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[G.R. No. 160039. June 29, 2004]

RAYMUNDO ODANI SECOSA,

EL BUENASENSO SY

and

DASSAD WAREHOUSING

and

PORT

SERVICES, INCORPORATED, petitioners,

vs. HEIRS OF ERWIN SUAREZ FRANCISCO, respondents.

D E C I S I O N

YNARES-SANTIAGO, J .:

This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the decision[1]

of theCourt of Appeals dated February 27, 2003 in CA-G.R. CV No. 61868, which affirmed in toto the June 19,1998 decision

[2] of Branch 20 of the Regional Trial Court of Manila in Civil Case No. 96-79554.

The facts are as follows:

On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco, an eighteen year old third year physicaltherapy student of the Manila Central University, was riding a motorcycle along Radial 10 Avenue, near the VeteranShipyard Gate in the City of Manila. At the same time, petitioner, Raymundo Odani Secosa, was driving an Isuzucargo truck with plate number PCU-253 on the same road. The truck was owned by petitioner, DassadWarehousing and Port Services, Inc.

Traveling behind the motorcycle driven by Francisco was a sand and gravel truck, which in turn was beingtailed by the Isuzu truck driven by Secosa. The three vehicles were traversing the southbound lane at a fairly highspeed. When Secosa overtook the sand and gravel truck, he bumped the motorcycle causing Francisco tofall. The rear wheels of the Isuzu truck then ran over Francisco, which resulted in his instantaneousdeath. Fearing for his life, petitioner Secosa left his truck and fled the scene of the collision.

[3]

Respondents, the parents of Erwin Francisco, thus filed an action for damages against Raymond OdaniSecosa, Dassad Warehousing and Port Services, Inc. and Dassad’s president, El Buenasucenso Sy. Thecomplaint was docketed as Civil Case No. 96-79554 of the RTC of Manila, Branch 20.

On June 19, 1998, after a full-blown trial, the court a quo rendered a decision in favor of herein respondents,the dispositive portion of which states:

WHEREFORE, premised on the foregoing, judgment is hereby rendered in favor of the plaintiffs ordering the defendants

to pay plaintiffs jointly and severally:

1. The sum of P55,000.00 as actual and compensatory damages;

2. The sum of P20,000.00 for the repair of the motorcycle;

3. The sum of P100,000.00 for the loss of earning capacity;

4. The sum of P500,000.00 as moral damages;

5. The sum of P50,000.00 as exemplary damages;

6. The sum of P50,000.00 as attorney’s fees plus cost of suit.

SO ORDERED.

Petitioners appealed the decision to the Court of Appeals, which affirmed the appealed decision in toto.[4]

Hence the present petition, based on the following arguments:

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I.

THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT

THAT PETITIONER DASSAD DID NOT EXERCISE THE DILIGENCE OF A GOOD FATHER OF A FAMILY IN THE

SELECTION AND SUPERVISION OF ITS EMPLOYEES WHICH IS NOT IN ACCORDANCE WITH ARTICLE 2180 OF

THE NEW CIVIL CODE AND RELATED JURISPRUDENCE ON THE MATTER.

II.

THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT

IN HOLDING PETITIONER EL BUENASENSO SY SOLIDARILY LIABLE WITH PETITIONERS DASSAD AND

SECOSA IN VIOLATION OF THE CORPORATION LAW AND RELATED JURISPRUDENCE ON THE MATTER.

III.

THE JUDGMENT OF THE TRIAL COURT AS AFFIRMED BY THE COURT OF APPEALS AWARDING

P500,000.00 AS MORAL DAMAGES IS MANIFESTLY ABSURD, MISTAKEN AND UNJUST.[5]

The petition is partly impressed with merit.

On the issue of whether petitioner Dassad Warehousing and Port Services, Inc. exercised the diligence of agood father of a family in the selection and supervision of its employees, we find the assailed decision to be in fullaccord with pertinent provisions of law and established jurisprudence.

Article 2176 of the Civil Code provides:

Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage

done. Such fault or negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and

is governed by the provisions of this Chapter.

On the other hand, Article 2180, in pertinent part, states:

The obligation imposed by article 2176 is demandable not only for one’s own acts or omissions, but also for those of

persons for whom one is responsible x x x.

Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of

their assigned tasks, even though the former are not engaged in any business or industry x x x.

The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the

diligence of a good father of a family to prevent damage.

Based on the foregoing provisions, when an injury is caused by the negligence of an employee, there instantlyarises a presumption that there was negligence on the part of the employer either in the selection of his employee

or in the supervision over him after such selection. The presumption, however, may be rebutted by a clearshowing on the part of the employer that it exercised the care and diligence of a good father of a family in theselection and supervision of his employee. Hence, to evade solidary liability for quasi-delict committed by anemployee, the employer must adduce sufficient proof that it exercised such degree of care.

[6]

How does an employer prove that he indeed exercised the diligence of a good father of a family in theselection and supervision of his employee? The case of Metro Manila Transit Corporation v. Court of Appeals

[7] is

instructive:

In fine, the party, whether plaintiff or defendant, who asserts the affirmative of the issue has the burden of presenting at

the trial such amount of evidence required by law to obtain a favorable judgment[8]

. . . In making proof in its or his case, it is

paramount that the best and most complete evidence is formally entered.[9]

Coming now to the case at bar, while there is no rule which requires that testimonial evidence, to hold sway, must be

corroborated by documentary evidence, inasmuch as the witnesses’ testimonies dwelt on mere generalities, we cannot consider



the same as sufficiently persuasive proof that there was observance of due diligence in the selection and supervision of

employees. Petitioner’s attempt to prove its “deligentissimi patris familias” in the selection and supervision of employees

through oral evidence must fail as it was unable to buttress the same with any other evidence, object or documentary, which

might obviate the apparent biased nature of the testimony.[10]

Our view that the evidence for petitioner MMTC falls short of the required evidentiary quantum as would convincingly

and undoubtedly prove its observance of the diligence of a good father of a family has its precursor in the underlying rationalepronounced in the earlier case of Central Taxicab Corp. vs. Ex-Meralco Employees Transportation Co., et al.,

[11] set amidst an

almost identical factual setting, where we held that:

“The failure of the defendant company to produce in court any ‘record’ or other documentary proof tending to establish

that it had exercised all the diligence of a good father of a family in the selection and supervision of its drivers and buses,

notwithstanding the calls therefor by both the trial court and the opposing counsel, argues strongly against its pretensions.

We are fully aware that there is no hard-and-fast rule on the quantum of evidence needed to prove due observance of all

the diligence of a good father of a family as would constitute a valid defense to the legal presumption of negligence on the part

of an employer or master whose employee has by his negligence, caused damage to another. x x x (R)educing the testimony of

Albert to its proper proportion, we do not have enough trustworthy evidence left to go by. We are of the considered opinion,

therefore, that the believable evidence on the degree of care and diligence that has been exercised in the selection andsupervision of Roberto Leon y Salazar, is not legally sufficient to overcome the presumption of negligence against the

defendant company.

The above-quoted ruling was reiterated in a recent case again involving the Metro Manila TransitCorporation,

[12] thus:

In the selection of prospective employees, employers are required to examine them as to their qualifications, experience,

and service records.[13]

On the other hand, with respect to the supervision of employees, employers should formulate standard

operating procedures, monitor their implementation, and impose disciplinary measures for breaches thereof. To establish these

factors in a trial involving the issue of vicarious liability, employers must submit concrete proof, including documentary

evidence.

In this case, MMTC sought to prove that it exercised the diligence of a good father of a family with respect to the

selection of employees by presenting mainly testimonial evidence on its hiring procedure. According to MMTC, applicants are

required to submit professional driving licenses, certifications of work experience, and clearances from the National Bureau of

Investigation; to undergo tests of their driving skills, concentration, reflexes, and vision; and, to complete training programs on

traffic rules, vehicle maintenance, and standard operating procedures during emergency cases.

x x x x x x x x x

Although testimonies were offered that in the case of Pedro Musa all these precautions were followed, the records of his

interview, of the results of his examinations, and of his service were not presented. . . [T]here is no record that Musa attended

such training programs and passed the said examinations before he was employed. No proof was presented that Musa did not

have any record of traffic violations. Nor were records of daily inspections, allegedly conducted by supervisors, ever

presented. . . The failure of MMTC to present such documentary proof puts in doubt the credibility of its witnesses.

Jurisprudentially, therefore, the employer must not merely present testimonial evidence to prove that heobserved the diligence of a good father of a family in the selection and supervision of his employee, but he mustalso support such testimonial evidence with concrete or documentary evidence. The reason for this is to obviatethe biased nature of the employer’s testimony or that of his witnesses.

[14]

Applying the foregoing doctrines to the present case, we hold that petitioner Dassad Warehousing and PortServices, Inc. failed to conclusively prove that it had exercised the requisite diligence of a good father of a family inthe selection and supervision of its employees.

Edilberto Duerme, the lone witness presented by Dassad Warehousing and Port Services, Inc. to support itsposition that it had exercised the diligence of a good father of a family in the selection and supervision of its

employees, testified that he was the one who recommended petitioner Raymundo Secosa as a driver to DassadWarehousing and Port Services, Inc.; that it was his duty to scrutinize the capabilities of drivers; and that he



believed petitioner to be physically and mentally fit for he had undergone rigid training and attended the PPA safetyseminar.

[15]

Petitioner Dassad Warehousing and Port Services, Inc. failed to support the testimony of its lone witness withdocumentary evidence which would have strengthened its claim of due diligence in the selection and supervision ofits employees. Such an omission is fatal to its position, on account of which, Dassad can be rightfully heldsolidarily liable with its co-petitioner Raymundo Secosa for the damages suffered by the heirs of Erwin Francisco.

However, we find that petitioner El Buenasenso Sy cannot be held solidarily liable with his co-petitioners.While it may be true that Sy is the president of petitioner Dassad Warehousing and Port Services, Inc., such fact isnot by itself sufficient to hold him solidarily liable for the liabilities adjudged against his co-petitioners.

It is a settled precept in this jurisdiction that a corporation is invested by law with a personality separate fromthat of its stockholders or members.

[16] It has a personality separate and distinct from those of the persons

composing it as well as from that of any other entity to which it may be related. Mere ownership by a singlestockholder or by another corporation of all or nearly all of the capital stock of a corporation is not in itself sufficientground for disregarding the separate corporate personality.

[17] A corporation’s authority to act and its liability for its

actions are separate and apart from the individuals who own it.[18]

The so-called veil of corporation fiction treats as separate and distinct the affairs of a corporation and itsofficers and stockholders. As a general rule, a corporation will be looked upon as a legal entity, unless and untilsufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience,

justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association ofpersons.

[19] Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may

work inequities among members of the corporation internally, involving no rights of the public or third persons. Inboth instances, there must have been fraud and proof of it. For the separate juridical personality of a corporation tobe disregarded, the wrongdoing must be clearly and convincingly established.

[20] It cannot be presumed.

[21]

The records of this case are bereft of any evidence tending to show the presence of any grounds enumeratedabove that will justify the piercing of the veil of corporate fiction such as to hold the president of DassadWarehousing and Port Services, Inc. solidarily liable with it.

The Isuzu cargo truck which ran over Erwin Francisco was registered in the name of Dassad Warehousingand Port Services, Inc., and not in the name of El Buenasenso Sy. Raymundo Secosa is an employee of Dassad

Warehousing and Port Services, Inc. and not of El Buenasenso Sy. All these things, when taken collectively, pointtoward El Buenasenso Sy’s exclusion from liability for damages arising from the death of Erwin Francisco.

Having both found Raymundo Secosa and Dassad Warehousing and Port Services, Inc. liable for negligencefor the death of Erwin Francisco on June 27, 1996, we now consider the question of moral damages which hisparents, herein respondents, are entitled to recover. Petitioners assail the award of moral damages ofP500,000.00 for being manifestly absurd, mistaken and unjust. We are not persuaded.

Under Article 2206, the “spouse, legitimate and illegitimate descendants and ascendants of the deceased maydemand moral damages for mental anguish for the death of the deceased.” The reason for the grant of moraldamages has been explained in this wise:

. . . the award of moral damages is aimed at a restoration, within the limits possible, of the spiritual status quo ante; and

therefore, it must be proportionate to the suffering inflicted. The intensity of the pain experienced by the relatives of the victimis proportionate to the intensity of affection for him and bears no relation whatsoever with the wealth or means of the

offender.”[22]

In the instant case, the spouses Francisco presented evidence of the searing pain that they felt when thepremature loss of their son was relayed to them. That pain was highly evident in the testimony of the father whowas forever deprived of a son, a son whose untimely death came at that point when the latter was nearing theculmination of every parent’s wish to educate their children. The death of Francis has indeed left a void in the livesof the respondents. Antonio Francisco testified on the effect of the death of his son, Francis, in this manner:

Q: (Atty. Balanag): What did you do when you learned that your son was killed on June 27, 1996?

A: (ANTONIO FRANCISCO): I boxed the door and pushed the image of St. Niño telling why thishappened to us.



Q: Mr. Witness, how did you feel when you learned of the untimely death of your son, Erwin Suares(sic)?

A: Masakit po ang mawalan ng anak. It’s really hard for me, the thought that my son is dead.

x x x x x x x x x

Q: How did your family react to the death of Erwin Suarez Francisco?

A: All of my family and relatives were felt (sic) sorrow because they knew that my son is (sic) good.

Q: We know that it is impossible to put money terms(s) [on] the life of [a] human, but since you are nowin court and if you were to ask this court how much would you and your family compensate? (sic)

A: Even if they pay me millions, they cannot remove the anguish of my son (sic).[23]

Moral damages are emphatically not intended to enrich a plaintiff at the expense of the defendant. They areawarded to allow the former to obtain means, diversion or amusements that will serve to alleviate the moralsuffering he has undergone due to the defendant’s culpable action and must, perforce, be proportional to thesuffering inflicted.

[24] We have previously held as proper an award of P500,000.00 as moral damages to the heirs of

a deceased family member who died in a vehicular accident. In our 2002 decision in Metro Manila Transit

Corporation v. Court of Appeals, et al.,

[25]

we affirmed the award of moral damages of P500,000.00 to the heirs ofthe victim, a mother, who died from injuries she sustained when a bus driven by an employee of the petitioner hither. In the case at bar, we likewise affirm the portion of the assailed decision awarding the moral damages.

Since the petitioners did not question the other damages adjudged against them by the court a quo, we affirmthe award of these damages to the respondents.

WHEREFORE, the petition is DENIED. The assailed decision is AFFIRMED with the MODIFICATIONthat petitioner El Buenasenso Sy is ABSOLVED from any liability adjudged against his co-petitioners in this case.

Costs against petitioners.

SO ORDERED.

FIRST DIVISION

PHILIPPINE NATIONAL BANK, Petitioner,

- versus -

MERELO B. AZNAR; MATIAS B. AZNAR III;

E L. AZNAR (deceased), represented by his heirs;

ON A. BARCENILLA; ROSARIO T.

CENILLA; JOSE B. ENAD (deceased), represented

his heirs; and RICARDO GABUYA (deceased),esented by his heirs,

Respondents.

x- - - - - - - - - - - - - - - - - - - - - - - - - x

MERELO B. AZNAR and MATIAS B. AZNAR III,

Petitioners,

- versus -

G.R. No. 171805

G.R. No. 172021

Present:

CORONA, C.J., Chairperson,

VELASCO, JR.,

LEONARDO-DE CASTRO, PERALTA,

* and



PHILIPPINE NATIONAL BANK,

Respondent.

PEREZ, JJ.

Promulgated:

May 30, 2011 x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

D E C I S I O N

LEONARDO-DE CASTRO, J .:

Before the Court are two petitions for review on certiorari under Rule 45 of the Rules of Court both seeking to annul and

set aside the Decision[1]

dated September 29, 2005 as well as the Resolution[2]

dated March 6, 2006 of the Court of Appeals in

CA-G.R. CV No. 75744, entitled “ Merelo B. Aznar, Matias B. Aznar III, Jose L. Aznar (deceased) represented by his heirs, Ramon A. Barcenilla (deceased) represented by his heirs, Rosario T. Barcenilla, Jose B. Enad (deceased) represented by his

heirs, and Ricardo Gabuya (deceased) represented by his heirs v. Philippine National Bank, Jose Garrido and Register of

Deeds of Cebu City.” The September 29, 2005 Decision of the Court of Appeals set aside the Decision[3]

dated November 18,

1998 of the Regional Trial Court (RTC) of Cebu City, Branch 17, in Civil Case No. CEB-21511. Furthermore, it ordered the

Philippine National Bank (PNB) to pay Merelo B. Aznar; Matias B. Aznar III; Jose L. Aznar (deceased), represented by his

heirs; Ramon A. Barcenilla (deceased), represented by his heirs; Rosario T. Barcenilla; Jose B. Enad (deceased), represented

by his heirs; and Ricardo Gabuya (deceased), represented by his heirs (Aznar, et al.), the amount of their lien based on the

Minutes of the Special Meeting of the Board of Directors[4]

(Minutes) of the defunct Rural Insurance and Surety Company,

Inc. (RISCO) duly annotated on the titles of three parcels of land, plus legal interests from the time of PNB’s acquisition of the

subject properties until the finality of the judgment but dismissing all other claims of Aznar, et al. On the other hand, the

March 6, 2006 Resolution of the Court of Appeals denied the Motion for Reconsideration subsequently filed by each party.

The facts of this case, as stated in the Decision dated September 29, 2005 of the Court of Appeals, are as follows:

In 1958, RISCO ceased operation due to business reverses. In plaintiffs’ desire to rehabilitate RISCO, they

contributed a total amount of P212,720.00 which was used in the purchase of the three (3) parcels of land described

as follows:

“A parcel of land (Lot No. 3597 of the Talisay-Minglanilla Estate, G.L.R.O. Record No. 3732) situated

in the Municipality of Talisay, Province of Cebu,Island of Cebu. xxx containing an area of SEVENTY[-

]EIGHT THOUSAND ONE HUNDRED EIGHTY[-]FIVE SQUARE METERS (78,185) more or less. x x

x” covered by Transfer Certificate of Title No. 8921 in the name of Rural Insurance & Surety Co., Inc.”;

“A parcel of land (Lot 7380 of the Talisay Minglanilla Estate, G.L.R.O. Record No. 3732), situated inthe Municipality of Talisay, Province of Cebu, Island of Cebu. xxx containing an area of THREE

HUNDRED TWENTY[-]NINE THOUSAND FIVE HUNDRED FORTY[-]SEVEN SQUARE METERS

(329,547), more or less. xxx” covered by Transfer Certificate of Title No. 8922 in the name of Rural

Insurance & Surety Co., Inc.” and

“A parcel of land (Lot 1323 of the subdivision plan Psd-No. 5988), situated in the District of Lahug,

City of Cebu, Island of Cebu. xxx containing an area of FIFTY[-

]FIVE THOUSAND SIX HUNDRED FIFTY[-]THREE (55,653) SQUARE METERS, more or less.”

covered by Transfer Certificate of Title No. 24576 in the name of Rural Insurance & Surety Co., Inc.”

After the purchase of the above lots, titles were issued in the name of RISCO. The amount contributed by

plaintiffs constituted as liens and encumbrances on the aforementioned properties as annotated in the titles of said

lots. Such annotation was made pursuant to the Minutes of the Special Meeting of the Board of Directors ofRISCO(hereinafter referred to as the “Minutes”) on March 14, 1961, pertinent portion of which states:



x x x x

3. The President then explained that in a special meeting of the stockholders previously called for the

purpose of putting up certain amount of P212,720.00 for the rehabilitation of the Company, the following

stockholders contributed the amounts indicated opposite their names:

CONTRIBUTED SURPLUS

MERELO B. AZNAR P50,000.00

MATIAS B. AZNAR 50,000.00 JOSE L. AZNAR 27,720.00 RAMON A. BARCENILLA 25,000.00 ROSARIO T. BARCENILLA 25,000.00 JOSE B. ENAD 17,500.00 RICARDO GABUYA 17,500.00

212,720.00

x x x x

And that the respective contributions above-mentioned shall constitute as their lien or interest on the

property described above, if and when said property are titled in the name of RURAL INSURANCE &

SURETY CO., INC., subject to registration as their adverse claim in pursuance of the Provisions of Land

Registration Act, (Act No. 496, as amended) until such time their respective contributions are refunded to

them completely.

x x x x”

Thereafter, various subsequent annotations were made on the same titles, including the Notice of Attachment

and Writ of Execution both dated August 3, 1962 in favor of herein defendant PNB, to wit:

On TCT No. 8921 for Lot 3597:

Entry No. 7416-V-4-D.B. – Notice of Attachment – By the Provincial Sheriff of Cebu, Civil Case No.

47725, Court of First Instance of Manila, entitled “Philippine National Bank, Plaintiff, versus Iluminada

Gonzales, et al., Defendants”, attaching all rights, interest and participation of the defendant Iluminada

Gonzales and Rural Insurance & Surety Co., Inc. of the two parcels of land covered by T.C.T. Nos. 8921,

Attachment No. 330 and 185.

Date of Instrument – August 3, 1962. Date of Inscription – August 3, 1962, 3:00 P.M.

Entry No. 7417-V-4-D.B. – Writ of Execution – By the Court of First Instance of Manila, commanding

the Provincial Sheriff of Cebu, of the lands and buildings of the defendants, to make the sum of Seventy[-

]One Thousand Three Hundred Pesos (P71,300.00) plus interest etc., in connection with Civil Case No.

47725, File No. T-8021.

Date of Instrument – July 21, 1962. Date of Inscription – August 3, 1962, 3:00 P.M.

Entry No. 7512-V-4-D.B. – Notice of Attachment – By the Provincial Sheriff of Cebu, Civil Case Nos.

IV-74065, 73929, 74129, 72818, in the Municipal Court of the City of Manila, entitled “Jose Garrido,

Plaintiff, versus Rural Insurance & Surety Co., Inc., et als., Defendants”, attaching all rights, interests and

participation of the defendants, to the parcels of land covered by T.C.T. Nos. 8921 & 8922 Attachment No.

186, File No. T-8921.

Date of the Instrument – August 16, 1962. Date of Inscription – August 16, 1962, 2:50 P.M.



Entry No. 7513-V-4-D.B. – Writ of Execution – By the Municipal Court of the City of Manila,

commanding the Provincial Sheriff of Cebu, of the lands and buildings of the defendants, to make the sum of

Three Thousand Pesos (P3,000.00), with interest at 12% per annum from July 20, 1959, in connection

with Civil Case Nos. IV-74065, 73929, 74613 annotated above.

File No. T-8921

Date of the Instrument – August 11, 1962.Date of the Inscription – August 16, 1962, 2:50 P.M.

On TCT No. 8922 for Lot 7380: (Same as the annotations on TCT 8921)

On TCT No. 24576 for Lot 1328 (Corrected to Lot 1323-c per court order):

Entry No. 1660-V-7-D.B. – Notice of Attachment – by the Provincial Sheriff of Cebu, Civil Case No.

47725, Court of First Instance of Manila, entitled “Philippine National Bank, Plaintiff, versus, Iluminada

Gonzales, et al., Defendants”, attaching all rights, interest, and participation of the defendants Iluminada

Gonzales and Rural Insurance & Surety Co., Inc. of the parcel of land herein described. Attachment No. 330 & 185.

Date of Instrument – August 3, 1962. Date of Inscription – August 3, 1962, 3:00 P.M.

Entry No. 1661-V-7-D.B. – Writ of Execution by the Court of First Instance of Manila commanding

the Provincial Sheriff of Cebu, of the lands and buildings of the defendants to make the sum of Seventy[-

]One Thousand Three Hundred Pesos (P71,300.00), plus interest, etc., in connection with Civil Case No.

47725. File No. T-8921. Date of the Instrument – July 21, 1962. Date of the Inscription – August 3, 1962 3:00 P.M.

Entry No. 1861-V-7-D.B. - Notice of Attachment – By the Provincial Sheriff of Cebu, Civil Case Nos.

IV-74065, 73929, 74129, 72613 & 72871, in the Municipal Court of the City of Manila, entitled “JoseGarrido, Plaintiff, versus Rural Insurance & Surety Co., Inc., et als., Defendants”, attaching all rights,

interest and participation of the defendants, to the parcel of land herein described. Attachment No. 186. File No. T-8921. Date of the Instrument – August 16, 1962. Date of the Instription – August 16, 1962 2:50 P.M.

Entry No. 1862-V-7-D.B. – Writ of Execution – by the Municipal Court of Manila, commanding the

Provincial Sheriff of Cebu, of the lands and buildings of the Defendants, to make the sum of Three Thousand

Pesos (P3,000.00), with interest at 12% per annum from July 20, 1959, in connection with Civil Case Nos.

IV-74065, 73929, 74129, 72613 & 72871 annotated above. File No. T-8921.

Date of the Instrument – August 11, 1962. Date of the Inscription – August 16, 1962 at 2:50 P.M.

As a result, a Certificate of Sale was issued in favor of Philippine National Bank, being the lone and highest

bidder of the three (3) parcels of land known as Lot Nos. 3597 and 7380, covered by T.C.T. Nos. 8921 and 8922,

respectively, both situated at Talisay, Cebu, and Lot No. 1328-C covered by T.C.T. No. 24576 situated at Cebu City,

for the amount of Thirty-One Thousand Four Hundred Thirty Pesos (P31,430.00). Thereafter, a Final Deed of Sale

dated May 27, 1991 in favor of the Philippine National Bank was also issued and Transfer Certificate of Title No.

24576 for Lot 1328-C (corrected to 1323-C) was cancelled and a new certificate of title, TCT 119848 was issued in

the name of PNB on August 26, 1991.

This prompted plaintiffs-appellees to file the instant complaint seeking the quieting of their supposed title to the

subject properties, declaratory relief, cancellation of TCT and reconveyance with temporary restraining order and

preliminary injunction. Plaintiffs alleged that the subsequent annotations on the titles are subject to the priorannotation of their liens and encumbrances. Plaintiffs further contended that the subsequent writs and processes



annotated on the titles are all null and void for want of valid service upon RISCO and on them, as stockholders. They

argued that the Final Deed of Sale and TCT No. 119848 are null and void as these were issued only after 28 years and

that any right which PNB may have over the properties had long become stale.

Defendant PNB on the other hand countered that plaintiffs have no right of action for quieting of title since the

order of the court directing the issuance of titles to PNB had already become final and executory and their validity

cannot be attacked except in a direct proceeding for their annulment. Defendant further asserted that plaintiffs, asmere stockholders of RISCO do not have any legal or equitable right over the properties of the corporation. PNB

posited that even if plaintiff’s monetary lien had not expired, their only recourse was to require the reimbursement or

refund of their contribution.[5]

Aznar, et al., filed a Manifestation and Motion for Judgment on the Pleadings[6]

on October 5, 1998. Thus, the trial

court rendered the November 18, 1998 Decision, which ruled against PNB on the basis that there was an express trust created

over the subject properties whereby RISCO was the trustee and the stockholders, Aznar, et al., were the beneficiaries or

the cestui que trust . The dispositive portion of the said ruling reads:

WHEREFORE, judgment is hereby rendered as follows:

a) Declaring the Minutes of the Special Meeting of the Board of Directors of RISCO approved on March 14,

1961 (Annex “E,” Complaint) annotated on the titles to subject properties on May 15, 1962 as an express trust

whereby RISCO was a mere trustee and the above-mentioned stockholders as beneficiaries being the true and lawful

owners of Lots 3597, 7380 and 1323;

b) Declaring all the subsequent annotations of court writs and processes, to wit: Entry No. 7416-V-4-D.B.,

7417-V-4-D.B., 7512-V-4-D.B., and 7513-V-4-D.B. in TCT No. 8921 for Lot 3597 and TCT No. 8922 for Lot 7380;

Entry No. 1660-V-7-D.B., Entry No. 1661-V-7-D.B., Entry No. 1861-V-7-D.B., Entry No. 1862-V-7-D.B., Entry No.

4329-V-7-D.B., Entry No. 3761-V-7-D.B. and Entry No. 26522 v. 34, D.B. on TCT No. 24576 for Lot 1323-C, and

all other subsequent annotations thereon in favor of third persons, as null and void;

c) Directing the Register of Deeds of the Province of Cebu and/or the Register of Deeds of Cebu City, as the

case may be, to cancel all these annotations mentioned in paragraph b) above the titles;

d) Directing the Register of Deeds of the Province of Cebu to cancel and/or annul TCTs Nos. 8921 and 8922

in the name of RISCO, and to issue another titles in the names of the plaintiffs; and

e) Directing Philippine National Bank to reconvey TCT No. 119848 in favor of the plaintiffs.[7]

PNB appealed the adverse ruling to the Court of Appeals which, in its September 29, 2005 Decision, set aside the

judgment of the trial court. Although the Court of Appeals agreed with the trial court that a judgment on the pleadings was

proper, the appellate court opined that the monetary contributions made by Aznar, et al., to RISCO can only be characterized

as a loan secured by a lien on the subject lots, rather than an express trust. Thus, it directed PNB to pay Aznar, et al., the

amount of their contributions plus legal interest from the time of acquisition of the property until finality of judgment. The

dispositive portion of the decision reads:

WHEREFORE, premises considered, the assailed Judgment is hereby SET ASIDE.

A new judgment is rendered ordering Philippine National Bank to pay plaintiffs-appellees the amount of their

lien based on the Minutes of the Special Meeting of the Board of Directors duly annotated on the titles, plus legal

interests from the time of appellants’ acquisition of the subject properties until the finality of this judgment.

All other claims of the plaintiffs-appellees are hereby DISMISSED.[8]



Both parties moved for reconsideration but these were denied by the Court of Appeals. Hence, each party filed with this

Court their respective petitions for review on certiorari under Rule 45 of the Rules of Court, which were consolidated in a

Resolution

[9]

dated October 2, 2006.

In PNB’s petition, docketed as G.R. No. 171805, the following assignment of errors were raised:

I

THE COURT OF APPEALS ERRED IN AFFIRMING THE FINDINGS OF THE TRIAL COURT THAT A

JUDGMENT ON THE PLEADINGS WAS WARRANTED DESPITE THE EXISTENCE OF GENUINE ISSUES

OF FACTS ALLEGED IN PETITIONER PNB’S ANSWER.

II

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF RESPONDENTS

TO REFUND OR REPAYMENT OF THEIR CONTRIBUTIONS HAD NOT PRESCRIBED AND/OR THAT THE

MINUTES OF THE SPECIAL MEETING OF THE BOARD OF DIRECTORS OF RISCO CONSTITUTED AS AN

EFFECTIVE ADVERSE CLAIM.

III

THE COURT OF APPEALS ERRED IN NOT CONSIDERING THE DISMISSAL OF THE COMPLAINT ON

GROUNDS OF RES JUDICATA AND LACK OF CAUSE OF ACTION ALLEGED BY PETITIONER IN ITS

ANSWER.[10]

On the other hand, Aznar, et al.’s petition, docketed as G.R. No. 172021, raised the following issue:

THE COURT OF APPEALS ERRED IN CONCLUDING THAT THE CONTRIBUTIONS MADE BY THE

STOCKHOLDERS OF RISCO WERE MERELY A LOAN SECURED BY THEIR LIEN OVER THE

PROPERTIES, SUBJECT TO REIMBURSEMENT OR REFUND, RATHER THAN AN EXPRESS TRUST.[11]

Anent the first issue raised in G.R. No. 171805, PNB argues that a judgment on the pleadings was not proper because its

Answer,[12]

which it filed during the trial court proceedings of this case, tendered genuine issues of fact since it did not only

deny material allegations in Aznar, et al.’s Complaint[13]

but also set up special and affirmative defenses. Furthermore, PNB

maintains that, by virtue of the trial court’s judgment on the pleadings, it was denied its right to present evidence and,

therefore, it was denied due process.

The contention is meritorious.

The legal basis for rendering a judgment on the pleadings can be found in Section 1, Rule 34 of the Rules of Court which

states that “[w]here an answer fails to tender an issue, or otherwise admits the material allegations of the adverse party’s

pleading, the court may, on motion of that party, direct judgment on such pleading. x x x.”

Judgment on the pleadings is, therefore, based exclusively upon the allegations appearing in the pleadings of the parties

and the annexes, if any, without consideration of any evidence aliunde.[14]

However, when it appears that not all the material



allegations of the complaint were admitted in the answer for some of them were either denied or disputed, and the defendant

has set up certain special defenses which, if proven, would have the effect of nullifying plaintiff’s main cause of action,

judgment on the pleadings cannot be rendered.[15]

In the case at bar, the Court of Appeals justified the trial court’s resort to a judgment on the pleadings in the following

manner: Perusal of the complaint, particularly, Paragraph 7 thereof reveals:

“7. That in their desire to rehabilitate RISCO, the above-named stockholders contributed a total amount

of PhP212,720.00 which was used in the purchase of the above-described parcels of land, which amount

constituted liens and encumbrances on subject properties in favor of the above-named stockholders as

annotated in the titles adverted to above, pursuant to the Minutes of the Special Meeting of the Board of

Directors of RISCO approved on March 14, 1961, a copy of which is hereto attached as Annex “E”.

On the other hand, defendant in its Answer, admitted the aforequoted allegation with the qualification

that the amount put up by the stockholders was “used as part payment” for the properties. Defendant further averred

that plaintiff’s liens and encumbrances annotated on the titles issued to RISCO constituted as “loan from the

stockholders to pay part of the purchase price of the properties” and “was a personal obligation of RISCO and was

thus not a claim adverse to the ownership rights of the corporation.” With these averments, We do not find error on

the part of the trial court in rendering a judgment on the pleadings. For one, the qualification made by defendant in its

answer is not sufficient to controvert the allegations raised in the complaint. As to defendants’ contention that the

money contributed by plaintiffs was in fact a “loan” from the stockholders, reference can be made to the Minutes of

the Special Meeting of the Board of Directors, from which plaintiffs-appellees anchored their complaint, in order to

ascertain the true nature of their claim over the properties. Thus, the issues raised by the parties can be resolved on the

basis of their respective pleadings and the annexes attached thereto and do not require further presentation of

evidence aliunde.[16]

However, a careful reading of Aznar, et al.’s Complaint and of PNB’s Answer would reveal that both parties raised

several claims and defenses, respectively, other than what was cited by the Court of Appeals, which requires the presentation

of evidence for resolution, to wit:

Complaint (Aznar, et al.) Answer (PNB)

11. That these subsequent annotations on the titles

he properties in question are subject to the prior

tation of liens and encumbrances of the above-

ed stockholders per Entry No. 458-V-7-D.B.

ribed on TCT No. 24576 on May 15, 1962 and per

y No. 6966-V-4-D.B. on TCT No. 8921 and TCT

8922 on May 15, 1962;

10) Par. 11 is denied as the loan from the

kholders to pay part of the purchase price of the

erties was a personal obligation of RISCO and was

not a claim adverse to the ownership rights of the

oration;

12. That these writs and processes annotated on the

s are all null and void for total want of valid service

RISCO and the above-named stockholders

idering that as early as sometime in 1958, RISCO

ed operations as earlier stated, and as early as May

1962, the liens and encumbrances of the above-

ed stockholders were annotated in the titles of subject

erties;

11) Par. 12 is denied as in fact notice to RISCO had

sent to its last known address at Plaza

e, Manila;

13. That more particularly, the Final Deed of Sale

ex “G”) and TCT No. 119848 are null and void as

e were issued only after 28 years and 5 months (in the

of the Final Deed of Sale) and 28 years, 6 months

29 days (in the case of TCT 119848) from the invalidion sale on December 27, 1962, hence, any right, if

12) Par. 13 is denied for no law requires the final

of sale to be executed immediately after the end of

redemption period. Moreover, another court of

petent jurisdiction has already ruled that PNB was

led to a final deed of sale;



which PNB had over subject properties had long

me stale;

14. That plaintiffs continue to have possession of

ect properties and of their corresponding titles, but

never received any process concerning the petition

by PNB to have TCT 24576 over Lot 1323-C

endered and/or cancelled;

13) Par. 14 is denied as plaintiffs are not in actual

ession of the land and if they were, their possession

as trustee for the creditors of RISCO like PNB;

15. That there is a cloud created on the

ementioned titles of RISCO by reason of the annotate

s, processes and proceedings caused by Jose Garrido

PNB which were apparently valid or effective, but

h are in truth and in fact invalid and ineffective, and

dicial to said titles and to the rights of the plaintiffs,

h should be removed and the titles quieted.[17]

14) Par. 15 is denied as the court orders directing

issuance of titles to PNB in lieu of TCT 24576 and

8922 are valid judgments which cannot be set aside

collateral proceeding like the instant case.[18]

Furthermore, apart from refuting the aforecited material allegations made by Aznar, et al ., PNB also indicated in its

Answer the special and affirmative defenses of (a) prescription; (b) res judicata; (c) Aznar, et al ., having no right of action for

quieting of title; (d) Aznar, et al .’s lien being ineffective and not binding to PNB; and (e) Aznar, et al .’s having no personality

to file the suit.[19]

From the foregoing, it is indubitably clear that it was error for the trial court to render a judgment on the pleadings and, in

effect, resulted in a denial of due process on the part of PNB because it was denied its right to present evidence. A remand of

this case would ordinarily be the appropriate course of action. However, in the interest of justice and in order to expedite the

resolution of this case which was filed with the trial court way back in 1998, the Court finds it proper to already resolve the

present controversy in light of the existence of legal grounds that would dispose of the case at bar without necessity of

presentation of further evidence on the other disputed factual claims and defenses of the parties.

A thorough and comprehensive scrutiny of the records would reveal that this case should be dismissed because Aznar, et

al., have no title to quiet over the subject properties and their true cause of action is already barred by prescription.

At the outset, the Court agrees with the Court of Appeals that the agreement contained in the Minutes of the Special

Meeting of the RISCO Board of Directors held on March 14, 1961 was a loan by the therein named stockholders to

RISCO. We quote with approval the following discussion from the Court of Appeals Decision dated September 29, 2005:

Careful perusal of the Minutes relied upon by plaintiffs-appellees in their claim, showed that their contributions

shall constitute as “lien or interest on the property” if and when said properties are titled in the name of RISCO,

subject to registration of their adverse claim under the Land Registration Act, until such time their respective

contributions are refunded to them completely.

It is a cardinal rule in the interpretation of contracts that if the terms of a contract are clear and leave no doubt

upon the intention of the contracting parties, the literal meaning of its stipulation shall control. When the language of

the contract is explicit leaving no doubt as to the intention of the drafters thereof, the courts may not read into it any

other intention that would contradict its plain import.

The term lien as used in the Minutes is defined as “a discharge on property usually for the payment of some

debt or obligation. A lien is a qualified right or a proprietary interest which may be exercised over the property ofanother. It is a right which the law gives to have a debt satisfied out of a particular thing. It signifies a legal claim or

charge on property; whether real or personal, as a collateral or security for the payment of some debt or



obligation.” Hence, from the use of the word “lien” in the Minutes, We find that the money contributed by plaintiffs-

appellees was in the nature of a loan, secured by their liens and interests duly annotated on the titles. The annotation

of their lien serves only as collateral and does not in any way vest ownership of property to plaintiffs.[20]

(Emphases

supplied.)

We are not persuaded by the contention of Aznar , et al ., that the language of the subject Minutes created an express trust.

Trust is the right to the beneficial enjoyment of property, the legal title to which is vested in another. It is a fiduciary

relationship that obliges the trustee to deal with the property for the benefit of the beneficiary. Trust relations between parties

may either be express or implied. An express trust is created by the intention of the trustor or of the parties. An implied trust

comes into being by operation of law.[21]

Express trusts, sometimes referred to as direct trusts, are intentionally created by the direct and positive acts of the settlor

or the trustor - by some writing, deed, or will or oral declaration. It is created not necessarily by some written words, but by

the direct and positive acts of the parties.[22]

This is in consonance with Article 1444 of the Civil Code, which states that “[n]o

particular words are required for the creation of an express trust, it being sufficient that a trust is clearly intended.”

In other words, the creation of an express trust must be manifested with reasonable certainty and cannot be inferred from

loose and vague declarations or from ambiguous circumstances susceptible of other interpretations.[23]

No such reasonable certitude in the creation of an express trust obtains in the case at bar. In fact, a careful scrutiny of the

plain and ordinary meaning of the terms used in the Minutes does not offer any indication that the parties thereto intended thatAznar, et al., become beneficiaries under an express trust and that RISCO serve as trustor.

Indeed, we find that Aznar, et al., have no right to ask for the quieting of title of the properties at issue because they have

no legal and/or equitable rights over the properties that are derived from the previous registered owner which is RISCO, the

pertinent provision of the law is Section 2 of the Corporation Code ( Batas Pambansa Blg. 68), which states that “[a]

corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and

properties expressly authorized by law or incident to its existence.”

As a consequence thereof, a corporation has a personality separate and distinct from those of its stockholders and other

corporations to which it may be connected.[24]

Thus, we had previously ruled in Magsaysay-Labrador v. Court of

Appeals[25]

that the interest of the stockholders over the properties of the corporation is merely inchoate and therefore does not

entitle them to intervene in litigation involving corporate property, to wit:

Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural,

consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the

management of the corporation and to share in the profits thereof and in the properties and assets thereof on

dissolution, after payment of the corporate debts and obligations.

While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does notvest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being



equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned

by the corporation as a distinct legal person.[26]

In the case at bar, there is no allegation, much less any proof, that the corporate existence of RISCO has ceased and the

corporate property has been liquidated and distributed to the stockholders. The records only indicate that, as per Securities and

Exchange Commission (SEC) Certification[27]

dated June 18, 1997, the SEC merely suspended RISCO’s Certificate of

Registration beginning on September 5, 1988 due to its non-submission of SEC required reports and its failure to operate for a

continuous period of at least five years.

Verily, Aznar, et al., who are stockholders of RISCO, cannot claim ownership over the properties at issue in this case on

the strength of the Minutes which, at most, is merely evidence of a loan agreement between them and the company. There is

no indication or even a suggestion that the ownership of said properties were transferred to them which would require no less

that the said properties be registered under their names. For this reason, the complaint should be dismissed since Aznar, et al.,have no cause to seek a quieting of title over the subject properties.

At most, what Aznar, et al., had was merely a right to be repaid the amount loaned to RISCO. Unfortunately, the right to

seek repayment or reimbursement of their contributions used to purchase the subject properties is already barred by

prescription.

Section 1, Rule 9 of the Rules of Court provides that when it appears from the pleadings or the evidence on record that

the action is already barred by the statute of limitations, the court shall dismiss the claim, to wit:

Defenses and objections not pleaded either in a motion to dismiss or in the answer are deemed waived.

However, when it appears from the pleadings or the evidence on record that the court has no jurisdiction over the

subject matter, that there is another action pending between the same parties for the same cause, or that the action is

barred by a prior judgment or by statute of limitations, the court shall dismiss the claim. (Emphasis supplied.)

In Feliciano v. Canoza,[28]

we held:

We have ruled that trial courts have authority and discretion to dismiss an action on the ground of prescription

when the parties’ pleadings or other facts on record show it to be indeed time-barred x x x; and it may do so on the

basis of a motion to dismiss, or an answer which sets up such ground as an affirmative defense; or even if the groundis alleged after judgment on the merits, as in a motion for reconsideration; or even if the defense has not been asserted

at all, as where no statement thereof is found in the pleadings, or where a defendant has been declared in

default. What is essential only, to repeat, is that the facts demonstrating the lapse of the prescriptive period, be

otherwise sufficiently and satisfactorily apparent on the record; either in the averments of the plaintiffs

complaint, or otherwise established by the evidence.[29]

(Emphasis supplied.)

The pertinent Civil Code provision on prescription which is applicable to the issue at hand is Article 1144(1), to wit:

The following actions must be brought within ten years from the time the right of action accrues:

1. Upon a written contract; 2. Upon an obligation created by law;



3. Upon a judgment. (Emphasis supplied.)

Moreover, in Nielson & Co., Inc. v. Lepanto Consolidated Mining Co.,[30]

we held that the term “written contract”

includes the minutes of the meeting of the board of directors of a corporation, which minutes were adopted by the parties

although not signed by them, to wit:

Coming now to the question of prescription raised by defendant Lepanto, it is contended by the latter that

the period to be considered for the prescription of the claim regarding participation in the profits is only four years,

because the modification of the sharing embodied in the management contract is merely verbal, no written document

to that effect having been presented. This contention is untenable. The modification appears in the minutes of the

special meeting of the Board of Directors of Lepanto held on August 21, 1940, it having been made upon the

authority of its President, and in said minutes the terms of modification had been specified. This is sufficient to have

the agreement considered, for the purpose of applying the statute of limitations, as a written contract even if the

minutes were not signed by the parties (3 A.L.R., 2d, p. 831). It has been held that a writing containing the terms of a

contract if adopted by two persons may constitute a contract in writing even if the same is not signed by either of the

parties (3 A.L.R., 2d, pp. 812-813). Another authority says that an unsigned agreement the terms of which are

embodied in a document unconditionally accepted by both parties is a written contract (Corbin on Contracts, Vol. I, p.85).

[31]

Applied to the case at bar, the Minutes which was approved on March 14, 1961 is considered as a written contract

between Aznar, et al ., and RISCO for the reimbursement of the contributions of the former. As such, the former had a period

of ten (10) years from 1961 within which to enforce the said written contract. However, it does not appear that Aznar, et al .,

filed any action for reimbursement or refund of their contributions against RISCO or even against PNB. Instead the suit that

Aznar, et al., brought before the trial court only on January 28, 1998 was one to quiet title over the properties purchased by

RISCO with their contributions. It is unmistakable that their right of action to claim for refund or payment of theircontributions had long prescribed. Thus, it was reversible error for the Court of Appeals to order PNB to pay Aznar, et al., the

amount of their liens based on the Minutes with legal interests from the time of PNB’s acquisition of the subject properties.

In view of the foregoing, it is unnecessary for the Court to pass upon the other issues raised by the parties.

WHEREFORE, the petition of Aznar, et al., in G.R. No. 172021 is DENIED for lack of merit. The petition of PNB in

G.R. No. 171805 is GRANTED. The Complaint, docketed as Civil Case No. CEB-21511, filed by Aznar, et al., is

hereby DISMISSED. No costs.

SO ORDERED.

[G.R. No. L-32409. February 27, 1971.]

BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, Petitioners, v. HON. JUDGEVIVENCIO M. RUIZ, MISAEL P. VERA, in his capacity as Commissioner of Internal

Revenue, ARTURO LOGRONIO, RODOLFO DE LEON, GAVINO VELASQUEZ, MIMIR DELLOSA,

NICANOR ALCORDO, JOHN DOE, JOHN DOE, JOHN DOE, and JOHN DOE, Respondents.

San Juan, Africa, Gonzales & San Agustin, for Petitioners.

Solicitor General Felix Q. Antonio, Assistant Solicitor General Crispin V . Bautista, Solicitor

Pedro A. Ramirez and Special Attorney Jaime M. Maza for Respondents.



D E C I S I O N

VILLAMOR, J.:

This is an original action of certiorari , prohibition and mandamus, with prayer for a writ ofpreliminary mandatory and prohibitory injunction. In their petition Bache & Co. (Phil.), Inc., acorporation duly organized and existing under the laws of the Philippines, and its President,Frederick E. Seggerman, pray this Court to declare null and void Search Warrant No. 2-M-70 issuedby respondent Judge on February 25, 1970; to order respondents to desist from enforcing the sameand/or keeping the documents, papers and effects seized by virtue thereof, as well as fromenforcing the tax assessments on petitioner corporation alleged by petitioners to have been madeon the basis of the said documents, papers and effects, and to order the return of the latter topetitioners. We gave due course to the petition but did not issue the writ of preliminary injunctionprayed for therein.

The pertinent facts of this case, as gathered from record, are as follows:chanrob1es virtual 1awlibrary

On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal Revenue, wrote a letteraddressed to respondent Judge Vivencio M. Ruiz requesting the issuance of a search warrant againstpetitioners for violation of Section 46(a) of the National Internal Revenue Code, in relation to allother pertinent provisions thereof, particularly Sections 53, 72, 73, 208 and 209, and authorizingRevenue Examiner Rodolfo de Leon, one of herein respondents, to make and file the application forsearch warrant which was attached to the letter.

In the afternoon of the following day, February 25, 1970, respondent De Leon and his witness,

respondent Arturo Logronio, went to the Court of First Instance of Rizal. They brought with them thefollowing papers: respondent Vera’s aforesaid letter-request; an application for search warrantalready filled up but still unsigned by respondent De Leon; an affidavit of respondent Logroniosubscribed before respondent De Leon; a deposition in printed form of respondent Logronio alreadyaccomplished and signed by him but not yet subscribed; and a search warrant already accomplishedbut still unsigned by respondent Judge.

At that time respondent Judge was hearing a certain case; so, by means of a note, he instructed hisDeputy Clerk of Court to take the depositions of respondents De Leon and Logronio. After thesession had adjourned, respondent Judge was informed that the depositions had already beentaken. The stenographer, upon request of respondent Judge, read to him her stenographic notes;and thereafter, respondent Judge asked respondent Logronio to take the oath and warned him thatif his deposition was found to be false and without legal basis, he could be charged for perjury.Respondent Judge signed respondent de Leon’s application for search warrant and respondentLogronio’s deposition, Search Warrant No. 2-M-70 was then sign by respondent Judge andaccordingly issued.

Three days later, or on February 28, 1970, which was a Saturday, the BIR agents served the searchwarrant petitioners at the offices of petitioner corporation on Ayala Avenue, Makati, Rizal.Petitioners’ lawyers protested the search on the ground that no formal complaint or transcript oftestimony was attached to the warrant. The agents nevertheless proceeded with their search whichyielded six boxes of documents.

On March 3, 1970, petitioners filed a petition with the Court of First Instance of Rizal praying thatthe search warrant be quashed, dissolved or recalled, that preliminary prohibitory and mandatory

writs of injunction be issued, that the search warrant be declared null and void, and that therespondents be ordered to pay petitioners, jointly and severally, damages and attorney’s fees. On



March 18, 1970, the respondents, thru the Solicitor General, filed an answer to the petition. Afterhearing, the court, presided over by respondent Judge, issued on July 29, 1970, an order dismissingthe petition for dissolution of the search warrant. In the meantime, or on April 16, 1970, the Bureauof Internal Revenue made tax assessments on petitioner corporation in the total sum ofP2,594,729.97, partly, if not entirely, based on the documents thus seized. Petitioners came to thisCourt.

The petition should be granted for the following reasons:chanrob1es virtual 1aw library

1. Respondent Judge failed to personally examine the complainant and his witness.

The pertinent provisions of the Constitution of the Philippines and of the Revised Rules of Courtare:jgc:chanrobles.com.ph

"(3) The right of the people to be secure in their persons, houses, papers and effects againstunreasonable searches and seizures shall not be violated, and no warrants shall issue but uponprobable cause, to be determined by the judge after examination under oath or affirmation of thecomplainant and the witnesses he may produce, and particularly describing the place to be

searched, and the persons or things to be seized." (Art. III, Sec. 1, Constitution.)

"SEC. 3. Requisites for issuing search warrant. — A search warrant shall not issue but upon probablecause in connection with one specific offense to be determined by the judge or justice of the peaceafter examination under oath or affirmation of the complainant and the witnesses he may produce,and particularly describing the place to be searched and the persons or things to be seized.

"No search warrant shall issue for more than one specific offense.

"SEC. 4. Examination of the applicant. — The judge or justice of the peace must, before issuing thewarrant, personally examine on oath or affirmation the complainant and any witnesses he mayproduce and take their depositions in writing, and attach them to the record, in addition to any

affidavits presented to him." (Rule 126, Revised Rules of Court.)

The examination of the complainant and the witnesses he may produce, required by Art. III, Sec. 1,par. 3, of the Constitution, and by Secs. 3 and 4, Rule 126 of the Revised Rules of Court, should beconducted by the judge himself and not by others. The phrase "which shall be determined by the judge after examination under oath or affirmation of the complainant and the witnesses he mayproduce," appearing in the said constitutional provision, was introduced by Delegate Francisco as anamendment to the draft submitted by the Sub-Committee of Seven. The following discussion in theConstitutional Convention (Laurel, Proceedings of the Philippine Constitutional Convention, Vol. III,pp. 755-757) is enlightening:jgc:chanrobles.com.ph

"SR. ORENSE. Vamos a dejar compañero los piropos y vamos al grano.

En los casos de una necesidad de actuar inmediatamente para que no se frusten los fines de la justicia mediante el registro inmediato y la incautacion del cuerpo del delito, no cree Su Señoria quecausaria cierta demora el procedimiento apuntado en su enmienda en tal forma que podria frustrarlos fines de la justicia o si Su Señoria encuentra un remedio para esto casos con el fin decompaginar los fines de la justicia con los derechos del individuo en su persona, bienes etcetera,etcetera.

"SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su Señoria pregunta por lasiguiente razon: el que solicita un mandamiento de registro tiene que hacerlo por escrito y eseescrito no aparecer en la Mesa del Juez sin que alguien vaya el juez a presentar ese escrito opeticion de sucuestro. Esa persona que presenta el registro puede ser el mismo denunciante oalguna persona que solicita dicho mandamiento de registro. Ahora toda la enmienda en esos casos

consiste en que haya peticion de registro y el juez no se atendra solamente a sea peticion sino queel juez examiner a ese denunciante y si tiene testigos tambin examiner a los testigos.



"SR. ORENSE. No cree Su Señoria que el tomar le declaracion de ese denunciante por escritosiempre requeriria algun tiempo?.

"SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado minimizamos en todo loposible las vejaciones injustas con la expedicion arbitraria de los mandamientos de registro. Creo

que entre dos males debemos escoger. el menor.

x x x

"MR. LAUREL. . . . The reason why we are in favor of this amendment is because we areincorporating in our constitution something of a fundamental character. Now, before a judge couldissue a search warrant, he must be under the obligation to examine personally under oath thecomplainant and if he has any witness, the witnesses that he may produce . . ."cralaw virtua1awlibrary

The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more emphatic and

candid, for it requires the judge, before issuing a search warrant, to "personally examine on oath oraffirmation the complainant and any witnesses he may produce . . ."cralaw virtua1aw library

Personal examination by the judge of the complainant and his witnesses is necessary to enable himto determine the existence or non-existence of a probable cause, pursuant to Art. III, Sec. 1, par. 3,of the Constitution, and Sec. 3, Rule 126 of the Revised Rules of Court, both of which prohibit theissuance of warrants except "upon probable cause." The determination of whether or not a probablecause exists calls for the exercise of judgment after a judicial appraisal of facts and should not beallowed to be delegated in the absence of any rule to the contrary.

In the case at bar, no personal examination at all was conducted by respondent Judge of thecomplainant (respondent De Leon) and his witness (respondent Logronio). While it is true that the

complainant’s application for search warrant and the witness’ printed-form deposition weresubscribed and sworn to before respondent Judge, the latter did not ask either of the two anyquestion the answer to which could possibly be the basis for determining whether or not there wasprobable cause against herein petitioners. Indeed, the participants seem to have attached so littlesignificance to the matter that notes of the proceedings before respondent Judge were not eventaken. At this juncture it may be well to recall the salient facts. The transcript of stenographic notes(pp. 61-76, April 1, 1970, Annex J-2 of the Petition) taken at the hearing of this case in the courtbelow shows that per instruction of respondent Judge, Mr. Eleodoro V. Gonzales, Special DeputyClerk of Court, took the depositions of the complainant and his witness, and that stenographic notesthereof were taken by Mrs. Gaspar. At that time respondent Judge was at the sala hearing a case.After respondent Judge was through with the hearing, Deputy Clerk Gonzales, stenographer Gaspar,complainant De Leon and witness Logronio went to respondent Judge’s chamber and informed theJudge that they had finished the depositions. Respondent Judge then requested the stenographer toread to him her stenographic notes. Special Deputy Clerk Gonzales testified asfollows:jgc:chanrobles.com.ph

"A And after finishing reading the stenographic notes, the Honorable Judge requested or instructedthem, requested Mr. Logronio to raise his hand and warned him if his deposition will be found to befalse and without legal basis, he can be charged criminally for perjury. The Honorable Court told Mr.Logronio whether he affirms the facts contained in his deposition and the affidavit executed beforeMr. Rodolfo de Leon.

"Q And thereafter?

"A And thereafter, he signed the deposition of Mr. Logronio.

"Q Who is this he?



"A The Honorable Judge.

"Q The deposition or the affidavit?

"A The affidavit, Your Honor."cralaw virtua1aw library

Thereafter, respondent Judge signed the search warrant.

The participation of respondent Judge in the proceedings which led to the issuance of SearchWarrant No. 2-M-70 was thus limited to listening to the stenographer’s readings of her notes, to afew words of warning against the commission of perjury, and to administering the oath to thecomplainant and his witness. This cannot be consider a personal examination. If there was anexamination at all of the complainant and his witness, it was the one conducted by the Deputy Clerkof Court. But, as stated, the Constitution and the rules require a personal examination by the judge.It was precisely on account of the intention of the delegates to the Constitutional Convention tomake it a duty of the issuing judge to personally examine the complainant and his witnesses thatthe question of how much time would be consumed by the judge in examining them came up before

the Convention, as can be seen from the record of the proceedings quoted above. The reading ofthe stenographic notes to respondent Judge did not constitute sufficient compliance with theconstitutional mandate and the rule; for by that manner respondent Judge did not have theopportunity to observe the demeanor of the complainant and his witness, and to propound initialand follow-up questions which the judicial mind, on account of its training, was in the best positionto conceive. These were important in arriving at a sound inference on the all-important question ofwhether or not there was probable cause.

2. The search warrant was issued for more than one specific offense.

Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a) of the National InternalRevenue Code in relation to all other pertinent provisions thereof particularly Secs. 53, 72, 73, 208

and 209." The question is: Was the said search warrant issued "in connection with one specificoffense," as required by Sec. 3, Rule 126?

To arrive at the correct answer it is essential to examine closely the provisions of the Tax Codereferred to above. Thus we find the following:chanrob1es virtual 1aw library

Sec. 46(a) requires the filing of income tax returns by corporations.

Sec. 53 requires the withholding of income taxes at source.

Sec. 72 imposes surcharges for failure to render income tax returns and for rendering false andfraudulent returns.

Sec. 73 provides the penalty for failure to pay the income tax, to make a return or to supply theinformation required under the Tax Code.

Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks, compounds, or manufactures anyarticle subject to a specific tax, without having paid the privilege tax therefore, or who aids or abetsin the conduct of illicit distilling, rectifying, compounding, or illicit manufacture of any article subjectto specific tax . . .," and provides that in the case of a corporation, partnership, or association, theofficial and/or employee who caused the violation shall be responsible.

Sec. 209 penalizes the failure to make a return of receipts, sales, business, or gross value of outputremoved, or to pay the tax due thereon.

The search warrant in question was issued for at least four distinct offenses under the Tax Code.The first is the violation of Sec. 46(a), Sec. 72 and Sec. 73 (the filing of income tax returns), which



are interrelated. The second is the violation of Sec. 53 (withholding of income taxes at source). Thethird is the violation of Sec. 208 (unlawful pursuit of business or occupation); and the fourth is theviolation of Sec. 209 (failure to make a return of receipts, sales, business or gross value of outputactually removed or to pay the tax due thereon). Even in their classification the six above-mentioned provisions are embraced in two different titles: Secs. 46(a), 53, 72 and 73 are underTitle II (Income Tax); while Secs. 208 and 209 are under Title V (Privilege Tax on Business and

Occupation).

Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550, June 19, 1967 (20 SCRA 383),is not applicable, because there the search warrants were issued for "violation of Central Bank Laws,Internal Revenue (Code) and Revised Penal Code;" whereas, here Search Warrant No 2-M-70 wasissued for violation of only one code, i.e., the National Internal Revenue Code. The distinction moreapparent than real, because it was precisely on account of the Stonehill incident, which occurredsometime before the present Rules of Court took effect on January 1, 1964, that this Courtamended the former rule by inserting therein the phrase "in connection with one specific offense,"and adding the sentence "No search warrant shall issue for more than one specific offense," in whatis now Sec. 3, Rule 126. Thus we said in Stonehill:jgc:chanrobles.com.ph

"Such is the seriousness of the irregularities committed in connection with the disputed searchwarrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Courtthat ‘a search warrant shall not issue but upon probable cause in connection with one specificoffense.’ Not satisfied with this qualification, the Court added thereto a paragraph, directing that ‘nosearch warrant shall issue for more than one specific offense.’"

3. The search warrant does not particularly describe the things to be seized.

The documents, papers and effects sought to be seized are described in Search Warrant No. 2-M-70in this manner:jgc:chanrobles.com.ph

"Unregistered and private books of accounts (ledgers, journals, columnars, receipts and

disbursements books, customers ledgers); receipts for payments received; certificates of stocks andsecurities; contracts, promissory notes and deeds of sale; telex and coded messages; businesscommunications, accounting and business records; checks and check stubs; records of bankdeposits and withdrawals; and records of foreign remittances, covering the years 1966 to1970."cralaw virtua1aw library

The description does not meet the requirement in Art III, Sec. 1, of the Constitution, and of Sec. 3,Rule 126 of the Revised Rules of Court, that the warrant should particularly describe the things tobe seized.

In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion,said:jgc:chanrobles.com.ph

"The grave violation of the Constitution made in the application for the contested search warrantswas compounded by the description therein made of the effects to be searched for and seized, towit:chanrob1es virtual 1aw library

‘Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers,portfolios, credit journals, typewriters, and other documents and/or paper showing all businesstransactions including disbursement receipts, balance sheets and related profit and loss statements.’

"Thus, the warrants authorized the search for and seizure of records pertaining to all businesstransactions of petitioners herein, regardless of whether the transactions were legal or illegal. Thewarrants sanctioned the seizure of all records of the petitioners and the aforementionedcorporations, whatever their nature, thus openly contravening the explicit command of our Bill of

Rights — that the things to be seized be particularly described — as well as tending to defeat itsmajor objective: the elimination of general warrants."cralaw virtua1aw library



While the term "all business transactions" does not appear in Search Warrant No. 2-M-70, the saidwarrant nevertheless tends to defeat the major objective of the Bill of Rights, i.e., the elimination ofgeneral warrants, for the language used therein is so all-embracing as to include all conceivablerecords of petitioner corporation, which, if seized, could possibly render its business inoperative.

In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this Court had occasion to explainthe purpose of the requirement that the warrant should particularly describe the place to besearched and the things to be seized, to wit:jgc:chanrobles.com.ph

". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97) specifically require that asearch warrant should particularly describe the place to be searched and the things to be seized.The evident purpose and intent of this requirement is to limit the things to be seized to those, andonly those, particularly described in the search warrant — to leave the officers of the law with nodiscretion regarding what articles they shall seize, to the end that ‘unreasonable searches andseizures’ may not be made, — that abuses may not be committed. That this is the correctinterpretation of this constitutional provision is borne out by American authorities."cralaw virtua1awlibrary

The purpose as thus explained could, surely and effectively, be defeated under the search warrantissued in this case.

A search warrant may be said to particularly describe the things to be seized when the descriptiontherein is as specific as the circumstances will ordinarily allow (People v. Rubio; 57 Phil. 384); orwhen the description expresses a conclusion of fact — not of law — by which the warrant officermay be guided in making the search and seizure (idem., dissent of Abad Santos, J.,); or when thethings described are limited to those which bear direct relation to the offense for which the warrantis being issued (Sec. 2, Rule 126, Revised Rules of Court). The herein search warrant does notconform to any of the foregoing tests. If the articles desired to be seized have any direct relation toan offense committed, the applicant must necessarily have some evidence, other than those

articles, to prove the said offense; and the articles subject of search and seizure should come inhandy merely to strengthen such evidence. In this event, the description contained in the hereindisputed warrant should have mentioned, at least, the dates, amounts, persons, and other pertinentdata regarding the receipts of payments, certificates of stocks and securities, contracts, promissorynotes, deeds of sale, messages and communications, checks, bank deposits and withdrawals,records of foreign remittances, among others, enumerated in the warrant.

Respondents contend that certiorari does not lie because petitioners failed to file a motion forreconsideration of respondent Judge’s order of July 29, 1970. The contention is without merit. In thefirst place, when the questions raised before this Court are the same as those which were squarelyraised in and passed upon by the court below, the filing of a motion for reconsideration in said courtbefore certiorari can be instituted in this Court is no longer a prerequisite. (Pajo, etc., Et. Al. v. Ago,Et Al., 108 Phil., 905). In the second place, the rule requiring the filing of a motion forreconsideration before an application for a writ of certiorari can be entertained was never intendedto be applied without considering the circumstances. (Matutina v. Buslon, Et Al., 109 Phil., 140.) Inthe case at bar time is of the essence in view of the tax assessments sought to be enforced byrespondent officers of the Bureau of Internal Revenue against petitioner corporation, On account ofwhich immediate and more direct action becomes necessary. (Matute v. Court of Appeals, Et Al., 26SCRA 768.) Lastly, the rule does not apply where, as in this case, the deprivation of petitioners’fundamental right to due process taints the proceeding against them in the court below not onlywith irregularity but also with nullity. (Matute v. Court of Appeals, Et Al., supra.)

It is next contended by respondents that a corporation is not entitled to protection againstunreasonable search and seizures. Again, we find no merit in the contention.

"Although, for the reasons above stated, we are of the opinion that an officer of a corporation whichis charged with a violation of a statute of the state of its creation, or of an act of Congress passed in



the exercise of its constitutional powers, cannot refuse to produce the books and papers of suchcorporation, we do not wish to be understood as holding that a corporation is not entitled toimmunity, under the 4th Amendment, against unreasonable searches and seizures. A corporation is,after all, but an association of individuals under an assumed name and with a distinct legal entity. Inorganizing itself as a collective body it waives no constitutional immunities appropriate to such body.Its property cannot be taken without compensation. It can only be proceeded against by due

process of law, and is protected, under the 14th Amendment, against unlawful discrimination . . ."(Hale v. Henkel, 201 U.S. 43, 50 L. ed. 652.)

"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a different ruleapplied to a corporation, the ground that it was not privileged from producing its books and papers.But the rights of a corporation against unlawful search and seizure are to be protected even if thesame result might have been achieved in a lawful way." (Silverthorne Lumber Company, Et. Al. v.United States of America, 251 U.S. 385, 64 L. ed. 319.)

In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly recognized the right of a corporationto object against unreasonable searches and seizures, thus:jgc:chanrobles.com.ph

"As regards the first group, we hold that petitioners herein have no cause of action to assail thelegality of the contested warrants and of the seizures made in pursuance thereof, for the simplereason that said corporations have their respective personalities, separate and distinct from thepersonality of herein petitioners, regardless of the amount of shares of stock or the interest of eachof them in said corporations, whatever, the offices they hold therein may be. Indeed, it is wellsettled that the legality of a seizure can be contested only by the party whose rights have beenimpaired thereby, and that the objection to an unlawful search and seizure is purely personal andcannot be availed of by third parties. Consequently, petitioners herein may not validly object to theuse in evidence against them of the documents, papers and things seized from the offices andpremises of the corporations adverted to above, since the right to object to the admission of saidpapers in evidence belongs exclusively to the corporations, to whom the seized effects belong, andmay not be invoked by the corporate officers in proceedings against them in their individual capacity

. . ."cralaw virtua1aw library

In the Stonehill case only the officers of the various corporations in whose offices documents,papers and effects were searched and seized were the petitioners. In the case at bar, thecorporation to whom the seized documents belong, and whose rights have thereby been impaired, isitself a petitioner. On that score, petitioner corporation here stands on a different footing from thecorporations in Stonehill.

The tax assessments referred to earlier in this opinion were, if not entirely — as claimed bypetitioners — at least partly — as in effect admitted by respondents — based on the documentsseized by virtue of Search Warrant No. 2-M-70. Furthermore, the fact that the assessments weremade some one and one-half months after the search and seizure on February 25, 1970, is a strongindication that the documents thus seized served as basis for the assessments. Those assessmentsshould therefore not be enforced.

PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No. 2-M-70 issued byrespondent Judge is declared null and void; respondents are permanently enjoined from enforcingthe said search warrant; the documents, papers and effects seized thereunder are ordered to bereturned to petitioners; and respondent officials the Bureau of Internal Revenue and theirrepresentatives are permanently enjoined from enforcing the assessments mentioned in Annex "G"of the present petition, as well as other assessments based on the documents, papers and effectsseized under the search warrant herein nullified, and from using the same against petitioners in anycriminal or other proceeding. No pronouncement as to costs.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee and Makasiar, JJ., concur.

Reyes, J.B.L., J., concurs with Mr. Justice Barredo.



Castro, J., concurs in the result.

G.R. No. 15574 September 17, 1919

SMITH, BELL & COMPANY (LTD.), petitioner, vs.JOAQUIN NATIVIDAD, Collector of Customs of the port of Cebu, respondent.

Ross and Lawrence for petitioner.

Attorney-General Paredes for respondent.

MALCOLM, J.:

A writ of mandamus is prayed for by Smith, Bell & Co. (Ltd.), against Joaquin Natividad, Collector of Customsof the port of Cebu, Philippine Islands, to compel him to issue a certificate of Philippine registry to the petitioner forits motor vessel Bato. The Attorney-General, acting as counsel for respondent, demurs to the petition on thegeneral ground that it does not state facts sufficient to constitute a cause of action. While the facts are thusadmitted, and while, moreover, the pertinent provisions of law are clear and understandable, and interpretative

American jurisprudence is found in abundance, yet the issue submitted is not lightly to be resolved. The question,flatly presented, is, whether Act. No. 2761 of the Philippine Legislature is valid — or, more directly stated, whetherthe Government of the Philippine Islands, through its Legislature, can deny the registry of vessels in its coastwisetrade to corporations having alien stockholders.

FACTS.

Smith, Bell & Co., (Ltd.), is a corporation organized and existing under the laws of the Philippine Islands. Amajority of its stockholders are British subjects. It is the owner of a motor vessel known as the Bato built for it in thePhilippine Islands in 1916, of more than fifteen tons gross The Bato was brought to Cebu in the present year for thepurpose of transporting plaintiff's merchandise between ports in the Islands. Application was made at Cebu, the

home port of the vessel, to the Collector of Customs for a certificate of Philippine registry. The Collector refused toissue the certificate, giving as his reason that all the stockholders of Smith, Bell & Co., Ltd., were not citizens eitherof the United States or of the Philippine Islands. The instant action is the result.

LAW.

The Act of Congress of April 29, 1908, repealing the Shipping Act of April 30, 1906 but reenacting a portion ofsection 3 of this Law, and still in force, provides in its section 1:

That until Congress shall have authorized the registry as vessels of the United States of vessels owned in thePhilippine Islands, the Government of the Philippine Islands is hereby authorized to adopt, from time to time, andenforce regulations governing the transportation of merchandise and passengers between ports or places in the

Philippine Archipelago. (35 Stat. at L., 70; Section 3912, U. S. Comp Stat. [1916]; 7 Pub. Laws, 364.)

The Act of Congress of August 29, 1916, commonly known as the Jones Law, still in force, provides in section3, (first paragraph, first sentence), 6, 7, 8, 10, and 31, as follows.

SEC. 3. That no law shall be enacted in said Islands which shall deprive any person of life, liberty, or propertywithout due process of law, or deny to any person therein the equal protection of the laws. . . .

SEC. 6. That the laws now in force in the Philippines shall continue in force and effect, except as altered,amended, or modified herein, until altered, amended, or repealed by the legislative authority herein provided or by

Act of Congress of the United States.

SEC. 7. That the legislative authority herein provided shall have power, when not inconsistent with this Act, bydue enactment to amend, alter modify, or repeal any law, civil or criminal, continued in force by this Act as it mayfrom time to time see fit



This power shall specifically extend with the limitation herein provided as to the tariff to all laws relating torevenue provided as to the tariff to all laws relating to revenue and taxation in effect in the Philippines.

SEC. 8. That general legislative power, except as otherwise herein provided, is hereby granted to thePhilippine Legislature, authorized by this Act.

SEC. 10. That while this Act provides that the Philippine government shall have the authority to enact a tarifflaw the trade relations between the islands and the United States shall continue to be governed exclusively by lawsof the Congress of the United States: Provided , That tariff acts or acts amendatory to the tariff of the PhilippineIslands shall not become law until they shall receive the approval of the President of the United States, nor shallany act of the Philippine Legislature affecting immigration or the currency or coinage laws of the Philippinesbecome a law until it has been approved by the President of the United States: Provided further, That the Presidentshall approve or disapprove any act mentioned in the foregoing proviso within six months from and after itsenactment and submission for his approval, and if not disapproved within such time it shall become a law the sameas if it had been specifically approved.

SEC. 31. That all laws or parts of laws applicable to the Philippines not in conflict with any of the provisions ofthis Act are hereby continued in force and effect." (39 Stat at L., 546.)

On February 23, 1918, the Philippine Legislature enacted Act No. 2761. The first section of this law amendedsection 1172 of the Administrative Code to read as follows:

SEC. 1172. Certificate of Philippine register. — Upon registration of a vessel of domestic ownership, and ofmore than fifteen tons gross, a certificate of Philippine register shall be issued for it. If the vessel is of domesticownership and of fifteen tons gross or less, the taking of the certificate of Philippine register shall be optional withthe owner.

"Domestic ownership," as used in this section, means ownership vested in some one or more of the followingclasses of persons: (a) Citizens or native inhabitants of the Philippine Islands; (b) citizens of the United Statesresiding in the Philippine Islands; (c ) any corporation or company composed wholly of citizens of the Philippine

Islands or of the United States or of both, created under the laws of the United States, or of any State thereof, or ofthereof, or the managing agent or master of the vessel resides in the Philippine Islands

Any vessel of more than fifteen gross tons which on February eighth, nineteen hundred and eighteen, had acertificate of Philippine register under existing law, shall likewise be deemed a vessel of domestic ownership solong as there shall not be any change in the ownership thereof nor any transfer of stock of the companies orcorporations owning such vessel to person not included under the last preceding paragraph.

Sections 2 and 3 of Act No. 2761 amended sections 1176 and 1202 of the Administrative Code to read asfollows:

SEC. 1176. Investigation into character of vessel. — No application for a certificate of Philippine register shall

be approved until the collector of customs is satisfied from an inspection of the vessel that it is engaged or destined

to be engaged in legitimate trade and that it is of domestic ownership as such ownership is defined in sectioneleven hundred and seventy-two of this Code.

The collector of customs may at any time inspect a vessel or examine its owner, master, crew, or passengersin order to ascertain whether the vessel is engaged in legitimate trade and is entitled to have or retain thecertificate of Philippine register.

SEC. 1202. Limiting number of foreign officers and engineers on board vessels. — No Philippine vesseloperating in the coastwise trade or on the high seas shall be permitted to have on board more than one master orone mate and one engineer who are not citizens of the United States or of the Philippine Islands, even if they holdlicenses under section one thousand one hundred and ninety-nine hereof. No other person who is not a citizen ofthe United States or of the Philippine Islands shall be an officer or a member of the crew of such vessel. Any such

vessel which fails to comply with the terms of this section shall be required to pay an additional tonnage tax of fiftycentavos per net ton per month during the continuance of said failure.



ISSUES.

Predicated on these facts and provisions of law, the issues as above stated recur, namely, whether Act No2761 of the Philippine Legislature is valid in whole or in part — whether the Government of the Philippine Islands,through its Legislature, can deny the registry of vessel in its coastwise trade to corporations having alienstockholders .

OPINION.

1. Considered from a positive standpoint, there can exist no measure of doubt as to the power of thePhilippine Legislature to enact Act No. 2761. The Act of Congress of April 29, 1908, with its specific delegation ofauthority to the Government of the Philippine Islands to regulate the transportation of merchandise and passengersbetween ports or places therein, the liberal construction given to the provisions of the Philippine Bill, the Act ofCongress of July 1, 1902, by the courts, and the grant by the Act of Congress of August 29, 1916, of generallegislative power to the Philippine Legislature, are certainly superabundant authority for such a law. While the Actof the local legislature may in a way be inconsistent with the Act of Congress regulating the coasting trade of theContinental United States, yet the general rule that only such laws of the United States have force in thePhilippines as are expressly extended thereto, and the abnegation of power by Congress in favor of the Philippine

Islands would leave no starting point for convincing argument. As a matter of fact, counsel for petitioner does notassail legislative action from this direction (See U. S. vs. Bull [1910], 15 Phil., 7; Sinnot vs. Davenport [1859] 22How., 227.)

2. It is from the negative, prohibitory standpoint that counsel argues against the constitutionality of Act No.2761. The first paragraph of the Philippine Bill of Rights of the Philippine Bill, repeated again in the first paragraphof the Philippine Bill of Rights as set forth in the Jones Law, provides "That no law shall be enacted in said Islandswhich shall deprive any person of life, liberty, or property without due process of law, or deny to any person thereinthe equal protection of the laws." Counsel says that Act No. 2761 denies to Smith, Bell & Co., Ltd., the equalprotection of the laws because it, in effect, prohibits the corporation from owning vessels, and becauseclassification of corporations based on the citizenship of one or more of their stockholders is capricious, and that

Act No. 2761 deprives the corporation of its properly without due process of law because by the passage of the lawcompany was automatically deprived of every beneficial attribute of ownership in the Bato and left with the naked

title to a boat it could not use .

The guaranties extended by the Congress of the United States to the Philippine Islands have been used in thesame sense as like provisions found in the United States Constitution. While the "due process of law and equalprotection of the laws" clause of the Philippine Bill of Rights is couched in slightly different words than thecorresponding clause of the Fourteenth Amendment to the United States Constitution, the first should beinterpreted and given the same force and effect as the latter. (Kepner vs. U.S. [1904], 195 U. S., 100; Sierra vs.Mortiga [1907], 204 U. S.,.470; U. S. vs. Bull [1910], 15 Phil., 7.) The meaning of the Fourteenth Amendment hasbeen announced in classic decisions of the United States Supreme Court. Even at the expense of restating what isso well known, these basic principles must again be set down in order to serve as the basis of this decision.

The guaranties of the Fourteenth Amendment and so of the first paragraph of the Philippine Bill of Rights, areuniversal in their application to all person within the territorial jurisdiction, without regard to any differences of race,color, or nationality. The word "person" includes aliens. (Yick Wo vs. Hopkins [1886], 118 U. S., 356; Truax vs.Raich [1915], 239 U. S., 33.) Private corporations, likewise, are "persons" within the scope of the guaranties in sofar as their property is concerned. (Santa Clara County vs. Southern Pac. R. R. Co. [1886], 118.U. S., 394;Pembina Mining Co. vs. Pennsylvania [1888],.125 U. S., 181 Covington & L. Turnpike Road Co. vs. Sandford[1896], 164 U. S., 578.) Classification with the end in view of providing diversity of treatment may be made amongcorporations, but must be based upon some reasonable ground and not be a mere arbitrary selection (Gulf,Colorado & Santa Fe Railway Co. vs. Ellis [1897],.165 U. S., 150.) Examples of laws held unconstitutional becauseof unlawful discrimination against aliens could be cited. Generally, these decisions relate to statutes which hadattempted arbitrarily to forbid aliens to engage in ordinary kinds of business to earn their living.(State vs. Montgomery [1900], 94 Maine, 192, peddling — but see. Commonwealth vs. Hana [1907], 195 Mass.,262; Templar vs. Board of Examiners of Barbers [1902], 131 Mich., 254, barbers; Yick Wo vs. Hopkins [1886], 118U. S.,.356, discrimination against Chinese; Truax vs. Raich [1915], 239 U. S., 33; In re Parrott [1880], 1 Fed , 481;

Fraser vs. McConway & Torley Co. [1897], 82 Fed , 257; Juniata Limestone Co. vs. Fagley [1898], 187 Penn., 193,all relating to the employment of aliens by private corporations.)



A literal application of general principles to the facts before us would, of course, cause the inevitablededuction that Act No. 2761 is unconstitutional by reason of its denial to a corporation, some of whole membersare foreigners, of the equal protection of the laws. Like all beneficient propositions, deeper research disclosesprovisos. Examples of a denial of rights to aliens notwithstanding the provisions of the Fourteenth Amendmentcould be cited. (Tragesser vs.Gray [1890], 73 Md., 250, licenses to sell spirituous liquors denied to persons notcitizens of the United States; Commonwealth vs. Hana [1907], 195 Mass , 262, excluding aliens from the right to

peddle; Patsone vs.Commonwealth of Pennsylvania [1914], 232 U. S. , 138, prohibiting the killing of any wild birdor animal by any unnaturalized foreign-born resident; Ex parte Gilleti [1915], 70 Fla., 442, discriminating in favor ofcitizens with reference to the taking for private use of the common property in fish and oysters found in the publicwaters of the State; Heim vs. McCall [1915], 239 U. S.,.175, and Crane vs. New York [1915], 239 U. S., 195,limiting employment on public works by, or for, the State or a municipality to citizens of the United States.)

One of the exceptions to the general rule, most persistent and far reaching in influence is, that neither theFourteenth Amendment to the United States Constitution, broad and comprehensive as it is, nor any otheramendment, "was designed to interfere with the power of the State, sometimes termed its `police power,' toprescribe regulations to promote the health, peace, morals, education, and good order of the people, and legislateso as to increase the industries of the State, develop its resources and add to its wealth and prosperity. From thevery necessities of society, legislation of a special character, having these objects in view, must often be had incertain districts." (Barbier vs. Connolly [1884], 113 U.S., 27; New Orleans Gas Co. vs. Lousiana Light Co. [1885],

115 U.S., 650.) This is the same police power which the United States Supreme Court say "extends to so dealingwith the conditions which exist in the state as to bring out of them the greatest welfare in of its people."(Bacon vs.Walker [1907], 204 U.S., 311.) For quite similar reasons, none of the provision of the Philippine OrganicLaw could could have had the effect of denying to the Government of the Philippine Islands, acting through itsLegislature, the right to exercise that most essential, insistent, and illimitable of powers, the sovereign policepower, in the promotion of the general welfare and the public interest. (U. S. vs. Toribio [1910], 15 Phil., 85;Churchill and Tait vs. Rafferty [1915], 32 Phil., 580; Rubi vs. Provincial Board of Mindoro [1919], 39 Phil., 660.)

Another notable exception permits of the regulation or distribution of the public domain or the common property orresources of the people of the State, so that use may be limited to its citizens. (Ex parte Gilleti [1915], 70 Fla., 442;McCready vs. Virginia [1876], 94 U. S., 391; Patsone vs. Commonwealth of Pennsylvania [1914], 232U. S., 138.)Still another exception permits of the limitation of employment in the construction of public works by, or for, theState or a municipality to citizens of the United States or of the State. (Atkin vs. Kansas [1903],191 U. S., 207;

Heim vs. McCall [1915], 239 U.S., 175; Cranevs. New York [1915], 239 U. S., 195.) Even as to classification, it isadmitted that a State may classify with reference to the evil to be prevented; the question is a practical one,dependent upon experience. (Patsone vs.Commonwealth of Pennsylvania [1914], 232 U. S., 138.)

To justify that portion of Act no. 2761 which permits corporations or companies to obtain a certificate ofPhilippine registry only on condition that they be composed wholly of citizens of the Philippine Islands or of theUnited States or both, as not infringing Philippine Organic Law, it must be done under some one of the exceptionshere mentioned This must be done, moreover, having particularly in mind what is so often of controlling effect inthis jurisdiction — our local experience and our peculiar local conditions.

To recall a few facts in geography, within the confines of Philippine jurisdictional limits are found more thanthree thousand islands. Literally, and absolutely, steamship lines are, for an Insular territory thus situated, thearteries of commerce. If one be severed, the life-blood of the nation is lost. If on the other hand these arteries are

protected, then the security of the country and the promotion of the general welfare is sustained. Time and again,with such conditions confronting it, has the executive branch of the Government of the Philippine Islands, alwayslater with the sanction of the judicial branch, taken a firm stand with reference to the presence of undesirableforeigners. The Government has thus assumed to act for the all-sufficient and primitive reason of the benefit andprotection of its own citizens and of the self-preservation and integrity of its dominion. (In re Patterson [1902], 1Phil., 93; Forbes vs.Chuoco, Tiaco and Crossfield [1910], 16 Phil., 534;.228 U.S., 549; In re McCulloch Dick [1918],38 Phil., 41.) Boats owned by foreigners, particularly by such solid and reputable firms as the instant claimant,might indeed traverse the waters of the Philippines for ages without doing any particular harm. Again, someevilminded foreigner might very easily take advantage of such lavish hospitality to chart Philippine waters, to obtainvaluable information for unfriendly foreign powers, to stir up insurrection, or to prejudice Filipino or Americancommerce. Moreover, under the Spanish portion of Philippine law, the waters within the domestic jurisdiction aredeemed part of the national domain, open to public use. (Book II, Tit. IV, Ch. I, Civil Code; Spanish Law of Watersof August 3, 1866, arts 1, 2, 3.) Common carriers which in the Philippines as in the United States and othercountries are, as Lord Hale said, "affected with a public interest," can only be permitted to use these public waters



as a privilege and under such conditions as to the representatives of the people may seem wise. (See DeVillata vs. Stanley [1915], 32 Phil., 541.)

In Patsone vs. Commonwealth of Pennsylvania ([1913], 232 U.S., 138), a case herein before mentioned,Justice Holmes delivering the opinion of the United States Supreme Court said:

This statute makes it unlawful for any unnaturalized foreign-born resident to kill any wild bird or animal exceptin defense of person or property, and `to that end' makes it unlawful for such foreign-born person to own or bepossessed of a shotgun or rifle; with a penalty of $25 and a forfeiture of the gun or guns. The plaintiff in error wasfound guilty and was sentenced to pay the abovementioned fine. The judgment was affirmed on successiveappeals. (231 Pa., 46; 79 Atl., 928.) He brings the case to this court on the ground that the statute is contrary to the14th Amendment and also is in contravention of the treaty between the United States and Italy, to which lattercountry the plaintiff in error belongs .

Under the 14th Amendment the objection is twofold; unjustifiably depriving the alien of property, anddiscrimination against such aliens as a class. But the former really depends upon the latter, since it hardly can bedisputed that if the lawful object, the protection of wild life (Geer vs. Connecticut, 161 U.S., 519; 40 L. ed., 793; 16Sup. Ct. Rep., 600), warrants the discrimination, the, means adopted for making it effective also might be adopted.

. . .

The discrimination undoubtedly presents a more difficult question. But we start with reference to the evil to beprevented, and that if the class discriminated against is or reasonably might be considered to define those fromwhom the evil mainly is to be feared, it properly may be picked out. A lack of abstract symmetry does not matter.The question is a practical one, dependent upon experience. . . .

The question therefore narrows itself to whether this court can say that the legislature of Pennsylvania was notwarranted in assuming as its premise for the law that resident unnaturalized aliens were the peculiar source of theevil that it desired to prevent. (Barrett vs. Indiana,. 229 U.S., 26, 29; 57 L. ed., 1050, 1052; 33 Sup. Ct. Rep., 692.)

Obviously the question, so stated, is one of local experience, on which this court ought to be very slow todeclare that the state legislature was wrong in its facts (Adams vs. Milwaukee, 228 U.S., 572, 583; 57 L. ed.,971,.977; 33 Sup. Ct. Rep., 610.) If we might trust popular speech in some states it was right; but it is enough thatthis court has no such knowledge of local conditions as to be able to say that it was manifestly wrong. . . .

Judgment affirmed.

We are inclined to the view that while Smith, Bell & Co. Ltd., a corporation having alien stockholders, isentitled to the protection afforded by the due-process of law and equal protection of the laws clause of thePhilippine Bill of Rights, nevertheless, Act No. 2761 of the Philippine Legislature, in denying to corporations suchas Smith, Bell &. Co. Ltd., the right to register vessels in the Philippines coastwise trade, does not belong to thatvicious species of class legislation which must always be condemned, but does fall within authorized exceptions,notably, within the purview of the police power, and so does not offend against the constitutional provision.

This opinion might well be brought to a close at this point. It occurs to us, however, that the legislative historyof the United States and the Philippine Islands, and, probably, the legislative history of other countries, if we wereto take the time to search it out, might disclose similar attempts at restriction on the right to enter the coastwisetrade, and might thus furnish valuable aid by which to ascertain and, if possible, effectuate legislative intention.

3. The power to regulate commerce, expressly delegated to the Congress by the Constitution, includes thepower to nationalize ships built and owned in the United States by registries and enrollments, and the recording ofthe muniments of title of American vessels. The Congress "may encourage or it may entirely prohibit suchcommerce, and it may regulate in any way it may see fit between these two extremes." (U.S. vs.Craig [1886], 28Fed., 795; Gibbons vs. Ogden [1824], 9 Wheat., 1; The Passenger Cases [1849], 7 How., 283.)

Acting within the purview of such power, the first Congress of the United States had not been long convened

before it enacted on September 1, 1789, "An Act for Registering and Clearing Vessels, Regulating the CoastingTrade, and for other purposes." Section 1 of this law provided that for any ship or vessel to obtain the benefits of American registry, it must belong wholly to a citizen or citizens of the United States "and no other." (1 Stat. at L.,



55.) That Act was shortly after repealed, but the same idea was carried into the Acts of Congress of December 31,1792 and February 18, 1793. (1 Stat. at L., 287, 305.).Section 4 of the Act of 1792 provided that in order to obtainthe registry of any vessel, an oath shall be taken and subscribed by the owner, or by one of the owners thereof,before the officer authorized to make such registry, declaring, "that there is no subject or citizen of any foreignprince or state, directly or indirectly, by way of trust, confidence, or otherwise, interested in such vessel, or in theprofits or issues thereof." Section 32 of the Act of 1793 even went so far as to say "that if any licensed ship or

vessel shall be transferred to any person who is not at the time of such transfer a citizen of and resident within theUnited States, ... every such vessel with her tackle, apparel, and furniture, and the cargo found on board her, shallbe forefeited." In case of alienation to a foreigner, Chief Justice Marshall said that all the privileges of an Americanbottom were ipso facto forfeited. (U.S. vs. Willings and Francis [1807], 4 Cranch, 48.) Even as late as 1873, the

Attorney-General of the United States was of the opinion that under the provisions of the Act of December 31,1792, no vessel in which a foreigner is directly or indirectly interested can lawfully be registered as a vessel of theUnited. States. (14 Op. Atty.-Gen. [U.S.], 340.)

These laws continued in force without contest, although possibly the Act of March 3, 1825, may have affectedthem, until amended by the Act of May 28, 1896 (29 Stat. at L., 188) which extended the privileges of registry fromvessels wholly owned by a citizen or citizens of the United States to corporations created under the laws of any ofthe states thereof. The law, as amended, made possible the deduction that a vessel belonging to a domesticcorporation was entitled to registry or enrollment even though some stock of the company be owned by aliens. The

right of ownership of stock in a corporation was thereafter distinct from the right to hold the property by thecorporation (Humphreys vs. McKissock [1890], 140 U.S., 304; Queen vs. Arnaud [1846], 9 Q. B., 806; 29 Op. Atty.-Gen. [U.S.],188.)

On American occupation of the Philippines, the new government found a substantive law in operation in theIslands with a civil law history which it wisely continued in force Article fifteen of the Spanish Code of Commercepermitted any foreigner to engage in Philippine trade if he had legal capacity to do so under the laws of his nation.When the Philippine Commission came to enact the Customs Administrative Act (No. 355) in 1902, it returned tothe old American policy of limiting the protection and flag of the United States to vessels owned by citizens of theUnited States or by native inhabitants of the Philippine Islands (Sec. 117.) Two years later, the same body revertedto the existing Congressional law by permitting certification to be issued to a citizen of the United States or to acorporation or company created under the laws of the United States or of any state thereof or of the PhilippineIslands (Act No. 1235, sec. 3.) The two administration codes repeated the same provisions with the necessaryamplification of inclusion of citizens or native inhabitants of the Philippine Islands (Adm. Code of 1916, sec. 1345;

Adm. Code of 1917, sec. 1172). And now Act No. 2761 has returned to the restrictive idea of the original Customs Administrative Act which in turn was merely a reflection of the statutory language of the first American Congress.

Provisions such as those in Act No. 2761, which deny to foreigners the right to a certificate of Philippineregistry, are thus found not to be as radical as a first reading would make them appear.

Without any subterfuge, the apparent purpose of the Philippine Legislature is seen to be to enact an anti-alienshipping act. The ultimate purpose of the Legislature is to encourage Philippine ship-building. This, without doubt,has, likewise, been the intention of the United States Congress in passing navigation or tariff laws on differentoccasions. The object of such a law, the United States Supreme Court once said, was to encourage Americantrade, navigation, and ship-building by giving American ship-owners exclusive privileges. (Old Dominion Steamship

Co. vs.Virginia [1905], 198 U.S., 299; Kent's Commentaries, Vol. 3, p. 139.)

In the concurring opinion of Justice Johnson in Gibbons vs. Ogden ([1824], 9 Wheat., 1) is found the following:

Licensing acts, in fact, in legislation, are universally restraining acts; as, for example, acts licensing gaminghouses, retailers of spirituous liquors, etc. The act, in this instance, is distinctly of that character, and forms part ofan extensive system, the object of which is to encourage American shipping, and place them on an equal footingwith the shipping of other nations. Almost every commercial nation reserves to its own subjects a monopoly of itscoasting trade; and a countervailing privilege in favor of American shipping is contemplated, in the whole legislationof the United States on this subject. It is not to give the vessel an American character, that the license is granted;that effect has been correctly attributed to the act of her enrollment. But it is to confer on her American privileges,as contradistinguished from foreign; and to preserve the. Government from fraud by foreigners, in surreptitiously

intruding themselves into the American commercial marine, as well as frauds upon the revenue in the tradecoastwise, that this whole system is projected.



The United States Congress in assuming its grave responsibility of legislating wisely for a new country did soimbued with a spirit of Americanism. Domestic navigation and trade, it decreed, could only be carried on by citizensof the United States. If the representatives of the American people acted in this patriotic manner to advance thenational policy, and if their action was accepted without protest in the courts, who can say that they did not enactsuch beneficial laws under the all-pervading police power, with the prime motive of safeguarding the country and ofpromoting its prosperity? Quite similarly, the Philippine Legislature made up entirely of Filipinos, representing the

mandate of the Filipino people and the guardian of their rights, acting under practically autonomous powers, andimbued with a strong sense of Philippinism, has desired for these Islands safety from foreign interlopers, the use ofthe common property exclusively by its citizens and the citizens of the United States, and protection for thecommon good of the people. Who can say, therefore, especially can a court, that with all the facts andcircumstances affecting the Filipino people before it, the Philippine Legislature has erred in the enactment of ActNo. 2761?

Surely, the members of the judiciary are not expected to live apart from active life, in monastic seclusionamidst dusty tomes and ancient records, but, as keen spectators of passing events and alive to the dictates of thegeneral — the national — welfare, can incline the scales of their decisions in favor of that solution which will mosteffectively promote the public policy. All the presumption is in favor of the constitutionally of the law and withoutgood and strong reasons, courts should not attempt to nullify the action of the Legislature. "In construing a statuteenacted by the Philippine Commission (Legislature), we deem it our duty not to give it a construction which would

be repugnant to an Act of Congress, if the language of the statute is fairly susceptible of another construction not inconflict with the higher law." (In re Guariña [1913], 24. Phil., 36; U.S. vs. Ten Yu [1912], 24 Phil., 1.) That is the trueconstruction which will best carry legislative intention into effect.

With full consciousness of the importance of the question, we nevertheless are clearly of the opinion that thelimitation of domestic ownership for purposes of obtaining a certificate of Philippine registry in the coastwise tradeto citizens of the Philippine Islands, and to citizens of the United States, does not violate the provisions ofparagraph 1 of section 3 of the Act of Congress of August 29, 1916 No treaty right relied upon Act No. 2761 of thePhilippine Legislature is held valid and constitutional .

The petition for a writ of mandamus is denied, with costs against the petitioner. So ordered.

G.R. No. 75885 May 27, 1987

BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner,vs.PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO SALONGA, COMMISSIONERMARY CONCEPCION BAUTISTA, COMMISSIONER RAMON DIAZ, COMMISSIONER RAUL R. DAZA,

COMMISSIONER QUINTIN S. DOROMAL, CAPT. JORGE B. SIACUNCO, et al., respondents.

Apostol, Bernas, Gumaru, Ona and Associates for petitioner.

Vicente G. Sison for intervenor A.T. Abesamis.

NARVASA, J.:

Challenged in this special civil action of certiorari and prohibition by a private corporation known as the BataanShipyard and Engineering Co., Inc. are: (1) Executive Orders Numbered 1 and 2, promulgated by PresidentCorazon C. Aquino on February 28, 1986 and March 12, 1986, respectively, and (2) the sequestration, takeover,and other orders issued, and acts done, in accordance with said executive orders by the Presidential Commissionon Good Government and/or its Commissioners and agents, affecting said corporation.

1. The Sequestration, Takeover, and Other Orders Complained of

a. The Basic Sequestration Order



The sequestration order which, in the view of the petitioner corporation, initiated all its misery was issued on April 14, 1986 by Commissioner Mary Concepcion Bautista. It was addressed to three of the agents of theCommission, hereafter simply referred to as PCGG. It reads as follows:

RE: SEQUESTRATION ORDER

By virtue of the powers vested in the Presidential Commission on Good Government, by authority of thePresident of the Philippines, you are hereby directed to sequester the following companies.

1. Bataan Shipyard and Engineering Co., Inc. (Engineering Island Shipyard and Mariveles Shipyard)

2. Baseco Quarry

3. Philippine Jai-Alai Corporation

4. Fidelity Management Co., Inc.

5. Romson Realty, Inc.

6. Trident Management Co.

7. New Trident Management

8. Bay Transport

9. And all affiliate companies of Alfredo "Bejo" Romualdez

You are hereby ordered:

1. To implement this sequestration order with a minimum disruption of these companies' business activities.

2. To ensure the continuity of these companies as going concerns, the care and maintenance of these assetsuntil such time that the Office of the President through the Commission on Good Government should decideotherwise.

3. To report to the Commission on Good Government periodically.

Further, you are authorized to request for Military/Security Support from the Military/Police authorities, andsuch other acts essential to the achievement of this sequestration order. 1

b. Order for Production of Documents

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

1. Stock Transfer Book

2. Legal documents, such as:

2.1. Articles of Incorporation

2.2. By-Laws

2.3. Minutes of the Annual Stockholders Meeting from 1973 to 1986



2.4. Minutes of the Regular and Special Meetings of the Board of Directors from 1973 to 1986

2.5. Minutes of the Executive Committee Meetings from 1973 to 1986

2.6. Existing contracts with suppliers/contractors/others.

3. Yearly list of stockholders with their corresponding share/stockholdings from 1973 to 1986 duly certified bythe Corporate Secretary.

4. Audited Financial Statements such as Balance Sheet, Profit & Loss and others from 1973 to December 31,1985.

5. Monthly Financial Statements for the current year up to March 31, 1986.

6. Consolidated Cash Position Reports from January to April 15, 1986.

7. Inventory listings of assets up dated up to March 31, 1986.

8. Updated schedule of Accounts Receivable and Accounts Payable.

9. Complete list of depository banks for all funds with the authorized signatories for withdrawals thereof.

10. Schedule of company investments and placements.2

The letter closed with the warning that if the documents were not submitted within five days, the officers wouldbe cited for "contempt in pursuance with Presidential Executive Order Nos. 1 and 2."

c. Orders Re Engineer Island

(1) Termination of Contract for Security Services

A third order assailed by petitioner corporation, hereafter referred to simply as BASECO, is that issued on April 21, 1986 by a Capt. Flordelino B. Zabala, a member of the task force assigned to carry out the basicsequestration order. He sent a letter to BASECO's Vice-President for Finance,

3 terminating the contract for

security services within the Engineer Island compound between BASECO and "Anchor and FAIRWAYS" and"other civilian security agencies," CAPCOM military personnel having already been assigned to the area,

(2) Change of Mode of Payment of Entry Charges

On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to "Truck Owners andContractors," particularly a "Mr. Buddy Ondivilla National Marine Corporation," advising of the amendment in partof their contracts with BASECO in the sense that the stipulated charges for use of the BASECO road network weremade payable "upon entry and not anymore subject to monthly billing as was originally agreed upon."

4

d. Aborted Contract for Improvement of Wharf at Engineer Island

On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf of BASECO withDeltamarine Integrated Port Services, Inc., in virtue of which the latter undertook to introduce improvementscosting approximately P210,000.00 on the BASECO wharf at Engineer Island, allegedly then in poor condition,avowedly to "optimize its utilization and in return maximize the revenue which would flow into the governmentcoffers," in consideration of Deltamarine's being granted "priority in using the improved portion of the wharf aheadof anybody" and exemption "from the payment of any charges for the use of wharf including the area where it mayinstall its bagging equipments" "until the improvement remains in a condition suitable for port operations."

5 It

seems however that this contract was never consummated. Capt. Jorge B. Siacunco, "Head- (PCGG) BASECO

Management Team," advised Deltamarine by letter dated July 30, 1986 that "the new management is not in a



position to honor the said contract" and thus "whatever improvements * * (may be introduced) shall be deemedunauthorized * * and shall be at * * (Deltamarine's) own risk."

6

e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan

By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG agent, Mayor Melba O.

Buenaventura, "to plan and implement progress towards maximizing the continuous operation of the BASECOSesiman Rock Quarry * * by conventional methods;" but afterwards, Commissioner Bautista, in representation ofthe PCGG, authorized another party, A.T. Abesamis, to operate the quarry, located at Mariveles, Bataan, anagreement to this effect having been executed by them on September 17, 1986.

7

f. Order to Dispose of Scrap, etc.

By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor Buenaventura was also"authorized to clean and beautify the Company's compound," and in this connection, to dispose of or sell "metalscraps" and other materials, equipment and machineries no longer usable, subject to specified guidelines andsafeguards including audit and verification.

8

g. The TAKEOVER Order

By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the provisional takeover by the PCGG ofBASECO, "the Philippine Dockyard Corporation and all their affiliated companies."

9 Diaz invoked the provisions of

Section 3 (c) of Executive Order No. 1, empowering the Commission —

* * To provisionally takeover in the public interest or to prevent its disposal or dissipation, business enterprisesand properties taken over by the government of the Marcos Administration or by entities or persons close to formerPresident Marcos, until the transactions leading to such acquisition by the latter can be disposed of by theappropriate authorities.

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

following powers:

1. Conducts all aspects of operation of the subject companies;

2. Installs key officers, hires and terminates personnel as necessary;

3. Enters into contracts related to management and operation of the companies;

4. Ensures that the assets of the companies are not dissipated and used effectively and efficiently; revenuesare duly accounted for; and disburses funds only as may be necessary;

5. Does actions including among others, seeking of military support as may be necessary, that will ensure

compliance to this order;

6. Holds itself fully accountable to the Presidential Commission on Good Government on all aspects related tothis take-over order.

h. Termination of Services of BASECO Officers

Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza, Moises M. Valdez, GilbertoPasimanero, and Benito R. Cuesta I, advising of the termination of their services by the PCGG. 10

2. Petitioner's Plea and Postulates

It is the foregoing specific orders and acts of the PCGG and its members and agents which, to repeat,petitioner BASECO would have this Court nullify. More particularly, BASECO prays that this Court-



1) declare unconstitutional and void Executive Orders Numbered 1 and 2;

2) annul the sequestration order dated April- 14, 1986, and all other orders subsequently issued and actsdone on the basis thereof, inclusive of the takeover order of July 14, 1986 and the termination of the services of theBASECO executives. 11

a. Re Executive Orders No. 1 and 2, and the Sequestration and Takeover Orders

While BASECO concedes that "sequestration without resorting to judicial action, might be made within thecontext of Executive Orders Nos. 1 and 2 before March 25, 1986 when the Freedom Constitution was promulgated,under the principle that the law promulgated by the ruler under a revolutionary regime is the law of the land, it

ceased to be acceptable when the same ruler opted to promulgate the Freedom Constitution on March 25, 1986wherein under Section I of the same, Article IV (Bill of Rights) of the 1973 Constitution was adopted providing,among others, that "No person shall be deprived of life, liberty and property without due process of law." (Const.,

Art. I V, Sec. 1)." 12

It declares that its objection to the constitutionality of the Executive Orders "as well as the Sequestration Order* * and Takeover Order * * issued purportedly under the authority of said Executive Orders, rests on four

fundamental considerations: First, no notice and hearing was accorded * * (it) before its properties and businesswere taken over;Second, the PCGG is not a court, but a purely investigative agency and therefore not competentto act as prosecutor and judge in the same cause; Third, there is nothing in the issuances which envisions anyproceeding, process or remedy by which petitioner may expeditiously challenge the validity of the takeover afterthe same has been effected; and Fourthly, being directed against specified persons, and in disregard of theconstitutional presumption of innocence and general rules and procedures, they constitute a Bill of Attainder." 13

b. Re Order to Produce Documents

It argues that the order to produce corporate records from 1973 to 1986, which it has apparently alreadycomplied with, was issued without court authority and infringed its constitutional right against self-incrimination, andunreasonable search and seizure. 14

c. Re PCGG's Exercise of Right of Ownership and Management

BASECO further contends that the PCGG had unduly interfered with its right of dominion and management ofits business affairs by —

1) terminating its contract for security services with Fairways & Anchor, without the consent and against thewill of the contracting parties; and amending the mode of payment of entry fees stipulated in its Lease Contractwith National Stevedoring & Lighterage Corporation, these acts being in violation of the non-impairment clause ofthe constitution; 15

2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract" with Deltamarine IntegratedPort Services, Inc., giving the latter free use of BASECO premises; 16

3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate its rock quarry at Sesiman,Mariveles; 17

4) authorizing the same mayor to sell or dispose of its metal scrap, equipment, machinery and othermaterials; 18

5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all their affiliated companies;

6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP Manuel S. Mendoza; GMMoises M. Valdez; Finance Mgr. Gilberto Pasimanero; Legal Dept. Mgr. Benito R. Cuesta I; 19

7) planning to elect its own Board of Directors; 20



8) allowing willingly or unwillingly its personnel to take, steal, carry away from petitioner's premises atMariveles * * rolls of cable wires, worth P600,000.00 on May 11, 1986;

21

9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars supposed to have been buriedtherein.

22

3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders

Many misconceptions and much doubt about the matter of sequestration, takeover and freeze orders havebeen engendered by misapprehension, or incomplete comprehension if not indeed downright ignorance of the lawgoverning these remedies. It is needful that these misconceptions and doubts be dispelled so that uninformed anduseless debates about them may be avoided, and arguments tainted b sophistry or intellectual dishonesty bequickly exposed and discarded. Towards this end, this opinion will essay an exposition of the law on the matter. Inthe process many of the objections raised by BASECO will be dealt with.

4. The Governing Law

a. Proclamation No. 3

The impugned executive orders are avowedly meant to carry out the explicit command of the ProvisionalConstitution, ordained by Proclamation No. 3,

23 that the President-in the exercise of legislative power which she

was authorized to continue to wield "(until a legislature is elected and convened under a new Constitution" — "shallgive priority to measures to achieve the mandate of the people," among others to (r)ecover ill-gotten properties

amassed by the leaders and supporters of the previous regime and protect the interest of the people throughorders of sequestration or freezing of assets or accounts."

24

b. Executive Order No. 1

Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and postulates that "vastresources of the government have been amassed by former President Ferdinand E. Marcos, his immediate family,

relatives, and close associates both here and abroad."

25

Upon these premises, the Presidential Commission onGood Government was created,26

"charged with the task of assisting the President in regard to (certain specified)matters," among which was precisely-

* * The recovery of all in-gotten wealth accumulated by former President Ferdinand E. Marcos, his immediatefamily, relatives, subordinates and close associates, whether located in the Philippines or abroad, includingthe takeover or sequestration of all business enterprises and entities owned or controlled by them, during hisadministration, directly or through nominees, by taking undue advantage of their public office and/or using theirpowers, authority, influence, connections or relationship.

27

In relation to the takeover or sequestration that it was authorized to undertake in the fulfillment of its mission,the PCGG was granted "power and authority" to do the following particular acts, to wit:

1. To sequester or place or cause to be placed under its control or possession any building or office whereinany ill-gotten wealth or properties may be found, and any records pertaining thereto, in order to prevent theirdestruction, concealment or disappearance which would frustrate or hamper the investigation or otherwise preventthe Commission from accomplishing its task.

2. To provisionally take over in the public interest or to prevent the disposal or dissipation, businessenterprises and properties taken over by the government of the Marcos Administration or by entities or personsclose to former President Marcos, until the transactions leading to such acquisition by the latter can be disposed ofby the appropriate authorities.

3. To enjoin or restrain any actual or threatened commission of acts by any person or entity that may rendermoot and academic, or frustrate or otherwise make ineffectual the efforts of the Commission to carry out its task

under this order.28



So that it might ascertain the facts germane to its objectives, it was granted power to conduct investigations;require submission of evidence by subpoenae ad testificandum and duces tecum; administer oaths; punish forcontempt.

29It was given power also to promulgate such rules and regulations as may be necessary to carry out the

purposes of * * (its creation).30

c. Executive Order No. 2

Executive Order No. 2 gives additional and more specific data and directions respecting "the recovery of ill-gotten properties amassed by the leaders and supporters of the previous regime." It declares that:

1) * * the Government of the Philippines is in possession of evidence showing that there are assets andproperties purportedly pertaining to former Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez Marcos,their close relatives, subordinates, business associates, dummies, agents or nominees which had been or wereacquired by them directly or indirectly, through or as a result of the improper or illegal use of funds or propertiesowned by the government of the Philippines or any of its branches, instrumentalities, enterprises, banks or financialinstitutions, or by taking undue advantage of their office, authority, influence, connections or relationship, resultingin their unjust enrichment and causing grave damage and prejudice to the Filipino people and the Republic of thePhilippines:" and

2) * * said assets and properties are in the form of bank accounts, deposits, trust accounts, shares of stocks,buildings, shopping centers, condominiums, mansions, residences, estates, and other kinds of real and personalproperties in the Philippines and in various countries of the world."

31

Upon these premises, the President-

1) froze "all assets and properties in the Philippines in which former President Marcos and/or his wife, Mrs.Imelda Romualdez Marcos, their close relatives, subordinates, business associates, dummies, agents, ornominees have any interest or participation;

2) prohibited former President Ferdinand Marcos and/or his wife * *, their close relatives, subordinates,business associates, duties, agents, or nominees from transferring, conveying, encumbering, concealing ordissipating said assets or properties in the Philippines and abroad, pending the outcome of appropriateproceedings in the Philippines to determine whether any such assets or properties were acquired by them throughor as a result of improper or illegal use of or the conversion of funds belonging to the Government of thePhilippines or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undueadvantage of their official position, authority, relationship, connection or influence to unjustly enrich themselves atthe expense and to the grave damage and prejudice of the Filipino people and the Republic of the Philippines;

3) prohibited "any person from transferring, conveying, encumbering or otherwise depleting or

concealing such assets and properties or from assisting or taking part in their transfer, encumbrance, concealmentor dissipation under pain of such penalties as are prescribed by law;" and

4) required "all persons in the Philippines holding such assets or properties, whether located in the Philippines

or abroad, in their names as nominees, agents or trustees, to make full disclosure of the same to the Commissionon Good Government within thirty (30) days from publication of * (the) Executive Order, * *.

32

d. Executive Order No. 14

A third executive order is relevant: Executive Order No. 14,33

by which the PCGG is empowered, "with theassistance of the Office of the Solicitor General and other government agencies, * * to file and prosecute all cases

investigated by it * * as may be warranted by its findings."34

All such cases, whether civil or criminal, are to be filed"with the Sandiganbayanwhich shall have exclusive and original jurisdiction thereof."

35 Executive Order No. 14

also pertinently provides that civil suits for restitution, reparation of damages, or indemnification for consequentialdamages, forfeiture proceedings provided for under Republic Act No. 1379, or any other civil actions under the CivilCode or other existing laws, in connection with * * (said Executive Orders Numbered 1 and 2) may be filedseparately from and proceed independently of any criminal proceedings and may be proved by a preponderance ofevidence;" and that, moreover, the "technical rules of procedure and evidence shall not be strictly applied to* *(said)civil cases."

36



5. Contemplated Situations

The situations envisaged and sought to be governed are self-evident, these being:

1) that "(i)ll-gotten properties (were) amassed by the leaders and supporters of the previous regime";37

a) more particularly, that ill-gotten wealth (was) accumulated by former President Ferdinand E. Marcos, hisimmediate family, relatives, subordinates and close associates, * * located in the Philippines or abroad, * * (and)business enterprises and entities (came to be) owned or controlled by them, during * * (the Marcos) administration,directly or through nominees, by taking undue advantage of their public office and/or using their powers, authority,influence, Connections or relationship;

38

b) otherwise stated, that "there are assets and properties purportedly pertaining to former President FerdinandE. Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, businessassociates, dummies, agents or nominees which had been or were acquired by them directly or indirectly, throughor as a result of the improper or illegal use of funds or properties owned by the Government of the Philippines orany of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage oftheir office, authority, influence, connections or relationship, resulting in their unjust enrichment and causing grave

damage and prejudice to the Filipino people and the Republic of the Philippines";39

c) that "said assets and properties are in the form of bank accounts. deposits, trust. accounts, shares ofstocks, buildings, shopping centers, condominiums, mansions, residences, estates, and other kinds of real andpersonal properties in the Philippines and in various countries of the world;"

40 and

2) that certain "business enterprises and properties (were) taken over by the government of the Marcos Administration or by entities or persons close to former President Marcos.

41

6. Government's Right and Duty to Recover All Ill-gotten Wealth

There can be no debate about the validity and eminent propriety of the Government's plan "to recover all ill-

gotten wealth."

Neither can there be any debate about the proposition that assuming the above described factual premises ofthe Executive Orders and Proclamation No. 3 to be true, to be demonstrable by competent evidence, the recoveryfrom Marcos, his family and his dominions of the assets and properties involved, is not only a right but a duty onthe part of Government.

But however plain and valid that right and duty may be, still a balance must be sought with the equallycompelling necessity that a proper respect be accorded and adequate protection assured, the fundamental rightsof private property and free enterprise which are deemed pillars of a free society such as ours, and to which allmembers of that society may without exception lay claim.

* * Democracy, as a way of life enshrined in the Constitution, embraces as its necessary components freedomof conscience, freedom of expression, and freedom in the pursuit of happiness. Along with these freedoms are

included economic freedom and freedom of enterprise within reasonable bounds and under proper control. * *Evincing much concern for the protection of property, the Constitution distinctly recognizes the preferred positionwhich real estate has occupied in law for ages. Property is bound up with every aspect of social life in a democracyas democracy is conceived in the Constitution.The Constitution realizes the indispensable role which property,owned in reasonable quantities and used legitimately, plays in the stimulation to economic effort and the formationand growth of a solid social middle class that is said to be the bulwark of democracy and the backbone of everyprogressive and happy country.

42

a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be assumed. They will have to be

duly established by adequate proof in each case, in a proper judicial proceeding, so that the recovery of the ill-gotten wealth may be validly and properly adjudged and consummated; although there are some who maintain that



the fact-that an immense fortune, and "vast resources of the government have been amassed by former PresidentFerdinand E. Marcos, his immediate family, relatives, and close associates both here and abroad," and they haveresorted to all sorts of clever schemes and manipulations to disguise and hide their illicit acquisitions-is within therealm of judicial notice, being of so extensive notoriety as to dispense with proof thereof, Be this as it may, therequirement of evidentiary substantiation has been expressly acknowledged, and the procedure to be followedexplicitly laid down, in Executive Order No. 14.

b. Need of Provisional Measures to Collect and Conserve Assets Pending Suits

Nor may it be gainsaid that pending the institution of the suits for the recovery of such "ill-gotten wealth" as theevidence at hand may reveal, there is an obvious and imperative need for preliminary, provisional measures toprevent the concealment, disappearance, destruction, dissipation, or loss of the assets and properties subject ofthe suits, or to restrain or foil acts that may render moot and academic, or effectively hamper, delay, or negateefforts to recover the same.

7. Provisional Remedies Prescribed by Law

To answer this need, the law has prescribed three (3) provisional remedies. These are: (1) sequestration; (2)

freeze orders; and (3) provisional takeover.

Sequestration and freezing are remedies applicable generally to unearthed instances of "ill-gotten wealth."The remedy of "provisional takeover" is peculiar to cases where "business enterprises and properties (were) takenover by the government of the Marcos Administration or by entities or persons close to former PresidentMarcos."

43

a. Sequestration

By the clear terms of the law, the power of the PCGG to sequester property claimed to be "ill-gotten" means toplace or cause to be placed under its possession or control said property, or any building or office wherein anysuch property and any records pertaining thereto may be found, including "business enterprises and entities,"-forthe purpose of preventing the destruction, concealment or dissipation of, and otherwise conserving and preserving,the same-until it can be determined, through appropriate judicial proceedings, whether the property was in truthwill- gotten," i.e., acquired through or as a result of improper or illegal use of or the conversion of funds belongingto the Government or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by takingundue advantage of official position, authority relationship, connection or influence, resulting in unjust enrichmentof the ostensible owner and grave damage and prejudice to the State.

44 And this, too, is the sense in which the

term is commonly understood in other jurisdictions.45

b. "Freeze Order"

A "freeze order" prohibits the person having possession or control of property alleged to constitute "ill -gottenwealth" "from transferring, conveying, encumbering or otherwise depleting or concealing such property, or fromassisting or taking part in its transfer, encumbrance, concealment, or dissipation."

46 In other words, it commands

the possessor to hold the property and conserve it subject to the orders and disposition of the authority decreeingsuch freezing. In this sense, it is akin to a garnishment by which the possessor or ostensible owner of property isenjoined not to deliver, transfer, or otherwise dispose of any effects or credits in his possession or control, and thusbecomes in a sense an involuntary depositary thereof.

47

c. Provisional Takeover

In providing for the remedy of "provisional takeover," the law acknowledges the apparent distinction between"ill gotten" "business enterprises and entities" (going concerns, businesses in actual operation), generally, as towhich the remedy of sequestration applies, it being necessarily inferred that the remedy entails no interference, orthe least possible interference with the actual management and operations thereof; and "business enterpriseswhich weretaken over by the government government of the Marcos Administration or by entities or persons closeto him," in particular, as to which a "provisional takeover" is authorized, "in the public interest or to prevent disposalor dissipation of the enterprises." 48 Such a "provisional takeover" imports something more than sequestration orfreezing, more than the placing of the business under physical possession and control, albeit without or with the



least possible interference with the management and carrying on of the business itself. In a "provisional takeover,"what is taken into custody is not only the physical assets of the business enterprise or entity, but the businessoperation as well. It is in fine the assumption of control not only over things, but over operations or on- goingactivities. But, to repeat, such a "provisional takeover" is allowed only as regards "business enterprises * * taken

over by the government of the Marcos Administration or by entities or persons close to former President Marcos."

d. No Divestment of Title Over Property Seized

It may perhaps be well at this point to stress once again the provisional, contingent character of the remedies just described. Indeed the law plainly qualifies the remedy of take-over by the adjective, "provisional." Theseremedies may be resorted to only for a particular exigency: to prevent in the public interest the disappearance ordissipation of property or business, and conserve it pending adjudgment in appropriate proceedings of the primaryissue of whether or not the acquisition of title or other right thereto by the apparent owner was attended by somevitiating anomaly. None of the remedies is meant to deprive the owner or possessor of his title or any right to theproperty sequestered, frozen or taken over and vest it in the sequestering agency, the Government or otherperson. This can be done only for the causes and by the processes laid down by law.

That this is the sense in which the power to sequester, freeze or provisionally take over is to be understood

and exercised, the language of the executive orders in question leaves no doubt. Executive Order No. 1 declaresthat the sequestration of property the acquisition of which is suspect shall last "until the transactions leading tosuch acquisition * * can be disposed of by the appropriate authorities."

49 Executive Order No. 2 declares that the

assets or properties therein mentioned shall remain frozen "pending the outcome of appropriate proceedings in thePhilippines to determine whether any such assets or properties were acquired" by illegal means. Executive OrderNo. 14 makes clear that judicial proceedings are essential for the resolution of the basic issue of whether or notparticular assets are "ill-gotten," and resultant recovery thereof by the Government is warranted.

e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional Command

There is thus no cause for the apprehension voiced by BASECO50

that sequestration, freezing or provisionaltakeover is designed to be an end in itself, that it is the device through which persons may be deprived of theirproperty branded as "ill-gotten," that it is intended to bring about a permanent, rather than a passing, transitional

state of affairs. That this is not so is quite explicitly declared by the governing rules.

Be this as it may, the 1987 Constitution should allay any lingering fears about the duration of these provisionalremedies. Section 26 of its Transitory Provisions,

51 lays down the relevant rule in plain terms, apart from extending

ratification or confirmation (although not really necessary) to the institution by presidential fiat of the remedy ofsequestration and freeze orders:

SEC. 26. The authority to issue sequestration or freeze orders under Proclamation No. 3 dated March 25,1986 in relation to the recovery of ill-gotten wealth shag remain operative for not more thaneighteen months afterthe ratification of this Constitution. However, in the national interest, as certified by the President, the Congress

may extend said period.

A sequestration or freeze order shall be issued only upon showing of a prima facie case. The order and the listof the sequestered or frozen properties shall forthwith be registered with the proper court. For orders issued beforethe ratification of this Constitution, the corresponding judicial action or proceeding shall be filed within six monthsfrom its ratification. For those issued after such ratification, the judicial action or proceeding shall be commencedwithin six months from the issuance thereof.

The sequestration or freeze order is deemed automatically lifted if no judicial action or proceeding iscommenced as herein provided.

52

f. Kinship to Attachment Receivership

As thus described, sequestration, freezing and provisional takeover are akin to the provisional remedy ofpreliminary attachment, or receivership.

53 By attachment, a sheriff seizes property of a defendant in a civil suit so

that it may stand as security for the satisfaction of any judgment that may be obtained, and not disposed of, ordissipated, or lost intentionally or otherwise, pending the action.

54 By receivership, property, real or personal,



which is subject of litigation, is placed in the possession and control of a receiver appointed by the Court, who shallconserve it pending final determination of the title or right of possession over it.

55 All these remedies —

sequestration, freezing, provisional, takeover, attachment and receivership — are provisional, temporary, designedfor-particular exigencies, attended by no character of permanency or finality, and always subject to the control ofthe issuing court or agency.

g. Remedies, Non-Judicial

Parenthetically, that writs of sequestration or freeze or takeover orders are not issued by a court is of nomoment. The Solicitor General draws attention to the writ of distraint and levy which since 1936 the Commissionerof Internal Revenue has been by law authorized to issue against property of a delinquent taxpayer.

56 BASECO

itself declares that it has not manifested "a rigid insistence on sequestration as a purely judicial remedy * * (as itfeels) that the law should not be ossified to a point that makes it insensitive to change." What it insists on, what itpronounces to be its "unyielding position, is that any change in procedure, or the institution of a new one, shouldconform to due process and the other prescriptions of the Bill of Rights of the Constitution."

57 It is, to be sure, a

proposition on which there can be no disagreement.

h. Orders May Issue Ex Parte

Like the remedy of preliminary attachment and receivership, as well as delivery of personal propertyin replevinsuits, sequestration and provisional takeover writs may issue ex parte.

58 And as in preliminary

attachment, receivership, and delivery of personality, no objection of any significance may be raised to the ex parte issuance of an order of sequestration, freezing or takeover, given its fundamental character of temporarinessor conditionality; and taking account specially of the constitutionally expressed "mandate of the people to recoverill-gotten properties amassed by the leaders and supporters of the previous regime and protect the interest of thepeople;"

59 as well as the obvious need to avoid alerting suspected possessors of "ill-gotten wealth" and thereby

cause that disappearance or loss of property precisely sought to be prevented, and the fact, just as self-evident,that "any transfer, disposition, concealment or disappearance of said assets and properties would frustrate,obstruct or hamper the efforts of the Government" at the just recovery thereof.

60

8. Requisites for Validity

What is indispensable is that, again as in the case of attachment and receivership, there exist a prima faciefactual foundation, at least, for the sequestration, freeze or takeover order, and adequate and fair opportunity tocontest it and endeavor to cause its negation or nullification.

61

Both are assured under the executive orders in question and the rules and regulations promulgated by thePCGG.

a. Prima Facie Evidence as Basis for Orders

Executive Order No. 14 enjoins that there be "due regard to the requirements of fairness and dueprocess."

62Executive Order No. 2 declares that with respect to claims on allegedly "ill-gotten" assets and

properties, "it is the position of the new democratic government that President Marcos * * (and other partiesaffected) be afforded fair opportunity to contest these claims before appropriate Philippine authorities."

63 Section 7

of the Commission's Rules and Regulations provides that sequestration or freeze (and takeover) orders issue uponthe authority of at least two commissioners, based on theaffirmation or complaint of an interested party, or motu

proprio when the Commission has reasonable grounds to believe that the issuance thereof is warranted.64

Asimilar requirement is now found in Section 26, Art. XVIII of the 1987 Constitution, which requires that a"sequestration or freeze order shall be issued only upon showing of a prima facie case."

65

b. Opportunity to Contest

And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by which a party may seekto set aside a writ of sequestration or freeze order, viz:



SECTION 5. Who may contend.-The person against whom a writ of sequestration or freeze or hold order isdirected may request the lifting thereof in writing, either personally or through counsel within five (5) days fromreceipt of the writ or order, or in the case of a hold order, from date of knowledge thereof.

SECTION 6. Procedure for review of writ or order.-After due hearing or motu proprio for good cause shown,the Commission may lift the writ or order unconditionally or subject to such conditions as it may deem necessary,

taking into consideration the evidence and the circumstance of the case. The resolution of the commission may beappealed by the party concerned to the Office of the President of the Philippines within fifteen (15) days fromreceipt thereof.

Parenthetically, even if the requirement for a prima facie showing of "ill- gotten wealth" were not expresslyimposed by some rule or regulation as a condition to warrant the sequestration or freezing of propertycontemplated in the executive orders in question, it would nevertheless be exigible in this jurisdiction in which theRule of Law prevails and official acts which are devoid of rational basis in fact or law, or are whimsical andcapricious, are condemned and struck down.

66

9. Constitutional Sanction of Remedies

If any doubt should still persist in the face of the foregoing considerations as to the validity and propriety ofsequestration, freeze and takeover orders, it should be dispelled by the fact that these particular remedies and theauthority of the PCGG to issue them have received constitutional approbation and sanction. As already mentioned,the Provisional or "Freedom" Constitution recognizes the power and duty of the President to enact "measures toachieve the mandate of the people to * * * (recover ill- gotten properties amassed by the leaders and supporters ofthe previous regime and protect the interest of the people through orders of sequestration or freezing of assets or

accounts." And as also already adverted to, Section 26, Article XVIII of the 1987 Constitution67

treats of, andratifies the "authority to issue sequestration or freeze orders under Proclamation No. 3 dated March 25, 1986."

The institution of these provisional remedies is also premised upon the State's inherent police power,regarded, as t lie power of promoting the public welfare by restraining and regulating the use of liberty andproperty,"

68 and as "the most essential, insistent and illimitable of powers * * in the promotion of general welfare

and the public interest,"69

and said to be co-extensive with self-protection and * * not inaptly termed (also) the'law

of overruling necessity." " 70

10. PCGG not a "Judge"; General Functions

It should also by now be reasonably evident from what has thus far been said that the PCGG is not, and wasnever intended to act as, a judge. Its general function is to conduct investigations in order to collectevidence establishing instances of "ill-gotten wealth;" issue sequestration, and such orders as may be warrantedby the evidence thus collected and as may be necessary to preserve and conserve the assets of which it takescustody and control and prevent their disappearance, loss or dissipation; and eventually file and prosecute in theproper court of competent jurisdiction all cases investigated by it as may be warranted by its findings. It does not tryand decide, or hear and determine, or adjudicate with any character of finality or compulsion, cases involving theessential issue of whether or not property should be forfeited and transferred to the State because "ill-gotten" within

the meaning of the Constitution and the executive orders. This function is reserved to the designated court, in thiscase, the Sandiganbayan.71

There can therefore be no serious regard accorded to the accusation, leveled byBASECO,

72 that the PCGG plays the perfidious role of prosecutor and judge at the same time.

11. Facts Preclude Grant of Relief to Petitioner

Upon these premises and reasoned conclusions, and upon the facts disclosed by the record, hereafter to bediscussed, the petition cannot succeed. The writs of certiorari and prohibition prayed for will not be issued.

The facts show that the corporation known as BASECO was owned or controlled by President Marcos "duringhis administration, through nominees, by taking undue advantage of his public office and/or using his powers,authority, or influence, " and that it was by and through the same means, that BASECO had taken over thebusiness and/or assets of the National Shipyard and Engineering Co., Inc., and other government-owned or

controlled entities.



12. Organization and Stock Distribution of BASECO

BASECO describes itself in its petition as "a shiprepair and shipbuilding company * * incorporated as adomestic private corporation * * (on Aug. 30, 1972) by a consortium of Filipino shipowners and shipping executives.Its main office is at Engineer Island, Port Area, Manila, where its Engineer Island Shipyard is housed, and its mainshipyard is located at Mariveles Bataan."

73 Its Articles of Incorporation disclose that its authorized capital stock is

P60,000,000.00 divided into 60,000 shares, of which 12,000 shares with a value of P12,000,000.00 have beensubscribed, and on said subscription, the aggregate sum of P3,035,000.00 has been paid by theincorporators.

74 The same articles Identify the incorporators, numbering fifteen (15), as follows: (1) Jose A. Rojas,

(2) Anthony P. Lee, (3) Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7) Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10) Jose Francisco, (11) Dioscoro Papa, (12)Octavio Posadas, (13) Manuel S. Mendoza, (14) Magiliw Torres, and (15) Rodolfo Torres.

By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be stockholders, namely: (1)Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias Amante, (4) Octavio Posadas, (5) Magiliw Torres, and (6)Rodolfo Torres. As of this year, 1986, there were twenty (20) stockholders listed in BASECO's Stock and TransferBook.

75Their names and the number of shares respectively held by them are as follows:

1. Jose A. Rojas 1,248 shares

2. Severino G. de la Cruz 1,248 shares

3. Emilio T. Yap 2,508 shares

4. Jose Fernandez 1,248 shares

5. Jose Francisco 128 shares

6. Manuel S. Mendoza 96 shares

7. Anthony P. Lee 1,248 shares

8. Hilario M. Ruiz 32 shares

9. Constante L. Fariñas 8 shares

10. Fidelity Management, Inc. 65,882 shares

11. Trident Management 7,412 shares

12. United Phil. Lines 1,240 shares

13. Renato M. Tanseco 8 shares

14. Fidel Ventura 8 shares

15. Metro Bay Drydock 136,370 shares

16. Manuel Jacela 1 share

17. Jonathan G. Lu 1 share

18. Jose J. Tanchanco 1 share



It further appears that on May 27, 1975 BASECO obtained a loan from the NDC, taken from "the last availableJapanese war damage fund of $19,000,000.00," to pay for "Japanese made heavy equipment (brand new)."

80 On

September 3, 1975, it got another loan also from the NDC in the amount of P30,000,000.00 (id.). And on January28, 1976, it got still another loan, this time from the GSIS, in the sum of P12,400,000.00.

81 The claim has been

made that not a single centavo has been paid on these loans.82

18. Reports to President Marcos

In September, 1977, two (2) reports were submitted to President Marcos regarding BASECO. The first wascontained in a letter dated September 5, 1977 of Hilario M. Ruiz, BASECO president.

83 The second was embodied

in a confidential memorandum dated September 16, 1977 of Capt. A.T. Romualdez.84

They further disclose thefine hand of Marcos in the affairs of BASECO, and that of a Romualdez, a relative by affinity.

a. BASECO President's Report

In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that there had been "no ordersor demands for ship construction" for some time and expressed the fear that if that state of affairs persisted,BASECO would not be able to pay its debts to the Government, which at the time stood at the not inconsiderable

amount of P165,854,000.00.85

He suggested that, to "save the situation," there be a "spin-off (of their) shipbuildingactivities which shall be handled exclusively by an entirely new corporation to be created;" and towards this end, heinformed Marcos that BASECO was —

* * inviting NDC and LUSTEVECO to participate by converting the NDC shipbuilding loan to BASECOamounting to P341.165M and assuming and converting a portion of BASECO's shipbuilding loans from REPACOMamounting to P52.2M or a total of P83.365M as NDC's equity contribution in the new corporation. LUSTEVECO willparticipate by absorbing and converting a portion of the REPACOM loan of Bay Shipyard and Drydock, Inc.,amounting to P32.538M.

86

b. Romualdez' Report

Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later. It opened with thefollowing caption:

MEMORANDUM:

FOR : The President

SUBJECT: An Evaluation and Re-assessment of a Performance of a Mission

FROM: Capt. A.T. Romualdez.

Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its loan obligations due chiefly to

the fact that "orders to build ships as expected * * did not materialize."

He advised that five stockholders had "waived and/or assigned their holdings inblank," these being: (1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo Torres, (4) Magiliw Torres, and (5) Anthony P. Lee. Pointing out that"Mr. Magiliw Torres * * is already dead and Mr. Jose A. Rojas had a major heart attack," he made the followingquite revealing, and it may be added, quite cynical and indurate recommendation, to wit:

* * (that) their replacements (be effected) so we can register their names in the stock book prior to theimplementation of your instructions to pass a board resolution to legalize the transfers under SEC regulations;

2. By getting their replacements, the families cannot question us later on; and

3. We will owe no further favors from them.

87

He also transmitted to Marcos, together with the report, the following documents:88



1. Stock certificates indorsed and assigned in blank with assignments and waivers;89

2. The articles of incorporation, the amended articles, and the by-laws of BASECO;

3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of land in "Engineer Island", Port Area,Manila;

4. Transfer Certificate of Title No. 124822 in the name of BASECO, covering "Engineer Island";

5. Contract dated October 9, 1973, between NASSCO and BASECO re-structure and equipment at Mariveles,Bataan;

6. Contract dated July 16, 1975, between NASSCO and BASECO re-structure and equipment at EngineerIsland, Port Area Manila;

7. Contract dated October 1, 1974, between EPZA and BASECO re 300 hectares of land at Mariveles,Bataan;

8. List of BASECO's fixed assets;

9. Loan Agreement dated September 3, 1975, BASECO's loan from NDC of P30,000,000.00;

10. BASECO-REPACOM Agreement dated May 27, 1975;

11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for the housing facilities for BASECO'srank-and-file employees.

90

Capt. Romualdez also recommended that BASECO's loans be restructured "until such period when BASECOwill have enough orders for ships in order for the company to meet loan obligations," and that —

An LOI may be issued to government agencies using floating equipment, that a linkage scheme be applied toa certain percent of BASECO's net profit as part of BASECO's amortization payments tomake it justifiable for you,

Sir. 91

It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or officer of BASECO, yet hehas presented a report on BASECO to President Marcos, and his report demonstrates intimate familiarity with thefirm's affairs and problems.

19. Marcos' Response to Reports

President Marcos lost no time in acting on his subordinates' recommendations, particularly as regards the"spin-off" and the "linkage scheme" relative to "BASECO's amortization payments."

a. Instructions re "Spin-Off"

Under date of September 28, 1977, he addressed a Memorandum to Secretary Geronimo Velasco of thePhilippine National Oil Company and Chairman Constante Fariñas of the National Development Company,directing them "to participate in the formation of a new corporation resulting from the spin-off of the shipbuilding

component of BASECO along the following guidelines:

a. Equity participation of government shall be through LUSTEVECO and NDC in the amount of P115,903,000consisting of the following obligations of BASECO which are hereby authorized to be converted to equity of thesaid new corporation, to wit:

1. NDC P83,865,000 (P31.165M loan & P52.2M Reparation)



2. LUSTEVECO P32,538,000 (Reparation)

b. Equity participation of government shall be in the form of non- voting shares.

For immediate compliance. 92

Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-two (22) days after receivingtheir president's memorandum, Messrs. Hilario M. Ruiz, Constante L. Fariñas and Geronimo Z. Velasco, inrepresentation of their respective corporations, executed a PRE-INCORPORATION AGREEMENT dated October20, 1977.

93 In it, they undertook to form a shipbuilding corporation to be known as "PHIL-ASIA SHIPBUILDING

CORPORATION," to bring to realization their president's instructions. It would seem that the new corporationultimately formed was actually named "Philippine Dockyard Corporation (PDC)."

94

b. Letter of Instructions No. 670

Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of instructions. On February 14,1978, he issued Letter of Instructions No. 670 addressed to the Reparations Commission REPACOM thePhilippine National Oil Company (PNOC), the Luzon Stevedoring Company (LUSTEVECO), and the National

Development Company (NDC). What is commanded therein is summarized by the Solicitor General, with pithy andnot inaccurate observations as to the effects thereof (in italics), as follows:

* * 1) the shipbuilding equipment procured by BASECO through reparations be transferred to NDC subject toreimbursement by NDC to BASECO (of) the amount of s allegedly representing the handling and incidentalexpenses incurred by BASECO in the installation of said equipment (so instead of NDC getting paid on its loan toBASECO, it was made to pay BASECO instead the amount of P18.285M); 2) the shipbuilding equipment procuredfrom reparations through EPZA, now in the possession of BASECO and BSDI (Bay Shipyard & Drydocking, Inc.)be transferred to LUSTEVECO through PNOC; and 3) the shipbuilding equipment (thus) transferred be invested byLUSTEVECO, acting through PNOC and NDC, as the government's equity participation in a shipbuildingcorporation to be established in partnership with the private sector.

xxx xxx xxx

And so, through a simple letter of instruction and memorandum, BASECO's loan obligation to NDC andREPACOM * * in the total amount of P83.365M and BSD's REPACOM loan of P32.438M were wiped out andconverted into non-voting preferred shares.

95

20. Evidence of Marcos'

Ownership of BASECO

It cannot therefore be gainsaid that, in the context of the proceedings at bar, the actuality of the control byPresident Marcos of BASECO has been sufficiently shown.

Other evidence submitted to the Court by the Solicitor General proves that President Marcos notonly exercised control over BASECO, but also that he actually owns well nigh one hundred percent of itsoutstanding stock.

It will be recalled that according to petitioner- itself, as of April 23, 1986, there were 218,819 shares of stockoutstanding, ostensibly owned by twenty (20) stockholders.

96 Four of these twenty are juridical persons: (1) Metro

Bay Drydock, recorded as holding 136,370 shares; (2) Fidelity Management, Inc., 65,882 shares; (3) Trident

Management, 7,412 shares; and (4) United Phil. Lines, 1,240 shares. The first three corporations, amongthemselves, own an aggregate of 209,664 shares of BASECO stock, or 95.82% of the outstanding stock.

Now, the Solicitor General has drawn the Court's attention to the intriguing circumstance that found inMalacanang shortly after the sudden flight of President Marcos, were certificates corresponding to more

than ninety-five percent (95%) of all the outstanding shares of stock of BASECO, endorsed in blank, together with



deeds of assignment of practically all the outstanding shares of stock of the three (3) corporations abovementioned (which hold 95.82% of all BASECO stock), signed by the owners thereof although not notarized.

97

More specifically, found in Malacanang (and now in the custody of the PCGG) were:

1) the deeds of assignment of all 600 outstanding shares of Fidelity Management Inc. — which supposedly

owns as aforesaid 65,882 shares of BASECO stock;

2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding shares of Metro Bay DrydockCorporation — which allegedly owns 136,370 shares of BASECO stock;

3) the deeds of assignment of 800 outstanding shares of Trident Management Co., Inc. — which allegedlyowns 7,412 shares of BASECO stock, assigned in blank;

98 and

4) stock certificates corresponding to 207,725 out of the 218,819 outstanding shares of BASECO stock;that is,all but 5 % — all endorsed in blank.

99

While the petitioner's counsel was quick to dispute this asserted fact, assuring this Court that the BASECO

stockholders were still in possession of their respective stock certificates and had "never endorsed * * them inblank or to anyone else," 100 that denial is exposed by his own prior and subsequent recorded statements as amere gesture of defiance rather than a verifiable factual declaration.

By resolution dated September 25, 1986, this Court granted BASECO's counsel a period of 10 days "toSUBMIT, as undertaken by him, * * the certificates of stock issued to the stockholders of * * BASECO as of April23, 1986, as listed in Annex 'P' of the petition.' 101 Counsel thereafter moved for extension; and in his motiondated October 2, 1986, he declared inter alia that "said certificates of stock are in the possession of third parties,among whom being the respondents themselves * * and petitioner is still endeavoring to secure copies thereof fromthem." 102 On the same day he filed another motion praying that he be allowed "to secure copies of theCertificates of Stock in the name of Metro Bay Drydock, Inc., and of all other Certificates, of Stock of petitioner'sstockholders in possession of respondents." 103

In a Manifestation dated October 10, 1986,, 104 the Solicitor General not unreasonably argued that counsel'saforestated motion to secure copies of the stock certificates "confirms the fact that stockholders of petitionercorporation are not in possession of * * (their) certificates of stock," and the reason, according to him, was "that95% of said shares * * have been endorsed in blank and found in Malacañang after the former President and hisfamily fled the country." To this manifestation BASECO's counsel replied on November 5, 1986, as alreadymentioned, Stubbornly insisting that the firm's stockholders had not really assigned their stock. 105

In view of the parties' conflicting declarations, this Court resolved on November 27, 1986 among other things"to require * * the petitioner * * to deposit upon proper receipt with Clerk of Court Juanito Ranjo the originals of thestock certificates alleged to be in its possession or accessible to it, mentioned and described in Annex 'P' of itspetition, (and other pleadings) * * within ten (10) days from notice." 106 In a motion filed on December 5,1986, 107 BASECO's counsel made the statement, quite surprising in the premises, that "it will negotiate with the

owners (of the BASECO stock in question) to allow petitioner to borrow from them, if available, the certificatesreferred to" but that "it needs a more sufficient time therefor" (sic). BASECO's counsel however eventually had toconfess inability to produce the originals of the stock certificates, putting up the feeble excuse that while he had"requested the stockholders to allow * * (him) to borrow said certificates, * * some of * * (them) claimed that theyhad delivered the certificates to third parties by way of pledge and/or to secure performance of obligations, whileothers allegedly have entrusted them to third parties in view of last national emergency." 108 He has convenientlyomitted, nor has he offered to give the details of the transactions adverted to by him, or to explain why he had notimpressed on the supposed stockholders the primordial importance of convincing this Court of their presentcustody of the originals of the stock, or if he had done so, why the stockholders are unwilling to agree to some sortof arrangement so that the originals of their certificates might at the very least be exhibited to the Court. Under thecircumstances, the Court can only conclude that he could not get the originals from the stockholders for the simplereason that, as the Solicitor General maintains, said stockholders in truth no longer have them in their possession,these having already been assigned in blank to then President Marcos.

21. Facts Justify Issuance of Sequestration and Takeover Orders



In the light of the affirmative showing by the Government that, prima facie at least, the stockholders anddirectors of BASECO as of April, 1986 109 were mere "dummies," nominees or alter egos of President Marcos; atany rate, that they are no longer owners of any shares of stock in the corporation, the conclusion cannot beavoided that said stockholders and directors have no basis and no standing whatever to cause the filing andprosecution of the instant proceeding; and to grant relief to BASECO, as prayed for in the petition, would in effectbe to restore the assets, properties and business sequestered and taken over by the PCGG to persons who are

"dummies," nominees or alter egos of the former president.

From the standpoint of the PCGG, the facts herein stated at some length do indeed show that the privatecorporation known as BASECO was "owned or controlled by former President Ferdinand E. Marcos * * during hisadministration, * * through nominees, by taking advantage of * * (his) public office and/or using * * (his) powers,authority, influence * *," and that NASSCO and other property of the government had been taken over byBASECO; and the situation justified the sequestration as well as the provisional takeover of the corporation in thepublic interest, in accordance with the terms of Executive Orders No. 1 and 2, pending the filing of the requisiteactions with the Sandiganbayan to cause divestment of title thereto from Marcos, and its adjudication in favor of theRepublic pursuant to Executive Order No. 14.

As already earlier stated, this Court agrees that this assessment of the facts is correct; accordingly, it sustainsthe acts of sequestration and takeover by the PCGG as being in accord with the law, and, in view of what has thusfar been set out in this opinion, pronounces to be without merit the theory that said acts, and the executive orderspursuant to which they were done, are fatally defective in not according to the parties affected prior notice andhearing, or an adequate remedy to impugn, set aside or otherwise obtain relief therefrom, or that the PCGG hadacted as prosecutor and judge at the same time.

22. Executive Orders Not a Bill of Attainder

Neither will this Court sustain the theory that the executive orders in question are a bill of attainder. 110 "A billof attainder is a legislative act which inflicts punishment without judicial trial." 111 "Its essence is the substitution ofa legislative for a judicial determination of guilt." 112

In the first place, nothing in the executive orders can be reasonably construed as a determination or

declaration of guilt. On the contrary, the executive orders, inclusive of Executive Order No. 14, make it perfectlyclear that any judgment of guilt in the amassing or acquisition of "ill-gotten wealth" is to be handed down by a

judicial tribunal, in this case, the Sandiganbayan, upon complaint filed and prosecuted by the PCGG. In the secondplace, no punishment is inflicted by the executive orders, as the merest glance at their provisions will immediatelymake apparent. In no sense, therefore, may the executive orders be regarded as a bill of attainder.

23. No Violation of Right against Self-Incrimination and Unreasonable Searches and Seizures

BASECO also contends that its right against self incrimination and unreasonable searches and seizures hadbeen transgressed by the Order of April 18, 1986 which required it "to produce corporate records from 1973 to1986 under pain of contempt of the Commission if it fails to do so." The order was issued upon the authority ofSection 3 (e) of Executive Order No. 1, treating of the PCGG's power to "issue subpoenas requiring * * the

production of such books, papers, contracts, records, statements of accounts and other documents as may bematerial to the investigation conducted by the Commission, " and paragraph (3), Executive Order No. 2 dealingwith its power to "require all persons in the Philippines holding * * (alleged "ill-gotten") assets or properties, whetherlocated in the Philippines or abroad, in their names as nominees, agents or trustees, to make full disclosure of thesame * *." The contention lacks merit.

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

While an individual may lawfully refuse to answer incriminating questions unless protected by an immunitystatute, it does not follow that a corporation, vested with special privileges and franchises, may refuse to show itshand when charged with an abuse ofsuchprivileges * * 113

Relevant jurisprudence is also cited by the Solicitor General. 114



* * corporations are not entitled to all of the constitutional protections which private individuals have. * *Theyare not at all within the privilege against self-incrimination, although this court more than once has said that theprivilege runs very closely with the 4th Amendment's Search and Seizure provisions. It is also settled that an officerof the company cannot refuse to produce its records in its possession upon the plea that they will either incriminatehim or may incriminate it." (Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186; emphasis, the SolicitorGeneral's).

* * The corporation is a creature of the state. It is presumed to be incorporated for the benefit of the public. Itreceived certain special privileges and franchises, and holds them subject to the laws of the state and thelimitations of its charter. Its powers are limited by law. It can make no contract not authorized by its charter. Itsrights to act as a corporation are only preserved to it so long as it obeys the laws of its creation. There is a reserveright in the legislature to investigate its contracts and find out whether it has exceeded its powers. It would be astrange anomaly to hold that a state, having chartered a corporation to make use of certain franchises, could not, inthe exercise of sovereignty, inquire how these franchises had been employed, and whether they had been abused,and demand the production of the corporate books and papers for that purpose. The defense amounts to this, thatan officer of the corporation which is charged with a criminal violation of the statute may plead the criminality ofsuch corporation as a refusal to produce its books. To state this proposition is to answer it. While an individual maylawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a

corporation, vested with special privileges and franchises may refuse to show its hand when charged with an

abuse of such privileges. (Wilson v. United States, 55 Law Ed., 771, 780 [emphasis, the Solicitor General's])

At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14 assures protection toindividuals required to produce evidence before the PCGG against any possible violation of his right against self-incrimination. It gives them immunity from prosecution on the basis of testimony or information he is compelled topresent. As amended, said Section 4 now provides that —

xxx xxx xxx

The witness may not refuse to comply with the order on the basis of his privilege against self-incrimination; butno testimony or other information compelled under the order (or any information directly or indirectly derived fromsuch testimony, or other information) may be used against the witness in any criminal case, except a prosecution

for perjury, giving a false statement, or otherwise failing to comply with the order.

The constitutional safeguard against unreasonable searches and seizures finds no application to the case atbar either. There has been no search undertaken by any agent or representative of the PCGG, and of course noseizure on the occasion thereof.

24. Scope and Extent of Powers of the PCGG

One other question remains to be disposed of, that respecting the scope and extent of the powers that may bewielded by the PCGG with regard to the properties or businesses placed under sequestration or provisionally takenover. Obviously, it is not a question to which an answer can be easily given, much less one which will suffice forevery conceivable situation.

a. PCGG May Not Exercise Acts of Ownership

One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts of dominion overproperty sequestered, frozen or provisionally taken over. AS already earlier stressed with no little insistence, theact of sequestration; freezing or provisional takeover of property does not import or bring about a divestment of titleover said property; does not make the PCGG the owner thereof. In relation to the property sequestered, frozen orprovisionally taken over, the PCGG is a conservator, not an owner. Therefore, it can not perform acts of strictownership; and this is specially true in the situations contemplated by the sequestration rules where, unlike casesof receivership, for example, no court exercises effective supervision or can upon due application and hearing,grant authority for the performance of acts of dominion.

Equally evident is that the resort to the provisional remedies in question should entail the least possible

interference with business operations or activities so that, in the event that the accusation of the business



enterprise being "ill gotten" be not proven, it may be returned to its rightful owner as far as possible in the samecondition as it was at the time of sequestration.

b. PCGG Has Only Powers of Administration

The PCGG may thus exercise only powers of administration over the property or business sequestered or

provisionally taken over, much like a court-appointed receiver, 115 such as to bring and defend actions in its ownname; receive rents; collect debts due; pay outstanding debts; and generally do such other acts and things as maybe necessary to fulfill its mission as conservator and administrator. In this context, it may in addition enjoin orrestrain any actual or threatened commission of acts by any person or entity that may render moot and academic,or frustrate or otherwise make ineffectual its efforts to carry out its task; punish for direct or indirect contempt inaccordance with the Rules of Court; and seek and secure the assistance of any office, agency or instrumentality ofthe government. 116 In the case of sequestered businesses generally (i.e., going concerns, businesses in currentoperation), as in the case of sequestered objects, its essential role, as already discussed, is that of conservator,caretaker, "watchdog" or overseer. It is not that of manager, or innovator, much less an owner.

c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons Close to him; Limitations

Thereon

Now, in the special instance of a business enterprise shown by evidence to have been "taken over by thegovernment of the Marcos Administration or by entities or persons close to former President Marcos," 117 thePCGG is given power and authority, as already adverted to, to "provisionally take (it) over in the public interest orto prevent * * (its) disposal or dissipation;" and since the term is obviously employed in reference to goingconcerns, or business enterprises in operation, something more than mere physical custody is connoted; thePCGG may in this case exercise some measure of control in the operation, running, or management of thebusiness itself. But even in this special situation, the intrusion into management should be restricted to theminimum degree necessary to accomplish the legislative will, which is "to prevent the disposal or dissipation" of thebusiness enterprise. There should be no hasty, indiscriminate, unreasoned replacement or substitution ofmanagement officials or change of policies, particularly in respect of viable establishments. In fact, such areplacement or substitution should be avoided if at all possible, and undertaken only when justified bydemonstrably tenable grounds and in line with the stated objectives of the PCGG. And it goes without saying that

where replacement of management officers may be called for, the greatest prudence, circumspection, care andattention - should accompany that undertaking to the end that truly competent, experienced and honest managersmay be recruited. There should be no role to be played in this area by rank amateurs, no matter how wen meaning.The road to hell, it has been said, is paved with good intentions. The business is not to be experimented or playedaround with, not run into the ground, not driven to bankruptcy, not fleeced, not ruined. Sight should never be lostsight of the ultimate objective of the whole exercise, which is to turn over the business to the Republic, once

judicially established to be "ill-gotten." Reason dictates that it is only under these conditions and circumstances thatthe supervision, administration and control of business enterprises provisionally taken over may legitimately beexercised.

d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions and circumstances that the PCGG may properlyexercise the prerogative to vote sequestered stock of corporations, granted to it by the President of the Philippinesthrough a Memorandum dated June 26, 1986. That Memorandum authorizes the PCGG, "pending the outcome ofproceedings to determine the ownership of * * (sequestered) shares of stock," "to vote such shares of stock as itmay have sequestered in corporations at all stockholders' meetings called for the election of directors, declarationof dividends, amendment of the Articles of Incorporation, etc." The Memorandum should be construed in such amanner as to be consistent with, and not contradictory of the Executive Orders earlier promulgated on the samematter. There should be no exercise of the right to vote simply because the right exists, or because the stockssequestered constitute the controlling or a substantial part of the corporate voting power. The stock is not to bevoted to replace directors, or revise the articles or by-laws, or otherwise bring about substantial changes in policy,program or practice of the corporation except for demonstrably weighty and defensible grounds, and always in thecontext of the stated purposes of sequestration or provisional takeover, i.e., to prevent the dispersion or unduedisposal of the corporate assets. Directors are not to be voted out simply because the power to do so exists.Substitution of directors is not to be done without reason or rhyme, should indeed be shunned if at an possible, andundertaken only when essential to prevent disappearance or wastage of corporate property, and always undersuch circumstances as assure that the replacements are truly possessed of competence, experience and probity.



In the case at bar, there was adequate justification to vote the incumbent directors out of office and electothers in their stead because the evidence showed prima facie that the former were just tools of President Marcosand were no longer owners of any stock in the firm, if they ever were at all. This is why, in its Resolution of October28, 1986;118 this Court declared that —

Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in respondents' calling and

holding of a stockholders' meeting for the election of directors as authorized by the Memorandum of the President ** (to the PCGG) dated June 26, 1986, particularly, where as in this case, the government can, through itsdesignated directors, properly exercise control and management over what appear to be properties and assetsowned and belonging to the government itself and over which the persons who appear in this case on behalf ofBASECO have failed to show any right or even any shareholding in said corporation.

It must however be emphasized that the conduct of the PCGG nominees in the BASECO Board in themanagement of the company's affairs should henceforth be guided and governed by the norms herein laid down.They should never for a moment allow themselves to forget that they are conservators, not owners of the business;they are fiduciaries, trustees, of whom the highest degree of diligence and rectitude is, in the premises, required.

25. No Sufficient Showing of Other Irregularities

As to the other irregularities complained of by BASECO, i.e., the cancellation or revision, and the execution ofcertain contracts, inclusive of the termination of the employment of some of its executives, 119 this Court cannot, inthe present state of the evidence on record, pass upon them. It is not necessary to do so. The issues arisingtherefrom may and will be left for initial determination in the appropriate action. But the Court will state that absentany showing of any important cause therefor, it will not normally substitute its judgment for that of the PCGG inthese individual transactions. It is clear however, that as things now stand, the petitioner cannot be said to haveestablished the correctness of its submission that the acts of the PCGG in question were done without or in excessof its powers, or with grave abuse of discretion.

WHEREFORE, the petition is dismissed. The temporary restraining order issued on October 14, 1986 is lifted.

Yap, Fernan, Paras, Gancayco and Sarmiento, JJ., concur.

G.R. No. L-27155 May 18, 1978

PHILIPPINE NATIONAL BANK, petitioner, vs.THE COURT OF APPEALS, RITA GUECO TAPNIO, CECILIO GUECO and THE PHILIPPINE AMERICAN

GENERAL INSURANCE COMPANY, INC.,

respondents.

Medina, Locsin, Coruña, & Sumbillo for petitioner.

Manuel Lim & Associates for private respondents.

ANTONIO, J.:

Certiorari to review the decision of the Court of Appeals which affirmed the judgment of the Court of FirstInstance of Manila in Civil Case No. 34185, ordering petitioner, as third-party defendant, to pay respondent RitaGueco Tapnio, as third-party plaintiff, the sum of P2,379.71, plus 12% interest per annum from September 19,1957 until the same is fully paid, P200.00 attorney's fees and costs, the same amounts which Rita Gueco Tapniowas ordered to pay the Philippine American General Insurance Co., Inc., to be paid directly to the Philippine

American General Insurance Co., Inc. in full satisfaction of the judgment rendered against Rita Gueco Tapnio infavor of the former; plus P500.00 attorney's fees for Rita Gueco Tapnio and costs. The basic action is thecomplaint filed by Philamgen (Philippine American General Insurance Co., Inc.) as surety against Rita Gueco

Tapnio and Cecilio Gueco, for the recovery of the sum of P2,379.71 paid by Philamgen to the Philippine NationalBank on behalf of respondents Tapnio and Gueco, pursuant to an indemnity agreement. Petitioner Bank was made



third-party defendant by Tapnio and Gueco on the theory that their failure to pay the debt was due to the fault ornegligence of petitioner.

The facts as found by the respondent Court of Appeals, in affirming the decision of the Court of First Instanceof Manila, are quoted hereunder:

Plaintiff executed its Bond, Exh. A, with defendant Rita Gueco Tapnio as principal, in favor of the PhilippineNational Bank Branch at San Fernando, Pampanga, to guarantee the payment of defendant Rita Gueco Tapnio'saccount with said Bank. In turn, to guarantee the payment of whatever amount the bonding company would pay tothe Philippine National Bank, both defendants executed the indemnity agreement, Exh. B. Under the terms andconditions of this indemnity agreement, whatever amount the plaintiff would pay would earn interest at the rate of12% per annum, plus attorney's fees in the amount of 15 % of the whole amount due in case of court litigation.

The original amount of the bond was for P4,000.00; but the amount was later reduced to P2,000.00.

It is not disputed that defendant Rita Gueco Tapnio was indebted to the bank in the sum of P2,000.00, plusaccumulated interests unpaid, which she failed to pay despite demands. The Bank wrote a letter of demand toplaintiff, as per Exh. C; whereupon, plaintiff paid the bank on September 18, 1957, the full amount due and owing

in the sum of P2,379.91, for and on account of defendant Rita Gueco's obligation (Exhs. D and D-1).

Plaintiff, in turn, made several demands, both verbal and written, upon defendants (Exhs. E and F), but to noavail.

Defendant Rita Gueco Tapnio admitted all the foregoing facts. She claims, however, when demand was madeupon her by plaintiff for her to pay her debt to the Bank, that she told the Plaintiff that she did not consider herselfto be indebted to the Bank at all because she had an agreement with one Jacobo-Nazon whereby she had leasedto the latter her unused export sugar quota for the 1956-1957 agricultural year, consisting of 1,000 piculs at therate of P2.80 per picul, or for a total of P2,800.00, which was already in excess of her obligation guaranteed byplaintiff's bond, Exh. A. This lease agreement, according to her, was with the knowledge of the bank. But the Bankhas placed obstacles to the consummation of the lease, and the delay caused by said obstacles forced 'Nazon torescind the lease contract. Thus, Rita Gueco Tapnio filed her third-party complaint against the Bank to recover

from the latter any and all sums of money which may be adjudged against her and in favor of the plaitiff plus moraldamages, attorney's fees and costs.

Insofar as the contentions of the parties herein are concerned, we quote with approval the following findings ofthe lower court based on the evidence presented at the trial of the case:

It has been established during the trial that Mrs. Tapnio had an export sugar quota of 1,000 piculs for theagricultural year 1956-1957 which she did not need. She agreed to allow Mr. Jacobo C. Tuazon to use said quotafor the consideration of P2,500.00 (Exh. "4"-Gueco). This agreement was called a contract of lease of sugarallotment.

At the time of the agreement, Mrs. Tapnio was indebted to the Philippine National Bank at San Fernando,

Pampanga. Her indebtedness was known as a crop loan and was secured by a mortgage on her standing cropincluding her sugar quota allocation for the agricultural year corresponding to said standing crop. This arrangementwas necessary in order that when Mrs. Tapnio harvests, the P.N.B., having a lien on the crop, may effectivelyenforce collection against her. Her sugar cannot be exported without sugar quota allotment Sometimes, however, aplanter harvest less sugar than her quota, so her excess quota is utilized by another who pays her for its use. Thisis the arrangement entered into between Mrs. Tapnio and Mr. Tuazon regarding the former's excess quota for1956-1957 (Exh. "4"-Gueco).

Since the quota was mortgaged to the P.N.B., the contract of lease had to be approved by said Bank, Thesame was submitted to the branch manager at San Fernando, Pampanga. The latter required the parties to raisethe consideration of P2.80 per picul or a total of P2,800.00 (Exh. "2-Gueco") informing them that "the minimumlease rental acceptable to the Bank, is P2.80 per picul." In a letter addressed to the branch manager on August 10,1956, Mr. Tuazon informed the manager that he was agreeable to raising the consideration to P2.80 per picul. He

further informed the manager that he was ready to pay said amount as the funds were in his folder which was keptin the bank.



Explaining the meaning of Tuazon's statement as to the funds, it was stated by him that he had an approvedloan from the bank but he had not yet utilized it as he was intending to use it to pay for the quota. Hence, when hesaid the amount needed to pay Mrs. Tapnio was in his folder which was in the bank, he meant and the managerunderstood and knew he had an approved loan available to be used in payment of the quota. In said Exh. "6-Gueco", Tuazon also informed the manager that he would want for a notice from the manager as to the time whenthe bank needed the money so that Tuazon could sign the corresponding promissory note.

Further Consideration of the evidence discloses that when the branch manager of the Philippine NationalBank at San Fernando recommended the approval of the contract of lease at the price of P2.80 per picul (Exh. 1 1-Bank), whose recommendation was concurred in by the Vice-president of said Bank, J. V. Buenaventura, the boardof directors required that the amount be raised to 13.00 per picul. This act of the board of directors wascommunicated to Tuazon, who in turn asked for a reconsideration thereof. On November 19, 1956, the branchmanager submitted Tuazon's request for reconsideration to the board of directors with another recommendation forthe approval of the lease at P2.80 per picul, but the board returned the recommendation unacted upon, consideringthat the current price prevailing at the time was P3.00 per picul (Exh. 9-Bank).

The parties were notified of the refusal on the part of the board of directors of the Bank to grant the motion forreconsideration. The matter stood as it was until February 22, 1957, when Tuazon wrote a letter (Exh. 10-Bankinforming the Bank that he was no longer interested to continue the deal, referring to the lease of sugar quotaallotment in favor of defendant Rita Gueco Tapnio. The result is that the latter lost the sum of P2,800.00 which sheshould have received from Tuazon and which she could have paid the Bank to cancel off her indebtedness,

The court below held, and in this holding we concur that failure of the negotiation for the lease of the sugarquota allocation of Rita Gueco Tapnio to Tuazon was due to the fault of the directors of the Philippine NationalBank, The refusal on the part of the bank to approve the lease at the rate of P2.80 per picul which, as statedabove, would have enabled Rita Gueco Tapnio to realize the amount of P2,800.00 which was more than sufficientto pay off her indebtedness to the Bank, and its insistence on the rental price of P3.00 per picul thus unnecessarilyincreasing the value by only a difference of P200.00. inevitably brought about the rescission of the lease contract tothe damage and prejudice of Rita Gueco Tapnio in the aforesaid sum of P2,800.00. The unreasonableness of theposition adopted by the board of directors of the Philippine National Bank in refusing to approve the lease at therate of P2.80 per picul and insisting on the rate of P3.00 per picul, if only to increase the retail value by only

P200.00 is shown by the fact that all the accounts of Rita Gueco Tapnio with the Bank were secured by chattelmortgage on standing crops, assignment of leasehold rights and interests on her properties, and surety bonds,aside from the fact that from Exh. 8-Bank, it appears that she was offering to execute a real estate mortgage infavor of the Bank to replace the surety bond This statement is further bolstered by the fact that Rita Gueco Tapnioapparently had the means to pay her obligation fact that she has been granted several value of almost P80,000.00for the agricultural years from 1952 to 56.

1

Its motion for the reconsideration of the decision of the Court of Appeals having been denied, petitioner filedthe present petition.

The petitioner contends that the Court of Appeals erred:

(1) In finding that the rescission of the lease contract of the 1,000 piculs of sugar quota allocation ofrespondent Rita Gueco Tapnio by Jacobo C. Tuazon was due to the unjustified refusal of petitioner to approve saidlease contract, and its unreasonable insistence on the rental price of P3.00 instead of P2.80 per picul; and

(2) In not holding that based on the statistics of sugar price and prices of sugar quota in the possession of thepetitioner, the latter's Board of Directors correctly fixed the rental of price per picul of 1,000 piculs of sugar quotaleased by respondent Rita Gueco Tapnio to Jacobo C. Tuazon at P3.00 per picul.

Petitioner argued that as an assignee of the sugar quota of Tapnio, it has the right, both under its own Charterand under the Corporation Law, to safeguard and protect its rights and interests under the deed of assignment,which include the right to approve or disapprove the said lease of sugar quota and in the exercise of that authority,its

Board of Directors necessarily had authority to determine and fix the rental price per picul of the sugar quotasubject of the lease between private respondents and Jacobo C. Tuazon. It argued further that both under its



Charter and the Corporation Law, petitioner, acting thru its Board of Directors, has the perfect right to adopt apolicy with respect to fixing of rental prices of export sugar quota allocations, and in fixing the rentals at P3.00 perpicul, it did not act arbitrarily since the said Board was guided by statistics of sugar price and prices of sugar quotasprevailing at the time. Since the fixing of the rental of the sugar quota is a function lodged with petitioner's Board ofDirectors and is a matter of policy, the respondent Court of Appeals could not substitute its own judgment for thatof said Board of Directors, which acted in good faith, making as its basis therefore the prevailing market price as

shown by statistics which were then in their possession.

Finally, petitioner emphasized that under the appealed judgment, it shall suffer a great injustice because as acreditor, it shall be deprived of a just claim against its debtor (respondent Rita Gueco Tapnio) as it would berequired to return to respondent Philamgen the sum of P2,379.71, plus interest, which amount had been previouslypaid to petitioner by said insurance company in behalf of the principal debtor, herein respondent Rita GuecoTapnio, and without recourse against respondent Rita Gueco Tapnio.

We must advert to the rule that this Court's appellate jurisdiction in proceedings of this nature is limited toreviewing only errors of law, accepting as conclusive the factual fin dings of the Court of Appeals upon its ownassessment of the evidence.

2

The contract of lease of sugar quota allotment at P2.50 per picul between Rita Gueco Tapnio and Jacobo C.Tuazon was executed on April 17, 1956. This contract was submitted to the Branch Manager of the PhilippineNational Bank at San Fernando, Pampanga. This arrangement was necessary because Tapnio's indebtedness topetitioner was secured by a mortgage on her standing crop including her sugar quota allocation for the agriculturalyear corresponding to said standing crop. The latter required the parties to raise the consideration to P2.80 perpicul, the minimum lease rental acceptable to the Bank, or a total of P2,800.00. Tuazon informed the BranchManager, thru a letter dated August 10, 1956, that he was agreeable to raising the consideration to P2.80 per picul.He further informed the manager that he was ready to pay the said sum of P2,800.00 as the funds were in hisfolder which was kept in the said Bank. This referred to the approved loan of Tuazon from the Bank which heintended to use in paying for the use of the sugar quota. The Branch Manager submitted the contract of lease ofsugar quota allocation to the Head Office on September 7, 1956, with a recommendation for approval, whichrecommendation was concurred in by the Vice-President of the Bank, Mr. J. V. Buenaventura. Thisnotwithstanding, the Board of Directors of petitioner required that the consideration be raised to P3.00 per picul.

Tuazon, after being informed of the action of the Board of Directors, asked for a reconsideration thereof. OnNovember 19, 1956, the Branch Manager submitted the request for reconsideration and again recommended theapproval of the lease at P2.80 per picul, but the Board returned the recommendation unacted, stating that thecurrent price prevailing at that time was P3.00 per picul.

On February 22, 1957, Tuazon wrote a letter, informing the Bank that he was no longer interested incontinuing the lease of sugar quota allotment. The crop year 1956-1957 ended and Mrs. Tapnio failed to utilize hersugar quota, resulting in her loss in the sum of P2,800.00 which she should have received had the lease in favor ofTuazon been implemented.

It has been clearly shown that when the Branch Manager of petitioner required the parties to raise theconsideration of the lease from P2.50 to P2.80 per picul, or a total of P2,800-00, they readily agreed. Hence, in hisletter to the Branch Manager of the Bank on August 10, 1956, Tuazon informed him that the minimum lease rentalof P2.80 per picul was acceptable to him and that he even offered to use the loan secured by him from petitioner topay in full the sum of P2,800.00 which was the total consideration of the lease. This arrangement was not onlysatisfactory to the Branch Manager but it was also approves by Vice-President J. V. Buenaventura of the PNB.Under that arrangement, Rita Gueco Tapnio could have realized the amount of P2,800.00, which was more thanenough to pay the balance of her indebtedness to the Bank which was secured by the bond of Philamgen.

There is no question that Tapnio's failure to utilize her sugar quota for the crop year 1956-1957 was due to thedisapproval of the lease by the Board of Directors of petitioner. The issue, therefore, is whether or not petitioner isliable for the damage caused.

As observed by the trial court, time is of the essence in the approval of the lease of sugar quota allotments,

since the same must be utilized during the milling season, because any allotment which is not filled during suchmilling season may be reallocated by the Sugar Quota Administration to other holders of allotments.

3 There was



no proof that there was any other person at that time willing to lease the sugar quota allotment of privaterespondents for a price higher than P2.80 per picul. "The fact that there were isolated transactions wherein theconsideration for the lease was P3.00 a picul", according to the trial court, "does not necessarily mean that thereare always ready takers of said price. " The unreasonableness of the position adopted by the petitioner's Board ofDirectors is shown by the fact that the difference between the amount of P2.80 per picul offered by Tuazon and theP3.00 per picul demanded by the Board amounted only to a total sum of P200.00. Considering that all the accounts

of Rita Gueco Tapnio with the Bank were secured by chattel mortgage on standing crops, assignment of leaseholdrights and interests on her properties, and surety bonds and that she had apparently "the means to pay herobligation to the Bank, as shown by the fact that she has been granted several sugar crop loans of the total valueof almost P80,000.00 for the agricultural years from 1952 to 1956", there was no reasonable basis for the Board ofDirectors of petitioner to have rejected the lease agreement because of a measly sum of P200.00.

While petitioner had the ultimate authority of approving or disapproving the proposed lease since the quotawas mortgaged to the Bank, the latter certainly cannot escape its responsibility of observing, for the protection ofthe interest of private respondents, that degree of care, precaution and vigilance which the circumstances justlydemand in approving or disapproving the lease of said sugar quota. The law makes it imperative that every person"must in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, andobserve honesty and good faith,

4 This petitioner failed to do. Certainly, it knew that the agricultural year was about

to expire, that by its disapproval of the lease private respondents would be unable to utilize the sugar quota in

question. In failing to observe the reasonable degree of care and vigilance which the surrounding circumstancesreasonably impose, petitioner is consequently liable for the damages caused on private respondents. Under Article21 of the New Civil Code, "any person who wilfully causes loss or injury to another in a manner that is contrary tomorals, good customs or public policy shall compensate the latter for the damage." The afore-cited provisions onhuman relations were intended to expand the concept of torts in this jurisdiction by granting adequate legal remedyfor the untold number of moral wrongs which is impossible for human foresight to specifically provide in thestatutes.

5

A corporation is civilly liable in the same manner as natural persons for torts, because "generally speaking, therules governing the liability of a principal or master for a tort committed by an agent or servant are the samewhether the principal or master be a natural person or a corporation, and whether the servant or agent be a naturalor artificial person. All of the authorities agree that a principal or master is liable for every tort which he expresslydirects or authorizes, and this is just as true of a corporation as of a natural person, A corporation is liable,therefore, whenever a tortious act is committed by an officer or agent under express direction or authority from thestockholders or members acting as a body, or, generally, from the directors as the governing body."

6

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby AFFIRMED.

Fernando, Aquino, Concepcion, Jr., and Santos, JJ., concur.

G.R. No. 126297 January 31, 2007

PROFESSIONAL SERVICES, INC., Petitioner,vs.

NATIVIDAD and ENRIQUE AGANA, Respondents.

x - - - - - - - - - - - - - - - - - - - - - - - x

G.R. No. 126467 January 31, 2007

NATIVIDAD (Substituted by her children MARCELINO AGANA III, ENRIQUE AGANA, JR., EMMAAGANA ANDAYA, JESUS AGANA, and RAYMUND AGANA) and ENRIQUE AGANA, Petitioners,vs.JUAN FUENTES, Respondent.

x- - - - - - - - - - - - - - - - - - - -- - - - x

G.R. No. 127590 January 31, 2007



MIGUEL AMPIL, Petitioner,vs.NATIVIDAD AGANA and ENRIQUE AGANA, Respondents.

D E C I S I O N

SANDOVAL-GUTIERREZ, J.:

Hospitals, having undertaken one of mankind’s most important and delicate endeavors, must assume thegrave responsibility of pursuing it with appropriate care. The care and service dispensed through this high trust,however technical, complex and esoteric its character may be, must meet standards of responsibilitycommensurate with the undertaking to preserve and protect the health, and indeed, the very lives of those placedin the hospital’s keeping.

1

Assailed in these three consolidated petitions for review on certiorari is the Court of Appeals’ Decision2 dated

September 6, 1996 in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198 affirming with modification theDecision

3dated March 17, 1993 of the Regional Trial Court (RTC), Branch 96, Quezon City in Civil Case No. Q-

43322 and nullifying its Order dated September 21, 1993.

The facts, as culled from the records, are:

On April 4, 1984, Natividad Agana was rushed to the Medical City General Hospital (Medical City Hospital)because of difficulty of bowel movement and bloody anal discharge. After a series of medical examinations, Dr.Miguel Ampil, petitioner in G.R. No. 127590, diagnosed her to be suffering from "cancer of the sigmoid."

On April 11, 1984, Dr. Ampil, assisted by the medical staff 4 of the Medical City Hospital, performed an anterior

resection surgery on Natividad. He found that the malignancy in her sigmoid area had spread on her left ovary,necessitating the removal of certain portions of it. Thus, Dr. Ampil obtained the consent of Natividad’s husband,Enrique Agana, to permit Dr. Juan Fuentes, respondent in G.R. No. 126467, to perform hysterectomy on her.

After Dr. Fuentes had completed the hysterectomy, Dr. Ampil took over, completed the operation and closedthe incision.

However, the operation appeared to be flawed. In the corresponding Record of Operation dated April 11,1984, the attending nurses entered these remarks:

"sponge count lacking 2

"announced to surgeon searched (sic) done but to no avail continue for closure."

On April 24, 1984, Natividad was released from the hospital. Her hospital and medical bills, including thedoctors’ fees, amounted to P60,000.00.

After a couple of days, Natividad complained of excruciating pain in her anal region. She consulted both Dr. Ampil and Dr. Fuentes about it. They told her that the pain was the natural consequence of the surgery. Dr. Ampilthen recommended that she consult an oncologist to examine the cancerous nodes which were not removedduring the operation.

On May 9, 1984, Natividad, accompanied by her husband, went to the United States to seek further treatment. After four months of consultations and laboratory examinations, Natividad was told she was free of cancer. Hence,she was advised to return to the Philippines.

On August 31, 1984, Natividad flew back to the Philippines, still suffering from pains. Two weeks thereafter,her daughter found a piece of gauze protruding from her vagina. Upon being informed about it, Dr. Ampilproceeded to her house where he managed to extract by hand a piece of gauze measuring 1.5 inches in width. Hethen assured her that the pains would soon vanish.



Dr. Ampil’s assurance did not come true. Instead, the pains intensified, prompting Natividad to seek treatmentat the Polymedic General Hospital. While confined there, Dr. Ramon Gutierrez detected the presence of anotherforeign object in her vagina -- a foul-smelling gauze measuring 1.5 inches in width which badly infected her vaginalvault. A recto-vaginal fistula had formed in her reproductive organs which forced stool to excrete through thevagina. Another surgical operation was needed to remedy the damage. Thus, in October 1984, Natividadunderwent another surgery.

On November 12, 1984, Natividad and her husband filed with the RTC, Branch 96, Quezon City a complaintfor damages against the Professional Services, Inc. (PSI), owner of the Medical City Hospital, Dr. Ampil, and Dr.Fuentes, docketed as Civil Case No. Q-43322. They alleged that the latter are liable for negligence for leaving twopieces of gauze inside Natividad’s body and malpractice for concealing their acts of negligence.

Meanwhile, Enrique Agana also filed with the Professional Regulation Commission (PRC) an administrativecomplaint for gross negligence and malpractice against Dr. Ampil and Dr. Fuentes, docketed as AdministrativeCase No. 1690. The PRC Board of Medicine heard the case only with respect to Dr. Fuentes because it failed toacquire jurisdiction over Dr. Ampil who was then in the United States.

On February 16, 1986, pending the outcome of the above cases, Natividad died and was duly substituted by

her above-named children (the Aganas).

On March 17, 1993, the RTC rendered its Decision in favor of the Aganas, finding PSI, Dr. Ampil and Dr.Fuentes liable for negligence and malpractice, the decretal part of which reads:

WHEREFORE, judgment is hereby rendered for the plaintiffs ordering the defendants PROFESSIONALSERVICES, INC., DR. MIGUEL AMPIL and DR. JUAN FUENTES to pay to the plaintiffs, jointly and severally,except in respect of the award for exemplary damages and the interest thereon which are the liabilities ofdefendants Dr. Ampil and Dr. Fuentes only, as follows:

1. As actual damages, the following amounts:

a. The equivalent in Philippine Currency of the total of US$19,900.00 at the rate of P21.60-US$1.00, asreimbursement of actual expenses incurred in the United States of America;

b. The sum of P4,800.00 as travel taxes of plaintiffs and their physician daughter;

c. The total sum of P45,802.50, representing the cost of hospitalization at Polymedic Hospital, medical fees,and cost of the saline solution;

2. As moral damages, the sum of P2,000,000.00;

3. As exemplary damages, the sum of P300,000.00;

4. As attorney’s fees, the sum of P250,000.00;

5. Legal interest on items 1 (a), (b), and (c); 2; and 3 hereinabove, from date of filing of the complaint until fullpayment; and

6. Costs of suit.

SO ORDERED.

Aggrieved, PSI, Dr. Fuentes and Dr. Ampil interposed an appeal to the Court of Appeals, docketed as CA-G.R. CV No. 42062.

Incidentally, on April 3, 1993, the Aganas filed with the RTC a motion for a partial execution of its Decision,which was granted in an Order dated May 11, 1993. Thereafter, the sheriff levied upon certain properties of Dr.

Ampil and sold them for P451,275.00 and delivered the amount to the Aganas.



Following their receipt of the money, the Aganas entered into an agreement with PSI and Dr. Fuentes toindefinitely suspend any further execution of the RTC Decision. However, not long thereafter, the Aganas againfiled a motion for an alias writ of execution against the properties of PSI and Dr. Fuentes. On September 21, 1993,the RTC granted the motion and issued the corresponding writ, prompting Dr. Fuentes to file with the Court of

Appeals a petition for certiorari and prohibition, with prayer for preliminary injunction, docketed as CA-G.R. SP No.32198. During its pendency, the Court of Appeals issued a Resolution

5 dated October 29, 1993 granting Dr.

Fuentes’ prayer for injunctive relief.

On January 24, 1994, CA-G.R. SP No. 32198 was consolidated with CA-G.R. CV No. 42062.

Meanwhile, on January 23, 1995, the PRC Board of Medicine rendered its Decision6 in Administrative Case

No. 1690 dismissing the case against Dr. Fuentes. The Board held that the prosecution failed to show that Dr.Fuentes was the one who left the two pieces of gauze inside Natividad’s body; and that he concealed such factfrom Natividad.

On September 6, 1996, the Court of Appeals rendered its Decision jointly disposing of CA-G.R. CV No. 42062and CA-G.R. SP No. 32198, thus:

WHEREFORE, except for the modification that the case against defendant-appellant Dr. Juan Fuentes ishereby DISMISSED, and with the pronouncement that defendant-appellant Dr. Miguel Ampil is liable to reimbursedefendant-appellant Professional Services, Inc., whatever amount the latter will pay or had paid to the plaintiffs-appellees, the decision appealed from is hereby AFFIRMED and the instant appeal DISMISSED.

Concomitant with the above, the petition for certiorari and prohibition filed by herein defendant-appellant Dr.Juan Fuentes in CA-G.R. SP No. 32198 is hereby GRANTED and the challenged order of the respondent judgedated September 21, 1993, as well as the alias writ of execution issued pursuant thereto are hereby NULLIFIEDand SET ASIDE. The bond posted by the petitioner in connection with the writ of preliminary injunction issued bythis Court on November 29, 1993 is hereby cancelled.

Costs against defendants-appellants Dr. Miguel Ampil and Professional Services, Inc.

SO ORDERED.

Only Dr. Ampil filed a motion for reconsideration, but it was denied in a Resolution7 dated December 19, 1996.

Hence, the instant consolidated petitions.

In G.R. No. 126297, PSI alleged in its petition that the Court of Appeals erred in holding that: (1) it is estoppedfrom raising the defense that Dr. Ampil is not its employee; (2) it is solidarily liable with Dr. Ampil; and (3) it is notentitled to its counterclaim against the Aganas. PSI contends that Dr. Ampil is not its employee, but a mereconsultant or independent contractor. As such, he alone should answer for his negligence.

In G.R. No. 126467, the Aganas maintain that the Court of Appeals erred in finding that Dr. Fuentes is notguilty of negligence or medical malpractice, invoking the doctrine of res ipsa loquitur. They contend that the piecesof gauze are prima facie proofs that the operating surgeons have been negligent.

Finally, in G.R. No. 127590, Dr. Ampil asserts that the Court of Appeals erred in finding him liable fornegligence and malpractice sans evidence that he left the two pieces of gauze in Natividad’s vagina. He pointed toother probable causes, such as: (1) it was Dr. Fuentes who used gauzes in performing the hysterectomy; (2) theattending nurses’ failure to properly count the gauzes used during surgery; and (3) the medical intervention of the

American doctors who examined Natividad in the United States of America.

For our resolution are these three vital issues: first, whether the Court of Appeals erred in holding Dr. Ampilliable for negligence and malpractice; second, whether the Court of Appeals erred in absolving Dr. Fuentes of anyliability; and third, whether PSI may be held solidarily liable for the negligence of Dr. Ampil.

I - G.R. No. 127590



Whether the Court of Appeals Erred in Holding Dr. Ampil

Liable for Negligence and Malpractice.

Dr. Ampil, in an attempt to absolve himself, gears the Court’s attention to other possible causes of Natividad’sdetriment. He argues that the Court should not discount either of the following possibilities: first, Dr. Fuentes left the

gauzes in Natividad’s body after performing hysterectomy; second, the attending nurses erred in counting thegauzes; and third, the American doctors were the ones who placed the gauzes in Natividad’s body.

Dr. Ampil’s arguments are purely conjectural and without basis. Records show that he did not present anyevidence to prove that the American doctors were the ones who put or left the gauzes in Natividad’s body. Neitherdid he submit evidence to rebut the correctness of the record of operation, particularly the number of gauzes used.

As to the alleged negligence of Dr. Fuentes, we are mindful that Dr. Ampil examined his (Dr. Fuentes’) work andfound it in order.

The glaring truth is that all the major circumstances, taken together, as specified by the Court of Appeals,directly point to Dr. Ampil as the negligent party, thus:

First, it is not disputed that the surgeons used gauzes as sponges to control the bleeding of the patient duringthe surgical operation.

Second, immediately after the operation, the nurses who assisted in the surgery noted in their report that the‘sponge count (was) lacking 2’; that such anomaly was ‘announced to surgeon’ and that a ‘search was done but tono avail’ prompting Dr. Ampil to ‘continue for closure’ x x x.

Third, after the operation, two (2) gauzes were extracted from the same spot of the body of Mrs. Agana wherethe surgery was performed.

An operation requiring the placing of sponges in the incision is not complete until the sponges are properlyremoved, and it is settled that the leaving of sponges or other foreign substances in the wound after the incision

has been closed is at least prima facie negligence by the operating surgeon.

8

To put it simply, such act isconsidered so inconsistent with due care as to raise an inference of negligence. There are even legions ofauthorities to the effect that such act is negligence per se.

9

Of course, the Court is not blind to the reality that there are times when danger to a patient’s life precludes asurgeon from further searching missing sponges or foreign objects left in the body. But this does not leave him freefrom any obligation. Even if it has been shown that a surgeon was required by the urgent necessities of the case toleave a sponge in his patient’s abdomen, because of the dangers attendant upon delay, still, it is his legal duty toso inform his patient within a reasonable time thereafter by advising her of what he had been compelled to do. Thisis in order that she might seek relief from the effects of the foreign object left in her body as her condition mightpermit. The ruling in Smith v. Zeagler

10 is explicit, thus:

The removal of all sponges used is part of a surgical operation, and when a physician or surgeon fails to

remove a sponge he has placed in his patient’s body that should be removed as part of the operation, he therebyleaves his operation uncompleted and creates a new condition which imposes upon him the legal duty of callingthe new condition to his patient’s attention, and endeavoring with the means he has at hand to minimize and avoiduntoward results likely to ensue therefrom.

Here, Dr. Ampil did not inform Natividad about the missing two pieces of gauze. Worse, he even misled herthat the pain she was experiencing was the ordinary consequence of her operation. Had he been more candid,Natividad could have taken the immediate and appropriate medical remedy to remove the gauzes from her body.To our mind, what was initially an act of negligence by Dr. Ampil has ripened into a deliberate wrongful act ofdeceiving his patient.

This is a clear case of medical malpractice or more appropriately, medical negligence. To successfully pursue

this kind of case, a patient must only prove that a health care provider either failed to do something which areasonably prudent health care provider would have done, or that he did something that a reasonably prudentprovider would not have done; and that failure or action caused injury to the patient.

11 Simply put, the elements are



duty, breach, injury and proximate causation. Dr, Ampil, as the lead surgeon, had the duty to remove all foreignobjects, such as gauzes, from Natividad’s body before closure of the incision. When he failed to do so, it was hisduty to inform Natividad about it. Dr. Ampil breached both duties. Such breach caused injury to Natividad,necessitating her further examination by American doctors and another surgery. That Dr. Ampil’s negligence is theproximate cause

12 of Natividad’s injury could be traced from his act of closing the incision despite the information

given by the attending nurses that two pieces of gauze were still missing. That they were later on extracted from

Natividad’s vagina established the causal link between Dr. Ampil’s negligence and the injury. And what furtheraggravated such injury was his deliberate concealment of the missing gauzes from the knowledge of Natividad andher family.

II - G.R. No. 126467

Whether the Court of Appeals Erred in Absolving

Dr. Fuentes of any Liability

The Aganas assailed the dismissal by the trial court of the case against Dr. Fuentes on the ground that it iscontrary to the doctrine of res ipsa loquitur. According to them, the fact that the two pieces of gauze were left inside

Natividad’s body is a prima facie evidence of Dr. Fuentes’ negligence.

We are not convinced.

Literally, res ipsa loquitur means "the thing speaks for itself." It is the rule that the fact of the occurrence of aninjury, taken with the surrounding circumstances, may permit an inference or raise a presumption of negligence, ormake out a plaintiff’s prima facie case, and present a question of fact for defendant to meet with anexplanation.

13 Stated differently, where the thing which caused the injury, without the fault of the injured, is under

the exclusive control of the defendant and the injury is such that it should not have occurred if he, having suchcontrol used proper care, it affords reasonable evidence, in the absence of explanation that the injury arose fromthe defendant’s want of care, and the burden of proof is shifted to him to establish that he has observed due careand diligence.

14

From the foregoing statements of the rule, the requisites for the applicability of the doctrine of res ipsa loquiturare: (1) the occurrence of an injury; (2) the thing which caused the injury was under the control and management ofthe defendant; (3) the occurrence was such that in the ordinary course of things, would not have happened if thosewho had control or management used proper care; and (4) the absence of explanation by the defendant. Of theforegoing requisites, the most instrumental is the "control and management of the thing which caused the injury."

15

We find the element of "control and management of the thing which caused the injury" to be wanting. Hence,the doctrine of res ipsa loquitur will not lie.

It was duly established that Dr. Ampil was the lead surgeon during the operation of Natividad. He requestedthe assistance of Dr. Fuentes only to perform hysterectomy when he (Dr. Ampil) found that the malignancy in hersigmoid area had spread to her left ovary. Dr. Fuentes performed the surgery and thereafter reported and showed

his work to Dr. Ampil. The latter examined it and finding everything to be in order, allowed Dr. Fuentes to leave theoperating room. Dr. Ampil then resumed operating on Natividad. He was about to finish the procedure when theattending nurses informed him that two pieces of gauze were missing. A "diligent search" was conducted, but themisplaced gauzes were not found. Dr. Ampil then directed that the incision be closed. During this entire period, Dr.Fuentes was no longer in the operating room and had, in fact, left the hospital.

Under the "Captain of the Ship" rule, the operating surgeon is the person in complete charge of the surgeryroom and all personnel connected with the operation. Their duty is to obey his orders.

16 As stated before, Dr. Ampil

was the lead surgeon. In other words, he was the "Captain of the Ship." That he discharged such role is evidentfrom his following conduct: (1) calling Dr. Fuentes to perform a hysterectomy; (2) examining the work of Dr.Fuentes and finding it in order; (3) granting Dr. Fuentes’ permission to leave; and (4) ordering the closure of theincision. To our mind, it was this act of ordering the closure of the incision notwithstanding that two pieces of gauzeremained unaccounted for, that caused injury to Natividad’s body. Clearly, the control and management of the thing

which caused the injury was in the hands of Dr. Ampil, not Dr. Fuentes.



In this jurisdiction, res ipsa loquitur is not a rule of substantive law, hence, does not per se create or constitutean independent or separate ground of liability, being a mere evidentiary rule.

17 In other words, mere invocation and

application of the doctrine does not dispense with the requirement of proof of negligence. Here, the negligence wasproven to have been committed by Dr. Ampil and not by Dr. Fuentes.

III - G.R. No. 126297

Whether PSI Is Liable for the Negligence of Dr. Ampil

The third issue necessitates a glimpse at the historical development of hospitals and the resulting theoriesconcerning their liability for the negligence of physicians.

Until the mid-nineteenth century, hospitals were generally charitable institutions, providing medical services tothe lowest classes of society, without regard for a patient’s ability to pay.

18 Those who could afford medical

treatment were usually treated at home by their doctors.19

However, the days of house calls and philanthropichealth care are over. The modern health care industry continues to distance itself from its charitable past and hasexperienced a significant conversion from a not-for-profit health care to for-profit hospital businesses.Consequently, significant changes in health law have accompanied the business-related changes in the hospital

industry. One important legal change is an increase in hospital liability for medical malpractice. Many courts nowallow claims for hospital vicarious liability under the theories of respondeat superior, apparent authority, ostensibleauthority, or agency by estoppel.

20

In this jurisdiction, the statute governing liability for negligent acts is Article 2176 of the Civil Code, whichreads:

Art. 2176. Whoever by act or omission causes damage to another, there being fault or negligence, is obligedto pay for the damage done. Such fault or negligence, if there is no pre-existing contractual relation between theparties, is called a quasi-delict and is governed by the provisions of this Chapter.

A derivative of this provision is Article 2180, the rule governing vicarious liability under the doctrine ofrespondeat superior, thus:

ART. 2180. The obligation imposed by Article 2176 is demandable not only for one’s own acts or omissions,but also for those of persons for whom one is responsible.

x x x x x x

The owners and managers of an establishment or enterprise are likewise responsible for damages caused bytheir employees in the service of the branches in which the latter are employed or on the occasion of theirfunctions.

Employers shall be liable for the damages caused by their employees and household helpers acting within thescope of their assigned tasks even though the former are not engaged in any business or industry.

x x x x x x

The responsibility treated of in this article shall cease when the persons herein mentioned prove that theyobserved all the diligence of a good father of a family to prevent damage.

A prominent civilist commented that professionals engaged by an employer, such as physicians, dentists, andpharmacists, are not "employees" under this article because the manner in which they perform their work is notwithin the control of the latter (employer). In other words, professionals are considered personally liable for the faultor negligence they commit in the discharge of their duties, and their employer cannot be held liable for such fault ornegligence. In the context of the present case, "a hospital cannot be held liable for the fault or negligence of aphysician or surgeon in the treatment or operation of patients."

21



The foregoing view is grounded on the traditional notion that the professional status and the very nature of thephysician’s calling preclude him from being classed as an agent or employee of a hospital, whenever he acts in aprofessional capacity.

22 It has been said that medical practice strictly involves highly developed and specialized

knowledge,23

such that physicians are generally free to exercise their own skill and judgment in rendering medicalservices sans interference.

24 Hence, when a doctor practices medicine in a hospital setting, the hospital and its

employees are deemed to subserve him in his ministrations to the patient and his actions are of his own

responsibility.25

The case of Schloendorff v. Society of New York Hospital26

was then considered an authority for this view.The "Schloendorff doctrine" regards a physician, even if employed by a hospital, as an independent contractorbecause of the skill he exercises and the lack of control exerted over his work. Under this doctrine, hospitals areexempt from the application of the respondeat superior principle for fault or negligence committed by physicians inthe discharge of their profession.

However, the efficacy of the foregoing doctrine has weakened with the significant developments in medicalcare. Courts came to realize that modern hospitals are increasingly taking active role in supplying and regulatingmedical care to patients. No longer were a hospital’s functions limited to furnishing room, food, facilities fortreatment and operation, and attendants for its patients. Thus, in Bing v. Thunig,

27 the New York Court of Appeals

deviated from the Schloendorff doctrine, noting that modern hospitals actually do far more than provide facilities fortreatment. Rather, they regularly employ, on a salaried basis, a large staff of physicians, interns, nurses,administrative and manual workers. They charge patients for medical care and treatment, even collecting for suchservices through legal action, if necessary. The court then concluded that there is no reason to exempt hospitalsfrom the universal rule of respondeat superior.

In our shores, the nature of the relationship between the hospital and the physicians is renderedinconsequential in view of our categorical pronouncement in Ramos v. Court of Appeals

28 that for purposes of

apportioning responsibility in medical negligence cases, an employer-employee relationship in effect existsbetween hospitals and their attending and visiting physicians. This Court held:

"We now discuss the responsibility of the hospital in this particular incident. The unique practice (amongprivate hospitals) of filling up specialist staff with attending and visiting "consultants," who are allegedly not hospital

employees, presents problems in apportioning responsibility for negligence in medical malpractice cases. However,the difficulty is more apparent than real.

In the first place, hospitals exercise significant control in the hiring and firing of consultants and in the conductof their work within the hospital premises. Doctors who apply for ‘consultant’ slots, visiting or attending, arerequired to submit proof of completion of residency, their educational qualifications, generally, evidence ofaccreditation by the appropriate board (diplomate), evidence of fellowship in most cases, and references. Theserequirements are carefully scrutinized by members of the hospital administration or by a review committee set upby the hospital who either accept or reject the application. x x x.

After a physician is accepted, either as a visiting or attending consultant, he is normally required to attendclinico-pathological conferences, conduct bedside rounds for clerks, interns and residents, moderate grand roundsand patient audits and perform other tasks and responsibilities, for the privilege of being able to maintain a clinic inthe hospital, and/or for the privilege of admitting patients into the hospital. In addition to these, the physician’sperformance as a specialist is generally evaluated by a peer review committee on the basis of mortality andmorbidity statistics, and feedback from patients, nurses, interns and residents. A consultant remiss in his duties, ora consultant who regularly falls short of the minimum standards acceptable to the hospital or its peer reviewcommittee, is normally politely terminated.

In other words, private hospitals, hire, fire and exercise real control over their attending and visiting‘consultant’ staff. While ‘consultants’ are not, technically employees, x x x, the control exercised, the hiring, and theright to terminate consultants all fulfill the important hallmarks of an employer-employee relationship, with theexception of the payment of wages. In assessing whether such a relationship in fact exists, the control test isdetermining. Accordingly, on the basis of the foregoing, we rule that for the purpose of allocating responsibility inmedical negligence cases, an employer-employee relationship in effect exists between hospitals and their

attending and visiting physicians. "



But the Ramos pronouncement is not our only basis in sustaining PSI’s liability. Its liability is also anchoredupon the agency principle of apparent authority or agency by estoppel and the doctrine of corporate negligencewhich have gained acceptance in the determination of a hospital’s liability for negligent acts of health professionals.The present case serves as a perfect platform to test the applicability of these doctrines, thus, enriching our

jurisprudence.

Apparent authority, or what is sometimes referred to as the "holding

out" theory, or doctrine of ostensible agency or agency by estoppel,29

has its origin from the law of agency. Itimposes liability, not as the result of the reality of a contractual relationship, but rather because of the actions of aprincipal or an employer in somehow misleading the public into believing that the relationship or the authorityexists.

30 The concept is essentially one of estoppel and has been explained in this manner:

"The principal is bound by the acts of his agent with the apparent authority which he knowingly permits theagent to assume, or which he holds the agent out to the public as possessing. The question in every case iswhether the principal has by his voluntary act placed the agent in such a situation that a person of ordinaryprudence, conversant with business usages and the nature of the particular business, is justified in presuming thatsuch agent has authority to perform the particular act in question.

31

The applicability of apparent authority in the field of hospital liability was upheld long time ago in Irving v.Doctor Hospital of Lake Worth, Inc.

32 There, it was explicitly stated that "there does not appear to be any rational

basis for excluding the concept of apparent authority from the field of hospital liability." Thus, in cases where it canbe shown that a hospital, by its actions, has held out a particular physician as its agent and/or employee and that apatient has accepted treatment from that physician in the reasonable belief that it is being rendered in behalf of thehospital, then the hospital will be liable for the physician’s negligence.

Our jurisdiction recognizes the concept of an agency by implication or estoppel. Article 1869 of the Civil Codereads:

ART. 1869. Agency may be express, or implied from the acts of the principal, from his silence or lack ofaction, or his failure to repudiate the agency, knowing that another person is acting on his behalf without authority.

In this case, PSI publicly displays in the lobby of the Medical City Hospital the names and specializations ofthe physicians associated or accredited by it, including those of Dr. Ampil and Dr. Fuentes. We concur with theCourt of Appeals’ conclusion that it "is now estopped from passing all the blame to the physicians whose names itproudly paraded in the public directory leading the public to believe that it vouched for their skill and competence."Indeed, PSI’s act is tantamount to holding out to the public that Medical City Hospital, through its accreditedphysicians, offers quality health care services. By accrediting Dr. Ampil and Dr. Fuentes and publicly advertisingtheir qualifications, the hospital created the impression that they were its agents, authorized to perform medical orsurgical services for its patients. As expected, these patients, Natividad being one of them, accepted the serviceson the reasonable belief that such were being rendered by the hospital or its employees, agents, or servants. Thetrial court correctly pointed out:

x x x regardless of the education and status in life of the patient, he ought not be burdened with the defense ofabsence of employer-employee relationship between the hospital and the independent physician whose name andcompetence are certainly certified to the general public by the hospital’s act of listing him and his specialty in itslobby directory, as in the case herein. The high costs of today’s medical and health care should at least exact onthe hospital greater, if not broader, legal responsibility for the conduct of treatment and surgery within its facility byits accredited physician or surgeon, regardless of whether he is independent or employed."

33

The wisdom of the foregoing ratiocination is easy to discern. Corporate entities, like PSI, are capable of actingonly through other individuals, such as physicians. If these accredited physicians do their job well, the hospitalsucceeds in its mission of offering quality medical services and thus profits financially. Logically, where negligencemars the quality of its services, the hospital should not be allowed to escape liability for the acts of its ostensibleagents.

We now proceed to the doctrine of corporate negligence or corporate responsibility.



One allegation in the complaint in Civil Case No. Q-43332 for negligence and malpractice is that PSI asowner, operator and manager of Medical City Hospital, "did not perform the necessary supervision nor exercisediligent efforts in the supervision of Drs. Ampil and Fuentes and its nursing staff, resident doctors, and medicalinterns who assisted Drs. Ampil and Fuentes in the performance of their duties as surgeons."

34 Premised on the

doctrine of corporate negligence, the trial court held that PSI is directly liable for such breach of duty.

We agree with the trial court.

Recent years have seen the doctrine of corporate negligence as the judicial answer to the problem ofallocating hospital’s liability for the negligent acts of health practitioners, absent facts to support the application ofrespondeat superior or apparent authority. Its formulation proceeds from the judiciary’s acknowledgment that inthese modern times, the duty of providing quality medical service is no longer the sole prerogative andresponsibility of the physician. The modern hospitals have changed structure. Hospitals now tend to organize ahighly professional medical staff whose competence and performance need to be monitored by the hospitalscommensurate with their inherent responsibility to provide quality medical care.

35

The doctrine has its genesis in Darling v. Charleston Community Hospital.36

There, the Supreme Court ofIllinois held that "the jury could have found a hospital negligent, inter alia, in failing to have a sufficient number of

trained nurses attending the patient; failing to require a consultation with or examination by members of thehospital staff; and failing to review the treatment rendered to the patient." On the basis of Darling, other jurisdictions held that a hospital’s corporate negligence extends to permitting a physician known to be incompetentto practice at the hospital.

37 With the passage of time, more duties were expected from hospitals, among them: (1)

the use of reasonable care in the maintenance of safe and adequate facilities and equipment; (2) the selection andretention of competent physicians; (3) the overseeing or supervision of all persons who practice medicine within itswalls; and (4) the formulation, adoption and enforcement of adequate rules and policies that ensure quality care forits patients.

38 Thus, in Tucson Medical Center, Inc. v. Misevich,

39 it was held that a hospital, following the doctrine

of corporate responsibility, has the duty to see that it meets the standards of responsibilities for the care of patients.Such duty includes the proper supervision of the members of its medical staff. And in Bost v. Riley,

40 the court

concluded that a patient who enters a hospital does so with the reasonable expectation that it will attempt to curehim. The hospital accordingly has the duty to make a reasonable effort to monitor and oversee the treatmentprescribed and administered by the physicians practicing in its premises.

In the present case, it was duly established that PSI operates the Medical City Hospital for the purpose andunder the concept of providing comprehensive medical services to the public. Accordingly, it has the duty toexercise reasonable care to protect from harm all patients admitted into its facility for medical treatment.Unfortunately, PSI failed to perform such duty. The findings of the trial court are convincing, thus:

x x x PSI’s liability is traceable to its failure to conduct an investigation of the matter reported in the nota beneof the count nurse. Such failure established PSI’s part in the dark conspiracy of silence and concealment about thegauzes. Ethical considerations, if not also legal, dictated the holding of an immediate inquiry into the events, if notfor the benefit of the patient to whom the duty is primarily owed, then in the interest of arriving at the truth. TheCourt cannot accept that the medical and the healing professions, through their members like defendant surgeons,and their institutions like PSI’s hospital facility, can callously turn their backs on and disregard even a mereprobability of mistake or negligence by refusing or failing to investigate a report of such seriousness as the one in

Natividad’s case.

It is worthy to note that Dr. Ampil and Dr. Fuentes operated on Natividad with the assistance of the MedicalCity Hospital’s staff, composed of resident doctors, nurses, and interns. As such, it is reasonable to conclude thatPSI, as the operator of the hospital, has actual or constructive knowledge of the procedures carried out, particularlythe report of the attending nurses that the two pieces of gauze were missing. In Fridena v. Evans,

41 it was held that

a corporation is bound by the knowledge acquired by or notice given to its agents or officers within the scope oftheir authority and in reference to a matter to which their authority extends. This means that the knowledge of anyof the staff of Medical City Hospital constitutes knowledge of PSI. Now, the failure of PSI, despite the attendingnurses’ report, to investigate and inform Natividad regarding the missing gauzes amounts to callous negligence.Not only did PSI breach its duties to oversee or supervise all persons who practice medicine within its walls, it alsofailed to take an active step in fixing the negligence committed. This renders PSI, not only vicariously liable for thenegligence of Dr. Ampil under Article 2180 of the Civil Code, but also directly liable for its own negligence under

Article 2176. In Fridena, the Supreme Court of Arizona held:



x x x In recent years, however, the duty of care owed to the patient by the hospital has expanded. Theemerging trend is to hold the hospital responsible where the hospital has failed to monitor and review medicalservices being provided within its walls. See Kahn Hospital Malpractice Prevention, 27 De Paul . Rev. 23 (1977).

Among the cases indicative of the ‘emerging trend’ is Purcell v. Zimbelman, 18 Ariz. App. 75,500 P. 2d 335(1972). In Purcell, the hospital argued that it could not be held liable for the malpractice of a medical practitioner

because he was an independent contractor within the hospital. The Court of Appeals pointed out that the hospitalhad created a professional staff whose competence and performance was to be monitored and reviewed by thegoverning body of the hospital, and the court held that a hospital would be negligent where it had knowledge orreason to believe that a doctor using the facilities was employing a method of treatment or care which fell below therecognized standard of care.

Subsequent to the Purcell decision, the Arizona Court of Appeals held that a hospital has certain inherentresponsibilities regarding the quality of medical care furnished to patients within its walls and it must meet thestandards of responsibility commensurate with this undertaking. Beeck v. Tucson General Hospital, 18 Ariz. App.165, 500 P. 2d 1153 (1972). This court has confirmed the rulings of the Court of Appeals that a hospital has theduty of supervising the competence of the doctors on its staff. x x x.

x x x x x x

In the amended complaint, the plaintiffs did plead that the operation was performed at the hospital with itsknowledge, aid, and assistance, and that the negligence of the defendants was the proximate cause of thepatient’s injuries. We find that such general allegations of negligence, along with the evidence produced at the trialof this case, are sufficient to support the hospital’s liability based on the theory of negligent supervision."

Anent the corollary issue of whether PSI is solidarily liable with Dr. Ampil for damages, let it be emphasizedthat PSI, apart from a general denial of its responsibility, failed to adduce evidence showing that it exercised thediligence of a good father of a family in the accreditation and supervision of the latter. In neglecting to offer suchproof, PSI failed to discharge its burden under the last paragraph of Article 2180 cited earlier, and, therefore, mustbe adjudged solidarily liable with Dr. Ampil. Moreover, as we have discussed, PSI is also directly liable to the

Aganas.

One final word. Once a physician undertakes the treatment and care of a patient, the law imposes on himcertain obligations. In order to escape liability, he must possess that reasonable degree of learning, skill andexperience required by his profession. At the same time, he must apply reasonable care and diligence in theexercise of his skill and the application of his knowledge, and exert his best judgment.

WHEREFORE, we DENY all the petitions and AFFIRM the challenged Decision of the Court of Appeals in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198.

Costs against petitioners PSI and Dr. Miguel Ampil.

SO ORDERED.

CHILD LEARNING CENTER, INC. G.R. No. 150920

and SPOUSES EDGARDO L. LIMON

and SYLVIA S. LIMON, Present: Petitioners,

DAVIDE, JR., C.J . (Chairman), - versus - QUISUMBING,

YNARES-SANTIAGO, CARPIO, and

AZCUNA, JJ. TIMOTHY TAGARIO, assisted by

his parents BASILIO TAGORIO and Promulgated:

HERMINIA TAGORIO,Respondents. November 25, 2005



x-------------------------------------------------------------------------------------------x

DECISION

AZCUNA, J .:

This petition started with a tort case filed with the Regional Trial Court of Makati by Timothy Tagorio

and his parents, Basilio R. Tagorio and Herminia Tagorio, docketed as Civil Case No. 91-1389. The

complaint[1] alleged that during the school year 1990-1991, Timothy was a Grade IV student at Marymount School,

an academic institution operated and maintained by Child Learning Center, Inc. (CLC). In the afternoon of March

5, 1991, between 1 and 2 p.m., Timothy entered the boy’s comfort room at the third floor of the Marymount

building to answer the call of nature. He, however, found himself locked inside and unable to get out. Timothy

started to panic and so he banged and kicked the door and yelled several times for help. When no help arrived he

decided to open the window to call for help. In the process of opening the window, Timothy went right throughand fell down three stories. Timothy was hospitalized and given medical treatment for serious multiple physical

injuries.

An action under Article 2176 of the Civil Code was filed by respondents against the CLC, the members

of its Board of Directors, namely Spouses Edgardo and Sylvia Limon, Alfonso Cruz, Carmelo Narciso and

Luningning Salvador, and the Administrative Officer of Marymount School, Ricardo Pilao. In its defense,[2] CLC

maintained that there was nothing defective about the locking mechanism of the door and that the fall of Timothy

was not due to its fault or negligence. CLC further maintained that it had exercised the due care and diligence of a

good father of a family to ensure the safety, well-being and convenience of its students.

After trial, the court a quo found in favor of respondents and ordered petitioners CLC and Spouses

Limon to pay respondents, jointly and severally, P200,253.12 as actual and compensatory damages, P200,000 as

moral damages, P50,000 as exemplary damages, P100,000 as attorney’s fees and the costs of the suit. The trial court

disregarded the corporate fiction of CLC and held the Spouses Limon personally liable because they were the ones

who actually managed the affairs of the CLC.

Petitioners CLC and the Spouses Limon appealed the decision to the Court of Appeals.

On September 28, 2001, the Court of Appeals[3] affirmed the decision in toto. Petitioners elevated the case to

this Court under Rule 45 of the Rules of Court, after their motion for reconsideration was denied by Resolution of

November 23, 2001.[4]

Petitioners question several factual findings of the trial court, which were affirmed by the Court of Appeals,

namely:[5]



person for whose act he must respond; and (3) the connection of cause and effect between the fault or negligence

and the damages incurred.[7]

Fault, in general, signifies a voluntary act or omission which causes damage to the right of another giving rise

to an obligation on the part of the actor to repair such damage. Negligence is the failure to observe for the

protection of the interest of another person that degree of care, precaution and vigilance which the circumstances

justly demand. Fault requires the execution of a positive act which causes damage to another while negligence

consists of the omission to do acts which result in damage to another.[8]

In this tort case, respondents contend that CLC failed to provide precautionary measures to avoid harm and

injury to its students in two instances: (1) failure to fix a defective door knob despite having been notified of the

problem; and (2) failure to install safety grills on the window where Timothy fell from.

The trial court found that the lock was defective on March 5, 1991:[9]

The door knob was defective. After the incident of March 5, 1991, said door knob was taken off thedoor of the toilet where Timothy was in. The architect who testified during the trial declared that althoughthere were standard specifications for door knobs for comfort room[s], and he designed them according tothat requirement, he did not investigate whether the door knob specified in his plans during theconstruction [was] actually put in place. This is so because he did not verify whether the door knob hespecified w[as] actually put in place at the particular comfort room where Timothy was barred fromgetting outside. (TSN, pp. 19-20, December 8, 1994).

The Court of Appeals held that there was no reason to disturb the factual assessment:[10]

After having perused the records, We fail to see any indication of whim or arbitrariness on the part ofthe trial magistrate in his assessment of the facts of the case. That said, We deem it not to be within Ourbusiness to recast the factual conclusions reached by the court below.

Petitioners would make much of the point that no direct evidence was presented to prove that the door knob

was indeed defective on the date in question.

The fact, however, that Timothy fell out through the window shows that the door could not be opened from

the inside. That sufficiently points to the fact that something was wrong with the door, if not the door knob, under

the principle of res ipsa loquitor . The doctrine of res ipsa loquitor applies where (1) the accident was of such character

as to warrant an inference that it would not have happened except for the defendant’s negligence; (2) the accident

must have been caused by an agency or instrumentality within the exclusive management or control of the person

charged with the negligence complained of; and (3) the accident must not have been due to any voluntary action or

contribution on the part of the person injured.[11]Petitioners are clearly answerable for failure to see to it that the

doors of their school toilets are at all times in working condition. The fact that a student had to go through thewindow, instead of the door, shows that something was wrong with the door.



As to the absence of grills on the window, petitioners contend that there was no such requirement under the

Building Code. Nevertheless, the fact is that such window, as petitioners themselves point out, was approximately

1.5 meters from the floor, so that it was within reach of a student who finds the regular exit, the door, not

functioning. Petitioners, with the due diligence of a good father of the family, should have anticipated that a

student, locked in the toilet by a non-working door, would attempt to use the window to call for help or even to

get out. Considering all the circumstances, therefore, there is sufficient basis to sustain a finding of liability on

petitioners’ part.

Petitioners’ argument that CLC exercised the due diligence of a good father of a family in the selection and

supervision of its employees is not decisive. Due diligence in the selection and supervision of employees is

applicable where the employer is being held responsible for the acts or omissions of others under Article 2180 of

the Civil Code.[12] In this case, CLC’s liability is under Article 2176 of the Civil Code, premised on the fact of its

own negligence in not ensuring that all its doors are properly maintained.

Our pronouncement that Timothy climbed out of the window because he could not get out using the door,

negates petitioners’ other contention that the proximate cause of the accident was Timothy’s own negligence. The

injuries he sustained from the fall were the product of a natural and continuous sequence, unbroken by any

intervening cause, that originated from CLC’s own negligence.

We, however, agree with petitioners that there was no basis to pierce CLC’s separate corporate personality. Todisregard the corporate existence, the plaintiff must prove: (1) Control by the individual owners, not mere majority

or complete stock ownership, resulting in complete domination not only of finances but of policy and business

practice in respect to a transaction so that the corporate entity as to this transaction had at the time no separate

mind, will or existence of its own; (2) such control must have been used by the defendant to commit fraud or

wrong, to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and unjust act in

contravention of the plaintiff’s legal right; and (3) the control and breach of duty must proximately cause the injury

or unjust loss complained of. The absence of these elements prevents piercing the corporate veil.[13]The evidence on

record fails to show that these elements are present, especially given the fact that plaintiffs’ complaint had pleaded

that CLC is a corporation duly organized and existing under the laws of the Philippines.

On 9th and 10th points raised concerning the award of damages, the resolution would rest on factual

determinations by the trial court, affirmed by the Court of Appeals, and no legal issue warrants our intervention.

WHEREFORE, the petition is partly granted and the Decision and Resolution of the Court of Appeals in

CA-G.R. CV No. 50961 dated September 28, 2001 and November 23, 2001, respectively, are MODIFIED in that

petitioners Spouses Edgardo and Sylvia Limon are absolved from personal liability. The Decision and Resolutionare AFFIRMED in all other respects. No pronouncement as to costs.



SO ORDERED.

G.R. No. L-30896 April 28, 1983

JOSE O. SIA, petitioner, vs.THE PEOPLE OF THE PHILIPPINES,

respondent.

DE CASTRO, J.:

Petition for review of the decision of the Court of Appeals affirming the decision of the Court of First Instanceof Manila convicting the appellant of estafa, under an information which reads:

That in, about or during the period comprised' between July 24, 1963 and December 31, 1963, both datesinclusive, in the City of Manila, Philippines, the said accused did then and there willfully, unlawfully and feloniouslydefraud the Continental Bank, a banking institution duly organized and doing business in the City of Manila, in thefollowing manner, to wit: the said accused, in his capacity as president and general manager of the MetalManufacturing of the Philippines, Inc. (MEMAP) and on behalf of said company, obtained delivery of 150 M/T ColdRolled Steel Sheets valued at P 71,023.60 under a trust receipt agreement under L/C No. 63/109, which cold rolledsteel sheets were consigned to the Continental Bank, under the express obligation on the part of said accused ofholding the said steel sheets in trust and selling them and turning over the proceeds of the sale to the ContinentalBank; but the said accused, once in possession of the said goods, far from complying with his aforesaid obligationand despite demands made upon him to do so, with intent to defraud, failed and refused to return the said coldrolled sheets or account for the proceeds thereof, if sold, which the said accused willfully, unlawfully and feloniously

misappropriated, misapplied and converted to his own personal use and benefit, to the damage and prejudice ofthe said Continental Bank in the total amount of P146,818.68, that is the balance including the interest afterdeducting the sum of P28,736.47 deposited by the said accused with the bank as marginal deposit and forfeited bythe said from the value of the said goods, in the said sum of P71,023.60. (Original Records, p. 1).

In reviewing the evidence, the Court of Appeals came up with the following findings of facts which the SolicitorGeneral alleges should be conclusive upon this Court:

There is no debate on certain antecedents: Accused Jose 0. Sia sometime prior to 24 May, 1963, wasGeneral Manager of the Metal Manufacturing Company of the Philippines, Inc. engaged in the manufacture of steeloffice equipment; on 31 May, 1963, because his company was in need of raw materials to be imported fromabroad, he applied for a letter of credit to import steel sheets from Mitsui Bussan Kaisha, Ltd. of Tokyo, Japan, theapplication being directed to the Continental Bank, herein complainant, Exhibit B and his application having been

approved, the letter of credit was opened on 5 June, 1963 in the amount of $18,300, Exhibit D; and the goodsarrived sometime in July, 1963 according to accused himself, tsn. II:7; now from here on there is some debate onthe evidence; according to Complainant Bank, there was permitted delivery of the steel sheets only upon executionof a trust receipt, Exhibit A; while according to the accused, the goods were delivered to him sometime before heexecuted that trust receipt in fact they had already been converted into steel office equipment by the time hesigned said trust receipt, tsn. II:8; but there is no question - and this is not debated - that the bill of exchange issuedfor the purpose of collecting the unpaid account thereon having fallen due (see Exh. B) neither accused nor hiscompany having made payment thereon notwithstanding demands, Exh. C and C-1, dated 17 and 27 December,1963, and the accounts having reached the sum in pesos of P46,818.68 after deducting his deposit valued atP28,736.47; that was the reason why upon complaint by Continental Bank, the Fiscal filed the information afterpreliminary investigation as has been said on 22 October, 1964. (Rollo [CA], pp. 103- 104).

The first issue raised, which in effect combines the first three errors assigned, is whether petitioner Jose O.Sia, having only acted for and in behalf of the Metal Manufacturing Company of the Philippines (Metal Company,



for short) as President thereof in dealing with the complainant, the Continental Bank, (Bank for short) he may beliable for the crime charged.

In discussing this question, petitioner proceeds, in the meantime, on the assumption that the acts imputed tohim would constitute the crime of estafa, which he also disputes, but seeks to avoid liability on his theory that theBank knew all along that petitioner was dealing with him only as an officer of the Metal Company which was the

true and actual applicant for the letter of credit (Exhibit B) and which, accordingly, assumed sole obligation underthe trust receipt (Exhibit A). In disputing the theory of petitioner, the Solicitor General relies on the general principlethat when a corporation commits an act which would constitute a punishable offense under the law, it is theresponsible officers thereof, acting for the corporation, who would be punished for the crime, The Court of Appealshas subscribed to this view when it quoted approvingly from the decision of the trial court the following:

A corporation is an artificial person, an abstract being. If the defense theory is followed unscrupulously legionswould form corporations to commit swindle right and left where nobody could be convicted, for it would be futile andridiculous to convict an abstract being that can not be pinched and confined in jail like a natural, living person,hence the result of the defense theory would be hopeless chose in business and finance. It is completelyuntenable. (Rollo [CA], p. 108.)

The above-quoted observation of the trial court would seem to be merely restating a general principle that forcrimes committed by a corporation, the responsible officers thereof would personally bear the criminal liability.(People vs. Tan Boon Kong, 54 Phil. 607. See also Tolentino, Commercial Laws of the Philippines, p. 625, citingcases.)

The case cited by the Court of Appeals in support of its stand-Tan Boon Kong case, supra-may however notbe squarely applicable to the instant case in that the corporation was directly required by law to do an act in a givenmanner, and the same law makes the person who fails to perform the act in the prescribed manner expressly liablecriminally. The performance of the act is an obligation directly imposed by the law on the corporation. Since it is aresponsible officer or officers of the corporation who actually perform the act for the corporation, they must ofnecessity be the ones to assume the criminal liability; otherwise this liability as created by the law would be illusory,and the deterrent effect of the law, negated.

In the present case, a distinction is to be found with the Tan Boon Kong case in that the act alleged to be acrime is not in the performance of an act directly ordained by law to be performed by the corporation. The act isimposed by agreement of parties, as a practice observed in the usual pursuit of a business or a commercialtransaction. The offense may arise, if at all, from the peculiar terms and condition agreed upon by the parties to thetransaction, not by direct provision of the law. The intention of the parties, therefore, is a factor determinant ofwhether a crime was committed or whether a civil obligation alone intended by the parties. With this explanation,the distinction adverted to between the Tan Boon Kong case and the case at bar should come out clear andmeaningful. In the absence of an express provision of law making the petitioner liable for the criminal offensecommitted by the corporation of which he is a president as in fact there is no such provisions in the Revised PenalCode under which petitioner is being prosecuted, the existence of a criminal liability on his part may not be said tobe beyond any doubt. In all criminal prosecutions, the existence of criminal liability for which the accused is madeanswerable must be clear and certain. The maxim that all doubts must be resolved in favor of the accused isalways of compelling force in the prosecution of offenses. This Court has thus far not ruled on the criminal liability

of an officer of a corporation signing in behalf of said corporation a trust receipt of the same nature as that involvedherein. In the case of Samo vs. People, L-17603-04, May 31, 1962, the accused was not clearly shown to be actingother than in his own behalf, not in behalf of a corporation.

The next question is whether the violation of a trust receipt constitutes estafa under Art. 315 (1-[2]) of theRevised Penal Code, as also raised by the petitioner. We now entertain grave doubts, in the light of thepromulgation of P.D. 115 providing for the regulation of trust receipts transaction, which is a very comprehensivepiece of legislation, and includes an express provision that if the violation or offense is committed by a corporation,partnership, association or other juridical entities the penalty provided for in this Decree shall be imposed upon thedirectors, officers, employees or other officials or persons therein responsible for the offense, without prejudice tocivil liabilities arising from the criminal offense. The question that suggests itself is, therefore, whether theprovisions of the Revised Penal Code, Article 315, par. 1 (b) are not adequate to justify the punishment of the actmade punishable by P.D. 115, that the necessity was felt for the promulgation of the decree. To answer thisquestion, it is imperative to make an indepth analysis of the conditions usually embodied in a trust receipt to best



their legal sufficiency to constitute the basis for holding the violation of said conditions as estafa under Article 315of the Revised Penal Code which P.D. 115 now seeks to punish expressly.

As executed, the trust receipt in question reads:

I/WE HEREBY AGREE TO HOLD SAID GOODS IN TRUST FOR THE SAID BANK as its property with liberty

to sell the same for its account but without authority to make any other disposition whatsoever of the said goods orany part thereof (or the proceeds thereof) either way of conditional sale, pledge or otherwise;

In case of sale I/we further agree to hand the proceeds as soon as received to the BANK to apply against therelative acceptance (as described above) and for the payment of any other indebtedness of mine/ours toCONTINENTAL BANK. (Original Records, p. 108)

One view is to consider the transaction as merely that of a security of a loan, and that the trust element is butand inherent feature of the security aspect of the arrangement where the goods are placed in the possession of the"entrustee," to use the term used in P.D. 115, violation of the element of trust not being intended to be in the sameconcept as how it is understood in the criminal sense. The other view is that the bank as the owner and "entrustor"delivers the goods to the "entrustee, " with the authority to sell the goods, but with the obligation to give the

proceeds to the "entrustor" or return the goods themselves if not sold, a trust being thus created in the full sense ascontemplated by Art. 315, par. 1 (b).

We consider the view that the trust receipt arrangement gives rise only to civil liability as the more feasible,before the promulgation of P.D. 115. The transaction being contractual, the intent of the parties should govern.Since the trust receipt has, by its nature, to be executed upon the arrival of the goods imported, and acquires legalstanding as such receipt only upon acceptance by the "entrustee," the trust receipt transaction itself, theantecedent acts consisting of the application of the L/C, the approval of the L/C and the making of the marginaldeposit and the effective importation of the goods, all through the efforts of the importer who has to find hissupplier, arrange for the payment and shipment of the imported goods-all these circumstances would negate anyintent of subjecting the importer to criminal prosecution, which could possibly give rise to a case of imprisonmentfor non-payment of a debt. The parties, therefore, are deemed to have consciously entered into a purelycommercial transaction that could give rise only to civil liability, never to subject the "entrustee" to criminal

prosecution. Unlike, for instance, when several pieces of jewelry are received by a person from the owner for saleon commission, and the former misappropriates for his personal use and benefit, either the jewelries or theproceeds of the sale, instead of returning them to the owner as is his obligation, the bank is not in the sameconcept as the jewelry owner with full power of disposition of the goods, which the bank does not have, for thebank has previously extended a loan which the L/C represents to the importer, and by that loan, the importershould be the real owner of the goods. If under the trust receipt the bank is made to appear as the owner, it wasbut an artificial expedient, more of a legal fiction than fact, for if it were really so, it could dispose of the goods inany manner it wants, which it cannot do, just to give consistency with the purpose of the trust receipt of giving astronger security for the loan obtained by the importer. To consider the bank as the true owner from the inceptionof the transaction would be to disregard the loan feature thereof, a feature totally absent in the case of thetransaction between the jewel-owner and his agent.

Consequently, if only from the fact that the trust receipt transaction is susceptible to two reasonableinterpretation, one as giving rise only to civil liability for the violation of the condition thereof, and the other, asgenerating also criminal liability, the former should be adopted as more favorable to the supposed offender. (Duranvs. CA, L-39758, May 7, 1976, 71 SCRA 68; People vs. Parayno, L-24804, July 5, 1968, 24 SCRA 3; People vs.

Abendan, L-1481, January 28,1949,82 Phil. 711; People vs. Bautista, L-1502, May 24, 1948, 81 Phil. 78; Peoplevs. Abana, L-39, February 1, 1946, 76 Phil. 1.)

There is, moreover, one circumstance appearing on record, the significance of which should be properlyevaluated. As stated in petitioner's brief (page 2), not denied by the People, "before the Continental Bank approvedthe application for a letter of credit (Exhibit 'D'), subsequently covered by the trust receipt, the Continental Bankexamined the financial capabilities of the applicant, Metal Manufacturing Company of the Philippines because thatwas the bank's standard procedure (Testimony of Mr. Ernesto Garlit, Asst. Manager of the Foreign Department,Continental Bank, t.s.n., August 30, 1965). The Continental Bank did not examine the financial capabilities of

herein petitioner, Jose O. Sia, in connection with the same letter of credit. (Ibid ). " From this fact, it would appear aspositively established that the intention of the parties in entering into the "trust receipt" agreement is merely toafford a stronger security for the loan evidenced by the letter of credit, may be not as an ordinary pledge as



observed inP.N.B. vs. Viuda e Hijos de Angel Jose, et al., 63 Phil. 814, citing In re Dunlap C (206 Fed. 726) butneither as a transaction falling under Article 315-1 (b) of the Revised Penal Code giving rise to criminal liability, aspreviously explained and demonstrated.

It is worthy of note that the civil liability imposed by the trust receipt is exclusively on the Metal Company.Speaking of such liability alone, as one arising from the contract, as distinguished from the civil liability arising out

of a crime, the petitioner was never intended to be equally liable as the corporation. Without being made so liablepersonally as the corporation is, there would then be no basis for holding him criminally liable, for any violation ofthe trust receipt. This is made clearly so upon consideration of the fact that in the violation of the trust agreementand in the absence of positive evidence to the contrary, only the corporation benefited, not the petitionerpersonally, yet, the allegation of the information is to effect that the misappropriation or conversion was for thepersonal use and benefit of the petitioner, with respect to which there is variance between the allegation and theevidence.

It is also worthy of note that while the trust receipt speaks of authority to sell, the fact is undisputed that theimported goods were to be manufactured into finished products first before they could be sold, as the Bank had fullknowledge of. This fact is, however, not embodied in the trust agreement, thus impressing on the trust receiptvagueness and ambiguity which should not be the basis for criminal prosecution, in the event of a violation of theterms of the trust receipt. Again, P.D. 115 has express provision relative to the "manufacture or process of thegood with the purpose of ultimate sale," as a distinct condition from that of "to sell the goods or procure their sale"(Section 4, (1). Note that what is embodied in the receipt in question is the sale of imported goods, the manufacturethereof not having been mentioned. The requirement in criminal prosecution, that there must be strict harmony, notvariance, between the allegation and the evidence, may therefore, not be said to have been satisfied in theinstance case.

FOR ALL THE FOREGOING, We reverse the decision of the Court of Appeals and hereby acquit thepetitioner, with costs de oficio.

SO ORDERED.

MANUEL C. ESPIRITU, JR., AUDIE G.R. No. 170891

LLONA, FREIDA F. ESPIRITU,

CARLO F. ESPIRITU, RAFAEL F.

ESPIRITU, ROLANDO M. MIRABUNA,

HERMILYN A. MIRABUNA, KIM

ROLAND A. MIRABUNA, KAYE

ANN A. MIRABUNA, KEN RYAN A.

MIRABUNA, JUANITO P. DE

CASTRO, GERONIMA A. ALMONITE

and MANUEL C. DEE, who are the

officers and directors of BICOL GAS

REFILLING PLANT CORPORATION,

Petitioners, Present:

Carpio, J ., Chairperson,

- versus - Leonardo-De Castro,

Brion,

Del Castillo, and

Abad, JJ.

PETRON CORPORATION and

CARMEN J. DOLOIRAS, doing

business under the name “KRISTINA Promulgated:

PATRICIA ENTERPRISES,”

Respondents. November 24, 2009

x ---------------------------------------------------------------------------------------- x



DECISION

ABAD, J .:

This case is about the offense or offenses that arise from the reloading of the liquefied petroleum gas cylinder

container of one brand with the liquefied petroleum gas of another brand.

The Facts and the Case

Respondent Petron Corporation (Petron) sold and distributed liquefied petroleum gas (LPG) in cylinder tanks that carried

its trademark “Gasul.”[1]

Respondent Carmen J. Doloiras owned and operated Kristina Patricia Enterprises (KPE), the

exclusive distributor of Gasul LPGs in the whole of Sorsogon.[2]

Jose Nelson Doloiras (Jose) served as KPE’s manager.

Bicol Gas Refilling Plant Corporation (Bicol Gas) was also in the business of selling and distributing LPGs in Sorsogon

but theirs carried the trademark “Bicol Savers Gas.” Petitioner Audie Llona managed Bicol Gas.

In the course of trade and competition, any given distributor of LPGs at times acquired possession of LPG cylinder tanks

belonging to other distributors operating in the same area. They called these “captured cylinders.” According to Jose, KPE’s

manager, in April 2001 Bicol Gas agreed with KPE for the swapping of “captured cylinders” since one distributor could not

refill captured cylinders with its own brand of LPG. At one time, in the course of implementing this arrangement, KPE’s Jose

visited the Bicol Gas refilling plant. While there, he noticed several Gasul tanks in Bicol Gas’ possession. He requested a

swap but Audie Llona of Bicol Gas replied that he first needed to ask the permission of the Bicol Gas owners. That

permission was given and they had a swap involving around 30 Gasul tanks held by Bicol Gas in exchange for assorted tanks

held by KPE.

KPE’s Jose noticed, however, that Bicol Gas still had a number of Gasul tanks in its yard. He offered to make a swap for

these but Llona declined, saying the Bicol Gas owners wanted to send those tanks to Batangas. Later Bicol Gas told Jose that

it had no more Gasul tanks left in its possession. Jose observed on almost a daily basis, however, that Bicol Gas’ trucks which

plied the streets of the province carried a load of Gasul tanks. He noted that KPE’s volume of sales dropped significantly from

June to July 2001.

On August 4, 2001 KPE’s Jose saw a particular Bicol Gas truck on the Maharlika Highway. While the truck carried

mostly Bicol Savers LPG tanks, it had on it one unsealed 50-kg Gasul tank and one 50-kg Shellane tank. Jose followed the

truck and when it stopped at a store, he asked the driver, Jun Leorena, and the Bicol Gas sales representative, Jerome Misal,

about the Gasul tank in their truck. They said it was empty but, when Jose turned open its valve, he noted that it was

not. Misal and Leorena then admitted that the Gasul and Shellane tanks on their truck belonged to a customer who had them

filled up by Bicol Gas. Misal then mentioned that his manager was a certain Rolly Mirabena.



Because of the above incident, KPE filed a complaint[3]

for violations of Republic Act (R.A.) 623 (illegally filling up

registered cylinder tanks), as amended, and Sections 155 (infringement of trade marks) and 169.1 (unfair competition) of the

Intellectual Property Code (R.A. 8293). The complaint charged the following: Jerome Misal, Jun Leorena, Rolly Mirabena,

Audie Llona, and several John and Jane Does, described as the directors, officers, and stockholders of Bicol Gas. These

directors, officers, and stockholders were eventually identified during the preliminary investigation.

Subsequently, the provincial prosecutor ruled that there was probable cause only for violation of R.A. 623 (unlawfully

filling up registered tanks) and that only the four Bicol Gas employees, Mirabena, Misal, Leorena, and petitioner Llona, could

be charged. The charge against the other petitioners who were the stockholders and directors of the company was dismissed.

Dissatisfied, Petron and KPE filed a petition for review with the Office of the Regional State Prosecutor, Region V,

which initially denied the petition but partially granted it on motion for reconsideration. The Office of the Regional State

Prosecutor ordered the filing of additional informations against the four employees of Bicol Gas for unfair competition. It

ruled, however, that no case for trademark infringement was present. The Secretary of Justice denied the appeal of Petron and

KPE and their motion for reconsideration.

Undaunted, Petron and KPE filed a special civil action for certiorari with the Court of Appeals[4]

but the Bicol Gas

employees and stockholders concerned opposed it, assailing the inadequacy in its certificate of non-forum shopping, given that

only Atty. Joel Angelo C. Cruz signed it on behalf of Petron. In its Decision[5]

dated October 17, 2005, the Court of Appeals

ruled, however, that Atty. Cruz’s certification constituted sufficient compliance. As to the substantive aspect of the case, the

Court of Appeals reversed the Secretary of Justice’s ruling. It held that unfair competition does not necessarily absorb

trademark infringement. Consequently, the court ordered the filing of additional charges of trademark infringement against the

concerned Bicol Gas employees as well.

Since the Bicol Gas employees presumably acted under the direct order and control of its owners, the Court of Appeals

also ordered the inclusion of the stockholders of Bicol Gas in the various charges, bringing to 16 the number of persons to be

charged, now including petitioners Manuel C. Espiritu, Jr., Freida F. Espiritu, Carlo F. Espiritu, Rafael F. Espiritu, Rolando M.

Mirabuna, Hermilyn A. Mirabuna, Kim Roland A. Mirabuna, Kaye Ann A. Mirabuna, Ken Ryan A. Mirabuna, Juanito P. de

Castro, Geronima A. Almonite, and Manuel C. Dee (together with Audie Llona), collectively, petitioners Espiritu, et al . The

court denied the motion for reconsideration of these employees and stockholders in its Resolution dated January 6, 2006,

hence, the present petition for review[6]

before this Court.

The Issues Presented

The petition presents the following issues:

1. Whether or not the certificate of non-forum shopping that accompanied the petition filed with the Court of

Appeals, signed only by Atty. Cruz on behalf of Petron, complied with what the rules require;

2. Whether or not the facts of the case warranted the filing of charges against the Bicol Gas people for:



a) Filling up the LPG tanks registered to another manufacturer without the latter’s consent in

violation of R.A. 623, as amended;

b) Trademark infringement consisting in Bicol Gas’ use of a trademark that is confusingly similar to

Petron’s registered “Gasul” trademark in violation of section 155 also of R.A. 8293; and

c) Unfair competition consisting in passing off Bicol Gas-produced LPGs for Petron-produced

Gasul LPG in violation of Section 168.3 of R.A. 8293.

The Court’s Rulings

First. Petitioners Espiritu, et al . point out that the certificate of non-forum shopping that respondents KPE and Petron

attached to the petition they filed with the Court of Appeals was inadequate, having been signed only by Petron, through Atty.

Cruz.

But, while procedural requirements such as that of submittal of a certificate of non-forum shopping cannot be totally

disregarded, they may be deemed substantially complied with under justifiable circumstances.[7]

One of these circumstances is

where the petitioners filed a collective action in which they share a common interest in its subject matter or raise a common

cause of action. In such a case, the certification by one of the petitioners may be deemed sufficient.[8]

Here, KPE and Petron shared a common cause of action against petitioners Espiritu, et al ., namely, the violation of their

proprietary rights with respect to the use of Gasul tanks and trademark. Furthermore, Atty. Cruz said in his certification that

he was executing it “for and on behalf of the Corporation, and co-petitioner Carmen J. Doloiras.” [9] Thus, the object of the

requirement – to ensure that a party takes no recourse to multiple forums – was substantially achieved. Besides, the failure of

KPE to sign the certificate of non-forum shopping does not render the petition defective with respect to Petron which signed it

through Atty. Cruz.[10]

The Court of Appeals, therefore, acted correctly in giving due course to the petition before it.

Second. The Court of Appeals held that under the facts of the case, there is probable cause that petitioners Espiritu, et al .

committed all three crimes: (a) illegally filling up an LPG tank registered to Petron without the latter’s consent in violation of

R.A. 623, as amended; (b) trademark infringement which consists in Bicol Gas’ use of a trademark that is confusingly similar

to Petron’s registered “Gasul” trademark in violation of Section 155 of R.A. 8293; and (c) unfair competition which consists in petitioners Espiritu, et al . passing off Bicol Gas-produced LPGs for Petron-produced Gasul LPG in violation of Section 168.3

of R.A. 8293.

Here, the complaint adduced at the preliminary investigation shows that the one 50-kg Petron Gasul LPG tank found on

the Bicol Gas’ truck “belonged to [a Bicol Gas] customer who had the same filled up by BICOL GAS.”[11]

In other words, the

customer had that one Gasul LPG tank brought to Bicol Gas for refilling and the latter obliged.

R.A. 623, as amended,[12]

punishes any person who, without the written consent of the manufacturer or seller of gases

contained in duly registered steel cylinders or tanks, fills the steel cylinder or tank, for the purpose of sale, disposal or



Essentially, what the law punishes is the act of giving one’s goods the general appearance of the goods of another, which

would likely mislead the buyer into believing that such goods belong to the latter. Examples of this would be the act of

manufacturing or selling shirts bearing the logo of an alligator, similar in design to the open-jawed alligator in La Coste shirts,

except that the jaw of the alligator in the former is closed, or the act of a producer or seller of tea bags with red tags showing

the shadow of a black dog when his competitor is producing or selling popular tea bags with red tags showing the shadow of a

black cat.

Here, there is no showing that Bicol Gas has been giving its LPG tanks the general appearance of the tanks of Petron’s

Gasul. As already stated, the truckfull of Bicol Gas tanks that the KPE manager arrested on a road in Sorsogon just happened

to have mixed up with them one authentic Gasul tank that belonged to Petron.

The only point left is the question of the liability of the stockholders and members of the board of directors of Bicol Gas

with respect to the charge of unlawfully filling up a steel cylinder or tank that belonged to Petron. The Court of Appeals ruled

that they should be charged along with the Bicol Gas employees who were pointed to as directly involved in overt acts

constituting the offense.

Bicol Gas is a corporation. As such, it is an entity separate and distinct from the persons of its officers, directors, and

stockholders. It has been held, however, that corporate officers or employees, through whose act, default or omission the

corporation commits a crime, may themselves be individually held answerable for the crime.[15]

Jose claimed in his affidavit that, when he negotiated the swapping of captured cylinders with Bicol Gas, its manager,

petitioner Audie Llona, claimed that he would be consulting with the owners of Bicol Gas about it. Subsequently, Bicol Gas

declined the offer to swap cylinders for the reason that the owners wanted to send their captured cylinders to Batangas. The

Court of Appeals seized on this as evidence that the employees of Bicol Gas acted under the direct orders of its owners and

that “the owners of Bicol Gas have full control of the operations of the business.”[16]

The “owners” of a corporate organization are its stockholders and they are to be distinguished from its directors and

officers. The petitioners here, with the exception of Audie Llona, are being charged in their capacities as stockholders of Bicol

Gas. But the Court of Appeals forgets that in a corporation, the management of its business is generally vested in its board of

directors, not its stockholders.[17]

Stockholders are basically investors in a corporation. They do not have a hand in running

the day-to-day business operations of the corporation unless they are at the same time directors or officers of the

corporation. Before a stockholder may be held criminally liable for acts committed by the corporation, therefore, it must be

shown that he had knowledge of the criminal act committed in the name of the corporation and that he took part in the same or

gave his consent to its commission, whether by action or inaction.

The finding of the Court of Appeals that the employees “could not have committed the crimes without the consent,

[abetment], permission, or participation of the owners of Bicol Gas”[18]

is a sweeping speculation especially since, as

demonstrated above, what was involved was just one Petron Gasul tank found in a truck filled with Bicol Gas tanks. Although



the KPE manager heard petitioner Llona say that he was going to consult the owners of Bicol Gas regarding the offer to swap

additional captured cylinders, no indication was given as to which Bicol Gas stockholders Llona consulted. It would be unfair

to charge all the stockholders involved, some of whom were proved to be minors.[19]

No evidence was presented establishing

the names of the stockholders who were charged with running the operations of Bicol Gas. The complaint even failed to

allege who among the stockholders sat in the board of directors of the company or served as its officers.

The Court of Appeals of course specifically mentioned petitioner stockholder Manuel C. Espiritu, Jr. as the registered

owner of the truck that the KPE manager brought to the police for investigation because that truck carried a tank of Petron

Gasul. But the act that R.A. 623 punishes is the unlawful filling up of registered tanks of another. It does not punish the act of

transporting such tanks. And the complaint did not allege that the truck owner connived with those responsible for filling up

that Gasul tank with Bicol Gas LPG.

WHEREFORE, the Court REVERSES and SETS ASIDE the Decision of the Court of Appeals in CA-G.R. SP 87711

dated October 17, 2005 as well as its Resolution dated January 6, 2006, the Resolutions of the Secretary of Justice dated

March 11, 2004 and August 31, 2004, and the Order of the Office of the Regional State Prosecutor, Region V, dated February

19, 2003. The Court REINSTATES the Resolution of the Office of the Provincial Prosecutor of Sorsogon in I.S. 2001-9231

(inadvertently referred in the Resolution itself as I.S. 2001-9234), dated February 26, 2002. The names of petitioners Manuel

C. Espiritu, Jr., Freida F. Espititu, Carlo F. Espiritu, Rafael F. Espiritu, Rolando M. Mirabuna, Hermilyn A. Mirabuna, Kim

Roland A. Mirabuna, Kaye Ann A. Mirabuna, Ken Ryan A. Mirabuna, Juanito P. De Castro, Geronima A. Almonite and

Manuel C. Dee are ORDERED excluded from the charge.

SO ORDERED.

JAIME U. GOSIACO, G.R. No. 173807

Petitioner,

Present:

QUISUMBING, J .,

- versus - Chairperson,

CARPIO MORALES,

TINGA,

VELASCO, JR., and

BRION, JJ .LETICIA CHING and EDWIN

CASTA,

Respondents. Promulgated:

April 16, 2009

x---------------------------------------------------------------------------------x

D E C I S I O N

TINGA, J.:



The right to recover due and demandable pecuniary obligations incurred by juridical persons such as corporations

cannot be impaired by procedural rules. Our rules of procedure governing the litigation of criminal actions for violation of

Batas Pambansa Blg. 22 (B.P. 22) have given the appearance of impairing such substantive rights, and we take the opportunity

herein to assert the necessary clarifications.

Before us is a Rule 45 petition[1]

which seeks the reversal of the Decision[2]

of the Court of Appeals in CA-GR No.

29488. The Court of Appeals' decision affirmed the decision[3]

of the Regional Trial Court of Pasig, Branch 68 in Criminal

Case No. 120482. The RTC's decision reversed the decision[4]

of the Metropolitan Trial Court of San Juan, Branch 58 in

Criminal Case No. 70445 which involved a charge of violation of B.P. Blg. 22 against respondents Leticia Ching (Ching) and

Edwin Casta (Casta).

On 16 February 2000, petitioner Jaime Gosiaco (petitioner) invested P8,000,000.00 with ASB Holdings, Inc.

(ASB) by way of loan. The money was loaned to ASB for a period of 48 days with interest at 10.5% which is equivalentto P112,000.00. In exchange, ASB through its Business Development Operation Group manager Ching, issued DBS checks

no. 0009980577 and 0009980578 for P8,000,000.00 and P112,000.00 respectively. The checks, both signed by Ching, were

drawn against DBS Bank Makati Head Office branch. ASB, through a letter dated 31 March 2000, acknowledged that it owed

petitioner the abovementioned amounts.[5]

Upon maturity of the ASB checks, petitioner went to the DBS Bank San Juan Branch to deposit the two (2) checks.

However, upon presentment, the checks were dishonored and payments were refused because of a stop payment order and for

insufficiency of funds. Petitioner informed respondents, through letters dated 6 and 10 April 2000,[6]

about the dishonor of the

checks and demanded replacement checks or the return of the money placement but to no avail. Thus, petitioner filed a

criminal complaint for violation of B.P. Blg. 22 before the Metropolitan Trial Court of San Juan against the private

respondents.

Ching was arraigned and tried while Casta remained at large. Ching denied liability and claimed that she was a

mere employee of ASB. She asserted that she did not have knowledge as to how much money ASB had in the banks. Such

responsibility, she claimed belonged to another department.

On 15 December 2000, petitioner moved[7]

that ASB and its president, Luke Roxas, be impleaded as party

defendants. Petitioner, then, paid the corresponding docket fees. However, the MTC denied the motion as the case had already

been submitted for final decision.[8]

On 8 February 2001, the MTC acquitted Ching of criminal liability but it did not absolve her from civil liability.

The MTC ruled that Ching, as a corporate officer of ASB, was civilly liable since she was a signatory to the checks.[9]

Both petitioner and Ching appealed the ruling to the RTC. Petitioner appealed to the RTC on the ground that the

MTC failed to hold ASB and Roxas either jointly or severally liable with Ching. On the other hand, Ching moved for a

reconsideration which was subsequently denied. Thereafter, she filed her notice of appeal on the ground that she should not be

held civilly liable for the bouncing checks because they were contractual obligations of ASB.



On 12 July 2005, the RTC rendered its decision sustaining Ching's appeal. The RTC affirmed the MTC’s ruling

which denied the motion to implead ASB and Roxas for lack of jurisdiction over their persons. The RTC also exonerated

Ching from civil liability and ruled that the subject obligation fell squarely on ASB. Thus, Ching should not be held civilly

liable.[10]

Petitioner filed a petition for review with the Court of Appeals on the grounds that the RTC erred in absolving

Ching from civil liability; in upholding the refusal of the MTC to implead ASB and Roxas; and in refusing to pierce the

corporate veil of ASB and hold Roxas liable.

On 19 July 2006, the Court of Appeals affirmed the decision of the RTC and stated that the amount petitioner

sought to recover was a loan made to ASB and not to Ching. Roxas’ testimony further bolstered the fact that the checks issued

by Ching were for and in behalf of ASB. The Court of Appeals ruled that ASB cannot be impleaded in a B.P. Blg. 22 case

since it is not a natural person and in the case of Roxas, he was not the subject of a preliminary investigation. Lastly, the Court

of Appeals ruled that there was no need to pierce the corporate veil of ASB since none of the requisites were present.[11]

Hence this petition.

Petitioner raised the following issues: (1) is a corporate officer who signed a bouncing check civilly liable under

B.P. Blg. 22; (2) can a corporation be impleaded in a B.P. Blg. 22 case; and (3) is there a basis to pierce the corporate veil of

ASB?

B.P. Blg. 22 is popularly known as the Bouncing Checks Law. Section 1 of B.P. Blg. 22 provides:

xxx xxx xxx

Where the check is drawn by a corporation, company or entity, the person or persons, who actually signed the

check in behalf of such drawer shall be liable under this Act.

B.P. Blg. 22 was enacted to address the rampant issuance of bouncing checks as payment for pre-existing obligations.

The circulation of bouncing checks adversely affected confidence in trade and commerce. The State criminalized such practice

because it was deemed injurious to public interests[12]

and was found to be pernicious and inimical to public welfare.[13]

B.P.

Blg. 22 punishes the act of making and issuing bouncing checks. It is the act itself of issuing the checks which is

considered malum prohibitum. The law is an offense against public order and not an offense against property.[14]

It penalizes

the issuance of a check without regard to its purpose. It covers all types of checks.[15]

Even checks that were issued as a form

of deposit or guarantee were held to be within the ambit of B.P. Blg. 22.[16]

When a corporate officer issues a worthless check in the corporate name he may be held personally liable for violating a

penal statute.[17]

The statute imposes criminal penalties on anyone who with intent to defraud another of money or property,

draws or issues a check on any bank with knowledge that he has no sufficient funds in such bank to meet the check on

presentment.[18]

Moreover, the personal liability of the corporate officer is predicated on the principle that he cannot shield

himself from liability from his own acts on the ground that it was a corporate act and not his personal act.[19]

As we held

in Llamado v. Court of Appeals:[20]

Petitioner's argument that he should not be held personally liable for the amount of the check because it was acheck of the Pan Asia Finance Corporation and he signed the same in his capacity as Treasurer of the corporation,



is also untenable. The third paragraph of Section 1 of BP Blg. 22 states: “Where the check is drawn by a

corporation, company or entity, the person or persons who actually signed the check in behalf of such drawer shall

be liable under this Act.”

The general rule is that a corporate officer who issues a bouncing corporate check can only be held civilly liable

when he is convicted. In the recent case of Bautista v. Auto Plus Traders Inc.,[21]

the Court ruled decisively that the civil

liability of a corporate officer in a B.P. Blg. 22 case is extinguished with the criminal liability. We are not inclined through this

case to revisit so recent a precedent, and the rule of stare decisis precludes us to discharge Ching of any civil liability arising

from the B.P. Blg. 22 case against her, on account of her acquittal in the criminal charge.

We recognize though the bind entwining the petitioner. The records clearly show that it is ASB is civilly obligated to

petitioner. In the various stages of this case, petitioner has been proceeding from the premise that he is unable to pursue a

separate civil action against ASB itself for the recovery of the amounts due from the subject checks. From this premise,

petitioner sought to implead ASB as a defendant to the B.P. Blg. 22 case, even if such case is criminal in nature.[22]

What supplied the notion to the petitioner that he was unable to pursue a separate civil action against ASB? He

cites the Revised Rules on Criminal Procedure, particularly the provisions involving B.P. Blg. 22 cases, which state that:

Rule 111, Section 1— Institution of criminal and civil action.

x x x

(b) The criminal action for violation of Batas Pambansa Blg. 22 shall be deemed to include the corresponding

civil action. No reservation to file such civil action separately shall be allowed.

Upon filing of the aforesaid joint criminal and civil actions, the offended party shall pay in full the filing

fees based on the amount of the check involved, which shall be considered as the actual damages claimed. Where the

complainant or information also seeks to recover liquidated, moral, nominal, temperate or exemplary damages, the

offended party shall pay the filing fees based on the amounts alleged therein. If the amounts are not so alleged but

any of these damages are subsequently awarded by the court, the filing fees based on the amount awarded shall

constitute a first lien on the judgment.

Where the civil action has been filed separately and trial thereof has not yet commenced, it may be

consolidated with the criminal action upon application with the court trying the latter case. If the application is

granted, the trial of both actions shall proceed in accordance with section 2 of this Rule governing consolidation of

the civil and criminal actions.[23]

We are unable to agree with petitioner that he is entitled to implead ASB in the B.P. Blg. 22 case, or any other

corporation for that matter, even if the Rules require the joint trial of both the criminal and civil liability. A basic maxim in

statutory construction is that the interpretation of penal laws is strictly construed against the State and liberally construed

against the accused. Nowhere in B.P. Blg. 22 is it provided that a juridical person may be impleaded as an accused or

defendant in the prosecution for violations of that law, even in the litigation of the civil aspect thereof.

Nonetheless, the substantive right of a creditor to recover due and demandable obligations against a debtor-

corporation cannot be denied or diminished by a rule of procedure. Technically, nothing in Section 1(b) of Rule 11 prohibits

the reservation of a separate civil action against the juridical person on whose behalf the check was



issued. What the rules prohibit is the reservation of a separate civil action against the natural person charged with violating

B.P. Blg. 22, including such corporate officer who had signed the bounced check.

In theory the B.P. Blg. 22 criminal liability of the person who issued the bouncing check in behalf of a corporation stands

independent of the civil liability of the corporation itself, such civil liability arising from the Civil Code. B.P. Blg. 22 itself

fused this criminal liability of the signer of the check in behalf of the corporation with the corresponding civil liability of the

corporation itself by allowing the complainant to recover such civil liability not from the corporation, but from the person who

signed the check in its behalf. Prior to the amendments to our rules on criminal procedure, it though clearly was permissible to

pursue the criminal liability against the signatory, while going after the corporation itself for the civil liability.

However, with the insistence under the amended rules that the civil and criminal liability attaching to the bounced check

be pursued jointly, the previous option to directly pursue the civil liability against the person who incurred the civil obligation–

the corporation itself–is no longer that clear. In theory, the implied institution of the civil case into the criminal case for B.P.

Blg. 22 should not affect the civil liability of the corporation for the same check, since such implied institution concerns the

civil liability of the signatory, and not of the corporation.

Let us pursue this point further. B.P. Blg. 22 imposes a distinct civil liability on the signatory of the check which is

distinct from the civil liability of the corporation for the amount represented from the check. The civil liability attaching to

the signatory arises from the wrongful act of signing the check despite the insufficiency of funds in the account, while

the civil liability attaching to the corporation is itself the very obligation covered by the check or the consideration for

its execution. Yet these civil liabilities are mistaken to be indistinct. The confusion is traceable to the singularity of the

amount of each.

If we conclude, as we should, that under the current Rules of Criminal Procedure, the civil action that is impliedly

instituted in the B.P. Blg. 22 action is only the civil liability of the signatory, and not that of the corporation itself, the

distinctness of the cause of action against the signatory and that against the corporation is rendered beyond dispute. It follows

that the actions involving these liabilities should be adjudged according to their respective standards and merits. In the B.P.

Blg. 22 case, what the trial court should determine whether or not the signatory had signed the check with knowledge of the

insufficiency of funds or credit in the bank account, while in the civil case the trial court should ascertain whether or not the

obligation itself

is valid and demandable. The litigation of both questions could, in theory, proceed independently and simultaneously

without being ultimately conclusive on one or the other.

It might be argued that under the current rules, if the signatory were made liable for the amount of the check by reason of

the B.P. Blg. 22 case, such signatory would have the option of recovering the same amount from the corporation. Yet that

prospect does not ultimately satisfy the ends of justice. If the signatory does not have sufficient assets to answer for the amount

of the check–a distinct possibility considering the occasional large-scale transactions engaged in by corporations – the

corporation would not be subsidiarily liable to the complainant, even if it in truth the controversy, of which the criminal case is

just a part, is traceable to the original obligation of the corporation. While the Revised Penal Code imposes subsidiary civil

liability to corporations for criminal acts engaged in by their employees in the discharge of their duties, said subsidiary liability



applies only to felonies,[24]

and not to crimes penalized by special laws such as B.P. Blg. 22. And nothing in B.P. Blg. 22

imposes such subsidiary liability to the corporation in whose name the check is actually issued. Clearly then, should the check

signatory be unable to pay the obligation incurred by the corporation, the complainant would be bereft of remedy unless the

right of action to collect on the liability of the corporation is recognized and given flesh.

There are two prevailing concerns should civil recovery against the corporation be pursued even as the B.P. Blg. 22 case

against the signatory remains extant. First, the possibility that the plaintiff might be awarded the amount of the check in both

the B.P. Blg. 22 case and in the civil action against the corporation. For obvious reasons, that should not be permitted.

Considering that petitioner herein has no chance to recover the amount of the check through the B.P. Blg. 22 case, we need not

contend with that possibility through this case. Nonetheless, as a matter of prudence, it is best we refer the matter to the

Committee on Rules for the formulation of proper guidelines to prevent that possibility.

The other concern is over the payment of filing fees in both the B.P. Blg. 22 case and the civil action against the

corporation. Generally, we see no evil or cause for distress if the plaintiff were made to pay filing fees based on the amount of

the check in both the B.P. Blg. 22 case and the civil action. After all, the plaintiff therein made the deliberate option to file two

separate cases, even if the recovery of the amounts of the check against the corporation could evidently be pursued through the

civil action alone.

Nonetheless, in petitioner’s particular case, considering the previous legal confusion on whether he is authorized to

file the civil case against ASB, he should, as a matter of equity, be exempted from paying the filing fees based on the amount

of the checks should he pursue the civil action against ASB. In a similar vein and for a similar reason, we likewise find that

petitioner should not be barred by prescription should he file the civil action as the period should not run from the date the

checks were issued but from the date this decision attains finality. The courts should not be bound strictly by the statute of

limitations or the doctrine of laches when to do so, manifest wrong or injustice would result.[25]

WHEREFORE, the petition is DENIED, without prejudice to the right of petitioner Jaime U. Gosiaco to pursue

an independent civil action against ASB Holdings Inc. for the amount of the subject checks, in accordance with the terms of

this decision. No pronouncements as to costs.

Let a copy of this Decision be REFERRED to the Committee on Revision of the Rules for the formulation of

the formal rules of procedure to govern the civil action for the recovery of the amount covered by the check against the