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Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-12719             May 31, 1962

THE COLLECTOR OF INTERNAL REVENUE, petitioner, vs.THE CLUB FILIPINO, INC. DE CEBU, respondent.

Office of the Solicitor General for petitioner.V. Jaime and L. E. Petilla for respondent.

PAREDES, J.:

This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the Collector of Internal Revenue, assessing against and demanding from the "Club Filipino, Inc. de Cebu", the sum of P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty, allegedly due from it as a keeper of bar and restaurant.

As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a civic corporation organized under the laws of the Philippines with an original authorized capital stock of P22,000.00, which was subsequently increased to P200,000.00, among others, to it "proporcionar, operar, y mantener un campo de golf, tenis, gimnesio (gymnasiums), juego de bolos (bowling alleys), mesas de billar y pool, y toda clase de juegos no prohibidos por leyes generales y ordenanzas generales; y desarollar y cultivar deportes de toda clase y denominacion cualquiera para el recreo y entrenamiento saludable de sus miembros y accionistas" (sec. 2, Escritura de Incorporacion del Club Filipino, Inc. Exh. A). Neither in the articles or by-laws is there a provision relative to dividends and their distribution, although it is covenanted that upon its dissolution, the Club's remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a.).

The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the government), and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its members and their guests. The bar-restaurant was a necessary incident to the operation of the club and its golf-course. The club is operated mainly with funds derived from membership fees and dues. Whatever profits it had, were used to defray its overhead expenses and to improve its golf-course. In 1951. as a result of a capital surplus, arising from the re-valuation of its real properties, the value or price of which increased, the Club declared stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its bar and restaurant, although it secured B-4, B-9(a) and B-7 licenses. In a letter dated December 22, 1852, the Collector of Internal Revenue assessed against and demanded from the Club, the following sums: —

As percentage tax on its gross receipts during the tax years 1946 to 1951 P9,599.07

Surcharge therein 2,399.77

As fixed tax for the years 1946 to 1952 70.00

Compromise penalty 500.00

The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been denied, the Club filed the instant petition for review.

The dominant issues involved in this case are twofold:

1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed and percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax Code, under which the assessment was made, in connection with the operation of its bar and restaurant, during the periods mentioned above; and

2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty.

Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a business on which the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos for each calendar year or fraction thereof in which such person shall engage in said business." Section 183 provides in general that "the percentage taxes on business shall be payable at the end of each calendar quarter in the amount lawfully due on the business transacted during each quarter; etc." And section 191, same Tax Code, provides "Percentage tax . . . Keepers of restaurants, refreshment parlors and other eating places shall pay a tax three per centum, and keepers of bar and cafes where wines or liquors are served five per centum of their gross receipts . . .". It has been held that the liability for fixed and percentage taxes, as provided by these sections, does not ipso facto attach by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof must be engaged in the business as a barkeeper and restaurateur. The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood (The Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila Elks Club] & Court of Tax Appeals, G.R. No. L-11176, June 29, 1959, giving full definitions of the word "business"; Coll. of Int. Rev. v. Sweeney, et al. [International Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959, the facts of which are similar to the ones at bar; Manila Polo Club v. B. L. Meer, etc., No. L-10854, Jan. 27, 1960).

Having found as a fact that the Club was organized to develop and cultivate sports of all class and denomination, for the healthful recreation and entertainment of its stockholders and members; that upon its dissolution, its remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu; that it is operated mainly with funds derived from membership fees and dues; that the Club's bar and restaurant catered only to its members and their guests; that there was in fact no cash dividend distribution to its stockholders and that whatever was derived on retail from its bar and restaurant was used to defray its overall overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the business of an operator of bar and restaurant (same authorities, cited above).

It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily incidental to the primary object of developing and cultivating sports for the healthful recreation and entertainment of the stockholders and members. That a Club makes some profit, does not make it a profit-making Club. As has been remarked a club should always strive, whenever possible, to have surplus (Jesus Sacred Heart College v. Collector of Int. Rev., G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct. 23, 1956).1äwphï1.ñët

It is claimed that unlike the two cases just cited (supra), which are non-stock, the appellee Club is a stock corporation. This is unmeritorious. The facts that the capital stock of the respondent Club is divided into shares, does not detract from the finding of the trial court that it is not engaged in the business of operator of bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its object or purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence, including

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the by-laws and the method of operation. From the extrinsic evidence adduced, the Tax Court concluded that the Club is not engaged in the business as a barkeeper and restaurateur.

Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the case at bar, nowhere in its articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered a stock corporation, within the contemplation of the corporation law.

A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, nonstock organizations, unless the intent to the contrary is manifest and patent" (Collector v. BPOE Elks Club, et al., supra), which is not the case in the present appeal.

Having arrived at the conclusion that respondent Club is not engaged in the business as an operator of a bar and restaurant, and therefore, not liable for fixed and percentage taxes, it follows that it is not liable for any penalty, much less of a compromise penalty.

WHEREFORE, the decision appealed from is affirmed without costs.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-43350 December 23, 1937

CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant, vs.TEODORO SANDIKO, defendant-appellee.

Arsenio P. Dizon for appellant.Sumulong, Lavides and Sumulong for appellee.

LAUREL, J.:

This is an appeal from a judgment of the Court of First Instance of Manila absolving the defendant from the plaintiff's complaint.

Manuel Tabora is the registered owner of four parcels of land situated in the barrio of Linao, town of Aparri, Province of Cagayan, as evidenced by transfer certificate of title No. 217 of the land records of Cagayan, a copy of which is in evidence as Exhibit 1. To guarantee the payment of a loan in the sum of P8,000, Manuel Tabora, on August 14, 1929, executed in favor of the Philippine National Bank a first mortgage on the four parcels of land above-mentioned. A second mortgage in favor of the same bank was in April of 1930 executed by Tabora over the same lands to guarantee the payment of another loan amounting to P7,000. A third mortgage on the same lands was executed on April 16, 1930 in favor of Severina Buzon to whom Tabora was indebted in the sum of P2,9000. These mortgages were registered and annotations thereof appear at the back of transfer certificate of title No. 217.

On May 31, 1930, Tabora executed a public document entitled "Escritura de Transpaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by him was sold to the plaintiff company, said to under process of incorporation, in consideration of one peso (P1) subject to the mortgages in favor of the Philippine National Bank and Severina Buzon and, to the condition that the certificate of title to said lands shall not be transferred to the name of the plaintiff company until the latter has fully and completely paid Tabora's indebtedness to the Philippine National Bank.

The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry on October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board of directors of said company adopted a resolution (Exhibit G) authorizing its president, Jose Ventura, to sell the four parcels of lands in question to Teodoro Sandiko for P42,000. Exhibits B, C and D were thereafter made and executed. Exhibit B is a deed of sale executed before a notary public by the terms of which the plaintiff sold ceded and transferred to the defendant all its right, titles, and interest in and to the four parcels of land described in transfer certificate in turn obligated himself to shoulder the three mortgages hereinbefore referred to. Exhibit C is a promisory note for P25,300. drawn by the defendant in favor of the plaintiff, payable after one year from the date thereof. Exhibit D is a deed of mortgage executed before a notary public in accordance with which the four parcels of land were given a security for the payment of the promissory note, Exhibit C. All these three instrument were dated February 15, 1932.

The defendant having failed to pay the sum stated in the promissory note, plaintiff, on January 25, 1934, brought this action in the Court of First Instance of Manila praying that judgment be rendered against the defendant for the sum of P25,300, with interest at legal rate from the date of the filing of the complaint, and the costs of the suits. After trial, the court below, on December 18, 1934, rendered judgment absolving the defendant, with costs against the plaintiff. Plaintiff presented a motion for new trial on January 14, 1935, which motion was denied by the trial court on January 19 of the same year. After due exception and notice, plaintiff has appealed to this court and makes an assignment of various errors.

In dismissing the complaint against the defendant, the court below, reached the conclusion that Exhibit B is invalid because of vice in consent and repugnancy to law. While we do not agree with this conclusion, we have however voted to affirm the judgment appealed from the reasons which we shall presently state.

The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was affected on May 31, 1930 (Exhibit A) and the actual incorporation of said company was affected later on October 22, 1930 (Exhibit 2). In other words, the transfer was made almost five months before the incorporation of the company. Unquestionably, a duly organized corporation has the power to purchase and hold such real property as the purposes for which such corporation was formed may permit and for this purpose may enter into such contracts as may be necessary (sec. 13, pars. 5 and 9, and sec. 14, Act No. 1459). But before a corporation may be said to be lawfully organized, many things have to be done. Among other things, the law requires the filing of articles of incorporation (secs. 6 et seq., Act. No. 1459). Although there is a presumption that all the requirements of law have been complied with (sec. 334, par. 31 Code of Civil Procedure), in the case before us it can not be denied that the plaintiff was not yet incorporated when it entered into a contract of sale, Exhibit A. The contract itself referred to the plaintiff as "una sociedad en vias de incorporacion." It was not even a de facto corporation at the time. Not being in legal existence then, it did not possess juridical capacity to enter into the contract.

Corporations are creatures of the law, and can only come into existence in the manner prescribed by law. As has already been stated, general law authorizing the formation of corporations are general offers to any persons who may bring themselves within their provisions; and if conditions precedent are prescribed in the statute, or certain acts are required to be done, they are terms of the offer, and must be complied with substantially before legal corporate existence can be acquired. (14 C. J., sec. 111, p. 118.)

That a corporation should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business, would seem to be self evident. . . . A corporation, until organized, has no being, franchises or faculties. Nor do those engaged in bringing it

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into being have any power to bind it by contract, unless so authorized by the charter there is not a corporation nor does it possess franchise or faculties for it or others to exercise, until it acquires a complete existence. (Gent vs. Manufacturers and Merchant's Mutual Insurance Company, 107 Ill., 652, 658.)

Boiled down to its naked reality, the contract here (Exhibit A) was entered into not between Manuel Tabora and a non-existent corporation but between the Manuel Tabora as owner of the four parcels of lands on the one hand and the same Manuel Tabora, his wife and others, as mere promoters of a corporations on the other hand. For reasons that are self-evident, these promoters could not have acted as agent for a projected corporation since that which no legal existence could have no agent. A corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere. This is not saying that under no circumstances may the acts of promoters of a corporation be ratified by the corporation if and when subsequently organized. There are, of course, exceptions (Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, secs. 207 et seq.), but under the peculiar facts and circumstances of the present case we decline to extend the doctrine of ratification which would result in the commission of injustice or fraud to the candid and unwary.(Massachusetts rule, Abbott vs. Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193; citing English cases; Koppel vs. Massachusetts Brick Co., 192 Mass., 223; 78 N. E., 128; Holyoke Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should be observed that Manuel Tabora was the registered owner of the four parcels of land, which he succeeded in mortgaging to the Philippine National Bank so that he might have the necessary funds with which to convert and develop them into fishery. He appeared to have met with financial reverses. He formed a corporation composed of himself, his wife, and a few others. From the articles of incorporation, Exhibit 2, it appears that out of the P48,700, amount of capital stock subscribed, P45,000 was subscribed by Manuel Tabora himself and P500 by his wife, Rufina Q. de Tabora; and out of the P43,300, amount paid on subscription, P42,100 is made to appear as paid by Tabora and P200 by his wife. Both Tabora and His wife were directors and the latter was treasurer as well. In fact, to this day, the lands remain inscribed in Tabora's name. The defendant always regarded Tabora as the owner of the lands. He dealt with Tabora directly. Jose Ventura, president of the plaintiff corporation, intervened only to sign the contract, Exhibit B, in behalf of the plaintiff. Even the Philippine National Bank, mortgagee of the four parcels of land, always treated Tabora as the owner of the same. (See Exhibits E and F.) Two civil suits (Nos. 1931 and 38641) were brought against Tabora in the Court of First Instance of Manila and in both cases a writ of attachment against the four parcels of land was issued. The Philippine National Bank threatened to foreclose its mortgages. Tabora approached the defendant Sandiko and succeeded in the making him sign Exhibits B, C, and D and in making him, among other things, assume the payment of Tabora's indebtedness to the Philippine National Bank. The promisory note, Exhibit C, was made payable to the plaintiff company so that it may not attached by Tabora's creditors, two of whom had obtained writs of attachment against the four parcels of land.

If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it follows that it did not possess any resultant right to dispose of them by sale to the defendant, Teodoro Sandiko.

Some of the members of this court are also of the opinion that the transfer from Manuel Tabora to the Cagayan Fishing Development Company, Inc., which transfer is evidenced by Exhibit A, was subject to a condition precedent (condicion suspensiva), namely, the payment of the mortgage debt of said Tabora to the Philippine National Bank, and that this condition not having been complied with by the Cagayan Fishing Development Company, Inc., the transfer was ineffective. (Art. 1114, Civil Code; Wise & Co. vs. Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having arrived at the conclusion that the transfer by Manuel Tabora to the Cagayan Fishing Development Company, Inc. was null because at the time it was affected the corporation was non-existent, we deem it unnecessary to discuss this point.lawphil.net

The decision of the lower court is accordingly affirmed, with costs against the appellant. So Ordered.

Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.

McArthur v. Times Printing Co., Supreme Court of Minnesota, 51 N.W. 216 (1892)

Nimrocks and others were promoters of a corporation to publish a newspaper, and contracted with plaintiff to be advertising solicitor for one year after the company was formed. The corporation after formation never formally adopted the contract, although all the stockholders, directors, and officers of the corporation knew of the contract and didn't object, but instead retained plaintiff as an employee. Is a corporation liable for promoters' contracts to which the corporation implicitly accepts? Held Yes. A corporation is not bound to a contract made by promoters before the company's organization, but the corporation can adopt a contract as if it were making the contract originally: by acceptance by the board of directors. The contract must be one the corporation would have made and one for which the agents of the corporation would have express or implied authority to make. Here the plaintiff's employment contract was inferred from acts and/or acquiescence on the part of the corporation. Does the statute of frauds make the contract void because its performance was to be completed more than a year from the date the promoters created it? Held No. Such a theory assumes ratification under a theory of agency. Ratification is not appropriate, because it creates the contract at a time in which the corporation did not exist. In reality, the time of the start of the contract was when the corporation adopted the contract, after the formation of the corporation, which allowed less than a year for fulfillment of performance.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-19761             January 29, 1923

PHILIPPINE TRUST COMPANY, as assignee in insolvency of "La Cooperativa Naval Filipina," plaintiff-appellee, vs.MARCIANO RIVERA, defendant-appellant.

Araneta and Zaragoza for appellant.Ross and Lawrence for appellee.

STREET, J.:

This action was instituted on November 21, 1921, in the Court of First Instance of Manila, by the Philippine Trust Company, as assignee in insolvency of La Cooperativa Naval Filipina, against Marciano Rivera, for the purpose of recovering a balance of P22,500, alleged to be due upon defendant's subscription to the capital stock of said insolvent corporation. The trial judge having given judgment in favor of the plaintiff for the amount sued for, the defendant appealed.

It appears in evidence that in 1918 the Cooperativa Naval Filipina was duly incorporated under the laws of the Philippine Islands, with a capital of P100,000, divided into one thousand shares of a par value of P100 each. Among the incorporators of this company was numbered the defendant Mariano Rivera, who subscribed for 450 shares representing a value of P45,000, the remainder of the stock being taken by other persons. The articles of incorporation were duly registered in the Bureau of Commerce and Industry on October 30 of the same year.

In the course of time the company became insolvent and went into the hands of the Philippine Trust Company, as assignee in bankruptcy; and by it this action was instituted to recover one-half of the stock subscription of the defendant, which admittedly has never been paid.

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The reason given for the failure of the defendant to pay the entire subscription is, that not long after theCooperativa Naval Filipina had been incorporated, a meeting of its stockholders occurred, at which a resolution was adopted to the effect that the capital should be reduced by 50 per centum and the subscribers released from the obligation to pay any unpaid balance of their subscription in excess of 50 per centum of the same. As a result of this resolution it seems to have been supposed that the subscription of the various shareholders had been cancelled to the extent stated; and fully paid certificate were issued to each shareholders for one-half of his subscription. It does not appear that the formalities prescribed in section 17 of the Corporation Law (Act No. 1459), as amended, relative to the reduction of capital stock in corporations were observed, and in particular it does not appear that any certificate was at any time filed in the Bureau of Commerce and Industry, showing such reduction.

His Honor, the trial judge, therefore held that the resolution relied upon the defendant was without effect and that the defendant was still liable for the unpaid balance of his subscription. In this we think his Honor was clearly right.

It is established doctrine that subscription to the capital of a corporation constitute a find to which creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts. (Velasco vs. Poizat, 37 Phil., 802.) A corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors a reduction of the capital stock can take place only in the manner an under the conditions prescribed by the statute or the charter or the articles of incorporation. Moreover, strict compliance with the statutory regulations is necessary (14 C. J., 498, 620).

In the case before us the resolution releasing the shareholders from their obligation to pay 50 per centum of their respective subscriptions was an attempted withdrawal of so much capital from the fund upon which the company's creditors were entitled ultimately to rely and, having been effected without compliance with the statutory requirements, was wholly ineffectual.

The judgment will be affirmed with cost, and it is so ordered.

 IGLESIA EVANGELICA METODISTA vs BISHOP LAZARO  

DECISION ABAD, J.:

  The present dispute resolves the issue of whether or not a corporation may change its character as a

corporation sole into a corporation aggregate by mere amendment of its articles of incorporation without first going through the process of dissolution. 

The Facts and the Case In 1909, Bishop Nicolas Zamora established the petitioner Iglesia Evangelica Metodista En Las Islas

Filipinas, Inc. (IEMELIF) as a corporation sole with Bishop Zamora acting as its “General Superintendent.”  Thirty-nine years later in 1948, the IEMELIF enacted and registered a by-laws that established a Supreme Consistory of Elders (the Consistory), made up of church ministers, who were to serve for four years.  The by-laws empowered the Consistory to elect a General Superintendent, a General Secretary, a General Evangelist, and a Treasurer General who would manage the affairs of the organization.  For all intents and purposes, the Consistory served as the IEMELIF’s board of directors.

 

Apparently, although the IEMELIF remained a corporation sole on paper (with all corporate powers theoretically lodged in the hands of one member, the General Superintendent), it had always acted like a corporation aggregate.  The Consistory exercised IEMELIF’s decision-making powers without ever being challenged.  Subsequently, during its 1973 General Conference, the general membership voted to put things right by changing IEMELIF’s organizational structure from a corporation sole to a corporation aggregate.   On May 7, 1973 the Securities and Exchange Commission (SEC) approved the vote.  For some reasons, however, the corporate papers of the IEMELIF remained unaltered as a corporation sole.

 Only in 2001, about 28 years later, did the issue reemerge.  In answer to a query from the IEMELIF,

the SEC replied on April 3, 2001 that, although the SEC Commissioner did not in 1948 object to the conversion of the IEMELIF into a corporation aggregate, that conversion was not properly carried out and documented.   The SEC said that the IEMELIF needed to amend its articles of incorporation for that purpose.[1]

 Acting on this advice, the Consistory resolved to convert the IEMELIF to a corporation

aggregate.  Respondent Bishop Nathanael Lazaro, its General Superintendent, instructed all their congregations to take up the matter with their respective members for resolution.  Subsequently, the general membership approved the conversion, prompting the IEMELIF to file amended articles of incorporation with the SEC.  Bishop Lazaro filed an affidavit-certification in support of the conversion.[2]

 Petitioners Reverend Nestor Pineda, et al., which belonged to a faction that did not support the

conversion, filed a civil case for “Enforcement of Property Rights of Corporation Sole, Declaration of Nullity of Amended Articles of Incorporation from Corporation Sole to Corporation Aggregate with Application for Preliminary Injunction and/or Temporary Restraining Order” in IEMELIF’s name against respondent members of its Consistory before the Regional Trial Court (RTC) of Manila. [3]   Petitioners claim that a complete shift from IEMELIF’s status as a corporation sole to a corporation aggregate required, not just an amendment of the IEMELIF’s articles of incorporation, but a complete dissolution of the existing corporation sole followed by a re-incorporation.

 Unimpressed, the RTC dismissed the action in its October 19, 2005 decision. [4]  It held that, while the

Corporation Code on Religious Corporations (Chapter II, Title XIII) has no provision governing the amendment of the articles of incorporation of a corporation sole, its Section 109 provides that religious corporations shall be governed additionally “by the provisions on non-stock corporations insofar as they may be applicable.”   The RTC thus held that Section 16 of the Code[5] that governed amendments of the articles of incorporation of non-stock corporations applied to corporations sole as well.  What IEMELIF needed to authorize the amendment was merely the vote or written assent of at least two-thirds of the IEMELIF membership.

 Petitioners Pineda, et al. appealed the RTC decision to the Court of Appeals (CA). [6]  On October 31,

2007 the CA rendered a decision,[7] affirming that of the RTC. Petitioners moved for reconsideration, but the CA denied it by its resolution of August 1, 2008,[8] hence, the present petition for review before this Court.

 The Issue Presented

 The only issue presented in this case is whether or not the CA erred in affirming the RTC ruling that a

corporation sole may be converted into a corporation aggregate by mere amendment of its articles of incorporation.

   

The Court’s Ruling Petitioners Pineda, et al. insist that, since the Corporation Code does not have any provision that

allows a corporation sole to convert into a corporation aggregate by mere amendment of its articles of incorporation, the conversion can take place only by first dissolving IEMELIF, the corporation sole, and afterwards by creating a new corporation in its place.

 Religious corporations are governed by Sections 109 through 116 of the Corporation Code.   In a 2009

case involving IEMELIF, the Court distinguished a corporation sole from a corporation aggregate. [9]  Citing

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Section 110 of the Corporation Code, the Court said that a corporation sole is “one formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of a religious denomination, sect, or church, for the purpose of administering or managing, as trustee, the affairs, properties and temporalities of such religious denomination, sect or church.”  A corporation aggregate formed for the same purpose, on the other hand, consists of two or more persons. 

 True, the Corporation Code provides no specific mechanism for amending the articles of

incorporation of a corporation sole.  But, as the RTC correctly held, Section 109 of the Corporation Code allows the application to religious corporations of the general provisions governing non-stock corporations. 

 For non-stock corporations, the power to amend its articles of incorporation lies in its members.   The

code requires two-thirds of their votes for the approval of such an amendment.  So how will this requirement apply to a corporation sole that has technically but one member (the head of the religious organization) who holds in his hands its broad corporate powers over the properties, rights, and interests of his religious organization? 

 Although a non-stock corporation has a personality that is distinct from those of its members who

established it, its articles of incorporation cannot be amended solely through the action of its board of trustees.  The amendment needs the concurrence of at least two-thirds of its membership.   If such approval mechanism is made to operate in a corporation sole, its one member in whom all the powers of the corporation technically belongs, needs to get the concurrence of two-thirds of its membership.   The one member, here the General Superintendent, is but a trustee, according to Section 110 of the Corporation Code, of its membership.

 There is no point to dissolving the corporation sole of one member to enable the corporation

aggregate to emerge from it.  Whether it is a non-stock corporation or a corporation sole, the corporate being remains distinct from its members, whatever be their number.  The increase in the number of its corporate membership does not change the complexion of its corporate responsibility to third parties.  The one member, with the concurrence of two-thirds of the membership of the organization for whom he acts as trustee, can self-will the amendment.  He can, with membership concurrence, increase the technical number of the members of the corporation from “sole” or one to the greater number authorized by its amended articles.

 Here, the evidence shows that the IEMELIF’s General Superintendent, respondent Bishop Lazaro,

who embodied the corporation sole, had obtained, not only the approval of the Consistory that drew up corporate policies, but also that of the required two-thirds vote of its membership. 

 The amendment of the articles of incorporation, as correctly put by the CA, requires merely that a) the

amendment is not contrary to any provision or requirement under the Corporation Code, and that b) it is for a legitimate purpose.  Section 17 of the Corporation Code[10] provides that amendment shall be disapproved if, among others, the prescribed form of the articles of incorporation or amendment to it is not observed, or if the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations, or if the required percentage of ownership is not complied with.  These impediments do not appear in the case of IEMELIF.

 Besides, as the CA noted, the IEMELIF worked out the amendment of its articles of incorporation

upon the initiative and advice of the SEC.  The latter’s interpretation and application of the Corporation Code is entitled to respect and recognition, barring any divergence from applicable laws.  Considering its experience and specialized capabilities in the area of corporation law, the SEC’s prior action on the IEMELIF issue should be accorded great weight.

 WHEREFORE, the Court DENIES the petition and AFFIRMS the October 31, 2007 decision and

August 1, 2008 resolution of the Court of Appeals in CA-G.R. SP 92640.

GAMBOA vs TEVES et alD E C I S I O N

  

CARPIO, J.: 

 The Case

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

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

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

 In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm, acquired the remaining 54 percent of the outstanding capital stock of PTIC. On 20 November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine Government announced that it would sell the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, through a public bidding to be conducted on 4 December 2006. Subsequently, the public bidding was reset to 8 December 2006, and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia Presidio Capital, submitted their bids. Parallax won with a bid of P25.6 billion or US$510 million. Thereafter, First Pacific announced that it would exercise its right of first refusal as a PTIC stockholder and buy the 111,415 PTIC shares by matching the bid price of Parallax. However, First Pacific failed to do so by the 1 February 2007 deadline set by IPC and instead, yielded its right to PTIC itself which was then given by IPC until 2 March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through its subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the 111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC, with the Philippine Government for the price of P25,217,556,000 or US$510,580,189. The sale was completed on 28 February 2007. Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of 46.125 percent of PTIC shares is actually an indirect sale of 12 million shares or about 6.3 percent of the outstanding common shares of PLDT. With the sale, First Pacific’s common shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing the common shareholdings of foreigners in PLDT to about 81.47 percent. This violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign ownership of the capital of a public utility to not more than 40 percent.3

 On the other hand, public respondents Finance Secretary Margarito B. Teves, Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the following relevant facts: On 9 November 1967, PTIC was incorporated and had since engaged in the business of investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847 percent of the total PLDT outstanding common shares. PHI, on the other hand, was incorporated in 1977, and became the owner of 111,415 PTIC shares or 46.125 percent of the outstanding capital stock of PTIC by virtue of three Deeds of Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the 111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently declared by this Court as part of the ill-gotten wealth of former President Ferdinand

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Marcos. The sequestered PTIC shares were reconveyed to the Republic of the Philippines in accordance with this Court’s decision4 which became final and executory on 8 August 2006.The Philippine Government decided to sell the 111,415 PTIC shares, which represent 6.4 percent of the outstanding common shares of stock of PLDT, and designated the Inter-Agency Privatization Council (IPC), composed of the Department of Finance and the PCGG, as the disposing entity. An invitation to bid was published in seven different newspapers from 13 to 24 November 2006. On 20 November 2006, a pre-bid conference was held, and the original deadline for bidding scheduled on 4 December 2006 was reset to 8 December 2006. The extension was published in nine different newspapers. During the 8 December 2006 bidding, Parallax Capital Management LP emerged as the highest bidder with a bid of P25,217,556,000. The government notified First Pacific, the majority owner of PTIC shares, of the bidding results and gave First Pacific until 1 February 2007 to exercise its right of first refusal in accordance with PTIC’s Articles of Incorporation. First Pacific announced its intention to match Parallax’s bid. On 31 January 2007, the House of Representatives (HR) Committee on Good Government conducted a public hearing on the particulars of the then impending sale of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those who attended the public hearing. The HR Committee Report No. 2270 concluded that: (a) the auction of the government’s 111,415 PTIC shares bore due diligence, transparency and conformity with existing legal procedures; and (b) First Pacific’s intended acquisition of the government’s 111,415 PTIC shares resulting in First Pacific’s 100% ownership of PTIC will not violate the 40 percent constitutional limit on foreign ownership of a public utility since PTIC holds only 13.847 percent of the total outstanding common shares of PLDT.5 On 28 February 2007, First Pacific completed the acquisition of the 111,415 shares of stock of PTIC. Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted a public bidding for the sale of 111,415 PTIC shares or 46 percent of the outstanding capital stock of PTIC (the remaining 54 percent of PTIC shares was already owned by First Pacific and its affiliates); (b) Parallax offered the highest bid amounting to P25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its shareholders granted in PTIC’s Articles of Incorporation, MPAH, a First Pacific affiliate, exercised its right of first refusal by matching the highest bid offered for PTIC shares on 13 February 2007; and (d) on 28 February 2007, the sale was consummated when MPAH paid IPC P25,217,556,000 and the government delivered the certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the other allegations of facts of petitioner. On 28 February 2007, petitioner filed the instant petition for prohibition, injunction, declaratory relief, and declaration of nullity of sale of the 111,415 PTIC shares. Petitioner claims, among others, that the sale of the 111,415 PTIC shares would result in an increase in First Pacific’s common shareholdings in PLDT from 30.7 percent to 37 percent, and this, combined with Japanese NTT DoCoMo’s common shareholdings in PLDT, would result to a total foreign common shareholdings in PLDT of 51.56 percent which is over the 40 percent constitutional limit.6 Petitioner asserts: 

If and when the sale is completed, First Pacific’s equity in PLDT will go up from 30.7 percent to 37.0 percent of its common – or voting- stockholdings, x x x. Hence, the consummation of the sale will put the two largest foreign investors in PLDT – First Pacific and Japan’s NTT DoCoMo, which is the world’s largest wireless telecommunications firm, owning 51.56 percent of PLDT common equity. x x x With the completion of the sale, data culled from the official website of the New York Stock Exchange (www.nyse.com) showed that those foreign entities, which own at least five percent of common equity, will collectively own 81.47 percent of PLDT’s common equity. x x x

x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x which PLDT submitted to the New York Stock Exchange for the period 2003-2005, revealed that First Pacific and several other foreign entities breached the constitutional limit of 40 percent ownership as early as 2003. x x x”7

 Petitioner raises the following issues: (1) whether the consummation of the then impending sale of 111,415 PTIC shares to First Pacific violates the constitutional limit on foreign ownership of a public utility; (2) whether public respondents committed grave abuse of discretion in allowing the sale of the 111,415 PTIC shares to First Pacific;

and (3) whether the sale of common shares to foreigners in excess of 40 percent of the entire subscribed common capital stock violates the constitutional limit on foreign ownership of a public utility.8

 On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for Leave to Intervene and Admit Attached Petition-in-Intervention. In the Resolution of 28 August 2007, the Court granted the motion and noted the Petition-in-Intervention. Petitioners-in-intervention “join petitioner Wilson Gamboa x x x in seeking, among others, to enjoin and/or nullify the sale by respondents of the 111,415 PTIC shares to First Pacific or assignee.” Petitioners-in-intervention claim that, as PLDT subscribers, they have a “stake in the outcome of the controversy x x x where the Philippine Government is completing the sale of government owned assets in [PLDT], unquestionably a public utility, in violation of the nationality restrictions of the Philippine Constitution.”  

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

The Ruling of the Court The petition is partly meritorious. 

Petition for declaratory relief treated as petition for mandamus At the outset, petitioner is faced with a procedural barrier. Among the remedies petitioner seeks, only the petition for prohibition is within the original jurisdiction of this court, which however is not exclusive but is concurrent with the Regional Trial Court and the Court of Appeals. The actions for declaratory relief,10 injunction, and annulment of sale are not embraced within the original jurisdiction of the Supreme Court. On this ground alone, the petition could have been dismissed outright. While direct resort to this Court may be justified in a petition for prohibition,11 the Court shall nevertheless refrain from discussing the grounds in support of the petition for prohibition since on 28 February 2007, the questioned sale was consummated when MPAH paid IPC P25,217,556,000 and the government delivered the certificates for the 111,415 PTIC shares. However, since the threshold and purely legal issue on the definition of the term “capital” in Section 11, Article XII of the Constitution has far-reaching implications to the nationaleconomy, the Court treats the petition for declaratory relief as one for mandamus.12

 In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for declaratory relief as one for mandamus considering the grave injustice that would result in the interpretation of a banking law. In that case, which involved the crime of rape committed by a foreign tourist against a Filipino minor and the execution of the final judgment in the civil case for damages on the tourist’s dollar deposit with a local bank, the Court declared Section 113 of Central Bank Circular No. 960, exempting foreign currency deposits from attachment, garnishment or any other order or process of any court, inapplicable due to the peculiar circumstances of the case. The Court held that “injustice would result especially to a citizen aggrieved by a foreign guest like accused x x x” that would “negate Article 10 of the Civil Code which provides that ‘in case of doubt in the interpretation or application of laws, it is presumed that the lawmaking body intended right and justice to prevail.’” The Court therefore required respondents Central Bank of the Philippines, the local bank, and the accused to comply with the writ of execution issued in the civil case for damages and to release the dollar deposit of the accused to satisfy the judgment.

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

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

  In the present case, petitioner seeks primarily the interpretation of the term “capital” in Section 11, Article XII of the Constitution. He prays that this Court declare that the term “capital” refers to common shares only, and that such shares constitute “the sole basis in determining foreign equity in a public utility.” Petitioner further asks this Court to declare any ruling inconsistent with such interpretation unconstitutional. The interpretation of the term “capital” in Section 11, Article XII of the Constitution has far-reaching implications to the national economy. In fact, a resolution of this issue will determine whether Filipinos are masters, or second class citizens, in their own country. What is at stake here is whether Filipinos or foreigners will have effective control of the national economy. Indeed, if ever there is a legal issue that has far-reaching implications to the entire nation, and to future generations of Filipinos, it is the threshhold legal issue presented in this case. The Court first encountered the issue on the definition of the term “capital” in Section 11, Article XII of the Constitution in the case of Fernandez v. Cojuangco, docketed as G.R. No. 157360.16 That case involved the same public utility (PLDT) and substantially the same private respondents. Despite the importance and novelty of the constitutional issue raised therein and despite the fact that the petition involved a purely legal question, the Court declined to resolve the case on the merits, and instead denied the same for disregarding the hierarchy of courts.17 There, petitioner Fernandez assailed on a pure question of law the Regional Trial Court’s Decision of 21 February 2003 via a petition for review under Rule 45. The Court’s Resolution, denying the petition, became final on 21 December 2004.The instant petition therefore presents the Court with another opportunity to finally settle this purely legal issue which is of transcendental importance to the national economy and a fundamental requirement to a faithful adherence to our Constitution. The Court must forthwith seize such opportunity, not only for the benefit of the litigants, but more significantly for the benefit of the entire Filipino people, to ensure, in the words of the Constitution, “a self-reliant and independent national economy effectively controlled by Filipinos.”18 Besides, in the light of vague and confusing positions taken by government agencies on this purely legal issue, present and future foreign investors in this country deserve, as a matter of basic fairness, a categorical ruling from this Court on the extent of their participation in the capital of public utilities and other nationalized businesses. Despite its far-reaching implications to the national economy, this purely legal issue has remained unresolved for over 75 years since the 1935 Constitution. There is no reason for this Court to evade this ever recurring fundamental issue and delay again defining the term “capital,” which appears not only in Section 11, Article XII of the Constitution, but also in Section 2, Article XII on co-production and joint venture agreements for the development of our natural resources,19 in Section 7, Article XII on ownership of private lands,20 in Section 10, Article XII on the reservation of certain investments to Filipino citizens,21 in Section 4(2), Article XIV on the ownership of educational institutions,22 and in Section 11(2), Article XVI on the ownership of advertising companies.23

  

Petitioner has locus standi 

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right to question the subject sale, which he claims to violate the nationality requirement prescribed in Section 11, Article XII of the Constitution. If the sale indeed violates the Constitution, then there is a possibility that PLDT’s franchise could be revoked, a dire consequence directly affecting petitioner’s interest as a stockholder. More importantly, there is no question that the instant petition raises matters of transcendental importance to the public. The fundamental and threshold legal issue in this case, involving the national economy and the economic welfare of the Filipino people, far outweighs any perceived impediment in the legal personality of the petitioner to bring this action. In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on matters of transcendental importance to the public, thus: In Tañada v. Tuvera, the Court asserted that when the issue concerns a public right and the object of mandamus is to obtain the enforcement of a public duty, the people are regarded as the real parties in interest; and because it is sufficient that petitioner is a citizen and as such is interested in the execution of the laws, he need not show that he has any legal or special interest in the result of the action. In the aforesaid case, the petitioners sought to enforce their right to be informed on matters of public concern, a right then recognized in Section 6, Article IV of the 1973 Constitution, in connection with the rule that laws in order to be valid and enforceable must be published in the Official Gazette or otherwise effectively promulgated. In ruling for the petitioners’ legal standing, the Court declared that the right they sought to be enforced ‘is a public right recognized by no less than the fundamental law of the land.’Legaspi v. Civil Service Commission, while reiterating Tañada, further declared that ‘when a mandamus proceeding involves the assertion of a public right, the requirement of personal interest is satisfied by the mere fact that petitioner is a citizen and, therefore, part of the general ‘public’ which possesses the right.’Further, in Albano v. Reyes, we said that while expenditure of public funds may not have been involved under the questioned contract for the development, management and operation of the Manila International Container Terminal, ‘public interest [was] definitely involved considering the important role [of the subject contract] . . . in the economic development of the country and the magnitude of the financial consideration involved.’ We concluded that, as a consequence, the disclosure provision in the Constitution would constitute sufficient authority for upholding the petitioner’s standing. (Emphasis supplied) Clearly, since the instant petition, brought by a citizen, involves matters of transcendental public importance, the petitioner has the requisite locus standi. 

Definition of the Term “Capital” inSection 11, Article XII of the 1987 Constitution

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

Section 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens; nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines. (Emphasis supplied)

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

Section 5. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of the capital of which is owned by such citizens, nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the National Assembly when the public interest so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in the capital thereof. (Emphasis supplied)   

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

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

 Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional Commission, reminds us that the Filipinization provision in the 1987 Constitution is one of the products of the spirit of nationalism which gripped the 1935 Constitutional Convention.25 The 1987 Constitution “provides for the Filipinization of public utilities by requiring that any form of authorization for the operation of public utilities should be granted only to ‘citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens.’ The provision is [an express] recognition of the sensitive and vital position of public utilities both in the national economy and for national security.”26 The evident purpose of the citizenship requirement is to prevent aliens from assuming control of public utilities, which may be inimical to the national interest.27 This specific provision explicitly reserves to Filipino citizens control of public utilities, pursuant to an overriding economic goal of the 1987 Constitution: to “conserve and develop our patrimony”28 and ensure “a self-reliant and independent national economy effectively controlled by Filipinos.”29

 Any citizen or juridical entity desiring to operate a public utility must therefore meet the minimum nationality requirement prescribed in Section 11, Article XII of the Constitution. Hence, for a corporation to be granted authority to operate a public utility, at least 60 percent of its “capital” must be owned by Filipino citizens. The crux of the controversy is the definition of the term “capital.” Does the term “capital” in Section 11, Article XII of the Constitution refer to common shares or to the total outstanding capital stock (combined total of common and non-voting preferred shares)? Petitioner submits that the 40 percent foreign equity limitation in domestic public utilities refers only to common shares because such shares are entitled to vote and it is through voting that control over a corporation is exercised. Petitioner posits that the term “capital” in Section 11, Article XII of the Constitution refers to “the ownership of common capital stock subscribed and outstanding, which class of shares alone, under the corporate set-up of PLDT, can vote and elect members of the board of directors.” It is undisputed that PLDT’s non-voting preferred shares are held mostly by Filipino citizens.30 This arose from Presidential Decree No. 217,31 issued on

16 June 1973 by then President Ferdinand Marcos, requiring every applicant of a PLDT telephone line to subscribe to non-voting preferred shares to pay for the investment cost of installing the telephone line.32

 Petitioners-in-intervention basically reiterate petitioner’s arguments and adopt petitioner’s definition of the term “capital.”33 Petitioners-in-intervention allege that “the approximate foreign ownership of common capital stock of PLDT x x x already amounts to at least 63.54% of the total outstanding common stock,” which means that foreigners exercise significant control over PLDT, patently violating the 40 percent foreign equity limitation in public utilities prescribed by the Constitution. Respondents, on the other hand, do not offer any definition of the term “capital” in Section 11, Article XII of the Constitution. More importantly, private respondents Nazareno andPangilinan of PLDT do not dispute that more than 40 percent of the common shares of PLDT are held by foreigners. In particular, respondent Nazareno’s Memorandum, consisting of 73 pages, harps mainly on the procedural infirmities of the petition and the supposed violation of the due process rights of the “affected foreign common shareholders.” Respondent Nazareno does not deny petitioner’s allegation of foreigners’ dominating the common shareholdings of PLDT. Nazarenostressed mainly that the petition “seeks to divest foreign common shareholders purportedly exceeding 40% of the total common shareholdings in PLDT of their ownership over their shares.” Thus, “the foreign natural and juridical PLDT shareholders must be impleaded in this suit so that they can be heard.”34 Essentially, Nazareno invokes denial of due process on behalf of the foreign common shareholders. While Nazareno does not introduce any definition of the term “capital,” he states that “among the factual assertions that need to be established to counter petitioner’s allegations is the uniform interpretation by government agencies (such as the SEC), institutions and corporations (such as the Philippine National Oil Company-Energy Development Corporation or PNOC-EDC) of including both preferred shares and common shares in “controlling interest” in view of testing compliance with the 40% constitutional limitation on foreign ownership in public utilities.”35

 Similarly, respondent Manuel V. Pangilinan does not define the term “capital” in Section 11, Article XII of the Constitution. Neither does he refute petitioner’s claim of foreigners holding more than 40 percent of PLDT’s common shares. Instead, respondent Pangilinan focuses on the procedural flaws of the petition and the alleged violation of the due process rights of foreigners. Respondent Pangilinan emphasizes in his Memorandum (1) the absence of this Court’s jurisdiction over the petition; (2) petitioner’s lack of standing; (3) mootnessof the petition; (4) non-availability of declaratory relief; and (5) the denial of due process rights. Moreover, respondent Pangilinan alleges that the issue should be whether “owners of shares in PLDT as well as owners of shares in companies holding shares in PLDT may be required to relinquish their shares in PLDT and in those companies without any law requiring them to surrender their shares and also without notice and trial.” Respondent Pangilinan further asserts that “Section 11, [Article XII of the Constitution] imposes no nationality requirement on the shareholders of the utility company as a condition for keeping their shares in the utility company.” According to him, “Section 11 does not authorize taking one person’s property (the shareholder’s stock in the utility company) on the basis of another party’s alleged failure to satisfy a requirement that is a condition only for that other party’s retention of another piece of property (the utility company being at least 60% Filipino-owned to keep its franchise).”36

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

 Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer of the Philippine Stock Exchange (PSE), does not also define the term “capital” and seeks the dismissal of the petition on the following

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grounds: (1) failure to state a cause of action against Lim; (2) the PSE allegedly implemented its rules and required all listed companies, including PLDT, to make proper and timely disclosures; and (3) the reliefs prayed for in the petition would adversely impact the stock market. In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to be a stockholder of record of PLDT, contended that the term “capital” in the 1987 Constitution refers to shares entitled to vote or the common shares. Fernandez explained thus: 

The forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares, considering that it is through voting that control is being exercised. x x x Obviously, the intent of the framers of the Constitution in imposing limitations and restrictions on fully nationalized and partially nationalized activities is for Filipino nationals to be always in control of the corporation undertaking said activities. Otherwise, if the Trial Court’s ruling upholding respondents’ arguments were to be given credence, it would be possible for the ownership structure of a public utility corporation to be divided into one percent (1%) common stocks and ninety-nine percent (99%) preferred stocks. Following the Trial Court’s ruling adopting respondents’ arguments, the common shares can be owned entirely by foreigners thus creating an absurd situation wherein foreigners, who are supposed to be minority shareholders, control the public utility corporation. x x x x Thus, the 40% foreign ownership limitation should be interpreted to apply to both the beneficial ownership and the controlling interest. x x x x Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities prescribed by the Constitution refers to ownership of shares of stock entitled to vote, i.e., common shares. Furthermore, ownership of record of shares will not suffice but it must be shown that the legal and beneficial ownership rests in the hands of Filipino citizens. Consequently, in the case of petitioner PLDT, since it is already admitted that the voting interests of foreigners which would gain entry to petitioner PLDT by the acquisition of SMART shares through the Questioned Transactions is equivalent to 82.99%, and the nominee arrangements between the foreign principals and the Filipino owners is likewise admitted, there is, therefore, a violation of Section 11, Article XII of the Constitution.Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by the Trial Court to support the proposition that the meaning of the word “capital” as used in Section 11, Article XII of the Constitution allegedly refers to the sum total of the shares subscribed and paid-in by the shareholder and it allegedly is immaterial how the stock is classified, whether as common or preferred, cannot stand in the face of a clear legislative policy as stated in the FIA which took effect in 1991 or way after said opinions were rendered, and as clarified by the above-quoted Amendments. In this regard, suffice it to state that as between the law and an opinion rendered by an administrative agency, the law indubitably prevails. Moreover, said Opinions are merely advisory and cannot prevail over the clear intent of the framers of the Constitution. In the same vein, the SEC’s construction of Section 11, Article XII of the Constitution is at best merely advisory for it is the courts that finally determine what a law means.39

  

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

16.  The Constitution applies its foreign ownership limitation on the corporation’s “capital,” without distinction as to classes of shares. x x x In this connection, the Corporation Code – which was already in force at the time the present (1987) Constitution was drafted – defined outstanding capital stock as follows: Section 137. Outstanding capital stock defined. – The term “outstanding capital stock”, as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares. Section 137 of the Corporation Code also does not distinguish between common and preferred shares, nor exclude either class of shares, in determining the outstanding capital stock (the “capital”) of a corporation. Consequently, petitioner’s suggestion to reckon PLDT’s foreign equity only on the basis of PLDT’s outstanding common shares is without legal basis. The language of the Constitution should be understood in the sense it has in common use.x x x x 

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

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

  

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

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as “preferred” or “redeemable” shares, unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. Any or all of the shares or series of shares may have a par value or have no par value as may be provided for in the articles of incorporation: Provided, however, That banks, trust companies, insurance companies, public utilities, and building and loan associations shall not be permitted to issue no-par value shares of stock.Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: Provided, That preferred shares of stock may be issued only with a stated par value. The Board of Directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission.Shares of capital stock issued without par value shall be deemed fully paid and non-assessable and the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto: Provided; That shares without par value may not be issued for a consideration less than the value of five (P5.00) pesos per share: Provided, further, That the entire consideration received by the

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corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends.A corporation may, furthermore, classify its shares for the purpose of insuring compliance with constitutional or legal requirements.Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;2. Adoption and amendment of by-laws;3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;4. Incurring, creating or increasing bonded indebtedness;5. Increase or decrease of capital stock;6. Merger or consolidation of the corporation with another corporation or other corporations;7. Investment of corporate funds in another corporation or business in accordance with this Code; and8. Dissolution of the corporation.

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

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

 Considering that common shares have voting rights which translate to control, as opposed to preferred shares which usually have no voting rights, the term “capital” in Section 11, Article XII of the Constitution refers only to common shares. However, if the preferred shares also have the right to vote in the election of directors, then the term “capital” shall include such preferred shares because the right to participate in the control or management of the corporation is exercised through the right to vote in the election of directors. In short, the term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock that can vote in the election of directors. This interpretation is consistent with the intent of the framers of the Constitution to place in the hands of Filipino citizens the control and management of public utilities. As revealed in the deliberations of the Constitutional Commission, “capital” refers to the voting stock or controlling interest of a corporation, to wit: 

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3 in Section 15. MR. VILLEGAS. That is right. MR. NOLLEDO. In teaching law, we are always faced with this question: “Where do we base the equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or on the paid-up capital stock of a corporation”? Will the Committee please enlighten me on this? 

MR. VILLEGAS. We have just had a long discussion with the members of the team from the UP Law Center who provided us a draft. The phrase that is contained here which we adopted from the UP draft is “60 percent of voting stock.” MR. NOLLEDO. That must be based on the subscribed capital stock, because unless declared delinquent, unpaid capital stock shall be entitled to vote. MR. VILLEGAS. That is right. MR. NOLLEDO. Thank you. With respect to an investment by one corporation in another corporation, say, a corporation with 60-40 percent equity invests in another corporation which is permitted by the Corporation Code, does the Committee adopt the grandfather rule? MR. VILLEGAS. Yes, that is the understanding of the Committee. MR. NOLLEDO. Therefore, we need additional Filipino capital? MR. VILLEGAS. Yes.48

 x x x xMR. AZCUNA. May I be clarified as to that portion that was accepted by the Committee. MR. VILLEGAS. The portion accepted by the Committee is the deletion of the phrase “voting stock or controlling interest.” MR. AZCUNA. Hence, without the Davide amendment, the committee report would read: “corporations or associations at least sixty percent of whose CAPITAL is owned by such citizens.” MR. VILLEGAS. Yes. MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of the capital to be owned by citizens. MR. VILLEGAS. That is right. MR. AZCUNA. But the control can be with the foreigners even if they are the minority. Let us say 40 percent of the capital is owned by them, but it is the voting capital, whereas, the Filipinos own the nonvoting shares. So we can have a situation where the corporation is controlled by foreigners despite being the minority because they have the voting capital. That is the anomaly that would result here. MR. BENGZON. No, the reason we eliminated the word “stock” as stated in the 1973 and 1935 Constitutions is that according to Commissioner Rodrigo, there are associations that do not have stocks. That is why we say “CAPITAL.” MR. AZCUNA. We should not eliminate the phrase “controlling interest.” MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis supplied) 

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

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

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

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

b. “Philippine national” shall mean a citizen of the Philippines or a domestic partnership or association wholly owned by the citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent [60%] of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent [60%] of the fund will accrue to the benefit of the Philippine nationals; Provided, that where a corporation its non-Filipino stockholders own stocks in a Securities and Exchange Commission [SEC] registered enterprise, at least sixty percent [60%] of the capital stock outstanding and entitled to vote of both corporations must be owned and held by citizens of the Philippines and at least sixty percent [60%] of the members of the Board of Directors of each of both corporation must be citizens of the Philippines, in order that the corporation shall be considered a Philippine national. The control test shall be applied for this purpose. Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered. For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals. Individuals or juridical entities not meeting the aforementioned qualifications are considered as non-Philippine nationals. (Emphasis supplied)      

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

Under Section 10, Article XII of the Constitution, Congress may “reserve to citizens of the Philippines or to corporations or associations at least sixty per centum of whose capital is owned by such citizens, or such higher percentage as Congress may prescribe, certain areas of investments.” Thus, in numerous laws Congress has reserved certain areas of investments to Filipino citizens or to corporations at least sixty percent of the “capital” of which is owned by Filipino citizens. Some of these laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2) Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro, Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of 2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No. 10055; and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term “capital” in Section 11, Article XII of the Constitution is also used in the same context in numerous laws reserving certain areas of investments to Filipino citizens. To construe broadly the term “capital” as the total outstanding capital stock, including both common and non-voting preferred shares, grossly contravenes the intent and letter of the Constitution that the “State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.” A broad definition unjustifiably disregards who owns the all-important voting stock, which necessarily equates to control of the public utility. We shall illustrate the glaring anomaly in giving a broad definition to the term “capital.” Let us assume that a corporation has 100 common shares owned by foreigners and 1,000,000 non-voting preferred shares owned by Filipinos, with both classes of share having a par value of one peso (P1.00) per share. Under the broad definition of the term “capital,” such corporation would be considered compliant with the 40 percent constitutional limit on foreign equity of public utilities since the overwhelming majority, or more than 99.999 percent, of the total outstanding capital stock is Filipino owned. This is obviously absurd. In the example given, only the foreigners holding the common shares have voting rights in the election of directors, even if they hold only 100 shares. The foreigners, with a minuscule equity of less than 0.001 percent, exercise control over the public utility. On the other hand, the Filipinos, holding more than 99.999 percent of the equity, cannot vote in the election of directors and hence, have no control over the public utility. This starkly circumvents the intent of the framers of the Constitution, as well as the clear language of the Constitution, to place the control of public utilities in the hands of Filipinos. It also renders illusory the State policy of an independent national economy effectively controlled by Filipinos. The example given is not theoretical but can be found in the real world, and in fact exists in the present case. Holders of PLDT preferred shares are explicitly denied of the right to vote in the election of directors. PLDT’s Articles of Incorporation expressly state that “the holders of Serial Preferred Stock shall not be entitled to vote at any meeting of the stockholders for the election of directors or for any other purpose or otherwise participate in any action taken by the corporation or its stockholders, or to receive notice of any meeting of stockholders.”51

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

 In short, only holders of common shares can vote in the election of directors, meaning only common shareholders exercise control over PLDT. Conversely, holders of preferred shares, who have no voting rights in the election of directors, do not have any control over PLDT. In fact, under PLDT’s Articles of Incorporation, holders of common shares have voting rights for all purposes, while holders of preferred shares have no voting right for any purpose whatsoever. It must be stressed, and respondents do not dispute, that foreigners hold a majority of the common shares of PLDT. In fact, based on PLDT’s 2010 General Information Sheet (GIS),54 which is a document required to be submitted annually to the Securities and Exchange Commission,55 foreigners hold 120,046,690 common shares of PLDT whereas Filipinos hold only 66,750,622 common shares.56 In other words, foreigners hold 64.27% of

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the total number of PLDT’s common shares, while Filipinos hold only 35.73%. Since holding a majority of the common shares equates to control, it is clear that foreigners exercise control over PLDT. Such amount of control unmistakably exceeds the allowable 40 percent limit on foreign ownership of public utilities expressly mandated in Section 11, Article XII of the Constitution. Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC, shows that per share the SIP58 preferred shares earn a pittance in dividends compared to the common shares. PLDT declared dividends for the common shares at P70.00 per share, while the declared dividends for the preferred shares amounted to a measly P1.00 per share.59So the preferred shares not only cannot vote in the election of directors, they also have very little and obviously negligible dividend earning capacity compared to common shares. As shown in PLDT’s 2010 GIS,60 as submitted to the SEC, the par value of PLDT common shares is P5.00 per share, whereas the par value of preferred shares is P10.00 per share. In other words, preferred shares have twice the par value of common shares but cannot elect directors and have only 1/70 of the dividends of common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos while foreigners own only a minuscule 0.56% of the preferred shares.61 Worse, preferred shares constitute 77.85% of the authorized capital stock of PLDT while common shares constitute only 22.15%.62 This undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares but with the common shares, blatantly violating the constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership in a public utility. The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipinos in accordance with the constitutional mandate. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is constitutionally required for the State’s grant of authority to operate a public utility. The undisputed fact that the PLDT preferred shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70 of the dividends that PLDT common shares earn, grossly violates the constitutional requirement of 60 percent Filipino control and Filipino beneficial ownership of a public utility.In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60 percent of the dividends, of PLDT. This directly contravenes the express command in Section 11, Article XII of the Constitution that “[n]o franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to x x xcorporations x x x organized under the laws of the Philippines, at least sixty per centum of whose capital is owned by such citizens x x x.” To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of shares exercises the sole right to vote in the election of directors, and thus exercise control over PLDT; (2) Filipinos own only 35.73% of PLDT’s common shares, constituting a minority of the voting stock, and thus do not exercise control over PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the dividends that common shares earn;63 (5) preferred shares have twice the par value of common shares; and (6) preferred shares constitute 77.85% of the authorized capital stock of PLDT and common shares only 22.15%. This kind of ownership and control of a public utility is a mockery of the Constitution. Incidentally, the fact that PLDT common shares with a par value of P5.00 have a current stock market value of P2,328.00 per share,64 while PLDT preferred shares with a par value ofP10.00 per share have a current stock market value ranging from only P10.92 to P11.06 per share,65 is a glaring confirmation by the market that control and beneficial ownership of PLDT rest with the common shares, not with the preferred shares. Indisputably, construing the term “capital” in Section 11, Article XII of the Constitution to include both voting and non-voting shares will result in the abject surrender of our telecommunications industry to foreigners, amounting to a clear abdication of the State’s constitutional duty to limit control of public utilities to Filipino citizens. Such an interpretation certainly runs counter to the constitutional provision reserving certain areas of investment to Filipino citizens, such as the exploitation of natural resources as well as the ownership of land, educational institutions and advertising businesses. The Court should never open to foreign control what the Constitution has expressly reserved to Filipinos for that would be a betrayal of the Constitution and of the national interest. The Court must perform its solemn duty to defend and uphold the intent and letter of the Constitution to ensure, in the words of the Constitution, “a self-reliant and independent national economy effectively controlled by Filipinos.” 

Section 11, Article XII of the Constitution, like other provisions of the Constitution expressly reserving to Filipinos specific areas of investment, such as the development of natural resources and ownership of land, educational institutions and advertising business, is self-executing. There is no need for legislation to implement these self-executing provisions of the Constitution. The rationale why these constitutional provisions are self-executing was explained in Manila Prince Hotel v. GSIS,66 thus:

x x x Hence, unless it is expressly provided that a legislative act is necessary to enforce a constitutional mandate, the presumption now is that all provisions of the constitution are self-executing. If the constitutional provisions are treated as requiring legislation instead of self-executing, the legislature would have the power to ignore and practically nullify the mandate of the fundamental law. This can be cataclysmic. That is why the prevailing view is, as it has always been, that — . . . in case of doubt, the Constitution should be considered self-executing rather than non-self-executing. . . . Unless the contrary is clearly intended, the provisions of the Constitution should be considered self-executing, as a contrary rule would give the legislature discretion to determine when, or whether, they shall be effective. These provisions would be subordinated to the will of the lawmaking body, which could make them entirely meaningless by simply refusing to pass the needed implementing statute. (Emphasis supplied)

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

Courts as a rule consider the provisions of the Constitution as self-executing, rather than as requiring future legislation for their enforcement. The reason is not difficult to discern. For if they are not treated as self-executing, the mandate of the fundamental law ratified by the sovereign people can be easily ignored and nullified by Congress. Suffused with wisdom of the ages is the unyielding rule that legislative actions may give breath to constitutional rights but congressional inaction should not suffocate them.  Thus, we have treated as self-executing the provisions in the Bill of Rights on arrests, searches and seizures, the rights of a person under custodial investigation, the rights of an accused, and the privilege against self-incrimination. It is recognized that legislation is unnecessary to enable courts to effectuate constitutional provisions guaranteeing the fundamental rights of life, liberty and the protection of property. The same treatment is accorded to constitutional provisions forbidding the taking or damaging of property for public use without just compensation. (Emphasis supplied)  

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

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

  

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To treat Section 11, Article XII of the Constitution as not self-executing would mean that since the 1935 Constitution, or over the last 75 years, not one of the constitutional provisions expressly reserving specific areas of investments to corporations, at least 60 percent of the “capital” of which is owned by Filipinos, was enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions miserably failed to effectively reserve to Filipinos specific areas of investment, like the operation by corporations of public utilities, the exploitation by corporations of mineral resources, the ownership by corporations of real estate, and the ownership of educational institutions. All the legislatures that convened since 1935 also miserably failed to enact legislations to implement these vital constitutional provisions that determine who will effectively control the national economy, Filipinos or foreigners. This Court cannot allow such an absurd interpretation of the Constitution. This Court has held that the SEC “has both regulatory and adjudicative functions.”69 Under its regulatory functions, the SEC can be compelled by mandamus to perform its statutory duty when it unlawfully neglects to perform the same. Under its adjudicative or quasi-judicial functions, the SEC can be also be compelled by mandamus to hear and decide a possible violation of any law it administers or enforces when it is mandated by law to investigate such violation. Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function to reject or disapprove the Articles of Incorporation of any corporation where “the required percentage of ownership of the capital stock to be owned by citizens of the Philippines has not been complied with as required by existing laws or the Constitution.” Thus, the SEC is the government agency tasked with the statutory duty to enforce the nationality requirement prescribed in Section 11, Article XII of the Constitution on the ownership of public utilities. This Court, in a petition for declaratory relief that is treated as a petition for mandamus as in the present case, can direct the SEC to perform its statutory duty under the law, a duty that the SEC has apparently unlawfully neglected to do based on the 2010 GIS that respondent PLDT submitted to the SEC.Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the “power and function” to “suspend or revoke, after proper notice and hearing, the franchise or certificate of registration of corporations, partnerships or associations, upon any of the grounds provided by law.” The SEC is mandated under Section 5(d) of the same Code with the “power and function” to “investigate x x x the activities of persons to ensure compliance” with the laws and regulations that SEC administers or enforces. The GIS that all corporations are required to submit to SEC annually should put the SEC on guard against violations of the nationality requirement prescribed in the Constitution and existing laws. This Court can compel the SEC, in a petition for declaratory relief that is treated as a petition for mandamus as in the present case, to hear and decide a possible violation of Section 11, Article XII of the Constitution in view of the ownership structure of PLDT’s voting shares, as admitted by respondents and as stated in PLDT’s 2010 GIS that PLDT submitted to SEC. WHEREFORE, we PARTLY GRANT the petition and rule that the term “capital” in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock (common and non-voting preferred shares). Respondent Chairperson of the Securities and Exchange Commission is DIRECTED to apply this definition of the term “capital” in determining the extent of allowable foreign ownership in respondent Philippine Long Distance Telephone Company, and if there is a violation of Section 11, Article XII of the Constitution, to impose the appropriate sanctions under the law. SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

 

G.R. No. 104175 June 25, 1993

YOUNG AUTO SUPPLY CO. AND NEMESIO GARCIA, petitioners, vs.THE HONORABLE COURT OF APPEALS (THIRTEENTH DIVISION) AND GEORGE CHIONG ROXAS,respondents.

Angara, Abello, Concepcion, Regala & Cruz for petitioners.

Antonio Nuyles for private respondent.

 

QUIASON, J.:

Petitioners seek to set aside the decision of respondent Court of Appeals in CA-G.R. SP No. 25237, which reversed the Order dated February 8, 1991 issued by the Regional Trial Court, Branch 11, Cebu City in Civil Case No. CEB 6967. The order of the trial court denied the motion to dismiss filed by respondent George C. Roxas of the complaint for collection filed by petitioners.

It appears that sometime on October 28, 1987, Young Auto Supply Co. Inc. (YASCO) represented by Nemesio Garcia, its president, Nelson Garcia and Vicente Sy, sold all of their shares of stock in Consolidated Marketing & Development Corporation (CMDC) to Roxas. The purchase price was P8,000,000.00 payable as follows: a downpayment of P4,000,000.00 and the balance of P4,000,000.00 in four post dated checks of P1,000,000.00 each.

Immediately after the execution of the agreement, Roxas took full control of the four markets of CMDC. However, the vendors held on to the stock certificates of CMDC as security pending full payment of the balance of the purchase price.

The first check of P4,000,000.00, representing the down-payment, was honored by the drawee bank but the four other checks representing the balance of P4,000,000.00 were dishonored. In the meantime, Roxas sold one of the markets to a third party. Out of the proceeds of the sale, YASCO received P600,000.00, leaving a balance of P3,400,000.00 (Rollo, p. 176).

Subsequently, Nelson Garcia and Vicente Sy assigned all their rights and title to the proceeds of the sale of the CMDC shares to Nemesio Garcia.

On June 10, 1988, petitioners filed a complaint against Roxas in the Regional Trial Court, Branch 11, Cebu City, praying that Roxas be ordered to pay petitioners the sum of P3,400,00.00 or that full control of the three markets be turned over to YASCO and Garcia. The complaint also prayed for the forfeiture of the partial payment of P4,600,000.00 and the payment of attorney's fees and costs (Rollo, p. 290).

Roxas filed two motions for extension of time to submit his answer. But despite said motion, he failed to do so causing petitioners to file a motion to have him declared in default. Roxas then filed, through a new counsel, a third motion for extension of time to submit a responsive pleading.

On August 19, 1988, the trial court declared Roxas in default. The order of default was, however, lifted upon motion of Roxas.

On August 22, 1988, Roxas filed a motion to dismiss on the grounds that:

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1. The complaint did not state a cause of action due to non-joinder of indispensable parties;

2. The claim or demand set forth in the complaint had been waived, abandoned or otherwise extinguished; and

3. The venue was improperly laid (Rollo, p. 299).

After a hearing, wherein testimonial and documentary evidence were presented by both parties, the trial court in an Order dated February 8, 1991 denied Roxas' motion to dismiss. After receiving said order, Roxas filed another motion for extension of time to submit his answer. He also filed a motion for reconsideration, which the trial court denied in its Order dated April 10, 1991 for being pro-forma (Rollo, p. 17). Roxas was again declared in default, on the ground that his motion for reconsideration did not toll the running of the period to file his answer.

On May 3, 1991, Roxas filed an unverified Motion to Lift the Order of Default which was not accompanied with the required affidavit or merit. But without waiting for the resolution of the motion, he filed a petition for certiorari with the Court of Appeals.

The Court of Appeals sustained the findings of the trial court with regard to the first two grounds raised in the motion to dismiss but ordered the dismissal of the complaint on the ground of improper venue (Rollo, p. 49).

A subsequent motion for reconsideration by petitioner was to no avail.

Petitioners now come before us, alleging that the Court of Appealserred in:

1. holding the venue should be in Pasay City, and not in Cebu City (where both petitioners/plaintiffs are residents;

2. not finding that Roxas is estopped from questioning the choice of venue (Rollo, p. 19).

The petition is meritorious.

In holding that the venue was improperly laid in Cebu City, the Court of Appeals relied on the address of YASCO, as appearing in the Deed of Sale dated October 28, 1987, which is "No. 1708 Dominga Street, Pasay City." This was the same address written in YASCO's letters and several commercial documents in the possession of Roxas (Decision, p. 12; Rollo, p. 48).

In the case of Garcia, the Court of Appeals said that he gave Pasay City as his address in three letters which he sent to Roxas' brothers and sisters (Decision, p. 12; Rollo, p. 47). The appellate court held that Roxas was led by petitioners to believe that their residence is in Pasay City and that he had relied upon those representations (Decision, p. 12, Rollo, p. 47).

The Court of Appeals erred in holding that the venue was improperly laid in Cebu City.

In the Regional Trial Courts, all personal actions are commenced and tried in the province or city where the defendant or any of the defendants resides or may be found, or where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff [Sec. 2(b) Rule 4, Revised Rules of Court].

There are two plaintiffs in the case at bench: a natural person and a domestic corporation. Both plaintiffs aver in their complaint that they are residents of Cebu City, thus:

1.1. Plaintiff Young Auto Supply Co., Inc., ("YASCO") is a domestic corporation duly organized and existing under Philippine laws with principal place of business at M. J. Cuenco Avenue, Cebu City. It also has a branch office at 1708 Dominga Street, Pasay City, Metro Manila.

Plaintiff Nemesio Garcia is of legal age, married, Filipino citizen and with business address at Young Auto Supply Co., Inc., M. J. Cuenco Avenue, Cebu City. . . . (Complaint, p. 1; Rollo, p. 81).

The Article of Incorporation of YASCO (SEC Reg. No. 22083) states:

THIRD That the place where the principal office of the corporation is to be established or located is at Cebu City, Philippines (as amended on December 20, 1980 and further amended on December 20, 1984) (Rollo, p. 273).

A corporation has no residence in the same sense in which this term is applied to a natural person. But for practical purposes, a corporation is in a metaphysical sense a resident of the place where its principal office is located as stated in the articles of incorporation (Cohen v. Benguet Commercial Co., Ltd., 34 Phil. 256 [1916] Clavecilla Radio System v. Antillon, 19 SCRA 379 [1967]). The Corporation Code precisely requires each corporation to specify in its articles of incorporation the "place where the principal office of the corporation is to be located which must be within the Philippines" (Sec. 14 [3]). The purpose of this requirement is to fix the residence of a corporation in a definite place, instead of allowing it to be ambulatory.

In Clavencilla Radio System v. Antillon, 19 SCRA 379 ([1967]), this Court explained why actions cannot be filed against a corporation in any place where the corporation maintains its branch offices. The Court ruled that to allow an action to be instituted in any place where the corporation has branch offices, would create confusion and work untold inconvenience to said entity. By the same token, a corporation cannot be allowed to file personal actions in a place other than its principal place of business unless such a place is also the residence of a co-plaintiff or a defendant.

If it was Roxas who sued YASCO in Pasay City and the latter questioned the venue on the ground that its principal place of business was in Cebu City, Roxas could argue that YASCO was in estoppel because it misled Roxas to believe that Pasay City was its principal place of business. But this is not the case before us.

With the finding that the residence of YASCO for purposes of venue is in Cebu City, where its principal place of business is located, it becomes unnecessary to decide whether Garcia is also a resident of Cebu City and whether Roxas was in estoppel from questioning the choice of Cebu City as the venue.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals appealed from is SET ASIDE and the Order dated February 8, 1991 of the Regional Trial Court is REINSTATED.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

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G.R. No. 96161 February 21, 1992

PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC.,petitioners, vs.COURT OF APPEALS, SECURITIES & EXCHANGE COMMISSION and STANDARD PHILIPS CORPORATION,respondents.

Emeterio V. Soliven & Associates for petitioners.

Narciso A. Manantan for private respondent.

 

MELENCIO-HERRERA, J.:

Petitioners challenge the Decision of the Court of Appeals, dated 31 July 1990, in CA-GR Sp. No. 20067, upholding the Order of the Securities and Exchange Commission, dated 2 January 1990, in SEC-AC No. 202, dismissing petitioners' prayer for the cancellation or removal of the word "PHILIPS" from private respondent's corporate name.

Petitioner Philips Export B.V. (PEBV), a foreign corporation organized under the laws of the Netherlands, although not engaged in business here, is the registered owner of the trademarks PHILIPS and PHILIPS SHIELD EMBLEM under Certificates of Registration Nos. R-1641 and R-1674, respectively issued by the Philippine Patents Office (presently known as the Bureau of Patents, Trademarks and Technology Transfer). Petitioners Philips Electrical Lamps, Inc. (Philips Electrical, for brevity) and Philips Industrial Developments, Inc. (Philips Industrial, for short), authorized users of the trademarks PHILIPS and PHILIPS SHIELD EMBLEM, were incorporated on 29 August 1956 and 25 May 1956, respectively. All petitioner corporations belong to the PHILIPS Group of Companies.

Respondent Standard Philips Corporation (Standard Philips), on the other hand, was issued a Certificate of Registration by respondent Commission on 19 May 1982.

On 24 September 1984, Petitioners filed a letter complaint with the Securities & Exchange Commission (SEC) asking for the cancellation of the word "PHILIPS" from Private Respondent's corporate name in view of the prior registration with the Bureau of Patents of the trademark "PHILIPS" and the logo "PHILIPS SHIELD EMBLEM" in the name of Petitioner, PEBV, and the previous registration of Petitioners Philips Electrical and Philips Industrial with the SEC.

As a result of Private Respondent's refusal to amend its Articles of Incorporation, Petitioners filed with the SEC, on 6 February 1985, a Petition (SEC Case No. 2743) praying for the issuance of a Writ of Preliminary Injunction, alleging, among others, that Private Respondent's use of the word PHILIPS amounts to an infringement and clear violation of Petitioners' exclusive right to use the same considering that both parties engage in the same business.

In its Answer, dated 7 March 1985, Private Respondent countered that Petitioner PEBV has no legal capacity to sue; that its use of its corporate name is not at all similar to Petitioners' trademark PHILIPS when considered in its entirety; and that its products consisting of chain rollers, belts, bearings and cutting saw are grossly different from Petitioners' electrical products.

After conducting hearings with respect to the prayer for Injunction; the SEC Hearing Officer, on 27 September 1985, ruled against the issuance of such Writ.

On 30 January 1987, the same Hearing Officer dismissed the Petition for lack of merit. In so ruling, the latter declared that inasmuch as the SEC found no sufficient ground for the granting of injunctive relief on the basis of the testimonial and documentary evidence presented, it cannot order the removal or cancellation of the word "PHILIPS" from Private Respondent's corporate name on the basis of the same evidence adopted in toto during trial on the merits. Besides, Section 18 of the Corporation Code (infra) is applicable only when the corporate names in question are identical. Here, there is no confusing similarity between Petitioners' and Private Respondent's corporate names as those of the Petitioners contain at least two words different from that of the Respondent. Petitioners' Motion for Reconsideration was likewise denied on 17 June 1987.

On appeal, the SEC en banc affirmed the dismissal declaring that the corporate names of Petitioners and Private Respondent hardly breed confusion inasmuch as each contains at least two different words and, therefore, rules out any possibility of confusing one for the other.

On 30 January 1990, Petitioners sought an extension of time to file a Petition for Review on Certiorari before this Court, which Petition was later referred to the Court of Appeals in a Resolution dated 12 February 1990.

In deciding to dismiss the petition on 31 July 1990, the Court ofAppeals 1 swept aside Petitioners' claim that following the ruling in Converse Rubber Corporation v. Universal Converse Rubber Products, Inc., et al, (G. R. No. L-27906, January 8, 1987, 147 SCRA 154), the word PHILIPS cannot be used as part of Private Respondent's corporate name as the same constitutes a dominant part of Petitioners' corporate names. In so holding, the Appellate Court observed that the Converse case is not four-square with the present case inasmuch as the contending parties in Converse are engaged in a similar business, that is, the manufacture of rubber shoes. Upholding the SEC, the Appellate Court concluded that "private respondents' products consisting of chain rollers, belts, bearings and cutting saw are unrelated and non-competing with petitioners' products i.e. electrical lamps such that consumers would not in any probability mistake one as the source or origin of the product of the other."

The Appellate Court denied Petitioners' Motion for Reconsideration on 20 November 1990, hence, this Petition which was given due course on 22 April 1991, after which the parties were required to submit their memoranda, the latest of which was received on 2 July 1991. In December 1991, the SEC was also required to elevate its records for the perusal of this Court, the same not having been apparently before respondent Court of Appeals.

We find basis for petitioners' plea.

As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115 (1927), the Court declared that a corporation's right to use its corporate and trade name is a property right, a right in rem, which it may assert and protect against the world in the same manner as it may protect its tangible property, real or personal, against trespass or conversion. It is regarded, to a certain extent, as a property right and one which cannot be impaired or defeated by subsequent appropriation by another corporation in the same field (Red Line Transportation Co. vs. Rural Transit Co., September 8, 1934, 20 Phil 549).

A name is peculiarly important as necessary to the very existence of a corporation (American Steel Foundries vs. Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its name is one of its attributes, an element of its existence, and essential to its identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as to corporations is that each corporation must have a name by which it is to sue and be sued and do all legal acts. The name of a corporation in this respect designates the corporation in the same manner as the name of an individual designates the person (Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538; Newport Mechanics Mfg. Co. vs. Starbird. 10 NH 123); and the right to use its corporate name is as much a part of the corporate franchise as any

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other privilege granted (Federal Secur. Co. vs. Federal Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial Association, 18 RI 165, 26 A 36).

A corporation acquires its name by choice and need not select a name identical with or similar to one already appropriated by a senior corporation while an individual's name is thrust upon him (See Standard Oil Co. of New Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, 977). A corporation can no more use a corporate name in violation of the rights of others than an individual can use his name legally acquired so as to mislead the public and injure another (Armington vs. Palmer, 21 RI 109. 42 A 308).

Our own Corporation Code, in its Section 18, expressly provides that:

No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing law.Where a change in a corporate name is approved, the commission shall issue an amended certificate of incorporation under the amended name. (Emphasis supplied)

The statutory prohibition cannot be any clearer. To come within its scope, two requisites must be proven, namely:

(1) that the complainant corporation acquired a prior right over the use of such corporate name; and

(2) the proposed name is either:

(a) identical; or

(b) deceptively or confusingly similar

to that of any existing corporation or to any other name already protected by law; or

(c) patently deceptive, confusing or contrary to existing law.

The right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption (1 Thompson, p. 80 citing Munn v. Americana Co., 82 N. Eq. 63, 88 Atl. 30; San Francisco Oyster House v. Mihich, 75 Wash. 274, 134 Pac. 921). In this regard, there is no doubt with respect to Petitioners' prior adoption of' the name ''PHILIPS" as part of its corporate name. Petitioners Philips Electrical and Philips Industrial were incorporated on 29 August 1956 and 25 May 1956, respectively, while Respondent Standard Philips was issued a Certificate of Registration on 12 April 1982, twenty-six (26) years later (Rollo, p. 16). Petitioner PEBV has also used the trademark "PHILIPS" on electrical lamps of all types and their accessories since 30 September 1922, as evidenced by Certificate of Registration No. 1651.

The second requisite no less exists in this case. In determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person, using ordinary care and discrimination. In so doing, the Court must look to the record as well as the names themselves (Ohio Nat. Life Ins. Co. v. Ohio Life Ins. Co., 210 NE 2d 298). While the corporate names of Petitioners and Private Respondent are not identical, a reading of Petitioner's corporate names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to conclude that "PHILIPS" is, indeed, the dominant word in that all the companies affiliated or associated with the principal corporation, PEBV, are known in the Philippines and abroad as the PHILIPS Group of Companies.

Respondents maintain, however, that Petitioners did not present an iota of proof of actual confusion or deception of the public much less a single purchaser of their product who has been deceived or confused or showed any likelihood of confusion. It is settled, however, that proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line of cases).

It may be that Private Respondent's products also consist of chain rollers, belts, bearing and the like, while petitioners deal principally with electrical products. It is significant to note, however, that even the Director of Patents had denied Private Respondent's application for registration of the trademarks "Standard Philips & Device" for chain, rollers, belts, bearings and cutting saw. That office held that PEBV, "had shipped to its subsidiaries in the Philippines equipment, machines and their parts which fall under international class where "chains, rollers, belts, bearings and cutting saw," the goods in connection with which Respondent is seeking to register 'STANDARD PHILIPS' . . . also belong" ( Inter Partes Case No. 2010, June 17, 1988, SEC Rollo).

Furthermore, the records show that among Private Respondent's primary purposes in its Articles of Incorporation (Annex D, Petition p. 37, Rollo) are the following:

To buy, sell, barter, trade, manufacture, import, export, or otherwise acquire, dispose of, and deal in and deal with any kind of goods, wares, and merchandise such as but not limited to plastics, carbon products, office stationery and supplies, hardware parts, electrical wiring devices, electrical component parts, and/or complement of industrial, agricultural or commercial machineries, constructive supplies, electrical supplies and other merchandise which are or may become articles of commerce except food, drugs and cosmetics and to carry on such business as manufacturer, distributor, dealer, indentor, factor, manufacturer's representative capacity for domestic or foreign companies. (emphasis ours)

For its part, Philips Electrical also includes, among its primary purposes, the following:

To develop manufacture and deal in electrical products, including electronic, mechanical and other similar products . . . (p. 30, Record of SEC Case No. 2743)

Given Private Respondent's aforesaid underlined primary purpose, nothing could prevent it from dealing in the same line of business of electrical devices, products or supplies which fall under its primary purposes. Besides, there is showing that Private Respondent not only manufactured and sold ballasts for fluorescent lamps with their corporate name printed thereon but also advertised the same as, among others, Standard Philips (TSN, before the SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As aptly pointed out by Petitioners, [p]rivate respondent's choice of "PHILIPS" as part of its corporate name [STANDARD PHILIPS CORPORATION] . . . tends to show said respondent's intention to ride on the popularity and established goodwill of said petitioner's business throughout the world" (Rollo, p. 137). The subsequent appropriator of the name or one confusingly similar thereto usually seeks an unfair advantage, a free ride of another's goodwill (American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC 269, 191 F 2d 488).

In allowing Private Respondent the continued use of its corporate name, the SEC maintains that the corporate names of Petitioners PHILIPS ELECTRICAL LAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at least two words different from that of the corporate name of respondent STANDARD PHILIPS CORPORATION, which words will readily identify Private Respondent from Petitioners and vice-versa.

True, under the Guidelines in the Approval of Corporate and Partnership Names formulated by the SEC, the proposed name "should not be similar to one already used by another corporation or partnership. If the proposed name contains a word already used as part of the firm name or style of a registered company; the proposed name must contain two other words different from the company already registered" (Emphasis ours). It is then pointed out that Petitioners Philips Electrical and Philips Industrial have two words different from that of Private Respondent's name.

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What is lost sight of, however, is that PHILIPS is a trademark or trade name which was registered as far back as 1922. Petitioners, therefore, have the exclusive right to its use which must be free from any infringement by similarity. A corporation has an exclusive right to the use of its name, which may be protected by injunction upon a principle similar to that upon which persons are protected in the use of trademarks and tradenames (18 C.J.S. 574). Such principle proceeds upon the theory that it is a fraud on the corporation which has acquired a right to that name and perhaps carried on its business thereunder, that another should attempt to use the same name, or the same name with a slight variation in such a way as to induce persons to deal with it in the belief that they are dealing with the corporation which has given a reputation to the name (6 Fletcher [Perm Ed], pp. 39-40, citingBorden Ice Cream Co. v. Borden's Condensed Milk Co., 210 F 510). Notably, too, Private Respondent's name actually contains only a single word, that is, "STANDARD", different from that of Petitioners inasmuch as the inclusion of the term "Corporation" or "Corp." merely serves the Purpose of distinguishing the corporation from partnerships and other business organizations.

The fact that there are other companies engaged in other lines of business using the word "PHILIPS" as part of their corporate names is no defense and does not warrant the use by Private Respondent of such word which constitutes an essential feature of Petitioners' corporate name previously adopted and registered and-having acquired the status of a well-known mark in the Philippines and internationally as well (Bureau of Patents Decision No. 88-35 [TM], June 17, 1988, SEC Records).

In support of its application for the registration of its Articles of Incorporation with the SEC, Private Respondent had submitted an undertaking "manifesting its willingness to change its corporate name in the event another person, firm or entity has acquired a prior right to the use of the said firm name or one deceptively or confusingly similar to it." Private respondent must now be held to its undertaking.

As a general rule, parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation, whether a business or a nonbusiness or non-profit organization if misleading and likely to injure it in the exercise in its corporate functions, regardless of intent, may be prevented by the corporation having the prior right, by a suit for injunction against the new corporation to prevent the use of the name (American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., 89 App DC 269, 191 F 2d 488, 27 ALR 2d 948).

WHEREFORE, the Decision of the Court of Appeals dated 31 July 1990, and its Resolution dated 20 November 1990, are SET ASIDE and a new one entered ENJOINING private respondent from using "PHILIPS" as a feature of its corporate name, and ORDERING the Securities and Exchange Commission to amend private respondent's Articles of Incorporation by deleting the word PHILIPS from the corporate name of private respondent.

No costs.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 101897. March 5, 1993.

LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS, LYCEUM OF APARRI, LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM OF LALLO, INC., LYCEUM OF TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF CATANDUANES, LYCEUM OF SOUTHERN PHILIPPINES, LYCEUM OF EASTERN MINDANAO, INC. and WESTERN PANGASINAN LYCEUM, INC., respondents.

Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla for petitioner.

Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law Offices for respondents.

Froilan Siobal for Western Pangasinan Lyceum.

SYLLABUS

1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF PROPOSED NAME WHICH IS IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF ANY EXISTING CORPORATION, PROHIBITED; CONFUSION AND DECEPTION EFFECTIVELY PRECLUDED BY THE APPENDING OF GEOGRAPHIC NAMES TO THE WORD "LYCEUM". — The Articles of Incorporation of a corporation must, among other things, set out the name of the corporation. Section 18 of the Corporation Code establishes a restrictive rule insofar as corporate names are concerned: "Section 18. Corporate name. — No corporate name may be allowed by the Securities an Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name." The policy underlying the prohibition in Section 18 against the registration of a corporate name which is "identical or deceptively or confusingly similar" to that of any existing corporation or which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which would have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations. We do not consider that the corporate names of private respondent institutions are "identical with, or deceptively or confusingly similar" to that of the petitioner institution. True enough, the corporate names of private respondent entities all carry the word "Lyceum" but confusion and deception are effectively precluded by the appending of geographic names to the word "Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of the Philippines.

2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD "LYCEUM," NOT ATTENDED WITH EXCLUSIVITY. — It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning in relation to petitioner with the result that word, although originally a generic, has become appropriable by petitioner to the exclusion of other institutions like private respondents herein. The doctrine of secondary meaning originated in the field of trademark law. Its application has, however, been extended to corporate names sine the right to use a corporate name to the exclusion of others is based upon the same principle which underlies the right to use a particular trademark or tradename. In Philippine Nut Industry, Inc. v. Standard Brands, Inc., the doctrine of secondary meaning was elaborated in the following terms: " . . . a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product." The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its corporate name has been for such length of time and with such exclusivity as to have become associated or identified with the petitioner institution in the mind of the general public (or at least that portion of the general public which has to do with schools). The Court of Appeals recognized this issue and answered it in the negative: "Under the doctrine of secondary meaning, a word or phrase originally incapable of

18

exclusive appropriation with reference to an article in the market, because geographical or otherwise descriptive might nevertheless have been used so long and so exclusively by one producer with reference to this article that, in that trade and to that group of the purchasing public, the word or phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been referred to as the distinctiveness into which the name or phrase has evolved through the substantial and exclusive use of the same for a considerable period of time. . . . No evidence was ever presented in the hearing before the Commission which sufficiently proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If there was any of this kind, the same tend to prove only that the appellant had been using the disputed word for a long period of time. . . . In other words, while the appellant may have proved that it had been using the word 'Lyceum' for a long period of time, this fact alone did not amount to mean that the said word had acquired secondary meaning in its favor because the appellant failed to prove that it had been using the same word all by itself to the exclusion of others. More so, there was no evidence presented to prove that confusion will surely arise if the same word were to be used by other educational institutions. Consequently, the allegations of the appellant in its first two assigned errors must necessarily fail." We agree with the Court of Appeals. The number alone of the private respondents in the case at bar suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the exclusivity essential for applicability of the doctrine of secondary meaning. Petitioner's use of the word "Lyceum" was not exclusive but was in truth shared with the Western Pangasinan Lyceum and a little later with other private respondent institutions which registered with the SEC using "Lyceum" as part of their corporation names. There may well be other schools using Lyceum or Liceo in their names, but not registered with the SEC because they have not adopted the corporate form of organization.

3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE WHETHER THEY ARE CONFUSINGLY OR DECEPTIVELY SIMILAR TO ANOTHER CORPORATE ENTITY'S NAME. — petitioner institution is not entitled to a legally enforceable exclusive right to use the word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of their corporate names. To determine whether a given corporate name is "identical" or "confusingly or deceptively similar" with another entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate names in their entirety and when the name of petitioner is juxtaposed with the names of private respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively similar" with each other.

D E C I S I O N

FELICIANO, J p:

Petitioner is an educational institution duly registered with the Securities and Exchange Commission ("SEC"). When it first registered with the SEC on 21 September 1950, it used the corporate name Lyceum of the Philippines, Inc. and has used that name ever since.

On 24 February 1984, petitioner instituted proceedings before the SEC to compel the private respondents, which are also educational institutions, to delete the word "Lyceum" from their corporate names and permanently to enjoin them from using "Lyceum" as part of their respective names.

Some of the private respondents actively participated in the proceedings before the SEC. These are the following, the dates of their original SEC registration being set out below opposite their respective names:

Western Pangasinan Lyceum — 27 October 1950

Lyceum of Cabagan — 31 October 1962

Lyceum of Lallo, Inc. — 26 March 1972

Lyceum of Aparri — 28 March 1972

Lyceum of Tuao, Inc. — 28 March 1972

Lyceum of Camalaniugan — 28 March 1972

The following private respondents were declared in default for failure to file an answer despite service of summons:

Buhi Lyceum;

Central Lyceum of Catanduanes;

Lyceum of Eastern Mindanao, Inc.; and

Lyceum of Southern Philippines

Petitioner's original complaint before the SEC had included three (3) other entities:

1. The Lyceum of Malacanay;

2. The Lyceum of Marbel; and

3. The Lyceum of Araullo

The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and the Lyceum of Marbel, for failure to serve summons upon these two (2) entities. The case against the Liceum of Araullo was dismissed when that school motu proprio change its corporate name to "Pamantasan ng Araullo."

The background of the case at bar needs some recounting. Petitioner had sometime before commenced in the SEC a proceeding (SEC-Case No. 1241) against the Lyceum of Baguio, Inc. to require it to change its corporate name and to adopt another name not "similar [to] or identical" with that of petitioner. In an Order dated 20 April 1977, Associate Commissioner Julio Sulit held that the corporate name of petitioner and that of the Lyceum of Baguio, Inc. were substantially identical because of the presence of a "dominant" word, i.e., "Lyceum," the name of the geographical location of the campus being the only word which distinguished one from the other corporate name. The SEC also noted that petitioner had registered as a corporation ahead of the Lyceum of Baguio, Inc. in point of time, 1 and ordered the latter to change its name to another name "not similar or identical [with]" the names of previously registered entities.

The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in a case docketed as G.R. No. L-46595. In a Minute Resolution dated 14 September 1977, the Court denied the Petition for Review for lack of merit. Entry of judgment in that case was made on 21 October 1977. 2

Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then wrote all the educational institutions it could find using the word "Lyceum" as part of their corporate name, and advised them to discontinue such use of "Lyceum." When, with the passage of time, it became clear that this recourse had failed, petitioner instituted before the SEC SEC-Case No. 2579 to enforce what petitioner claims as its proprietary right to the word "Lyceum." The SEC hearing officer rendered a decision sustaining petitioner's claim to an exclusive right to use the word "Lyceum." The hearing officer relied upon the SEC ruling in the Lyceum of Baguio, Inc.

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case (SEC-Case No. 1241) and held that the word "Lyceum" was capable of appropriation and that petitioner had acquired an enforceable exclusive right to the use of that word.

On appeal, however, by private respondents to the SEC En Banc, the decision of the hearing officer was reversed and set aside. The SEC En Banc did not consider the word "Lyceum" to have become so identified with petitioner as to render use thereof by other institutions as productive of confusion about the identity of the schools concerned in the mind of the general public. Unlike its hearing officer, the SEC En Banc held that the attaching of geographical names to the word "Lyceum" served sufficiently to distinguish the schools from one another, especially in view of the fact that the campuses of petitioner and those of the private respondents were physically quite remote from each other. 3

Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28 June 1991, however, the Court of Appeals affirmed the questioned Orders of the SEC En Banc. 4 Petitioner filed a motion for reconsideration, without success.

Before this Court, petitioner asserts that the Court of Appeals committed the following errors:

1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in G.R. No. L-46595 did not constitute stare decisis as to apply to this case and in not holding that said Resolution bound subsequent determinations on the right to exclusive use of the word Lyceum.

2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum, Inc. was incorporated earlier than petitioner.

3. The Court of Appeals erred in holding that the word Lyceum has not acquired a secondary meaning in favor of petitioner.

4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be appropriated by the petitioner to the exclusion of others. 5

We will consider all the foregoing ascribed errors, though not necessarily seriatim. We begin by noting that the Resolution of the Court in G.R. No. L-46595 does not, of course, constitute res adjudicata in respect of the case at bar, since there is no identity of parties. Neither is stare decisis pertinent, if only because the SEC En Banc itself has re-examined Associate Commissioner Sulit's ruling in the Lyceum of Baguio case. The Minute Resolution of the Court in G.R. No. L-46595 was not a reasoned adoption of the Sulit ruling.

The Articles of Incorporation of a corporation must, among other things, set out the name of the corporation. 6 Section 18 of the Corporation Code establishes a restrictive rule insofar as corporate names are concerned:

"SECTION 18. Corporate name. — No corporate name may be allowed by the Securities an Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name." (Emphasis supplied)

The policy underlying the prohibition in Section 18 against the registration of a corporate name which is "identical or deceptively or confusingly similar" to that of any existing corporation or which is "patently deceptive" or "patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the public which would have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations. 7

We do not consider that the corporate names of private respondent institutions are "identical with, or deceptively or confusingly similar" to that of the petitioner institution. True enough, the corporate names of private respondent entities all carry the word "Lyceum" but confusion and deception are effectively precluded by the appending of geographic names to the word "Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum of the Philippines.

Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn referred to a locality on the river Ilissius in ancient Athens "comprising an enclosure dedicated to Apollo and adorned with fountains and buildings erected by Pisistratus, Pericles and Lycurgus frequented by the youth for exercise and by the philosopher Aristotle and his followers for teaching." 8 In time, the word "Lyceum" became associated with schools and other institutions providing public lectures and concerts and public discussions. Thus today, the word "Lyceum" generally refers to a school or an institution of learning. While the Latin word "lyceum" has been incorporated into the English language, the word is also found in Spanish (liceo) and in French (lycee). As the Court of Appeals noted in its Decision, Roman Catholic schools frequently use the term; e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate," "Liceo de Albay." 9 "Lyceum" is in fact as generic in character as the word "university." In the name of the petitioner, "Lyceum" appears to be a substitute for "university;" in other places, however, "Lyceum," or "Liceo" or "Lycee" frequently denotes a secondary school or a college. It may be (though this is a question of fact which we need not resolve) that the use of the word "Lyceum" may not yet be as widespread as the use of "university," but it is clear that a not inconsiderable number of educational institutions have adopted "Lyceum" or "Liceo" as part of their corporate names. Since "Lyceum" or "Liceo" denotes a school or institution of learning, it is not unnatural to use this word to designate an entity which is organized and operating as an educational institution.

It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary meaning in relation to petitioner with the result that that word, although originally a generic, has become appropriable by petitioner to the exclusion of other institutions like private respondents herein.

The doctrine of secondary meaning originated in the field of trademark law. Its application has, however, been extended to corporate names sine the right to use a corporate name to the exclusion of others is based upon the same principle which underlies the right to use a particular trademark or tradename. 10 In Philippine Nut Industry, Inc. v. Standard Brands, Inc., 11 the doctrine of secondary meaning was elaborated in the following terms:

" . . . a word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product." 12

The question which arises, therefore, is whether or not the use by petitioner of "Lyceum" in its corporate name has been for such length of time and with such exclusivity as to have become associated or identified with the petitioner institution in the mind of the general public (or at least that portion of the general public which has to do with schools). The Court of Appeals recognized this issue and answered it in the negative:

"Under the doctrine of secondary meaning, a word or phrase originally incapable of exclusive appropriation with reference to an article in the market, because geographical or otherwise descriptive might nevertheless have been used so long and so exclusively by one producer with reference to this article that, in that trade and to that group of the purchasing public, the word or phrase has come to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been referred to as the distinctiveness into which the name or phrase has evolved through the substantial and exclusive use of the same for a considerable period of time. Consequently, the same doctrine or principle cannot be made to apply where the evidence did not prove that the business (of the plaintiff) has continued for so long a time that it has become of consequence and acquired a good will of considerable value such that its articles and produce have acquired a well-known reputation, and

20

confusion will result by the use of the disputed name (by the defendant) (Ang Si Heng vs. Wellington Department Store, Inc., 92 Phil. 448).

With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the aforementioned requisites. No evidence was ever presented in the hearing before the Commission which sufficiently proved that the word 'Lyceum' has indeed acquired secondary meaning in favor of the appellant. If there was any of this kind, the same tend to prove only that the appellant had been using the disputed word for a long period of time. Nevertheless, its (appellant) exclusive use of the word (Lyceum) was never established or proven as in fact the evidence tend to convey that the cross-claimant was already using the word 'Lyceum' seventeen (17) years prior to the date the appellant started using the same word in its corporate name. Furthermore, educational institutions of the Roman Catholic Church had been using the same or similar word like 'Liceo de Manila,' 'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de Albay' long before appellant started using the word 'Lyceum'. The appellant also failed to prove that the word 'Lyceum' has become so identified with its educational institution that confusion will surely arise in the minds of the public if the same word were to be used by other educational institutions.

In other words, while the appellant may have proved that it had been using the word 'Lyceum' for a long period of time, this fact alone did not amount to mean that the said word had acquired secondary meaning in its favor because the appellant failed to prove that it had been using the same word all by itself to the exclusion of others. More so, there was no evidence presented to prove that confusion will surely arise if the same word were to be used by other educational institutions. Consequently, the allegations of the appellant in its first two assigned errors must necessarily fail." 13 (Underscoring partly in the original and partly supplied)

We agree with the Court of Appeals. The number alone of the private respondents in the case at bar suggests strongly that petitioner's use of the word "Lyceum" has not been attended with the exclusivity essential for applicability of the doctrine of secondary meaning. It may be noted also that at least one of the private respondents, i.e., the Western Pangasinan Lyceum, Inc., used the term "Lyceum" seventeen (17) years before the petitioner registered its own corporate name with the SEC and began using the word "Lyceum." It follows that if any institution had acquired an exclusive right to the word "Lyceum," that institution would have been the Western Pangasinan Lyceum, Inc. rather than the petitioner institution.

In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc. failed to reconstruct its records before the SEC in accordance with the provisions of R.A. No. 62, which records had been destroyed during World War II, Western Pangasinan Lyceum should be deemed to have lost all rights it may have acquired by virtue of its past registration. It might be noted that the Western Pangasinan Lyceum, Inc. registered with the SEC soon after petitioner had filed its own registration on 21 September 1950. Whether or not Western Pangasinan Lyceum, Inc. must be deemed to have lost its rights under its original 1933 registration, appears to us to be quite secondary in importance; we refer to this earlier registration simply to underscore the fact that petitioner's use of the word "Lyceum" was neither the first use of that term in the Philippines nor an exclusive use thereof. Petitioner's use of the word "Lyceum" was not exclusive but was in truth shared with the Western Pangasinan Lyceum and a little later with other private respondent institutions which registered with the SEC using "Lyceum" as part of their corporation names. There may well be other schools using Lyceum or Liceo in their names, but not registered with the SEC because they have not adopted the corporate form of organization.

We conclude and so hold that petitioner institution is not entitled to a legally enforceable exclusive right to use the word "Lyceum" in its corporate name and that other institutions may use "Lyceum" as part of their corporate names. To determine whether a given corporate name is "identical" or "confusingly or deceptively similar" with another entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate names in their entirety and when the name of petitioner is juxtaposed with the names of private respondents, they are not reasonably regarded as "identical" or "confusingly or deceptively similar" with each other.

WHEREFORE, the petitioner having failed to show any reversible error on the part of the public respondent Court of Appeals, the Petition for Review is DENIED for lack of merit, and the Decision of the Court of Appeals dated 28 June 1991 is hereby AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. L-54580 December 29, 1987

ARMCO STEEL CORPORATION (OF THE PHILIPPINES), petitioner, vs.SECURITIES AND EXCHANGE COMMISSION, ARMCO STEEL CORPORATION (of Ohio, U.S.A.) and ARMCO MARSTEEL ALLOY CORPORATION, respondents.

 

GANCAYCO, J.:

On July 1, 1965 ARMCO Steel Corporation, a corporation organized in Ohio, U.S.A., hereinafter called ARMCO-OHIO, obtained from the Philippine Patent Office, Certificate of Registration No. 11750 for its trademark consisting of the word "ARMCO" and a triangular device for "ferrous metals and ferrous metal castings and forgings." On April 14, 1971, pursuant to trademark rules, the petitioner filed with the said patent office an "Affidavit of Use" for said trademark, which was subsequently accepted and for which the Patent Office issued the corresponding notice of acceptance of "Affidavit of Use."

ARMCO Marsteel-Alloy Corporation was also incorporated on July 11, 1972 under its original name Marsteel Alloy Company, Inc. but on March 28, 1973 its name was changed to ARMCO-Marsteel Alloy Corporation hereinafter called ARMCO-Marsteel, by amendment of its Articles of Incorporation after the ARMCO-Ohio purchased 40% of its capital stock. Both said corporations are engaged in the manufacture of steel products. Its article of incorporation in part reads as follows as to its purposes: "to manufacture, process ... and deal in all kinds, form, and combinations of iron, steel or other metals and all or any products or articles particularly consisting of iron, steel or other metals .... .

On the other hand ARMCO Steel Corporation was incorporated in the Philippines on April 25, 1973, hereinafter called ARMCO-Philippines. A pertinent portion of its articles of incorporation provides as among its purposes: "to contract, fabricate ... manufacture ... regarding pipelines, steel frames ... ."

ARMCO-Ohio and ARMCO-Marsteel then filed a petition in the Securities and Exchange Commission (SEC) to compel ARMCO-Philippines to change its corporate name on the ground that it is very similar, if not exactly the same as the name of one of the petitioners, which is docketed as SEC Case No. 1187. In due course an order was issued by the SEC on February 14, 1975 granting the petition, the dispositive part of which reads as follows:

In view of the foregoing, the respondent, ARMCO STEEL CORPORATION, is hereby ordered to take out 'ARMCO' and substitute another word in lieu thereof in its corporate name by amending the articles of incorporation to that effect, within thirty (30) days from date of receipt of a copy of this Order; after which, three (3) copies of the amended articles

21

of incorporation, duly certified by a majority of the board of directors and countersigned by the president and secretary of the corporation, shall be submitted to this Commission, together with the corresponding filing fees, as required by law. 1

A motion for reconsideration of the said order was filed by said respondent on March 6. 1975 but this was denied in, an order of April 16, 1965 as the motion was filed out of time, a copy of the questioned order having been received by respondent on February 18, 1975 so that said order had become final and executory. 2 A motion for reconsideration filed by respondent to set aside said order of April 16, 1965 was also denied by the SEC on June 23, 1975. 3 An appeal was interposed by respondent to the Court of Appeals which was docketed as CA G.R. No. 04448-R but the appeal was dismissed in a resolution of January 13, 1976, on the ground that the appeal was perfected beyond the reglementary period allowed by law.

On March 22, 1976 said respondent amended its articles of incorporation by changing its name to "ARMCO structures, Inc." which was filed with and approved by the SEC.

Nevertheless, in an order of January 6, 1977, the SEC issued an order requiring respondent, its directors and officers to comply with the aforesaid order of the Commission of February 14, 1975 within ten (10) days from notice thereof. 5

A manifestation and motion was filed by respondent informing SEC that it had already changed its corporate name with the approval of the SEC to ARMCO Structures, Inc. in substantial compliance with the said order or in the alternative prayed for a hearing to determine if there is a confusing similarity between the names of the petitioners on one hand and the ARMCO Structures, Inc. on the other.

Petitioners then filed a comment to said manifestation alleging that the change of name of said respondent was not done in good faith and is not in accordance with the order of the Commission of February 14, 1975 so that drastic action should be taken against the respondent and its officers. Subsequently, petitioners filed a motion to cite said respondent, its directors and officers in contempt for disobeying the orders of February 14, 1975 and January 6, 1977. In an order of August 31, 1977, the SEC finding that the respondent, its directors, and officers have not complied with the final order of February 14, 1975 required them to appeal before the Commission on September 22, 1977 at 10:00 o'clock in the morning to show cause why they should not be punished for contempt by the Commission. 6

After the hearing the parties submitted their respective memoranda. In another order of January 17, 1979, the SEC finding that the respondent did not make the proper disclosure of the circumstances when it amended its articles of incorporation and submitted the same for the approval of the SEC thus said respondent, its directors, and officers were ordered within ten (10) days from notice to comply with the order of February 14, 1975. An appeal was interposed by the respondent to the SEC en banc. The Commission en banc in an order of December 14, 1979 dismissed the appeal for lack of merit. 7

Hence, the herein petition for review filed by ARMCO-Philippines wherein it seeks the reversal of the orders of the SEC of December 14, 1979 and August 6, 1980 and that the order of February 14, 1975 be declared functus oficio for having been substantially complied with by the petitioner. The grounds of the petition are as follows:

I

THE SECURITIES AND EXCHANGE COMMISSION ERRED WHEN IT DID NOT CONSIDER ITS ORDER DATED FEBRUARY 14,1975 FUNCTUS OFFICIO PURSUANT TO THE LEGAL MAXIM CESSANTE LEGIS RATIONE CESSAT ET IPSA LEX' AFTER PETITIONER HAD SUBSTANTIALLY COMPLIED IN GOOD FAITH WITH SAID ORDER AND SAID COMPLIANCE HAD ACHIEVED THE

PURPOSE OF THE ORDER, BY CHANGING ITS CORPORATE NAME WITH THE APPROVAL OF SAID COMMISSION.

II

THE COMMISSION ERRED WHEN IT DID NOT FIND THAT ITS APPROVAL OF PETITIONER'S AMENDED ARTICLES OF INCORPORATION CHANGING PETITIONER'S CORPORATE NAME FROM "ARMCO STEEL CORPORATION" TO "ARMCO STRUCTURES, INCORPORATED" WAS REGULAR AND LEGAL.

III

THE COMMISSION ERRED WHEN IT DID NOT FIND THAT PRIVATE RESPONDENTS WERE NO LONGER ENTITLED TO THE RELIEF AWARDED BY THE ORDER DATED FEBRUARY 14,1975 CONSIDERING THAT SAID ORDER HAD BECOME FUNCTUS OFFICIO AND FURTHER ENFORCEMENT THEREOF WILL BE INEQUITABLE AS IT WILL DEPRIVE PETITIONER OF EQUAL PROTECTION OF LAWS.

IV

THE COMMISSION ERRED WHEN, THERE BEING A DISPUTE AS TO WHETHER OR NOT THE PURPOSE OF THE ORDER DATED FEBRUARY 14,1975 HAD BEEN COMPLIED WITH AND WHETHER THERE WAS STILL CONFUSING SIMILARITY BETWEEN THE CORPORATE NAMES OF RESPONDENTS AND THE NEW NAME OF PETITIONER, IT DID NOT GRANT PETITIONER'S PRAYER THAT A HEART NG BE HELD TO THRESH THE ISSUE."

The Court finds no merit in the petition.

The order of the public respondent SEC of February 14, 1975 which has long become final and executory clearly spells out that petitioner must "take out ARMCO and substitute another word in lieu thereof in its corporate name by amending the articles of incorporation to that effect, ... ." Far from complying with said order petitioner amended its corporate name into ARMCO Structures, Inc., and secured its approval by the SEC on March 22, 1976. That this amendment was made by petitioner without the knowledge of the proper authorities of the SEC is home by the fact that thereafter on January 6, 1977 an order was issued by the SEC requiring petitioner, its board of directors, and officers to comply with the order of the Commission of February 14, 1975. When the attention of the SEC was called by petitioner that the change of corporate name had been undertaken by it to ARMCO Structures, Inc. and asked that it be considered as a substantial compliance with the order of February 14, 1975, the SEC in its order of January 17, 1979 speaking through its hearing officer Antonio R. Manabat ruled as follows:

The Order of February 14, 1975, cannot but be clearer than what it purports to require or demand from respondent. Under in no distinct terms, it enjoins the removal or deletion of the word 'Armco' from respondent's corporate name, which was not so complied with. The Commission, therefore, cannot give its imprimatur to the new corporate name because there was no compliance at all.

The fact that the Securities and Exchange Commission issued its certificate of filing of amended articles of incorporation on March 22, 1976, is nothing but an illusory approval of the change of corporate name and a self-induced protection from the Commission to further exact compliance of the Order of February 14, 1975. Craftily, the Securities and

22

Exchange Commission and/or its administrative personnel were made to issue such certificate during its unguarded moment. Verily, the certificate could not have been issued were it not for such lapses or had respondent been in good faith by making the proper disclosures of the circumstances which led it to amend its articles of incorporation.

Correctly pointed out by petitioners, a 'new determination as to whether or not there is confusing similarity between petitioners' names and that of 'Armco Structures, Incorporated,' cannot be ordered without transgression on the rule of, or the decisional law on, finality of judgment. 8

The Court finds that the said amendment in the corporate name of petitioner is not in substantial compliance with the order of February 14, 1975. Indeed it is in contravention therewith. To repeat, the order was for the removal of the word "ARMCO" from the corporate name of the petitioner which it failed to do. And even if this change of corporate name was erroneously accepted and approved in the SEC it cannot thereby legalize nor change what is clearly unauthorized if not contemptuous act of petitioner in securing the registration of a new corporate name against the very order of the SEC of February 14, 1975. Certainly the said order of February 14, 1975 is not rendered functus oficio thereby. Had petitioner revealed at the time of the registration of its amended corporate name that there was the said order, the registration of the amended corporate name could not have been accepted and approved by the persons in-charge of the registration. The actuations in this respect of petitioner are far from regular much less in good faith.

The arguments of the petitioner that the SEC had approved the registration of several other entities with one principal word common to all as "ARMCO," and that there is no confusing similarity between the corporate names of respondents and the new name of petitioner, would indeed in effect be reopening the final and executory order of the SEC of February 14, 1975 which had already foreclosed the issue. Indeed, in said final order the SEC made the following findings which are conclusive and well-taken:

The only question for resolution in this case is whether therespondent's name ARMCO STEEL CORPORATION is similar, if not Identical with that of petitioner, ARMCO STEEL CORPORATION (of Ohio, U.S.A.) and of petitioner, ARMCO-MARSTEEL ALLOY CORPORATION, as to create uncertainty and confusion in the minds of the public.

By mere looking at the names it is clear that the name of petitioner, ARMCO STEEL CORPORATION (of Ohio, U.S.A.), and that of the respondent, ARMCO STEEL CORPORATION, are not only similar but Identical and the words "of Ohio, U.S.A.," are being used only to Identify petitioner ARMCO STEEL-OHIO as a U.S. corporation.

It is indisputable that ARMCO-STEEL-OHIO, having patented the term 'Armco' as part of its trademark on its steel products, is entitled to protection in the use thereof in the Philippines. The term "Armco" is now being used on the products being manufactured and sold in this country by Armco-Marsteel by virtue of its tie-up with ARMCO-STEEL-OHIO. Clearly, the two companies have the right to the exclusive use and enjoyment of said term.

ARMCO STEEL-PHILIPPINES, has not only an Identical name but also a similar line of business, as shown above, as that of ARMCO STEEL- OHIO. People who are buying and using products bearing the trademark "Armco" might be led to believe that such products are manufactured by the respondent, when in fact, they might actually be produced by the petitioners. Thus, the goodwill that should grow and inure to the benefit of petitioners could be impaired and prejudiced by the continued use of the same term by the respondent.

Obviously, the petition for review is designed to further delay if not simply evade compliance with the said final and executory SEC order. Petitioner also seeks a review of the orders of execution of the SEC of the said February 14, 1975 order. An order or resolution granting execution of the final judgment cannot be appealed 9 otherwise there will be no end to the litigation. 10

WHEREFORE, the petition is DISMISSED for lack of merit with costs against petitioner. This decision is immediately executory.

SO ORDERED.

SECOND DIVISION

[G.R. No. 129552.  June 29, 2005]

P.C. JAVIER & SONS, INC., SPS. PABLO C. JAVIER, SR. and ROSALINA F. JAVIER, petitioners, vs. HON. COURT OF APPEALS, PAIC SAVINGS & MORTGAGE BANK, INC., SHERIFFS GRACE BELVIS, SOFRONIO VILLARIN, PIO MARTINEZ and NICANOR BLANCO, respondents.

D E C I S I O N

CHICO-NAZARIO, J.:

Before Us is an appeal by certiorari under Rule 45 of the Rules of Court which seeks to set aside the decision[1] of the Court of Appeals dated 31 January 1997 which affirmed in toto the decision of Branch 62 of the Regional Trial Court (RTC) of Makati City, dismissing the complaint for Annulment of Mortgage and Foreclosure with Preliminary Injunction, Prohibition and Damages filed by petitioners, and its Resolution [2] dated 20 June 1997 denying petitioners’ motion for reconsideration.

A complaint[3] for Annulment of Mortgage and Foreclosure with Preliminary Injunction, Prohibition and Damages was filed by petitioners P.C. Javier & Sons, Inc. and spouses Pablo C. Javier, Sr. and Rosalina F. Javier against PAIC Savings & Mortgage Bank, Inc., Grace S. Belvis, Acting Ex Officio Regional Sheriff of Pasig, Metro Manila and Sofronio M. Villarin, Deputy Sheriff-in-Charge, before Branch 62 of the RTC of Makati City, on 07 May 1984.  The case was docketed as Civil Case No. 7184.

On 10 May 1984, a Supplemental Complaint[4] was filed to include additional defendants, namely: Pio Martinez, Acting Ex Officio Regional Sheriff of Antipolo, Rizal, and Nicanor D. Blanco, Deputy Sheriff-in-Charge.

The facts that gave rise to the aforesaid complaint, as found by Branch 62 of the RTC of Makati City, and adopted by the respondent court, are as follows:

In February, 1981, Plaintiff P.C. Javier and Sons Services, Inc., Plaintiff Corporation, for short, applied with First Summa Savings and Mortgage Bank, later on renamed as PAIC Savings and Mortgage Bank, Defendant Bank, for short, for a loan accommodation under the Industrial Guarantee Loan Fund (IGLF) for P1.5 Million. On March 21, 1981, Plaintiff Corporation through Plaintiff Pablo C. Javier, Plaintiff Javier for short, was advised that its loan application was approved and that the same shall be forwarded to the Central Bank (CB) for processing and release (Exhibit A also Exhibit 8).

23

The CB released the loan to Defendant Bank in two (2) tranches of P750,000 each. The first tranche was released to the Plaintiff Corporation on May 18, 1981 in the amount of P750,000.00 and the second tranche was released to Plaintiff Corporation on November 21, 1981 in the amount of P750,000.00.  From the second tranche release, the amount of P250,000.00 was deducted and deposited in the name of Plaintiff Corporation under a time deposit.

Plaintiffs claim that the loan releases were delayed; that the amount of P250,000.00 was deducted from the IGLF loan of P1.5 Million and placed under time deposit; that Plaintiffs were never allowed to withdraw the proceeds of the time deposit because Defendant Bank intended this time deposit as automatic payments on the accrued principal and interest due on the loan. Defendant Bank, however, claims that only the final proceeds of the loan in the amount of P750,000.00 was delayed the same having been released to Plaintiff Corporation only on November 20, 1981, but this was because of the shortfall in the collateral cover of Plaintiff’s loan; that this second tranche of the loan was precisely released after a firm commitment was made by Plaintiff Corporation to cover the collateral deficiency through the opening of a time deposit using a portion of the loan proceeds in the amount of P250,000.00 for the purpose; that in compliance with their commitment to submit additional security and open time deposit, Plaintiff Javier in fact opened a time deposit for P250,000.00 and on February 15, 1983, executed a chattel mortgage over some machineries in favor of Defendant Bank; that thereafter, Plaintiff Corporation defaulted in the payment of its IGLF loan with Defendant Bank hence Defendant Bank sent a demand letter dated November 22, 1983, reminding Plaintiff Javier to make payments because their accounts have been long overdue; that on May 2, 1984, Defendant Bank sent another demand letter to Plaintiff spouses informing them that since they have defaulted in paying their obligation, their mortgage will now be foreclosed; that when Plaintiffs still failed to pay, Defendant Bank initiated extrajudicial foreclosure of the real estate mortgage executed by Plaintiff spouses and accordingly the auction sale of the property covered by TCT No. 473216 was scheduled by the Ex–Officio Sheriff on May 9, 1984.[5]

The instant complaint was filed to forestall the extrajudicial foreclosure sale of a piece of land covered by Transfer Certificate of Title (TCT) No. 473216[6] mortgaged by petitioner corporation in favor of First Summa Savings and Mortgage Bank which bank was later renamed as PAIC Savings and Mortgage Bank, Inc. [7] It likewise asked for the nullification of the Real Estate Mortgages it entered into with First Summa Savings and Mortgage Bank.  The supplemental complaint added several defendants who scheduled for public auction other real estate properties contained in the same real estate mortgages and covered by TCTs No. N-5510, No. 426872, No. 506346 and Original Certificate of Title No. 10146.[8]

Several extrajudicial foreclosures of the mortgaged properties were scheduled but were temporarily restrained by the RTC notwithstanding the denial[9] of petitioners’ prayer for a writ of preliminary injunction.  In an Order[10] dated 10 December 1990, the RTC ordered respondents-sheriffs to maintain the status quo and to desist from further proceeding with the extrajudicial foreclosure of the mortgaged properties.

Among the issues raised by petitioners at the RTC are whether or not First Summa Savings and Mortgage Bank and PAIC Savings and Mortgage Bank, Inc. are one and the same entity, and whether or not their obligation is already due and demandable at the time respondent bank commenced to extrajudicially foreclose petitioners’ properties in April 1984.

The RTC declared that First Summa Savings and Mortgage Bank and PAIC Savings and Mortgage Bank, Inc. are one and the same entity and that petitioner corporation is liable to respondent bank for the unpaid balance of its Industrial Guarantee Loan Fund (IGLF) loans.  The RTC further ruled that respondent bank was justified in extrajudicially foreclosing the real estate mortgages executed by petitioner corporation in its favor because the loans were already due and demandable when it commenced foreclosure proceedings in April 1984.

In its decision dated 06 July 1993, the RTC disposed of the case as follows:

Premises considered, judgment is hereby rendered dismissing the Complaint against Defendant Bank and ordering Plaintiffs to pay Defendant Bank jointly and severally, the following:

1.        The principal amount of P700,453.45 under P.N. No. 713 plus all the accrued interests, liquidated damages and other fees due thereon from March 18, 1983 until fully paid as provided in said PN;

2.        The principal amount of P749,879.38 under P.N. No. 841 plus all the accrued interests, liquidated damages and other fees due thereon from September 1, 1982 until fully paid as provided in such PN;

3.        The amount of P40,000.00 as actual damages;

4.        The amount of P30,000.00 as exemplary damages;

5.        The amount of P50,000.00 as attorney’s fees; plus

6.        Cost of suit.[11]

Petitioners filed a Motion for Reconsideration[12] which was opposed[13] by respondent bank.  The motion was denied in an Order dated 11 May 1994.

Petitioners appealed the decision to the Court of Appeals.  The latter affirmed in toto the decision of the lower court.  It also denied petitioners’ motion for reconsideration.

Hence, this appeal by certiorari.

Petitioners assigned the following as errors:

a.        PUBLIC RESPONDENT COURT GRAVELY ERRED WHEN IT SUSTAINED THE DISMISSAL OF PETITIONERS’ COMPLAINT AND IN AFFIRMING THE RIGHT OF THE RESPONDENT BANK TO COLLECT THE IGLF LOANS IN LIEU OF FIRST SUMMA SAVINGS AND MORTGAGE BANK WHICH ORIGINALLY GRANTED SAID LOANS.

COROLLARY TO THE ABOVE ARGUMENT, THE PUBLIC RESPONDENT COURT ALSO GRAVELY ERRED WHEN IT RULED THAT THE PETITIONERS CANNOT WITHHOLD THEIR PAYMENT TO THE RESPONDENT BANK NOTWITHSTANDING THE ADMITTED INABILITY OF THE RESPONDENT BANK TO FURNISH THE PETITIONERS THE SAID REQUESTED DOCUMENTS.

b.        PUBLIC RESPONDENT COURT GRAVELY ERRED WHEN IT SUSTAINED THE COLLECTION OF THE ENTIRE PROCEEDS OF THE IGLF LOANS OF P1,500,000.00 DESPITE THE FACT THAT THE P250,000.00 OF THIS LOAN WAS WITHHELD BY THE FIRST SUMMA SAVINGS AND MORTGAGE BANK TO BECOME PART OF THE COLLATERALS TO THE SAID P1,500,000.00 LOAN.

c.        PUBLIC RESPONDENT COURT GRAVELY ERRED WHEN IT SUSTAINED THE DAMAGES AWARDED TO THE RESPONDENT BANK DESPITE THE ABSENCE OF MALICE OR BAD FAITH ON THE PART OF THE PETITIONERS IN FILING THIS CASE AGAINST THE RESPONDENT BANK.

On the first assigned error, petitioners argue that they are legally justified to withhold their amortized payments to the respondent bank until such time they would have been properly notified of the change in the corporate name of First Summa Savings and Mortgage Bank.  They claim that they have never received any formal notice of the alleged change of corporate name of First Summa Savings and Mortgage Bank to PAIC Savings & Mortgage Bank, Inc.  They further claim that the only and first time they received formal evidence of a change in the corporate name of First Summa Savings and Mortgage Bank surfaced when respondent bank presented its witness, Michael Caguioa, on 03 April 1990, where he presented the Securities and Exchange Commission (SEC) Certificate of Filing of the Amended Articles of Incorporation of First Summa Savings and Mortgage Bank,[14] the Central Bank (CB) Certificate of Authority[15] to change the name of First Summa Savings and Mortgage Bank to PAIC Savings and Mortgage Bank, Inc., and the CB Circular Letter [16] dated 27 June 1983.

24

Their argument does not hold water.  Their defense that they should first be formally notified of the change of corporate name of First Summa Savings and Mortgage Bank to PAIC Savings and Mortgage Bank, Inc., before they will continue paying their loan obligations to respondent bank presupposes that there exists a requirement under a law or regulation ordering a bank that changes its corporate name to formally notify all its debtors.  After going over the Corporation Code and Banking Laws, as well as the regulations and circulars of both the SEC and the Bangko Sentral ng Pilipinas (BSP), we find that there is no such requirement.  This being the case, this Court cannot impose on a bank that changes its corporate name to notify a debtor of such change absent any law, circular or regulation requiring it.  Such act would be judicial legislation.  The formal notification is, therefore, discretionary on the bank.  Unless there is a law, regulation or circular from the SEC or BSP requiring the formal notification of all debtors of banks of any change in corporate name, such notification remains to be a mere internal policy that banks may or may not adopt.

In the case at bar, though there was no evidence showing that petitioners were furnished copies of official documents showing the First Summa Savings and Mortgage Bank’s change of corporate name to PAIC Savings and Mortgage Bank, Inc., evidence abound that they had notice or knowledge thereof.  Several documents establish this fact.  First, letter[17] dated 16 July 1983 signed by Raymundo V. Blanco, Accountant of petitioner corporation, addressed to PAIC Savings and Mortgage Bank, Inc.  Part of said letter reads: “In connection with your inquiry as to the utilization of funds we obtained from the former First Summa Savings and Mortgage Bank, . . .” Second, Board Resolution[18] of petitioner corporation signed by Pablo C. Javier, Sr. on 24 August 1983 authorizing him to execute a Chattel Mortgage over certain machinery in favor of PAIC Savings and Mortgage Bank, Inc.  Third, Secretary’s Certificate[19] signed by Fortunato E. Gabriel, Corporate Secretary of petitioner corporation, on 01 September 1983, certifying that a board resolution was passed authorizing Mr. Pablo C. Javier, Sr. to execute a chattel mortgage on the corporation’s equipment that will serve as collateral to cover the IGLF loan with PAIC Savings and Mortgage Bank, Inc.  Fourth, undated letter[20] signed by Pablo C. Javier, Sr.  and addressed to PAIC Savings and Mortgage Bank, Inc., authorizing Mr. Victor F. Javier, General Manager of petitioner corporation, to secure from PAIC Savings and Mortgage Bank, Inc. certain documents for his signature.

From the foregoing documents, it cannot be denied that petitioner corporation was aware of First Summa Savings and Mortgage Bank’s change of corporate name to PAIC Savings and Mortgage Bank, Inc.  Knowing fully well of such change, petitioner corporation has no valid reason not to pay because the IGLF loans were applied with and obtained from First Summa Savings and Mortgage Bank.  First Summa Savings and Mortgage Bank and PAIC Savings and Mortgage Bank, Inc., are one and the same bank to which petitioner corporation is indebted.  A change in the corporate name does not make a new corporation, whether effected by a special act or under a general law.  It has no effect on the identity of the corporation, or on its property, rights, or liabilities.[21] The corporation, upon such change in its name, is in no sense a new corporation, nor the successor of the original corporation.  It is the same corporation with a different name, and its character is in no respect changed.[22]

Anent the second assigned error, this Court rules that respondent court did not err when it sustained the collection of the entire proceeds of the IGLF loans amounting to P1,500,000.00 despite the withholding of P250,000.00 to become part of the collaterals to the said P1,500,000.00 IGLF loan.

Petitioners contend that the collaterals they submitted were more than sufficient to cover the P1,500,000.00 IGLF loan.  Such contention is untenable.  Petitioner corporation was required to place P250,000.00 in a time deposit with respondent bank for the simple reason that the collateral it put up was insufficient to cover the IGLF loans it has received.  It admitted the shortfall of its collateral when it authorized petitioner Pablo C. Javier, Sr., via a board resolution,[23] to execute a chattel mortgage over certain machinery in favor of PAIC Savings and Mortgage Bank, Inc. which was certified by its corporate secretary. [24] If the collateral it put up was sufficient, why then did it execute another chattel mortgage?

In his order dated 07 September 1984, Hon. Rafael T. Mendoza found that the loanable value of the lands, buildings, machinery and equipment amounted only to P934,000.00.  The order reads in part:

The terms and conditions of the IGLF loan extended to plaintiff corporation are governed by the loan and security documents evidencing said loan.  Although the loan agreement was approved by the defendant bank, the same has to be processed and be finally approved by the Central Bank of the Philippines, in pursuance to the

IGLF program, of which the defendant bank is an accredited participant.  The defendant had to await Central Bank’s advise (sic) regarding the final approval of the loan before the release of the proceeds thereof.  The proceeds of the loan was released to the plaintiff on 6 April and November 20, 1981, and the final proceeds was released only on November 20, 1981, on account of short fall in the collateral covered by the lands and buildings as well as the machineries and equipment then subject of the existing mortgages in favor of the defendant bank, having only a loanable value of P934,000.00, and only after a firm commitment made by plaintiff corporation to the defendant bank to correct the collateral deficiency thru the execution of a chattel mortgage on additional machineries, equipment and tools and thru the opening of a time deposit with PAIC Bank using a portion of the loan proceeds in the amount of P250,000.00 to answer for its obligation to the defendant bank under the IGLF loan was the final proceeds of the loan released in favor of the plaintiffs.  The delay in the release of the final proceeds of the IGLF loan was due to the aforestated collateral deficiency.[25]

As declared by the respondent court, the finding in said order was not disputed in the appeal before it.   It said that what was contained in petitioners’ brief was that “their loans were ‘overcollateralized,’ and fail to specify why or in what manner it was so.”[26] Having failed to raise this issue before the respondent court, petitioners thus cannot raise this issue before this Court.  Moreover, since the issue of whether or not the collateral put up by petitioners is sufficient is factual, the same is not proper for this Court’s consideration.   The basic rule is that factual questions are beyond the province of the Supreme Court in a petition for review.[27]

Petitioners maintain that to collect the P250,000.00 from them would be a clear case of unjust enrichment because they have not availed or used said amount for the same was unlawfully withheld from them.

We do not agree.  The fundamental doctrine of unjust enrichment is the transfer of value without just cause or consideration.  The elements of this doctrine are: enrichment on the part of the defendant; impoverishment on the part of the plaintiff; and lack of cause. The main objective is to prevent one to enrich himself at the expense of another.[28] It is commonly accepted that this doctrine simply means that a person shall not be allowed to profit or enrich himself inequitably at another's expense.[29] In the instant case, there is no unjust enrichment to speak of.  The amount of P225,905.79 was applied as payment for petitioner corporation’s loan which was taken from the P250,000.00, together with its accrued interest, that was placed in time deposit with First Summa Savings and Mortgage Bank.  The use of said amount as payment was approved by petitioner Pablo C. Javier, Sr. on 17 March 1983.[30] As further found by the RTC in its decision, the balance of the time deposit was withdrawn by petitioners.[31]

Petitioner corporation faults respondent bank, then known as First Summa Savings and Mortgage Bank, for requiring it to put up as additional collateral the amount of P250,000.00 inasmuch as the CB never required it to do so.  It added that respondent bank took advantage of its urgent and immediate need at the time for the proceeds of the IGLF loans that it had no choice but to comply with respondent bank’s requirement to put in time deposits the said amount as additional collateral.

We agree with respondent court that the questioning of the propriety of the placing of the P250,000.00 in time deposits[32] with respondent bank as additional collateral was belatedly made.  As above-discussed, the requirement to give additional collateral was warranted because the collateral petitioner corporation put up failed to cover its IGLF loans.  If petitioner corporation was really bent on questioning the reasonableness of putting up the aforementioned amount as additional collateral, it should have done immediately after it made the time deposits on 26 November 1981.  This, it did not do.  It questioned the placing of the time deposits only on 08 February 1984[33] or long after defendant bank had already demanded full payment of the loans, then amounting to P2,045,401.79 as of 22 November 1983.  It is too late in the day for petitioner corporation to question the placing of the P250,000.00 in time deposits after it failed to pay its loan obligations as scheduled, making them due and demandable, and after a  demand for full payment has been made.  We will not allow petitioner corporation to have one’s cake and eat it too.

As regards the payments made by petitioner corporation, respondent court has this to say:

The trial court held, based on plaintiffs’ own exhibits, that plaintiff[s] made the following payments:

On Promissory Note No. 713:

25

Date(Per PN Schedule)

Actual Date ofPayment

Amount

     July 6, 1981 August 3, 1981 P  28,125.00

October 6, 1981 October 28, 1981      28,836.13January 6, 1982 January 22, 1982       29,227.38

  March 17, 1983       225,905.79             TOTAL P  312,094.30

And on Promissory Note No. 841:

Date(Per PN Schedule)

Actual Date ofPayment

Amount

     February 20, 1982 April 13, 1982 P  28,569.30May 20, 1982 July 7, 1982      29,254.31August 20, 1982 August 31, 1982        36,795.44   TOTAL P   94,619.05

Plaintiff-appellant[s] does not dispute the finding, which is obvious from the foregoing summary, that plaintiff[s] stopped payments on March 17, 1983 on Promissory Note No. 713, and on August 31, 1982 on Promissory Note No. 841.

By simply looking at the amortization schedule attached to the two promissory notes, it is clear that plaintiff[s] already defaulted on its loan obligations when the defendant Bank gave notice of the foreclosure proceedings on April 28, 1984.  On amortization payments alone, plaintiff[s] should have paid a total of P459,339 as of  April 6, 1984 on Promissory [Note] No. 713, and a total of P328,173.00 as of February 20, 1984 on Promissory Note [No.] 841.  No extended computation is necessary to demonstrate that, even without imputing the liquidated damages equivalent to 2% a month on the delayed payments (see second paragraph of the promissory notes), the plaintiffs were grossly deficient in amortization payments, and already in default when the foreclosure proceedings were commenced.  Further, we note that under the terms of the promissory note, “failure to pay an installment when due shall entitle the bank or its assign to declare all the obligations as immediately due and payable” (second paragraph).[34]

As to the third assigned error, petitioners argue that there being no malice or bad faith on their part when they filed the instant case, no damages should have been awarded to respondent bank.

We cannot sustain such argument.  The presence of malice or bad faith is very evident in the case before us.  By the documents it executed, petitioner corporation was well aware that First Summa Savings and Mortgage Bank changed its corporate name to PAIC Savings and Mortgage Bank, Inc.  Despite knowledge that First Summa Savings and Mortgage Bank and PAIC Savings and Mortgage Bank, Inc., are one and the same entity, it pretended otherwise.  It used this purported ignorance as an excuse to renege on its obligation to pay its loans after they became due and after demands for payment were made, claiming that it never obtained the loans from respondent bank.

No good faith was shown by petitioner corporation.  If it were in good faith in complying with its loan obligations since it believed that respondent bank had no right to the payment, it should have made a valid consignation in court.  This, it did not do.  If petitioner corporation were at a loss as to who should receive the payment, it could have easily taken steps and inquired from the SEC, CB of the Philippines or from the bank itself from which it received the loans and to where it made previous payments.   Further, the fact that it was respondent bank that was demanding payment for loans already due and demandable and not First Summa Savings and Mortgage Bank is sufficient to make petitioner corporation wonder why this is so.  It never took any initiative to clear the matter.  Instead, it paid no attention to the valid demands of respondent bank.

The awarding of actual and compensatory damages, as well as attorney’s fees, is justified under the circumstances.  We quote with approval the reasons given by the RTC for the grant of the same:

Considering that Defendant Bank had been prevented at least four (4) times from foreclosing the mortgages (i.e., Temporary Restraining Orders of May 9 and 19 and October 22, 1984 and status quo order of December 10, 1990 enjoining the extrajudicial foreclosure sales of May 9 and 16 and October 23, 1984 and December 20, 1990, respectively), it is proper that Defendant Bank be reimbursed its actual expenses.  The amount of P40,000.00 is reasonable reimbursement for the publication and other expenses incurred in the four (4) extrajudicial foreclosures which were enjoined by the Court. Considering the wanton and reckless filing of this clearly unfounded and baseless legal action and the fact that Defendant Bank had to defend itself against such suit, attorney’s fees in the amount of P50,000.00 should be paid by the Plaintiffs to the Defendant Bank.  Defendant Bank failed to adduce indubitable proof on the moral and exemplary damages that it seeks.  Nevertheless, since such proof is not absolutely necessary and primarily as an example for the public good to deter others from filing a similar clearly unfounded legal action, Defendant Bank should be entitled to an award of exemplary damages.[35]

This Court finds that petitioners failed to comply with what is incumbent upon them – to pay their loans when they became due.  The lame excuse they belatedly advanced for their non-payment cannot and should not prevent respondent bank from exercising its right to foreclose the real estate mortgages executed in its favor.

WHEREFORE, premises considered, the Court of Appeals decision dated 31 January 1997 and its resolution dated 20 June 1997 are hereby AFFIRMED in toto.  Costs against petitioners.

SO ORDERED.

SECOND DIVISION

[G.R. No. 122174.  October 3, 2002]

INDUSTRIAL REFRACTORIES CORPORATION OF THE PHILIPPINES, petitioner, vs. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and REFRACTORIES CORPORATION OF THE PHILIPPINES, respondents.

D E C I S I O N

AUSTRIA-MARTINEZ, J.:

Filed before us is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the Decision of the Court of Appeals in CA-G.R. SP No. 35056, denying due course and dismissing the petition filed by Industrial Refractories Corp. of the Philippines (IRCP).

Respondent Refractories Corporation of the Philippines (RCP) is a corporation duly organized on October 13, 1976 for the purpose of engaging in the business of manufacturing, producing, selling, exporting and otherwise dealing in any and all refractory bricks, its by-products and derivatives.  On June 22, 1977, it registered its corporate and business name with the Bureau of Domestic Trade.

Petitioner IRCP on the other hand, was incorporated on August 23, 1979 originally under the name “Synclaire Manufacturing Corporation”.  It amended its Articles of Incorporation on August 23, 1985 to change its corporate name to “Industrial Refractories Corp. of the Philippines”.  It is engaged in the business of manufacturing all kinds of ceramics and other products, except paints and zincs.

26

Both companies are the only local suppliers of monolithic gunning mix.[1]

Discovering that petitioner was using such corporate name, respondent RCP filed on April 14, 1988 with the Securities and Exchange Commission (SEC) a petition to compel petitioner to change its corporate name on the ground that its corporate name is confusingly similar with that of petitioner’s such that the public may be confused or deceived into believing that they are one and the same corporation.[2]

The SEC decided in favor of respondent RCP and rendered judgment on July 23, 1993 with the following dispositive portion:

“WHEREFORE, judgment is hereby rendered in favor of the petitioner and against the respondent declaring the latter’s corporate name ‘Industrial Refractories Corporation of the Philippines’ as deceptively and confusingly similar to that of petitioner’s corporate name ‘Refractories Corporation of the Philippines’.  Accordingly, respondent is hereby directed to amend its Articles of Incorporation by deleting the name ‘Refractories Corporation of the Philippines’ in its corporate name within thirty (30) days from finality of this Decision.  Likewise, respondent is hereby ordered to pay the petitioner the sum of P50,000.00 as attorney’s fees.”[3]

Petitioner appealed to the SEC En Banc, arguing that it does not have any jurisdiction over the case, and that respondent RCP has no right to the exclusive use of its corporate name as it is composed of generic or common words.[4]

In its Decision dated July 23, 1993, the SEC En Banc modified the appealed decision in that petitioner was ordered to delete or drop from its corporate name only the word “Refractories”.[5]

Petitioner IRCP elevated the decision of the SEC En Banc through a petition for review on certiorari to the Court of Appeals which then rendered the herein assailed decision.  The appellate court upheld the jurisdiction of the SEC over the case and ruled that the corporate names of petitioner IRCP and respondent RCP are confusingly or deceptively similar, and that respondent RCP has established its prior right to use the word “Refractories” as its corporate name.[6] The appellate court also found that the petition was filed beyond the reglementary period.[7]

Hence, herein petition which we must deny.

Petitioner contends that the petition before the Court of Appeals was timely filed.  It must be noted that at the time the SEC En Banc rendered its decision on May 10, 1994, the governing rule on appeals from quasi-judicial agencies like the SEC was Supreme Court Circular No. 1-91.  As provided therein, the remedy should have been a petition for review filed before the Court of Appeals within fifteen (15) days from notice, raising questions of fact, of law, or mixed questions of fact and law. [8] A motion for reconsideration suspends the running of the period.[9]

In the case at bench, there is a discrepancy between the dates provided by petitioner and respondent.  Petitioner alleges the following dates of receipt and filing:[10]

June 10, 1994           Receipt of SEC’s Decision dated May 10, 1994June 20, 1994           Filing of Motion for Reconsideration

September 1, 1994   Receipt of SEC’s  Order dated August 3, 1994 denying petitioner’s motion for reconsideration

September 2, 1994   Filing of Motion for extension of timeSeptember 6, 1994   Filing of Petition

Respondent RCP, however, asserts that the foregoing dates are incorrect as the certifications issued by the SEC show that petitioner received the SEC’s Decision dated May 10, 1994 on June 9, 1994, filed the motion for reconsideration via registered mail on June 25, 1994, and received the Order dated August 3, 1994 on August 15, 1994.[11] Thus, the petition was filed twenty-one (21) days beyond the reglementary period provided in Supreme Court Circular No. 1-91.[12]

If reckoned from the dates supplied by petitioner, then the petition was timely filed.  On the other hand, if reckoned from the dates provided by respondent RCP, then it was filed way beyond the reglementary period.   On this score, we agree with the appellate court’s finding that petitioner failed to rebut respondent RCP’s allegations of material dates of receipt and filing.[13] In addition, the certifications were executed by the SEC officials based on their official records[14] which enjoy the presumption of regularity.[15] As such, these are prima facie evidence of the facts stated therein.[16] And based on such dates, there is no question that the petition was filed with the Court of Appeals beyond the fifteen (15) day period.  On this ground alone, the instant petition should be denied as the SEC En Banc’s decision had already attained finality and the SEC’s findings of fact, when supported by substantial evidence, is final.[17]

Nevertheless, to set the matters at rest, we shall delve into the other issues posed by petitioner.

Petitioner’s arguments, substantially, are as follows: (1) jurisdiction is vested with the regular courts as the present case is not one of the instances provided in P.D. 902-A; (2) respondent RCP is not entitled to use the generic name “refractories”; (3) there is no confusing similarity between their corporate names; and (4) there is no basis for the award of attorney’s fees.[18]

Petitioner’s argument on the SEC’s jurisdiction over the case is utterly myopic.  The jurisdiction of the SEC is not merely confined to the adjudicative functions provided in Section 5 of P.D. 902-A, as amended. [19] By express mandate, it has absolute jurisdiction, supervision and control over all corporations. [20] It also exercises regulatory and administrative powers to implement and enforce the Corporation Code,[21] one of which is Section 18, which provides:

“SEC. 18. Corporate name. --  No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws.  When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name.”

It is the SEC’s duty to prevent confusion in the use of corporate names not only for the protection of the corporations involved but more so for the protection of the public, and it has authority to de-register at all times and under all circumstances corporate names which in its estimation are likely to generate confusion. [22] Clearly therefore, the present case falls within the ambit of the SEC’s regulatory powers.[23]

Likewise untenable is petitioner’s argument that there is no confusing or deceptive similarity between petitioner and respondent RCP’s corporate names.  Section 18 of the Corporation Code expressly prohibits the use of a corporate name which is “identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws”.  The policy behind the foregoing prohibition is to avoid fraud upon the public that will have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporation.[24]

Pursuant thereto, the Revised Guidelines in the Approval of Corporate and Partnership Names[25] specifically requires that: (1) a corporate name shall not be identical, misleading or confusingly similar to one already registered by another corporation with the Commission; [26] and (2) if the proposed name is similar to the name of a registered firm, the proposed name must contain at least one distinctive word different from the name of the company already registered.[27]

As held in Philips Export B.V. vs. Court of Appeals,[28] to fall within the prohibition of the law, two requisites must be proven, to wit:

(1)            that the complainant corporation acquired a prior right over the use of such corporate name;

and

27

(2)            the proposed name is either: (a) identical, or (b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or (c) patently deceptive, confusing or contrary to existing law.

As regards the first requisite, it has been held that the right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption.[29] In this case, respondent RCP was incorporated on October 13, 1976 and since then has been using the corporate name “Refractories Corp. of the Philippines”.  Meanwhile, petitioner was incorporated on August 23, 1979 originally under the name “Synclaire Manufacturing Corporation”.  It only started using the name “Industrial Refractories Corp. of the Philippines” when it amended its Articles of Incorporation on August 23, 1985, or nine (9) years after respondent RCP started using its name.  Thus, being the prior registrant, respondent RCP has acquired the right to use the word “Refractories” as part of its corporate name.

Anent the second requisite, in determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person using ordinary care and discrimination and the Court must look to the record as well as the names themselves. [30] Petitioner’s corporate name is “Industrial Refractories Corp. of the Phils.”, while respondent’s is “Refractories Corp. of the Phils.”   Obviously, both names contain the identical words “Refractories”, “Corporation” and “Philippines”.  The only word that distinguishes petitioner from respondent RCP is the word “Industrial” which merely identifies a corporation’s general field of activities or operations.  We need not linger on these two corporate names to conclude that they are patently similar that even with reasonable care and observation, confusion might arise. [31] It must be noted that both cater to the same clientele, i.e.¸ the steel industry.  In fact, the SEC found that there were instances when different steel companies were actually confused between the two, especially since they also have similar product packaging.[32] Such findings are accorded not only great respect but even finality, and are binding upon this Court, unless it is shown that it had arbitrarily disregarded or misapprehended evidence before it to such an extent as to compel a contrary conclusion had such evidence been properly appreciated.  [33] And even without such proof of actual confusion between the two corporate names, it suffices that confusion is probable or likely to occur.[34]

Refractory materials are described as follows:

“Refractories are structural materials used at high temperatures to [sic] industrial furnaces. They are supplied mainly in the form of brick of standard sizes and of special shapes. Refractories also include refractory cements, bonding mortars, plastic firebrick, castables, ramming mixtures, and other bulk materials such as dead-burned grain magneside, chrome or ground ganister and special clay.”[35]

While the word “refractories” is a generic term, its usage is not widespread and is limited merely to the industry/trade in which it is used, and its continuous use by respondent RCP for a considerable period has made the term so closely identified with it.  [36] Moreover, as held in the case of Ang Kaanib sa Iglesia ng Dios kay Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesia ng Dios kay Cristo Jesus, Haligi at Suhay ng Katotohanan, petitioner’s appropriation of respondent's corporate name cannot find justification under the generic word rule. [37] A contrary ruling would encourage other corporations to adopt verbatim and register an existing and protected corporate name, to the detriment of the public.[38]

Finally, we find the award of P50,000.00 as attorney's fees to be fair and reasonable. Article 2208 of the Civil Code allows the award of such fees when its claimant is compelled to litigate with third persons or to incur expenses to protect its just and valid claim.  In this case, despite its undertaking to change its corporate name in case another firm has acquired a prior right to use such name,[39] it refused to do so, thus compelling respondent to undergo litigation and incur expenses to protect its corporate name.

WHEREFORE, the instant petition for review on certiorari is hereby DENIED for lack of merit.

Costs against petitioner.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs.THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner, vs.COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES and CONSTANCIO MAGLANA,respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.

Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

Leonardo B. Lucena for Constancio Maglana.

 

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV No. 66195 which modified the decision of the then Court of First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No. 84197) was dismissed but in all other respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to pay plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees from July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary damages.

It is found in the records that the cross party plaintiffs incurred additional miscellaneous expenses aside from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim is further required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half, the amount of Pl84,878.74 with interest from the filing of the

28

cross-complaints until the amount is fully paid; plus moral and exemplary damages in the amount of P184,878.84 with interest from the filing of the cross-complaints until the amount is fully paid; plus moral and exemplary damages in the amount of P50,000.00 for each of the two Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and another P20,000.00 to Constancio B. Maglana as attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is required to indemnify the defendants Bormaheco and the Cervanteses the amount of P20,000.00 as attorney's fees and the amount of P4,379.21, per year from 1966 with legal rate of interest up to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00 as attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action was filed in good faith. The fact that the properties of the Bormaheco and the Cervanteses were attached and that they were required to file a counterbond in order to dissolve the attachment, is not an act of bad faith. When a man tries to protect his rights, he should not be saddled with moral or exemplary damages. Furthermore, the rights exercised were provided for in the Rules of Court, and it was the court that ordered it, in the exercise of its discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-party defendant, for it only secured the attachment prayed for by the plaintiff Pioneer. If an insurance company would be liable for damages in performing an act which is clearly within its power and which is the reason for its being, then nobody would engage in the insurance business. No further claim or counter-claim for or against anybody is declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-operator of Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary spare parts for the total agreed price of US $109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July 18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions) contributed some funds used in the purchase of the above aircrafts and spare parts. The funds were supposed to be their contributions to a new corporation proposed by Lim to expand his airline business. They executed two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements stipulated that the indemnitors

principally agree and bind themselves jointly and severally to indemnify and hold and save harmless Pioneer from and against any/all damages, losses, costs, damages, taxes, penalties, charges and expenses of whatever kind and nature which Pioneer may incur in consequence of having become surety upon the bond/note and to pay, reimburse and make good to Pioneer, its successors and assigns, all sums and amounts of money which it or its representatives should or may pay or cause to be paid or become liable to pay on them of whatever kind and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the former. It was stipulated therein that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit D) was duly registered with the Office of the Register of Deeds of the City of Manila and with the Civil Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety. Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary attachment against Lim and respondents, the Cervanteses, Bormaheco and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they were not privies to the contracts signed by Lim and, by way of counterclaim, sought for damages for being exposed to litigation and for recovery of the sums of money they advanced to Lim for the purchase of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint against all the defendants was dismissed. In all other respects the trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its risk of liability under the surety bond in favor of JDA and subsequently collected the proceeds of such reinsurance in the sum of P295,000.00. Defendants' alleged obligation to Pioneer amounts to P295,000.00, hence, plaintiffs instant action for the recovery of the

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amount of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is not the real party in interest to institute the instant action as it does not stand to be benefited or injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from defendants, hence, it instituted the action is utterly devoid of merit. Plaintiff did not even present any evidence that it is the attorney-in-fact of the reinsurance company, authorized to institute an action for and in behalf of the latter. To qualify a person to be a real party in interest in whose name an action must be prosecuted, he must appear to be the present real owner of the right sought to be enforced (Moran, Vol. I, Comments on the Rules of Court, 1979 ed., p. 155). It has been held that the real party in interest is the party who would be benefited or injured by the judgment or the party entitled to the avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a present substantial interest as distinguished from a mere expectancy or a future, contingent, subordinate or consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in interest as it has already been paid by the reinsurer the sum of P295,000.00 — the bulk of defendants' alleged obligation to Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its reinsurer, the former was able to foreclose extra-judicially one of the subject airplanes and its spare engine, realizing the total amount of P37,050.00 from the sale of the mortgaged chattels. Adding the sum of P37,050.00, to the proceeds of the reinsurance amounting to P295,000.00, it is patent that plaintiff has been overpaid in the amount of P33,383.72 considering that the total amount it had paid to JDA totals to only P298,666.28. To allow plaintiff Pioneer to recover from defendants the amount in excess of P298,666.28 would be tantamount to unjust enrichment as it has already been paid by the reinsurance company of the amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled is the rule that no person should unjustly enrich himself at the expense of another (Article 22, New Civil Code). (Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner was paid by its reinsurer in the aforesaid amount, as this matter has never been raised by any of the parties herein both in their answers in the court below and in their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the respondents had any interest in the matter since the reinsurance is strictly between the petitioner and the re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity agreements, the petitioner is entitled to recover from respondents Bormaheco and Maglana; and (4) the principle of unjust enrichment is not applicable considering that whatever amount he would recover from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money was never raised by the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:

xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so much of its obligations to JDA as has been paid with reinsurance money?

2. If the answer to the preceding question is in the negative, has Pioneer still any claim against defendants, considering the amount it has realized from the sale of the mortgaged properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed in favor of JDA, collected the proceeds of such reinsurance in the sum of P295,000, and paid with the said amount the bulk of its alleged liability to JDA under the said surety bond, it is plain that on this score it no longer has any right to collect to the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants for the amount paid to it by the reinsurers, notwithstanding that the cause of action pertains to the latter, Pioneer says: The reinsurers opted instead that the Pioneer Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer Insurance & Surety Corporation is representing the reinsurers to recover the amount.' In other words, insofar as the amount paid to it by the reinsurers Pioneer is suing defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint that Pioneer is suing as attorney-in- fact of the reinsurers for any amount. Lastly, and most important of all, Pioneer has no right to institute and maintain in its own name an action for the benefit of the reinsurers. It is well-settled that an action brought by an attorney-in-fact in his own name instead of that of the principal will not prosper, and this is so even where the name of the principal is disclosed in the complaint.

Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be prosecuted in the name of the real party in interest.' This provision is mandatory. The real party in interest is the party who would be benefitted or injured by the judgment or is the party entitled to the avails of the suit.

This Court has held in various cases that an attorney-in-fact is not a real party in interest, that there is no law permitting an action to be brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968, 23 SCRA 706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected P295,000.00 from the reinsurers, the uninsured portion of what it paid to JDA is the difference between the two amounts, or P3,666.28. This is the amount for which Pioneer may sue defendants, assuming that the indemnity agreement is still valid and effective. But since the amount realized from the sale of the mortgaged chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has no more claim against defendants. (Record on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering this admitted payment, the only issue that cropped up was the effect of payment made by the reinsurers to the petitioner. Therefore, the petitioner's argument that the respondents had no interest in the reinsurance contract as

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this is strictly between the petitioner as insured and the reinsuring company pursuant to Section 91 (should be Section 98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are acquired in similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).

The rules of practice in actions on original insurance policies are in general applicable to actions or contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v. Court of Appeals(154 SCRA 650 [1987]):

Note that if a property is insured and the owner receives the indemnity from the insurer, it is provided in said article that the insurer is deemed subrogated to the rights of the insured against the wrongdoer and if the amount paid by the insurer does not fully cover the loss, then the aggrieved party is the one entitled to recover the deficiency. Evidently, under this legal provision, the real party in interest with regard to the portion of the indemnity paid is the insurer and not the insured. (Emphasis supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint as against the respondents for the reason that the petitioner was not the real party in interest in the complaint and, therefore, has no cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have been dismissed on the premise that the evidence on record shows that it is entitled to recover from the counter indemnitors. It does not, however, cite any grounds except its allegation that respondent "Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its finding that the counter-indemnitors are not liable to the petitioner. The trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to be valid and effective after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to issue the bond provided that the same would be mortgaged to it, but this was not possible because the planes were still in Japan and could not be mortgaged here in the Philippines. As soon as the aircrafts were brought to the Philippines, they would be mortgaged to Pioneer Insurance to cover the bond, and this indemnity agreement would be cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties have impaired and rendered insufficient the security under the chattel mortgage and there is thus no other sufficient security for the claim sought to be enforced by this action.

This is judicial admission and aside from the chattel mortgage there is no other security for the claim sought to be enforced by this action, which necessarily means that the indemnity agreement had ceased to have any force and effect at the time this action was instituted. Sec 2, Rule 129, Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes and spare parts, no longer has any further action against the defendants as indemnitors to recover any unpaid balance of the price. The indemnity agreement was ipso jure extinguished upon the foreclosure of the chattel mortgage. These defendants, as indemnitors, would be entitled to be subrogated to the right of Pioneer should they make payments to the latter. Articles 2067 and 2080 of the New Civil Code of the Philippines.

Independently of the preceding proposition Pioneer's election of the remedy of foreclosure precludes any further action to recover any unpaid balance of the price.

SAL or Lim, having failed to pay the second to the eight and last installments to JDA and Pioneer as surety having made of the payments to JDA, the alternative remedies open to Pioneer were as provided in Article 1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial foreclosure and the instant suit. Such being the case, as provided by the aforementioned provisions, Pioneer shall have no further action against the purchaser to recover any unpaid balance and any agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through the contention that Pioneer is not the vendor but JDA. The reason is that Pioneer is actually exercising the rights of JDA as vendor, having subrogated it in such rights. Nor may the application of the provision be validly opposed on the ground that these defendants and defendant Maglana are not the vendee but indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates discharged these defendants from any liability as alleged indemnitors. The change of the maturity dates of the obligations of Lim, or SAL extinguish the original obligations thru novations thus discharging the indemnitors.

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The principal hereof shall be paid in eight equal successive three months interval installments, the first of which shall be due and payable 25 August 1965, the remainder of which ... shall be due and payable on the 26th day x x x of each succeeding three months and the last of which shall be due and payable 26th May 1967.

However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim and JDA, modifying the maturity dates of the obligations, as follows:

The principal hereof shall be paid in eight equal successive three month interval installments the first of which shall be due and payable 4 September 1965, the remainder of which ... shall be due and payable on the 4th day ... of each succeeding months and the last of which shall be due and payable 4th June 1967.

Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates different from that fixed in the aforesaid memorandum; the due date of the first installment appears as October 15, 1965, and those of the rest of the installments, the 15th of each succeeding three months, that of the last installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates, effected twice, were done without the knowledge, much less, would have it believed that these defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it believed that these defendants and defendant Maglana knew of and consented to the modification of the obligations. But if that were so, there would have been the corresponding documents in the form of a written notice to as well as written conformity of these defendants, and there are no such document. The consequence of this was the extinguishment of the obligations and of the surety bond secured by the indemnity agreement which was thereby also extinguished. Applicable by analogy are the rulings of the Supreme Court in the case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty The mere failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension time referred to herein, (New Civil Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same. Consequently, Pioneer has no more cause of action to recover from these defendants, as supposed indemnitors, what it has paid to JDA. By virtue of an express stipulation in the surety bond, the failure of JDA to present its claim to Pioneer within ten days from default of Lim or SAL on every installment, released Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees from Pioneer and its surety by reason of the filing of the instant case against them and the attachment and garnishment of their properties. The instant action is clearly unfounded insofar as plaintiff drags these defendants and defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose agreement was to do business through the corporate vehicle but who failed to incorporate the entity in which they had chosen to invest? How are the losses to be treated in situations where their contributions to the intended 'corporation' were invested not through the corporate form? This Petition presents these fundamental questions which we believe were resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim to incorporate, a de facto partnership among them was created, and that as a consequence of such relationship all must share in the losses and/or gains of the venture in proportion to their contribution. The petitioner, therefore, questions the appellate court's findings ordering him to reimburse certain amounts given by the respondents to the petitioner as their contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the total amount of P184,878.74 as correctly found by the trial court, with interest from the filing of the cross-complaints until the amount is fully paid. Defendant Lim should pay one-half of the said amount to Bormaheco and the Cervanteses and the other one-half to defendant Maglana. It is established in the records that defendant Lim had duly received the amount of Pl51,000.00 from defendants Bormaheco and Maglana representing the latter's participation in the ownership of the subject airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred additional expenses, hence, the total sum of P 184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the stockholders in a defectively incorporated association should be governed by the supposed charter and the laws of the state relating thereto and not by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt, but fail, to form a corporation and who carry on business under the corporate name occupy the position of partners inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate themselves together under articles to purchase property to carry on a business, and their organization is so defective

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as to come short of creating a corporation within the statute, they become in legal effect partners inter se, and their rights as members of the company to the property acquired by the company will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where certain persons associated themselves as a corporation for the development of land for irrigation purposes, and each conveyed land to the corporation, and two of them contracted to pay a third the difference in the proportionate value of the land conveyed by him, and no stock was ever issued in the corporation, it was treated as a trustee for the associates in an action between them for an accounting, and its capital stock was treated as partnership assets, sold, and the proceeds distributed among them in proportion to the value of the property contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist, for ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their purpose is that no partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it should be implied only when necessary to do justice between the parties; thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other subscribers who engage in business under the name of the pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership and contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between certain stockholders and other stockholders, who were also directors, will not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear during the pretrial despite notification. In his answer, the petitioner denied having received any amount from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the appellate court, however, found through Exhibit 58, that the petitioner received the amount of P151,000.00 representing the participation of Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes and spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with the respondents despite his representations to them. This gives credence to the cross-claims of the respondents to the effect that they were induced and lured by the petitioner to make contributions to a proposed corporation which was never formed because the petitioner reneged on their agreement. Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to expand his airline business. Lim was to procure two DC-3's from Japan and secure the necessary certificates of public convenience and necessity as well as the required permits for the operation thereof. Maglana sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery to Lim which Cervantes did and Lim acknowledged receipt thereof. Cervantes, likewise, delivered his share of the undertaking. Lim in an undertaking sometime on or about August 9,1965, promised to incorporate his airline in accordance with their agreement and proceeded to acquire the planes on his own account. Since then up to the filing of this answer, Lim has refused, failed and still refuses to set up the corporation or return the money of Maglana. (Record on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering defendants to purchase two airplanes and spare parts from Japan which the latter considered as their lawful contribution and participation in the proposed corporation to be known as SAL. Arrangements and negotiations were undertaken by defendant Lim. Down payments were

advanced by defendants Bormaheco and the Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to the agreement among the defendants, defendant Lim in connivance with the plaintiff, signed and executed the alleged chattel mortgage and surety bond agreement in his personal capacity as the alleged proprietor of the SAL. The answering defendants learned for the first time of this trickery and misrepresentation of the other, Jacob Lim, when the herein plaintiff chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them to file an adverse claim in the form of third party claim. Notwithstanding repeated oral demands made by defendants Bormaheco and Cervanteses, to defendant Lim, to surrender the possession of the two planes and their accessories and or return the amount advanced by the former amounting to an aggregate sum of P 178,997.14 as evidenced by a statement of accounts, the latter ignored, omitted and refused to comply with them. (Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto partnership was created among the parties which would entitle the petitioner to a reimbursement of the supposed losses of the proposed corporation. The record shows that the petitioner was acting on his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-28113               March 28, 1969

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

L. Amores and R. Gonzales for petitioners. Jose W. Diokno for respondents.

CASTRO, J.:

            The petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur, while the respondent Pangandapun Bonito is the mayor, and the rest of the respondents are the councilors, of the municipality of Balabagan of the same province. Balabagan was formerly a part of the municipality of Malabang, having been created on March 15, 1960, by Executive Order 386 of the then President Carlos P. Garcia, out of barrios and sitios 1 of the latter municipality.

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            The petitioners brought this action for prohibition to nullify Executive Order 386 and to restrain the respondent municipal officials from performing the functions of their respective office relying on the ruling of this Court in Pelaez v. Auditor General 2 and Municipality of San Joaquin v. Siva. 3

            In Pelaez this Court, through Mr. Justice (now Chief Justice) Concepcion, ruled: (1) that section 23 of Republic Act 2370 [Barrio Charter Act, approved January 1, 1960], by vesting the power to create barrios in the provincial board, is a "statutory denial of the presidential authority to create a new barrio [and] implies a negation of the bigger power to create municipalities," and (2) that section 68 of the Administrative Code, insofar as it gives the President the power to create municipalities, is unconstitutional (a) because it constitutes an undue delegation of legislative power and (b) because it offends against section 10 (1) of article VII of the Constitution, which limits the President's power over local governments to mere supervision. As this Court summed up its discussion: "In short, even if it did not entail an undue delegation of legislative powers, as it certainly does, said section 68, as part of the Revised Administrative Code, approved on March 10, 1917, must be deemed repealed by the subsequent adoption of the Constitution, in 1935, which is utterly incompatible and inconsistent with said statutory enactment."

            On the other hand, the respondents, while admitting the facts alleged in the petition, nevertheless argue that the rule announced in Pelaez can have no application in this case because unlike the municipalities involved in Pelaez, the municipality of Balabagan is at least a de facto corporation, having been organized under color of a statute before this was declared unconstitutional, its officers having been either elected or appointed, and the municipality itself having discharged its corporate functions for the past five years preceding the institution of this action. It is contended that as a de facto corporation, its existence cannot be collaterally attacked, although it may be inquired into directly in an action for quo warranto at the instance of the State and not of an individual like the petitioner Balindong.

            It is indeed true that, generally, an inquiry into the legal existence of a municipality is reserved to the State in a proceeding for quo warranto or other direct proceeding, and that only in a few exceptions may a private person exercise this function of government. 4 But the rule disallowing collateral attacks applies only where the municipal corporation is at least a de facto corporations. 5 For where it is neither a corporation de jure nor de facto, but a nullity, the rule is that its existence may be, questioned collaterally or directly in any action or proceeding by any one whose rights or interests ate affected thereby, including the citizens of the territory incorporated unless they are estopped by their conduct from doing so. 6

            And so the threshold question is whether the municipality of Balabagan is a de facto corporation. As earlier stated, the claim that it is rests on the fact that it was organized before the promulgation of this Court's decision inPelaez. 7

            Accordingly, we address ourselves to the question whether a statute can lend color of validity to an attempted organization of a municipality despite the fact that such statute is subsequently declared unconstitutional.lawphi1.ñet

            This has been a litigiously prolific question, sharply dividing courts in the United States. Thus, some hold that a de facto corporation cannot exist where the statute or charter creating it is unconstitutional because there can be no de facto corporation where there can be no de jure one, 8 while others hold otherwise on the theory that a statute is binding until it is condemned as unconstitutional. 9

            An early article in the Yale Law Journal offers the following analysis:

            It appears that the true basis for denying to the corporation a de facto status lay in the absence of any legislative act to give vitality to its creation. An examination of the cases holding, some of them unreservedly, that a de facto office or municipal corporation can exist under color of an unconstitutional statute will reveal that in no instance did the invalid act give life to the corporation,

but that either in other valid acts or in the constitution itself the office or the corporation was potentially created....

            The principle that color of title under an unconstitutional statute can exist only where there is some other valid law under which the organization may be effected, or at least an authority in potentia by the state constitution, has its counterpart in the negative propositions that there can be no color of authority in an unconstitutional statute that plainly so appears on its face or that attempts to authorize the ousting of a de jure or de facto municipal corporation upon the same territory; in the one case the fact would imply the imputation of bad faith, in the other the new organization must be regarded as a mere usurper....

            As a result of this analysis of the cases the following principles may be deduced which seem to reconcile the apparently conflicting decisions:

I. The color of authority requisite to the organization of a de facto municipal corporation may be:

1. A valid law enacted by the legislature.

2. An unconstitutional law, valid on its face, which has either (a) been upheld for a time by the courts or (b) not yet been declared void; provided that a warrant for its creation can be found in some other valid law or in the recognition of its potential existence by the general laws or constitution of the state.

II. There can be no de facto municipal corporation unless either directly or potentially, such a de jurecorporation is authorized by some legislative fiat.

III. There can be no color of authority in an unconstitutional statute alone, the invalidity of which is apparent on its face.

            IV. There can be no de facto corporation created to take the place of an existing de jure corporation, as such organization would clearly be a usurper.10

            In the cases where a de facto municipal corporation was recognized as such despite the fact that the statute creating it was later invalidated, the decisions could fairly be made to rest on the consideration that there was some other valid law giving corporate vitality to the organization. Hence, in the case at bar, the mere fact that Balabagan was organized at a time when the statute had not been invalidated cannot conceivably make it a de facto corporation, as, independently of the Administrative Code provision in question, there is no other valid statute to give color of authority to its creation. Indeed, in Municipality of San Joaquin v. Siva, 11 this Court granted a similar petition for prohibition and nullified an executive order creating the municipality of Lawigan in Iloilo on the basis of the Pelaez ruling, despite the fact that the municipality was created in 1961, before section 68 of the Administrative Code, under which the President had acted, was invalidated. 'Of course the issue of de factomunicipal corporation did not arise in that case.

            In Norton v. Shelby Count, 12 Mr. Justice Field said: "An unconstitutional act is not a law; it confers no rights; it imposes no duties; it affords no protection; it creates no office; it is, in legal contemplation, as inoperative as though it had never been passed." Accordingly, he held that bonds issued by a board of commissioners created under an invalid statute were unenforceable.

34

            Executive Order 386 "created no office." This is not to say, however, that the acts done by the municipality of Balabagan in the exercise of its corporate powers are a nullity because the executive order "is, in legal contemplation, as inoperative as though it had never been passed." For the existence of Executive, Order 386 is "an operative fact which cannot justly be ignored." As Chief Justice Hughes explained in Chicot County Drainage District v. Baxter State Bank: 13

            The courts below have proceeded on the theory that the Act of Congress, having been found to be unconstitutional, was not a law; that it was inoperative, conferring no rights and imposing no duties, and hence affording no basis for the challenged decree. Norton v. Shelby County, 118 U.S. 425, 442; Chicago, I. & L. Ry. Co. v. Hackett, 228 U.S. 559, 566. It is quite clear, however, that such broad statements as to the effect of a determination of unconstitutionality must be taken with qualifications. The actual existence of a statute, prior to such a determination, is an operative fact and may have consequences which cannot justly be ignored. The past cannot always be erased by a new judicial declaration. The effect of the subsequent ruling as to invalidity may have to be considered in various aspects — with respect to particular relations, individual and corporate, and particular conduct, private and official. Questions of rights claimed to have become vested, of status of prior determinations deemed to have finality and acted upon accordingly, of public policy in the light of the nature both of the statute and of its previous application, demand examination. These questions are among the most difficult of those which have engaged the attention of courts, state and federal, and it is manifest from numerous decisions that an all-inclusive statement of a principle of absolute retroactive invalidity cannot be justified.

            There is then no basis for the respondents' apprehension that the invalidation of the executive order creating Balabagan would have the effect of unsettling many an act done in reliance upon the validity of the creation of that municipality. 14

            ACCORDINGLY, the petition is granted, Executive Order 386 is declared void, and the respondents are hereby permanently restrained from performing the duties and functions of their respective offices. No pronouncement as to costs.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-28113               March 28, 1969

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

L. Amores and R. Gonzales for petitioners. Jose W. Diokno for respondents.

CASTRO, J.:

            The petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur, while the respondent Pangandapun Bonito is the mayor, and the rest of the respondents are the councilors, of the municipality of

Balabagan of the same province. Balabagan was formerly a part of the municipality of Malabang, having been created on March 15, 1960, by Executive Order 386 of the then President Carlos P. Garcia, out of barrios and sitios 1 of the latter municipality.

            The petitioners brought this action for prohibition to nullify Executive Order 386 and to restrain the respondent municipal officials from performing the functions of their respective office relying on the ruling of this Court in Pelaez v. Auditor General 2 and Municipality of San Joaquin v. Siva. 3

            In Pelaez this Court, through Mr. Justice (now Chief Justice) Concepcion, ruled: (1) that section 23 of Republic Act 2370 [Barrio Charter Act, approved January 1, 1960], by vesting the power to create barrios in the provincial board, is a "statutory denial of the presidential authority to create a new barrio [and] implies a negation of the bigger power to create municipalities," and (2) that section 68 of the Administrative Code, insofar as it gives the President the power to create municipalities, is unconstitutional (a) because it constitutes an undue delegation of legislative power and (b) because it offends against section 10 (1) of article VII of the Constitution, which limits the President's power over local governments to mere supervision. As this Court summed up its discussion: "In short, even if it did not entail an undue delegation of legislative powers, as it certainly does, said section 68, as part of the Revised Administrative Code, approved on March 10, 1917, must be deemed repealed by the subsequent adoption of the Constitution, in 1935, which is utterly incompatible and inconsistent with said statutory enactment."

            On the other hand, the respondents, while admitting the facts alleged in the petition, nevertheless argue that the rule announced in Pelaez can have no application in this case because unlike the municipalities involved in Pelaez, the municipality of Balabagan is at least a de facto corporation, having been organized under color of a statute before this was declared unconstitutional, its officers having been either elected or appointed, and the municipality itself having discharged its corporate functions for the past five years preceding the institution of this action. It is contended that as a de facto corporation, its existence cannot be collaterally attacked, although it may be inquired into directly in an action for quo warranto at the instance of the State and not of an individual like the petitioner Balindong.

            It is indeed true that, generally, an inquiry into the legal existence of a municipality is reserved to the State in a proceeding for quo warranto or other direct proceeding, and that only in a few exceptions may a private person exercise this function of government. 4 But the rule disallowing collateral attacks applies only where the municipal corporation is at least a de facto corporations. 5 For where it is neither a corporation de jure nor de facto, but a nullity, the rule is that its existence may be, questioned collaterally or directly in any action or proceeding by any one whose rights or interests ate affected thereby, including the citizens of the territory incorporated unless they are estopped by their conduct from doing so. 6

            And so the threshold question is whether the municipality of Balabagan is a de facto corporation. As earlier stated, the claim that it is rests on the fact that it was organized before the promulgation of this Court's decision inPelaez. 7

            Accordingly, we address ourselves to the question whether a statute can lend color of validity to an attempted organization of a municipality despite the fact that such statute is subsequently declared unconstitutional.lawphi1.ñet

            This has been a litigiously prolific question, sharply dividing courts in the United States. Thus, some hold that a de facto corporation cannot exist where the statute or charter creating it is unconstitutional because there can be no de facto corporation where there can be no de jure one, 8 while others hold otherwise on the theory that a statute is binding until it is condemned as unconstitutional. 9

            An early article in the Yale Law Journal offers the following analysis:

35

            It appears that the true basis for denying to the corporation a de facto status lay in the absence of any legislative act to give vitality to its creation. An examination of the cases holding, some of them unreservedly, that a de facto office or municipal corporation can exist under color of an unconstitutional statute will reveal that in no instance did the invalid act give life to the corporation, but that either in other valid acts or in the constitution itself the office or the corporation was potentially created....

            The principle that color of title under an unconstitutional statute can exist only where there is some other valid law under which the organization may be effected, or at least an authority in potentia by the state constitution, has its counterpart in the negative propositions that there can be no color of authority in an unconstitutional statute that plainly so appears on its face or that attempts to authorize the ousting of a de jure or de facto municipal corporation upon the same territory; in the one case the fact would imply the imputation of bad faith, in the other the new organization must be regarded as a mere usurper....

            As a result of this analysis of the cases the following principles may be deduced which seem to reconcile the apparently conflicting decisions:

I. The color of authority requisite to the organization of a de facto municipal corporation may be:

1. A valid law enacted by the legislature.

2. An unconstitutional law, valid on its face, which has either (a) been upheld for a time by the courts or (b) not yet been declared void; provided that a warrant for its creation can be found in some other valid law or in the recognition of its potential existence by the general laws or constitution of the state.

II. There can be no de facto municipal corporation unless either directly or potentially, such a de jurecorporation is authorized by some legislative fiat.

III. There can be no color of authority in an unconstitutional statute alone, the invalidity of which is apparent on its face.

            IV. There can be no de facto corporation created to take the place of an existing de jure corporation, as such organization would clearly be a usurper.10

            In the cases where a de facto municipal corporation was recognized as such despite the fact that the statute creating it was later invalidated, the decisions could fairly be made to rest on the consideration that there was some other valid law giving corporate vitality to the organization. Hence, in the case at bar, the mere fact that Balabagan was organized at a time when the statute had not been invalidated cannot conceivably make it a de facto corporation, as, independently of the Administrative Code provision in question, there is no other valid statute to give color of authority to its creation. Indeed, in Municipality of San Joaquin v. Siva, 11 this Court granted a similar petition for prohibition and nullified an executive order creating the municipality of Lawigan in Iloilo on the basis of the Pelaez ruling, despite the fact that the municipality was created in 1961, before section 68 of the Administrative Code, under which the President had acted, was invalidated. 'Of course the issue of de factomunicipal corporation did not arise in that case.

            In Norton v. Shelby Count, 12 Mr. Justice Field said: "An unconstitutional act is not a law; it confers no rights; it imposes no duties; it affords no protection; it creates no office; it is, in legal contemplation, as

inoperative as though it had never been passed." Accordingly, he held that bonds issued by a board of commissioners created under an invalid statute were unenforceable.

            Executive Order 386 "created no office." This is not to say, however, that the acts done by the municipality of Balabagan in the exercise of its corporate powers are a nullity because the executive order "is, in legal contemplation, as inoperative as though it had never been passed." For the existence of Executive, Order 386 is "an operative fact which cannot justly be ignored." As Chief Justice Hughes explained in Chicot County Drainage District v. Baxter State Bank: 13

            The courts below have proceeded on the theory that the Act of Congress, having been found to be unconstitutional, was not a law; that it was inoperative, conferring no rights and imposing no duties, and hence affording no basis for the challenged decree. Norton v. Shelby County, 118 U.S. 425, 442; Chicago, I. & L. Ry. Co. v. Hackett, 228 U.S. 559, 566. It is quite clear, however, that such broad statements as to the effect of a determination of unconstitutionality must be taken with qualifications. The actual existence of a statute, prior to such a determination, is an operative fact and may have consequences which cannot justly be ignored. The past cannot always be erased by a new judicial declaration. The effect of the subsequent ruling as to invalidity may have to be considered in various aspects — with respect to particular relations, individual and corporate, and particular conduct, private and official. Questions of rights claimed to have become vested, of status of prior determinations deemed to have finality and acted upon accordingly, of public policy in the light of the nature both of the statute and of its previous application, demand examination. These questions are among the most difficult of those which have engaged the attention of courts, state and federal, and it is manifest from numerous decisions that an all-inclusive statement of a principle of absolute retroactive invalidity cannot be justified.

            There is then no basis for the respondents' apprehension that the invalidation of the executive order creating Balabagan would have the effect of unsettling many an act done in reliance upon the validity of the creation of that municipality. 14

            ACCORDINGLY, the petition is granted, Executive Order 386 is declared void, and the respondents are hereby permanently restrained from performing the duties and functions of their respective offices. No pronouncement as to costs.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-43350 December 23, 1937

CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant, vs.TEODORO SANDIKO, defendant-appellee.

Arsenio P. Dizon for appellant.Sumulong, Lavides and Sumulong for appellee.

LAUREL, J.:

36

This is an appeal from a judgment of the Court of First Instance of Manila absolving the defendant from the plaintiff's complaint.

Manuel Tabora is the registered owner of four parcels of land situated in the barrio of Linao, town of Aparri, Province of Cagayan, as evidenced by transfer certificate of title No. 217 of the land records of Cagayan, a copy of which is in evidence as Exhibit 1. To guarantee the payment of a loan in the sum of P8,000, Manuel Tabora, on August 14, 1929, executed in favor of the Philippine National Bank a first mortgage on the four parcels of land above-mentioned. A second mortgage in favor of the same bank was in April of 1930 executed by Tabora over the same lands to guarantee the payment of another loan amounting to P7,000. A third mortgage on the same lands was executed on April 16, 1930 in favor of Severina Buzon to whom Tabora was indebted in the sum of P2,9000. These mortgages were registered and annotations thereof appear at the back of transfer certificate of title No. 217.

On May 31, 1930, Tabora executed a public document entitled "Escritura de Transpaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by him was sold to the plaintiff company, said to under process of incorporation, in consideration of one peso (P1) subject to the mortgages in favor of the Philippine National Bank and Severina Buzon and, to the condition that the certificate of title to said lands shall not be transferred to the name of the plaintiff company until the latter has fully and completely paid Tabora's indebtedness to the Philippine National Bank.

The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry on October 22, 1930 (Exhibit 2). A year later, on October 28, 1931, the board of directors of said company adopted a resolution (Exhibit G) authorizing its president, Jose Ventura, to sell the four parcels of lands in question to Teodoro Sandiko for P42,000. Exhibits B, C and D were thereafter made and executed. Exhibit B is a deed of sale executed before a notary public by the terms of which the plaintiff sold ceded and transferred to the defendant all its right, titles, and interest in and to the four parcels of land described in transfer certificate in turn obligated himself to shoulder the three mortgages hereinbefore referred to. Exhibit C is a promisory note for P25,300. drawn by the defendant in favor of the plaintiff, payable after one year from the date thereof. Exhibit D is a deed of mortgage executed before a notary public in accordance with which the four parcels of land were given a security for the payment of the promissory note, Exhibit C. All these three instrument were dated February 15, 1932.

The defendant having failed to pay the sum stated in the promissory note, plaintiff, on January 25, 1934, brought this action in the Court of First Instance of Manila praying that judgment be rendered against the defendant for the sum of P25,300, with interest at legal rate from the date of the filing of the complaint, and the costs of the suits. After trial, the court below, on December 18, 1934, rendered judgment absolving the defendant, with costs against the plaintiff. Plaintiff presented a motion for new trial on January 14, 1935, which motion was denied by the trial court on January 19 of the same year. After due exception and notice, plaintiff has appealed to this court and makes an assignment of various errors.

In dismissing the complaint against the defendant, the court below, reached the conclusion that Exhibit B is invalid because of vice in consent and repugnancy to law. While we do not agree with this conclusion, we have however voted to affirm the judgment appealed from the reasons which we shall presently state.

The transfer made by Tabora to the Cagayan fishing Development Co., Inc., plaintiff herein, was affected on May 31, 1930 (Exhibit A) and the actual incorporation of said company was affected later on October 22, 1930 (Exhibit 2). In other words, the transfer was made almost five months before the incorporation of the company. Unquestionably, a duly organized corporation has the power to purchase and hold such real property as the purposes for which such corporation was formed may permit and for this purpose may enter into such contracts as may be necessary (sec. 13, pars. 5 and 9, and sec. 14, Act No. 1459). But before a corporation may be said to be lawfully organized, many things have to be done. Among other things, the law requires the filing of articles of incorporation (secs. 6 et seq., Act. No. 1459). Although there is a presumption that all the requirements of law have been complied with (sec. 334, par. 31 Code of Civil Procedure), in the case before us it can not be denied that the plaintiff was not yet incorporated when it entered into a contract of sale, Exhibit A. The contract itself

referred to the plaintiff as "una sociedad en vias de incorporacion." It was not even a de facto corporation at the time. Not being in legal existence then, it did not possess juridical capacity to enter into the contract.

Corporations are creatures of the law, and can only come into existence in the manner prescribed by law. As has already been stated, general law authorizing the formation of corporations are general offers to any persons who may bring themselves within their provisions; and if conditions precedent are prescribed in the statute, or certain acts are required to be done, they are terms of the offer, and must be complied with substantially before legal corporate existence can be acquired. (14 C. J., sec. 111, p. 118.)

That a corporation should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business, would seem to be self evident. . . . A corporation, until organized, has no being, franchises or faculties. Nor do those engaged in bringing it into being have any power to bind it by contract, unless so authorized by the charter there is not a corporation nor does it possess franchise or faculties for it or others to exercise, until it acquires a complete existence. (Gent vs. Manufacturers and Merchant's Mutual Insurance Company, 107 Ill., 652, 658.)

Boiled down to its naked reality, the contract here (Exhibit A) was entered into not between Manuel Tabora and a non-existent corporation but between the Manuel Tabora as owner of the four parcels of lands on the one hand and the same Manuel Tabora, his wife and others, as mere promoters of a corporations on the other hand. For reasons that are self-evident, these promoters could not have acted as agent for a projected corporation since that which no legal existence could have no agent. A corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere. This is not saying that under no circumstances may the acts of promoters of a corporation be ratified by the corporation if and when subsequently organized. There are, of course, exceptions (Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, secs. 207 et seq.), but under the peculiar facts and circumstances of the present case we decline to extend the doctrine of ratification which would result in the commission of injustice or fraud to the candid and unwary.(Massachusetts rule, Abbott vs. Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193; citing English cases; Koppel vs. Massachusetts Brick Co., 192 Mass., 223; 78 N. E., 128; Holyoke Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65 N. E., 54.) It should be observed that Manuel Tabora was the registered owner of the four parcels of land, which he succeeded in mortgaging to the Philippine National Bank so that he might have the necessary funds with which to convert and develop them into fishery. He appeared to have met with financial reverses. He formed a corporation composed of himself, his wife, and a few others. From the articles of incorporation, Exhibit 2, it appears that out of the P48,700, amount of capital stock subscribed, P45,000 was subscribed by Manuel Tabora himself and P500 by his wife, Rufina Q. de Tabora; and out of the P43,300, amount paid on subscription, P42,100 is made to appear as paid by Tabora and P200 by his wife. Both Tabora and His wife were directors and the latter was treasurer as well. In fact, to this day, the lands remain inscribed in Tabora's name. The defendant always regarded Tabora as the owner of the lands. He dealt with Tabora directly. Jose Ventura, president of the plaintiff corporation, intervened only to sign the contract, Exhibit B, in behalf of the plaintiff. Even the Philippine National Bank, mortgagee of the four parcels of land, always treated Tabora as the owner of the same. (See Exhibits E and F.) Two civil suits (Nos. 1931 and 38641) were brought against Tabora in the Court of First Instance of Manila and in both cases a writ of attachment against the four parcels of land was issued. The Philippine National Bank threatened to foreclose its mortgages. Tabora approached the defendant Sandiko and succeeded in the making him sign Exhibits B, C, and D and in making him, among other things, assume the payment of Tabora's indebtedness to the Philippine National Bank. The promisory note, Exhibit C, was made payable to the plaintiff company so that it may not attached by Tabora's creditors, two of whom had obtained writs of attachment against the four parcels of land.

If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it follows that it did not possess any resultant right to dispose of them by sale to the defendant, Teodoro Sandiko.

Some of the members of this court are also of the opinion that the transfer from Manuel Tabora to the Cagayan Fishing Development Company, Inc., which transfer is evidenced by Exhibit A, was subject to a condition

37

precedent (condicion suspensiva), namely, the payment of the mortgage debt of said Tabora to the Philippine National Bank, and that this condition not having been complied with by the Cagayan Fishing Development Company, Inc., the transfer was ineffective. (Art. 1114, Civil Code; Wise & Co. vs. Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However, having arrived at the conclusion that the transfer by Manuel Tabora to the Cagayan Fishing Development Company, Inc. was null because at the time it was affected the corporation was non-existent, we deem it unnecessary to discuss this point.lawphil.net

The decision of the lower court is accordingly affirmed, with costs against the appellant. So Ordered.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 22106           September 11, 1924

ASIA BANKING CORPORATION, plaintiff-appellee, vs.STANDARD PRODUCTS, CO., INC., defendant-appellant.

Charles C. De Selms for appellant.Gibbs & McDonough and Roman Ozaeta for appellee.

OSTRAND, J.:

This action is brought to recover the sum of P24,736.47, the balance due on the following promissory note:

P37,757.22

MANILA, P. I.,     Nov. 28, 1921.

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

On demand, after date we promise to pay to the Asia Banking Corporation, or order, the sum of thirty-seven thousand seven hundred fifty-seven and 22/100 pesos at their office in Manila, for value received, together with interest at the rate of ten per cent per annum.

No. ________ Due __________

THE STANDARD PRODUCTS CO., INC.        By     (Sgd.) GEORGE H. SEAVER

                By     President

The court below rendered judgment in favor of the plaintiff for the sum demanded in the complaint, with interest on the sum of P24,147.34 from November 1, 1923, at the rate of 10 per cent per annum, and the costs. From this judgment the defendant appeals to this court.

At the trial of the case the plaintiff failed to prove affirmatively the corporate existence of the parties and the appellant insists that under these circumstances the court erred in finding that the parties were corporations with juridical personality and assigns same as reversible error.

There is no merit whatever in the appellant's contention. The general rule is that in the absence of fraud a person who has contracted or otherwise dealt with an association in such a way as to recognize and in effect admit its legal existence as a corporate body is thereby estopped to deny its corporate existence in any action leading out of or involving such contract or dealing, unless its existence is attacked for cause which have arisen since making the contract or other dealing relied on as an estoppel and this applies to foreign as well as to domestic corporations. (14 C. J., 227; Chinese Chamber of Commerce vs. Pua Te Ching, 14 Phil., 222.)

The defendant having recognized the corporate existence of the plaintiff by making a promissory note in its favor and making partial payments on the same is therefore estopped to deny said plaintiff's corporate existence. It is, of course, also estopped from denying its own corporate existence. Under these circumstances it was unnecessary for the plaintiff to present other evidence of the corporate existence of either of the parties. It may be noted that there is no evidence showing circumstances taking the case out of the rules stated.

The judgment appealed from is affirmed, with the costs against the appellant. So ordered.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-11442             May 23, 1958

MANUELA T. VDA. DE SALVATIERRA, petitioner, vs.HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte, Branch II, and SEGUNDINO REFUERZO, respondents.

Jimenez, Tantuico, Jr. and Tolete for petitioner.Francisco Astilla for respondent Segundino Refuerzo.

FELIX, J.:

This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the order of the Court of First Instance of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving Segundino Refuerzo of liability for the contract entered into between the former and the Philippine Fibers Producers Co., Inc., of which Refuerzo is the president. The facts of the case are as follows:

Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at Maghobas, Poblacion, Burauen, Teyte. On March 7, 1954, said landholder entered into a contract of lease with the Philippine Fibers Producers Co., Inc., allegedly a corporation "duly organized and existing under the laws of the Philippines, domiciled at Burauen, Leyte, Philippines, and with business address therein, represented in this instance by Mr. Segundino Q. Refuerzo, the President". It was provided in said contract, among other things, that the lifetime of

38

the lease would be for a period of 10 years; that the land would be planted to kenaf, ramie or other crops suitable to the soil; that the lessor would be entitled to 30 per cent of the net income accruing from the harvest of any, crop without being responsible for the cost of production thereof; and that after every harvest, the lessee was bound to declare at the earliest possible time the income derived therefrom and to deliver the corresponding share due the lessor.

Apparently, the aforementioned obligations imposed on the alleged corporation were not complied with because on April 5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court of First Instance of Leyte a complaint against the Philippine Fibers Producers Co., Inc., and Segundino Q. Refuerzo, for accounting, rescission and damages (Civil Case No. 1912). She averred that sometime in April, 1954, defendants planted kenaf on 3 hectares of the leased property which crop was, at the time of the commencement of the action, already harvested, processed and sold by defendants; that notwithstanding that fact, defendants refused to render an accounting of the income derived therefrom and to deliver the lessor's share; that the estimated gross income was P4,500, and the deductible expenses amounted to P1,000; that as defendants' refusal to undertake such task was in violation of the terms of the covenant entered into between the plaintiff and defendant corporation, a rescission was but proper.

As defendants apparently failed to file their answer to the complaint, of which they were allegedly notified, the Court declared them in default and proceeded to receive plaintiff's evidence. On June 8, 1955, the lower Court rendered judgment granting plaintiff's prayer, and required defendants to render a complete accounting of the harvest of the land subject of the proceeding within 15 days from receipt of the decision and to deliver 30 per cent of the net income realized from the last harvest to plaintiff, with legal interest from the date defendants received payment for said crop. It was further provide that upon defendants' failure to abide by the said requirement, the gross income would be fixed at P4,200 or a net income of P3,200 after deducting the expenses for production, 30 per cent of which or P960 was held to be due the plaintiff pursuant to the aforementioned contract of lease, which was declared rescinded.

No appeal therefrom having been perfected within the reglementary period, the Court, upon motion of plaintiff, issued a writ of execution, in virtue of which the Provincial Sheriff of Leyte caused the attachment of 3 parcels of land registered in the name of Segundino Refuerzo. No property of the Philippine Fibers Producers Co., Inc., was found available for attachment. On January 31, 1956, defendant Segundino Refuerzo filed a motion claiming that the decision rendered in said Civil Case No. 1912 was null and void with respect to him, there being no allegation in the complaint pointing to his personal liability and thus prayed that an order be issued limiting such liability to defendant corporation. Over plaintiff's opposition, the Court a quo granted the same and ordered the Provincial Sheriff of Leyte to release all properties belonging to the movant that might have already been attached, after finding that the evidence on record made no mention or referred to any fact which might hold movant personally liable therein. As plaintiff's petition for relief from said order was denied, Manuela T. Vda. de Salvatierra instituted the instant action asserting that the trial Judge in issuing the order complained of, acted with grave abuse of discretion and prayed that same be declared a nullity.

From the foregoing narration of facts, it is clear that the order sought to be nullified was issued by tile respondent Judge upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of the Rules of Court. Section 3 of said Rule, however, in providing for the period within which such a motion may be filed, prescribes that:

SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. — A petition provided for in either of the preceding sections of this rule must be verified, filed within sixty days after the petitioner learns of the judgment, order, or other proceeding to be set aside, and not more than six months after such judgment or order was entered, or such proceeding was taken; and must be must be accompanied with affidavit showing the fraud, accident, mistake, or excusable negligence relied upon, and the facts constituting the petitioner is good and substantial cause of action or defense, as the case may be, which he may prove if his petition be granted". (Rule 38)

The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the judgment, and not more than 6 months after the judgment or order was rendered, both of which must be satisfied. As the decision in the

case at bar was under date of June 8, 1955, whereas the motion filed by respondent Refuerzo was dated January 31, 1956, or after the lapse of 7 months and 23 days, the filing of the aforementioned motion was clearly made beyond the prescriptive period provided for by the rules. The remedy allowed by Rule 38 to a party adversely affected by a decision or order is certainly an alert of grace or benevolence intended to afford said litigant a penultimate opportunity to protect his interest. Considering the nature of such relief and the purpose behind it, the periods fixed by said rule are non-extendible and never interrupted; nor could it be subjected to any condition or contingency because it is of itself devised to meet a condition or contingency (Palomares vs. Jimenez,* G.R. No. L-4513, January 31, 1952). On this score alone, therefore, the petition for a writ of certiorari filed herein may be granted. However, taking note of the question presented by the motion for relief involved herein, We deem it wise to delve in and pass upon the merit of the same.

Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of the obligation imposed on defendant Philippine Fibers Producers Co., Inc., interposed the defense that the complaint filed with the lower court contained no allegation which would hold him liable personally, for while it was stated therein that he was a signatory to the lease contract, he did so in his capacity as president of the corporation. And this allegation was found by the Court a quo to be supported by the records. Plaintiff on the other hand tried to refute this averment by contending that her failure to specify defendant's personal liability was due to the fact that all the time she was under the impression that the Philippine Fibers Producers Co., Inc., represented by Refuerzo was a duly registered corporation as appearing in the contract, but a subsequent inquiry from the Securities and Exchange Commission yielded otherwise. While as a general rule a person who has contracted or dealt with an association in such a way as to recognize its existence as a corporate body is estopped from denying the same in an action arising out of such transaction or dealing, (Asia Banking Corporation vs. Standard Products Co., 46 Phil., 114; Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.; vs. Steamship Pompey, 49 Phil., 117), yet this doctrine may not be held to be applicable where fraud takes a part in the said transaction. In the instant case, on plaintiff's charge that she was unaware of the fact that the Philippine Fibers Producers Co., Inc., had no juridical personality, defendant Refuerzo gave no confirmation or denial and the circumstances surrounding the execution of the contract lead to the inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra was really made to believe that such corporation was duly organized in accordance with law.

There can be no question that a corporation with registered has a juridical personality separate and distinct from its component members or stockholders and officers such that a corporation cannot be held liable for the personal indebtedness of a stockholder even if he should be its president (Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420) and conversely, a stockholder or member cannot be held personally liable for any financial obligation be, the corporation in excess of his unpaid subscription. But this rule is understood to refer merely to registered corporations and cannot be made applicable to the liability of members of an unincorporated association. The reason behind this doctrine is obvious-since an organization which before the law is non-existent has no personality and would be incompetent to act and appropriate for itself the powers and attribute of a corporation as provided 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 at their own risk. And as it is an elementary principle of law that a person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the rights and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and comes personally liable for contracts entered into or for other acts performed as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's Commercial Laws of the Philippines, Fifth Ed., P. 689-690). Considering that defendant Refuerzo, as president of the unregistered corporation Philippine Fibers Producers Co., Inc., was the moving spirit behind the consummation of the lease agreement by acting as its representative, his liability cannot be limited or restricted that imposed upon corporate shareholders. In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk of reaping the consequential damages or resultant rights, if any, arising out of such transaction.

Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on this matter and ordering the Provincial Sheriff of Leyte to release any and all properties of movant therein which might have been attached in the execution of such judgment, is hereby set aside and nullified as if it had never been issued. With costs against respondent Segundino Refuerzo. It is so ordered.

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Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., and Endencia, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-26364           May 29, 1968

MARIANO A. ALBERT, petitioner, vs.THE COURT OF FIRST INSTANCE OF MANILA (BR. VI), UNIVERSITY PUBLISHING CO., INC., and JOSE M. ARUEGO, respondents.

Uy, Artiaga and Antonio M. Molina for petitioner.Aruego, Mamaril and Associates Law Office for respondents.

REYES, J.B.L., J.:

This case is a veritable legal marathon. Originally docketed in 1949, within a span of 19 years, the legal dispute has come to this Court four times:

(1) L-9300, promulgated April 18, 1958;

(2) L-15275, promulgated October 24, 1960;

(3) L-18350, dismissed May 17, 1961; and

(4) L-19118, promulgated January 30, 1965 (Resolution of Defendant's Motion for Reconsideration denied on June 16, 1965).

The present petition for certiorari is the fifth. The time is long past when courts of justice must write finis to this case. For,

Public policy and sound practice demand that, at the risk of occasional errors, judgments of courts should become final at some definite date fixed by law. The very object for which courts were instituted was to put an end to controversies.1

The factual setting necessary to a clear understanding of the instant petition for certiorari needs to be restated. Plaintiff Albert sued University Publishing Company, Inc. for breach of contract. Albert died before the case proceeded to trial, and Justo R. Albert, his estate's administrator, was substituted. Finally, defendant's liability was determined by this Court in L-15275. Plaintiff was to recover P15,000.00 with legal interest from judicial demand.

From the inception of the suit below up to the time the judgment in L-15275 was to be executed, the corporate existence of university Publishing Company, Inc. appears to have been taken for granted, and was not then put in issue. However, when the Court of First Instance of Manila issued on July 22, 1961 an order of execution against

University Publishing Company, Inc., a new problem cropped up. By virtue of this writ, plaintiff's counsel and the Sheriff of the City of Manila went to see Jose M. Aruego who signed the contract with plaintiff on behalf and as President of University Publishing Company, Inc. They then discovered that no such entity exists. A verification made at the Securities and Exchange Commission confirmed this fact. On July 31, 1961, said Commission issued a certification "that the records of this Commission do not show the registration of UNIVERSITY PUBLISHING CO., INC., either as a corporation or partnership." 2 This triggered a verified petition in the court below on August 10, 1961 for the issuance of a writ of execution ordering the Sheriff of Manila to cause the satisfaction of the judgment against the assets and properties of Jose M. Aruego as the real defendant in the case.

All along, Jose M. Aruego and his law firm were counsel for the University Publishing Company, Inc.

Instead of informing the lower court that it had in its possession copies of its certificate of registration, its articles of incorporation, its by-laws and all other paper materials to its disputed corporate existence, University Publishing Company, Inc. chose to remain silent. On August 11, 1961, University Publishing Company, Inc., by counsel Aruego, Mamaril and Associates (the law firm of Jose M. Aruego aforesaid) merely countered plaintiffs petition for execution as against Aruego with an unsworn manifestation in court that "said Jose M. Aruego is not a party to this case," and, therefore, plaintiff's petition should be denied.3

Respondent court, presided over by His Honor, Judge Gaudencio Cloribel, on September 9, 1961, came up with an order, which reads thus:

It appearing that Jose M. Aruego against whom the judgment rendered herein is sought to be enforced is not a party to this case, plaintiff's motion filed on August 10, 1961 is hereby denied.4

Plaintiff appealed to this Court on this sole issue: "The lower court erred in denying the plaintiff-appellant's petition praying that the judgment rendered against the alleged corporation, the above-named defendant-appellee, be executed against the personal assets and properties of Jose M. Aruego, the real party to this case."

In an extended opinion written by Mr. Justice Jose P. Bengzon, this Court in L-19118, on January 30, 1965, resolved the issue as follows:

The fact of non-registration of University Publishing Co., Inc. in the Securities and Exchange Commission has not been disputed. Defendant would only raise the point that "University Publishing Co., Inc." and not Jose M. Aruego, is the party defendant; thereby assuming that "University Publishing Co., Inc." is an existing corporation with an independent juridical personality. Precisely, however, on account of the non-registration it cannot be considered a corporation, not even a corporation de facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no personality separate from Jose M. Aruego; it cannot be sued independently.

The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is inapplicable here. Aruego represented a non-existent entity and induced not only the plaintiff but even the court to believe in such representation. He signed the contract as "President" of "University Publishing Co., Inc.," stating that this was 'a corporation duly organized and existing under the laws of the Philippines,' and obviously misled plaintiff (Mariano A. Albert) into believing the same. One who has induced another to act upon his wilful misrepresentation that a corporation was duly organized and existing under the law, cannot thereafter set up against his victim the principle of corporation by estoppel (Salvatiera vs. Garlitos, 56 O.G. 3609).

"University Publishing Co., Inc." purported to come to court, answering the complaint and litigating upon the merits. But as stated, "University Publishing Co., Inc." has no independent personality; it is

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just a name. Jose M. Aruego was, in reality, the one who answered and litigated, through his own law firm as counsel. He was in fact, if not in name, the defendant.

Even with regard to corporations duly organized and existing under the law, we have in many a case pierced the veil of corporate fiction to administer the ends of justice. (Arnold vs. Willits & Patterson, Ltd., 44 Phil. 634; Koppel (Phil.), Inc. vs. Yatco, 77 Phil. 496; La Campana Coffee Factory, Inc. vs. Kaisahan ng mga Manggagawa sa La Campana, 93 Phil. 160; Marvel Building Corporation vs. David, 94 Phil. 376; Madrigal Shipping Co., Inc. vs. Ogilvie, L-8431, Oct. 30, 1958; Laguna Transportation Co., Inc. vs. S.S.S., L-14606, April 28, 1960; McConnel vs. C.A., L-10510, Mar. 17, 1961; Liddell & Co., Inc. vs. Collector of Internal Revenue, L-9687, June 30, 1961; Palacio vs. Fely Transportation Co., L-15121, August 31, 1962). And in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent." Had Jose M. Aruego been named as party defendant instead of, or together, with, "University Publishing Co., Inc." there would be no room for debate as to his personal liability. Since he was not so named, the matters of "day in court" and "due process" have arisen.

In this connection, it must be realized that parties to a suit are "persons who have a right to control the proceedings, to make defense, to adduce and cross-examine witnesses, and to appeal from a decision" (67 C.J.S. 887) — and Aruego was, in reality, the person who had and exercised these rights. Clearly then, Aruego had his day in court as the real defendant; and due process of law has been substantially observed.

By "due process of law" we mean "a law which hears before it condemns; which proceeds upon inquiry, and renders judgment only after trial.... (4 Wheaton, U.S. 518, 581); or, as this Court has said, "Due process of law" contemplates notice and opportunity to be heard before judgment is rendered, affecting one's person or property." (Lopez vs. Director of Lands, 47 Phil. 23, 32). (Sicat vs. Reyes, L-11023, Dec. 14, 1956.) And it may not be amiss to mention here also that the "due process" clause of the Constitution is designed to secure justice as a living reality; not to sacrifice it by paying undue homage to formality. For substance must prevail over form. It may now be trite, but none the less apt, to quote what long ago we said in Alonso vs. Villamor, 16 Phil. 315, 321-322:

A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art of movement and position, entraps and destroys the other. It is, rather, a contest in which each contending party fully and fairly lays before the court the facts in issue and then, brushing aside as wholly trivial and indecisive all imperfections of form and technicalities of procedure, asks that justice be done upon the merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts. There should be no vested rights in technicalities.

The evidence is patently clear that Jose M. Aruego, acting as representative of a non-existent principal was the real party to the contract sued upon; that he was the one who reaped the benefits resulting from it, so much so that partial payments of the consideration were made by him; that he violated its terms, thereby precipitating the suit in question; and that in the litigation he was the real defendant. Perforce, in line with the ends of justice, responsibility under the judgment falls on him.

We need hardly state that should there be persons who under the law are liable to Aruego for reimbursement or contribution with respect to the payment he makes under the judgment in question, he may, of course, proceed against them through proper remedial measures.

PREMISES CONSIDERED, the order appealed from is hereby set aside and the case remanded ordering the lower court to hold supplementary proceedings for the purpose of carrying the judgment into effect against University Publishing Co., Inc. and/or Jose M. Aruego.

It is to be observed that even as this case was elevated to this Court in L-19118, University Publishing Company, Inc. or its president and counsel chose to withhold pertinent documents and papers in its possession and control. But when the foregoing judgment came, the University Publishing Company, Inc., in its motion for reconsideration thereof, asked that it be afforded opportunity to prove its corporate existence. It submitted with that motion for reconsideration, its certificate of registration, articles of incorporation, by-laws, and a certificate of reconstitution of records issued by the Securities and Exchange Commission, which was procured only from the Securities and Exchange Commissioner on April 1, 1965 — after the decision in L-19118 was promulgated.

Jose M. Aruego, the president and counsel of University Publishing Company, Inc., for the first time appeared in propria persona before this Court as a "member of the Philippine Bar, private citizen." He pointedly stated that he did not submit to the jurisdiction of this Court. He wanted, though, that his side of the case be heard. He formally joined hands with University Publishing Company, Inc. on the plea of due process in his favor. He insisted that he was not a party to this litigation.

The resolution of this Court, on June 16, 1965, extensively dwelt on the due process plea of Jose M. Aruego, thus:

It may be worth noting again that Jose M. Aruego started the negotiation which culminated in the contract between the parties, signing said contract as president of University Publishing Co., Inc. Likewise he was the one who made partial payments up to the amount of P7,000.00 for and in behalf of University Publishing Co., Inc. He also appeared not only as a witness but as a lawyer, signing some pleadings or motions in defense of University Publishing Co., Inc., although in other instances it is one of his associates or member of his law firm who did so. Known is the fact that even a duly existing corporation can only move and act through natural persons. In this case it was Jose M. Aruego who moved and acted as or for University Publishing Co., Inc.

It is elemental that the courts can only decide the merits of a given suit according to the records that are in the case. It is true that in the two previous cases decided by this Court, the first, awarding damages (L-9300), the second, clarifying the amount of P15,000.00 awarded as such (L-15275), the corporate existence of University Publishing Co., Inc. as a legal entity was merely taken for granted.

However, when the said issue was squarely presented before the court, and University Publishing Co., Inc., chose to keep the courts in the dark by withholding pertinent documents and papers in its possession and control, Court had to decide the points raised according to the records of the case and whatever related matters necessarily included therein. Hence, as a consequence of the certification of the Securities and Exchange Commission that its records 'do not show the registration of University Publishing Co., Inc., either as a corporation or partnership' this Court concluded that by virtue of its non-registration it cannot be considered a corporation. We further said that it has therefore no personality separate from Jose M. Aruego and that Aruego was in reality the one who answered and litigated through his own law firm as counsel. Stated otherwise, we found that Aruego was in fact, if not in name, the defendant (Decision, p. 6). Indeed, the judge of the court of first instance wrote in his decision thus: "Defendant Aruego (all along the judge who pens this decision considered that the defendant here is the president of the University Publishing Co., Inc. since it was he who really made the contract with Justice Albert)." (Decision of CFI, p. 9, quoted in plaintiff-appellant's brief, p. 10). And this portion of the decision made by the court a quo was never questioned by the defendant.

The above statement made by the court a quo in its decision compelled this Court to carefully examine the facts surrounding the dispute starting from the time of the negotiation of the business proposition, followed by the signing of the contract; considered the benefits received; took into

41

account the partial payments made, the litigation conducted, the decisions rendered and the appeals undertaken. After thus considering the facts and circumstances, keeping in mind that even with regard to corporations shown as duly registered and existing, we have in many a case pierced the veil of corporate fiction to administer the ends of justice, (Arnold vs. Willits & Patterson, Ltd., 44 Phil. 634; Koppel (Phil.), Inc. vs. Yatco, 77 Phil. 496; La Campana Coffee Factory, Inc. vs. Kaisahan ng mga Manggagawa sa La Campana, 93 Phil. 160; Marvel Building Corporation vs. David, 94 Phil. 376; Madrigal Shipping Co., Inc. vs Ogilvie, L-8431, Oct. 30, 1958; Laguna Transportation Co., Inc. vs. S.S.S., L-14606, April 28, 1960; McConnel vs. C.A., L-10510, Mar. 17, 1961; Liddell & Co., Inc., vs. Collector of Internal Revenue, L-9687, June 30, 1961: Palacio vs. Fely Transportation Co., L-15121, August 31, 1962) we held Aruego personally responsible for his acts on behalf of University Publishing Co., Inc.

Defendant would reply that in all those cases where the Court pierced the veil of corporate fiction the officials held liable were made party defendants. As stated, defendant-appellee could not even pretend to possess corporate fiction — in view of its non-registration per the evidence — so that from the start Aruego was the real defendant. Since the purpose of formally impleading a party is to assure him a day in court, once the protective mantle of due process of law has in fact been accorded a litigant, whatever the imperfection in form, the real litigant may be held liable as a party. Jose M. Aruego definitely had his day in court, and due process of law was enjoyed by him as a matter of fact as revealed by the records of the case. (Decision, p. 6).

The dispositive portion of the decision the reconsideration of which is being sought is the following: "Premises considered, the order appealed from is hereby set aside and the case remanded ordering the lower court to hold supplementary proceedings for the purpose of carrying the judgment into effect against University Publishing Co., Inc. and/or Jose M. Aruego."

According to several cases a litigant is not allowed to speculate on the decision the court may render in the case. (Rodriguez vs. Treasurer of the Philippines, 45 O.G. 4457 (Resolution); Arnault vs. Nazareno, L-3820, Resolution of August 9, 1950; Howden vs. Collector of Internal Revenue, L-19392, April 14, 1965). The University Publishing Co., Inc. speculated on a favorable decision based on the issue that Jose M. Aruego not being a formal party defendant in this case a writ of execution against him was not in order. It therefore preferred to suppress vital documents under its possession and control rather than to rebut the certification issued by the Securities and Exchange Commission that according to its records University Publishing Co., Inc. was not registered. If the lower court's order is sustained, collection of damages becomes problematical. If a new suit is filed against Aruego, prescription might be considered as effective defense, aside from the prospect of another ten years of pending litigation. Such are the possible reasons for adopting the position of speculation of our decision. Our ruling appeared to be unfavorable to such speculation. It was only after the receipt of the adverse decision promulgated by this Court that University Publishing Co., Inc. disclosed its registration papers. For purposes of this case only and according to its particular facts and circumstances, we rule that in view of the late disclosure of said papers by the University Publishing Co., Inc., the same can no longer be considered at this stage of the proceedings.1ªvvphi1.nêt

And on the issue of whether or not the certificate of registration, the articles of incorporation, the by-laws and the certificate of the reconstitution of the records proffered by the University Publishing Company, Inc. should be admitted, this Court, in the said resolution of the motion for reconsideration, in part said:

Defendant-appellee could have presented the foregoing papers before the lower court to counter the evidence of non-registration, but defendant-appellee did not do so. It could have reconstituted its records at that stage of the proceedings, instead of only on April 1, 1965, after decision herein was promulgated.

x x x           x x x           x x x

As far as this case is concerned, therefore, University Publishing Co., Inc. must be deemed as unregistered, since by defendant-appellee's choice the record shows it to be so. Defendant-appellee apparently sought to delay the execution by remaining unregistered per the certification of the Securities and Exchange Commission. It was only when execution was to be carried out, anyway, against it and/or its president — and almost 19 years after the approval of the law authorizing reconstitution — that it reconstituted its records to show its registration, thereby once more attempting to delay the payment of plaintiff's claim, long since adjudged meritorious. Deciding, therefore, as we must, this particular case on its record as submitted by the parties, defendant-appellee's proffered evidence of its corporate existence cannot at this stage be considered to alter the decision reached herein. This is not to preclude in future cases the consideration of properly submitted evidence as to defendant-appellee's corporate existence.

WHEREFORE, the motion for reconsideration and for leave to file original papers not in the record, is hereby denied.

1äwphï1.ñët

Armed with the aforementioned decision and resolution of this Court in L-19118, petitioner returned to the lower court on July 28, 1965 with a motion for execution and approval of the bill of costs and asking specifically for the issuance of the corresponding writ against Aruego to satisfy the judgment.

On July 30, 1965, Aruego moved to intervene with an opposition in intervention to the motion for execution. Alleging that the judgment of this Court in L-19118 dated January 30, 1965, which reads: —

PREMISES CONSIDERED, the order appealed from is hereby set aside and the case remanded ordering the lower court to hold supplementary proceedings for the purpose of carrying the judgment into effect against University Publishing Co., Inc. and/or Jose M. Aruego.

should be construed in the sense that "the supplementary proceedings mentioned in the aforequoted dispositive portion of the Supreme Court Decision means no other than a proceeding to show cause why the judgment should be carried into effect against either the University Publishing Co., Inc. and/or Jose M. Aruego, as the case may be" and that until such supplementary proceedings was had petitioner could ask for the execution of the judgment against Jose M. Aruego as a matter of course, Aruego falls back on his averment (made in his manifestation already ruled out by this Court in L-19118) that he had never been a party to the case and that the judgment sought to be executed was solely against University Publishing Company, Inc.

On February 21, 1966, Judge Gaudencio Cloribel, upon consideration of this motion for execution and for approval of the bill of costs, the opposition thereto by Aruego, and the reply to the opposition, granted the motion for execution and directed that a writ of execution "be issued accordingly".

Aruego came back with a motion for reconsideration, adamant in his resolve that he would not pay as he was not a party to the suit. This was opposed by plaintiff.

On March 5, 1966, Judge Gaudencio Cloribel reconsidered his order of February 21, 1966, and denied the motion for a writ of execution against Jose M. Aruego — upon the ground that "said Jose M. Aruego has never been a party to the case and that the judgment sought to be executed is not against him."

On April 4, 1966, it was petitioner's turn to file a motion for reconsideration for the reason that the question of whether or not an order of execution could issue against Aruego had already been resolved by this Court in its final judgment in L-19118.

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On April 20, 1966, Jose M. Aruego opposed the motion for reconsideration and prayed for supplementary proceedings to allow him as intervenor to present evidence in support thereof, alleging that the execution of the judgment against him was not sanctioned by law and procedure and that had intervenor been impleaded or given his day in court, he could have easily proven the legitimate and due existence of the University Publishing Company, Inc. as a bona fide corporation. He attached thereto the very same articles of incorporation, certificate of registration, by-laws and certificate of the Securities and Exchange Commission in the reconstitution of its records — documents which were rejected by this Court in its resolution of June 16, 1965 in L-19118.

On April 28, 1966, petitioner filed his reply to Aruego's opposition upon the ground that these are matters concluded in the decision and resolution of this Court, and that respondent court cannot admit said documents without going against this Court's clear mandate.

Resolution on plaintiff's motion for reconsideration was, by Judge Gaudencio Cloribel's order of May 20, 1966, held in abeyance until the termination of the supplementary proceedings, which the court thereupon granted, to allow Aruego to present evidence in support of his opposition to the motion for reconsideration.

On May 28, 1966, Aruego presented in evidence the documents heretofore mentioned, and in addition, the certificate dated February 17, 1965 signed by a majority of the directors of the University Publishing Company, Inc. declaring that the corporation still exists and that the articles of incorporation have not been amended or modified.

On July 13, 1966, notwithstanding plaintiff's opposition to the admission of the documents just mentioned, and his claim that the matter involved in the execution had long been finished and decided by this Court, Judge Gaudencio Cloribel denied plaintiff's motion for execution.

Hence, this petition for a writ of certiorari and mandamus.

1. When this case was elevated to this Court for the fourth time in L-19118, we made it abundantly clear in the decision therein rendered and in the resolution issued thereafter, that the judgment rendered against University Publishing Company, Inc. could and should be enforced against respondent Jose M. Aruego. Our language in the dispositive portion is clear. It reads:

PREMISES CONSIDERED, the order appealed from is hereby set aside and the case remanded ordering the lower court to hold supplementary proceedings for the purpose of carrying the judgment into effect against University Publishing Co., Inc. and/or Jose M. Aruego.

The judgment does not contemplate of any proceeding other than for the purpose of carrying into effect the judgment against University Publishing Company, Inc. and/or Jose M. Aruego — which is the proceeding on execution. It does not admit of any other interpretation such as that which is advocated by Aruego that such proceeding "is to show cause why the judgment should be carried into effect against either the University Publishing Co., Inc. and/or Jose M. Aruego." Indeed, the issue of whether or not the judgment rendered against University Publishing Company, Inc. could be enforced against Jose M. Aruego had already been definitely decided in that case, L-19118. Even worse, all the arguments and evidence presented by Aruego before the respondent court resulting in the orders that gave rise to the present proceedings had been previously adduced before this Court and decided adversely against him in the January decision and the June resolution of 1965 in L-19118. There can be no clearer case for the principle of conclusiveness of judgment to apply. Thus, in certiorariand prohibition proceedings brought by the Manila Underwriters Insurance Co., Inc. against Judge Bienvenido A. Tan, L-17445, November 27, 1964, this Court ruled:

On August 15, 1960, respondent Borja filed another motion in the same case asking the court to require petitioner again to show cause why it should not be made liable under its bond, and thereafter to issue a writ of execution against it. Petitioner opposed the motion on the ground that our decision

in G.R. No. L-12256 had finally disposed of the issue raised therein. Despite this, the respondent judge, on August 30, 1960 issued an order citing petitioner to appear before it and show cause why it should not be held liable under its bond, and on September 10 of the same year, his honor also denied petitioner's motion for reconsideration of said order. Thereupon, the present action was filed.

Upon the undisputed facts stated heretofore, it appears abundantly clear that the respondent judge seriously erred in issuing the orders complained of. The question of whether petitioner could still be held liable upon its bond must be deemed finally settled by our decision in G.R. No. L-12256, and any attempt to hold petitioner liable upon the bond already mentioned must necessarily be deemed as an improper attempt to reopen a case already finally adjudicated.

WHEREFORE, the orders complained of are hereby declared void and of no legal force and effect. The writ of preliminary injunction issued in this case on October 26, 1960 is hereby made final. Costs against respondent Borja.

The liability of Aruego has been established so plainly in the decision and resolution in L-19118 that there could not be any quibbling as to the import of the words there used. Case L-19118 was brought into being because precisely Judge Cloribel ruled that execution could not be issued against Jose M. Aruego upon the ground, so he said in his appealed order, that Aruego was not a party to the action. This Court there reversed Judge Gaudencio Cloribel.

In the circumstances of this case, we are constrained to articulate a number of possibilities: that Judge Gaudencio Cloribel either (1) did not read our decision in L-19118, January 30, 1965, and our resolution in the same case promulgated on June 16, 1965; or (2) having read, did not comprehend their import; or (3) having read and understood, wantonly ignored them. It is the thinking of this Court, however, that Judge Gaudencio Cloribel simply shunted aside our decision and resolution. He could not have overlooked the fact that it was his own order of September 9, 1961 denying execution — because Aruego is not a party to this case — which was appealed to this Court. That very question of whether execution should issue against Aruego was squarely presented and as squarely resolved in the affirmative by this Court in L-19118. That Gaudencio Cloribel should have insisted in his opinion after his attention to this Court's decision and resolution adverse thereto had been repeatedly called by plaintiff, is an act which deserves unsympathetic and unqualified condemnation.

Judge Gaudencio Cloribel need not be reminded that the Supreme Court, by tradition and in our system of judicial administration, has the last word on what the law is; it is the final arbiter of any justifiable controversy. There is only one Supreme Court from whose decisions all other courts should take their bearings. 5 Judge Gaudencio Cloribel should have known that "[a] becoming modesty of inferior courts demands conscious realization of the position that they occupy in the interrelation and operation of the integrated judicial system of the nation."6

So it is, that in Martiniano P. Vivo vs. Hon. Gaudencio Cloribel, et al., L-23239, November 23, 1966 (18 Supreme Court Reports Anno. 713, 726), this Court stressed the need for trial judges to take cognizance of the rulings of the Supreme Court. We there reproduced the following from People vs. Santos, 56 O.G. 3546, 3552-3552, viz.:

Now, if a judge of a lower Court feels, in the fulfillment of his mission of deciding cases, that the application of a doctrine promulgated by this Superiority is against his way of reasoning, or against his conscience, he may state his opinion on the matter, but rather than disposing of the case in accordance with his personal views he must first think that it is his duty to apply the law as interpreted by the Highest Court of the Land, and that any deviation from a principle laid down by the latter would unavoidably cause, as a sequel, unnecessary inconveniences, delays and expenses to the litigants. And if despite of what is here said, a Judge still believes that he cannot follow Our rulings, then he has no other alternative than to place himself in the position that he could properly avoid the

43

duty of having to render judgment on the case concerned (Art. 9, C.C.), and he has only one legal way to do that.7

We rule that because of the foregoing circumstances, Judge Gaudencio Cloribel acted with grave abuse of discretion. And certiorari lies. 8

2. We now come to the cry of injustice proffered by respondent Jose M. Aruego. Even upon a cursory examination of his gripe, his position at once loses leverage; the potency of his arguments vanishes.

As we look in retrospect at the facts, we find that it was Aruego who executed the contract as president of the University Publishing Company, Inc. He is a lawyer. At the time he executed the contract with plaintiff, he should have known that the possibility existed that the records of the corporation had been destroyed. For, it is a matter of public knowledge that buildings which kept public records in the City of Manila had been razed by fire during the last war. He should have at least inquired whether the records of the corporation in the Securities and Exchange Commission had been saved. Of course, he knew and should have known that persons dealing with corporations are wont to look to records of the Securities and Exchange Commission for the existence or non-existence thereof. In this particular case, from the documents he himself presented in the court below (after he had knowledge of the fact that admission thereof was denied by this Court in L-19118), he is practically the corporation itself. Because out of the capital stock of P2,000.00, he subscribed to P1,600.00, and out of the paid subscription of P500.00, he contributed the sum of P450.00, leaving but P50.00 to be spread amongst the minor stockholders.

This case was filed and concluded as against the corporation. When finally, plaintiff's counsel and the Sheriff came to him as president (and incidentally counsel) of University Publishing Company, Inc. for execution of that judgment, he sought to stave off satisfaction thereof. Then, plaintiff's counsel and the Sheriff came to know that the corporation did not legally exist. Aruego could have very easily caused the corporation to pay. Or did he think that the corporation could evade payment, since the records of the corporation in the Securities and Exchange Commission had not yet been reconstituted? The resultant effect is that after long years of ligation, plaintiff is still left holding the bag. As this Court noted in L-19118, it would be too late for the plaintiff to file suit against Aruego personally. For, by then prescription has set in.

Canon 22 of the Canons of Legal Ethics is a constant reminder to the members of the Bar that the conduct of a lawyer before the court "should be characterized by candor and fairness"; and it is "unprofessional and dishonorable to deal other than candidly with the facts ... in the presentation of causes." When the question of whether execution should issue against Jose M. Aruego, a member of the Bar, did emerge before the lower court in the proceedings for execution of the judgment, candor and fairness should have impelled him to tell the court that the representation of counsel for plaintiff that University Publishing Company, Inc. is not a corporation, was not true, and that the corporation had the papers and documents to show otherwise. He should not have kept this fact under wraps for so long a time while the execution proceedings were still with the lower court and before judgment on the appeal taken by plaintiff in L-19118. He has failed in these. Literally, he laid an ambush. It was only after he realized that this Court considered him as the real party in interest that he presented the fact of corporate existence to this Court to overturn the decision rendered in L-19118. Where a party "has taken a position with regard to procedure, which has been acted or relied on by his adversary or by the court," he must be held to be in estoppel "from taking an inconsistent position respecting the same matter in the same proceeding, to his adversary's prejudice." 9

This is not the first time that this Court has ordered the execution of a judgment against a person who was not formally named as party defendant in the action. In a series of cases, substantial in number, 10 this Court's stand has been consistent that the judgment for payment of back salaries of officers entitled to reinstatement may, in effect, be enforced against the city or municipality, although not by name impleaded in the suit. Reasons therefore are concretely expressed in Mangubat vs. Osmeña, supra, in this wise:

The necessity of making the City a respondent herein is based upon its right to defend itself, as demanded by the requirements of due process. However, these requirement have been substantially complied with in the case at bar. The parties herein have handled the case, and the same was heard and decided in the lower court, as if the City had been named respondent in the pleadings. The officer required by law "to cause to be defended all suits against the City", namely, its mayor (Sec. 8, Commonwealth Act No. 58), is respondent in his official capacity. The officer charged with the duty to represent the City "in all civil cases wherein the city ... is a party" — to wit, its city attorney (Sec. 17, Commonwealth Act No. 58) — is counsel for respondents herein. In addition thereto, the auditor, the treasurer and even the municipal board of the City of Cebu, are parties respondents.

There is no reason to believe that these officers and the City Mayor would have exerted greater efforts than those already displayed by them, in protesting the interests of the City of Cebu, were it formally a respondent herein. Indeed, it is only logical to expect that, having been individually named as respondents, said officers must have taken as much concern, if not more, in warding off petitioners' claim. Under the foregoing circumstances, we would be subordinating the substance to the form if the action for mandamus— insofar as the claim for back salaries is concerned — were either dismissed or remanded to the lower court, for the corresponding amendment of the pleadings and a repetition of the proceedings held for the last five (5) years, in order to reach the same decision rendered by the lower court and the same conclusions set forth in this decision, as regards the substantive rights of the parties. It is our considered opinion, therefore, that the ends of justice and equity would be served best if the inclusion of the City of Cebu, as one of the respondents herein, were considered a mere formality and deemed effected, as if a formal amendment of the pleadings had been made.

A recent case, whose factual situation has great relevance to the present, is Torres vs. Caluag, L-20906, July 30, 1966. There, petitioner Torres was not a party defendant in a suit to recover possession of land instituted against defendant Conocido who declared that he was a mere tenant of Torres. Judgment was rendered against Conocido, and a writ of execution was issued ejecting Torres from the property. On writ of certiorari and prohibition to this Court to nullify the writ of execution aforesaid, we pronounced that when petitioner Torres testified in the court below, she had her day in court and had laid squarely before said court the issue of ownership. We then explicitly stated that the fact that petitioner was not formally made a party defendant is a mere technicality that does not serve the interest of justice.

In the end, we find it pertinent to quote from the early case of Herrera vs. Barretto, 25 Phil. 245, 271, thus:

... The office of the writ of certiorari has been reduced to the correction of defects of jurisdiction solely and cannot legally be used for any other purpose. It is truly an extraordinary remedy and, in this jurisdiction, its use is restricted to truly extra-ordinary cases — cases in which the action of the inferior court is wholly void; where any further steps in the case would result in a waste of time and money and would produce no result whatever; where the parties, or their privies, would be utterly deceived; where a final judgment or decree would be nought but a snare and a delusion, deciding nothing, protecting nobody, a judicial pretention, a recorded falsehood, a standing menace. It is only to avoid such results as these that a writ of certiorari is issuable; and even here an appeal will lie if the aggrieved party prefers to prosecute it.

For the reasons given, the petition for certiorari and mandamus prayed for herein is hereby granted; and

(a) The orders of Judge Gaudencio Cloribel of March 5, May 20, and July 13, 1966 are hereby set aside and declared null and void; and

(b) The Court a quo is hereby directed forthwith to issue a writ of execution against respondent University Publishing Company, Inc. and/or Jose M. Aruego.

Treble costs shall be paid by respondent Jose M. Aruego. So ordered.

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FIRST DIVISION

[G.R. No. 152988.  August 24, 2004]

CHIANG KAI SHEK COLLEGE, and CHIEN YIN SHAO, petitioners, vs. HON. COURT OF APPEALS; HON. NATIONAL LABOR RELATIONS COMMISSION; HON. COMMISSIONER VICTORIANO R. CALAYLAY, HON. PRESIDING COMMISSIONER RAUL T. AQUINO, and HON. COMMISSIONER ANGELITA A. GACUTAN; and MS. DIANA P. BELO, respondents.

D E C I S I O N

DAVIDE, JR., C.J.:

Assailed in this petition is the decision [1] of 12 October 2001, as well as the resolution [2] of 11 April 2002, of the Court Appeals in CA-G.R. SP No. 59996, which affirmed the decision [3] of 29 February 2000 of the National Labor Relations Commission (NLRC) declaring that Diana P. Belo was illegally dismissed as a teacher of petitioner Chiang Kai Shek College (CKSC).

The controversy began on 8 June 1992, when Ms. Belo, a teacher of CKSC since 1977, applied for a leave of absence for the school year 1992-1993 because her children of tender age had no yaya to take care of them.  The then principal, Mrs. Joan Sy Cotio, approved her application.  However, on 15 June 1992, Ms. Belo received a letter dated 9 June 1992 of Mr. Chien Yin Shao, President of CKSC,  informing her of the school’s existing policy; thus:

Regarding your letter of request for leave of absence dated June 8, 1992, we would like to inform you of the existing policy of our school:

(1)   We could not assure you of any teaching load should you decide to return in the future.

(2)   Only teachers in service may enjoy the privilege and benefits provided by our school.  Hence, your children are no longer entitled to free tuition starting school year 1992-1993.[4]

Ms. Belo, nonetheless, took her leave of absence.  On 8 July 1992, she learned that Laurence, one of her three children studying at the CKSC, was sent out of the examination room because his tuition fees were not paid.  This embarrassing incident impelled Ms. Belo to pay, allegedly under protest, all the school fees of her children.[5]

In May 1993, after her one-year leave of absence, Ms. Belo presented herself to Ms. Cotio and signified her readiness to teach for the incoming school year 1993-1994.  She was, however, denied and not accepted by Ms. Cotio.  She then relayed the denial to Mr. Chien on 17 May 1993.  On 21 July 1993, she received the reply of Mr. Chien dated 1 July 1993  informing her that her confirmation to teach was filed late and that there was no available teaching load for her because as early as April 21 of that year, the school had already hired non-permanent teachers.[6]

Adversely affected by the development, Ms. Belo filed with the Labor Arbitration Office a complaint for illegal dismissal; non-payment of salaries, 13th month pay, living allowance, teacher's day pay; loss of income; and moral damages.

In his decision[7] of 18 October 1995, Labor Arbiter Donato G. Quinto, Jr., dismissed the complaint, reasoning that Ms. Belo was not dismissed but that there was simply no available teaching load for her.  When in May 1993 she signified her intention to teach, the school had already acted on the applications or re-applications to teach of probationary teachers.  The school’s policies, which were articulated in Mr. Chien’s letter of 9 June 1992 to Ms. Belo, were management prerogatives which did not amount to her dismissal.  Said policies were also the consequences of her leave of absence and were not even questioned by her.  The Labor Arbiter thus offered a Solomonic solution by directing the petitioners to give her a teaching load in the ensuing year 1996-1997 and the succeeding years without loss of seniority rights.[8]

On appeal[9] by the private respondent, the NLRC reversed the decision of the Labor Arbiter.  It considered as misplaced the Labor Arbiter’s utter reliance on Mr. Chien’s letter to Ms. Belo enunciating the questioned school policies.   It reasoned that if the school policy was to extend free tuition fees to children of teachers in school, then the petitioners must have considered her “already not in school or summarily dismissed or separated the very moment [she] applied for leave,”  for, otherwise, her children would have been granted that privilege.  Thus, it directed the petitioners to immediately reinstate Ms. Belo to her former position with full back wages from the time of her dismissal up to her actual reinstatement.  It, however, dismissed Ms. Belo's prayer for moral and exemplary damages and attorney's fees for lack of evidence that the petitioners acted in bad faith and malice.

Their motion for reconsideration having been denied,[10] the petitioners filed a petition for certiorari with the Court of Appeals contending that the NLRC gravely abused its discretion amounting to lack of jurisdiction in (a) overturning the factual determination of the Labor Arbiter despite the fact that  Ms. Belo stated in her Notice of Appeal that she was appealing only on a pure question of law; (b) holding that Ms. Belo was constructively dismissed by the petitioners despite the uncontroverted evidence that she was not illegally dismissed; and (c) granting Ms. Belo monetary awards.

On 12 October 2001, the Court of Appeals found that far from abusing its discretion, the NLRC acted correctly when it ascertained that Ms. Belo was constructively dismissed.  It declared as illegal, for being violative of Ms. Belo’s right to security of tenure, the school policy that a teacher who goes on leave cannot be assured of a teaching load.  The school should have set aside a teaching load for her after the expiration of her leave of absence.  It would have been a different story, one indeed ripe for termination of her employment, had Ms. Belo failed to report for work. As for the school’s contention that the NLRC was barred from resolving factual issues because of Ms. Belo's statement that she was appealing the case on a pure question of law, the Court of Appeals declared that such statement was a simple mistake in terminology, which is insufficient to deny an employee of her rights under the law.

In its resolution dated 11 April 2002, the Court of Appeals denied the motion for reconsideration for lack of merit. 

Hence, on 11 June 2002,[11] petitioner CKSC and its president Mr. Chien filed the present petition.  They claim that the Court of Appeals erred in affirming the NLRC decision which reversed the factual findings of the Labor Arbiter even if the said findings were amply supported by clear and uncontroverted evidence and had already attained finality, as Ms. Belo had appealed merely on a question of law.   The Court of Appeals also erred in upholding the NLRC decision which failed to point out specifically the alleged particular portions of the records of the case, parties’ respective position papers, and pleadings, much less particular testimonial and documentary evidence, that warrant the patently erroneous and baseless conclusion that there was a “clear case of constructive dismissal.” The NLRC decision is in complete violation of Section 14, Article VIII of the Constitution, which provides: “No decision shall be rendered by any court without expressing therein clearly and distinctly the facts and the laws on which it is based.” Likewise, the Court of Appeals has not only completely and arbitrarily ignored and disregarded the facts and issues raised as an issue before it, but also decided on the illegality of the school’s policy, which was never raised before it or in any of the forums below.   Anent the free tuition fee benefit extended to children of teachers in service in petitioner school, the same is a privilege granted not by law, but voluntarily by the said school.  Hence, the petitioner school could determine the conditions under which said privilege may be enjoyed, such as, that only teachers in actual service can enjoy the privilege.

Amidst the convolution of issues proffered by the petitioners, the only issue that needs to be determined and on which hinges the resolution of the other issues is whether the Court of Appeals erred in affirming the

45

NLRC decision that Ms. Belo was constructively, nay, illegally dismissed and is, therefore, entitled to reinstatement and back wages.

It must be noted at the outset that Ms. Belo had been a full-time teacher in petitioner CKSC continuously for fifteen years or since 1977 until she took a leave of absence for the school year 1992-1993.  Under the Manual of Regulations for Private Schools, for a private school teacher to acquire a permanent status of employment and, therefore, be entitled to a security of tenure, the following requisites must concur: (a) the teacher is a full-time teacher; (b) the teacher must have rendered three consecutive years of service; and (c) such service must have been satisfactory.[12]

Since Ms. Belo has measured up to these standards, she therefore enjoys security of tenure.  The fundamental guarantees of security of tenure and due process dictate that no worker shall be dismissed except for just and authorized cause provided by law and after due notice and hearing.[13]

We agree with the Court of Appeals that the NLRC did not commit any grave abuse of discretion in finding that Ms. Belo was constructively dismissed when the petitioners, in implementing their policies, effectively barred her from teaching for the school year 1993-1994.  The three policies are (1) the non-assurance of a teaching load to a teacher who took a leave of absence; (2) the hiring of non-permanent teachers in April to whom teaching loads were already assigned when Ms. Belo signified in May 1993 her intention to teach; and (3) the non-applicability to children of teachers on leave of the free tuition fee benefits extended to children of teachers in service.

Case law defines constructive dismissal as a cessation from work because continued employment is rendered impossible, unreasonable, or unlikely; when there is a demotion in rank or a diminution in pay or both; or when a clear discrimination, insensibility, or disdain by an employer becomes unbearable to the employee.[14]

When in the school year 1992-1993, the petitioners already applied to Ms. Belo’s children the policy of extending free tuition fee benefits only to children of teachers in service, Ms. Belo was clearly discriminated by them.  True, the policy was made known to Ms. Belo in a letter dated 9 June 1992, but, this only additionally and succinctly reinforced the clear case of discrimination. Notably, petitioners’ statements of policies dated 13 March 1992 for the school year 1992-1993 did not include that policy; thus:

To       :  All Teachers and Staff of Chiang Kai Shek College

From   :  The  President

Pursuant to laws, rules and regulations promulgated by the proper government authorities of the Philippines, the following procedure are hereby issued for proper compliance of all concerned:

1.  All teachers and staff who have rendered satisfactory service for a period of more than three (3) full consecutive years (e.g. those who started working in June, 1988 or before) are considered permanent employees and therefore need not re-apply for the forthcoming school year 1992-1993.

2. However, should any teacher or staff of permanent status wish to resign or to retire after this school year 1991-1992, he/she must file his/her written resignation or retirement application on or before March 28, 1992, so that the school will have sufficient time to make the necessary adjustments.  Failure to file formal application on the part of the permanent employee shall be construed as consent to work for another school year.

3.  All probationary employees (e.g. those who started working after June, 1988) who wish to continue their services in our school shall re-apply. Reapplications must be submitted on or before March 28, 1992. Failure to submit reapplication shall be construed  as not interested to work for Chiang Kai Shek College in the coming school year 1992-1993.

4. All reapplications shall be acted upon and the decision of the administration will be conveyed to the employees concerned on or before April 21, 1992. [15]

It can be argued that the extension of free tuition fees to children of teachers in service was an informal policy or custom. If it were so, there would have been no need to include this policy in the school’s written statement of policies dated 12 March 1993, which reads:

To      :  All Teachers and Staff of Chiang Kai Shek College

From  :  The Office of the President

Pursuant to laws, rules and regulations promulgated by the proper government authorities of the Philippines, the following procedure are hereby issued for proper compliance of all concerned:

1.  All teachers and staff who have rendered satisfactory service for a period of more than three (3) full consecutive years (e.g. those who started working in June, 1989 or before) are considered permanent employees and therefore need not re-apply for the forthcoming school year 1993-1994.

2.  However, should any teacher or staff of permanent status wish to resign, to retire, or to take a leave of absence after this school year 1992-1993, he/she must file his/her written application on or before March 27, 1993, so that the school will have sufficient time to make the necessary adjustments.  Failure to file formal application on the part of the permanent employee shall be construed as consent to work for another school year.

In accordance with our school policy, employees not in service are not entitled to any benefit extended by our school.

3. All probationary employees (e.g. those who started working after June 1989) who wish to continue their services in our school shall re-apply. Reapplications must be submitted on or before March 27, 1993. Failure to submit reapplication shall be construed  as not interested to work for Chiang Kai Shek College in the coming school year 1993-1994.

4. All reapplications shall be acted upon and the decision of the administration will be conveyed to the employees concerned on or before April 21, 1993.[16]

A cursory analysis of the petitioners’ statements of policies dated 13 March 1992 and 12 March 1993 reveals that the lists of policies are essentially the same.  Both are addressed to all teachers and staff of petitioner school.  However, the policy “that employees not in service are not entitled to any benefit extended by the school” was not listed in the written statement of policies dated 13 March 1992.   The policy made its maiden appearance in petitioners’ statement of policies one year after or on 12 March 1993.   It was, therefore, the policy of extending free tuition fees to children of teachers of the school, whether on service or on leave, which existed as a matter of custom and practice. That is why the school modified the privilege in written form.

Thus, when the petitioners retroactively applied the modified written policy to Ms. Belo, they considered her already a teacher not in service.  The NLRC was correct when  it reasoned as follows: “[I]f the school policy is to extend ‘free tuition fees’ to children of teachers in school, then respondents [petitioners herein] have considered [Ms. Belo] ‘already not in school or summarily dismissed or separated the very moment the latter applied for leave.’ Otherwise, [her] children should have been granted the ‘on-going’ privileges and benefits on free tuition fees, among others.”

Ms. Belo was definitely singled out in the implementation of a future policy.  This is grossly unfair and unjust.  The petitioners did not take heed of the principle enshrined in our labor laws that policies should be

46

adequately known to the employees and uniformly implemented to the body of employees as a whole and not in isolation.

The continued employment of Ms. Belo was also rendered unlikely by the insistence of the petitioners in implementing the alleged policy that a teacher who goes on leave for one year is not assured of a teaching load. While this alleged policy was mentioned in Mr. Chien’s letter of 9 June 1992, it was not included in the school’s written statement of policies dated 13 March 1992. Hence, it was then a non-existent policy.  When a non-existent policy is implemented and, in this case, only to Ms. Belo, it constitutes a clear case of discrimination.

Even if the policy of non-assurance of a teaching load existed as a matter of practice and custom, it still glaringly contradicts petitioners’ written statement of policies dated 12 March 1993. Crystal clear therefrom is the fact that only permanent teachers who wished “to resign, to retire, or to take a leave of absence after the school year 1992-1993 must file their written application in March 1993.” Those who failed to file an application were expressly considered by the school as consenting to teach for the succeeding school year.   Additionally, the petitioners did not require permanent teachers with satisfactory service to re-apply.

It, therefore, blows our mind why the petitioners would require Ms. Belo, a permanent teacher since 1977 with a satisfactory service record, to signify her intention to teach in March 1993. Plainly, the petitioners violated their avowed policies.  Since Ms. Belo was not retiring, resigning or filing another leave of absence after the school year 1992-1993, the petitioners should have considered her as consenting to teach for the incoming school year 1993-1994.  In fact, they should not have required her to re-apply to teach.   In accordance with the written statement of policies dated 12 March 1993, only probationary teachers are required by the petitioners to re-apply in March. Failure of probationary teachers to re-apply in March is an indication of their lack of interest to teach again at the school.

Petitioners’ invocation of the third policy – that of giving teaching assignments to probationary teachers in April – to justify their refusal to provide Ms. Belo a teaching load is, therefore, a lame excuse that rings of untruth and dishonesty.  Patently clear is the illegal manner by which the petitioners eased out Ms. Belo from the teaching corps.

Thus, the Court of Appeals’ justification in upholding the NLRC ruling attains an added judicial and logical sting:

When respondent Belo reported for work after the termination of her one-year leave of absence, it was obligatory for petitioner school to give her a teaching load. It was improper for petitioner school to farm out subjects of respondent Belo to provisionary [sic] teacher [sic]. The petitioner school should have assumed that respondent Belo was returning for work after the expiration of her leave. It would have been a different story, if after the start of classes, respondent Belo failed to report for work, then the school had a right to institute the necessary proceeding for the termination of her employment.[17]

Likewise, we do not find merit in petitioners’ assertion that the Court of Appeals should not have passed upon the illegality of the school policy of non-assurance of a teaching load, since the alleged illegality was never raised as an issue before the respondent court or in the forums below.  As pointed out by the private respondent, that policy was part of the defense invoked by the petitioners in the Arbiter level, in the NLRC, and in the respondent court to the charge of illegal dismissal; and, hence, it must necessarily be passed upon and scrutinized.  Besides, that policy is intimately intertwined with the main issue of whether Ms. Belo was illegally dismissed.

We reject petitioners’ contention that “the NLRC decision failed to point out specifically the alleged particular portions of the records of the case, parties’ respective position papers, and pleadings, much less particular testimonial and documentary evidence, that warrant the patently erroneous and baseless conclusion that there is a clear case of constructive dismissal.” In fact, the NLRC considered the same policies that the petitioners insist as their bases for maintaining that Ms. Belo was not dismissed.   It seems that the petitioners could only be persuaded if the reviewing bodies unearthed a document that explicitly states that Ms. Belo was being constructively dismissed.  This phantom paper chase unveils the unsubstantiated and contrived claim of the petitioners.  They need only to look, for example, at the letter dated 9 June 1992 to Ms. Belo.   The “policies” therein stated are discernibly non-existent, or if existing as a matter of custom they grossly transgressed

petitioners’ formal written policies dated 13 March 1992 and 12 March 1993.  Clear, therefore, is the fact that the written formal policies apply to all teachers and staff except Ms. Belo.

Hence, there is no need to belabor the point that the NLRC decision clearly complied with the requirement expressed under Section 14, Article VIII of the Constitution.  The decision speaks for itself.

Suffice it is to say,  this case is an exception to the general rule that the  factual findings and conclusions of the Labor Arbiter are accorded weight and respect  on appeal, and even finality. For one thing, the findings of the NLRC and the Labor Arbiter are contrary to each other; hence, the reviewing court may delve into the records and examine for itself the questioned findings.[18]

Further, we do not find merit in petitioners’ claim that Ms. Belo’s judicial admission that she was appealing on a “pure question of law” precludes the review and reversal of the Labor Arbiter’s factual finding that she was not illegally dismissed.  Such claim is belied by the Notice of Appeal itself, [19] wherein Ms. Belo declared that she was appealing the decision of the Labor Arbiter to the NLRC “on a pure question of law and for being contrary to law and jurisprudence applicable [to] the case and the evidence on record,  and rendered with grave abuse of discretion.”[20]

Oddly, even the petitioners themselves maintain that to prove grave abuse of discretion, “it is necessary to bring out questions of fact.” Thus, in their own justification in resorting to both Rules 45 and 65 of the Rules of Court for the review and the nullification of the decision of the Court of Appeals, they contend:

Clearly, petitioners’ remedy is two-fold – under Rule 45 and 65.  Under Rule 45, only questions of law may be raised.  Perhaps, respondents can now understand why petitioners have used both Rules 45 and 65.  And this is simply because by invoking said two rules, they are not limited to raising questions of law, but they can raise both questions of fact and law.  To show that grave abuse of discretion has been committed under Rule 65, it is necessary to bring out questions of fact, which was precisely done in the issues raised in page 2 of the petition….[21]

Indeed, Ms. Belo questioned the legality of her dismissal and the denial of her monetary claims, as well as her claim for damages.  Both are essentially factual issues, since their determination necessitates an evaluation of proof and not only a consideration of the applicable statutory and case laws.

Basic is the distinction between legal and factual issues. A question of law exists when the doubt or controversy concerns the correct application of law or jurisprudence to a certain set of facts; or when the issue does not call for an examination of probative value of the evidence presented, the truth or falsehood of facts being admitted.  A question of fact exists when the doubt or difference arises as to the truth or falsehood of facts or when the query invites calibration of the whole evidence considering mainly the credibility of witnesses, the existence and relevancy of specific surrounding circumstances, as well as their relation to each other and to the whole, and the probability of the situation.[22]

More importantly, the Labor Arbiter’s conclusions are baseless, bereft of any rational basis, unsupported by evidence on record, and glaringly erroneous.  The decisions of the NLRC and the Court of Appeals are the ones in harmony with the evidence on record.

In sum, we are convinced that Ms. Belo was unceremoniously and constructively dismissed by the petitioners without just cause and without observing the twin requirements of due process, i.e., due notice and hearing, in violation of the tenets of equity and fair play. Ms. Belo is, therefore, entitled to reinstatement and back wages in accordance with the questioned Court of Appeals’ and NLRC decisions.

WHEREFORE, the petition is DENIED.  The decision of 12 October 2001 and resolution of 11 April 2002 of the Court of Appeals in CA-GR. SP No. 59996 are hereby AFFIRMED.

Costs against the petitioners.

SO ORDERED.

THIRD DIVISION

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[G.R. No. 136448.  November 3, 1999]

LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

D E C I S I O N

PANGANIBAN, J.:

A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to divide the profits or losses that may arise therefrom, even if it is shown that they have not contributed any capital of their own to a "common fund." Their contribution may be in the form of credit or industry, not necessarily cash or fixed assets.  Being partners, they are all liable for debts incurred by or on behalf of the partnership.  The liability for a contract entered into on behalf of an unincorporated association or ostensible corporation may lie in a person who may not have directly transacted on its behalf, but reaped benefits from that contract.

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision of the Court of Appeals in CA-GR CV 41477,[1] which disposed as follows:

“WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby affirmed.”[2]

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the CA, reads as follows:

“WHEREFORE, the Court rules:

1.  That plaintiff is entitled to the writ of preliminary attachment issued by this Court on September 20, 1990;

2.  That defendants are jointly liable to plaintiff for the following amounts, subject to the modifications as hereinafter made by reason of the special and unique facts and circumstances and the proceedings that transpired during the trial of this case;

a.  P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the Agreement plus P68,000.00 representing the unpaid price of the floats not covered by said Agreement;

b.  12% interest per annum counted from date of plaintiff’s invoices and computed on their respective amounts as follows:

i.  Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February 9, 1990;

ii.  Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated February 13, 1990;

iii.  Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February 19, 1990;

c.  P50,000.00 as and for attorney’s fees, plus P8,500.00 representing P500.00 per appearance in court;

d.  P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets counted from September 20, 1990 (date of attachment) to September 12, 1991 (date of auction sale);

e.  Cost of suit.

“With respect to the joint liability of defendants for the principal obligation or for the unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00, respectively, or for the total amount of P600,045.00, this Court noted that these items were attached to guarantee any judgment that may be rendered in favor of the plaintiff but, upon agreement of the parties, and, to avoid further deterioration of the nets during the pendency of this case, it was ordered sold at public auction for not less than P900,000.00 for which the plaintiff was the sole and winning bidder.  The proceeds of the sale paid for by plaintiff was deposited in court.  In effect, the amount of P900,000.00 replaced the attached property as a guaranty for any judgment that plaintiff may be able to secure in this case with the ownership and possession of the nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder in the public auction sale.  It has also been noted that ownership of the nets [was] retained by the plaintiff until full payment [was] made as stipulated in the invoices; hence, in effect, the plaintiff attached its own properties.  It [was] for this reason also that this Court earlier ordered the attachment bond filed by plaintiff to guaranty damages to defendants to be cancelled and for the P900,000.00 cash bidded and paid for by plaintiff to serve as its bond in favor of defendants.

“From the foregoing, it would appear therefore that whatever judgment the plaintiff may be entitled to in this case will have to be satisfied from the amount of P900,000.00 as this amount replaced the attached nets and floats.  Considering, however, that the total judgment obligation as computed above would amount to only P840,216.92, it would be inequitable, unfair and unjust to award the excess to the defendants who are not entitled to damages and who did not put up a single centavo to raise the amount of P900,000.00 aside from the fact that they are not the owners of the nets and floats.  For this reason, the defendants are hereby relieved from any and all liabilities arising from the monetary judgment obligation enumerated above and for plaintiff to retain possession and ownership of the nets and floats and for the reimbursement of the P900,000.00 deposited by it with the Clerk of Court.

SO ORDERED.” [3]

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. (herein respondent).  They claimed that they were engaged in a business venture with Petitioner Lim Tong Lim, who however was not a signatory to the agreement.   The total price of the nets amounted toP532,045.  Four hundred pieces of floats worth P68,000 were also sold to the Corporation.[4]

The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondent filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was brought against the three in their capacities as general partners, on the allegation that “Ocean Quest Fishing Corporation” was a nonexistent corporation as shown by a Certification from the Securities and Exchange Commission.[5] On September 20, 1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets on board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.

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Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a reasonable time within which to pay.  He also turned over to respondent some of the nets which were in his possession.  Peter Yao filed an Answer, after which he was deemed to have waived his right to cross-examine witnesses and to present evidence on his behalf, because of his failure to appear in subsequent hearings.   Lim Tong Lim, on the other hand, filed an Answer with Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment.[6] The trial court maintained the Writ, and upon motion of private respondent, ordered the sale of the fishing nets at a public auction.  Philippine Fishing Gear Industries won the bidding and deposited with the said court the sales proceeds of P900,000.[7]

On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay respondent.[8]

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the three [9] in Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b) a reformation of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e) damages.[10] The Compromise Agreement provided:

“a)            That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in the amount of P5,750,000.00 including the fishing net.  This P5,750,000.00 shall be applied as full payment for P3,250,000.00 in favor of JL Holdings Corporation and/or Lim Tong Lim;

“b)            If the four (4) vessel[s] and the fishing net will be sold at a higher price than P5,750,000.00 whatever will be the excess will be divided into 3:  1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;

“c)            If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the deficiency shall be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao.”[11]

The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that joint liability could be presumed from the equal distribution of the profit and loss.[12]

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

Ruling of the Court of Appeals

In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing business and may thus be held liable as a such for the fishing nets and floats purchased by and for the use of the partnership.  The appellate court ruled:

“The evidence establishes that all the defendants including herein appellant Lim Tong Lim undertook a partnership for a specific undertaking, that is for commercial fishing x x x.  Obviously, the ultimate undertaking of the defendants was to divide the profits among themselves which is what a partnership essentially is x x x.  By a contract of partnership, two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves (Article 1767, New Civil Code).”[13]

Hence, petitioner brought this recourse before this Court.[14]

The Issues

In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the following grounds:

“I         THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.

“II        SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM AS WELL.

“III       THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF PETITIONER LIM’S GOODS.”

In determining whether petitioner may be held liable for the fishing nets and floats purchased from respondent, the Court must resolve this key issue:  whether by their acts, Lim, Chua and Yao could be deemed to have entered into a partnership.

This Court’s Ruling

The Petition is devoid of merit.

First and Second Issues:  Existence of a Partnership and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from respondent, petitioner controverts the CA finding that a partnership existed between him, Peter Yao and Antonio Chua.  He asserts that the CA based its finding on the Compromise Agreement alone.  Furthermore, he disclaims any direct participation in the purchase of the nets, alleging that the negotiations were conducted by Chua and Yao only, and that he has not even met the representatives of the respondent company.  Petitioner further argues that he was a lessor, not a partner, of Chua and Yao, for the "Contract of Lease" dated February 1, 1990, showed that he had merely leased to the two the main asset of the purported partnership -- the fishing boat  F/B Lourdes.  The lease was for six months, with a monthly rental of P37,500 plus 25 percent of the gross catch of the boat.

We are not persuaded by the arguments of petitioner.  The facts as found by the two lower courts clearly showed that there existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the Civil Code which provides:

“Article 1767 - By the contract of partnership, two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.”

Specifically, both lower courts ruled that a partnership among the three existed based on the following factual findings:[15]

(1)  That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing to join him, while Antonio Chua was already Yao’s partner;

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(2)  That after convening for a few times, Lim Chua, and Yao verbally agreed to acquire two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;

(3)  That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to finance the venture.

(4)  That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security for the loan extended by Jesus Lim;

(5)  That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing, dry docking and other expenses for the boats would be shouldered by Chua and Yao;

(6)  That because of the “unavailability of funds,” Jesus Lim again extended a loan to the partnership in the amount of P1 million secured by a check, because of which, Yao and Chua entrusted the ownership papers of two other boats, Chua’s FB Lady Anne Mel and Yao’s FB Tracy to Lim Tong Lim.

(7)  That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their purported business name.

(8)  That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of commercial documents; (b) reformation of contracts; (c) declaration of ownership of fishing boats; (4) injunction; and (e) damages.

(9)  That the case was amicably settled through a Compromise Agreement executed between the parties-litigants the terms of which are already enumerated above.

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a fishing business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim who was petitioner’s brother.  In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess or loss.  These boats, the purchase and the repair of which were financed with borrowed money, fell under the term “common fund” under Article 1767.  The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry.  That the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed formed a partnership.

Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets and the floats.  The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of their business.  It would have been inconceivable for Lim to involve himself so much in buying the boat but not in the acquisition of the aforesaid equipment, without which the business could not have proceeded.

Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged in the fishing business.  They purchased the boats, which constituted the main assets of the partnership, and they agreed that the proceeds from the sales and operations thereof would be divided among them.

We stress that under Rule 45, a petition for review like the present case should involve only questions of law.  Thus, the foregoing factual findings of the RTC and the CA are binding on this Court, absent any cogent proof that the present action is embraced by one of the exceptions to the rule. [16] In assailing the factual findings of the two lower courts, petitioner effectively goes beyond the bounds of a petition for review under Rule 45.

Compromise Agreement Not the Sole Basis of Partnership

Petitioner argues that the appellate court’s sole basis for assuming the existence of a partnership was the Compromise Agreement.  He also claims that the settlement was entered into only to end the dispute among them, but not to adjudicate their preexisting rights and obligations.  His arguments are baseless.  The Agreement was but an embodiment of the relationship extant among the parties prior to its execution.

A proper adjudication of claimants’ rights mandates that courts must review and thoroughly appraise all relevant facts.  Both lower courts have done so and have found, correctly, a preexisting partnership among the parties.  In implying that the lower courts have decided on the basis of one piece of document alone, petitioner fails to appreciate that the CA and the RTC delved into the history of the document and explored all the possible consequential combinations in harmony with law, logic and fairness.  Verily, the two lower courts’ factual findings mentioned above nullified petitioner’s argument that the existence of a partnership was based only on the Compromise Agreement.

Petitioner Was a Partner, Not a Lessor

We are not convinced by petitioner’s argument that he was merely the lessor of the boats to Chua and Yao, not a partner in the fishing venture.  His argument allegedly finds support in the Contract of Lease and the registration papers showing that he was the owner of the boats, including F/B Lourdes where the nets were found.

His allegation defies logic.  In effect, he would like this Court to believe that he consented to the sale of his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the three of them.  No lessor would do what petitioner did.  Indeed, his consent to the sale proved that there was a preexisting partnership among all three.

Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in which debts were undertaken in order to finance the acquisition and the upgrading of the vessels which would be used in their fishing business.  The sale of the boats, as well as the division among the three of the balance remaining after the payment of their loans, proves beyond cavil that F/B Lourdes, though registered in his name, was not his own property but an asset of the partnership.  It is not uncommon to register the properties acquired from a loan in the name of the person the lender trusts, who in this case is the petitioner himself.  After all, he is the brother of the creditor, Jesus Lim.

We stress that it is unreasonable – indeed, it is absurd -- for petitioner to sell his property to pay a debt he did not incur, if the relationship among the three of them was merely that of lessor-lessee, instead of partners.

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao, and not to him.  Again, we disagree.

Section 21 of the Corporation Code of the Philippines provides:

“Sec. 21.  Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof:  Provided however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.

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“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, a party may be estopped from denying its corporate existence. “The reason behind this doctrine is obvious - an unincorporated association has no personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided 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 at their own risk.   And as it is an elementary principle of law that a person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent.”[17]

The doctrine of corporation by estoppel may apply to the alleged 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 corporate capacity in a suit against it by a third person who relied in good faith on such representation.  It cannot allege lack of personality to be sued to evade its responsibility for 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 association to be unincorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation.  In such case, all those who benefited from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of.

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the nets it sold.  The only question here is whether petitioner should be held jointly[18] liable with Chua and Yao. Petitioner contests such liability, insisting that only those who dealt in the name of the ostensible corporation should be held liable.  Since his name does not appear on any of the contracts and since he never directly transacted with the respondent corporation, ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which has earlier been proven to be an asset of the partnership.  He in fact questions the attachment of the nets, because the Writ has effectively stopped his use of the fishing vessel.

It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a corporation.  Although it was never legally formed for unknown reasons, this fact alone does not preclude the 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 be without valid existence, are held liable as general partners.

Technically, it is true that petitioner did not directly act on behalf of the corporation.  However, having reaped the benefits of the contract entered into by persons with whom he previously had an existing relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel.  We reiterate the ruling of the Court in Alonso v. Villamor:[19]

“A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art of movement and position , entraps and destroys the other.  It is, rather, a contest in which each contending party fully and fairly lays before the court the facts in issue and then, brushing aside as wholly trivial and indecisive all imperfections of form and technicalities of procedure, asks that justice be done upon the merits.  Lawsuits, unlike duels, are not to be won by a rapier’s thrust.  Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts.  There should be no vested rights in technicalities.”

Third Issue:  Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets.   We agree with the Court of Appeals that this issue is now moot and academic.  As previously discussed, F/B Lourdes was an asset of the partnership and that it was placed in the name of petitioner, only to assure payment of the debt he and his partners owed.  The nets and the floats were specifically manufactured and tailor-made according to their own design, and were bought and used in the fishing venture they agreed upon.  Hence, the issuance of the Writ to assure the payment of the price stipulated in the invoices is proper.  Besides, by specific agreement, ownership of the nets remained with Respondent Philippine Fishing Gear, until full payment thereof.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED.  Costs against petitioner.

SO ORDERED.

FIRST DIVISION

[G.R. No. 119002. October 19, 2000]

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner, vs. HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION, respondents.

D E C I S I O N

KAPUNAN, J.:

On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its managing director, wrote a letter to the Philippine Football Federation (Federation), through its president private respondent Henri Kahn, wherein the former offered its services as a travel agency to the latter.[1] The offer was accepted.

Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to the South East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic of China and Brisbane. The total cost of the tickets amounted to P449,654.83. For the tickets received, the Federation made two partial payments, both in September of 1989, in the total amount of P176,467.50.[2]

On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand letter requesting for the amount of P265,894.33.[3] On 30 October 1989, the Federation, through the Project Gintong Alay, paid the amount of P31,603.00.[4]

On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial payment for the outstanding balance of the Federation.[5] Thereafter, no further payments were made despite repeated demands.

This prompted petitioner to file a civil case before the Regional Trial Court of Manila.  Petitioner sued Henri Kahn in his personal capacity and as President of the Federation and impleaded the Federation as an alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid balance for the tickets purchased by the Federation on the ground that Henri Kahn allegedly guaranteed the said obligation.[6]

Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federation owed the amount P207,524.20, representing the unpaid balance for the plane tickets, he averred that the petitioner has no cause of action against him either in his personal capacity or in his official capacity as president of the

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Federation. He maintained that he did not guarantee payment but merely acted as an agent of the Federation which has a separate and distinct juridical personality.[7]

On the other hand, the Federation failed to file its answer, hence, was declared in default by the trial court.[8]

In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared Henri Kahn personally liable for the unpaid obligation of the Federation. In arriving at the said ruling, the trial court rationalized:

Defendant Henri Kahn would have been correct in his contentions had it been duly established that defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor the defendant Henri Kahn has adduced any evidence proving the corporate existence of the defendant Federation. In paragraph 2 of its complaint, plaintiff asserted that "Defendant Philippine Football Federation is a sports association xxx." This has not been denied by defendant Henri Kahn in his Answer. Being the President of defendant Federation, its corporate existence is within the personal knowledge of defendant Henri Kahn. He could have easily denied specifically the assertion of the plaintiff that it is a mere sports association, if it were a domestic corporation. But he did not.

x x x

A voluntary unincorporated association, like defendant Federation has no power to enter into, or to ratify, a contract. The contract entered into by its officers or agents on behalf of such association is not binding on, or enforceable against it. The officers or agents are themselves personally liable.

x x x[9]

The dispositive portion of the trial court's decision reads:

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the principal sum of P207,524.20, plus the interest thereon at the legal rate computed from July 5, 1990, the date the complaint was filed, until the principal obligation is fully liquidated; and another sum of P15,000.00 for attorney's fees.

The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of the defendant Henri Kahn are hereby dismissed.

With the costs against defendant Henri Kahn.[10]

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994, the respondent court rendered a decision reversing the trial court, the decretal portion of said decision reads:

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET ASIDE and another one is rendered dismissing the complaint against defendant Henri S. Kahn.[11]

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the Federation. It rationalized that since petitioner failed to prove that Henri Kahn guaranteed the obligation of the Federation, he should not be held liable for the same as said entity has a separate and distinct personality from its officers.

Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the Federation be held liable for the unpaid obligation. The same was denied by the appellate court in its resolution of 8 February 1995, where it stated that:

As to the alternative prayer for the Modification of the Decision by expressly declaring in the dispositive portion thereof the Philippine Football Federation (PFF) as liable for the unpaid obligation, it should be remembered that the trial court dismissed the complaint against the Philippine Football Federation, and the plaintiff did not appeal from this decision. Hence, the Philippine Football Federation is not a party to this appeal and consequently, no judgment may be pronounced by this Court against the PFF without violating the due process clause, let alone the fact that the judgment dismissing the complaint against it, had already become final by virtue of the plaintiff's failure to appeal therefrom. The alternative prayer is therefore similarly DENIED.[12]

Petitioner now seeks recourse to this Court and alleges that the respondent court committed the following assigned errors:[13]

A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE ONE WHO REPRESENTED THE PFF AS HAVING A CORPORATE PERSONALITY.

B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND CONTRACTED THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AND ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION.

C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE FOR THE OBLIGATION.

The resolution of the case at bar hinges on the determination of the existence of the Philippine Football Federation as a juridical person. In the assailed decision, the appellate court recognized the existence of the Federation. In support of this, the CA cited Republic Act 3135, otherwise known as the Revised Charter of the Philippine Amateur Athletic Federation, and Presidential Decree No. 604 as the laws from which said Federation derives its existence.

As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the juridical existence of national sports associations. This may be gleaned from the powers and functions granted to these associations. Section 14 of R.A. 3135 provides:

SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall have the following functions, powers and duties:

1. To adopt a constitution and by-laws for their internal organization and government;

2. To raise funds by donations, benefits, and other means for their purposes.

3. To purchase, sell, lease or otherwise encumber property both real and personal, for the accomplishment of their purpose;

4. To affiliate with international or regional sports' Associations after due consultation with the executive committee;

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13. To perform such other acts as may be necessary for the proper accomplishment of their purposes and not inconsistent with this Act.

Section 8 of P.D. 604, grants similar functions to these sports associations:

SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports associations shall have the following functions, powers, and duties:

1. Adopt a Constitution and By-Laws for their internal organization and government which shall be submitted to the Department and any amendment thereto shall take effect upon approval by the Department: Provided,however, That no team, school, club, organization, or entity shall be admitted as a voting member of an association unless 60 per cent of the athletes composing said team, school, club, organization, or entity are Filipino citizens;

2. Raise funds by donations, benefits, and other means for their purpose subject to the approval of the Department;

3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the accomplishment of their purpose;

4. Conduct local, interport, and international competitions, other than the Olympic and Asian Games, for the promotion of their sport;

5. Affiliate with international or regional sports associations after due consultation with the Department;

x x x

13. Perform such other functions as may be provided by law.

The above powers and functions granted to national sports associations clearly indicate that these entities may acquire a juridical personality. The power to purchase, sell, lease and encumber property are acts which may only be done by persons, whether natural or artificial, with juridical capacity. However, while we agree with the appellate court that national sports associations may be accorded corporate status, such does not automatically take place by the mere passage of these laws.

It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act. We cannot agree with the view of the appellate court and the private respondent that the Philippine Football Federation came into existence upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision creating the Philippine Football Federation. These laws merely recognized the existence of national sports associations and provided the manner by which these entities may acquire juridical personality. Section 11 of R.A. 3135 provides:

SEC. 11. National Sports' Association; organization and recognition. - A National Association shall be organized for each individual sports in the Philippines in the manner hereinafter provided to constitute the Philippine Amateur Athletic Federation. Applications for recognition as a National Sports' Association shall be filed with the executive committee together with, among others, a copy of the constitution and by-laws and a list of the members of the proposed association, and a filing fee of ten pesos.

The Executive Committee shall give the recognition applied for if it is satisfied that said association will promote the purposes of this Act and particularly section three thereof. No application shall be held pending for more than three months after the filing thereof without any action having been taken thereon by the executive

committee. Should the application be rejected, the reasons for such rejection shall be clearly stated in a written communication to the applicant. Failure to specify the reasons for the rejection shall not affect the application which shall be considered as unacted upon: Provided, however, That until the executive committee herein provided shall have been formed, applications for recognition shall be passed upon by the duly elected members of the present executive committee of the Philippine Amateur Athletic Federation. The said executive committee shall be dissolved upon the organization of the executive committee herein provided: Provided, further, That the functioning executive committee is charged with the responsibility of seeing to it that the National Sports' Associations are formed and organized within six months from and after the passage of this Act.

Section 7 of P.D. 604, similarly provides:

SEC. 7. National Sports Associations. - Application for accreditation or recognition as a national sports association for each individual sport in the Philippines shall be filed with the Department together with, among others, a copy of the Constitution and By-Laws and a list of the members of the proposed association.

The Department shall give the recognition applied for if it is satisfied that the national sports association to be organized will promote the objectives of this Decree and has substantially complied with the rules and regulations of the Department: Provided, That the Department may withdraw accreditation or recognition for violation of this Decree and such rules and regulations formulated by it.

The Department shall supervise the national sports association: Provided, That the latter shall have exclusive technical control over the development and promotion of the particular sport for which they are organized.

Clearly the above cited provisions require that before an entity may be considered as a national sports association, such entity must be recognized by the accrediting organization, the Philippine Amateur Athletic Federation under R.A. 3135, and the Department of Youth and Sports Development under P.D. 604.  This fact of recognition, however, Henri Kahn failed to substantiate. In attempting to prove the juridical existence of the Federation, Henri Kahn attached to his motion for reconsideration before the trial court a copy of the constitution and by-laws of the Philippine Football Federation. Unfortunately, the same does not prove that said Federation has indeed been recognized and accredited by either the Philippine Amateur Athletic Federation or the Department of Youth and Sports Development. Accordingly, we rule that the Philippine Football Federation is not a national sports association within the purview of the aforementioned laws and does not have corporate existence of its own.

Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid obligations of the unincorporated Philippine Football Federation. It is a settled principal in corporation law that any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for other acts performed as such agent. [14] As president of the Federation, Henri Kahn is presumed to have known about the corporate existence or non-existence of the Federation. We cannot subscribe to the position taken by the appellate court that even assuming that the Federation was defectively incorporated, the petitioner cannot deny the corporate existence of the Federation because it had contracted and dealt with the Federation in such a manner as to recognize and in effect admit its existence.[15] The doctrine of corporation by estoppel is mistakenly applied by the respondent court to the petitioner. The application of the doctrine applies to a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation.[16] In the case at bar, the petitioner is not trying to escape liability from the contract but rather is the one claiming from the contract.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED.

SO ORDERED.