Page | 1

G.R. No. L-13203             January 28, 1961

YUTIVO SONS HARDWARE COMPANY, petitioner, vs.COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.

Sycip, Quisumbing, Salazar & Associates for petitioner.Office of the Solicitor General for respondents.

GUTIERREZ DAVID, J.:

This is a petition for review of a decision of the Court of Tax Appeals ordering petitioner to pay to respondent Collector of Internal Revenue the sum of P1,266,176.73 as sales tax deficiency for the third quarter of 1947 to the fourth quarter of 1950; inclusive, plus 75% surcharge thereon, equivalent to P349,632.54, or a sum total of P2,215,809.27, plus costs of the suit.

From the stipulation of facts and the evidence adduced by both parties, it appears that petitioner Yutivo Sons Hardware Co. (hereafter referred to as Yutivo) is a domestic corporation, organized under the laws of the Philippines, with principal office at 404 Dasmariñas St., Manila. Incorporated in 1916, it was engaged, prior to the last world war, in the importation and sale of hardware supplies and equipment. After the liberation, it resumed its business and until June of 1946 bought a number of cars and trucks from General Motors Overseas Corporation (hereafter referred to as GM for short), an American corporation licensed to do business in the Philippines. As importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no further sales tax on its sales to the public.

On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM) was organized to engage in the business of selling cars, trucks and spare parts. Its original authorized capital stock was P1,000,000 divided into 10,000 shares with a par value of P100 each.

At the time of its incorporation 2,500 shares worth P250,000 appear to have been subscribed into equal proportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington Sycip. The first three named subscribers are brothers, being sons of Yu Tiong Yee, one of Yutivo's founders. The latter two are respectively sons of Yu Tiong Sin and Albino Sycip, who are among the founders of Yutivo.

After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of 1947, the cars and tracks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the Visayas and Mindanao.

When GM decided to withdraw from the Philippines in the middle of 1947, the U.S. manufacturer of GM cars and trucks appointed Yutivo as importer for the Visayas and

Mindanao, and Yutivo continued its previous arrangement of selling exclusively to SM. In the same way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as importer, paid sales tax prescribed on the basis of its selling price to SM, and since such sales tax, as already stated, is collected only once on original sales, SM paid no sales tax on its sales to the public.

On November 7, 1950, after several months of investigation by revenue officers started in July, 1948, the Collector of Internal Revenue made an assessment upon Yutivo and demanded from the latter P1,804,769.85 as deficiency sales tax plus surcharge covering the period from the third quarter of 1947 to the fourth quarter of 1949; or from July 1, 1947 to December 31, 1949, claiming that the taxable sales were the retail sales by SM to the public and not the sales at wholesale made by, Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being the subsidiary of the latter.

The assessment was disputed by the petitioner, and a reinvestigation of the case having been made by the agents of the Bureau of Internal Revenue, the respondent Collector in his letter dated November 15, 1952 countermanded his demand for sales tax deficiency on the ground that "after several investigations conducted into the matter no sufficient evidence could be gathered to sustain the assessment of this Office based on the theory that Southern Motors is a mere instrumentality or subsidiary of Yutivo." The withdrawal was subject, however, to the general power of review by the now defunct Board of Tax Appeals. The Secretary of Finance to whom the papers relative to the case were endorsed, apparently not agreeing with the withdrawal of the assessment, returned them to the respondent Collector for reinvestigation.

After another investigation, the respondent Collector, in a letter to petitioner dated December 16, 1954, redetermined that the aforementioned tax assessment was lawfully due the government and in addition assessed deficiency sales tax due from petitioner for the four quarters of 1950; the respondents' last demand was in the total sum of P2,215,809.27 detailed as follows:

Deficiency Sales Tax

75% Surcharge

Total Amount

Assessment (First) of November 7, 1950 for deficiency sales Tax for the period from 3rd Qrtr 1947 to 4th Qrtr 1949 inclusive P1,031,296.60

P773,473.45 P1,804,769.05

Additional Assessment for period from 1st to 4th Qrtr 1950, inclusive 234,880.13 176,160.09 411,040.22

Total amount demanded per letter of December 16, 1954 P1,266,176.73

P949,632.54 P2,215,809.27

This second assessment was contested by the petitioner Yutivo before the Court of Tax Appeals, alleging that there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner Yutivo; (2) that assuming the separate personality of SM may be disregarded, the sales tax already

Page | 2

paid by Yutivo should first be deducted from the selling price of SM in computing the sales tax due on each vehicle; and (3) that the surcharge has been erroneously imposed by respondent. Finding against Yutivo and sustaining the respondent Collector's theory that there was no legitimate or bona fide purpose in the organization of SM — the apparent objective of its organization being to evade the payment of taxes — and that it was owned (or the majority of the stocks thereof are owned) and controlled by Yutivo and is a mere subsidiary, branch, adjunct, conduit, instrumentality or alter ego of the latter, the Court of Tax Appeals — with Judge Roman Umali not taking part — disregarded its separate corporate existence and on April 27, 1957, rendered the decision now complained of. Of the two Judges who signed the decision, one voted for the modification of the computation of the sales tax as determined by the respondent Collector in his decision so as to give allowance for the reduction of the tax already paid (resulting in the reduction of the assessment to P820,509.91 exclusive of surcharges), while the other voted for affirmance. The dispositive part of the decision, however, affirmed the assessment made by the Collector. Reconsideration of this decision having been denied, Yutivo brought the case to this Court thru the present petition for review.

It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporation petitions to which it may be connected. However, "when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime," the law will regard the corporation as an association of persons, or in the case of two corporations merge them into one. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 496, citing I Fletcher Cyclopedia of Corporation, Perm Ed., pp. 135 136; United States vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.) Another rule is that, when the corporation is the "mere alter ego or business conduit of a person, it may be disregarded." (Koppel [Phil.], Inc. vs. Yatco, supra.)

After going over the voluminous record of the present case, we are inclined to rule that the Court of Tax Appeals was not justified in finding that SM was organized for no other purpose than to defraud the Government of its lawful revenues. In the first place, this corporation was organized in June, 1946 when it could not have caused Yutivo any tax savings. From that date up to June 30, 1947, or a period of more than one year, GM was the importer of the cars and trucks sold to Yutivo, which, in turn resold them to SM. During that period, it is not disputed that GM as importer, was the one solely liable for sales taxes. Neither Yutivo or SM was subject to the sales taxes on their sales of cars and trucks. The sales tax liability of Yutivo did not arise until July 1, 1947 when it became the importer and simply continued its practice of selling to SM. The decision, therefore, of the Tax Court that SM was organized purposely as a tax evasion device runs counter to the fact that there was no tax to evade.

Making the observation from a newspaper clipping (Exh. "T") that "as early as 1945 it was known that GM was preparing to leave the Philippines and terminate its business of importing vehicles," the court below speculated that Yutivo anticipated the withdrawal of GM from business in the Philippines in June, 1947. This observation, which was made only in the resolution on the motion for reconsideration, however, finds no basis in the record. On the other hand, GM had been an importer of cars in the Philippines even before the war and had but recently resumed its operation in the

Philippines in 1946 under an ambitious plan to expand its operation by establishing an assembly plant here, so that it could not have been expected to make so drastic a turnabout of not merely abandoning the assembly plant project but also totally ceasing to do business as an importer. Moreover, the newspaper clipping, Exh. "T", was published on March 24, 1947, and clipping, merely reported a rumored plan that GM would abandon the assembly plant project in the Philippines. There was no mention of the cessation of business by GM which must not be confused with the abandonment of the assembly plant project. Even as respect the assembly plant, the newspaper clipping was quite explicit in saying that the Acting Manager refused to confirm that rumor as late as March 24, 1947, almost a year after SM was organized.

At this juncture, it should be stated that the intention to minimize taxes, when used in the context of fraud, must be proved to exist by clear and convincing evidence amounting to more than mere preponderance, and cannot be justified by a mere speculation. This is because fraud is never lightly to be presumed. (Vitelli & Sons vs. U.S 250 U.S. 355; Duffin vs. Lucas, 55 F (2d) 786; Budd vs. Commr., 43 F (2d) 509; Maryland Casualty Co. vs. Palmette Coal Co., 40 F (2d) 374; Schoonfield Bros., Inc. vs. Commr., 38 BTA 943; Charles Heiss vs. Commr 36 BTA 833; Kerbaugh vs. Commr 74 F (2d) 749; Maddas vs. Commr., 114 F. (2d) 548; Moore vs. Commr., 37 BTA 378; National City Bank of New York vs. Commr., 98 (2d) 93; Richard vs. Commr., 15 BTA 316; Rea Gane vs. Commr., 19 BTA 518). (See also Balter, Fraud Under Federal Law, pp. 301-302, citing numerous authorities: Arroyo vs. Granada, et al., 18 Phil. 484.) Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at the most, create only suspicion. (Haygood Lumber & Mining Co. vs. Commr., 178 F (2d) 769; Dalone vs. Commr., 100 F (2d) 507).

In the second place, SM was organized and it operated, under circumstance that belied any intention to evade sales taxes. "Tax evasion" is a term that connotes fraud thru the use of pretenses and forbidden devices to lessen or defeat taxes. The transactions between Yutivo and SM, however, have always been in the open, embodied in private and public documents, constantly subject to inspection by the tax authorities. As a matter of fact, after Yutivo became the importer of GM cars and trucks for Visayas and Mindanao, it merely continued the method of distribution that it had initiated long before GM withdrew from the Philippines.

On the other hand, if tax saving was the only justification for the organization of SM, such justification certainly ceased with the passage of Republic Act No. 594 on February 16, 1951, governing payment of advance sales tax by the importer based on the landed cost of the imported article, increased by mark-ups of 25%, 50%, and 100%, depending on whether the imported article is taxed under sections 186, 185 and 184, respectively, of the Tax Code. Under Republic Act No. 594, the amount at which the article is sold is immaterial to the amount of the sales tax. And yet after the passage of that Act, SM continued to exist up to the present and operates as it did many years past in the promotion and pursuit of the business purposes for which it was organized.

In the third place, sections 184 to 186 of the said Code provides that the sales tax shall be collected "once only on every original sale, barter, exchange . . , to be paid

Page | 3

by the manufacturer, producer or importer." The use of the word "original" and the express provision that the tax was collectible "once only" evidently has made the provisions susceptible of different interpretations. In this connection, it should be stated that a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits. (U.S. vs. Isham 17 Wall. 496, 506; Gregory vs. Helvering 293 U.S. 465, 469; Commr. vs. Tower, 327 U.S. 280; Lawton vs. Commr 194 F (2d) 380). Any legal means by the taxpayer to reduce taxes are all right Benry vs. Commr. 25 T. Cl. 78). A man may, therefore, perform an act that he honestly believes to be sufficient to exempt him from taxes. He does not incur fraud thereby even if the act is thereafter found to be insufficient. Thus in the case of Court Holding Co. vs. Commr. 2 T. Cl. 531, it was held that though an incorrect position in law had been taken by the corporation there was no suppression of the facts, and a fraud penalty was not justified.

The evidence for the Collector, in our opinion, falls short of the standard of clear and convincing proof of fraud. As a matter of fact, the respondent Collector himself showed a great deal of doubt or hesitancy as to the existence of fraud. He even doubted the validity of his first assessment dated November 7, 1959. It must be remembered that the fraud which respondent Collector imputed to Yutivo must be related to its filing of sales tax returns of less taxes than were legally due. The allegation of fraud, however, cannot be sustained without the showing that Yutivo, in filing said returns, did so fully knowing that the taxes called for therein called for therein were less than what were legally due. Considering that respondent Collector himself with the aid of his legal staff, and after some two years of investigation and duty of investigation and study concluded in 1952 that Yutivo's sales tax returns were correct — only to reverse himself after another two years — it would seem harsh and unfair for him to say in 1954 that Yutivo fully knew in October 1947 that its sales tax returns were inaccurate.

On this point, one other consideration would show that the intent to save taxes could not have existed in the minds of the organizers of SM. The sales tax imposed, in theory and in practice, is passed on to the vendee, and is usually billed separately as such in the sales invoice. As pointed out by petitioner Yutivo, had not SM handled the retail, the additional tax that would have been payable by it, could have been easily passed off to the consumer, especially since the period covered by the assessment was a "seller's market" due to the post-war scarcity up to late 1948, and the imposition of controls in the late 1949.

It is true that the arrastre charges constitute expenses of Yutivo and its non-inclusion in the selling price by Yutivo cost the Government P4.00 per vehicle, but said non-inclusion was explained to have been due to an inadvertent accounting omission, and could hardly be considered as proof of willful channelling and fraudulent evasion of sales tax. Mere understatement of tax in itself does not prove fraud. (James Nicholson, 32 BTA 377, affirmed 90 F. (2) 978, cited in Merten's Sec. 55.11 p. 21) The amount involved, moreover, is extremely small inducement for Yutivo to go thru all the trouble of organizing SM. Besides, the non-inclusion of these small arrastre charges in the sales tax returns of Yutivo is clearly shown in the records of Yutivo, which is uncharacteristic of fraud (See Insular Lumber Co. vs. Collector, G.R. No. L-719, April 28, 1956.)

We are, however, inclined to agree with the court below that SM was actually owned and controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and maintaining stores for spare parts as well as service repair shops. It is not disputed that the petitioner, which is engaged principally in hardware supplies and equipment, is completely controlled by the Yutivo, Young or Yu family. The founders of the corporation are closely related to each other either by blood or affinity, and most of its stockholders are members of the Yu (Yutivo or Young) family. It is, likewise, admitted that SM was organized by the leading stockholders of Yutivo headed by Yu Khe Thai. At the time of its incorporation 2,500 shares worth P250,000.00 appear to have been subscribed in five equal proportions by Yu Khe Thai, Yu Khe Siong, Yu Khe Jin, Yu Eng Poh and Washington Sycip. The first three named subscribers are brothers, being the sons of Yu Tien Yee, one of Yutivo's founders. Yu Eng Poh and Washington Sycip are respectively sons of Yu Tiong Sing and Alberto Sycip who are co-founders of Yutivo. According to the Articles of Incorporation of the said subscriptions, the amount of P62,500 was paid by the aforenamed subscribers, but actually the said sum was advanced by Yutivo. The additional subscriptions to the capital stock of SM and subsequent transfers thereof were paid by Yutivo itself. The payments were made, however, without any transfer of funds from Yutivo to SM. Yutivo simply charged the accounts of the subscribers for the amount allegedly advanced by Yutivo in payment of the shares. Whether a charge was to be made against the accounts of the subscribers or said subscribers were to subscribe shares appears to constitute a unilateral act on the part of Yutivo, there being no showing that the former initiated the subscription.

The transactions were made solely by and between SM and Yutivo. In effect, it was Yutivo who undertook the subscription of shares, employing the persons named or "charged" with corresponding account as nominal stockholders. Of course, Yu Khe Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were manifestly aware of these subscriptions, but considering that they were the principal officers and constituted the majority of the Board of Directors of both Yutivo and SM, their subscriptions could readily or easily be that of Yutivo's Moreover, these persons were related to death other as brothers or first cousins. There was every reason for them to agree in order to protect their common interest in Yutivo and SM.

The issued capital stock of SM was increased by additional subscriptions made by various person's but except Ng Sam Bak and David Sycip, "payments" thereof were effected by merely debiting 'or charging the accounts of said stockholders and crediting the corresponding amounts in favor of SM, without actually transferring cash from Yutivo. Again, in this instance, the "payments" were Yutivo, by effected by the mere unilateral act of Yutivo a accounts of the virtue of its control over the individual persons charged, would necessarily exercise preferential rights and control directly or indirectly, over the shares, it being the party which really undertook to pay or underwrite payment thereof.

The shareholders in SM are mere nominal stockholders holding the shares for and in behalf of Yutivo, so even conceding that the original subscribers were stockholders bona fide Yutivo was at all times in control of the majority of the stock of SM and that the latter was a mere subsidiary of the former.

Page | 4

True, petitioner and other recorded stockholders transferred their shareholdings, but the transfers were made to their immediate relatives, either to their respective spouses and children or sometimes brothers or sisters. Yutivo's shares in SM were transferred to immediate relatives of persons who constituted its controlling stockholders, directors and officers. Despite these purported changes in stock ownership in both corporations, the Board of Directors and officers of both corporations remained unchanged and Messrs. Yu Khe Thai, Yu Khe Siong Hu Khe Jin and Yu Eng Poll (all of the Yu or Young family) continued to constitute the majority in both boards. All these, as observed by the Court of Tax Appeals, merely serve to corroborate the fact that there was a common ownership and interest in the two corporations.

SM is under the management and control of Yutivo by virtue of a management contract entered into between the two parties. In fact, the controlling majority of the Board of Directors of Yutivo is also the controlling majority of the Board of Directors of SM. At the same time the principal officers of both corporations are identical. In addition both corporations have a common comptroller in the person of Simeon Sy, who is a brother-in-law of Yutivo's president, Yu Khe Thai. There is therefore no doubt that by virtue of such control, the business, financial and management policies of both corporations could be directed towards common ends.

Another aspect relative to Yutivo's control over SM operations relates to its cash transactions. All cash assets of SM were handled by Yutivo and all cash transactions of SM were actually maintained thru Yutivo. Any and all receipts of cash by SM including its branches were transmitted or transferred immediately and directly to Yutivo in Manila upon receipt thereof. Likewise, all expenses, purchases or other obligations incurred by SM are referred to Yutivo which in turn prepares the corresponding disbursement vouchers and payments in relation there, the payment being made out of the cash deposits of SM with Yutivo, if any, or in the absence thereof which occurs generally, a corresponding charge is made against the account of SM in Yutivo's books. The payments for and charges against SM are made by Yutivo as a matter of course and without need of any further request, the latter would advance all such cash requirements for the benefit of SM. Any and all payments and cash vouchers are made on Yutivo stationery and made under authority of Yutivo's corporate officers, without any copy thereof being furnished to SM. All detailed records such as cash disbursements, such as expenses, purchases, etc. for the account of SM, are kept by Yutivo and SM merely keeps a summary record thereof on the basis of information received from Yutivo.

All the above plainly show that cash or funds of SM, including those of its branches which are directly remitted to Yutivo, are placed in the custody and control of Yutivo, resources and subject to withdrawal only by Yutivo. SM's being under Yutivo's control, the former's operations and existence became dependent upon the latter.

Consideration of various other circumstances, especially when taken together, indicates that Yutivo treated SM merely as its department or adjunct. For one thing, the accounting system maintained by Yutivo shows that it maintained a high degree of control over SM accounts. All transactions between Yutivo and SM are recorded and effected by mere debit or credit entries against the reciprocal account maintained

in their respective books of accounts and indicate the dependency of SM as branch upon Yutivo.

Apart from the accounting system, other facts corroborate or independently show that SM is a branch or department of Yutivo. Even the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat Yutivo — Manila as their "Head Office" or "Home Office" as shown by their letters of remittances or other correspondences. These correspondences were actually received by Yutivo and the reference to Yutivo as the head or home office is obvious from the fact that all cash collections of the SM's branches are remitted directly to Yutivo. Added to this fact, is that SM may freely use forms or stationery of Yutivo

The fact that SM is a mere department or adjunct of Yutivo is made more patent by the fact that arrastre conveying, and charges paid for the "operation of receiving, loading or unloading" of imported cars and trucks on piers and wharves, were charged against SM. Overtime charges for the unloading of cars and trucks as requested by Yutivo and incurred as part of its acquisition cost thereof, were likewise charged against and treated as expenses of SM. If Yutivo were the importer, these arrastre and overtime charges were Yutivo's expenses in importing goods and not SM's. But since those charges were made against SM, it plainly appears that Yutivo had sole authority to allocate its expenses even as against SM in the sense that the latter is a mere adjunct, branch or department of the former.

Proceeding to another aspect of the relation of the parties, the management fees due from SM to Yutivo were taken up as expenses of SM and credited to the account of Yutivo. If it were to be assumed that the two organizations are separate juridical entities, the corresponding receipts or receivables should have been treated as income on the part of Yutivo. But such management fees were recorded as "Reserve for Bonus" and were therefore a liability reserve and not an income account. This reserve for bonus were subsequently distributed directly to and credited in favor of the employees and directors of Yutivo, thereby clearly showing that the management fees were paid directly to Yutivo officers and employees.

Briefly stated, Yutivo financed principally, if not wholly, the business of SM and actually extended all the credit to the latter not only in the form of starting capital but also in the form of credits extended for the cars and vehicles allegedly sold by Yutivo to SM as well as advances or loans for the expenses of the latter when the capital had been exhausted. Thus, the increases in the capital stock were made in advances or "Guarantee" payments by Yutivo and credited in favor of SM. The funds of SM were all merged in the cash fund of Yutivo. At all times Yutivo thru officers and directors common to it and SM, exercised full control over the cash funds, policies, expenditures and obligations of the latter.

Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court of Tax Appeals correctly disregarded the technical defense of separate corporate entity in order to arrive at the true tax liability of Yutivo.

Page | 5

Petitioner contends that the respondent Collector had lost his right or authority to issue the disputed assessment by reason of prescription. The contention, in our opinion, cannot be sustained. It will be noted that the first assessment was made on November 7, 1950 for deficiency sales tax from 1947 to 1949. The corresponding returns filed by petitioner covering the said period was made at the earliest on October 1, as regards the third quarter of 1947, so that it cannot be claimed that the assessment was not made within the five-year period prescribed in section 331 of the Tax Code invoked by petitioner. The assessment, it is admitted, was withdrawn by the Collector on insufficiency of evidence, but November 15, 1952 due to insufficiency of evidence, but the withdrawal was made subject to the approval of the Secretary of Finance and the Board of Tax Appeals, pursuant to the provisions of section 9 of Executive Order No. 401-A, series of 1951. The decision of the previous assessment of November 7, Collector countermanding the as 1950 was forwarded to the Board of Tax Appeals through the Secretary of Finance but that official, apparently disagreeing with the decision, sent it back for re-investigation. Consequently, the assessment of November 7, 1950 cannot be considered to have been finally withdrawn. That the assessment was subsequently reiterated in the decision of respondent Collector on December 16, 1954 did not alter the fact that it was made seasonably. In this connection, it would appear that a warrant of distraint and levy had been issued on March 28, 1951 in relation with this case and by virtue thereof the properties of Yutivo were placed under constructive distraint. Said warrant and constructive distraint have not been lifted up to the present, which shows that the assessment of November 7, 1950 has always been valid and subsisting.

Anent the deficiency sale tax for 1950, considering that the assessment thereof was made on December 16, 1954, the same was assessed well within the prescribed five-year period.

Petitioner argues that the original assessment of November 7, 1950 did not extend the prescriptive period on assessment. The argument is untenable, for, as already seen, the assessment was never finally withdrawn, since it was not approved by the Secretary of Finance or of the Board of Tax Appeals. The authority of the Secretary to act upon the assessment cannot be questioned, for he is expressly granted such authority under section 9 of Executive Order No. 401-And under section 79 (c) of the Revised Administrative Code, he has "direct control, direction and supervision over all bureaus and offices under his jurisdiction and may, any provision of existing law to the contrary not withstanding, repeal or modify the decision of the chief of said Bureaus or offices when advisable in public interest."

It should here also be stated that the assessment in question was consistently protested by petitioner, making several requests for reinvestigation thereof. Under the circumstances, petitioner may be considered to have waived the defense of prescription.

"Estoppel has been employed to prevent the application of the statute of limitations against the government in certain instances in which the taxpayer has taken some affirmative action to prevent the collection of the tax within the statutory period. It is generally held that a taxpayer is estopped to repudiate waivers of the statute of limitations upon which the government

relied. The cases frequently involve dissolved corporations. If no waiver has been given, the cases usually show come conduct directed to a postponement of collection, such, for example, as some variety of request to apply an overassessment. The taxpayer has 'benefited' and 'is not in a position to contest' his tax liability. A definite representation of implied authority may be involved, and in many cases the taxpayer has received the 'benefit' of being saved from the inconvenience, if not hardship of immediate collection. "

Conceivably even in these cases a fully informed Commissioner may err to the sorrow of the revenues, but generally speaking, the cases present a strong combination of equities against the taxpayer, and few will seriously quarrel with their application of the doctrine of estoppel." (Mertens Law of Federal Income Taxation, Vol. 10-A, pp. 159-160.)

It is also claimed that section 9 of Executive Order No. 401-A, series of 1951 — es involving an original assessment of more than P5,000 — refers only to compromises and refunds of taxes, but not to total withdrawal of the assessment. The contention is without merit. A careful examination of the provisions of both sections 8 and 9 of Executive Order No. 401-A, series of 1951, reveals the procedure prescribed therein is intended as a check or control upon the powers of the Collector of Internal Revenue in respect to assessment and refunds of taxes. If it be conceded that a decision of the Collector of Internal Revenue on partial remission of taxes is subject to review by the Secretary of Finance and the Board of Tax Appeals, then with more reason should the power of the Collector to withdraw totally an assessment be subject to such review.

We find merit, however, in petitioner's contention that the Court of Tax Appeals erred in the imposition of the 5% fraud surcharge. As already shown in the early part of this decision, no element of fraud is present.

Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge should be added to the deficiency sales tax "in case a false or fraudulent return is willfully made." Although the sales made by SM are in substance by Yutivo this does not necessarily establish fraud nor the willful filing of a false or fraudulent return.

The case of Court Holding Co. v. Commissioner of Internal Revenue (August 9, 1943, 2 TC 531, 541-549) is in point. The petitioner Court Holding Co. was a corporation consisting of only two stockholders, to wit: Minnie Miller and her husband Louis Miller. The only assets of third husband and wife corporation consisted of an apartment building which had been acquired for a very low price at a judicial sale. Louis Miller, the husband, who directed the company's business, verbally agreed to sell this property to Abe C. Fine and Margaret Fine, husband and wife, for the sum of $54,000.00, payable in various installments. He received $1,000.00 as down payment. The sale of this property for the price mentioned would have netted the corporation a handsome profit on which a large corporate income tax would have to be paid. On the afternoon of February 23, 1940, when the Millers and the Fines got together for the execution of the document of sale, the Millers announced that their attorney had called their attention to the large corporate tax which would have to be

Page | 6

paid if the sale was made by the corporation itself. So instead of proceeding with the sale as planned, the Millers approved a resolution to declare a dividend to themselves "payable in the assets of the corporation, in complete liquidation and surrender of all the outstanding corporate stock." The building, which as above stated was the only property of the corporation, was then transferred to Mr. and Mrs. Miller who in turn sold it to Mr. and Mrs. Fine for exactly the same price and under the same terms as had been previously agreed upon between the corporation and the Fines.

The return filed by the Court Holding Co. with the respondent Commissioner of Internal Revenue reported no taxable gain as having been received from the sale of its assets. The Millers, of course, reported a long term capital gain on the exchange of their corporate stock with the corporate property. The Commissioner of Internal Revenue contended that the liquidating dividend to stockholders had no purpose other than that of tax avoidance and that, therefore, the sale by the Millers to the Fines of the corporation's property was in substance a sale by the corporation itself, for which the corporation is subject to the taxable profit thereon. In requiring the corporation to pay the taxable profit on account of the sale, the Commissioner of Internal Revenue, imposed a surcharge of 25% for delinquency, plus an additional surcharge as fraud penalties.

The U. S. Court of Tax Appeals held that the sale by the Millers was for no other purpose than to avoid the tax and was, in substance, a sale by the Court Holding Co., and that, therefore, the said corporation should be liable for the assessed taxable profit thereon. The Court of Tax Appeals also sustained the Commissioner of Internal Revenue on the delinquency penalty of 25%. However, the Court of Tax Appeals disapproved the fraud penalties, holding that an attempt to avoid a tax does not necessarily establish fraud; that it is a settled principle that a taxpayer may diminish his tax liability by means which the law permits; that if the petitioner, the Court Holding Co., was of the opinion that the method by which it attempted to effect the sale in question was legally sufficient to avoid the imposition of a tax upon it, its adoption of that methods not subject to censure; and that in taking a position with respect to a question of law, the substance of which was disclosed by the statement indorsed on it return, it may not be said that that position was taken fraudulently. We quote in full the pertinent portion of the decision of the Court of Tax Appeals: .

". . . The respondent's answer alleges that the petitioner's failure to report as income the taxable profit on the real estate sale was fraudulent and with intent to evade the tax. The petitioner filed a reply denying fraud and averring that the loss reported on its return was correct to the best of its knowledge and belief. We think the respondent has not sustained the burden of proving a fraudulent intent. We have concluded that the sale of the petitioner's property was in substance a sale by the petitioner, and that the liquidating dividend to stockholders had no purpose other than that of tax avoidance. But the attempt to avoid tax does not necessarily establish fraud. It is a settled principle that a taxpayer may diminish his liability by any means which the law permits. United States v. Isham, 17 Wall. 496; Gregory v. Helvering, supra; Chrisholm v. Commissioner, 79 Fed. (2d) 14. If the petitioner here was of the opinion that the method by which it attempted to effect the sale in question was legally sufficient to avoid the imposition of tax

upon it, its adoption of that method is not subject to censure. Petitioner took a position with respect to a question of law, the substance of which was disclosed by the statement endorsed on its return. We can not say, under the record before us, that that position was taken fraudulently. The determination of the fraud penalties is reversed."

When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the sales tax was paid only once and on the original sales by the former and neither the latter nor SM paid taxes on their subsequent sales. Yutivo might have, therefore, honestly believed that the payment by it, as importer, of the sales tax was enough as in the case of GM Consequently, in filing its return on the basis of its sales to SM and not on those by the latter to the public, it cannot be said that Yutivo deliberately made a false return for the purpose of defrauding the government of its revenues which will justify the imposition of the surcharge penalty.

We likewise find meritorious the contention that the Tax Court erred in computing the alleged deficiency sales tax on the selling price of SM without previously deducting therefrom the sales tax due thereon. The sales tax provisions (sees. 184.186, Tax Code) impose a tax on original sales measured by "gross selling price" or "gross value in money". These terms, as interpreted by the respondent Collector, do not include the amount of the sales tax, if invoiced separately. Thus, General Circular No. 431 of the Bureau of Internal Revenue dated July 29, 1939, which implements sections 184.186 of the Tax Code provides: "

. . .'Gross selling price' or gross value in money' of the articles sold, bartered, exchanged, transferred as the term is used in the aforecited sections (sections 184, 185 and 186) of the National Internal Revenue Code, is the total amount of money or its equivalent which the purchaser pays to the vendor to receive or get the goods. However, if a manufacturer, producer, or importer, in fixing the gross selling price of an article sold by him has included an amount intended to cover the sales tax in the gross selling price of the articles, the sales tax shall be based on the gross selling price less the amount intended to cover the tax, if the same is billed to the purchaser as a separate item.

General Circular No. 440 of the same Bureau reads:

Amount intended to cover the tax must be billed as a separate em so as not to pay a tax on the tax. — On sales made after he third quarter of 1939, the amount intended to cover the sales tax must be billed to the purchaser as separate items in the, invoices in order that the reduction thereof from the gross ailing price may be allowed in the computation of the merchants' percentage tax on the sales. Unless billed to the purchaser as a separate item in the invoice, the amounts intended to cover the sales tax shall be considered as part of the gross selling price of the articles sold, and deductions thereof will not be allowed, (Cited in Dalupan, Nat. Int. Rev. Code, Annotated, Vol. II, pp. 52-53.)

Page | 7

Yutivo complied with the above circulars on its sales to SM, and as separately billed, the sales taxes did not form part of the "gross selling price" as the measure of the tax. Since Yutivo had previously billed the sales tax separately in its sales invoices to SM General Circulars Nos. 431 and 440 should be deemed to have been complied. Respondent Collector's method of computation, as opined by Judge Nable in the decision complained of —

. . . is unfair, because . . .(it is) practically imposing tax on a tax already paid. Besides, the adoption of the procedure would in certain cases elevate the bracket under which the tax is based. The late payment is already penalized, thru the imposition of surcharges, by adopting the theory of the Collector, we will be creating an additional penalty not contemplated by law."

If the taxes based on the sales of SM are computed in accordance with Gen. Circulars Nos. 431 and 440 the total deficiency sales taxes, exclusive of the 25% and 50% surcharges for late payment and for fraud, would amount only to P820,549.91 as shown in the following computation:

Rates of Sales Tax

Gross Sales of Vehicles Exclusive of Sales Tax

Sales Taxes Due and Computed under Gen. Cir Nos. 431 & 400

Total Gross Selling Price Charged to the Public

5 % P11,912,219.57 P595,610.98 P12,507,83055

7% 909,559.50 63,669.16 973,228.66

10% 2,618,695.28 261,869.53 2,880,564.81

15% 3,602,397.65 540,359.65 4,142,757.30

20% 267,150.50 53,430.10 320,580.60

30% 837,146.97 251,114.09 1,088,291.06

50% 74,244.30 37,122.16 111,366.46

75%           8,000.00           6,000.00         14,000.00

TOTAL P20,220,413.77 P1,809,205.67 P22,038,619.44

Less Taxes Paid by Yutivo 988,655.76

Deficiency Tax still dueP820,549.9

1

This is the exact amount which, according to Presiding Judge Nable of the Court of Tax Appeals, Yutivo would pay, exclusive of the surcharges.

Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of its jurisdiction in promulgating judgment for the affirmance of the decision of respondent Collector by less than the statutory requirement of at least two votes of its judges. Anent this contention, section 2 of Republic Act No. 1125, creating the Court

of Tax Appeals, provides that "Any two judges of the Court of Tax Appeals shall constitute a quorum, and the concurrence of two judges shall be necessary to promulgate decision thereof. . . . " It is on record that the present case was heard by two judges of the lower court. And while Judge Nable expressed his opinion on the issue of whether or not the amount of the sales tax should be excluded from the gross selling price in computing the deficiency sales tax due from the petitioner, the opinion, apparently, is merely an expression of his general or "private sentiment" on the particular issue, for he concurred the dispositive part of the decision. At any rate, assuming that there is no valid decision for lack of concurrence of two judges, the case was submitted for decision of the court below on March 28, 1957 and under section 13 of Republic Act 1125, cases brought before said court hall be decided within 30 days after submission thereof. "If no decision is rendered by the Court within thirty days from the date a case is submitted for decision, the party adversely affected by said ruling, order or decision, may file with said Court a notice of his intention to appeal to the Supreme Court, and if no decision has as yet been rendered by the Court, the aggrieved party may file directly with the Supreme Court an appeal from said ruling, order or decision, notwithstanding the foregoing provisions of this section." The case having been brought before us on appeal, the question raised by petitioner as become purely academic.

IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under review is hereby modified in that petitioner shall be ordered to pay to respondent the sum of P820,549.91, plus 25% surcharge thereon for late payment.

So ordered without costs.

Bengzon, Labrador, Concepcion, Reyes, J.B.L., Barrera and Paredes, JJ., concur.Padilla, J., took no part.

G.R. No. L-68661 July 22, 1986

NATIONAL FEDERATION OF LABOR UNION (NAFLU) AND TERESITA LORENZO, ET AL., petitioners, vs.HON. MINISTER BLAS OPLE, as Minister of Labor and Employment; LAWMAN INDUSTRIAL/LIBRA GARMENTS/DOLPHIN ENTERPRISES, respondents.

Olalia, Dimapilis, Olalia & Associates for petitioners.

 

GUTIERREZ, JR., J.:

The only issue raised in this petition is whether or not, on the basis of the findings of the public respondent that the respondent company was guilty of unfair labor practice, the petitioners should be reinstated to their former positions without loss of seniority rights and with full backwages.

Page | 8

The background facts which led to the filing of the instant petition are summarized in the assailed decision as follows:

On September 8, 1982, the National Federation of Labor Union (NAFLU) filed a request for conciliation before the Bureau of Labor Relations requesting for the intervention in its dispute with management involving certain money claims, refusal to conclude a collective agreement after such has been negotiated and run-away shop undertaken by management in order to bust the union.

Several conferences were conducted by the Bureau to settle the dispute amicably. In the course of the proceedings, however, management unilaterally declared a temporary shutdown on September 15, 1982. "On September 23, 1982, the management of Lawman Industrial promised the union 'that it will start the normalization of operations at Lawman effective January, 1983.

On October 11, 1982, after all efforts to mediate the charges of unfair labor practice and non-payment of certain money claims have failed, the union filed its notice of strike.

On November 9, 1982, the firm offered payment of P200,000. as complete settlement of all claims inclusive of the separation pay from the company. The union rejected the offer which it felt was tantamount to a proposal to eliminate the union and final separation of its members from the company.

Efforts of conciliation proved futile. Until the last conference on January 6, 1983, the company had failed to resume operations alleging poor business conditions.

Meanwhile, the union filed a complaint for unfair labor practice against the management of Lawman sometime December 1982 docketed as Case No. 11-695-82 (NAFLU v. Lawman) pending before the Metro Manila Branch of the NLRC.

Notwithstanding the commitment of management to resume operations in January, 1983 and even with the expiration on March 15, 1983 of the provisional shutdown, the period of shutdown was extended without notifying this Office of such extension. On March 17, 1983, this Office issued the Order now in question.

On May 20, 1983, respondent filed a motion for reconsideration alleging that it had suffered losses as shown by its financial statements. In view thereof, it informed this Ministry of its decision to effect a shutdown on September 8, 1982 and to circularize a memorandum on November 2, 1982 announcing the cessation of operations.

The company alleged further that it had no more plant and building because they were allegedly repossessed by the Pioneer Texturizing Corporation for the failure of respondent to pay rentals as evidenced by the letter of Mr. Eugenio Tan dated August 10, 1982 stating that respondent is given fifteen (15) days to settle its accounts, otherwise an action for repossession and ejectment would be instituted against it.

Nonetheless, the company offered to pay every employee affected by the shutdown a separation pay of P328.95 each.

On June 6, 1983, the National Federation of Labor Unions (NAFLU) submitted a position paper alleging that it was certified by the Bureau of Labor Relations as the sole and exclusive bargaining agent of all the rank and file employees of the said factory. Negotiations followed in October 1981 until January 1982. The management refused to grant substantial economic demands to the workers, hence, the union declared a strike in July 1982. Thru the efforts of the Bureau of Labor Relations, the strike was settled in July 1982. The management agreed as follows: Wage increase, Pl.00 for the first year; Pl.00 for the second year and P1.00 for the third year of the contract. Vacation and sick leaves were also granted and other fringe benefits. The collective bargaining agreement was suppose to be effective September 1982.

But the actual partial shutdown began in August 1982. It appears moreover that at night, machines were dismantled, hauled out and then installed at No. 43 Engineering Road, Araneta University compound, Malabon, Metro Manila and the name of Lawman was changed to LIBRA GARMENTS. Under that name, new applicants for employment were called even as the company continued to manufacture the same products but under the name of LIBRA GARMENTS. When this was discovered by the workers, LIBRA GARMENTS was changed to DOLPHIN GARMENTS.

On March 17,1983, the Minister of Labor and Employment issued an order, stating:

In view of the foregoing, this office hereby assumes jurisdiction over the dispute at Lawman Industrial Corporation pursuant to Art. 264 (g) of the Labor Code. All employees affected by the extended shutdown which is highly irregular, are ordered to return to work and management is directed to accept all returning workers under the same terms and conditions prevailing previous to the illegal shutdown. Management is further directed to pay severance compensation including all unpaid wages previous to the shutdown and after March 15, 1983 in the event that the company cannot resume operations, All pending cases including Case No. 11-695-82 (NAFLU v. Lawman) are hereby ordered consolidated to this Office for resolution. Pending the determination of the charges on

Page | 9

illegal lockout run-away-shop and the pending money claims against the company, Lawman Industrial is hereby enjoined from transferring ownership or otherwise effecting any encumbrance or any of its existing assets in favor of any third party without a prior clearance from this Office and timely notice to the union. The company is likewise prohibited from terminating the employment of any of its employees pending the outcome of this dispute.

This order automatically enjoins a strike or lockout.

On July 31, 1984, the public respondent modified its earlier order and directed the private respondent to pay all accrued wages and benefits including a one month's pay for its failure to comply with the requirement of notice under Batas Pambansa Blg. 130, as amended and separation pay for all dismissed employees equivalent to one month's pay or one-half month's pay for every year of service whichever is higher computed up to January, 1983 when the company had declared its intention to actually close its operations. However, despite a finding that the private respondent company was guilty of unfair labor practice, the public respondent did not order the reinstatement of the employees concerned "because the company has declared that it had already ceased its operations completely." It is this order for non-reinstatement which is now before us.

The petition is impressed with merit.

We see no reason to disturb the findings of fact of the public respondent, supported as they are by substantial evidence in the light of the well established principle that findings of administrative agencies which have acquired expertise because their jurisdiction is confined to specific matters are geiterary accorded not only respect but at times even finality, and that judicial review by this Court on labor cases does not go so far as to evaluate the sufficiency of the evidence upon which the Deputy Minister and the Regional Director based their determinations but are limited to issues of jurisdiction or grave abuse of discretion (Special Events and Central Shipping Office Workers Union v. San Miguel Corporation, 122 SCRA 557).

The findings of the Minister of Labor and Employment embodied in its July 31, 1984 decision are categorical:

It is clear from the records of this case that the company bargained in bad faith with the union when pending the negotiation of their collective agreement, the company declared a temporary cessation of its operations which in reality was an illegal lockout. Evidently, the company also maintained run-away shop when it started transferring its machine first to Libra and then to Dolphin Garments. Failure on the part of the company to comply with the requirements of notice and due process to the employees and the Labor Ministry one month before the intended 'closure' of the firm is clearly against the law.

There is also evidence on the record that even after the alleged 'shutdown' the company was still operating in the name of Lawman Industrial although production was being carried out by another firm called Libra Garments (later Dolphin Garments). When the company declared in its position paper dated May 20, 1983 that all the machines of Lawman had been repossessed by the owner, Pioneer Texturizing Corporation, it admitted the fact that it has violated the 17 March Order of this Office enjoining any encumbrance or transfer of the properties of Lawman without prior clearance from this Office. The evident bad faith, fraud and deceit committed by the company to the prejudice of both the union and the employees who have existing wage claims, some of which are due for execution, leads us to affirm the union's position that the veil of corporate fiction should be pierced in order to safeguard the right to self-organization and certain vested rights which had accrued in favor of the union.

It is very obvious from the above findings that the second corporation seeks the protective shield of a corporate fiction to achieve an illegal purpose. As enunciated in the case of Claparols v. Court of Industrial Relations (65 SCRA 613) its veil in the present case should, therefore, be pierced as it was deliberately and maliciously designed to evade its financial obligations to its employees. It is an established principle that when the veil of corporate fiction is made as a shield to perpetrate a fraud or to confuse legitimate issues (here, the relation of employer-employee), the same should be pierced (A.D. Santos, Inc. v. Vasquez, 22 SCRA 1156).

Thus, as Lawman Industrial Corporation was guilty of unfair labor practice, the public respondent's order for reinstatement should follow as a matter of right. In National Mines and Allied Workers Union v. National Labor Relations Commission (118 SCRA 637), this Court held that it is an established rule that an employer who commits an unfair labor practice may be required to reinstate with fun backwages the workers affected by such act (See also Compana Maritima v. United Seamen's Union, 104 Phil. 7; Talisay Silay Mining Co. v. Court of Industrial Relations, 106 Phil. 1081; Velez v. PAV Watchmen's Union, 107 Phil. 689; Phil. Sugar Institute v. Court of Industrial Relations, et al., 109 Phil. 452; Big Five Products Workers Union v. Court of Industrial Relations, 8 SCRA 559; and MD Transit and Taxi Co. v. De Guzman, 7 SCRA 726).

After finding that Lawman Industrial Corporation had transferred its business operations to Libra Garments Enterprises, which later changed its name to Dolphin Garments Enterprises, the public respondent cannot deny reinstatement to the petitioners simply because Lawman Industrial Corporation has ceased its operations.

As Libra/Dolphin Garments is but an alter-ego of the old employer, Lawman Industrial, the former must bear the consequences of the latter's unfair acts by reinstating the petitioners to their former positions without loss of seniority rights (See Phil. Land-Air-Sea Labor Union (PLASLU) v. Sy Indong Co. Rice and Corn Mill, 11 SCRA 277).

Page | 10

To justify its closure, the respondent company argues that it can no longer continue its operations due to serious losses, and in support thereof, presented its financial statements for 1980-1981 and from January to June, 1986.

The alleged losses of the respondent company are more apparent than real. The argument of the private respondent are refuted by the petitioners:

As of December 1981, LAWMAN's Cost of Goods Manufactured and Sold was P2,065,822.26 while on June 30, 1982, it was P 3,768,609.22. The alleged reason was the entry of Direct Labor under the 'Statement of Cost of Goods Manufactured and Sold' amounting to P 1,703,768.27 for 1982. This could only mean that there was a sudden increase in production of LAWMAN necessitating an additional and huge labor cost, Comparing this with the past year (1981), the entry for Direct Labor was only P 398,863.40. This tremendous increase in Direct Labor for the six months ending June 1982 was not sufficiently explained by LAWMAN in the proceedings below.

Even on the entry Administrative Salaries has been increased to justify losses. For June 30, 1982, LAWMAN spent a sizable P213,752.85 whereas for December 30, 1981, it only spent P47,889.20 without any justifiable reason at all.

In addition, the Solicitor General submits the following observations:

xxx xxx xxx

... [T]he net sales of LAWMAN for the year 1981 was, P2,117,203.95 whereas for the shorter period of January to June 1982, its next sales was already P2,359,479.25, surpassing its entire 1981 sales. This clearly shows that the firm was experiencing a sales upswing at the time of its shutdown,

Following the precedent set in Lepanto Consolidated Mining Co. v. Encarnacion et al (136 SCRA 256) and cases cited therein, the petitioner-workers should be reinstated but with backwages not exceeding three years.

WHEREFORE, the petition for review is GRANTED. The appealed decision dated July 31, 1984 is hereby SET ASIDE. The private respondent is ordered to reinstate the petitioners to positions in LIBRA/DOLPHIN GARMENTS with backwages of not more than three (3) years each and without loss of seniority rights and benefits being enjoyed by them prior to the alleged closure of Lawman's Industrial Corporation.

SO ORDERED.

Feria (Chairman), Fenan, Alampay and Paras, JJ. , concur

G.R. No. L-15121             August 31, 1962

GREGORIO PALACIO, in his own behalf and in behalf of his minor child, MARIO PALACIO, plaintiffs-appellants, vs.FELY TRANSPORTATION COMPANY, defendant-appellee.

Antonio A. Saba for plaintiffs-appellants.Mercado, Ver and Reyes for defendant-appellee.

REGALA, J.:

This is an appeal by the plaintiffs from the decision of the Court of First Instance of Manila which dismissed their complaint.

Originally taken to the Court of Appeals, this appeal was certified to this Court on the ground that it raises purely questions of law.

The parties in this case adopt the following findings of fact of the lower court:

In their complaint filed with this Court on May 15, 1954, plaintiffs allege, among other things, "that about December, 1952, the defendant company hired Alfredo Carillo as driver of AC-787 (687) (a registration for 1952) owned and operated by the said defendant company; that on December 24, 1952, at about 11:30 a.m., while the driver Alfonso (Alfredo) Carillo was driving AC-687 at Halcon Street, Quezon City, wilfully, unlawfully and feloniously and in a negligent, reckless and imprudent manner, run over a child Mario Palacio of the herein plaintiff Gregorio Palacio; that on account of the aforesaid injuries, Mario Palacio suffered a simple fracture of the right tenor (sic), complete third, thereby hospitalizing him at the Philippine Orthopedic Hospital from December 24, 1952, up to January 8, 1953, and continued to be treated for a period of five months thereafter; that the plaintiff Gregorio Palacio herein is a welder by occupation and owner of a small welding shop and because of the injuries of his child he has abandoned his shop where he derives income of P10.00 a day for the support of his big family; that during the period that the plaintiff's (Gregorio Palacio's) child was in the hospital and who said child was under treatment for five months in order to meet the needs of his big family, he was forced to sell one air compressor (heavy duty) and one heavy duty electric drill, for a sacrifice sale of P150.00 which could easily sell at P350.00; that as a consequence of the negligent and reckless act of the driver Alfredo Carillo of the herein defendant company, the herein plaintiffs were forced to litigate this case in Court for an agreed amount of P300.00 for attorney's fee; that the herein plaintiffs have now incurred the amount of P500.00 actual expenses for transportation, representation and similar expenses for gathering evidence and witnesses; and that because of the nature of the injuries of plaintiff Mario Palacio and the fear that the child might become a useless invalid, the

Page | 11

herein plaintiff Gregorio Palacio has suffered moral damages which could be conservatively estimated at P1,200.00.

On May 23, 1956, defendant Fely Transportation Co., filed a Motion to Dismiss on the grounds (1) that there is no cause of action against the defendant company, and (2) that the cause of action is barred by prior judgment..

In its Order, dated June 8, 1956, this Court deferred the determination of the grounds alleged in the Motion to Dismiss until the trial of this case.

On June 20, 1956, defendant filed its answer. By way of affirmative defenses, it alleges (1) that complaint states no cause of action against defendant, and (2) that the sale and transfer of the jeep AC-687 by Isabelo Calingasan to the Fely Transportation was made on December 24, 1955, long after the driver Alfredo Carillo of said jeep had been convicted and had served his sentence in Criminal Case No. Q-1084 of the Court of First Instance of Quezon City, in which both the civil and criminal cases were simultaneously tried by agreement of the parties in said case. In the Counterclaim of the Answer, defendant alleges that in view of the filing of this complaint which is a clearly unfounded civil action merely to harass the defendant, it was compelled to engage the services of a lawyer for an agreed amount of P500.00.

During the trial, plaintiffs presented the transcript of the stenographic notes of the trial of the case of "People of the Philippines vs. Alfredo Carillo, Criminal Case No. Q-1084," in the Court of First Instance of Rizal, Quezon City (Branch IV), as Exhibit "A".1äwphï1.ñët

It appears from Exhibit "A" that Gregorio Palacio, one of the herein plaintiffs, testified that Mario Palacio, the other plaintiff, is his son; that as a result of the reckless driving of accused Alfredo Carillo, his child Mario was injured and hospitalized from December 24, 1952, to January 8, 1953; that during all the time that his child was in the hospital, he watched him during the night and his wife during the day; that during that period of time he could not work as he slept during the day; that before his child was injured, he used to earn P10.00 a day on ordinary days and on Sundays from P20 to P50 a Sunday; that to meet his expenses he had to sell his compressor and electric drill for P150 only; and that they could have been sold for P300 at the lowest price.

During the trial of the criminal case against the driver of the jeep in the Court of First Instance of Quezon City (Criminal Case No. Q-1084) an attempt was unsuccessfully made by the prosecution to prove moral damages allegedly suffered by herein plaintiff Gregorio Palacio. Likewise an attempt was made in vain by the private prosecutor in that case to prove the agreed attorney's fees between him and plaintiff Gregorio Palacio and the expenses allegedly incurred by the herein plaintiffs in connection with that case. During the trial

of this case, plaintiff Gregorio Palacio testified substantially to the same facts.

The Court of First Instance of Quezon City in its decision in Criminal Case No. 1084 (Exhibit "2") determined and thoroughly discussed the civil liability of the accused in that case. The dispositive part thereof reads as follows:

IN VIEW OF THE FOREGOING, the Court finds the accused Alfredo Carillo y Damaso guilty beyond reasonable doubt of the crime charged in the information and he is hereby sentenced to suffer imprisonment for a period of Two Months & One Day of Arresto Mayor; to indemnify the offended party, by way of consequential damages, in the sum of P500.00 which the Court deems reasonable; with subsidiary imprisonment in case of insolvency but not to exceed ¹/3 of the principal penalty imposed; and to pay the costs.

On the basis of these facts, the lower court held action is barred by the judgment in the criminal case and, that under Article 103 of the Revised Penal Code, the person subsidiarily liable to pay damages is Isabel Calingasan, the employer, and not the defendant corporation.

Against that decision the plaintiffs appealed, contending that:

THE LOWER COURT ERRED IN NOT SUSTAINING THAT THE DEFENDANT-APPELLEE IS SUBSIDIARILY LIABLE FOR DAMAGES AS A RESULT OF CRIMINAL CASE NO. Q-1084 OF THE COURT OF FIRST INSTANCE OF QUEZON CITY FOR THE REASON THAT THE INCORPORATORS OF THE FELY TRANSPORTATION COMPANY, THE DEFENDANT-APPELLEE HEREIN, ARE ISABELO CALINGASAN HIMSELF, HIS SON AND DAUGHTERS;

THE LOWER COURT ERRED IN NOT CONSIDERING THAT THE INTENTION OF ISABELO CALINGASAN IN INCORPORATING THE FELY TRANSPORTATION COMPANY, THE DEFENDANT-APPELLEE HEREIN, WAS TO EVADE HIS CIVIL LIABILITY AS A RESULT OF THE CONVICTION OF HIS DRIVER OF VEHICLE AC-687 THEN OWNED BY HIM:

THE LOWER COURT ERRED IN HOLDING THAT THE CAUSE OF ACTION OF THE PLAINTIFFS-APPELLANTS IS BARRED BY PRIOR JUDGMENT.

With respect to the first and second assignments of errors, plaintiffs contend that the defendant corporate should be made subsidiarily liable for damages in the criminal case because the sale to it of the jeep in question, after the conviction of Alfred Carillo in Criminal Case No. Q-1084 of the Court of First Instance of Quezon City was merely an attempt on the part of Isabelo Calingasan its president and general manager, to evade his subsidiary civil liability.

Page | 12

The Court agrees with this contention of the plaintiffs. Isabelo Calingasan and defendant Fely Transportation may be regarded as one and the same person. It is evident that Isabelo Calingasan's main purpose in forming the corporation was to evade his subsidiary civil liability1 resulting from the conviction of his driver, Alfredo Carillo. This conclusion is borne out by the fact that the incorporators of the Fely Transportation are Isabelo Calingasan, his wife, his son, Dr. Calingasan, and his two daughters. We believe that this is one case where the defendant corporation should not be heard to say that it has a personality separate and distinct from its members when to allow it to do so would be to sanction the use of the fiction of corporate entity as a shield to further an end subversive of justice. (La Campana Coffee Factory, et al. v. Kaisahan ng mga Manggagawa, etc., et al., G.R. No. L-5677, May 25, 1953) Furthermore, the failure of the defendant corporation to prove that it has other property than the jeep (AC-687) strengthens the conviction that its formation was for the purpose above indicated.

And while it is true that Isabelo Calingasan is not a party in this case, yet, is held in the case of Alonso v. Villamor, 16 Phil. 315, this Court can substitute him in place of the defendant corporation as to the real party in interest. This is so in order to avoid multiplicity of suits and thereby save the parties unnecessary expenses and delay. (Sec. 2, Rule 17, Rules of Court; Cuyugan v. Dizon. 79 Phil. 80; Quison v. Salud, 12 Phil. 109.)

Accordingly, defendants Fely Transportation and Isabelo Calingasan should be held subsidiarily liable for P500.00 which Alfredo Carillo was ordered to pay in the criminal case and which amount he could not pay on account of insolvency.

We also sustain plaintiffs' third assignment of error and hold that the present action is not barred by the judgment of the Court of First Instance of Quezon City in the criminal case. While there seems to be some confusion on part of the plaintiffs as to the theory on which the is based — whether ex-delito or quasi ex-delito (culpa aquiliana) — We are convinced, from the discussion prayer in the brief on appeal, that they are insisting the subsidiary civil liability of the defendant. As a matter of fact, the record shows that plaintiffs merely presented the transcript of the stenographic notes (Exhibit "A") taken at the hearing of the criminal case, which Gregorio Palacio corroborated, in support of their claim for damages. This rules out the defense of res judicata, because such liability proceeds precisely from the judgment in the criminal action, where the accused was found guilty and ordered to pay an indemnity in the sum P500.00.

WHEREFORE, the decision of the lower court is hereby reversed and defendants Fely Transportation and Isabelo Calingasan are ordered to pay, jointly and severally, the plaintiffs the amount of P500.00 and the costs.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes, Dizon and Makalintal, concur.Reyes, J.B.L., J., took no part.

G.R. No. L-23893            October 29, 1968

VILLA REY TRANSIT, INC., plaintiff-appellant, vs.EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and PUBLIC SERVICE COMMISSION,defendants. EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO., INC., defendants-appellants.

PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant, vs.JOSE M. VILLARAMA, third-party defendant-appellee.

Chuidian Law Office for plaintiff-appellant.Bengzon, Zarraga & Villegas for defendant-appellant / third-party plaintiff-appellant.Laurea & Pison for third-party defendant-appellee.

ANGELES, J.:

This is a tri-party appeal from the decision of the Court of First Instance of Manila, Civil Case No. 41845, declaring null and void the sheriff's sale of two certificates of public convenience in favor of defendant Eusebio E. Ferrer and the subsequent sale thereof by the latter to defendant Pangasinan Transportation Co., Inc.; declaring the plaintiff Villa Rey Transit, Inc., to be the lawful owner of the said certificates of public convenience; and ordering the private defendants, jointly and severally, to pay to the plaintiff, the sum of P5,000.00 as and for attorney's fees. The case against the PSC was dismissed.

The rather ramified circumstances of the instant case can best be understood by a chronological narration of the essential facts, to wit:

Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under the business name of Villa Rey Transit, pursuant to certificates of public convenience granted him by the Public Service Commission (PSC, for short) in Cases Nos. 44213 and 104651, which authorized him to operate a total of thirty-two (32) units on various routes or lines from Pangasinan to Manila, and vice-versa. On January 8, 1959, he sold the aforementioned two certificates of public convenience to the Pangasinan Transportation Company, Inc. (otherwise known as Pantranco), for P350,000.00 with the condition, among others, that the seller (Villarama) "shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing with the buyer."

Barely three months thereafter, or on March 6, 1959: a corporation called Villa Rey Transit, Inc. (which shall be referred to hereafter as the Corporation) was organized with a capital stock of P500,000.00 divided into 5,000 shares of the par value of P100.00 each; P200,000.00 was the subscribed stock; Natividad R. Villarama (wife of Jose M. Villarama) was one of the incorporators, and she subscribed for P1,000.00; the balance of P199,000.00 was subscribed by the brother and sister-in-law of Jose M. Villarama; of the subscribed capital stock, P105,000.00 was paid to the treasurer of the corporation, who was Natividad R. Villarama.

Page | 13

In less than a month after its registration with the Securities and Exchange Commission (March 10, 1959), the Corporation, on April 7, 1959, bought five certificates of public convenience, forty-nine buses, tools and equipment from one Valentin Fernando, for the sum of P249,000.00, of which P100,000.00 was paid upon the signing of the contract; P50,000.00 was payable upon the final approval of the sale by the PSC; P49,500.00 one year after the final approval of the sale; and the balance of P50,000.00 "shall be paid by the BUYER to the different suppliers of the SELLER."

The very same day that the aforementioned contract of sale was executed, the parties thereto immediately applied with the PSC for its approval, with a prayer for the issuance of a provisional authority in favor of the vendee Corporation to operate the service therein involved.1 On May 19, 1959, the PSC granted the provisional permit prayed for, upon the condition that "it may be modified or revoked by the Commission at any time, shall be subject to whatever action that may be taken on the basic application and shall be valid only during the pendency of said application." Before the PSC could take final action on said application for approval of sale, however, the Sheriff of Manila, on July 7, 1959, levied on two of the five certificates of public convenience involved therein, namely, those issued under PSC cases Nos. 59494 and 63780, pursuant to a writ of execution issued by the Court of First Instance of Pangasinan in Civil Case No. 13798, in favor of Eusebio Ferrer, plaintiff, judgment creditor, against Valentin Fernando, defendant, judgment debtor. The Sheriff made and entered the levy in the records of the PSC. On July 16, 1959, a public sale was conducted by the Sheriff of the said two certificates of public convenience. Ferrer was the highest bidder, and a certificate of sale was issued in his name.

Thereafter, Ferrer sold the two certificates of public convenience to Pantranco, and jointly submitted for approval their corresponding contract of sale to the PSC.2 Pantranco therein prayed that it be authorized provisionally to operate the service involved in the said two certificates.

The applications for approval of sale, filed before the PSC, by Fernando and the Corporation, Case No. 124057, and that of Ferrer and Pantranco, Case No. 126278, were scheduled for a joint hearing. In the meantime, to wit, on July 22, 1959, the PSC issued an order disposing that during the pendency of the cases and before a final resolution on the aforesaid applications, the Pantranco shall be the one to operate provisionally the service under the two certificates embraced in the contract between Ferrer and Pantranco. The Corporation took issue with this particular ruling of the PSC and elevated the matter to the Supreme Court,3 which decreed, after deliberation, that until the issue on the ownership of the disputed certificates shall have been finally settled by the proper court, the Corporation should be the one to operate the lines provisionally.

On November 4, 1959, the Corporation filed in the Court of First Instance of Manila, a complaint for the annulment of the sheriff's sale of the aforesaid two certificates of public convenience (PSC Cases Nos. 59494 and 63780) in favor of the defendant Ferrer, and the subsequent sale thereof by the latter to Pantranco, against Ferrer, Pantranco and the PSC. The plaintiff Corporation prayed therein that all the orders of the PSC relative to the parties' dispute over the said certificates be annulled.

In separate answers, the defendants Ferrer and Pantranco averred that the plaintiff Corporation had no valid title to the certificates in question because the contract pursuant to which it acquired them from Fernando was subject to a suspensive condition — the approval of the PSC — which has not yet been fulfilled, and, therefore, the Sheriff's levy and the consequent sale at public auction of the certificates referred to, as well as the sale of the same by Ferrer to Pantranco, were valid and regular, and vested unto Pantranco, a superior right thereto.

Pantranco, on its part, filed a third-party complaint against Jose M. Villarama, alleging that Villarama and the Corporation, are one and the same; that Villarama and/or the Corporation was disqualified from operating the two certificates in question by virtue of the aforementioned agreement between said Villarama and Pantranco, which stipulated that Villarama "shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing with the buyer."

Upon the joinder of the issues in both the complaint and third-party complaint, the case was tried, and thereafter decision was rendered in the terms, as above stated.

As stated at the beginning, all the parties involved have appealed from the decision. They submitted a joint record on appeal.

Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey Transit, Inc. (Corporation) is a distinct and separate entity from Jose M. Villarama; that the restriction clause in the contract of January 8, 1959 between Pantranco and Villarama is null and void; that the Sheriff's sale of July 16, 1959, is likewise null and void; and the failure to award damages in its favor and against Villarama.

Ferrer, for his part, challenges the decision insofar as it holds that the sheriff's sale is null and void; and the sale of the two certificates in question by Valentin Fernando to the Corporation, is valid. He also assails the award of P5,000.00 as attorney's fees in favor of the Corporation, and the failure to award moral damages to him as prayed for in his counterclaim.

The Corporation, on the other hand, prays for a review of that portion of the decision awarding only P5,000.00 as attorney's fees, and insisting that it is entitled to an award of P100,000.00 by way of exemplary damages.

After a careful study of the facts obtaining in the case, the vital issues to be resolved are: (1) Does the stipulation between Villarama and Pantranco, as contained in the deed of sale, that the former "SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE DATE OF THIS SALE, APPLY FOR ANY TPU SERVICE IDENTICAL OR COMPETING WITH THE BUYER," apply to new lines only or does it include existing lines?; (2) Assuming that said stipulation covers all kinds of lines, is such stipulation valid and enforceable?; (3) In the affirmative, that said stipulation is valid, did it bind the Corporation?

For convenience, We propose to discuss the foregoing issues by starting with the last proposition.

Page | 14

The evidence has disclosed that Villarama, albeit was not an incorporator or stockholder of the Corporation, alleging that he did not become such, because he did not have sufficient funds to invest, his wife, however, was an incorporator with the least subscribed number of shares, and was elected treasurer of the Corporation. The finances of the Corporation which, under all concepts in the law, are supposed to be under the control and administration of the treasurer keeping them as trust fund for the Corporation, were, nonetheless, manipulated and disbursed as if they were the private funds of Villarama, in such a way and extent that Villarama appeared to be the actual owner-treasurer of the business without regard to the rights of the stockholders. The following testimony of Villarama,4 together with the other evidence on record, attests to that effect:

Q.       Doctor, I want to go back again to the incorporation of the Villa Rey Transit, Inc. You heard the testimony presented here by the bank regarding the initial opening deposit of ONE HUNDRED FIVE THOUSAND PESOS, of which amount Eighty-Five Thousand Pesos was a check drawn by yourself personally. In the direct examination you told the Court that the reason you drew a check for Eighty-Five Thousand Pesos was because you and your wife, or your wife, had spent the money of the stockholders given to her for incorporation. Will you please tell the Honorable Court if you knew at the time your wife was spending the money to pay debts, you personally knew she was spending the money of the incorporators?

A.       You know my money and my wife's money are one. We never talk about those things.

Q.       Doctor, your answer then is that since your money and your wife's money are one money and you did not know when your wife was paying debts with the incorporator's money?

A.       Because sometimes she uses my money, and sometimes the money given to her she gives to me and I deposit the money.

Q.       Actually, aside from your wife, you were also the custodian of some of the incorporators here, in the beginning?

A.       Not necessarily, they give to my wife and when my wife hands to me I did not know it belonged to the incorporators.

Q.       It supposes then your wife gives you some of the money received by her in her capacity as treasurer of the corporation?

A.       Maybe.

Q.       What did you do with the money, deposit in a regular account?

A.       Deposit in my account.

Q.       Of all the money given to your wife, she did not receive any check?

A.       I do not remember.

Q.       Is it usual for you, Doctor, to be given Fifty Thousand Pesos without even asking what is this?

xxx           xxx           xxx

JUDGE:    Reform the question.

Q.       The subscription of your brother-in-law, Mr. Reyes, is Fifty-Two Thousand Pesos, did your wife give you Fifty-two Thousand Pesos?

A.       I have testified before that sometimes my wife gives me money and I do not know exactly for what.

The evidence further shows that the initial cash capitalization of the corporation of P105,000.00 was mostly financed by Villarama. Of the P105,000.00 deposited in the First National City Bank of New York, representing the initial paid-up capital of the Corporation, P85,000.00 was covered by Villarama's personal check. The deposit slip for the said amount of P105,000.00 was admitted in evidence as Exh. 23, which shows on its face that P20,000.00 was paid in cash and P85,000.00 thereof was covered by Check No. F-50271 of the First National City Bank of New York. The testimonies of Alfonso Sancho5 and Joaquin Amansec,6 both employees of said bank, have proved that the drawer of the check was Jose Villarama himself.

Another witness, Celso Rivera, accountant of the Corporation, testified that while in the books of the corporation there appears an entry that the treasurer received P95,000.00 as second installment of the paid-in subscriptions, and, subsequently, also P100,000.00 as the first installment of the offer for second subscriptions worth P200,000.00 from the original subscribers, yet Villarama directed him (Rivera) to make vouchers liquidating the sums.7 Thus, it was made to appear that the P95,000.00 was delivered to Villarama in payment for equipment purchased from him, and the P100,000.00 was loaned as advances to the stockholders. The said accountant, however, testified that he was not aware of any amount of money that had actually passed hands among the parties involved,8 and actually the only money of the corporation was the P105,000.00 covered by the deposit slip Exh. 23, of which as mentioned above, P85,000.00 was paid by Villarama's personal check.

Further, the evidence shows that when the Corporation was in its initial months of operation, Villarama purchased and paid with his personal checks Ford trucks for the Corporation. Exhibits 20 and 21 disclose that the said purchases were paid by Philippine Bank of Commerce Checks Nos. 992618-B and 993621-B, respectively. These checks have been sufficiently established by Fausto Abad, Assistant Accountant of Manila Trading & Supply Co., from which the trucks were

Page | 15

purchased9 and Aristedes Solano, an employee of the Philippine Bank of Commerce,10as having been drawn by Villarama.

Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger entries and vouchers showing that Villarama had co-mingled his personal funds and transactions with those made in the name of the Corporation, are very illuminating evidence. Villarama has assailed the admissibility of these exhibits, contending that no evidentiary value whatsoever should be given to them since "they were merely photostatic copies of the originals, the best evidence being the originals themselves." According to him, at the time Pantranco offered the said exhibits, it was the most likely possessor of the originals thereof because they were stolen from the files of the Corporation and only Pantranco was able to produce the alleged photostat copies thereof.

Section 5 of Rule 130 of the Rules of Court provides for the requisites for the admissibility of secondary evidence when the original is in the custody of the adverse party, thus: (1) opponent's possession of the original; (2) reasonable notice to opponent to produce the original; (3) satisfactory proof of its existence; and (4) failure or refusal of opponent to produce the original in court.11 Villarama has practically admitted the second and fourth requisites.12 As to the third, he admitted their previous existence in the files of the Corporation and also that he had seen some of them.13 Regarding the first element, Villarama's theory is that since even at the time of the issuance of the subpoena duces tecum, the originals were already missing, therefore, the Corporation was no longer in possession of the same. However, it is not necessary for a party seeking to introduce secondary evidence to show that the original is in the actual possession of his adversary. It is enough that the circumstances are such as to indicate that the writing is in his possession or under his control. Neither is it required that the party entitled to the custody of the instrument should, on being notified to produce it, admit having it in his possession.14Hence, secondary evidence is admissible where he denies having it in his possession. The party calling for such evidence may introduce a copy thereof as in the case of loss. For, among the exceptions to the best evidence rule is "when the original has been lost, destroyed, or cannot be produced in court."15 The originals of the vouchers in question must be deemed to have been lost, as even the Corporation admits such loss. Viewed upon this light, there can be no doubt as to the admissibility in evidence of Exhibits 6 to 19 and 22.

Taking account of the foregoing evidence, together with Celso Rivera's testimony,16 it would appear that: Villarama supplied the organization expenses and the assets of the Corporation, such as trucks and equipment;17there was no actual payment by the original subscribers of the amounts of P95,000.00 and P100,000.00 as appearing in the books;18 Villarama made use of the money of the Corporation and deposited them to his private accounts;19 and the Corporation paid his personal accounts.20

Villarama himself admitted that he mingled the corporate funds with his own money.21 He also admitted that gasoline purchases of the Corporation were made in his name22 because "he had existing account with Stanvac which was properly secured and he wanted the Corporation to benefit from the rebates that he received."23

The foregoing circumstances are strong persuasive evidence showing that Villarama has been too much involved in the affairs of the Corporation to altogether negative the claim that he was only a part-time general manager. They show beyond doubt that the Corporation is his alter ego.

It is significant that not a single one of the acts enumerated above as proof of Villarama's oneness with the Corporation has been denied by him. On the contrary, he has admitted them with offered excuses.

Villarama has admitted, for instance, having paid P85,000.00 of the initial capital of the Corporation with the lame excuse that "his wife had requested him to reimburse the amount entrusted to her by the incorporators and which she had used to pay the obligations of Dr. Villarama (her husband) incurred while he was still the owner of Villa Rey Transit, a single proprietorship." But with his admission that he had received P350,000.00 from Pantranco for the sale of the two certificates and one unit,24 it becomes difficult to accept Villarama's explanation that he and his wife, after consultation,25 spent the money of their relatives (the stockholders) when they were supposed to have their own money. Even if Pantranco paid the P350,000.00 in check to him, as claimed, it could have been easy for Villarama to have deposited said check in his account and issued his own check to pay his obligations. And there is no evidence adduced that the said amount of P350,000.00 was all spent or was insufficient to settle his prior obligations in his business, and in the light of the stipulation in the deed of sale between Villarama and Pantranco that P50,000.00 of the selling price was earmarked for the payments of accounts due to his creditors, the excuse appears unbelievable.

On his having paid for purchases by the Corporation of trucks from the Manila Trading & Supply Co. with his personal checks, his reason was that he was only sharing with the Corporation his credit with some companies. And his main reason for mingling his funds with that of the Corporation and for the latter's paying his private bills is that it would be more convenient that he kept the money to be used in paying the registration fees on time, and since he had loaned money to the Corporation, this would be set off by the latter's paying his bills. Villarama admitted, however, that the corporate funds in his possession were not only for registration fees but for other important obligations which were not specified.26

Indeed, while Villarama was not the Treasurer of the Corporation but was, allegedly, only a part-time manager,27he admitted not only having held the corporate money but that he advanced and lent funds for the Corporation, and yet there was no Board Resolution allowing it.28

Villarama's explanation on the matter of his involvement with the corporate affairs of the Corporation only renders more credible Pantranco's claim that his control over the corporation, especially in the management and disposition of its funds, was so extensive and intimate that it is impossible to segregate and identify which money belonged to whom. The interference of Villarama in the complex affairs of the corporation, and particularly its finances, are much too inconsistent with the ends and purposes of the Corporation law, which, precisely, seeks to separate personal responsibilities from corporate undertakings. It is the very essence of incorporation

Page | 16

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

The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who compose it is recognized and respected in all cases which are within reason and the law.29 When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime,30 the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals.

Upon the foregoing considerations, We are of the opinion, and so hold, that the preponderance of evidence have shown that the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that the restrictive clause in the contract entered into by the latter and Pantranco is also enforceable and binding against the said Corporation. For the rule is that a seller or promisor may not make use of a corporate entity as a means of evading the obligation of his covenant.31 Where the Corporation is substantially the alter ego of the covenantor to the restrictive agreement, it can be enjoined from competing with the covenantee.32

The Corporation contends that even on the supposition that Villa Rey Transit, Inc. and Villarama are one and the same, the restrictive clause in the contract between Villarama and Pantranco does not include the purchase of existing lines but it only applies to application for the new lines. The clause in dispute reads thus:

(4) The SELLER shall not, for a period of ten (10) years from the date of this sale apply for any TPU service identical or competing with the BUYER. (Emphasis supplied)

As We read the disputed clause, it is evident from the context thereof that the intention of the parties was to eliminate the seller as a competitor of the buyer for ten years along the lines of operation covered by the certificates of public convenience subject of their transaction. The word "apply" as broadly used has for frame of reference, a service by the seller on lines or routes that would compete with the buyer along the routes acquired by the latter. In this jurisdiction, prior authorization is needed before anyone can operate a TPU service,33whether the service consists in a new line or an old one acquired from a previous operator. The clear intention of the parties was to prevent the seller from conducting any competitive line for 10 years since, anyway, he has bound himself not to apply for authorization to operate along such lines for the duration of such period.34

If the prohibition is to be applied only to the acquisition of new certificates of public convenience thru an application with the Public Service Commission, this would, in effect, allow the seller just the same to compete with the buyer as long as his authority to operate is only acquired thru transfer or sale from a previous operator, thus defeating the intention of the parties. For what would prevent the seller, under the circumstances, from having a representative or dummy apply in the latter's name

and then later on transferring the same by sale to the seller? Since stipulations in a contract is the law between the contracting parties,

Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good faith. (Art. 19, New Civil Code.)

We are not impressed of Villarama's contention that the re-wording of the two previous drafts of the contract of sale between Villarama and Pantranco is significant in that as it now appears, the parties intended to effect the least restriction. We are persuaded, after an examination of the supposed drafts, that the scope of the final stipulation, while not as long and prolix as those in the drafts, is just as broad and comprehensive. At most, it can be said that the re-wording was done merely for brevity and simplicity.

The evident intention behind the restriction was to eliminate the sellers as a competitor, and this must be, considering such factors as the good will35 that the seller had already gained from the riding public and his adeptness and proficiency in the trade. On this matter, Corbin, an authority on Contracts has this to say.36

When one buys the business of another as a going concern, he usually wishes to keep it going; he wishes to get the location, the building, the stock in trade, and the customers. He wishes to step into the seller's shoes and to enjoy the same business relations with other men. He is willing to pay much more if he can get the "good will" of the business, meaning by this the good will of the customers, that they may continue to tread the old footpath to his door and maintain with him the business relations enjoyed by the seller.

... In order to be well assured of this, he obtains and pays for the seller's promise not to reopen business in competition with the business sold.

As to whether or not such a stipulation in restraint of trade is valid, our jurisprudence on the matter37says:

The law concerning contracts which tend to restrain business or trade has gone through a long series of changes from time to time with the changing condition of trade and commerce. With trifling exceptions, said changes have been a continuous development of a general rule. The early cases show plainly a disposition to avoid and annul all contract which prohibited or restrained any one from using a lawful trade "at any time or at any place," as being against the benefit of the state. Later, however, the rule became well established that if the restraint was limited to "a certain time" and within "a certain place," such contracts were valid and not "against the benefit of the state." Later cases, and we think the rule is now well established, have held that a contract in restraint of trade is valid providing there is a limitation upon either time or place. A contract, however, which restrains a man from entering into business or trade without either a limitation as to time or place, will be held invalid.

Page | 17

The public welfare of course must always be considered and if it be not involved and the restraint upon one party is not greater than protection to the other requires, contracts like the one we are discussing will be sustained. The general tendency, we believe, of modern authority, is to make the test whether the restraint is reasonably necessary for the protection of the contracting parties. If the contract is reasonably necessary to protect the interest of the parties, it will be upheld. (Emphasis supplied.)

Analyzing the characteristics of the questioned stipulation, We find that although it is in the nature of an agreement suppressing competition, it is, however, merely ancillary or incidental to the main agreement which is that of sale. The suppression or restraint is only partial or limited: first, in scope, it refers only to application for TPU by the seller in competition with the lines sold to the buyer; second, in duration, it is only for ten (10) years; and third, with respect to situs or territory, the restraint is only along the lines covered by the certificates sold. In view of these limitations, coupled with the consideration of P350,000.00 for just two certificates of public convenience, and considering, furthermore, that the disputed stipulation is only incidental to a main agreement, the same is reasonable and it is not harmful nor obnoxious to public service.38 It does not appear that the ultimate result of the clause or stipulation would be to leave solely to Pantranco the right to operate along the lines in question, thereby establishing monopoly or predominance approximating thereto. We believe the main purpose of the restraint was to protect for a limited time the business of the buyer.

Indeed, the evils of monopoly are farfetched here. There can be no danger of price controls or deterioration of the service because of the close supervision of the Public Service Commission.39 This Court had stated long ago,40that "when one devotes his property to a use in which the public has an interest, he virtually grants to the public an interest in that use and submits it to such public use under reasonable rules and regulations to be fixed by the Public Utility Commission."

Regarding that aspect of the clause that it is merely ancillary or incidental to a lawful agreement, the underlying reason sustaining its validity is well explained in 36 Am. Jur. 537-539, to wit:

... Numerous authorities hold that a covenant which is incidental to the sale and transfer of a trade or business, and which purports to bind the seller not to engage in the same business in competition with the purchaser, is lawful and enforceable. While such covenants are designed to prevent competition on the part of the seller, it is ordinarily neither their purpose nor effect to stifle competition generally in the locality, nor to prevent it at all in a way or to an extent injurious to the public. The business in the hands of the purchaser is carried on just as it was in the hands of the seller; the former merely takes the place of the latter; the commodities of the trade are as open to the public as they were before; the same competition exists as existed before; there is the same employment furnished to others after as before; the profits of the business go as they did before to swell the sum of public wealth; the public has the same opportunities of purchasing, if it is a mercantile business; and production is not lessened if it is a manufacturing plant.

The reliance by the lower court on tile case of Red Line Transportation Co. v. Bachrach41 and finding that the stipulation is illegal and void seems misplaced. In the said Red Line case, the agreement therein sought to be enforced was virtually a division of territory between two operators, each company imposing upon itself an obligation not to operate in any territory covered by the routes of the other. Restraints of this type, among common carriers have always been covered by the general rule invalidating agreements in restraint of trade. 42

Neither are the other cases relied upon by the plaintiff-appellee applicable to the instant case. In Pampanga Bus Co., Inc. v. Enriquez,43the undertaking of the applicant therein not to apply for the lifting of restrictions imposed on his certificates of public convenience was not an ancillary or incidental agreement. The restraint was the principal objective. On the other hand, in Red Line Transportation Co., Inc. v. Gonzaga,44 the restraint there in question not to ask for extension of the line, or trips, or increase of equipment — was not an agreement between the parties but a condition imposed in the certificate of public convenience itself.

Upon the foregoing considerations, Our conclusion is that the stipulation prohibiting Villarama for a period of 10 years to "apply" for TPU service along the lines covered by the certificates of public convenience sold by him to Pantranco is valid and reasonable. Having arrived at this conclusion, and considering that the preponderance of the evidence have shown that Villa Rey Transit, Inc. is itself the alter ego of Villarama, We hold, as prayed for in Pantranco's third party complaint, that the said Corporation should, until the expiration of the 1-year period abovementioned, be enjoined from operating the line subject of the prohibition.

To avoid any misunderstanding, it is here to be emphasized that the 10-year prohibition upon Villarama is not against his application for, or purchase of, certificates of public convenience, but merely the operation of TPU along the lines covered by the certificates sold by him to Pantranco. Consequently, the sale between Fernando and the Corporation is valid, such that the rightful ownership of the disputed certificates still belongs to the plaintiff being the prior purchaser in good faith and for value thereof. In view of the ancient rule of caveat emptor prevailing in this jurisdiction, what was acquired by Ferrer in the sheriff's sale was only the right which Fernando, judgment debtor, had in the certificates of public convenience on the day of the sale.45

Accordingly, by the "Notice of Levy Upon Personalty" the Commissioner of Public Service was notified that "by virtue of an Order of Execution issued by the Court of First Instance of Pangasinan, the rights, interests, or participation which the defendant, VALENTIN A. FERNANDO — in the above entitled case may have in the following realty/personalty is attached or levied upon, to wit: The rights, interests and participation on the Certificates of Public Convenience issued to Valentin A. Fernando, in Cases Nos. 59494, etc. ... Lines — Manila to Lingayen, Dagupan, etc. vice versa." Such notice of levy only shows that Ferrer, the vendee at auction of said certificates, merely stepped into the shoes of the judgment debtor. Of the same principle is the provision of Article 1544 of the Civil Code, that "If the same thing should have been sold to different vendees, the ownership shall be transferred to the

Page | 18

person who may have first taken possession thereof in good faith, if it should be movable property."

There is no merit in Pantranco and Ferrer's theory that the sale of the certificates of public convenience in question, between the Corporation and Fernando, was not consummated, it being only a conditional sale subject to the suspensive condition of its approval by the Public Service Commission. While section 20(g) of the Public Service Act provides that "subject to established limitation and exceptions and saving provisions to the contrary, it shall be unlawful for any public service or for the owner, lessee or operator thereof, without the approval and authorization of the Commission previously had ... to sell, alienate, mortgage, encumber or lease its property, franchise, certificates, privileges, or rights or any part thereof, ...," the same section also provides:

... Provided, however, That nothing herein contained shall be construed to prevent the transaction from being negotiated or completed before its approval or to prevent the sale, alienation, or lease by any public service of any of its property in the ordinary course of its business.

It is clear, therefore, that the requisite approval of the PSC is not a condition precedent for the validity and consummation of the sale.

Anent the question of damages allegedly suffered by the parties, each of the appellants has its or his own version to allege.

Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of defendants (Pantranco and Ferrer) in acquiring the certificates of public convenience in question, despite constructive and actual knowledge on their part of a prior sale executed by Fernando in favor of the said corporation, which necessitated the latter to file the action to annul the sheriff's sale to Ferrer and the subsequent transfer to Pantranco, it is entitled to collect actual and compensatory damages, and attorney's fees in the amount of P25,000.00. The evidence on record, however, does not clearly show that said defendants acted in bad faith in their acquisition of the certificates in question. They believed that because the bill of sale has yet to be approved by the Public Service Commission, the transaction was not a consummated sale, and, therefore, the title to or ownership of the certificates was still with the seller. The award by the lower court of attorney's fees of P5,000.00 in favor of Villa Rey Transit, Inc. is, therefore, without basis and should be set aside.

Eusebio Ferrer's charge that by reason of the filing of the action to annul the sheriff's sale, he had suffered and should be awarded moral, exemplary damages and attorney's fees, cannot be entertained, in view of the conclusion herein reached that the sale by Fernando to the Corporation was valid.

Pantranco, on the other hand, justifies its claim for damages with the allegation that when it purchased ViIlarama's business for P350,000.00, it intended to build up the traffic along the lines covered by the certificates but it was rot afforded an opportunity to do so since barely three months had elapsed when the contract was violated by

Villarama operating along the same lines in the name of Villa Rey Transit, Inc. It is further claimed by Pantranco that the underhanded manner in which Villarama violated the contract is pertinent in establishing punitive or moral damages. Its contention as to the proper measure of damages is that it should be the purchase price of P350,000.00 that it paid to Villarama. While We are fully in accord with Pantranco's claim of entitlement to damages it suffered as a result of Villarama's breach of his contract with it, the record does not sufficiently supply the necessary evidentiary materials upon which to base the award and there is need for further proceedings in the lower court to ascertain the proper amount.

PREMISES CONSIDERED, the judgment appealed from is hereby modified as follows:

1. The sale of the two certificates of public convenience in question by Valentin Fernando to Villa Rey Transit, Inc. is declared preferred over that made by the Sheriff at public auction of the aforesaid certificate of public convenience in favor of Eusebio Ferrer;

2. Reversed, insofar as it dismisses the third-party complaint filed by Pangasinan Transportation Co. against Jose M. Villarama, holding that Villa Rey Transit, Inc. is an entity distinct and separate from the personality of Jose M. Villarama, and insofar as it awards the sum of P5,000.00 as attorney's fees in favor of Villa Rey Transit, Inc.;

3. The case is remanded to the trial court for the reception of evidence in consonance with the above findings as regards the amount of damages suffered by Pantranco; and

4. On equitable considerations, without costs. So ordered.

Concepcion, C. J., Reyes, J.B.L., Dizon, Makalintal, Castro and Fernando, JJ., concur.Sanchez and Capistrano, JJ., took no part.Zaldivar, J., is on leave.

G.R. No. 129459 September 29, 1998

SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner, vs.COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT CORP., respondents.

 

PANGANIBAN, J.:

Page | 19

May corporate treasurer, by herself and without any authorization from he board of directors, validly sell a parcel of land owned by the corporation?. May the veil of corporate fiction be pierced on the mere ground that almost all of the shares of stock of the corporation are owned by said treasurer and her husband?

The Case

These questions are answered in the negative by this Court in resolving the Petition for Review on Certioraribefore us, assailing the March 18, 1997 Decision 1 of the Court of Appeals 2 in CA GR CV No. 46801 which, in turn, modified the July 18, 1994 Decision of the Regional Trial Court of Makati, Metro Manila, Branch 63 3 in Civil Case No. 89-3511. The RTC dismissed both the Complaint and the Counterclaim filed by the parties. On the other hand, the Court of Appeals ruled:

WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH MODIFICATION ordering defendant-appellee Nenita Lee Gruenberg to REFUND or return to plaintiff-appellant the downpayment of P100,000.00 which she received from plaintiff-appellant. There is no pronouncement as to costs. 4

The petition also challenges the June 10, 1997 CA Resolution denying reconsideration. 5

The Facts

The facts as found by the Court of Appeals are as follows:

Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.'s amended complaint alleged that on 14 February 1989, plaintiff-appellant entered into an agreement with defendant-appellee Motorich Sales Corporation for the transfer to it of a parcel of land identified as Lot 30, Block 1 of the Acropolis Greens Subdivision located in the District of Murphy, Quezon City. Metro Manila, containing an area of Four Hundred Fourteen (414) square meters, covered by TCT No. (362909) 2876: that as stipulated in the Agreement of 14 February 1989, plaintiff-appellant paid the downpayment in the sum of One Hundred Thousand (P100,000.00) Pesos, the balance to be paid on or before March 2, 1989; that on March 1, 1989. Mr. Andres T. Co, president of plaintiff-appellant corporation, wrote a letter to defendant-appellee Motorich Sales Corporation requesting for a computation of the balance to be paid: that said letter was coursed through defendant-appellee's broker. Linda Aduca, who wrote the computation of the balance: that on March 2, 1989, plaintiff-appellant was ready with the amount corresponding to the balance, covered by Metrobank Cashier's Check No. 004223, payable to defendant-appellee Motorich Sales Corporation; that plaintiff-appellant and defendant-appellee Motorich Sales Corporation were supposed to meet in the office of

plaintiff-appellant but defendant-appellee's treasurer, Nenita Lee Gruenberg, did not appear; that defendant-appellee Motorich Sales Corporation despite repeated demands and in utter disregard of its commitments had refused to execute the Transfer of Rights/Deed of Assignment which is necessary to transfer the certificate of title; that defendant ACL Development Corp. is impleaded as a necessary party since Transfer Certificate of Title No. (362909) 2876 is still in the name of said defendant; while defendant JNM Realty & Development Corp. is likewise impleaded as a necessary party in view of the fact that it is the transferor of right in favor of defendant-appellee Motorich Sales Corporation: that on April 6, 1989, defendant ACL Development Corporation and Motorich Sales Corporation entered into a Deed of Absolute Sale whereby the former transferred to the latter the subject property; that by reason of said transfer, the Registry of Deeds of Quezon City issued a new title in the name of Motorich Sales Corporation, represented by defendant-appellee Nenita Lee Gruenberg and Reynaldo L. Gruenberg, under Transfer Certificate of Title No. 3571; that as a result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporation's bad faith in refusing to execute a formal Transfer of Rights/Deed of Assignment, plaintiff-appellant suffered moral and nominal damages which may be assessed against defendants-appellees in the sum of Five Hundred Thousand (500,000.00) Pesos; that as a result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporation's unjustified and unwarranted failure to execute the required Transfer of Rights/Deed of Assignment or formal deed of sale in favor of plaintiff-appellant, defendants-appellees should be assessed exemplary damages in the sum of One Hundred Thousand (P100,000.00) Pesos; that by reason of defendants-appellees' bad faith in refusing to execute a Transfer of Rights/Deed of Assignment in favor of plaintiff-appellant, the latter lost the opportunity to construct a residential building in the sum of One Hundred Thousand (P100,000.00) Pesos; and that as a consequence of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporation's bad faith in refusing to execute a deed of sale in favor of plaintiff-appellant, it has been constrained to obtain the services of counsel at an agreed fee of One Hundred Thousand (P100,000.00) Pesos plus appearance fee for every appearance in court hearings.

In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee Gruenberg interposed as affirmative defense that the President and Chairman of Motorich did not sign the agreement adverted to in par. 3 of the amended complaint; that Mrs. Gruenberg's signature on the agreement (ref: par. 3 of Amended Complaint) is inadequate to bind Motorich. The other signature, that of Mr. Reynaldo Gruenberg, President and Chairman of Motorich, is required: that plaintiff knew this from the very beginning as it was presented a copy of the Transfer of Rights (Annex B of amended complaint) at the time the Agreement (Annex B of amended

Page | 20

complaint) was signed; that plaintiff-appellant itself drafted the Agreement and insisted that Mrs. Gruenberg accept the P100,000.00 as earnest money; that granting, without admitting, the enforceability of the agreement, plaintiff-appellant nonetheless failed to pay in legal tender within the stipulated period (up to March 2, 1989); that it was the understanding between Mrs. Gruenberg and plaintiff-appellant that the Transfer of Rights/Deed of Assignment will be signed only upon receipt of cash payment; thus they agreed that if the payment be in check, they will meet at a bank designated by plaintiff-appellant where they will encash the check and sign the Transfer of Rights/Deed. However, plaintiff-appellant informed Mrs. Gruenberg of the alleged availability of the check, by phone, only after banking hours.

On the basis of the evidence, the court a quo rendered the judgment appealed from[,] dismissing plaintiff-appellant's complaint, ruling that:

The issue to be resolved is: whether plaintiff had the right to compel defendants to execute a deed of absolute sale in accordance with the agreement of February 14, 1989: and if so, whether plaintiff is entitled to damage.

As to the first question, there is no evidence to show that defendant Nenita Lee Gruenberg was indeed authorized by defendant corporation. Motorich Sales, to dispose of that property covered by T.C.T. No. (362909) 2876. Since the property is clearly owned by the corporation. Motorich Sales, then its disposition should be governed by the requirement laid down in Sec. 40. of the Corporation Code of the Philippines, to wit:

Sec. 40, Sale or other disposition of assets. Subject to the provisions of existing laws on illegal combination and monopolies, a corporation may by a majority vote of its board of directors . . . sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets including its goodwill . . . when authorized by the vote of the stockholders representing at least two third

(2/3) of the outstanding capital stock . . .

No such vote was obtained by defendant Nenita Lee Gruenberg for that proposed sale[;] neither was there evidence to show that the supposed transaction was ratified by the corporation. Plaintiff should have been on the look out under these circumstances. More so, plaintiff himself [owns] several corporations (tsn dated August 16, 1993, p. 3) which makes him knowledgeable on corporation matters.

Regarding the question of damages, the Court likewise, does not find substantial evidence to hold defendant Nenita Lee Gruenberg liable considering that she did not in anyway misrepresent herself to be authorized by the corporation to sell the property to plaintiff (tsn dated September 27, 1991, p. 8).

In the light of the foregoing, the Court hereby renders judgment DISMISSING the complaint at instance for lack of merit.

"Defendants" counterclaim is also DISMISSED for lack of basis. (Decision, pp. 7-8; Rollo, pp. 34-35)

For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:

AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

This Agreement, made and entered into by and between:

MOTORICH SALES CORPORATION, a corporation duly organized and existing under and by virtue of Philippine Laws, with principal office address at 5510 South Super Hi-way cor. Balderama St., Pio del Pilar. Makati, Metro Manila, represented herein by its Treasurer, NENITA LEE GRUENBERG, hereinafter referred to as the TRANSFEROR;

— and —

Page | 21

SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation duly organized and existing under and by virtue of the laws of the Philippines, with principal office address at Sumulong Highway, Barrio Mambungan, Antipolo, Rizal, represented herein by its President, ANDRES T. CO, hereinafter referred to as the TRANSFEREE.

WITNESSETH, That:

WHEREAS, the TRANSFEROR is the owner of a parcel of land identified as Lot 30 Block 1 of the ACROPOLIS GREENS SUBDIVISION located at the District of Murphy, Quezon City, Metro Manila, containing an area of FOUR HUNDRED FOURTEEN (414) SQUARE METERS, covered by a TRANSFER OF RIGHTS between JNM Realty & Dev. Corp. as the Transferor and Motorich Sales Corp. as the Transferee;

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties have agreed as follows:

1. That the purchase price shall be at FIVE THOUSAND TWO HUNDRED PESOS (P5,200.00) per square meter; subject to the following terms:

a. Earnest money amounting to ONE HUNDRED THOUSAND PESOS (P100,000.00), will be paid upon the execution of this agreement and shall form part of the total purchase price;

b. Balance shall be payable on or before March 2, 1989;

2. That the monthly amortization for the month of February 1989 shall be for the account of the Transferor; and that the monthly amortization starting March 21, 1989 shall be for the account of the Transferee;

The transferor warrants that he [sic] is the lawful owner of the above-described property and that there [are] no existing liens and/or encumbrances of whatsoever nature;

In case of failure by the Transferee to pay the balance on the date specified on 1, (b), the earnest money shall be forfeited in favor of the Transferor.

That upon full payment of the balance, the TRANSFEROR agrees to execute a TRANSFER OF RIGHTS/DEED OF ASSIGNMENT in favor of the TRANSFEREE.

IN WITNESS WHEREOF, the parties have hereunto set their hands this 14th day of February, 1989 at Greenhills, San Juan, Metro Manila, Philippines.

MOTORICH SALES CORPORATION SAN JUAN STRUCTURAL & STEEL FABRICATORS

TRANSFEROR TRANSFEREE

[SGD.] [SGD.]

By. NENITA LEE GRUENBERG By: ANDRES T. CO

Treasurer President

Signed In the presence of:

[SGD.] [SGD.]

————————————— ——————————— 6

In its recourse before the Court of Appeals, petitioner insisted:

1. Appellant is entitled to compel the appellees to execute a Deed of Absolute Sale in accordance with the Agreement of February 14, 1989,

2. Plaintiff is entitled to damages. 7

As stated earlier, the Court of Appeals debunked petitioner's arguments and affirmed the Decision of the RTC with the modification that Respondent Nenita Lee Gruenberg was ordered to refund P100,000 to petitioner, the amount remitted as "downpayment" or "earnest money." Hence, this petition before us. 8

The Issues

Before this Court, petitioner raises the following issues:

Page | 22

I. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in the instant case

II. Whether or not the appellate court may consider matters which the parties failed to raise in the lower court

III. Whether or not there is a valid and enforceable contract between the petitioner and the respondent corporation

IV. Whether or not the Court of Appeals erred in holding that there is a valid correction/substitution of answer in the transcript of stenographic note[s].

V. Whether or not respondents are liable for damages and attorney's fees 9

The Court synthesized the foregoing and will thus discuss them seriatim as follows:

1. Was there a valid contract of sale between petitioner and Motorich?

2. May the doctrine of piercing the veil of corporate fiction be applied to Motorich?

3. Is the alleged alteration of Gruenberg's testimony as recorded in the transcript of stenographic notes material to the disposition of this case?

4. Are respondents liable for damages and attorney's fees?

The Court's Ruling

The petition is devoid of merit.

First Issue: Validity of Agreement

Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14, 1989, it entered through its president, Andres Co, into the disputed Agreement with Respondent Motorich Sales Corporation, which was in turn allegedly represented by its treasurer, Nenita Lee Gruenberg. Petitioner insists that "[w]hen Gruenberg and Co

affixed their signatures on the contract they both consented to be bound by the terms thereof." Ergo, petitioner contends that the contract is binding on the two corporations. We do not agree.

True, Gruenberg and Co signed on February 14, 1989, the Agreement, according to which a lot owned by Motorich Sales Corporation was purportedly sold. Such contract, however, cannot bind Motorich, because it never authorized or ratified such sale.

A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the corporation is not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the corporation's board of directors. 10 Section 23 of BP 68, otherwise known as the Corporation Code of the Philippines, provides;

Sec. 23. The Board of Directors or Trustees. — Unless otherwise provided in this Code, the corporate powers of all corporations formed under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are elected and qualified.

Indubitably, a corporation may act only through its board of directors or, when authorized either by its bylaws or by its board resolution, through its officers or agents in the normal course of business. The general principles of agency govern the relation between the corporation and its officers or agents, subject to the articles of incorporation, bylaws, or relevant provisions of law. 11 Thus, this Court has held that "a corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that the authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the officer or agent to believe that it has conferred." 12

Furthermore, the Court has also recognized the rule that "persons dealing with an assumed agent, whether the assumed agency be a general or special one bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil. 19)." 13 Unless duly authorized, a treasurer, whose powers are limited, cannot bind the corporation in a sale of its assets. 14

In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita Gruenberg, its treasurer, to sell the subject parcel of land. 15 Consequently,

Page | 23

petitioner had the burden of proving that Nenita Gruenberg was in fact authorized to represent and bind Motorich in the transaction. Petitioner failed to discharge this burden. Its offer of evidence before the trial court contained no proof of such authority. 16 It has not shown any provision of said respondent's articles of incorporation, bylaws or board resolution to prove that Nenita Gruenberg possessed such power.

That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the responsibility of ascertaining the extent of her authority to represent the corporation. Petitioner cannot assume that she, by virtue of her position, was authorized to sell the property of the corporation. Selling is obviously foreign to a corporate treasurer's function, which generally has been described as "to receive and keep the funds of the corporation, and to disburse them in accordance with the authority given him by the board or the properly authorized officers." 17

Neither was such real estate sale shown to be a normal business activity of Motorich. The primary purpose of Motorich is marketing, distribution, export and import in relation to a general merchandising business. 18 Unmistakably, its treasurer is not cloaked with actual or apparent authority to buy or sell real property, an activity which falls way beyond the scope of her general authority.

Art. 1874 and 1878 of the Civil Code of the Philippines provides:

Art. 1874. When a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing: otherwise, the sale shall be void.

Art. 1878. Special powers of attorney are necessary in the following case:

xxx xxx xxx

(5) To enter any contract by which the ownership of an immovable is transmitted or acquired either gratuitously or for a valuable consideration;

xxx xxx xxx.

Petitioner further contends that Respondent Motorich has ratified said contract of sale because of its "acceptance of benefits," as evidenced by the receipt issued by Respondent Gruenberg. 19 Petitioner is clutching at straws.

As a general rule, the acts of corporate officers within the scope of their authority are binding on the corporation. But when these officers exceed their authority, their actions "cannot bind the corporation, unless it has ratified such acts or is estopped from disclaiming them." 20

In this case, there is a clear absence of proof that Motorich ever authorized Nenita Gruenberg, or made it appear to any third person that she had the authority, to sell its land or to receive the earnest money. Neither was there any proof that Motorich ratified, expressly or impliedly, the contract. Petitioner rests its argument on the receipt which, however, does not prove the fact of ratification. The document is a hand-written one, not a corporate receipt, and it bears only Nenita Gruenberg's signature. Certainly, this document alone does not prove that her acts were authorized or ratified by Motorich.

Art. 1318 of the Civil Code lists the requisites of a valid and perfected contract: "(1) consent of the contracting parties; (2) object certain which is the subject matter of the contract; (3) cause of the obligation which is established." As found by the trial court 21 and affirmed by the Court of Appeals, 22 there is no evidence that Gruenberg was authorized to enter into the contract of sale, or that the said contract was ratified by Motorich. This factual finding of the two courts is binding on this Court. 23 As the consent of the seller was not obtained, no contract to bind the obligor was perfected. Therefore, there can be no valid contract of sale between petitioner and Motorich.

Because Motorich had never given a written authorization to Respondent Gruenberg to sell its parcel of land, we hold that the February 14, 1989 Agreement entered into by the latter with petitioner is void under Article 1874 of the Civil Code. Being inexistent and void from the beginning, said contract cannot be ratified. 24

Second Issue:Piercing the Corporate Veil Not Justified

Petitioner also argues that the veil of corporate fiction of Motorich should be pierced, because the latter is a close corporation. Since "Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all or almost all or 99.866% to be accurate, of the subscribed capital stock" 25 of Motorich, petitioner argues that Gruenberg needed no authorization from the board to enter into the subject contract. 26 It adds that, being solely owned by the Spouses Gruenberg, the company can treated as a close corporation which can be bound by the acts of its principal stockholder who needs no specific authority. The Court is not persuaded.

First, petitioner itself concedes having raised the issue belatedly, 27 not having done so during the trial, but only when it filed its sur-rejoinder before the Court of Appeals. 28 Thus, this Court cannot entertain said issue at this late stage of the proceedings. It is well-settled the points of law, theories and arguments not brought to the attention of the trial court need not be, and ordinarily will not be, considered by a reviewing court, as they cannot be raised for the first time on appeal. 29Allowing petitioner to change horses in midstream, as it were, is to run roughshod over the basic principles of fair play, justice and due process.

Second, even if the above mentioned argument were to be addressed at this time, the Court still finds no reason to uphold it. True, one of the advantages of a corporate form of business organization is the limitation of an investor's liability to the amount of the investment. 30 This feature flows from the legal theory that a corporate entity is

Page | 24

separate and distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may be used only for legitimate purposes. 31 On equitable considerations, the veil can be disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another corporation. 32

Thus, the Court has consistently ruled that "[w]hen the fiction is used as a means of perpetrating a fraud or an illegal act or as vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals."33

We stress that the corporate fiction should be set aside when it becomes a shield against liability for fraud, illegality or inequity committed on third persons. The question of piercing the veil of corporate fiction is essentially, then, a matter of proof. In the present case, however, the Court finds no reason to pierce the corporate veil of Respondent Motorich. Petitioner utterly failed to establish that said corporation was formed, or that it is operated, for the purpose of shielding any alleged fraudulent or illegal activities of its officers or stockholders; or that the said veil was used to conceal fraud, illegality or inequity at the expense of third persons like petitioner.

Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the Corporation Code defines a close corporation as follows:

Sec. 96. Definition and Applicability of Title. — A close corporation, within the meaning of this Code, is one whose articles of incorporation provide that: (1) All of the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall be deemed not a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. . . . .

The articles of incorporation 34 of Motorich Sales Corporation does not contain any provision stating that (1) the number of stockholders shall not exceed 20, or (2) a preemption of shares is restricted in favor of any stockholder or of the corporation, or (3) listing its stocks in any stock exchange or making a public offering of such stocks is prohibited. From its articles, it is clear that Respondent Motorich is not a close corporation. 35 Motorich does not become one either, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed capital stock. The "[m]ere ownership by a single stockholder or by another corporation of all or capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate

personalities." 36 So, too, a narrow distribution of ownership does not, by itself, make a close corporation.

Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals 37 wherein the Court ruled that ". . . petitioner corporation is classified as a close corporation and, consequently, a board resolution authorizing the sale or mortgage of the subject property is not necessary to bind the corporation for the action of its president." 38 But the factual milieu in Dulay is not on all fours with the present case. In Dulay, the sale of real property was contracted by the president of a close corporation with the knowledge and acquiescence of its board of directors. 39 In the present case, Motorich is not a close corporation, as previously discussed, and the agreement was entered into by the corporate treasurer without the knowledge of the board of directors.

The Court is not unaware that there are exceptional cases where "an action by a director, who singly is the controlling stockholder, may be considered as a binding corporate act and a board action as nothing more than a mere formality." 40 The present case, however, is not one of them.

As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own "almost 99.866%" of Respondent Motorich.41 Since Nenita is not the sole controlling stockholder of Motorich, the aforementioned exception does not apply. Grantingarguendo that the corporate veil of Motorich is to be disregarded, the subject parcel of land would then be treated as conjugal property of Spouses Gruenberg, because the same was acquired during their marriage. There being no indication that said spouses, who appear to have been married before the effectivity of the Family Code, have agreed to a different property regime, their property relations would be governed by conjugal partnership of gains. 42 As a consequence, Nenita Gruenberg could not have effected a sale of the subject lot because "[t]here is no co-ownership between the spouses in the properties of the conjugal partnership of gains. Hence, neither spouse can alienate in favor of another his or interest in the partnership or in any property belonging to it; neither spouse can ask for a partition of the properties before the partnership has been legally dissolved." 43

Assuming further, for the sake of argument, that the spouses' property regime is the absolute community of property, the sale would still be invalid. Under this regime, "alienation of community property must have the written consent of the other spouse or he authority of the court without which the disposition or encumbrance is void." 44 Both requirements are manifestly absent in the instant case.

Third Issue: Challenged Portion of TSN Immaterial

Petitioner calls our attention to the following excerpt of the transcript of stenographic notes (TSN):

Q Did you ever represent to Mr. Co that you were authorized by the corporation to sell the property?

Page | 25

A Yes, sir. 45

Petitioner claims that the answer "Yes" was crossed out, and, in its place was written a "No" with an initial scribbled above it. 46 This, however, is insufficient to prove that Nenita Gruenberg was authorized to represent Respondent Motorich in the sale of its immovable property. Said excerpt be understood in the context of her whole testimony. During her cross-examination. Respondent Gruenberg testified:

Q So, you signed in your capacity as the treasurer?

[A] Yes, sir.

Q Even then you kn[e]w all along that you [were] not authorized?

A Yes, sir.

Q You stated on direct examination that you did not represent that you were authorized to sell the property?

A Yes, sir.

Q But you also did not say that you were not authorized to sell the property, you did not tell that to Mr. Co, is that correct?

A That was not asked of me.

Q Yes, just answer it.

A I just told them that I was the treasurer of the corporation and it [was] also the president who [was] also authorized to sign on behalf of the corporation.

Q You did not say that you were not authorized nor did you say that you were authorized?

A Mr. Co was very interested to purchase the property and he offered to put up a P100,000.00 earnest money at that time. That was our first meeting. 47

Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell its property. On the other hand, her testimony demonstrates that the president of Petitioner Corporation, in his great desire to buy the property, threw caution to the wind by offering and paying the earnest money without first verifying Gruenberg's authority to sell the lot.

Fourth Issue:Damages and Attorney's Fees

Finally, petitioner prays for damages and attorney's fees, alleging that "[i]n an utter display of malice and bad faith, respondents attempted and succeeded in impressing on the trial court and [the] Court of Appeals that Gruenberg did not represent herself as authorized by Respondent Motorich despite the receipt issued by the former specifically indicating that she was signing on behalf of Motorich Sales Corporation. Respondent Motorich likewise acted in bad faith when it claimed it did not authorize Respondent Gruenberg and that the contract [was] not binding, [insofar] as it [was] concerned, despite receipt and enjoyment of the proceeds of Gruenberg's act." 48Assuming that Respondent Motorich was not a party to the alleged fraud, petitioner maintains that Respondent Gruenberg should be held liable because she "acted fraudulently and in bad faith [in] representing herself as duly authorized by [R]espondent [C]orporation." 49

As already stated, we sustain the findings of both the trial and the appellate courts that the foregoing allegations lack factual bases. Hence, an award of damages or attorney's fees cannot be justified. The amount paid as "earnest money" was not proven to have redounded to the benefit of Respondent Motorich. Petitioner claims that said amount was deposited to the account of Respondent Motorich, because "it was deposited with the account of Aren Commercial c/o Motorich Sales Corporation." 50 Respondent Gruenberg, however, disputes the allegations of petitioner. She testified as follows:

Q You voluntarily accepted the P100,000.00, as a matter of fact, that was encashed, the check was encashed.

A Yes. sir, the check was paid in my name and I deposit[ed] it.

Q In your account?

A Yes, sir. 51

In any event, Gruenberg offered to return the amount to petitioner ". . . since the sale did not push through." 52

Moreover, we note that Andres Co is not a neophyte in the world of corporate business. He has been the president of Petitioner Corporation for more than ten years

Page | 26

and has also served as chief executive of two other corporate entities. 53 Co cannot feign ignorance of the scope of the authority of a corporate treasurer such as Gruenberg. Neither can he be oblivious to his duty to ascertain the scope of Gruenberg's authorization to enter into a contract to sell a parcel of land belonging to Motorich.

Indeed, petitioner's claim of fraud and bad faith is unsubstantiated and fails to persuade the Court. Indubitably, petitioner appears to be the victim of its own officer's negligence in entering into a contract with and paying an unauthorized officer of another corporation.

As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be ordered to return to petitioner the amount she received as earnest money, as "no one shall enrich himself at the expense of another." 54 a principle embodied in Article 2154 of Civil Code. 55 Although there was no binding relation between them, petitioner paid Gruenberg on the mistaken belief that she had the authority to sell the property of Motorich. 56 Article 2155 of Civil Code provides that "[p]ayment by reason of a mistake in the contruction or application of a difficult question of law may come within the scope of the preceding article."

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.

SO ORDERED.

Davide, Jr., Bellosillo, Vitug and Quisumbing, JJ., concur.

G.R. No. 167530               March 13, 2013

PHILIPPINE NATIONAL BANK, Petitioner, vs.HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

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

G.R. No. 167561

ASSET PRIVATIZATION TRUST, Petitioner, vs.HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

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

G.R. No. 167603

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, vs.HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

D E C I S I O N

LEONARDO-DE CASTRO, J.:

These petitions for review on certiorari1 assail the Decision2 dated November 30, 2004 and the Resolution3 dated March 22, 2005 of the Court of Appeals in CA-G.R. CV No. 57553. The said Decision affirmed the Decision4 dated November 6, 1995 of the Regional Trial Court (RTC) of Makati City, Branch 62, granting a judgment award ofP8,370,934.74, plus legal interest, in favor of respondent Hydro Resources Contractors Corporation (HRCC) with the modification that the Privatization and Management Office (PMO), successor of petitioner Asset Privatization Trust (APT),5 has been held solidarily liable with Nonoc Mining and Industrial Corporation (NMIC)6 and petitioners Philippine National Bank (PNB) and Development Bank of the Philippines (DBP), while the Resolution denied reconsideration separately prayed for by PNB, DBP, and APT.

Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the properties of Marinduque Mining and Industrial Corporation (MMIC). As a result of the foreclosure, DBP and PNB acquired substantially all the assets of MMIC and resumed the business operations of the defunct MMIC by organizing NMIC.7 DBP and PNB owned 57% and 43% of the shares of NMIC, respectively, except for five qualifying shares.8As of September 1984, the members of the Board of Directors of NMIC, namely, Jose Tengco, Jr., Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada, were either from DBP or PNB.9

Subsequently, NMIC engaged the services of Hercon, Inc., for NMIC’s Mine Stripping and Road Construction Program in 1985 for a total contract price of P35,770,120. After computing the payments already made by NMIC under the program and crediting the NMIC’s receivables from

Hercon, Inc., the latter found that NMIC still has an unpaid balance of P8,370,934.74.10 Hercon, Inc. made several demands on NMIC, including a letter of final demand dated August 12, 1986, and when these were not heeded, a complaint for sum of money was filed in the RTC of Makati, Branch 136 seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the amount owing Hercon, Inc.11 The case was docketed as Civil Case No. 15375.

Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This prompted the amendment of the complaint to substitute HRCC for Hercon, Inc.12

Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50 creating the APT for the expeditious disposition and privatization of certain government corporations and/or the assets thereof. Pursuant to the said

Page | 27

Proclamation, on February 27, 1987, DBP and PNB executed their respective deeds of transfer in favor of the National Government assigning, transferring and conveying certain assets and liabilities, including their respective stakes in NMIC.13 In turn and on even date, the National Government transferred the said assets and liabilities to the APT as trustee under a Trust Agreement.14 Thus, the complaint was amended for the second time to implead and include the APT as a defendant.

In its answer,15 NMIC claimed that HRCC had no cause of action. It also asserted that its contract with HRCC was entered into by its then President without any authority. Moreover, the said contract allegedly failed to comply with laws, rules and regulations concerning government contracts. NMIC further claimed that the contract amount was manifestly excessive and grossly disadvantageous to the government. NMIC made counterclaims for the amounts already paid to Hercon, Inc. and attorney’s fees, as well as payment for equipment rental for four trucks, replacement of parts and other services, and damage to some of NMIC’s properties.16

For its part, DBP’s answer17 raised the defense that HRCC had no cause of action against it because DBP was not privy to HRCC’s contract with NMIC. Moreover, NMIC’s juridical personality is separate from that of DBP. DBP further interposed a counterclaim for attorney’s fees.18

PNB’s answer19 also invoked lack of cause of action against it. It also raised estoppel on HRCC’s part and laches as defenses, claiming that the inclusion of PNB in the complaint was the first time a demand for payment was made on it by HRCC. PNB also invoked the separate juridical personality of NMIC and made counterclaims for moral damages and attorney’s fees.20

APT set up the following defenses in its answer21: lack of cause of action against it, lack of privity between Hercon, Inc. and APT, and the National Government’s preferred lien over the assets of NMIC.22

After trial, the RTC of Makati rendered a Decision dated November 6, 1995 in favor of HRCC. It pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with NMIC:

On the issue of whether or not there is sufficient ground to pierce the veil of corporate fiction, this Court likewise finds for the plaintiff.

From the documentary evidence adduced by the plaintiff, some of which were even adopted by defendants and DBP and PNB as their own evidence (Exhibits "I", "I-1", "I-2", "I-3", "I-4", "I-5", "I5-A", "I-5-B", "I-5-C", "I-5-D" and submarkings, inclusive), it had been established that except for five (5) qualifying shares, NMIC is owned by defendants DBP and PNB, with the former owning 57% thereof, and the latter 43%. As of September 24, 1984, all the members of NMIC’s Board of Directors, namely, Messrs. Jose Tengco, Jr., Rolando M. Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada are either from DBP or PNB (Exhibits "I-5", "I-5-C", "I-5-D").

The business of NMIC was then also being conducted and controlled by both DBP and PNB. In fact, it was Rolando M. Zosa, then Governor of DBP, who was signing and entering into contracts with third persons, on behalf of NMIC.

In this jurisdiction, it is well-settled that "where it appears that the business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third persons, disregard legal fiction that two (2) corporations are distinct entities, and treat them as identical." (Phil. Veterans Investment Development Corp. vs. CA, 181 SCRA 669).

From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both DBP and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC for the latter’s unpaid obligations to plaintiff.23

Having found DBP and PNB solidarily liable with NMIC, the dispositive portion of the Decision of the trial court reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff HYDRO RESOURCES CONTRACTORS CORPORATION and against the defendants NONOC

MINING AND INDUSTRIAL CORPORATION, DEVELOPMENT BANK OF THE PHILIPPINES and PHILIPPINE NATIONAL BANK, ordering the aforenamed defendants, to pay the plaintiff jointly and severally, the sum ofP8,370,934.74 plus legal interest thereon from date of demand, and attorney’s fees equivalent to 25% of the judgment award.

The complaint against APT is hereby dismissed. However, APT, as trustee of NONOC MINING AND INDUSTRIAL CORPORATION is directed to ensure compliance with this Decision.24

DBP and PNB filed their respective appeals in the Court of Appeals. Both insisted that it was wrong for the RTC to pierce the veil of NMIC’s corporate personality and hold DBP and PNB solidarily liable with NMIC.25

The Court of Appeals rendered the Decision dated November 30, 2004, affirmed the piercing of the veil of the corporate personality of NMIC and held DBP, PNB, and APT solidarily liable with NMIC. In particular, the Court of Appeals made the following findings:

In the case before Us, it is indubitable that [NMIC] was owned by appellants DBP and PNB to the extent of 57% and 43% respectively; that said two (2) appellants are the only stockholders, with the qualifying stockholders of five (5) consisting of its own officers and included in its charter merely to comply with the requirement of the law as to number of incorporators; and that the directorates of DBP, PNB and [NMIC] are interlocked.

Page | 28

x x x x

We find it therefore correct for the lower court to have ruled that:

"From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both DBP and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC for the latter’s unpaid obligation to plaintiff."26(Citation omitted.)

The Court of Appeals then concluded that, "in keeping with the concept of justice and fair play," the corporate veil of NMIC should be pierced, ratiocinating:

For to treat NMIC as a separate legal entity from DBP and PNB for the purpose of securing beneficial contracts, and then using such separate entity to evade the payment of a just debt, would be the height of injustice and iniquity. Surely that could not have been the intendment of the law with respect to corporations. x x x.27

The dispositive portion of the Decision of the Court of Appeals reads:

WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED. The judgment in favor of appellee Hydro Resources Contractors Corporation in the amount of P8,370,934.74 with legal interest from date of demand is hereby AFFIRMED, but the dismissal of the case as against Assets Privatization Trust is REVERSED, and its successor the Privatization and Management Office is INCLUDED as one of those jointly and severally liable for such indebtedness. The award of attorney’s fees is DELETED.

All other claims and counter-claims are hereby DISMISSED.

Costs against appellants.28

The respective motions for reconsideration of DBP, PNB, and APT were denied.29

Hence, these consolidated petitions.30

All three petitioners assert that NMIC is a corporate entity with a juridical personality separate and distinct from both PNB and DBP. They insist that the majority ownership by DBP and PNB of NMIC is not a sufficient ground for disregarding the separate corporate personality of NMIC because NMIC was not a mere adjunct, business conduit or alter ego of DBP and PNB. According to them, the application of the doctrine of piercing the corporate veil is unwarranted as nothing in the records would show that the ownership and control of the shareholdings of NMIC by DBP and PNB were used to commit fraud, illegality or injustice. In the absence of evidence that the stock control by DBP and PNB over NMIC was used to commit some fraud or a wrong and that said control was the proximate cause of the injury sustained by HRCC, resort to the doctrine of "piercing the veil of corporate entity" is misplaced.31

DBP and PNB further argue that, assuming they may be held solidarily liable with NMIC to pay NMIC’s exclusive and separate corporate indebtedness to HRCC, such liability of the two banks was transferred to and assumed by the National Government through the APT, now the PMO, under the respective deeds of transfer both dated February 27, 1997 executed by DBP and PNB pursuant to Proclamation No. 50 dated December 8, 1986 and Administrative Order No. 14 dated February 3, 1987.32

For its part, the APT contends that, in the absence of an unqualified assumption by the National Government of all liabilities incurred by NMIC, the National Government through the APT could not be held liable for NMIC’s contractual liability. The APT asserts that HRCC had not sufficiently shown that the APT is the successor-in-interest of all the liabilities of NMIC, or of DBP and PNB as transferors, and that the adjudged liability is included among the liabilities assigned and transferred by DBP and PNB in favor of the National Government.33

HRCC counters that both the RTC and the CA correctly applied the doctrine of "piercing the veil of corporate fiction." It claims that NMIC was the alter ego of DBP and PNB which owned, conducted and controlled the business of NMIC as shown by the following circumstances: NMIC was owned by DBP and PNB, the officers of DBP and PNB were also the officers of NMIC, and DBP and PNB financed the operations of NMIC. HRCC further argues that a parent corporation may be held liable for the contracts or obligations of its subsidiary corporation where the latter is a mere agency, instrumentality or adjunct of the parent corporation.34

Moreover, HRCC asserts that the APT was properly held solidarily liable with DBP, PNB, and NMIC because the APT assumed the obligations of DBP and PNB as the successor-in-interest of the said banks with respect to the assets and liabilities of NMIC.35 As trustee of the Republic of the Philippines, the APT also assumed the responsibility of the Republic pursuant to the following provision of Section 2.02 of the respective deeds of transfer executed by DBP and PNB in favor of the Republic:

SECTION 2. TRANSFER OF BANK’S LIABILITIES

x x x x

2.02 With respect to the Bank’s liabilities which are contingent and those liabilities where the Bank’s creditors consent to the transfer thereof is not obtained, said liabilities shall remain in the books of the BANK with the GOVERNMENT funding the payment thereof.36

After a careful review of the case, this Court finds the petitions impressed with merit.

A corporation is an artificial entity created by operation of law. It possesses the right of succession and such powers, attributes, and properties expressly authorized by law or incident to its existence.37 It has a personality separate and distinct from that of its stockholders and from that of other corporations to which it may be connected.38 As a consequence of its status as a distinct legal entity and as a result of a conscious policy decision to promote capital formation,39 a corporation incurs its

Page | 29

own liabilities and is legally responsible for payment of its obligations.40 In other words, by virtue of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder.41 This protection from liability for shareholders is the principle of limited liability.42

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons.43

However, the rule is that a court should be careful in assessing the milieu where the doctrine of the corporate veil may be applied. Otherwise an injustice, although unintended, may result from its erroneous application.44 Thus, cutting through the corporate cover requires an approach characterized by due care and caution:

Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. x x x.45 (Emphases supplied; citations omitted.)

Sarona v. National Labor Relations Commission46 has defined the scope of application of the doctrine of piercing the corporate veil:

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. (Citation omitted.)

Here, HRCC has alleged from the inception of this case that DBP and PNB (and the APT as assignee of DBP and PNB) should be held solidarily liable for using NMIC as alter ego.47 The RTC sustained the allegation of HRCC and pierced the corporate veil of NMIC pursuant to the alter ego theory when it concluded that NMIC "is a mere adjunct, business conduit or alter ego of both DBP and PNB."48 The Court of Appeals upheld such conclusion of the trial court.49 In other words, both the trial and appellate courts relied on the alter ego theory when they disregarded the separate corporate personality of NMIC.

In this connection, case law lays down a three-pronged test to determine the application of the alter ego theory, which is also known as the instrumentality theory, namely:

(1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal right; and

(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.50 (Emphases omitted.)

The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely under the control and domination of the parent.51 It examines the parent corporation’s relationship with the subsidiary.52It inquires whether a subsidiary corporation is so organized and controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent corporation such that its separate existence as a distinct corporate entity will be ignored.53 It seeks to establish whether the subsidiary corporation has no autonomy and the parent corporation, though acting through the subsidiary in form and appearance, "is operating the business directly for itself."54

The second prong is the "fraud" test. This test requires that the parent corporation’s conduct in using the subsidiary corporation be unjust, fraudulent or wrongful.55 It examines the relationship of the plaintiff to the corporation.56 It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor.57 As such, it requires a showing of "an element of injustice or fundamental unfairness."58

The third prong is the "harm" test. This test requires the plaintiff to show that the defendant’s control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered.59 A causal connection between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the defendant’s exercise of control and improper use of the corporate form and, thereby, suffer damages.60

To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three elements: control of the corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the corporate veil.61

This Court finds that none of the tests has been satisfactorily met in this case.

In applying the alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that

Page | 30

operation.62 With respect to the control element, it refers not to paper or formal control by majority or even complete stock control but actual control which amounts to "such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal."63 In addition, the control must be shown to have been exercised at the time the acts complained of took place.64

Both the RTC and the Court of Appeals applied the alter ego theory and penetrated the corporate cover of NMIC based on two factors: (1) the ownership by DBP and PNB of effectively all the stocks of NMIC, and (2) the alleged interlocking directorates of DBP, PNB and NMIC.65 Unfortunately, the conclusion of the trial and appellate courts that the DBP and PNB fit the alter ego theory with respect to NMIC’s transaction with HRCC on the premise of complete stock ownership and interlocking directorates involved a quantum leap in logic and law exposing a gap in reason and fact.

While ownership by one corporation of all or a great majority of stocks of another corporation and their interlocking directorates may serve as indicia of control, by themselves and without more, however, these circumstances are insufficient to establish an alter ego relationship or connection between DBP and PNB on the one hand and NMIC on the other hand, that will justify the puncturing of the latter’s corporate cover. This Court has declared that "mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality."66 This Court has likewise ruled that the "existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations."67

True, the findings of fact of the Court of Appeals are conclusive and cannot be reviewed on appeal to this Court, provided they are borne out of the record or are based on substantial evidence.68 It is equally true that the question of whether one corporation is merely an alter ego of another is purely one of fact. So is the question of whether a corporation is a paper company, a sham or subterfuge or whether the requisite quantum of evidence has been adduced warranting the piercing of the veil of corporate personality.69 Nevertheless, it has been held in Sarona v. National Labor Relations Commission70 that this Court has the power to resolve a question of fact, such as whether a corporation is a mere alter ego of another entity or whether the corporate fiction was invoked for fraudulent or malevolent ends, if the findings in the assailed decision are either not supported by the evidence on record or based on a misapprehension of facts.

In this case, nothing in the records shows that the corporate finances, policies and practices of NMIC were dominated by DBP and PNB in such a way that NMIC could be considered to have no separate mind, will or existence of its own but a mere conduit for DBP and PNB. On the contrary, the evidence establishes that HRCC knew and acted on the knowledge that it was dealing with NMIC, not with NMIC’s stockholders. The letter proposal of Hercon, Inc., HRCC’s predecessor-in-interest, regarding the contract for NMIC’s mine stripping and road construction program was addressed to and accepted by NMIC.71 The various billing reports, progress reports,

statements of accounts and communications of Hercon, Inc./HRCC regarding NMIC’s mine stripping and road construction program in 1985 concerned NMIC and NMIC’s officers, without any indication of or reference to the control exercised by DBP and/or PNB over NMIC’s affairs, policies and practices.72

HRCC has presented nothing to show that DBP and PNB had a hand in the act complained of, the alleged undue disregard by NMIC of the demands of HRCC to satisfy the unpaid claims for services rendered by HRCC in connection with NMIC’s mine stripping and road construction program in 1985. On the contrary, the overall picture painted by the evidence offered by HRCC is one where HRCC was dealing with NMIC as a distinct juridical person acting through its own corporate officers.73

Moreover, the finding that the respective boards of directors of NMIC, DBP, and PNB were interlocking has no basis. HRCC’s Exhibit "I-5,"74 the initial General Information Sheet submitted by NMIC to the Securities and Exchange Commission, relied upon by the trial court and the Court of Appeals may have proven that DBP and PNB owned the stocks of NMIC to the extent of 57% and 43%, respectively. However, nothing in it supports a finding that NMIC, DBP, and PNB had interlocking directors as it only indicates that, of the five members of NMIC’s board of directors, four were nominees of either DBP or PNB and only one was a nominee of both DBP and PNB.75 Only two members of the board of directors of NMIC, Jose Tengco, Jr. and Rolando Zosa, were established to be members of the board of governors of DBP and none was proved to be a member of the board of directors of PNB.76 No director of NMIC was shown to be also sitting simultaneously in the board of governors/directors of both DBP and PNB.

In reaching its conclusion of an alter ego relationship between DBP and PNB on the one hand and NMIC on the other hand, the Court of Appeals invoked Sibagat Timber Corporation v. Garcia,77 which it described as "a case under a similar factual milieu."78 However, in Sibagat Timber Corporation, this Court took care to enumerate the circumstances which led to the piercing of the corporate veil of Sibagat Timber Corporation for being the alter ego of Del Rosario & Sons Logging Enterprises, Inc. Those circumstances were as follows: holding office in the same building, practical identity of the officers and directors of the two corporations and assumption of management and control of Sibagat Timber Corporation by the directors/officers of Del Rosario & Sons Logging Enterprises, Inc.

Here, DBP and PNB maintain an address different from that of NMIC.79 As already discussed, there was insufficient proof of interlocking directorates. There was not even an allegation of similarity of corporate officers. Instead of evidence that DBP and PNB assumed and controlled the management of NMIC, HRCC’s evidence shows that NMIC operated as a distinct entity endowed with its own legal personality. Thus, what obtains in this case is a factual backdrop different from, not similar to, Sibagat Timber Corporation.

In relation to the second element, to disregard the separate juridical personality of a corporation, the wrongdoing or unjust act in contravention of a plaintiff’s legal rights must be clearly and convincingly established; it cannot be presumed. Without a

Page | 31

demonstration that any of the evils sought to be prevented by the doctrine is present, it does not apply.80

In this case, the Court of Appeals declared:

We are not saying that PNB and DBP are guilty of fraud in forming NMIC, nor are we implying that NMIC was used to conceal fraud. x x x.81

Such a declaration clearly negates the possibility that DBP and PNB exercised control over NMIC which DBP and PNB used "to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal rights." It is a recognition that, even assuming that DBP and PNB exercised control over NMIC, there is no evidence that the juridical personality of NMIC was used by DBP and PNB to commit a fraud or to do a wrong against HRCC.

There being a total absence of evidence pointing to a fraudulent, illegal or unfair act committed against HRCC by DBP and PNB under the guise of NMIC, there is no basis to hold that NMIC was a mere alter ego of DBP and PNB. As this Court ruled in Ramoso v. Court of Appeals82:

As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud, and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed.

As regards the third element, in the absence of both control by DBP and PNB of NMIC and fraud or fundamental unfairness perpetuated by DBP and PNB through the corporate cover of NMIC, no harm could be said to have been proximately caused by DBP and PNB on HRCC for which HRCC could hold DBP and PNB solidarily liable with NMIC.1âwphi1

Considering that, under the deeds of transfer executed by DBP and PNB, the liability of the APT as transferee of the rights, titles and interests of DBP and PNB in NMIC will attach only if DBP and PNB are held liable, the APT incurs no liability for the judgment indebtedness of NMIC. Even HRCC recognizes that "as assignee of DBP and PNB 's loan receivables," the APT simply "stepped into the shoes of DBP and PNB with respect to the latter's rights and obligations" in NMIC.83 As such assignee, therefore, the APT incurs no liability with respect to NMIC other than whatever liabilities may be imputable to its assignors, DBP and PNB.

Even under Section 2.02 of the respective deeds of transfer executed by DBP and PNB which HRCC invokes, the APT cannot be held liable. The contingent liability for

which the National Government, through the APT, may be held liable under the said provision refers to contingent liabilities of DBP and PNB. Since DBP and PNB may not be held solidarily liable with NMIC, no contingent liability may be imputed to the APT as well. Only NMIC as a distinct and separate legal entity is liable to pay its corporate obligation to HRCC in the amount of P8,370,934.74, with legal interest thereon from date of demand.

As trustee of the. assets of NMIC, however, the APT should ensure compliance by NMIC of the judgment against it. The APT itself acknowledges this.84

WHEREFORE, the petitions are hereby GRANTED.

The complaint as against Development Bank of the Philippines, the Philippine National Bank, and the Asset Privatization Trust, now the Privatization and Management Office, is DISMISSED for lack of merit. The Asset Privatization Trust, now the Privatization and Management Office, as trustee of Nonoc Mining and Industrial Corporation, now the Philnico Processing Corporation, is DIRECTED to ensure compliance by the Nonoc Mining and Industrial Corporation, now the Philnico Processing Corporation, with this Decision.

SO ORDERED.

G.R. No. 166282               February 13, 2013

HEIRS OF FE TAN UY (Represented by her heir, Mauling Uy Lim), Petitioners, vs.INTERNATIONAL EXCHANGE BANK, Respondent.

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

G.R. No. 166283

GOLDKEYDEVELOPMENT CORPORATION, Petitioner, vs.INTERNATIONAL EXCHANGE BANK, Respondent.

D E C I S I O N

MENDOZA, J.:

Before the Court are two consolidated petitions for review on certiorari under Rule 45 of the 1997 Revised Rules of Civil Procedure, assailing the August 16, 2004 Decision1 and the December 2, 2004 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 69817 entitled "International Exchange Bank v. Hammer Garments Corp., et al."

Page | 32

The Facts

On several occasions, from June 23, 1997 to September 3, 1997, respondent International Exchange Bank (iBank), granted loans to Hammer Garments Corporation (Hammer), covered by promissory notes and deeds of assignment, in the following amounts:3

Date of Promissory Note AmountJune 23, 1997 P 5,599,471.33July 24, 1997 2,700,000.00July 25, 1997 2,300,000.00August 1, 1997 2,938,505.04August 1, 1997 3,361,494.96August 14, 1997 980,000.00August 21, 1997 2,527,200.00August 21, 1997 3,146,715.00September 3, 1997 1,385,511.75Total P24,938,898.08

These were made pursuant to the Letter-Agreement,4 dated March 23, 1996, between iBank and Hammer, represented by its President and General Manager, Manuel Chua (Chua) a.k.a. Manuel Chua Uy Po Tiong, granting Hammer a P 25 Million-Peso Omnibus Line.5 The loans were secured by a P 9 Million-Peso Real Estate Mortgage6 executed on July 1, 1997 by Goldkey Development Corporation (Goldkey) over several of its properties and a P 25 Million-Peso Surety Agreement7 signed by Chua and his wife, Fe Tan Uy (Uy), on April 15, 1996.

As of October 28, 1997, Hammer had an outstanding obligation of P25,420,177.62 to iBank.8 Hammer defaulted in the payment of its loans, prompting iBank to foreclose on Goldkey’s third-party Real Estate Mortgage. The mortgaged properties were sold for P 12 million during the foreclosure sale, leaving an unpaid balance of P 13,420,177.62.9 For failure of Hammer to pay the deficiency, iBank filed a Complaint10 for sum of money on December 16, 1997 against Hammer, Chua, Uy, and Goldkey before the Regional Trial Court, Makati City(RTC).11

Despite service of summons, Chua and Hammer did not file their respective answers and were declared in default. In her separate answer, Uy claimed that she was not liable to iBank because she never executed a surety agreement in favor of iBank. Goldkey, on the other hand, also denies liability, averring that it acted only as a third-party mortgagor and that it was a corporation separate and distinct from Hammer.12

Meanwhile, iBank applied for the issuance of a writ of preliminary attachment which was granted by the RTC in its December 17, 1997 Order.13 The Notice of Levy on Attachment of Real Properties, dated July 15, 1998, covering the properties under the name of Goldkey, was sent by the sheriff to the Registry of Deeds of Quezon City.14

The RTC, in its Decision,15 dated December 27, 2000, ruled in favor of iBank. While it made the pronouncement that the signature of Uy on the Surety Agreement was a forgery, it nevertheless held her liable for the outstanding obligation of Hammer because she was an officer and stockholder of the said corporation. The RTC agreed with Goldkey that as a third-party mortgagor, its liability was limited to the properties mortgaged. It came to the conclusion, however, that Goldkey and Hammer were one and the same entity for the following reasons: (1) both were family corporations of Chua and Uy, with Chua as the President and Chief Operating Officer; (2) both corporations shared the same office and transacted business from the same place, (3) the assets of Hammer and Goldkey were co-mingled; and (4) when Chua absconded, both Hammer and Goldkey ceased to operate. As such, the piercing of the veil of corporate fiction was warranted. Uy, as an officer and stockholder of Hammer and Goldkey, was found liable to iBank together with Chua, Hammer and Goldkey for the deficiency of P13,420,177.62.

Aggrieved, the heirs of Uy and Goldkey (petitioners) elevated the case to the CA. On August 16, 2004, it promulgated its decision affirming the findings of the RTC. The CA found that iBank was not negligent in evaluating the financial stability of Hammer. According to the appellate court, iBank was induced to grant the loan because petitioners, with intent to defraud the bank, submitted a falsified Financial Report for 1996 which incorrectly declared the assets and cashflow of Hammer.16 Because petitioners acted maliciously and in bad faith and used the corporate fiction to defraud iBank, they should be treated as one and the same as Hammer.17

Hence, these petitions filed separately by the heirs of Uy and Goldkey. On February 9, 2005, this Court ordered the consolidation of the two cases.18

The Issues

Petitioners raise the following issues:

Whether or not a trial court, under the facts of this case, can go out of the issues raised by the pleadings;19

Whether or not there is guilt by association in those cases where the veil of corporate fiction may be pierced;20 and

Whether or not the "alter ego" theory in disregarding the corporate personality of a corporation is applicable to Goldkey.21

Simplifying the issues in this case, the Court must resolve the following: (1) whether Uy can be held liable to iBank for the loan obligation of Hammer as an officer and stockholder of the said corporation; and (2) whether Goldkey can be held liable for the obligation of Hammer for being a mere alter ego of the latter.

The Court’s Ruling

Page | 33

The petitions are partly meritorious.

Uy is not liable; The piercing of theveil of corporate fiction is not justified

The heirs of Uy argue that the latter could not be held liable for being merely an officer of Hammer and Goldkey because it was not shown that she had committed any actionable wrong22 or that she had participated in the transaction between Hammer and iBank. They further claim that she had cut all ties with Hammer and her husband long before the execution of the loan.23

The Court finds in favor of Uy.

Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. Following this principle, obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. A director, officer or employee of a corporation is generally not held personally liable for obligations incurred by the corporation.24 Nevertheless, this legal fiction may be disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate issues.25 This is consistent with the provisions of the Corporation Code of the Philippines, which states:

Sec. 31. Liability of directors, trustees or officers. – Directors or trustees who wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

Solidary liability will then attach to the directors, officers or employees of the corporation in certain circumstances, such as:

1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the corporate affairs; and (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons;

2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto;

3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation; or

4. When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.26

Before a director or officer of a corporation can be held personally liable for corporate obligations, however, the following requisites must concur: (1) the complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove such unlawful acts, negligence or bad faith.27

While it is true that the determination of the existence of any of the circumstances that would warrant the piercing of the veil of corporate fiction is a question of fact which cannot be the subject of a petition for review on certiorari under Rule 45, this Court can take cognizance of factual issues if the findings of the lower court are not supported by the evidence on record or are based on a misapprehension of facts.28

In this case, petitioners are correct to argue that it was not alleged, much less proven, that Uy committed an act as an officer of Hammer that would permit the piercing of the corporate veil. A reading of the complaint reveals that with regard to Uy, iBank did not demand that she be held liable for the obligations of Hammer because she was a corporate officer who committed bad faith or gross negligence in the performance of her duties such that the lifting of the corporate mask would be merited. What the complaint simply stated is that she, together with her errant husband Chua, acted as surety of Hammer, as evidenced by her signature on the Surety Agreement which was later found by the RTC to have been forged.29

Considering that the only basis for holding Uy liable for the payment of the loan was proven to be a falsified document, there was no sufficient justification for the RTC to have ruled that Uy should be held jointly and severally liable to iBank for the unpaid loan of Hammer. Neither did the CA explain its affirmation of the RTC’s ruling against Uy. The Court cannot give credence to the simplistic declaration of the RTC that liability would attach directly to Uy for the sole reason that she was an officer and stockholder of Hammer.

At most, Uy could have been charged with negligence in the performance of her duties as treasurer of Hammer by allowing the company to contract a loan despite its precarious financial position. Furthermore, if it was true, as petitioners claim, that she no longer performed the functions of a treasurer, then she should have formally resigned as treasurer to isolate herself from any liability that could result from her being an officer of the corporation. Nonetheless, these shortcomings of Uy are not sufficient to justify the piercing of the corporate veil which requires that the negligence of the officer must be so gross that it could amount to bad faith and must be established by clear and convincing evidence. Gross negligence is one that is characterized by the lack of the slightest care, acting or failing to act in a situation where there is a duty to act, wilfully and intentionally with a conscious indifference to the consequences insofar as other persons may be affected.30

Page | 34

It behooves this Court to emphasize that the piercing of the veil of corporate fiction is frowned upon and can only be done if it has been clearly established that the separate and distinct personality of the corporation is used to justify a wrong, protect fraud, or perpetrate a deception.31 As aptly explained in Philippine National Bank v. Andrada Electric & Engineering Company:32

Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous application.33

Indeed, there is no showing that Uy committed gross negligence. And in the absence of any of the aforementioned requisites for making a corporate officer, director or stockholder personally liable for the obligations of a corporation, Uy, as a treasurer and stockholder of Hammer, cannot be made to answer for the unpaid debts of the corporation.

Goldkey is a mere alter ego of Hammer

Goldkey contends that it cannot be held responsible for the obligations of its stockholder, Chua.34 Moreover, it theorizes that iBank is estopped from expanding Goldkey’s liability beyond the real estate mortgage.35 It adds that it did not authorize the execution of the said mortgage.36 Finally, it passes the blame on to iBank for failing to exercise the requisite due diligence in properly evaluating Hammer’s creditworthiness before it was extended an omnibus line.37

The Court disagrees with Goldkey.

There is no reason to discount the findings of the CA that iBank duly inspected the viability of Hammer and satisfied itself that the latter was a good credit risk based on the Financial Statement submitted. In addition, iBank required that the loan be secured by Goldkey’s Real Estate Mortgage and the Surety Agreement with Chua and Uy. The records support the factual conclusions made by the RTC and the CA.

To the Court’s mind, Goldkey’s argument, that iBank is barred from pursuing Goldkey for the satisfaction of the unpaid obligation of Hammer because it had already limited its liability to the real estate mortgage, is completely absurd. Goldkey needs to be reminded that it is being sued not as a consequence of the real estate mortgage, but rather, because it acted as an alter ego of Hammer. Accordingly, they must be treated as one and the same entity, making Goldkey accountable for the debts of Hammer.

In fact, it is Goldkey who is now precluded from denying the validity of the Real Estate Mortgage. In its Answer with Affirmative Defenses and Compulsory Counterclaim, dated January 5, 1998, it already admitted that it acted as a third-party mortgagor to secure the obligation of Hammer to iBank.38 Thus, it cannot, at this late stage, question the due execution of the third-party mortgage.

Similarly, Goldkey is undoubtedly mistaken in claiming that iBank is seeking to enforce an obligation of Chua. The records clearly show that it was Hammer, of which Chua was the president and a stockholder, which contracted a loan from iBank. What iBank sought was redress from Goldkey by demanding that the veil of corporate fiction be lifted so that it could not raise the defense of having a separate juridical personality to evade liability for the obligations of Hammer.

Under a variation of the doctrine of piercing the veil of corporate fiction, when two business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or one and the same.39

While the conditions for the disregard of the juridical entity may vary, the following are some probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, as laid down in Concept Builders, Inc. v NLRC:40

(1) Stock ownership by one or common ownership of both corporations;

(2) Identity of directors and officers;

(3) The manner of keeping corporate books and records, and

(4) Methods of conducting the business.41

These factors are unquestionably present in the case of Goldkey and Hammer, as observed by the RTC, as follows:

1. Both corporations are family corporations of defendants Manuel Chua and his wife Fe Tan Uy. The other incorporators and shareholders of the two corporations are the brother and sister of Manuel Chua (Benito Ng Po Hing and Nenita Chua Tan) and the sister of Fe Tan Uy, Milagros Revilla. The other incorporator/share holder is Manling Uy, the daughter of Manuel Chua Uy Po Tiong and Fe Tan Uy.

The stockholders of Hammer Garments as of March 23, 1987, aside from spouses Manuel and Fe Tan Uy are: Benito Chua, brother Manuel Chua, Nenita Chua Tan, sister of Manuel Chua and Tessie See Chua Tan. On March 8, 1988, the shares of Tessie See Chua Uy were assigned to Milagros T. Revilla, thereby consolidating the shares in the family of Manuel Chua and Fe Tan Uy.

Page | 35

2. Hammer Garments and Goldkey share the same office and practically transact their business from the same place.

3. Defendant Manuel Chua is the President and Chief Operating Officer of both corporations. All business transactions of Goldkey and Hammer are done at the instance of defendant Manuel Chua who is authorized to do so by the corporations.

The promissory notes subject of this complaint are signed by him as Hammer’s President and General Manager. The third-party real estate mortgage of defendant Goldkey is signed by him for Goldkey to secure the loan obligation of Hammer Garments with plaintiff "iBank". The other third-party real estate mortgages which Goldkey executed in favor of the other creditor banks of Hammer are also assigned by Manuel Chua.

4. The assets of Goldkey and Hammer are co-mingled. The real properties of Goldkey are mortgaged to secure Hammer’s obligation with creditor banks.

The proceed of at least two loans which Hammer obtained from plaintiff "iBank", purportedly to finance its export to Wal-Mart are instead used to finance the purchase of a manager’s check payable to Goldkey. The defendants’ claim that Goldkey is a creditor of Hammer to justify its receipt of the Manager’s check is not substantiated by evidence. Despite subpoenas issued by this Court, Goldkey thru its treasurer, defendant Fe Tan Uy and or its corporate secretary Manling Uy failed to produce the Financial Statement of Goldkey.

5. When defendant Manuel Chua "disappeared", the defendant Goldkey ceased to operate despite the claim that the other "officers" and stockholders like Benito Chua, Nenita Chua Tan, Fe Tan Uy, Manling Uy and Milagros T. Revilla are still around and may be able to continue the business of Goldkey, if it were different or distinct from Hammer which suffered financial set back.42

Based on the foregoing findings of the RTC, it was apparent that Goldkey was merely an adjunct of Hammer and, as such, the legal fiction that it has a separate personality from that of Hammer should be brushed aside as they are, undeniably, one and the same.

WHEREFORE, the petition are PARTLY GRANTED. The August 16, 2004 Decision and the December 2, 2004 Resolution of the Court of Appeals in CA-G.R. CV No. 69817, are hereby MODIFIED. Fe Tan Uy is released from any liability arising from the debts incurred by Hammer from iBank. Hammer Garments Corporation, Manuel Chua Uy Po Tiong and Goldkey Development Corporation are jointly and severally liable to pay International Exchange Bank the sum of P13,420,177.62 representing the unpaid loan obligation of Hammer as of December 12, 1997 plus interest. No costs.

SO ORDERED.

G.R. No. L-56076 September 21, 1983

PALAY, INC. and ALBERT ONSTOTT, petitioner, vs.JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING AUTHORITY and NAZARIO DUMPIT respondents.

Santos, Calcetas-Santos & Geronimo Law Office for petitioner.

Wilfredo E. Dizon for private respondent.

 

MELENCIO-HERRERA, J.:

The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant Jacobo Clave in O.P. Case No. 1459, directing petitioners Palay, Inc. and Alberto Onstott jointly and severally, to refund to private respondent, Nazario Dumpit, the amount of P13,722.50 with 12% interest per annum, as resolved by the National Housing Authority in its Resolution of July 10, 1979 in Case No. 2167, as well as the Resolution of October 28, 1980 denying petitioners' Motion for Reconsideration of said Resolution of May 2, 1980, are being assailed in this petition.

On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott executed in favor of private respondent, Nazario Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of the Crestview Heights Subdivision in Antipolo, Rizal, with an area of 1,165 square meters, - covered by TCT No. 90454, and owned by said corporation. The sale price was P23,300.00 with 9% interest per annum, payable with a downpayment of P4,660.00 and monthly installments of P246.42 until fully paid. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in payment of any monthly installment after the lapse of 90 days from the expiration of the grace period of one month, without need of notice and with forfeiture of all installments paid.

Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50. The last payment was made on December 5, 1967 for installments up to September 1967.

On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to update all his overdue accounts with interest, and seeking its written consent to the assignment of his rights to a certain Lourdes Dizon. He followed this up with another letter dated June 20, 1973 reiterating the same request. Replying petitioners informed respondent that his Contract to Sell had long been rescinded pursuant to paragraph 6 of the contract, and that the lot had already been resold.

Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the National Housing Authority (NHA) for reconveyance with an

Page | 36

altenative prayer for refund (Case No. 2167). In a Resolution, dated July 10, 1979, the NHA, finding the rescission void in the absence of either judicial or notarial demand, ordered Palay, Inc. and Alberto Onstott in his capacity as President of the corporation, jointly and severally, to refund immediately to Nazario Dumpit the amount of P13,722.50 with 12% interest from the filing of the complaint on November 8, 1974. Petitioners' Motion for Reconsideration of said Resolution was denied by the NHA in its Order dated October 23, 1979. 1

On appeal to the Office of the President, upon the allegation that the NHA Resolution was contrary to law (O.P. Case No. 1459), respondent Presidential Executive Assistant, on May 2, 1980, affirmed the Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus, the present petition wherein the following issues are raised:

I

Whether notice or demand is not mandatory under the circumstances and, therefore, may be dispensed with by stipulation in a contract to sell.

II

Whether petitioners may be held liable for the refund of the installment payments made by respondent Nazario M. Dumpit.

III

Whether the doctrine of piercing the veil of corporate fiction has application to the case at bar.

IV

Whether respondent Presidential Executive Assistant committed grave abuse of discretion in upholding the decision of respondent NHA holding petitioners solidarily liable for the refund of the installment payments made by respondent Nazario M. Dumpit thereby denying substantial justice to the petitioners, particularly petitioner Onstott

We issued a Temporary Restraining Order on Feb 11, 1981 enjoining the enforcement of the questioned Resolutions and of the Writ of Execution that had been issued on December 2, 1980. On October 28, 1981, we dismissed the petition but upon petitioners' motion, reconsidered the dismissal and gave due course to the petition on March 15, 1982.

On the first issue, petitioners maintain that it was justified in cancelling the contract to sell without prior notice or demand upon respondent in view of paragraph 6 thereof which provides-

6. That in case the BUYER falls to satisfy any monthly installment or any other payments herein agreed upon, the BUYER shall be granted a month of grace within which to make the payment of the t in arrears together with the one corresponding to the said month of grace. -It shall be understood, however, that should the month of grace herein granted to the BUYER expire, without the payment & corresponding to both months having been satisfied, an interest of ten (10%) per cent per annum shall be charged on the amounts the BUYER should have paid; it is understood further, that should a period of NINETY (90) DAYS elapse to begin from the expiration of the month of grace hereinbefore mentioned, and the BUYER shall not have paid all the amounts that the BUYER should have paid with the corresponding interest up to the date, the SELLER shall have the right to declare this contract cancelled and of no effect without notice, and as a consequence thereof, the SELLER may dispose of the lot/lots covered by this Contract in favor of other persons, as if this contract had never been entered into. In case of such cancellation of this Contract, all the amounts which may have been paid by the BUYER in accordance with the agreement, together with all the improvements made on the premises, shall be considered as rents paid for the use and occupation of the above mentioned premises and for liquidated damages suffered by virtue of the failure of the BUYER to fulfill his part of this agreement : and the BUYER hereby renounces his right to demand or reclaim the return of the same and further obligates peacefully to vacate the premises and deliver the same to the SELLER.

Well settled is the rule, as held in previous jurisprudence, 2 that judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions. However, even in the cited cases, there was at least a written notice sent to the defaulter informing him of the rescission. As stressed in University of the Philippines vs. Walfrido de los Angeles 3 the act of a party in treating a contract as cancelled should be made known to the other. We quote the pertinent excerpt:

Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved in account of infractions by the other contracting party must be made known to the other and is always provisional being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary

Page | 37

case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced.

In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203).

We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation (Ocejo Perez & Co., vs. International Banking Corp., 37 Phil. 631; Republic vs. Hospital de San Juan De Dios, et al., 84 Phil 820) since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action win be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation unless attack thereon should become barred by acquiescense, estoppel or prescription.

Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or error by the rescinder the other party is not barred from questioning in court such abuse or error, the practical effect of the stipulation being merely to transfer to the defaulter the initiative of instituting suit, instead of the rescinder (Emphasis supplied).

Of similar import is the ruling in Nera vs. Vacante 4, reading:

A stipulation entitling one party to take possession of the land and building if the other party violates the contract does not ex propio vigore confer upon the former the right to take possession thereof if objected to without judicial intervention and determination.

This was reiterated in Zulueta vs. Mariano 5 where we held that extrajudicial rescission has legal effect where the other party does not oppose it. 6 Where it is objected to, a judicial determination of the issue is still necessary.

In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully impugned in Court. If the debtor impugns the declaration, it shall be subject to judicial determination. 7

In this case, private respondent has denied that rescission is justified and has resorted to judicial action. It is now for the Court to determine whether resolution of the contract by petitioners was warranted.

We hold that resolution by petitioners of the contract was ineffective and inoperative against private respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra

Petitioner relies on Torralba vs. De los Angeles 8 where it was held that "there was no contract to rescind in court because from the moment the petitioner defaulted in the timely payment of the installments, the contract between the parties was deemed ipso facto rescinded." However, it should be noted that even in that case notice in writing was made to the vendee of the cancellation and annulment of the contract although the contract entitled the seller to immediate repossessing of the land upon default by the buyer.

The indispensability of notice of cancellation to the buyer was to be later underscored in Republic Act No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment Payments." which took effect on September 14, 1972, when it specifically provided:

Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to the buyer. (Emphasis supplied).

The contention that private respondent had waived his right to be notified under paragraph 6 of the contract is neither meritorious because it was a contract of adhesion, a standard form of petitioner corporation, and private respondent had no freedom to stipulate. A waiver must be certain and unequivocal, and intelligently made; such waiver follows only where liberty of choice has been fully accorded. 9 Moreover, it is a matter of public policy to protect buyers of real estate on installment payments against onerous and oppressive conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real estate on installment payments.

Regarding the second issue on refund of the installment payments made by private respondent. Article 1385 of the Civil Code provides:

Page | 38

ART. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore.

Neither sham rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith.

In this case, indemnity for damages may be demanded from the person causing the loss.

As a consequence of the resolution by petitioners, rights to the lot should be restored to private respondent or the same should be replaced by another acceptable lot. However, considering that the property had already been sold to a third person and there is no evidence on record that other lots are still available, private respondent is entitled to the refund of installments paid plus interest at the legal rate of 12% computed from the date of the institution of the action. 10 It would be most inequitable if petitioners were to be allowed to retain private respondent's payments and at the same time appropriate the proceeds of the second sale to another.

We come now to the third and fourth issues regarding the personal liability of petitioner Onstott who was made jointly and severally liable with petitioner corporation for refund to private respondent of the total amount the latter had paid to petitioner company. It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as wen as from that of any other legal entity to which it may be related. 11 As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. However, the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice 12 ; or for purposes that could not have been intended by the law that created it 13 ; or to defeat public convenience, justify wrong, protect fraud, or defend crime. 14 ; or to perpetuate fraud or confuse legitimate issues 15 ; or to circumvent the law or perpetuate deception 16 ; or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. 17

We find no badges of fraud on petitioners' part. They had literally relied, albeit mistakenly, on paragraph 6 (supra) of its contract with private respondent when it rescinded the contract to sell extrajudicially and had sold it to a third person.

In this case, petitioner Onstott was made liable because he was then the President of the corporation and he a to be the controlling stockholder. No sufficient proof exists on record that said petitioner used the corporation to defraud private respondent. He cannot, therefore, be made personally liable just because he "appears to be the controlling stockholder". Mere ownership by a single stockholder or by another corporation is not of itself sufficient ground for disregarding the separate corporate personality. 18 In this respect then, a modification of the Resolution under review is called for.

WHEREFORE, the questioned Resolution of respondent public official, dated May 2, 1980, is hereby modified. Petitioner Palay, Inc. is directed to refund to respondent Nazario M. Dumpit the amount of P13,722.50, with interest at twelve (12%) percent per annum from November 8, 1974, the date of the filing of the Complaint. The temporary Restraining Order heretofore issued is hereby lifted.

No costs.

SO ORDERED.

G.R. No. L-48627 June 30, 1987

FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners vs.THE HONORABLE COURT OF APPEALS and ALBERTO V. ARELLANO, respondents.

 

CRUZ, J.:

We gave limited due course to this petition on the question of the solidary liability of the petitioners with their co-defendants in the lower court 1 because of the challenge to the following paragraph in the dispositive portion of the decision of the respondent court: *

1. Defendants are hereby ordered to jointly and severally pay the plaintiff the amount of P50,000.00 for the preparation of the project study and his technical services that led to the organization of the defendant corporation, plus P10,000.00 attorney's fees; 2

The petitioners claim that this order has no support in fact and law because they had no contract whatsoever with the private respondent regarding the above-mentioned services. Their position is that as mere subsequent investors in the corporation that was later created, they should not be held solidarily liable with the Filipinas Orient Airways, a separate juridical entity, and with Barretto and Garcia, their co-defendants in the lower court, ** who were the ones who requested the said services from the private respondent. 3

Page | 39

We are not concerned here with the petitioners' co-defendants, who have not appealed the decision of the respondent court and may, for this reason, be presumed to have accepted the same. For purposes of resolving this case before us, it is not necessary to determine whether it is the promoters of the proposed corporation, or the corporation itself after its organization, that shall be responsible for the expenses incurred in connection with such organization.

The only question we have to decide now is whether or not the petitioners themselves are also and personallyliable for such expenses and, if so, to what extent.

The reasons for the said order are given by the respondent court in its decision in this wise:

As to the 4th assigned error we hold that as to the remuneration due the plaintiff for the preparation of the project study and the pre-organizational services in the amount of P50,000.00, not only the defendant corporation but the other defendants including defendants Caram should be jointly and severally liable for this amount. As we above related it was upon the request of defendants Barretto and Garcia that plaintiff handled the preparation of the project study which project study was presented to defendant Caram so the latter was convinced to invest in the proposed airlines. The project study was revised for purposes of presentation to financiers and the banks. It was on the basis of this study that defendant corporation was actually organized and rendered operational. Defendants Garcia and Caram, and Barretto became members of the Board and/or officers of defendant corporation. Thus, not only the defendant corporation but all the other defendants who were involved in the preparatory stages of the incorporation, who caused the preparation and/or benefited from the project study and the technical services of plaintiff must be liable. 4

It would appear from the above justification that the petitioners were not really involved in the initial steps that finally led to the incorporation of the Filipinas Orient Airways. Elsewhere in the decision, Barretto was described as "the moving spirit." The finding of the respondent court is that the project study was undertaken by the private respondent at the request of Barretto and Garcia who, upon its completion, presented it to the petitioners to induce them to invest in the proposed airline. The study could have been presented to other prospective investors. At any rate, the airline was eventually organized on the basis of the project study with the petitioners as major stockholders and, together with Barretto and Garcia, as principal officers.

The following portion of the decision in question is also worth considering:

... Since defendant Barretto was the moving spirit in the pre-organization work of defendant corporation based on his experience and expertise, hence he was logically compensated in

the amount of P200,000.00 shares of stock not as industrial partner but more for his technical services that brought to fruition the defendant corporation. By the same token, We find no reason why the plaintiff should not be similarly compensated not only for having actively participated in the preparation of the project study for several months and its subsequent revision but also in his having been involved in the pre-organization of the defendant corporation, in the preparation of the franchise, in inviting the interest of the financiers and in the training and screening of personnel. We agree that for these special services of the plaintiff the amount of P50,000.00 as compensation is reasonable. 5

The above finding bolsters the conclusion that the petitioners were not involved in the initial stages of the organization of the airline, which were being directed by Barretto as the main promoter. It was he who was putting all the pieces together, so to speak. The petitioners were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the project study, to invest in the proposed airline.

Significantly, there was no showing that the Filipinas Orient Airways was a fictitious corporation and did not have a separate juridical personality, to justify making the petitioners, as principal stockholders thereof, responsible for its obligations. As a bona fide corporation, the Filipinas Orient Airways should alone be liable for its corporate acts as duly authorized by its officers and directors.

In the light of these circumstances, we hold that the petitioners cannot be held personally liable for the compensation claimed by the private respondent for the services performed by him in the organization of the corporation. To repeat, the petitioners did not contract such services. It was only the results of such services that Barretto and Garcia presented to them and which persuaded them to invest in the proposed airline. The most that can be said is that they benefited from such services, but that surely is no justification to hold them personally liable therefor. Otherwise, all the other stockholders of the corporation, including those who came in later, and regardless of the amount of their share holdings, would be equally and personally liable also with the petitioners for the claims of the private respondent.

The petition is rather hazy and seems to be flawed by an ambiguous ambivalence. Our impression is that it is opposed to the imposition of solidary responsibility upon the Carams but seems to be willing, in a vague, unexpressed offer of compromise, to accept joint liability. While it is true that it does here and there disclaim total liability, the thrust of the petition seems to be against the imposition of solidary liability only rather than against any liability at all, which is what it should have categorically argued.

Categorically, the Court holds that the petitioners are not liable at all, jointly or jointly and severally, under the first paragraph of the dispositive portion of the challenged decision. So holding, we find it unnecessary to examine at this time the rules on solidary obligations, which the parties-needlessly, as it turns out have belabored unto death.

Page | 40

WHEREFORE, the petition is granted. The petitioners are declared not liable under the challenged decision, which is hereby modified accordingly. It is so ordered.

Yap (Chairman), Narvasa, Melencio-Herrera, Feliciano and Sarmiento, JJ., concur.

Gancayco, J., took no part.

G.R. No. 78413 November 8, 1989

CAGAYAN VALLEY ENTERPRISES, INC., Represented by its President, Rogelio Q. Lim, petitioner, vs.THE HON. COURT OF APPEALS and LA TONDEÑA, INC., respondents.

Efren M. Cacatian for petitioners.

San Jose, Enrique, Lacas, Santos and Borje for private respondent.

 

REGALADO, J.:

This petition for review on certiorari seeks the nullification of the decision of the Court of Appeals of December 5, 1986 in CA-G.R. CV No. 06685 which reversed the decision of the trial court, and its resolution dated May 5, 1987 denying petitioner's motion for reconsideration.

The following antecedent facts generative of the present controversy are not in dispute.

Sometime in 1953, La Tondeña, Inc. (hereafter, LTI for short) registered with the Philippine Patent Office pursuant to Republic Act No. 623 1 the 350 c.c. white flint bottles it has been using for its gin popularly known as "Ginebra San Miguel". This registration was subsequently renewed on December 4, 1974. 2

On November 10, 1981, LTI filed Civil Case No. 2668 for injunction and damages in the then Branch 1, Court of First Instance of Isabela against Cagayan Valley Enterprises, Inc. (Cagayan, for brevity) for using the 350 c.c., white flint bottles with the mark "La Tondeña Inc." and "Ginebra San Miguel" stamped or blown-in therein by filling the same with Cagayan's liquor product bearing the label "Sonny Boy" for commercial sale and distribution, without LTI's written consent and in violation of Section 2 of Republic Act No. 623, as amended by Republic Act No. 5700. On the same date, LTI further filed an ex parte petition for the issuance of a writ of preliminary injunction against the defendant therein. 3 On November 16, 1981, the court a quo issued a temporary restraining order against Cagayan and its officers and employees from using the 350 c.c. bottles with the marks "La Tondeña" and "Ginebra San Miguel." 4

Cagayan, in its answer, 5 alleged the following defenses:

1. LTI has no cause of action due to its failure to comply with Section 21 of Republic Act No. 166 which requires the giving of notice that its aforesaid marks are registered by displaying and printing the words "Registered in the Phil. Patent Office" or "Reg Phil. Pat. Off.," hence no suit, civil or criminal, can be filed against Cagayan;

2. LTI is not entitled to any protection under Republic Act No. 623, as amended by Republic Act No. 5700, because its products, consisting of hard liquor, are not among those contemplated therein. What is protected under said law are beverages like Coca-cola, Royal Tru-Orange, Lem-o-Lime and similar beverages the bottles whereof bear the words "Reg Phil. Pat. Off.;"

3. No reservation of ownership on its bottles was made by LTI in its sales invoices nor does it require any deposit for the retention of said bottles; and

4. There was no infringement of the goods or products of LTI since Cagayan uses its own labels and trademark on its product.

In its subsequent pleadings, Cagayan contended that the bottles they are using are not the registered bottles of LTI since the former was using the bottles marked with "La Tondeña, Inc." and "Ginebra San Miguel" but without the words "property of" indicated in said bottles as stated in the sworn statement attached to the certificate of registration of LTI for said bottles.

On December 18, 1981, the lower court issued a writ of preliminary injunction, upon the filing of a bond by LTI in the sum of P50,000.00, enjoining Cagayan, its officers and agents from using the aforesaid registered bottles of LTI. 6

After a protracted trial, which entailed five (5) motions for contempt filed by LTI against Cagayan, the trial court rendered judgment 7 in favor of Cagayan, ruling that

Page | 41

the complaint does not state a cause of action and that Cagayan was not guilty of contempt. Furthermore, it awarded damages in favor of Cagayan.

LTI appealed to the Court of Appeals which, on December 5, 1986 rendered a decision in favor of said appellant, the dispositive portion whereof reads:

WHEREFORE, the decision appealed from is hereby SET ASIDE and judgment is rendered permanently enjoining the defendant, its officers and agents from using the 350 c.c. white flint bottles with the marks of ownership "La Tondeña, Inc." and "Ginebra San Miguel", blown-in or stamped on said bottles as containers for defendant's products.

The writ of preliminary injunction issued by the trial court is therefore made permanent.

Defendant is ordered to pay the amounts of:

(1) P15,000.00 as nominal or temperate damages;

(2) P50,000.00 as exemplary damages;

(3) P10,000.00 as attorney's fees; and

(4) Costs of suit. 8

On December 23, 1986, Cagayan filed a motion for reconsideration which was denied by the respondent court in its resolution dated May 5, 1987, hence the present petition, with the following assignment of errors:

I. The Court of Appeals gravely erred in the decision granting that "there is, therefore, no need for plaintiff to display the words "Reg. Phil. Pat. Off." in order for it to succeed in bringing any injunction suit against defendant for the illegal use of its bottles. Rep. Act No. 623, as amended by Rep. Act No. 5700 simply provides and requires that the marks or names shall be stamped or marked on the containers."

II. The Court of Appeals gravely erred in deciding that "neither is there a reason to distinguish between the two (2) sets of marked bottles-those which contain the marks "Property of La Tondeña, Inc., Ginebra San Miguel," and those simply marked La Tondeña Inc., Ginebra San

Miguel'. By omitting the words "property of" plaintiff did not open itself to violation of Republic Act No. 623, as amended, as having registered its marks or names it is protected under the law."

III. The Honorable Court of Appeals gravely erred in deciding that the words "La Tondeña, Inc. and Ginebra San Miguel" are sufficient notice to the defendant which should have inquired from the plaintiff or the Philippine Patent Office, if it was lawful for it to re-use the empty bottles of the plaintiff.

IV. The Honorable Court of Appeals gravely erred in deciding that defendant-appellee cannot claim good faith from using the bottles of plaintiff with marks "La Tondeña, Inc." alone, short for the description contained in the sworn statement of Mr. Carlos Palanca, Jr., which was a requisite of its original and renewal registrations.

V. The Honorable Court of Appeals gravely erred in accommodating the appeal on the dismissals of the five (5) contempt charges.

VI. The Honorable Court of Appeals gravely erred in deciding that the award of damages in favor of the defendant-appellee, petitioner herein, is not in order. Instead it awarded nominal or temperate, exemplary damages and attorney's fees without proof of bad faith.9

The pertinent provisions of Republic Act No. 623, as amended by Republic Act No. 5700, provides:

SECTION 1. Persons engaged or licensed to engage in the manufacture, bottling, or selling of soda water, mineral or aerated waters, cider, milk, cream or other lawful beverages in bottles, boxes, casks, kegs, or barrels and other similar containers, or in the manufacturing, compressing or selling of gases such as oxygen, acytelene, nitrogen, carbon dioxide ammonia, hydrogen, chloride, helium, sulphur, dioxide, butane, propane, freon, melthyl chloride or similar gases contained in steel cylinders, tanks, flasks, accumulators or similar containers, with the name or the names of their principals or products, or other marks of ownership stamped or marked thereon, may register with the Philippine Patent Office a description of the names or marks, and the purpose for which the containers so marked and used by them, under the same

Page | 42

conditions, rules, and regulations, made applicable by law or regulation to the issuance of trademarks.

SEC. 2. It shall be unlawful for any person, without the written consent of the manufacturer, bottler, or seller, who has succesfully registered the marks of ownership in accordance with the provisions of the next preceding section, to fill such bottles, boxes, kegs, barrels, steel cylinders, tanks, flasks, accumulators or other similar containers so marked or stamped, for the purpose of sale, or to sell, disposed of, buy or traffic in, or wantonly destroy the same, whether filled or not, to use the same, for drinking vessels or glasses or drain pipes, foundation pipes, for any other purpose than that registered by the manufacturer, bottler or seller. Any violation of this section shall be punished by a fine of not more than one thousand pesos or imprisonment of not more than one year or both.

SEC. 3. The use by any person other than the registered manufacturer, bottler or seller, without written permission of the latter of any such bottle, cask, barrel, keg, box, steel cylinders, tanks, flask, accumulators, or other similar containers, or the possession thereof without written permission of the manufacturer, by any junk dealer or dealer in casks, barrels, kegs boxes, steel cylinders, tanks, flasks, accumulators or other similar containers, the same being duly marked or stamped and registered as herein provided, shall give rise to a prima facie presumption that such use or possession is unlawful.

The above-quoted provisions grant protection to a qualified manufacturer who successfully registered with the Philippine Patent Office its duly stamped or marked bottles, boxes, casks and other similar containers. The mere use of registered bottles or containers without the written consent of the manufacturer is prohibited, the only exceptions being when they are used as containers for "sisi," bagoong," "patis" and similar native products. 10

It is an admitted fact that herein petitioner Cagayan buys from junk dealers and retailers bottles which bear the marks or names La Tondeña Inc." and "Ginebra San Miguel" and uses them as containers for its own liquor products. The contention of Cagayan that the aforementioned bottles without the words "property of" indicated thereon are not the registered bottles of LTI, since they do not conform with the statement or description in the supporting affidavits attached to the original registration certificate and renewal, is untenable.

Republic Act No. 623 which governs the registration of marked bottles and containers merely requires that the bottles, in order to be eligible for registration, must be stamped or marked with the names of the manufacturers or the names of their principals or products, or other marks of ownership. No drawings or labels are required but, instead, two photographs of the container, duly signed by the applicant, showing clearly and legibly the names and other marks of ownership sought to be registered and a bottle showing the name or other mark or ownership, irremovably stamped or marked, shall be submitted. 11

The term "Name or Other Mark of Ownership" 12 means the name of the applicant or the name of his principal, or of the product, or other mark of ownership. The second set of bottles of LTI without the words "property of" substantially complied with the requirements of Republic Act No. 623, as amended, since they bear the name of the principal, La Tondeña Inc., and of its product, Ginebra San Miguel. The omitted words "property of" are not of such vital indispensability such that the omission thereof will remove the bottles from the protection of the law. The owner of a trade-mark or trade-name, and in this case the marked containers, does not abandon it by making minor modifications in the mark or name itself. 13 With much more reason will this be true where what is involved is the mere omission of the words "property of" since even without said words the ownership of the bottles is easily Identifiable. The words "La Tondeña Inc." and "Ginebra San Miguel" stamped on the bottles, even without the words "property of," are sufficient notice to the public that those bottles so marked are owned by LTI.

The claim of petitioner that hard liquor is not included under the term "other lawful beverages" as provided in Section I of Republic Act No. 623, as amended by Republic Act No. 5700, is without merit. The title of the law itself, which reads " An Act to Regulate the Use of Duly Stamped or Marked Bottles, Boxes, Casks, Kegs, Barrels and Other Similar Containers" clearly shows the legislative intent to give protection to all marked bottles and containers of all lawful beverages regardless of the nature of their contents. The words "other lawful beverages" is used in its general sense, referring to all beverages not prohibited by law. Beverage is defined as a liquor or liquid for drinking. 14 Hard liquor, although regulated, is not prohibited by law, hence it is within the purview and coverage of Republic Act No. 623, as amended.

Republic Act No. 623, as amended, has for its purpose the protection of the health of the general public and the prevention of the spread of contagious diseases. It further seeks to safeguard the property rights of an important sector of Philippine industry. 15 As held by this Court in Destileria Ayala, Inc. vs. Tan Tay & Co., 16 the purpose of then Act 3070, was to afford a person a means of Identifying the containers he uses in the manufacture, preservation, packing or sale of his products so that he may secure their registration with the Bureau of Commerce and Industry and thus prevent other persons from using them. Said Act 3070 was substantially reenacted as Republic Act No. 623. 17

The proposition that Republic Act No. 623, as amended, protects only the containers of the soft drinks enumerated by petitioner and those similar thereto, is unwarranted and specious. The rule of ejusdem generiscannot be applied in this case. To limit the coverage of the law only to those enumerated or of the same kind or class as those

Page | 43

specifically mentioned will defeat the very purpose of the law. Such rule of ejusdem generis is to be resorted to only for the purpose of determining what the intent of the legislature was in enacting the law. If that intent clearly appears from other parts of the law, and such intent thus clearly manifested is contrary to the result which would be reached by the appreciation of the rule of ejusdem generis, the latter must give way. 18

Moreover, the above conclusions are supported by the fact that the Philippine Patent Office, which is the proper and competent government agency vested with the authority to enforce and implement Republic Act No. 623, registered the bottles of respondent LTI as containers for gin and issued in its name a certificate of registration with the following findings:

It appearing, upon due examination that the applicant is entitled to have the said MARKS OR NAMES registered under R.A. No. 623, the said marks or names have been duly registered this day in the PATENT OFFICE under the said Act, for gin, Ginebra San Miguel. 19

While executive construction is not necessarily binding upon the courts, it is entitled to great weight and consideration. The reason for this is that such construction comes from the particular branch of government called upon to implement the particular law involved. 20

Just as impuissant is petitioners contention that respondent court erred in holding that there is no need for LTI to display the words "Reg Phil. Pat. Off." in order to succeed in its injunction suit against Cagayan for the illegal use of the bottles. To repeat, Republic Act No. 623 governs the registration of marked bottles and containers and merely requires that the bottles and/or containers be marked or stamped by the names of the manufacturer or the names of their principals or products or other marks of ownership. The owner upon registration of its marked bottles, is vested by law with an exclusive right to use the same to the exclusion of others, except as a container for native products. A violation of said right gives use to a cause of action against the violator or infringer.

While Republic Act No. 623, as amended, provides for a criminal action in case of violation, a civil action for damages is proper under Article 20 of the Civil Code which provides that every person who, contrary to law, wilfully or negligently causes damage to another, shall indemnify the latter for the same. This particular provision of the Civil Case was clearly meant to complement all legal provisions which may have inadvertently failed to provide for indemnification or reparation of damages when proper or called for. In the language of the Code Commission "(t)he foregoing rule pervades the entire legal system, and renders it impossible that a person who suffers damage because another has violated some legal provisions, should find himself without relief." 21 Moreover, under Section 23 of Republic Act No. 166, as amended, a person entitled to the exclusive use of a registered mark or tradename may recover damages in a civil action from any person who infringes his rights. He may also, upon proper showing, be granted injunction.

It is true that the aforesaid law on trademarks provides:

SEC. 21. Requirements of notice of registration of trade-mark.-The registrant of a trade-mark, heretofore registered or registered under the provisions of this Act, shall give notice that his mark is registered by displaying with the same as used the words 'Registered in the Philippines Patent Office' or 'Reg Phil. Pat. Off.'; and in any suit for infringement under this Act by a registrant failing so to mark the goods bearing the registered trade-mark, no damages shall be recovered under the provisions of this Act, unless the defendant has actual notice of the registration.

 

Even assuming that said provision is applicable in this case, the failure of LTI to make said marking will not bar civil action against petitioner Cagayan. The aforesaid requirement is not a condition sine qua non for filing of a civil action against the infringer for other reliefs to which the plaintiff may be entitled. The failure to give notice of registration will not deprive the aggrieved party of a cause of action against the infringer but, at the most, such failure may bar recovery of damages but only under the provisions of Republic Act No. 166.

However, in this case an award of damages to LTI is ineluctably called for. Petitioner cannot claim good faith. The record shows that it had actual knowledge that the bottles with the blown-in marks "La Tondeña Inc." and "Ginebra San Miguel" are duly registered. In Civil Case No. 102859 of the Court of First Instance of Manila, entitled "La Tondeña Inc. versus Diego Lim, doing business under the name and style 'Cagayan Valley Distillery,' " a decision was rendered in favor of plaintiff therein on the basis of the admission and/or acknowledgment made by the defendant that the bottles marked only with the words "La Tondeña Inc." and "Ginebra San Miguel" are registered bottles of LTI. 22

Petitioner cannot avoid the effect of the admission and/or acknowledgment made by Diego Lim in the said case. While a corporation is an entity separate and distinct from its stock-holders and from other corporations with which it may be connected, where the discreteness of its personality is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons, or in the case of two corporations, merge them into one. When the corporation is the mere alter ego or business conduit of a person, it may be disregaded. 23

Petitioner's claim that it is separate and distinct from the former Cagayan Valley Distillery is belied by the evidence on record. The following facts warrant the conclusion that petitioner, as a corporate entity, and Cagayan Valley Distillery are one and the same. to wit: (1) petitioner is being managed by Rogelio Lim, the son of Diego Lim, the owner and manager of Cagayan Valley Distellery; (2) it is a family corporation; 24 (3) it is an admitted fact that before petitioner was incorporated it was under a single proprietorship; 25 (4) petitioner is engaged in the same business as

Page | 44

Cagayan Valley Distillery, the manufacture of wines and liquors; and (5) the factory of petitioner is located in the same place as the factory of the former Cagayan Valley Distillery.

It is thus clear that herein petitioner is a mere continuation and successor of Cagayan Valley Distillery. It is likewise indubitable that the admission made in the former case, as earlier explained, is binding on it as cogent proof that even before the filing of this case it had actual knowledge that the bottles in dispute were registered containers of LTI As held in La Campana Coffee Factory, Inc., et al. vs. Kaisahan Ng Mga Manggagawa sa La Campana (KKM), et al., 26 where the main purpose in forming the corporation was to evade one's subsidiary liability for damages in a criminal case, the corporation may not be heard to say that it has a personality separate and distinct from its members, because to allow it to do so would be to sanction the use of the fiction of corporate entity as a shield to further an end subversive of justice.

Anent the several motions of private respondent LTI to have petitioner cited for contempt, we reject the argument of petitioner that an appeal from a verdict of acquittal in a contempt, proceeding constitutes double jeopardy. A failure to do something ordered by the court for the benefit of a party constitutes civil contempt. 27 As we held inConverse Rubber Corporation vs. Jacinto Rubber & Plastics Co., Inc.:

...True it is that generally, contempt proceedings are characterized as criminal in nature, but the more accurate juridical concept is that contempt proceedings may actually be either civil or criminal, even if the distinction between one and the other may be so thin as to be almost imperceptible. But it does exist in law. It is criminal when the purpose is to vindicate the authority of the court and protect its outraged dignity. It is civil when there is failure to do something ordered by a court to be done for the benefit of a party (3 Moran Rules of Court, pp. 343-344, 1970 ed.; see also Perkins vs. Director of Prisons, 58 Phil. 272; Harden vs. Director of Prisons, 81 Phil. 741.) And with this distinction in mind, the fact that the injunction in the instant case is manifestly for the benefit of plaintiffs makes of the contempt herein involved civil, not criminal. Accordingly, the conclusion is inevitable that appellees have been virtually found by the trial court guilty of civil contempt, not criminal contempt, hence, the rule on double jeopardy may not be invoked. 28

The contempt involved in this case is civil and constructive in nature, it having arisen from the act of Cagayan in violating the writ of preliminary injunction of the lower court which clearly defined the forbidden act, to wit:

NOW THEREFORE, pending the resolution of this case by the court, you are enjoined from using the 350 c.c. white flint bottles with the marks La Tondeña Inc.,' and 'Ginebra San Miguel' blown-in or stamped into the bottles as containers for the defendant's products. 19

On this incident, two considerations must be borne in mind. Firstly, an injunction duly issued must be obeyed, however erroneous the action of the court may be, until its decision is overruled by itself or by a higher court. 30Secondly, the American rule that the power to judge a contempt rests exclusively with the court contemned does not apply in this Jurisdiction. The provision of the present Section 4, Rule 71 of the Rules of Court as to where the charge may be filed is permissive in nature and is merely declaratory of the inherent power of courts to punish contumacious conduct. Said rules do not extend to the determination of the jurisdiction of Philippine courts. 31 In appropriate case therefore, this Court may, in the interest of expedient justice, impose sanctions on contemners of the lower courts.

Section 3 of Republic Act No. 623, as amended, creates a prima facie presumption against Cagayan for its unlawful use of the bottles registered in the name of LTI Corollarily, the writ of injunction directing petitioner to desist from using the subject bottles was properly issued by the trial court. Hence, said writ could not be simply disregarded by Cagayan without adducing proof sufficient to overcome the aforesaid presumption. Also, based on the findings of respondent court, and the records before us being sufficient for arbitrament without remanding the incident to the court a quo petitioner can be adjudged guilty of contempt and imposed a sanction in this appeal since it is a cherished rule of procedure for this Court to always strive to settle the entire controversy in a single proceeding, 32 We so impose such penalty concordant with the preservative principle and as demanded by the respect due the orders, writs and processes of the courts of justice.

WHEREFORE, judgment is hereby rendered DENYING the petition in this case and AFFIRMING the decision of respondent Court of Appeals. Petitioner is hereby declared in contempt of court and ORDERED to pay a fine of One Thousand Pesos (P1,000.00), with costs.

SO ORDERED.

Paras, Padilla and Sarmiento, JJ., concur.

Melencio-Herrera (Chairperson), J., is on leave