fees and the costs of suit.11

Respondent filed a manifestation and a motion to dismiss the counterclaim for want of jurisdiction,

which drew petitioner to assert in his comment and opposition thereto that the veil of corporatefiction must be pierced to hold respondent liable for his counterclaims.

By Order of January 3, 2000, Branch 155 of the RTC of Pasig denied respondent’s motion todismiss the counterclaim on the following premises: A counterclaim being essentially a complaint,the principle that a motion to dismiss hypothetically admits the allegations of the complaint isapplicable; the counterclaim is compulsory, hence, within its jurisdiction; and there is identity ofinterest between respondent and Sky Vision to merit the piercing of the veil of corporate fiction. 12

Respondent’s motion for reconsideration of the trial court’s Order of January 3, 2000 having beendenied, it filed a Petition for Certiorari at the Court of Appeals which held that respondent is not thereal party-in-interest on the counterclaim and that there was failure to show the presence of any of

the circumstances to justify the application of the principle of "piercing the veil of corporate fiction."The Orders of the trial court were thus set aside and the counterclaims of petitioner wereaccordingly dismissed.13

The Court of Appeals having denied petitioner’s motion for reconsideration, the instant Petition forReview was filed which assigns the following errors:

I.



80

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE RTC BRANCH 155 ALLEGEDLY ACTED WITH GRAVE ABUSE OF DISCRETION IN ISSUING THE ORDERSDATED JANUARY 3, 2000 AND OCTOBER 9, 2000 CONSIDERING THAT THE GROUNDSRAISED BY RESPONDENT LOPEZ, INC. IN ITS PETITION FOR CERTIORARI INVOLVEDMERE ERRORS OF JUDGMENT AND NOT ERRORS OF JURISDICTION.

II.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT RESPONDENT LOPEZ, INC.

IS NOT THE REAL PARTY-IN-INTEREST AS PARTY-DEFENDANT ON THE COUNTERCLAIMSOF PETITIONER VELARDE CONSIDERING THAT THE FILING OF RESPONDENT LOPEZ,INC.’S MANIFESTATION AND MOTION TO DISMISS COUNTERCLAIM HAD THE EFFECT OFHYPOTHETICALLY ADMITTING THE TRUTH OF THE MATERIAL AVERMENTS OF THE

ANSWER, WHICH MATERIAL AVERMENTS SUFFICIENTLY ALLEGED THAT RESPONDENTLOPEZ, INC. COMMITTED ACTS WHICH SHOW THAT ITS SUBSIDIARY, SKY VISION, WAS AMERE BUSINESS CONDUIT OR ALTER EGO OF THE FORMER, THUS, JUSTIFYING THEPIERCING OF THE VEIL OF CORPORATE FICTION.

III.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE COUNTERCLAIMS OFPETITIONER VELARDE ARE NOT COMPULSORY.14

While petitioner correctly invokes the ruling in Atienza v. Court of Appeals15 to postulate that notevery denial of a motion to dismiss can be corrected by certiorari under Rule 65 and that, as ageneral rule, the remedy from such denial is to appeal in due course after a decision has beenrendered on the merits, there are exceptions thereto, as when the court in denying the motion todismiss acted without or in excess of jurisdiction or with patent grave abuse of discretion, 16 orwhen the assailed interlocutory order is patently erroneous and the remedy of appeal would notafford adequate and expeditious relief,17 or when the ground for the motion to dismiss is impropervenue,18 res judicata,19 or lack of jurisdiction20 as in the case at bar.

Early on, it bears noting, when the case was still with the trial court, respondent filed a motion todismiss the counterclaims to assail its jurisdiction, respondent asserting that the counterclaims,

being money claims arising from a labor relationship, are within the exclusive competence of the

National Labor Relations Commission.21 On the other hand, petitioner alleged that due to thetortuous manner he was coerced into retirement, it is the Regional Trial Courts (RTCs) and not theNational Labor Relations Commission which has exclusive jurisdiction over his counterclaims.

In determining which has jurisdiction over a case, the averments of the complaint/counterclaim,taken as a whole, are considered.22 In his counterclaim, petitioner alleged that:

x x x

29. It was only on July 15, 1998 that Lopez, Inc. submitted a computation of the retirementbenefit due to the Defendant. (Copy attached as ANNEX 4). Immediately after receiving

this computation, Defendant immediately informed Plaintiff of the erroneous figure used assalary in the computation of benefits. This was done in a telephone conversation with acertain Atty. Amina Amado of Lopez, Inc.

29.1 The Defendant also informed her that the so called "unliquidated advancesamounting to P422,922.87 since 1995" had all been properly liquidated as reflected in allthe reports of the company. The Defendant reminded Atty. Amado ofunpaid incentives and salaries for 1997.

29.2 Defendant likewise informed Plaintiff that the one month for every

year of service as a basis for the computation of the Defendant’s retirement benefit is

erroneous. This computation is even less than what the rank and file employees get. That

CEO’s, COO’s and senior executives of the level of ABS-CBN, Sky Vision, Benpres,Meralco and other Lopez companies had and have received a lot more than the regularrank and file employees. All these retired executives and records can be summoned forverification.

29.3 The circumstances of the retirement of the Defendant are not those for a simple andordinary rank and file employee. Mr. Lopez, III admitted that he and the Defendant havehad problems which accumulated through time and that they chose to part ways in amanner that was dignified for both of them. Treating the Defendant as a rank and file



81

employee is hardly dignified not just to the Defendant but also to the Lopezes whoseexisting executives serving them will draw lessons from the Defendant’s experience.

29.4 These circumstances hardly reflect a simple retirement. The Defendant, who isknown in the local and international media community, is hardly considered a rank and fileemployee. Defendant was a stockholder of the Corporation and a duly-elected member ofthe Board of Directors. Certain government officials can attest to the sensitivity of issuesand matters the Defendant had represented for the Lopezes that are hardly issueshandled by a simple rank and file employee. Respectable individuals in government and

industry are willing to testify to this regard.x x x

23

(Underscoring and italics supplied).

At the heart of petitioner’s counterclaim is his alleged forced retirement which is also the basis ofhis claim for, among other things, unpaid salaries, unpaid incentives, reasonable return on thestock ownership plan, and other benefits from a subsidiary company of the respondent.

Section 5(c) of P.D. 902-A (as amended by R.A. 8799, the Securities Regulation Code) applies toa corporate officer’s dismissal. For a corporate officer’s dismissal is always a corporate act and/oran intra-corporate controversy and that its nature is not altered by the reason or wisdom which theBoard of Directors may have in taking such action.24

With regard to petitioner’s claim for unpaid salaries, unpaid share in net income, reasonable returnon the stock ownership plan and other benefits for services rendered to Sky Vision, jurisdictionthereon pertains to the Securities Exchange Commission even if the complaint by a corporateofficer includes money claims since such claims are actually part of the prerequisite of his positionand, therefore, interlinked with his relations with the corporation.25 The question of remunerationinvolving a person who is not a mere employee but a stockholder and officer of the corporation isnot a simple labor problem but a matter that comes within the area of corporate affairs andmanagement, and is in fact a corporate controversy in contemplation of the Corporation Code.26

While petitioner’s counterclaims were filed on December 1, 1998, the second challenged order ofthe trial court denying respondent’s motion for reconsideration of the denial of its motion to dismisswas issued on October 9, 2000 at which time P.D. 902-A had been amended by R.A. 8799(approved on July 19, 2000) which mandated the transfer of jurisdiction over intra-corporatecontroversies, subject of the counterclaims, to RTCs.

But even if the subject matter of the counterclaims is now cognizable by RTCs, the filing thereofagainst respondent is improper, it not being the real party-in- interest, for it is petitioner’s employerSky Vision, respondent’s subsidiary.

It cannot be gainsaid 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 bindthe former and vice versa.

Petitioner argues nevertheless that jurisdiction over the subsidiary is justified by piercing the veil ofcorporate fiction. Piercing the veil of corporate fiction is warranted, however, only in cases whenthe separate legal entity is used to defeat public convenience, justify wrong, protect fraud, or

defend crime, such that in the case of two corporations, the law will regard the corporations asmerged into one.27 The rationale behind piercing a corporation’s identity is to remove the barrierbetween the corporation from the persons comprising it to thwart the fraudulent and illegalschemes of those who use the corporate personality as a shield for undertaking certain proscribedactivities.28

In applying the doctrine of piercing the veil of corporate fiction, the following requisites must beestablished: (1) control, not merely majority or complete stock control; (2) such control must havebeen used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory orother positive legal duty, or dishonest acts in contravention of plaintiff’s legal rights; and (3) theaforesaid control and breach of duty must proximately cause the injury or unjust loss complainedof.29

Nowhere, however, in the pleadings and other records of the case can it be gathered thatrespondent has complete control over Sky Vision, not only of finances but of policy and businesspractice in respect to the transaction attacked, so that Sky Vision had at the time of the transactionno separate mind, will or existence of its own. The existence of interlocking directors, corporateofficers and shareholders is not enough justification to pierce the veil of corporate fiction in theabsence of fraud or other public policy considerations.



This Court is thus not convinced that the real party-in-interest with regard to the counterclaim fordamages arising from the alleged tortuous manner by which petitioner was forced to retire asGeneral Manager of Sky Vision is respondent.

Petitioner muddles the issues by arguing that respondent fraudulently took advantage of thecontrol over the matter of compensation and benefits of an employee of Sky Vision to deceivepetitioner into signing the loan agreement on the misleading assurance that it was merely for thepurpose of documenting the reward to him of ten million pesos. This argument does not persuade.Petitioner, being a lawyer, is presumed to know the legal and binding effects of loan agreements.

It bears emphasis that Sky Vision’s involvement in the transaction subject of the case sp rang onlyafter a proposal was apparently proffered by petitioner that his retirement benefits from Sky Visionbe used in partial payment of his loan from respondent as gathered from the July 15, 1998letter 30 of Rommel Duran, Vice-President and General Manager of respondent, to petitionerreading:

Dear Mr. Velarde:

As requested, we have made computations on the outstanding amount of your loan with

Lopez, Inc. should your retirement benefits from Sky Vision Corporation/Central CATV,Inc. ""Sky/Central") be applied to the partial payment of your loan. Please note that inorder to effect the application of your retirement benefits to the partial payment of yourloan, you will need to give Sky/Central written instructions on the same in the soonest

possible time.

As you will see in the attached computation, the amount of P4,077,077.13 will be appliedto the payment of your loan to retroact on January 1, 1998. The amount of P422,922.87,representing unliquidated advances made by Sky/Central to you (see attached listing), hasbeen deducted from your retirement pay of P4.5 million. Should you be ableto liquidate the advances as requested by Sky/Central, the said amount will be applied to

the partial payment of your loan and we shall adjust the amount of principal and interestdue from you accordingly. After the application of the amount of P4,077,077.13 to thepartial payment of your loan, the amount of P7,585,912.86 will be immediately due anddemandable. The amount of P7,585,912.86 represents the outstanding principal and

interest due as of July 15, 1998.

Without the application of your retirement benefits to the partial payment of your loan, theamount of P11,850,000.00 is due as of July 15, 1998. We reiterate our demand for fullpayment of your outstanding obligation immediately. (Underscoring supplied)

As for the trial court’s ruling that the agreement to set-off is an amendment of the loan agreementresulting to an identity of interest between respondent and Sky Vision and, therefore, sufficient topierce the veil of corporate fiction, it is untenable. The abovequoted letter is clear that, to effect aset-off, it is a condition sine qua non that the approval thereof by "Sky/Central" must be obtained,and that petitioner liquidate his advances from Sky Vision. These conditions hardly manifest thatrespondent possessed that degree of control over Sky Vision as to make the latter its mere

instrumentality, agency or adjunct.

WHEREFORE, the instant petition for review on certiorari is hereby DENIED.

SO ORDERED.

Documents

Batch 2 Corpo Cases