chapter 2 digests

8/10/2019 Chapter 2 Digests

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1.MANILA INTERNATIONAL AIRPORT AUTHORITY VS CA

FACTS: Petitioner) operates the Ninoy Aquino International Airport (NAIA) Complex inParaaque City under Executive Order No. 903, otherwise known as the Revised Charter of theManila International Airport Authority ("MIAA Charter"). MIAA administers the land,improvements and equipment within the NAIA Complex. The MIAA Charter transferred to MIAA

approximately 600 hectares of land, including the runways and buildings ("Airport Lands andBuildings") then under the Bureau of Air Transportation.

On 21 March 1997, the Office of the Government Corporate Counsel (OGCC) issued OpinionNo. 061. The OGCC opined that the Local Government Code of 1991 withdrew the exemptionfrom real estate tax granted to MIAA under Section 21 of the MIAA Charter. Thus, MIAAnegotiated with respondent City of Paraaque to pay the real estate tax imposed by the City.MIAA then paid some of the real estate tax already due.

On 17 July 2001, the City of Paraaque, through its City Treasurer, issued notices of levy andwarrants of levy on the Airport Lands and Buildings. The Mayor of the City of Paraaquethreatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay thereal estate tax delinquency. MIAA thus sought a clarification of OGCC Opinion No. 061. TheOGCC opined that Section 21 of the MIAA Charter is the proof that MIAA is exempt from realestate tax. On 1 October 2001, MIAA filed with the Court of Appeals an original petition forprohibition and injunction, with prayer for preliminary injunction or temporary restraining order.The petition sought to restrain the City of Paraaque from imposing real estate tax on, levyingagainst, and auctioning for public sale the Airport Lands and Buildings.

ISSUE:whether the Airport Lands and Buildings of MIAA are exempt from real estate tax underexisting laws.

HELD: YES. First, MIAA is not a government-owned or controlled corporation but aninstrumentality of the National Government and thus exempt from local taxation. Second,the real properties of MIAA are owned by the Republic of the Philippines and thus

exempt from real estate tax.

1. MIAA is Not a Government-Owned or Controlled Corporation

There is no dispute that a government-owned or controlled corporation is not exempt from realestate tax. However, MIAA is not a government-owned or controlled corporation. Section 2(13)of the Introductory Provisions of the Administrative Code of 1987 defines a government-ownedor controlled corporation as follows:

SEC. 2. General Terms Defined.x x x x

(13) Government-owned or controlled corporation refers to any agency organized as a stock ornon-stock corporation, vested with functions relating to public needs whether governmental or

proprietary in nature, and owned by the Government directly or through its instrumentalitieseither wholly, or, where applicable as in the case of stock corporations, to the extent of at leastfifty-one (51) percent of its capital stock: x x x. (Emphasis supplied)

A government-owned or controlled corporation must be "organized as a stock or non-stock corporation." MIAA is not organized as a stock or non-stock corporation. MIAA isnot a stock corporation because it has no capital stock divided into shares. MIAA has nostockholders or voting shares.Section 10 of the MIAA Charter provides:


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SECTION 10. Capital. The capital of the Authority to be contributed by the NationalGovernment shall be increased from Two and One-half Billion (P2,500,000,000.00) Pesos toTen Billion (P10,000,000,000.00) Pesos to consist of:

(a) The value of fixed assets including airport facilities, runways and equipment and such otherproperties, movable and immovable[,] which may be contributed by the National Government or

transferred by it from any of its agencies, the valuation of which shall be determined jointly withthe Department of Budget and Management and the Commission on Audit on the date of suchcontribution or transfer after making due allowances for depreciation and other deductionstaking into account the loans and other liabilities of the Authority at the time of the takeover ofthe assets and other properties;

(b) That the amount of P605 million as of December 31, 1986 representing about seventypercentum (70%) of the unremitted share of the National Government from 1983 to 1986 to beremitted to the National Treasury as provided for in Section 11 of E. O. No. 903 as amended,shall be converted into the equity of the National Government in the Authority. Thereafter, theGovernment contribution to the capital of the Authority shall be provided in the General

Appropriations Act.

Clearly, under its Charter, MIAA does not have capital stock that is divided into shares.

Section 3 of the Corporation Code10 defines a stock corporation as one whose "capital stock isdivided into shares and x x x authorized to distribute to the holders of such shares dividends x xx." MIAA has capital but it is not divided into shares of stock. MIAA has no stockholders orvoting shares. Hence, MIAA is not a stock corporation.

MIAA is also not a non-stock corporation because it has no members. Section 87 of theCorporation Code defines a non-stock corporation as "one where no part of its income isdistributable as dividends to its members, trustees or officers." A non-stock corporation musthave members. Even if we assume that the Government is considered as the sole member ofMIAA, this will not make MIAA a non-stock corporation. Non-stock corporations cannot distribute

any part of their income to their members. Section 11 of the MIAA Charter mandates MIAA toremit 20% of its annual gross operating income to the National Treasury.11 This prevents MIAAfrom qualifying as a non-stock corporation.

Section 88 of the Corporation Code provides that non-stock corporations are "organized forcharitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific,social, civil service, or similar purposes, like trade, industry, agriculture and like chambers."MIAA is not organized for any of these purposes. MIAA, a public utility, is organized to operatean international and domestic airport for public use.

Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as agovernment-owned or controlled corporation. What then is the legal status of MIAA within theNational Government?

MIAA is a government instrumentality vested with corporate powers to performefficiently its governmental functions. MIAA is like any other government instrumentality, theonly difference is that MIAA is vested with corporate powers. Section 2(10) of the IntroductoryProvisions of the Administrative Code defines a government "instrumentality" as follows:

SEC. 2. General Terms Defined.x x x x


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(10) Instrumentality refers to any agency of the National Government, not integrated within thedepartment framework, vested with special functions or jurisdiction by law, endowed with someif not all corporate powers, administering special funds, and enjoying operational autonomy,usually through a charter. x x x (Emphasis supplied)

When the law vests in a government instrumentality corporate powers, the instrumentality does

not become a corporation. Unless the government instrumentality is organized as a stock ornon-stock corporation, it remains a government instrumentality exercising not only governmentalbut also corporate powers. Thus, MIAA exercises the governmental powers of eminentdomain,12 police authority13 and the levying of fees and charges.14 At the same time, MIAAexercises "all the powers of a corporation under the Corporation Law, insofar as these powersare not inconsistent with the provisions of this Executive Order."

Likewise, when the law makes a government instrumentality operationally autonomous, theinstrumentality remains part of the National Government machinery although not integrated withthe department framework. The MIAA Charter expressly states that transforming MIAA into a"separate and autonomous body"16 will make its operation more "financially viable."


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2. G.R. No. 58168 December 19, 1989, CONCEPCION MAGSAYSAY-LABRADOR vs. THECOURT OF APPEALS

FERNAN, C.J.:

FACTS: Adelaida Rodriguez-Magsaysay, widow and special administratix of the estate of thelate Senator Genaro Magsaysay, brought an action against Subic Land Corporation (SUBIC),Filipinas Manufacturer's Bank (FILMANBANK) and the Register of Deeds of Zambales for thecancellation of a title covering a parcel of land registered in the name of Subic. She alleged thatthe said property is their conjugal property and that her husband, without her consent, causedthe annotation on the back of its title the sale of the same to Subic and a mortgage by Subic toFilmanbank.

During the pendency of the case, the petitioners, sisters of the late senator, filed amotion for intervention on the ground that their brother conveyed to them of his shareholdingsin Subic and as assignees of around 41 % of the total outstanding shares of such stocks ofSubic, they have a substantial and legal interest in the subject matter of litigation.

Both the trial and appellate courts denied the motion for intervention, and ruled thatpetitioners have no legal interest whatsoever in the matter in litigation because Subic has apersonality separate and distinct from its stockholders. Hence, the instant recourse.

ISSUE: Whether or not petitioners have the right to intervene in the action brought againstSubic?

HELD: NO. Petitioners motion for interventionwas properly denied. The interest which entitlesa person to intervene in a suit between other parties must be in the matter in litigation and ofsuch direct and immediate character that the intervenor will either gain or lose by the direct legaloperation and effect of the judgment. In the case at bar, petitioners interest is indirect,

contingent, and purely inchoate of a right in the management of the corporation and to share inthe profits thereof and in the properties and assets thereof on dissolution, after payment of thecorporate debts and obligations.

While a share of stock represents a proportionate or aliquot interest in the property of thecorporation, it does not vest the owner thereof with any legal right or title to any of the property,his interest in the corporate property being equitable or beneficial in nature. Shareholders are inno legal sense the owners of corporate property, which is owned by the corporation as a distinctlegal person.


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3.Sulo ng Bayan vs. Araneta [GR L-31061, 17 August 1976]

Facts:On 26 April 1966, Sulo ng Bayan, Inc. filed an accion de revindicacion with the Court of

First Instanceof Bulacan, Fifth Judicial District, Valenzuela, Bulacan, against Gregorio Araneta Inc. (GAI),

Paradise Farms Inc., National Waterworks & Sewerage Authority (NAWASA), Hacienda CaretasInc., and the Register of Deeds of Bulacan to recover the ownership and possession of a largetract of land in San Jose del Monte, Bulacan, containing an area of 27,982,250 sq. ms., more orless, registered under the Torrens System in the name of GAI, et. al.'s predecessors-in-interest(who are members of the corporation).

On 2 September 1966,GAI filed a motion to dismiss the amended complaint on thegrounds that (1) the complaint states no cause of action; and (2) the cause of action, if any, isbarred by prescription and laches. Paradise Farms, Inc. and Hacienda Caretas, Inc. filedmotions to dismiss based on the same grounds. NAWASA did not file any motion to dismiss.However, it pleaded in its answer as special and affirmative defenses lack of cause of action bySulo ng Bayan Inc. and the barring of such action by prescription and laches. On 24 January1967, the trial court issued an Order dismissing the (amended) complaint. On 14 February

1967, Sulo ng Bayan filed a motion to reconsider the Order of dismissal, arguing among othersthat the complaint states a sufficient cause of action because the subject matter of thecontroversy in one of common interest to the members of the corporation who are so numerousthat the present complaint should be treated as a class suit. The motion was denied by the trialcourt in its Order dated 22 February 1967.Sulo ng Bayan appealed to the Court of Appeals.

On 3 September 1969, the Court of Appeals, upon finding that no question of fact wasinvolved in the appeal but only questions of law and jurisdiction, certified the case to theSupreme Court for resolution of the legal issues involved in the controversy.

Issue:Whether the corporation (non-stock) may institute an action in behalf of its individualmembers for

the recovery of certain parcels of land allegedly owned by said members, among others.

Held:It is a doctrine well-established and obtains both at law and in equity that a corporation isa distinct legal entity to be considered as separate and apart from the individual stockholders ormembers who compose it, and is not affected by the personal rights, obligations andtransactions of its stockholders or members. The property of the corporation is its property andnot that of the stockholders, as owners, although they have equities in it. Properties registeredin the name of the corporation are owned by it as an entity separate and distinct from itsmembers.

Conversely, a corporation ordinarily has no interest in the individual property of itsstockholders unless transferred to the corporation, "even in the case of a one-man corporation."The mere fact that one is president of a corporation does not render the property which he owns

or possesses the property of the corporation, since the president, as individual, and thecorporation are separate similarities. Similarly, stockholders in a corporation engaged in buyingand dealing in real estate whose certificates of stock entitled the holder thereof to an allotmentin the distribution of the land of the corporation upon surrender of their stock certificates wereconsidered not to have such legal or equitable title or interest in the land, as would support asuit for title, especially against parties other than the corporation.It must be noted, however, that the juridical personality of the corporation, as separate and

distinct from the persons composing it, is but a legal fiction introduced for the purpose of


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4. BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO) vs. PRESIDENTIALCOMMISSION ON GOOD GOVERNMENT

NARVASA, J.:

FACTS: Challenged in this special civil action of certiorari and prohibition by a privatecorporation known as the Bataan Shipyard and Engineering Co., Inc. are: (1) Executive OrdersNumbered 1 and 2, promulgated by President Corazon C. Aquino on February 28, 1986 andMarch 12, 1986, respectively, and (2) the sequestration, takeover, and other orders issued, andacts done, in accordance with said executive orders by the Presidential Commission on GoodGovernment.

The sequestration order which, in the view of the petitioner corporation, initiated all its miserywas issued on April 14, 1986 by Commissioner Mary Concepcion Bautista.

On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the PCGG,addressed a letter dated April 18, 1986 to the President and other officers of petitioner firm,reiterating an earlier request for the production of certain documents.

The letter closed with the warning that if the documents were not submitted within five days, theofficers would be cited for "contempt.

A third order assailed by petitioner corporation, is that issued on April 21, 1986 by a Capt.Flordelino B. Zabala, to BASECO's Vice-President for Finance, 3 terminating the contract forsecurity services within the Engineer Island compound between BASECO and civilian securityagencies.

By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the provisional takeoverby the PCGG of BASECO,. Diaz invoked the provisions of Section 3 (c) of Executive Order No.

1, empowering the Commission

* * To provisionally takeover in the public interest or to prevent its disposal ordissipation, business enterprises and properties taken over by the government ofthe Marcos Administration or by entities or persons close to former PresidentMarcos, until the transactions leading to such acquisition by the latter can bedisposed of by the appropriate authorities.

A management team was designated to implement the order, headed by Capt. Siacunco.

While BASECO concedes that "sequestration without resorting to judicial action, might be madewithin the context of Executive Orders Nos. 1 and 2 before March 25, 1986 when the Freedom

Constitution was promulgated, it ceased to be acceptablewhen the same ruler opted topromulgate the Freedom Constitution wherein "No person shall be deprived of life, liberty andproperty without due process of law."

It argues that the order to produce corporate records from 1973 to 1986, which it has apparentlyalready complied with, was issued without court authority and infringed its constitutional rightagainst self-incrimination, and unreasonable search and seizure.


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BASECO further contends that the PCGG had unduly interfered with its right of dominion andmanagement of its business affairs.

ISSUE:Whether BASECO may properly invoke Right against Self-Incrimination

RULING: No Violation of Right against Self-Incrimination and Unreasonable Searches andSeizures

It is elementary that the right against self-incrimination has no application to juridical persons.

While an individual may lawfully refuse to answer incriminating questions unlessprotected by an immunity statute, it does not follow that a corporation, vestedwith special privileges and franchises, may refuse to show its hand whencharged with an abuse of such privileges.

The corporation is a creature of the state. It is presumed to be incorporated forthe benefit of the public. It received certain special privileges and franchises, and

holds them subject to the laws of the state and the limitations of its charter. Itspowers are limited by law. It can make no contract not authorized by its charter.Its rights to act as a corporation are only preserved to it so long as it obeys thelaws of its creation. There is a reserve right in the legislature to investigate itscontracts and find out whether it has exceeded its powers. It would be a strangeanomaly to hold that a state, having chartered a corporation to make use ofcertain franchises, could not, in the exercise of sovereignty, inquire how thesefranchises had been employed, and whether they had been abused, and demandthe production of the corporate books and papers for that purpose. The defenseamounts to this, that an officer of the corporation which is charged with a criminalviolation of the statute may plead the criminality of such corporation as a refusalto produce its books. To state this proposition is to answer it. While an individualmay lawfully refuse to answer incriminating questions unless protected by animmunity statute, it does not follow that a corporation, vested with special

privileges and franchises may refuse to show its hand when charged with anabuse of such privileges.

The constitutional safeguard against unreasonable searches and seizures finds no applicationto the case at bar either. There has been no search undertaken by any agent or representativeof the PCGG, and of course no seizure on the occasion thereof.


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5.LUXURIA HOMES VS CA

FACTS: Petitioner Aida M. Posadas and her two (2) minor children co-owned a 1.6 hectareproperty in Sucat, Muntinlupa, which was occupied by squatters. Petitioner Posadas enteredinto negotiations with private respondent Jaime T. Bravo regarding the development of the saidproperty into a residential subdivision. Meanwhile, some seven (7) months later, on December

11, 1989, petitioner, through a Deed of Assignment, assigned the said property to petitionerLuxuria Homes, Inc., purportedly for organizational and tax avoidance purposes. RespondentBravo signed as one of the witnesses to the execution of the Deed of Assignment and the

Articles of Incorporation of petitioner Luxuria Homes, Inc.

Sometime in 1992, the harmonious and congenial relationship of petitioner Posadas andrespondent Bravo turned sour when the former supposedly could not accept the managementcontracts to develop the 1.6 hectare property. Respondent Bravo demanded payment forservices rendered in connection with the development of the land. In his statement of accountdated 21 August 1991 respondent demanded the payment of P1,708,489.00 for variousservices rendered, i.e., relocation of squatters, preparation of the architectural design and sitedevelopment plan, survey and fencing.

Petitioner Posadas refused to pay the amount demanded. Thus, in September 1992, privaterespondents James Builder Construction and Jaime T. Bravo instituted a complaint for specificperformance before the trial court against petitioners Posadas and Luxuria Homes, Inc.

ISSUE:WON petitioner Luxuria Homes, Inc., can be held liable to private respondents for thetransactions supposedly entered into between petitioner Posadas and private respondents.

HELD: NO.We easily glean from the record that private respondents sent demand letters on 21August 1991 and 14 September 1991, or more than a year and a half after the execution of theDeed of Assignment on 11 December 1989, and the issuance of the Articles of Incorporation ofpetitioner Luxuria Homes on 26 January 1990. And, the transfer was made at the time the

relationship between petitioner Posadas and private respondents was supposedly verypleasant. In fact the Deed of Assignment dated 11 December 1989 and the Articles ofIncorporation of Luxuria Homes, Inc., issued 26 January 1990 were both signed by respondentBravo himself as witness. It cannot be said then that the incorporation of petitionerLuxuria Homes and the eventual transfer of the subject property to it were in fraud ofprivate respondent as such were done with the full knowledge of respondent Bravohimself.

Besides petitioner Posadas is not the majority stockholder of petitioner Luxuria Homes, Inc., aserroneously stated by the lower court. The Articles of Incorporation of petitioner Luxuria Homes,Inc., clearly show that petitioner Posadas owns approximately 33% only of the capital stock.Hence petitioner Posadas cannot be considered as an alter ego of petitioner Luxuria Homes,

Inc.

To disregard the separate juridical personality of a corporation, the wrongdoing must be clearlyand convincingly established. It cannot be presumed. This is elementary. Thus in Bayer-Roxas v. Court of Appeals,[17] we said that the separate personality of the corporation maybe disregarded only when the corporation is used as a cloak or cover for fraud orillegality, or to work injustice, or where necessary for the protection of the creditors.


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Obviously in the instant case, private respondents failed to show proof that petitioner Posadasacted in bad faith. Consequently since private respondents failed to show that petitioner LuxuriaHomes, Inc., was a party to any of the supposed transactions, not even to the agreement tonegotiate with and relocate the squatters, it cannot be held liable, nay jointly and in solidum, topay private respondents. In this case since it was petitioner Aida M. Posadas who contractedrespondent Bravo to render the subject services, only she is liable to pay the amounts adjudged

herein.


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

CONCEPT BUILDERS, INC., vs. THE NATIONAL LABOR RELATIONS COMMISSION

HERMOSISIMA, JR., J.:

FACTS: Petitioner Concept Builders, Inc., a domestic corporation, is engaged in theconstruction business. Private respondents were employed by said company as laborers,carpenters and riggers. They filed a complaint for illegal dismissal against the petitioner after thelatter terminated theirs services even before the completion of the project in which they werehired. The Labor Arbiter and NLRC decided in favour of the employees. To execute suchdecision, a Motion for the Issuance of a Break-Open Order was filed by the private respondentsto enable the sheriff to levy on the personal properties of petitioner. It was opposed to by DennisCuyegkeng, alleging that the properties to be levied were owned not by petitioner, but by HydroPipes Philippines, Inc., (HPPI).

The Labor Arbiter denied the Motion but the NLRC issued the break-open order after afinding that HPPI and petitioner were owned by the same incorporator stockholders and that thelatter only temporarily suspended its business operations in order to evade its legal obligationsto the laborers. The doctrine of piercing the corporate veil is applicable in this case.

Petitioner contended that the said doctrine is inapplicable, in the absence of anyshowing that it created HPPI in order to evade its liability to private respondents. It alsocontends that HPPI is engaged in the manufacture and sale of steel, concrete and iron pipes, abusiness which is distinct and separate from petitioners construction business. Hence, it is ofno consequence that petitioner and HPPI shared the same premises, the same President andthe same set of officers and subscribers.

ISSUE: Whether or not the doctrine of piercing the corporate veil is applicable in the instantcase?

HELD: YES. It is a fundamental principle of corporation law that a corporation is an entityseparate and distinct from its stockholders and from other corporations to which it may beconnected. But, if this separate and distinct personality of a corporation is used to defeat publicconvenience, justify wrong, protect fraud or defend crime, or is used as a device to defeat thelabor laws, this separate personality of the corporation may be disregarded.

This is true likewise when the corporation is merely an adjunct, a business conduit or analter ego of another corporation. Under the instrumentality rule, Where one corporation is soorganized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentalityor adjunct of the other, the fiction of the corporate entity of the instrumentality may bedisregarded.

In the case at bar, while petitioner claimed that it ceased its business operations on April29, 1986, on the same day, HPPI an Information sheet stating that its office address is the sameas that of the petitioner. Both information sheets were filed by the same Virgilio O. Casino as thecorporate secretary of both corporations. Both corporations had the same president, the sameboard of directors, the same corporate officers, and substantially the same subscribers.

Clearly, petitioner ceased its business operations in order to evade the payment to privaterespondents of backwages and to bar their reinstatement to their former positions. HPPI is


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obviously a business conduit of petitioner corporation and its emergence was skillfullyorchestrated to avoid the financial liability that already attached to petitioner corporation.

7. Villa Rey Transit vs. Ferrer [GR L-23893, 29 October 1968]

Facts:

Jose Villarama was an operator of a bus transportation pursuant to two certificates ofpublic convenience granted him by the Public Service Commission (PSC). Later, he sold thecertificates to the Pangasinan Transportation Company, Inc. (Pantranco) with the condition thatthe seller (Villarama) "shall not for a period of 10 years, apply for any TPU service identical orcompeting with the buyer.

"Barely three months thereafter, a corporation called Villa Rey Transit, Inc. (theCorporation) was organized with a capital stock of P500,000.00 divided into 5,000 shares of thepar value of P100.00 each;P200,000.00 was the subscribed stock; Natividad Villarama (wife ofJose Villarama) was one of the incorporators, and she subscribed for P1,000.00; the balance ofP199,000.00 was subscribed by the brother and sister-in-law of Jose Villarama; of thesubscribed capital stock, P105,000.00 was paid to the treasurer of the corporation, Natividad. In

less than a month after its registration with the SEC, the Corporation bought five certificates ofpublic convenience and 49 buses from one Valentin Fernando.

Later, the Sheriff of Manila levied on 2 of the 5 certificates , in favor of Eusebio Ferrer,judgment creditor, against Fernando, judgment debtor. A public sale was conducted. Ferrer wasthe highest bidder. Ferrer sold the two certificates to Pantranco. The Corporation filed acomplaint against Ferrer, Pantranco and the PSC for the annulment of the sheriff's sale.Pantranco, on its part, filed a third-party complaint against Villarama, alleging that Villaramaand/or the Corporation was disqualified from operating the two certificates in question by virtueof the previous agreement. The trial court declared null and void the sheriff's sale of twocertificates of public convenience in favor of Ferrer and the subsequent sale thereof by the latterto Pantranco and declaring Villa Rey Transit, Inc., to be the lawful owner of the said certificatesof public convenience. Pantranco disputes the correctness of the decision insofar as it holds

that Villa Rey Transit, Inc.(Corporation) is a distinct and separate entity from Villarama. Ferrer,for his part, challenges the decision insofar as it holds that the sheriff's sale is null and void

ISSUE: Whether the stipulation, "SHALL NOT FOR A PERIOD OF 10 YEARS FROM THEDATE OF THIS SALE, APPLY FOR ANY TPU SERVICE IDENTICAL OR COMPETING WITHTHE BUYER" in the contract between Villarama and Pantranco, binds the Corporation (the VillaRey Transit, Inc.).

Held: Villarama supplied the organization expenses and the assets of the Corporation, such astrucks and equipment; there was no actual payment by the original subscribers of the amountsof P95,000.00 and P100,000.00 as appearing in the books; Villarama made use of the money of

the Corporation and deposited them to his private accounts; and the Corporation paid hispersonal accounts. Villarama himself admitted that he mingled the corporate funds with his ownmoney. These circumstances are strong persuasive evidence showing that Villarama has beentoo much involved in the affairs of the Corporation to altogether negative the claim that he wasonly a part-time general manager.

They show beyond doubt that the Corporation is his alter ego. The interference ofVillarama in the complex affairs of the corporation, and particularly its finances, are much tooinconsistent with the ends and purposes of the Corporation law, which, precisely, seeks toseparate personal responsibilities from corporate undertakings. It is the very essence of


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incorporation that the acts and conduct of the corporation be carried out in its own corporatename because it has its own personality.

The doctrine that a corporation is a legal entity distinct and separate from the membersand stockholders who compose it is recognized and respected in all cases which are withinreason and the law. When the fiction is urged as a means of perpetrating a fraud or an illegalact or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the

achievement or perfection of a monopoly or generally the perpetration of knavery or crime, theveil with which the law covers and isolates the corporation from the members or stockholderswho compose it will be lifted to allow for its consideration merely as an aggregation ofindividuals. Hence, the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that therestrictive clause in the contract entered into by the latter and Pantranco is also enforceable andbinding against the said Corporation. For the rule is that a seller or promisor may not make useof a corporate entity as a means of evading the obligation of his covenant. Where theCorporation is substantially the alter ego of the covenantor to the restrictive agreement, it canbe enjoined from competing with the covenantee.


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8. FRANCISCO MOTORS CORPORATION, peti t ioner, vs. COURT OF APPEALS andSPOUSES GREGORIO and LIBRADA MANUEL, respondents.

D E C I S I O N

QUISUMBING, J.:

FACTS: Francisco Motors filed a complaint[2]against Spouses Manuel to the balance of thejeep body purchased by the Manuels from petitioner; the unpaid balance on the cost of repair ofthe vehicle; and cost of suit and attorneys fees.[3]Private respondents interposed acounterclaim for unpaid legal services by Gregorio Manuel which was not paid by theincorporators, directors and officers of the petitioner.

Gregorio Manuel alleged as an affirmative defense that, while he was petitioners AssistantLegal Officer, he represented members of the Francisco family in the intestate estateproceedings of the late Benita Trinidad. However, even after the termination of theproceedings, his services were not paid. Said family members, he said, were alsoincorporators, directors and officers of petitioner.

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 concerning the Intestate Estate of the late Benita Trinidad. They assertthat the members of petitioner corporation took advantage of their positions by notcompensating respondent Gregorio Manuel after the termination of the estate proceedingsdespite his repeated demands for payment of his services. They cite findings of the appellatecourt that support piercing the veil of corporate identity in this particular case.

ISSUE:Whether the Doctrine of Piercing the Veil of Corporate Entity applies.

RULING: NO. Basic in corporation law is the principle that a corporation has a separatepersonality distinct from its stockholders and from other corporations to which it may beconnected.[18]However, under the doctrine of piercing the veil of corporate entity, thecorporations separate juridical personality may be disregarded, when the corporate identity isused to defeat public convenience, justify wrong, protect fraud, or defend crime. Also, wherethe corporation is a mere alter ego or business conduit of a person, or where the corporation isso organized and controlled and its affairs are so conducted as to make it merely aninstrumentality, agency, conduit or adjunct of another corporation, then its distinct personalitymay be ignored.

The doctrine of piercing the corporate veil has no relevant application here. Therationale behind piercing a corporations identity in a given case is to remove the barrierbetween the corporation from the persons comprising it to thwart the fraudulent andillegal schemes of those who use the corporate personality as a shield for undertakingcertain proscribed activities. However, in the case at bar, instead of holding certainindividuals or persons responsible for an alleged corporate act, the situation has beenreversed. It is the petitioner as a corporation which is being ordered to answer for thepersonal liability of certain individual directors, officers and incorporators
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concerned. Hence, it appears to us that the doctrine has been turned upside downbecause of its erroneous invocation. Note that according to private respondent GregorioManuel his services were solicited as counsel for members of the Francisco family to representthem in the intestate proceedings over Benita Trinidads estate. These estate proceedings didnot involve any business of petitioner.

Note also that he sought to collect legal fees not just from certain Francisco familymembers but also from petitioner corporation on the claims that its management had requestedhis services and he acceded thereto as an employee of petitioner from whom it could bededuced he was also receiving a salary. His move to recover unpaid legal fees through acounterclaim against Francisco Motors Corporation, to offset the unpaid balance of thepurchase and repair of a jeep body could only result from an obvious misapprehension thatpetitioners corporate assets could be used to answer for the liabilities of its individual directors,officers, and incorporators. Such result if permitted could easily prejudice the corporation, itsown creditors, and even other stockholders; hence, clearly inequitous to petitioner.

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 perpetuatingfraud or promoting injustice, and be thereby held liable therefor by piercing its corporate veil.

The personality of the corporation and those of its incorporators, directors andofficers in their personal capacities ought to be kept separate in this case. The claim forlegal fees against the concerned individual incorporators, officers and directors couldnot be properly directed against the corporation without violating basic principlesgoverning corporations. Moreover, every action including a counterclaim must beprosecuted or defended in the name of the real party in interest.[20]It is plainly an error tolay the claim for legal fees of private respondent Gregorio Manuel at the door ofpetitioner (FMC) rather than individual members of the Francisco family.
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9. TIMES TRANSPORTATION COMPANY, INC., petitioner, vs. SANTOS SOTELO

FACTS:Petitioner Times Transportation Company, Inc. (Times) is a corporation engaged in thebusiness of land transportation. Prior to its closure in 1997, the Times Employees Union (TEU)was formed and issued a certificate of union registration. Times challenged the legitimacy of

TEU by filing a petition for the cancellation of its union registration.

TEU held a strike in response to Times alleged attempt to form a rival union and its dismissal ofthe employees identified to be active union members. In a certification election, TEU wascertified as the sole and exclusive collective bargaining agent in Times. Consequently, TEUspresident wrote the management of Times and requested for collective bargaining. Timesrefused on the ground that the decision of the Med-Arbiter upholding the validity of thecertification election was not yet final and executory. TEU filed a Notice of Strike on August 8,1997. In the meantime, Times management implemented a retrenchment program and noticesof retrenchment dated September 16, 1997 were sent to some of its employees, including therespondents herein, informing them of their retrenchment effective 30 days thereafter.

TEU held a strike vote on grounds of unfair labor practice on the part of Times. For allegedparticipation in what it deemed was an illegal strike, Times terminated all the 123 strikingemployees. In the meantime, by December 12, 1997, Mencorp Transport Systems, Inc.(Mencorp) had acquired ownership over Times Certificates of Public Convenience and anumber of its bus units by virtue of several deeds of sale.Mencorp is controlled and operated byMrs. Virginia Mendoza, daughter of Santiago Rondaris, the majority stockholder of Times. TheNLRC rendered a decision in the cases certified to it by the DOLE, saying that respondents firststrike is LEGAL; its second strike is ILLEGAL.

ISSUE:WON the Honorable Court a quo, in applying wholesale the doctrine of piercing the veilof corporate fiction and finding Times co-petitioners liable for the formers obligations, resolvedthe matter in a manner contradictory to existing applicable laws and dispositions of this

Honorable Court, and departed from the accepted and usual course of judicial proceedings withregard to admitting evidence to sustain the application of such principle.

HELD: NO. We have held that piercing the corporate veil is warranted only in cases when theseparate legal entity is used to defeat public convenience, justify wrong, protect fraud, or defendcrime, such that in the case of two corporations, the law will regard the corporations as mergedinto one.27 It may be allowed only if the following elements concur: (1) controlnot merestock control, but complete dominationnot only of finances, but of policy and businesspractice in respect to the transaction attacked; (2) such control must have been used tocommit a fraud or a wrong to perpetuate the violation of a statutory or other positivelegal duty, or a dishonest and an unjust act in contravention of a legal right; and (3) thesaid control and breach of duty must have proximately caused the injury or unjust loss

complained of.

The following findings of the Labor Arbiter, which were cited and affirmed by the Court ofAppeals, have not been refuted by Times, to wit:1. The sale was transferred to a corporation controlled by V. Mendoza, the daughter ofrespondent S. Rondaris of [Times] where she is/was also a director, as proven by the articles ofincorporation of [Mencorp];


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2. All of the stockholders/incorporators of [Mencorp]: Reynaldo M. Mendoza, Virginia R.Mendoza, Vernon Gerard R. Mendoza, Vivian Charity R. Mendoza, Vevey Rosario R. Mendozaare all relatives of respondent S. Rondaris;3. The timing of the sale evidently was to negate the employees/complainants/members right toorganization as it was effected when their union (TEU) was just organized/requesting [Times] tobargain;

5. [Mencorp] never obtained a franchise since its supposed incorporation in 10 May 1994 but atpresent, all the buses of [Times] are already being run/operated by respondent [Mencorp], thefranchise of [Times] having been transferred to it.

The sale of Times franchise as well as most of its bus units to a company owned by Rondarisdaughter and family members, right in the middle of a labor dispute, is highly suspicious. It isevident that the transaction was made in order to remove Times remaining assets from thereach of any judgment that may be rendered in the unfair labor practice cases filed against it.


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10. YAO vs. PEOPLE OF THE PHILIPPINES

CHICO-NAZARIO, J.

FACTS:

Petitioners are incorporators and officers of MASAGANA GAS CORPORATION (MASAGANA),an entity engaged in the refilling, sale and distribution of LPG products. A search and seizurewere conducted by NBI officials in its premises for alleged violation of the Intellectual PropertyCode, particularly for producing and selling LPG products using steel cylinders bearing thetrademarks of Gasul by Petron and Shellane by Pilipinas Shell, without authority and inviolation of the rights of the said entities.

MASAGANA, as third party claimant, filed with the RTC a Motion for the Return of MotorCompressor and LPG Refilling Machine. It claimed that it is the owner of the said items seizedby the NBI officers and that these items were used in the operation of its legitimate business.

The RTC denied the Motion ruling that the petitioners, to whom the warrant was issued, are thestockholders of MASAGANA and they conduct their business through the same juridical entity.The veil of corporate fiction cannot be used by the Yaos as a refuge from liability. On appeal,the CA affirmed the decision of the RTC.

Hence, this petition was filed with MASAGANA claiming that since there is no action forinfringement filed against MASAGANA, it is only fair that the seized articles be returned to it, thelawful owner MASAGANA being an entity distinct and separate from the petitioner-incorporators.

ISSUE: Whether or not the doctrine of separate entity is applicable in the case at bar?

HELD: NO.It is an elementary and fundamental principle of corporation law that a corporation isan entity separate and distinct from its stockholders, directors or officers. However, when thenotion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defendcrime, the law will regard the corporation as an association of persons, that is, liability will attachpersonally or directly to the officers and stockholders; or in the case of two corporations mergethem into one. This non-recognition is sometimes referred to as the doctrine of piercing the veilof corporate entity or disregarding the fiction of corporate entity.

In the case at bar, petitioners, as directors/officers of MASAGANA, are utilizing the latter inviolating the intellectual property rights of Petron and Pilipinas Shell. Thus, petitionerscollectively and MASAGANA should be considered as one and the same person for liabilitypurposes. Consequently, MASAGANAs third party claim serves no refuge for petitioners.

Assuming arguendo that MASAGANA has a personality separate from that of the petitioners,the effect will still be the same. The law does not require that the property to be seized shouldbe owned by the person against whom the search warrants is directed. It is sufficient that theperson against whom the warrant is directed has control or possession of the property sought tobe seized.


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11.Seventh Day Adventist Conference Church of Southern Philippines vs. North EasternMindanao Mission of Seventh Day Adventist, Inc.

FACTS:

Spouses Felix Cosio and his wife Felisa donated a parcel of land to South Philippine

[Union] Mission of Seventh Day Adventist Church, and was received by Liberato Rayos, an

elder of the Seventh Day Adventist Church, on behalf of the donee. However, twenty one years

later, the spouses sold the same land to the Seventh Day Adventist Church of Northeastern

Mindanao Mission.A TCT was later issued in the name of respondent North Eastern Mindanao

Mission.

Claiming to be the alleged donees successors-in-interest, petitioners filed a case for

cancellation of title, quieting of ownership and possession, declaratory relief and reconveyance

with prayer for preliminary injunction and damages against respondents. Respondents, on the

other hand, argued that at the time of the donation, petitioners predecessors -in-interest has no

juridical personality to accept the donation because it was not yet incorporated. Moreover,

petitioners were not members of the local church then hence, the donation could not have been

made particularly to them.

ISSUE: Whether or not the donation made to SDA-SPUM Bayugon was valid

HELD:No. Donation is an act of liberality whereby a person disposes gratuitously of a thing or

right in favor of another person who accepts it. The donation could not have been made in favor

of an entity yet inexistent at the time it was made. Nor could it have been accepted as there was

yet no one to accept it.

The deed of donation was not in favor of any informal group of SDA members but a

supposed SPUM-SDA Bayugan (the local church) which, at the time, had neither juridical

personality nor capacity to accept such gift.

Declaring themselves a de facto corporation, petitioners allege that they should benefit

from the donation.But there are stringent requirements before one can qualify as a de facto corporation:

(a) the existence of a valid law under which it may be incorporated;

(b) an attempt in good faith to incorporate; andcralawlibrary

(c) assumption of corporate powers.

While there existed the old Corporation Law (Act 1459), a law under which SPUM-SDA

Bayugan could have been organized, there is no proof that there was an attempt to incorporate

at that time.

The filing of articles of incorporation and the issuance of the certificate of incorporation

are essential for the existence of a de facto corporation. We have held that an organization not

registered with the Securities and Exchange Commission (SEC) cannot be considered a

corporation in any concept, not even as a corporation de facto.13 Petitioners themselvesadmitted that at the time of the donation, they were not registered with the SEC, nor did they

even attempt to organize14 to comply with legal requirements.

Corporate existence begins only from the moment a certificate of incorporation is issued.

No such certificate was ever issued to petitioners or their supposed predecessor-in-interest at

the time of the donation. Petitioners obviously could not have claimed succession to an entity

that never came to exist. Neither could the principle of separate juridical personality apply since

there was never any corporation to speak of. And, as already stated, some of the


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representatives of petitioner Seventh Day Adventist Conference Church of Southern Philippines,

Inc. were not even members of the local church then, thus, they could not even claim that the

donation was particularly for them.


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12. LIM TONG LIM, peti t ioner, vs.PHILIPPINE FISHING GEAR INDUSTRIES,INC., respondent.

D E C I S I O N

PANGANIBAN, J.:

FACTS: On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yaoentered into a Contract for the purchase of fishing nets of various sizes from the PhilippineFishing Gear Industries, Inc. (herein respondent). They claimed that they were engaged in abusiness venture with Petitioner Lim Tong Lim, who however was not a signatory to theagreement

The buyers, however, failed to pay for the fishing nets and the floats; hence, privaterespondent filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayerfor a writ of preliminary attachment. The suit was brought against the three in their capacities asgeneral partners, on the allegation that Ocean Quest Fishing Corporation was a nonexistentcorporation as shown by a Certification from the Securities and Exchange Commission.[5]Thelower court issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching thefishing nets.

The trial court rendered its Decision, ruling that Philippine Fishing Gear Industries wasentitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointlyliable to pay respondent.[8]

Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.

The CA held that petitioner was a partner of Chua and Yao in a fishing business and maythus be held liable as a such for the fishing nets and floats purchased by and for the use of thepartnership.

ISSUE: whether petitioner should be held jointly[18]liable with Chua and Yao.

RULING:YES. Corporation by Estoppel

Section 21 of the Corporation Code of the Philippines provides:

Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowingit to be without authority to do so shall be liable as general partners for all debts, liabilities anddamages incurred or arising as a result thereof: Provided however, That when any suchostensible corporation is sued on any transaction entered by it as a corporation or on any tortcommitted by it as such, it shall not be allowed to use as a defense its lack of corporatepersonality.

One who assumes an obligation to an ostensible corporation as such, cannot resist

performance thereof on the ground that there was in fact no corporation.

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, aparty may be estopped from denying its corporate existence. The reason behind thisdoctrine is obvious - an unincorporated association has no personality and would beincompetent to act and appropriate for itself the power and attributes of a corporation asprovided by law; it cannot create agents or confer authority on another to act in its behalf; thus,those who act or purport to act as its representatives or agents do so without authority and attheir own risk. The doctrine of corporation by estoppel may apply to the alleged
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corporation and to a third party. In the first instance, an unincorporated association,which represented itself to be a corporation, will be estopped from denying its corporatecapacity in a suit against it by a third person who relied in good faith on suchrepresentation. It cannot allege lack of personality to be sued to evade its responsibilityfor a contract it entered into and by virtue of which it received advantages and benefits.

On the other hand, a third party who, knowing an associat ion to be uninco rporated,nonetheless treated it as a corporation and received benefi ts from it, may be barred fromdenying its c orpor ate existence in a suit brought against th e al leged corporation. In suchcase, all those who benefited from the transaction made by the ostensible corporation, despiteknowledge of its legal defects, may be held liable for contracts they impliedly assented to ortook advantage of.

Philippine Fishing Gear Industries, is entitled to be paid for the nets itsold. Unquestionably, petitioner benefited from the use of the nets found inside F/BLourdes, the boat which has earlier been proven to be an asset of the partnership

Although it was never legally formed for unknown reasons, this fact alone does not precludethe liabilities of the three as contracting parties in representation of it. Clearly, under the law on

estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to bewithout valid existence, are held liable as general partners.

Technically, it is true that petitioner did not direct lyac ton behalf of thecorporation. However, having reaped the benefi ts of the contract entered into bypersons w ith wh om h e previously had an exist ing relationsh ip, he is deemed to be part of

said associat ion and is covered by the scope of the doctr in e of corporation by estoppel


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13. INTERNATIONAL TRAVEL AND TOUR SERVICES, INC VS CA

FACTS: Petitioner, through its managing director, wrote a letter to the Philippine FootballFederation (Federation), through its president private respondent Henri Kahn, wherein theformer offered its services as a travel agency to the latter. The offer was accepted.

Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation tothe South East Asian Games in Kuala Lumpur and other trips to the People's Republic of Chinaand Brisbane. The total cost of the tickets amounted to P449,654.83. The Federation made twopartial payments, in the total amount of P176,467.50. Petitioner wrote the Federation, throughthe private respondent a demand letter requesting for the amount of P265,894.33. On 27December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partialpayment for the outstanding balance of the Federation.Thereafter, no further payments weremade despite repeated demands.

Petitioner sued Henri Kahn in his personal capacity and as President of the Federation andimpleaded the Federation as an alternative defendant. Petitioner sought to hold Henri Kahnliable for the unpaid balance for the tickets purchased by the Federation on the ground thatHenri Kahn allegedly guaranteed the said obligationHenri Kahn, while not denying the allegationthat the Federation owed the amount P207,524.20, representing the unpaid balance for theplane tickets, he averred that the petitioner has no cause of action against him either in hispersonal capacity or in his official capacity as president of the Federation. He maintained that hedid not guarantee payment but merely acted as an agent of the Federation which has aseparate and distinct juridical personality.

ISSUE: WON THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HADDEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE ENTITY

AND IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE ONE WHOREPRESENTED THE PFF AS HAVING A CORPORATE PERSONALITY.

HELD: YES. It is a basic postulate that before a corporation may acquire juridical personality,

the State must give its consent either in the form of a special law or a general enabling act. Wecannot agree with the view of the appellate court and the private respondent that the PhilippineFootball Federation came into existence upon the passage of these laws. Nowhere can it befound in R.A. 3135 or P.D. 604 any provision creating the Philippine Football Federation. Theselaws merely recognized the existence of national sports associations and provided the mannerby which these entities may acquire juridical personality.

Clearly the above cited provisions require that before an entity may be considered as a nationalsports association, such entity must be recognized by the accrediting organization, thePhilippine Amateur Athletic Federation under R.A. 3135, and the Department of Youth andSports Development under P.D. 604. This fact of recognition, however, Henri Kahn failed tosubstantiate. In attempting to prove the juridical existence of the Federation, Henri Kahn

attached to his motion for reconsideration before the trial court a copy of the constitution and by-laws of the Philippine Football Federation. Unfortunately, the same does not prove that saidFederation has indeed been recognized and accredited by either the Philippine Amateur AthleticFederation or the Department of Youth and Sports Development. Accordingly, we rule that thePhilippine Football Federation is not a national sports association within the purview of theaforementioned laws and does not have corporate existence of its own.

Thus being said, it follows that private respondent Henry Kahn should be held liable forthe unpaid obligations of the unincorporated Philippine Football Federation. It is a settled


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principal in corporation law that any person acting or purporting to act on behalf of acorporation which has no valid existence assumes such privileges and becomespersonally liable for contract entered into or for other acts performed as such agent.[14]As president of the Federation, Henri Kahn is presumed to have known about thecorporate existence or non-existence of the Federation.


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14. FILIPINAS BROADCASTING NETWORK, INC., vs.AGO MEDICAL AND EDUCATIONALCENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM) andANGELITA F. AGO

CARPIO, J.:

FACTS: In their radio documentary program Expos, radio hosts Carmelo Mel Rima (Rima)and Hermogenes Jun Alegre (Alegre) exposed various alleged complaints from students,teachers and parents against respondent AMEC and its administrators. Expos is owned byFilipinas Broadcasting Network, Inc. (FBNI). AMEC and Angelita Ago (Ago), as Dean of

AMECs College of Medicine, filed a complaint for damages against FBNI, Rima and Alegre,claiming that the broadcasts were defamatory and libelous.

The trial court found the broadcasts to be libelous and ordered Alegre and FBNI toindemnify AMEC in the amount of P300,000.00 moral damages, plus P30,000.00 as attorneysfees.

On appeal, the CA affirmed the judgment with modifications. It made Rima solidarilyliable with FBNI and Alegre. Hence, FBNI filed this petition. FBNI contends that AMEC is notentitled to moral damages because it is a corporation.

ISSUE: Whether or not AMEC is entitled to moral damages?

HELD:A juridical person is generally not entitled to moral damages because, unlike a naturalperson, it cannot experience physical suffering or such sentiments as wounded feelings, seriousanxiety, mental anguish or moral shock. The Courts statement in Mambulaothat acorporation may have a good reputation which, if besmirched, may also be a ground for theaward of moral damages is anobiter dictum.

Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219 of theCivil Code. This provision expressly authorizes the recovery of moral damages in cases of libel,slander or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff isa natural or juridical person. Therefore, a juridical person such as a corporation can validlycomplain for libel or any other form of defamation and claim for moral damages.

Moreover, where the broadcast is libelousper se, the law implies damages. In such a case,evidence of an honest mistake or the want of character or reputation of the party libeled goesonly in mitigation of damages. In this case, the broadcasts are libelous per se. Thus, AMEC isentitled to moral damages.

However, the award of P300,000 moral damages unreasonable. AMEC has not sufferedany substantial or material damage to its reputation. Therefore, the award of moral damages isreduced from P300,000 to P150,000.


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15. Coastal Pacific Trading, Inc. vs. Southern Rolling Mills Co. G.R. No. 118692 July 28,

2006

FACTS:

Southern Rolling Mills was renamed into Visayan Integrated Steel Corp (VISCO). On

Dec. 11, 1961-VISCO obtained a loan from DBP amounting to P836,000. It was secured by aReal Estate Mortgage covering VISCO's 3 parcels of land including the machinery and

equipments therein. Second Loan: VISCO entered a Loan Agreement with respondent banks (

referred as "Consortium") to finance its importation for various raw materials. VISCO executed a

second mortgage over the previous properties mentioned, however they were unrecorded

VISCO was unable to pay its second mortgage with the consortium, which resulted in the latter

acquiring 90% of the equity of VISCO giving the Consortium the control and management of

VISCO.

Despite the acquisition, VISCO still remained indebted to the Consortium. Transaction to

Coastal: Between 1964 to 1965, VISCO entered a processing agreement with Coastal wherein

Coastal delivered 3,000 metric tons of hot rolled steel coils which VISCO would process into

block iron sheets. However, VISCO was only able to return 1,600 metric tons of those sheets.

On the loan to DBP: To pay its first mortgage with DBP, VISCO sold 2 of its generators to

FILMAG Phils, Inc. DBP executed a Deed of Assignment of the mortgage in favor of the

consortium. The Consortium foreclosed the mortgage and was the highest bidder in an auction

sale of VISCO's properties. The Consortium later sold the properties in favor of National Steel

Corporation. Coastal files a civil action for Annulment or Rescission of Sale, Damages with

Preliminary Injunction. Coastal imputes bad faith on the action of the Consortium, the latter

being able to sell the properties of VISCO despite the attachment of the properties, placing them

beyond the reach of VISCO's other creditors. The lower court ruled in favor of VISCO, declaring

the sale valid and legal. The CA affirmed this.

ISSUES: 1. Whether the consortium disposed VISCO's assets in fraud of creditors?

2. Whether petitioner is entitled to moral damages?

HELD:

1. Yes. What the consortium did was to pay to them the proceeds from the sale of the

generator sets which in turn they used to pay DBP. Due to the Deed of Assignment

issued by DBP, the respondent banks recovered what they remitted to DBP & it allowed

the Consortium to acquire DBP's primary lien on the mortgaged properties. Allowing

them as unsecured creditors ( as the mortgage was unrecorded) to foreclose on the

assets of the corporation without regard to inferior claims.

2. No. As a rule, a corporation is not entitled to moral damages because, not being a

natural person, it cannot experience physical suffering or sentiments like wounded

feelings, serious anxiety, mental anguish and moral shock. The only exception to thisrule is when the corporation has a good reputation that is debased, resulting in its

humiliation in the business realm. In the present case, the records do not show any

evidence that the name or reputation of petitioner has been sullied as a result of the

Consortium's fraudulent acts. Accordingly, moral damages are not warranted. Petitioner

was able to recover exemplary damages.


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chapter 2 digests

Documents